EXHIBIT 99.1
PETMED EXPRESS, INC. CONFERENCE CALL
QUARTER 2 FINANCIAL RESULTS
October 25, 2004
8:30 a.m. EDT
Coordinator Welcome to the PetMed Express Inc., doing
business as 1-800-PetMeds conference call to review the
financial results for the second fiscal quarter ended on
September 30, 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 nonprescription
medications and health and nutritional supplements for
dogs and cats direct to the consumer. 1-800-PetMeds
markets its products through national television, online
and direct mail advertising campaigns, which directs
consumers to order by phone or on the Internet, and aim
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 would like to turn the call over to the
company's Chief Financial Officer, Mr. Bruce Rosenbloom.
B. Rosenbloom Thank you. I'd like to welcome everyone
here today. Before I turn the call to Mendo Akdag, our
Chief Executive Officer, I'd like to remind everyone that
the first portion of this conference call with 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 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. Mendo.
M. Akdag Thank you, Bruce. Welcome and thank you for
joining us. Today we will review the highlights of our
financial results. We will compare our second fiscal
quarter and six months ended on September 30, 2004 to
last year's quarter and six months, ended on September
30, 2003.
Exhibit 99.1 Page 1 - 7
For the second fiscal quarter ended on September 30,
2004, our sales were $28.8 million, compared to sales of
$25.0 million for the same period the prior year - an
increase of 15%. For the six months, sales were $64
million, compared to $55.4 million for the six months the
prior year - an increase of 16%. The increase was
primarily due to increased reorders offset by decreased
new orders. Net income was $1.8 million or $0.08 diluted
per share in each of the quarters ended on September 30,
2004 and 2003. For the six months, net income was $3.6
million, $0.15 diluted per share, compared to $3.3
million, $0.14 diluted per share a year ago - an increase
of 12%. Retail reorder sales increased by 34% to $17.2
million for the quarter, compared to reorder sales of
$12.9 million for the same quarter the prior year. For
the six months, the reorder sales increased by 46% to
$37.2 million, compared to $25.4 million for the same
period a year ago. Retail new order sales decreased by
9% to $10.9 million for the quarter, compared to $12
million for the same period the prior year. For the six
months, the new order sales decreased by 13% to $25.8
million, compared to $29.7 million for the same period a
year ago. We attribute the decline in new orders to the
increase in advertising cost of acquiring customers,
which we'll discuss further in a few moments.
Our premises had no physical damage from the hurricanes,
but our call center was closed for approximately four
days in September, due to the issuance of hurricane
warnings, which might have negatively impacted our second
quarter sales. Our Web site was up at all times, and
callers were directed to our Web site. Also slowdown in
our sales growth compared to the last year may be
attributable to increased competition, both by
veterinarians and traditional and online retailers.
We acquired 154,000 new customers in our second fiscal
quarter, compared to 166,000 for the same period the
prior year. We acquired 345,000 new customers in six
months, compared to 400,000 for the same period a year
ago.
The seasonality in our business is due to the proportion
of flea, tick and heartworm medications in our product
mix. Spring and summer are considered peak seasons, with
fall and winter being the off season.
For the second fiscal quarter, our gross profit as a
percent of sales was 40.4%, compared to 40.9% for the
same period a year ago. For the six months ended
September 30, 2004 and 2003, our gross profit as a
percent of sales was the same at 39.8%.
Exhibit 99.1 Page 2 - 7
Our general and administrative expenses, as a percent of
sales, decreased to 10.3% for the quarter, compared to
10.9% for the same quarter the prior year and for the six
months, the G&A decreased to 9.7%, compared to 10.3% a
year ago. The improvement shows a continued leverage of
the G&A. Also a positive trend is the increase to 52% of
our customers placing their orders on our Web site,
compared to 50% for the prior year. We spent $5.6
million in advertising, compared to $4.4 million for the
same quarter the prior year - an increase of 27%. For
the six months, we spent $13.4 million for advertising,
compared to $11 million a year ago - an increase of 22%.
Advertising costs of acquiring a customer for the quarter
was $37, compared to $27 for the same quarter the prior
year and for the six months, it was $39, compared to $27
for the same period a year ago. We attribute this to our
change in advertising media mix, due to a shortage of
television inventory, as a result of the upcoming
elections and the strengthening economy.
Our working capital increased by $5.7 million to $17
million since March 31, 2004. The increase was due to
increases in net income and the exercise of stock options
and warrants. We had $10.8 million in cash and $9.4
million in inventory, with no debt as of September 30,
2004. Cash from operations for the six months was $6.6
million, compared to cash from operations of $2.8 million
for the same period last year.
Capital expenditures for the six months were
approximately $110,000. One other point: to continue to
grow the business, we are currently focusing our efforts
in two areas. One, optimizing our advertising media buys
as well as developing new creatives to reduce customer
acquisition costs. Number two, improving reorders by
leveraging our database, cross selling, improving patient
compliance, and expanding our product lines. Operator,
we are ready to take questions.
Coordinator At this time, we are ready to begin the
Q&A session. Our first question comes from Frank
Gristina of Avondale.
F. Gristina Thank you, guys. Nice quarter considering
the storms you guys had in the off season. I had a
question on sales and marketing. It didn't come in quite
as bad as we were modeling and I was just curious if you
did anything in particular that helped limit that in the
quarter, so targeting remnant space and states outside of
the battleground states? That's the first question.
M. Akdag We did a little bit better on television than
we anticipated and that was the difference on the
customer acquisition cost coming down from the June
quarter.
F. Gristina What did television ads look like exiting
the quarter? Were costs high and do you expect those to
ease November 2nd or is it going to take a little longer?
M. Akdag The elections are almost over, as you know next
week. It will probably be loose until Thanksgiving, then
the holiday season starts. It tightens back up until the
new year.
F. Gristina Is there anything you can do - You're
entering two weaker quarters. Is there anything you can
do to increase sales or reorder during this time? I know
you get a lot of your sales in the flea and tick season,
but are there any products you can go into to try to get
customers back? Then also, can you give us an update on
some of the initiatives you may have mentioned the
previous quarter? Pet insurance was one of those.
Exhibit 99.1 Page 3 - 7
M. Akdag Right. We will attempt to cross sell obviously
products that are not seasonal during the off season. We
added compounded medications and we added horse
medications recently. Pet insurance, we are still
negotiating so it's not final yet. So we're not in that
business at this time.
F. Gristina Okay. That will do for now. Thank you.
M. Akdag Thank you.
Coordinator Our next question comes from Michael
Moriarty of Tee One Up.
T. Oatman Hello. This is Tom Oatman for Michael. I was
just wondering if you could just give us an update please
on the competitive environment and what you see in terms
of their efforts to acquire customers, whether it be
print or TV or online? Thank you.
M. Akdag We are seeing some TV. We are seeing some
radio from competitors. We are not really seeing much
print, although one of the competitors is a catalog
company, so they mail catalogs. We consider that a
direct mail basically. The online marketing environment
is highly competitive now. It's a lot more competitive
than it was last year.
T. Oatman So given that, do you see a significant change
in the mix of your customer acquisition efforts by
channel or do you think you'll just continue with the
same approach?
M. Akdag Traditionally, as you know, we spend a majority
of the advertising dollars on television. This year we
have not been able to do that. We would like to go back
to that, so going forward, we would like to spend the
majority of the dollars on television.
T. Oatman Can you give us some sense of who is heading
that effort now? Is it you primarily or is it Puleo or -
Who is heading that for you?
M. Akdag It's a team effort. Puleo is involved with
that. We also have a new marketing director that we
hired a few months ago who is involved with that.
T. Oatman Thank you.
Coordinator Our next question comes from A. Gusican of
Mosaic.
A. Gusican Hello, gentlemen. I wanted to ask about
the reordering. Can you comment on how they compare to
last year?
M. Akdag As you know the reorders increased, I think,
about 34% for the quarter from the last year's reorders.
It went up from $12.9 million, the reorders were last
year same quarter and it went up to $17.2 million for the
quarter ended on September 30, 2004. For the six months,
it was up 46% to $37.2 million, compared to $25.4 million
for the six months last year.
A. Gusican I don't know if this was mentioned before.
What was the average order size in the quarter?
M. Akdag We like to give you the 12 months so it's not
misleading. For the 12 months, it's about $75. For the
quarter it was $74.
Exhibit 99.1 Page 4 - 7
A. Gusican You said that you added horse medications?
Was that for the entire quarter and how did that business
perform?
M. Akdag We just added it in September so it did not
have any material impact so far.
A. Gusican What are the margins like on this
business? Are they 40% or -
M. Akdag They're a little less. It will probably be
about 35%; maybe 30%, 35% range.
A. Gusican Okay. Thank you.
M. Akdag You're welcome.
Coordinator Our next question comes from Peter
Treadway of Tracer Capital.
P. Treadway Hello. Did you guys say your reorder new
sales were - Did you say it was $10.9? Did I get that
right?
M. Akdag New order sales, yes - $10.9 million for the
quarter compared to $12 million last year, same quarter.
P. Treadway What's the difference, if I take your
reorder and your new order and I get to $28.1 million?
What's the difference between that and the $28.8 that you
guys reported?
M. Akdag Wholesale.
P. Treadway Okay, great. That was it. Thank you.
M. Akdag You're welcome.
Coordinator Our next question comes from Francisco
Benefiel of Noble Financial Group.
F. Benefiel Good morning, Mendo. I've got two
questions. The first one, could you give me an idea of
how is the change in your inventory levels quarter-over-
quarter, and can you remind us of the breakdown in
general and G&A costs? What percentage is fixed and
variable percentage for that cost?
M. Akdag Our inventory levels will fluctuate. Right
now, obviously we are going to our off-season so it will
be lower. It really depends on buying opportunities. If
there are buying opportunities, we will have higher
inventory levels. So there will be a tradeoff between
cash and inventory, depending on buying opportunities.
As far as your second question is concerned, G&A, I would
say approximately 60% is variable and 40% is fixed.
F. Benefiel One other question, Mendo. Could you give
us an idea of new products that your company will put out
there?
M. Akdag I'm sorry. I couldn't get your question.
F. Benefiel Could you give us an idea of what will be
the new products, if any, in the market that your company
will put?
Exhibit 99.1 Page 5 - 7
M. Akdag As I mentioned, we started offering compounded
medications. We recently started in September offering
horse medications. We have not really marketed it yet.
And we are negotiating on pet insurance with one of the
pet insurance companies.
F. Benefiel Thank you very much.
M. Akdag You're welcome.
Coordinator Our next question comes from Frank
Gristina of Avondale.
F. Gristina Thank you again. Mendo, can you give us
an update on the vet environment? Are they still - You
mentioned in the peak season that they were pricing
competitively, doing a lot of price matching. Do you
expect that that will continue or have they backed off
that given that they're not as big a part of sales right
now? Then, are they cooperating more or less than say a
year ago?
M. Akdag I would say there is probably - I'll answer
your last question first. There is probably not much of
a material change on the cooperation. It's probably
slightly higher this year versus last year; slightly
higher cooperation. As far as competition is concerned,
it's really hard to - We don't have any hard data to give
you. Spring and summer are also high season for
veterinary visits. Obviously there is a risk while the
pet owner is visiting the veterinarian, while they're
there, they may pick up the medications there and the vet
may match our prices at that time. That does not
necessarily mean we lost a customer, so there may be some
back and forth as far as where the consumer purchases it.
R. Gristina What about last quarter sales may have
been hurt by counterfeit medications? Are those - Did
they shut most of those down or is that still an issue
with online sales; affecting online sales?
M. Akdag They shut quite a bit of that down, but it's a
work in progress actually, so it's an ongoing maintenance
issue it looks like, with the online companies.
R. Gristina The Web site overhaul, did that have
material impact on visits or order rates that you've
noticed or anything you've noticed since you did the
overhaul? More non-prescription sales or non-medication
sales?
M. Akdag We are getting slightly higher conversion from
the visitors with the new Web site. We are actually
going to update it again shortly, within a few weeks.
R. Gristina Based on some things you've learned about
conversion?
M. Akdag Yes, based on data that we have. We want to do
a better job of cross selling and deliver the message to
both our database and to the public that we not only your
best source for flea, tick and heartworm medications.
R. Gristina Thank you.
M. Akdag You're welcome.
Coordinator This concludes the question and answer
session. I'd like to turn the call back over to the
speaker for any closing remarks.
Exhibit 99.1 Page 6 - 7
M. Akdag Thank you. We are a leader in a new
distribution channel. Our key opportunity is to leverage
our brand name to continue to increase our market share.
As I mentioned earlier, we will do this by focusing our
efforts in two areas. One, optimizing our advertising
media buys as well as developing new creatives to reduce
customer acquisition costs. Number two, improving
reorders by leveraging our database, cross selling,
improving patient compliance, and expanding our product
line. This wraps up today's conference call. Thank you
for joining us. Operator, this ends the conference call.
Coordinator Thank you for attending today's conference
call and have a nice day.
Exhibit 99.1 Page 7 - 7