EXHIBIT 99.1
PETMED EXPRESS, INC. CONFERENCE CALL
YEAR END FINANCIAL RESULTS
May 17, 2004
5:00 p.m. EDT
Coordinator Welcome to the PetMed Express doing business as 1-800-
PetMeds conference call, to review the financial
results for the fiscal year ended March 31, 2004. At
the request of the company, this conference call is
being recorded.
Founded in 1996, 1-800-PetMeds is America's largest pet
pharmacy, delivering prescription and non-prescription
medications and health and nutritional supplements for
dogs and cats direct to the consumer. 1-800-PetMeds
markets its products through national television, on-
line and direct mail advertising campaigns, which
directs the consumers to order by phone or on Internet
and aims to increase the recognition of the "1-800-
PetMeds" brand name. 1-800-PetMeds provides an
attractive alternative for obtaining pet medications in
terms of convenience, price, ease of ordering and rapid
home delivery.
At this time, I'd like to turn the call over to the
company's Chief Financial Officer, Mr. Bruce
Rosenbloom. Sir, you may begin.
B. Rosenbloom Thank you. I'd like to welcome everyone here today.
Before I turn the call over to Mendo, I'd like to
remind everyone that the first portion of this
conference call will be listen-only until the question
and answer session, which will be later in the call.
Also, certain information that will be included in this
press conference may include forward-looking statements
within the meaning of the Private Securities Litigation
Reform Act of 1995 or the Securities and Exchange
Commission that may involve a number of risks and
uncertainties. These statements are based on our
beliefs as well as assumptions we have used, based upon
the information currently available to us. Because
these statements reflect our current views concerning
future events, these statements involve risks,
uncertainties and assumptions. Actual future results
may vary significantly, based on a number of factors
that may cause the actual results or events to be
materially different from future results, performance
or achievements expressed or implied by these
statements. We have identified various risk factors
associated with our operations in our most recent
annual report and other filings with the Securities and
Exchange Commission.
Now, let me introduce today's speaker, Mendo Akdag,
Chief Executive Officer of 1-800-PetMeds.
M. Akdag Welcome, and thank you for joining us. We will start
with reviewing the highlights of our financial results.
We'll compare our fiscal year ended on March 31, 2004
to last year's fiscal year ended on March 31, 2003.
For the fiscal year ended on March 31, 2004, our sales
were $94.0 million compared to sales of $55.0 million
for the prior fiscal year. This was a 71% increase in
sales. The increase was primarily due to increased
reorders and increased new orders as a result of
increased advertising. The average order size was $73
for the fiscal year, compared to $71 for the prior
year.
99.1 page 1 - 9
For the fiscal year, net income was $5.8 million, $0.25
diluted per share, compared to $3.3 million, $0.16
diluted per share a year ago, an increase of 79%.
Reorder sales increased by approximately 100% to $51.4
million for the year, compared to reorder sales of
$25.8 million for the prior year. New order sales
increased by 46% to $42.1 million, compared to $28.9
million for the prior year.
Over-the-counter products were 70% of sales and
prescription medications were 30% of sales. We
acquired approximately 572,000 new customers in the
fiscal year, compared to 414,000 for the prior year.
We had about 1.15 million unique customers who
purchased from us in the last two years. There is
seasonality in our business, due to the flea, tick and
heartworm medications that we sell; spring and summer
are considered peak season and fall and winter are off-
season.
For the fiscal year, our gross profit as a percentage
of sales was 40.6%, compared to 42.7% for the prior
fiscal year. The decrease was due to our free-shipping
promotion, which portions of it were offset by
increases to our product pricing. We plan on
continuing the free-shipping promotion on orders over
$49 during this fiscal year.
Our general and administrative expenses as a percentage
of sales decreased to 11.4% for the year, compared to
14.5% for the prior year. The improvement was due to
economies of scale gained with increased sales, and
also almost 50% of our customers placed their order on
our web site, compared to 44% for the prior year.
We spent $17.7 million in advertising for the year,
compared to $11.7 million for the prior year, an
increase of 52%. The key matrix, we look at is the
correlation between the advertising expense and the
new order sales. For every dollar we spent in
advertising for the year, we got $2.40 in new order
sales, compared to $2.50 the prior year. Advertising
cost of acquiring a customer for the year was $31,
compared to $28 for the prior year.
Our working capital increased by $8.3 million to $11.3
million since March 31, 2003, and our net worth
increased by $8.4 million to $14 million for the year.
Both increases were due to increases in net income and
the exercise of stock options and warrants.
We had $3.3 million in cash, $11.2 million in inventory
and $68,000 in debt as of March 31, 2004. Although on
average, we carry about eight weeks of inventory in
stock, the inventory may fluctuate depending on buying
opportunities.
The company's most valuable asset is its customer
database, which is not on the balance sheet.
Now, we will briefly highlight the results for the
quarter ended on March 31, 2004.
Net sales for the quarter ended on March 31, 2004 were
$21.5 million, compared to $14.9 million for the same
quarter the prior year, an increase of 44%. For the
quarter, net income was $1.3 million, $0.06 diluted per
share, compared to $1.7 million, $0.09 diluted per
share for the same quarter a year ago, which the latter
included a deferred tax asset eliminating the income
tax provision to reflect the tax benefit of $535,000.
It may help to point out that for the quarter ended on
March 31, 2004, income before provision for income
taxes was $2.2 million, compared to $1.2 million for
the same quarter a year ago, an increase of 83%.
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Overall, we're very pleased with the financial results.
A brief overview on the market-the pet medication
market is estimated at $3 billion. Market share
estimate is veterinarians have about 87% of the market,
retailers 8%, and we are estimating that the mail
order/online channel has about 5% of the market, out of
which we have approximately 3%. In human
pharmaceuticals, 18% of the market is serviced by mail
order. Based on that, the mail order/online channel
for pet medication has a potential to triple in the
next four to five years, with average yearly growth
rate of about 25% to 30%.
A few other points, we were listed on the Nasdaq
national market in January 2004. This was an
achievement of a major milestone for us. We increased
our credit line from $2 million to $5 million during
the fiscal year. We added 12,000 sq. ft. to our
warehouse, and we have increased our fulfillment
capacity to approximately 13,000 to 15,000 orders a day
with increased efficiency. We enhanced our Web site by
adding the "ask the veterinarian" feature, product
comparison charts, and educational articles to assist
consumers with selection of medications.
Operator, we're ready to take questions.
Coordinator Our first question is from Zach McAdoo with MCM
Associates.
Z. McAdoo It looks like the cost per customer acquired went up
quite a bit. Is that a number-is the higher number
something we should expect going forward?
M. Akdag Television inventory has been tight lately. There are
presidential elections this year, so we're shifting our
advertising from television to print. It will be
higher this year. I can't tell you-it's tight right
now, but it's being expected to loosen up in July, but
we expect it to tighten back up in, probably,
September, due to presidential elections. So it's
going to be a tight year, it looks like.
Z. McAdoo Did you spend a significant amount of your advertising
budget on print?
M. Akdag Historically, we spent about 70%, 80% of our
advertising on television. We're changing that,
probably-television will be going forward 40% to 50% of
the budget, and we'll have more print and direct mail
advertising.
Z. McAdoo Because it looks like, the cost per customer went up
50% approximately, I don't know, but I'm assuming the
TV ad pricing didn't go up 50%. What accounted for
that increase?
M. Akdag There are two reasons, really. One is, we buy remnant
space, so we're opportunistic advertisers. We are
direct response advertisers. In order to clear, we
would have to pay more. The second reason could be the
weather and if you're comparing to the last year same
quarter, last year, there was a war and we were running
on news stations, which we were not paying any extra,
but their viewership would have tripled at that time,
during the month of March. So those are the two
reasons. It looks like this year, the flea and tick
season started a little later than last year. That has
been our experience so far.
Z. McAdoo Were the ad rates and the remnant space up 50% or is
the print advertising more expensive?
M. Akdag Both. I'm not going to say it's up 50%, obviously, we
bid accordingly and it depends on the station. We make
a bid and it either it clears or it doesn't clear. So
in order to clear, we would have to pay more. I would
say, on average, probably, 30%.
99.1 page 3 - 9
Z. McAdoo Do you think you're getting the same response per eye
on TV?
M. Akdag As far as the dollars versus eyes is concerned, what do
you mean?
Z. McAdoo Not dollars versus eyes, but spots on TV.
M. Akdag I'm not clear what your question is.
Z. McAdoo Is the same advertising spot converting the same amount
of customers, or do you think you're getting a lower
response?
M. Akdag I would say probably slightly lower, but not that much,
maybe 10% lower than last year.
Z. McAdoo Why do you think that is?
M. Akdag As I told you, its weather related, too, since flea and
tick and heartworm medications are seasonal. It looks
like the season started later this year; that has been
our experience versus last year. So that may have
something to do with it.
Coordinator Our next question is from Jake Andrew, private
investor.
J. Andrew It seems that everything is going on track and everyone
is going into a great direction. The one thing that I
am concerned about that I've noticed is, I've seen a
lot of competitive marketplace out there. Meaning that
on TV, you guys used to run the show, now I'm seeing a
company, Foster&Smith, and I'm seeing a company Pet
Care Rx and other people that are really building a
brand out there, besides the name 1-800-PetMeds, which
we've known for a long time now. Do you feel that
that's increasing the loss of sales in that 10% that
you were just talking about?
M. Akdag It's possible. We're seeing them on and off. They're
not consistently on TV. There are about two dozen
companies in our space. They're privately held. We
don't have really any financial information about them,
but based on their advertising, they're on and off.
They don't really stay. They're not consistent. So
they're on for one month, then they're off. So we'll
see what happens going forward.
J. Andrew Is there any way to look into further in these
companies to see if they're moving in on competitive
space, defensively behave, keep the brand solid? As a
private company, could they be moving ahead of us and
we don't even realize it?
M. Akdag I highly doubt it. Obviously, we watched their
advertising spending, and that's why I said they have
not been consistently on television. They go on for
one month then they're off for a couple of months. So
that tells us that it doesn't work for them as well; if
it did, they would be on all the time.
J. Andrew Or may be they're shifting towards what you said print
or whatever else you said that seems to be better
working during the season right now.
M. Akdag We have not seen it much on print. A lot of them, you
have mentioned, like Fosters & Smith, is a catalog
company; obviously they mail catalogs, but we haven't
seen much print advertising from them.
99.1 page 4 - 9
J. Andrew We do get a lot of e-mails both my wife and I from you,
advertising, so that's obviously an avenue that you
guys are pursuing.
M. Akdag Yes, we do.
Coordinator Our next question is from Rich Slattery, private
investor.
R. Slattery Just a quick question here, I just been sort of
watching the stocks start to pull back over the last
couple of weeks. Is there any reason that you guys can
note specifics or is it just the market?
M. Akdag We don't know any specifics, so I would say it's just
the market.
R. Slattery Do you foresee things staying the same or should we
look for a more positive outlook in this next coming
trading session?
M. Akdag We focus as management, we focus on the fundamentals
and on the long-term success of the company. We don't
even look at the stock price day-to-day.
Coordinator Our next question is from Daniel Guidry with Guidry and
Guidry.
D. Guidry Thank you. My question is, could you give us some
earnings guidance for the coming fiscal year, based
upon your earnings models?
M. Akdag We don't give guidance; we never did. It has been our
policy. As I said, we focus on the fundamentals and
the long terms success of the company, but we do not
give guidance.
Coordinator Our next question is from Dennis Johnson, private
investor.
D. Johnson I had noted recently, that you have a recent agreement
with the Florida Board of Pharmacy and that seemed to
kind of coincide with a little bit of downward spiral
on the stock price. Are there any other situations out
there that we should be aware of, in particular, the
one with the State of Texas Board of Pharmacy and the
Board of Veterinary Medicine, has an agreement or
settlement been reached on that suit that started a
couple of years ago?
M. Akdag We have not recently reached an agreement with Florida
Board of Pharmacy. That agreement was reached, I
believe, in year 2002. We were on probation for three
years with them, with Florida Board of Pharmacy; but
they recently early released us from probation for
complying with all rules and regulations; so the
decision the Pharmacy Board made was really positive,
not negative.
D. Johnson My mistake then, I thought it was recent agreement.
Sorry about that.
M. Akdag That agreement is a little over two years old. As far
as the Texas lawsuit is concerned, there's really no
change in status. Allegations are for past conduct,
not for current conduct. It's difficult to assess any
possible outcome at this time, but the outcome would
not impact our current operation. We as management are
confident that we comply with all applicable laws and
regulations.
D. Johnson Okay. So the discontinuation of the alternative vet
program is not-you don't see that as a major impact on
future sales and earnings?
99.1 page 5 - 9
M. Akdag It's already reflected in the numbers. We discontinued
in February 2002, so it has already been over two
years, so the impact has already been reflected in the
numbers.
D. Johnson Okay. I'm sorry I brought it up then. I thought that
that was much more current and I'm very sorry that I
was mistaken.
M. Akdag That's okay.
Coordinator Our next question is from Dan Morgan with Noble
Financial.
D. Morgan I had a question concerning, trying to compare your
bottom line number in terms of net income for the
fourth quarter, versus the year before. I know you
said that there was a tax benefit of about $535,000.
If you were trying to compare Q4 of this year versus Q4
of last, would it be safe to assume a 38% tax rate in
the previous quarter to try to compare apples-to-
apples, because it kind of throws off the year-over-
year comparisons and also the quarter-to-quarter
comparisons?
M. Akdag Bruce, what is our tax rate?
B. Rosenbloom Right now, we're just under 38%, like 37.6%, so 38% is
a fairly good estimate. In fiscal 2004 -or last year's
fourth quarter, we did take advantage of other loss
carryforwards that were not recurring. The only one
that's recurring going forward is our $266,000 loss
carryforward, for the next 12-13 years. So if you look
at it and compare fiscal year 2004 versus 2003, you can
see a difference year-over-year that we have more of a
tax provision this year, and it wasn't 38% last year,
but going forward, that's what it should be.
D. Morgan Would it be safe to take your income before tax in the
fourth quarter of '03 and use the same rate, to try to
compare the bottom line net income numbers, just we can
see what the performance would be? Because I came-when
I did that I got 82% increase, I'm just trying to get a
handle on exactly what the-
B. Rosenbloom If you take out the tax effect, income before the
provision for income taxes, it's $2.2 million versus
$1.2 million, which is about an 83% increase.
D. Morgan Okay. I had about that number, too.
B. Rosenbloom Right. And then after taxes net income year-over-year,
increased 79%, so that would probably be a better way
to look at it.
D. Morgan Can you talk a little bit about, you mentioned on the
earlier comments, that you're going to be shifting your
advertising; previously it was 75% to 80% TV. Now
you're going to be moving to 40% to 50% TV and doing
more print. Can you talk about the effectiveness in
terms of those two measures and how it impacts in terms
of the dollar spend to acquire a new customer?
M. Akdag We tested the print last year in summer, so it worked
pretty well for us and so, that's why we launched it
this year since television inventory has been tight and
presidential elections are coming up. We'll see how it
works out. Certain things may work as well as TV.
D. Morgan And you're holding on to the 18% to 22% as percentage
of revenue that turns to advertising spent?
99.1 page 6 - 9
M. Akdag At this time, yes.
Coordinator Our next question is from Frank Catrickes with
Wellington.
F. Catrickes So, it looks like a very good quarter there with the
growth. I just had a question, the first person on the
call was asking about the customer and acquisition
cost. He mentioned some figure about up 50% year-over-
year, but that to me looks a little high. I was
curious, so you added 89,000 customers in this quarter,
correct?
M. Akdag About 90,000.
F. Catrickes So there's about a $45 cost per customer?
M. Akdag That is correct, yes.
F. Catrickes I thought last year, the cost for customer was only
$36; is that roughly correct? You got 105,000
customers on-about $2.9 million advertising
expenditure?
M. Akdag For which time period?
F. Catrickes Last year's quarter.
M. Akdag Twenty-eight dollars is what we have. It's $45
compared to $28. One thing that really worked for us
was, we looked at reorders as a percent of prior year's
total sale and that was 98% for the quarter ending on
March 31, 2004, compared to 72% for the last year's
same quarter.
F. Catrickes The other interesting thing is, I guess it would be
natural to expect your customer acquisition cost
possibly to go up over time, given that you've probably
hit a lot of the, so to speak, easy or low hanging
fruit in terms of the customers. It would also seem
like, I'm just sort of curious, what sort of level you
think is good. Because if you're only spending even
$45, which might be up a lot from last year to acquire
a customer that's spending $70 in average at 1.3 times
a year with a 40% gross margin, you're netting almost
$40 of gross profits on a new customer. Which seems
very good, because I look at a lot of industries across
the overall economy, and most companies would love to
have that ratio. I'm just wondering what you think
about that.
M. Akdag It still works; the model still works even at $45 as
long as reorders come in, so you know $45 is a little
high. We don't give guidance, so I don't want to
comment on it; as what happens in the future, but you
are right. As you spend more in advertising, obviously
you're using all the avenues that give you the least,
most efficient customer acquisition that as you spend
more, naturally your cost of acquisition will go up.
It's not unexpected to us.
Coordinator Our next question is from Donald Moriarty with Twin
Oaks.
D. Moriarty I just want to get back to the switching from TV to
print. It seems like it's fairly risky to go from 70%
to 80% TV, down to 40% to 50%. That's a big move and I
just wonder if in your mind, is it risky and have you
done sufficient testing that you think there's not much
risk?
M. Akdag It's not as risky as you may think. We did testing
last year, it worked just as well as TV during the
summer. But print has a little bit more lifetime than
TV, so print stays on. It has more shelf time, so we
need to have a little bit more results from it really
for us, probably next conference call, I can give you a
better idea. But I don't think it's as risky.
99.1 page 7 - 9
D. Moriarty Could you tell me what's included in print, obviously,
newspapers, magazines, what else?
M. Akdag Direct mail.
D. Moriarty So that's it?
M. Akdag Yes.
Coordinator Our next question is from Richard Shapiro with
Amaranth.
R. Shapiro I have a question; I would like to hear if you could
share with us for the March '04 fiscal year, what the
operating cash flow and cap ex was for the year?
M. Akdag The cash was-on the balance sheet, we had $3.3 million
in cash and the cap ex was-
R. Shapiro I'm sorry, cash flow from operations.
M. Akdag About $1.1 million cash from operation.
R. Shapiro Okay, and then in terms of cap ex?
M. Akdag That's $742,000.
R. Shapiro Let me ask you this. One of the things, obviously your
stock was very volatile and I think one of the
contributors to that is lack of Street coverage. You
have minimal coverage. Is this something that is a
focus initiative for you at this point, now that you're
putting up consistent results?
M. Akdag It's really not a focus for us as management, but there
are a couple of people looking at it. I don't know if
they're going to come up with the coverage or not.
Coordinator Next, we have Jake Andrew, private investor.
J. Andrew One more question I forgot about, my wife is a big
customer of a company called DrugStore.com, and they're
now currently selling Frontline and Program and all the
other flea and tick products. And it seems as if they
look like they're thinking about possibly moving into
that category; any comments about someone like that
moving into the category?
M. Akdag They have been carrying that more than a year now,
maybe 18 months. Their focus really is not pet
medications. We have a niche; our focus is pet
medications only. So the public knows us as pet
medication experts, so to speak. If you go to
DrugStore.com, there are 20,000 SKUs there, so you
really have to search to find out that they even carry
it, so I don't see that as an issue.
J. Andrew To me, DrugStore.com is like almost a WalMart; that's a
big Amazon backed company-because they said something,
because we originally bought a pet plan, and they sent
us one, "Hey, we now carry those products." And I
said, "Oh, great."
M. Akdag Unless they focus on it specifically, I don't think
they will go too far.
J. Andrew Okay. Well that's good news.
99.1 page 8 - 9
M. Akdag I mean, that's my view.
Coordinator Next, we have Greg Margolis with Balyasna Asset
G. Margolis Just curious what you're seeing in terms of ad rates in
terms of looking out towards the next six months,
especially with the elections coming, if you're seeing
any increases in your rates or because of the times
that you're doing most your advertising and stations
that you're advertising on, are you not seeing any kind
of changes there, and if that had anything to do with
your potential change in strategy.
M. Akdag We are seeing a potential drop in rates in July and
probably August and going back up in September and
October for the presidential election, and I'm talking
about television.
G. Margolis You're sort of change in channel for advertising really
nothing to do with any changes in ad rates that you're
seeing then, it sounds like?
M. Akdag It has been tight, so the inventory has really been
tight on television. Most of the stations are sold out
and we buy remnant space. I guess, I can give you a
hypothetical example, let's say there's an xyz station.
What really we tell them is, "Okay, you can run us
anytime between 6:00 a.m. until midnight and we're
going to give you $100 for every time you run us."
Obviously, they will only run us if somebody is not
paying or if they have inventory available if somebody
is not paying more than $100, so that's kind of how it
works.
G. Margolis I got it.
M. Akdag We manage that weekly to see where it's going.
G. Margolis What was your cap ex for the year?
M. Akdag It was $742,000.
Coordinator That concludes the question and answer session of
today's conference call. I'd like to turn the
conference back over to Mr. Akdag for any closing
remarks.
M. Akdag We would like to close with giving you a big picture on
long-term prospects of the company. We are a leader in
a new distribution channel in an estimated $3 billion
industry, offering the consumer savings and
convenience. There is a demand from pet owners for our
channel of distribution, which may accelerate with
consumers becoming more comfortable with ordering
through the Internet.
We have a powerful brand name, 1-800-PetMeds. We have
grown from $10 million in sales, to $94 million in the
last three years; and our diluted earnings per share
improved from $0.28 loss per share, to $0.25 earnings
per share at the same time period. We have an
experienced management team in place and we have the
operating technology infrastructure in place to
continue to grow the business. We are very pleased
with the results so far and we're excited about the
future prospects of the company. Thank you for joining
us.
Operator, this ends the conference call.
Coordinator Thank you, sir, and thank you for participating in
today's conference call. Have a nice day.
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