EXHIBIT 99.1
PETMED EXPRESS INC.
FISCAL YEAR ENDED MARCH 31, 2005
CONFERENCE CALL TRANSCRIPT
MAY 16, 2005 at 8:30 a.m. EDT
Coordinator Welcome to the PetMed Express Incorporated doing
business as 1-800-PetMeds conference call to review
the financial results for the fiscal year ended March
31, 2005. 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 pet medications, and other health
products for dogs, cats, and horses direct to the
consumer. 1-800-PetMeds markets its products through
national television, online, direct mail, and print
advertising campaigns, which direct 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 would like to welcome everybody here
today. Before I turn the call over to Mendo Akdag,
our Chief Executive Officer, I would 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 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, the Chief
Executive Officer of 1-800-PetMeds, Mendo.
M. Akdag Thank you. Welcome and thank you for joining us.
Today we will review the highlights of our financial
results. We will compare our fiscal year ended on
March 31, 2005 to last year's fiscal year ended on
March 31, 2004. For the fiscal year ended on March
31, 2005, sales were $108.4 million compared to sales
of $94.0 million for the prior fiscal year, an
increase of 15%. The increase was primarily due to
increased reorders, offset by decreased new orders.
The average order size was approximately $76 for the
fiscal year, compared to $73 for the prior year. For
the fiscal year, net income was $8.0 million or $0.34
diluted per share, compared to $5.8 million or $0.25
diluted per share a year ago, an increase to net
income of 38%.
Retail reorder sales increased by 34% to $68.7 million
for the year, compared to reorder sales of $51.4
million for the prior year. Retail new order sales
decreased by 12% to $37.2 million for the year,
compared to $42.1 million for the prior year. The
decline in new orders for the year can be attributed
to the increase in advertising costs of acquiring new
customers during the first six months of the fiscal
year. A slow down in our retail sales growth compared
to the last year may also be attributable to increased
competition, both by veterinarians, and traditional
and online retailers.
Exhibit 99.1 Page 1 - 7
Wholesale sales were $2.4 million for the year,
compared to approximately half a million for the prior
year. We acquired approximately 510,000 new customers
in the fiscal year, compared to 572,000 for the prior
year.
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 fiscal year, our gross profit as a percent of
sales was 40.3%, compared to 40.6% for the same period
a year ago. The percentage decrease can be attributed
to increases in wholesale sales, which have lower
gross profit margins. Our general and administrative
expenses as a percent of sales decreased to 10.5% for
the year, compared to 11.4% for the prior year. The
improvement shows a continuous leverage of the G&A.
53% of our customers placed their orders on our Web
site for the year, compared to 50% for the prior year.
We spent $19.2 million in advertising for the year,
compared to $17.7 million for the prior year, an
increase of 9%. Advertising cost of acquiring a
customer for the year was approximately $38, compared
to $31 for the prior year. We attribute the increase
in advertising cost of acquiring a customer during the
first six months of our fiscal year to our change in
advertising media mix due to shortage of television
inventory, as a result of the strengthening economy,
and the elections held in November.
Our working capital increased by $10.6 million to
$22.0 million since March 31, 2004. The increase can
be attributed to cash flow generated from operation
and the exercise of stock options and warrants. We
had $12.7 million in cash and $11.2 million in
inventory with no debt as of March 31, 2005. Net cash
from operations for the year was $8.3 million,
compared to $1.1 million for the prior year. Capital
expenditures for the year were approximately $172,000,
compared to $742,000 for the prior year.
Now we will briefly compare our quarter ended on March
31, 2005, to last year's quarter ended on March 31,
2004. Net sales for the quarter ended on March 31,
2005 were $23.5 million, compared to $21.5 million for
the same quarter the prior year, an increase of 10%.
For the quarter, net income was $2.4 million, $0.10
diluted per share, compared to $1.3 million, $0.06
diluted per share for the same quarter a year ago, an
increase to net income of 81%. The increase in net
income for the quarter was primarily due to decreased
advertising expenditures, which was 13.5% of sales for
the quarter, compared to 19% for the same quarter the
prior year. This ends the financial review.
Operator, we are ready to take questions.
Coordinator Thank you. Our first question comes from Bernard Liu
with Noble Financial.
B. Liu Good morning and good quarter, guys.
M. Akdag Thank you.
B. Liu Mendo, I missed a couple of numbers on inventory and
the number for the reorder sales?
M. Akdag The retail reorder sales for the year was $68.7
million, compared to $51.4 million for the prior year.
And inventory was $11.2 million.
B. Liu And what was the average size for the quarter?
M. Akdag Average what, I'm sorry?
B. Liu Average order size for the quarter.
M. Akdag Seventy-six dollars.
Exhibit 99.1 Page 2 - 7
B. Liu OK, you know PetMeds has been historically strong in
certain markets, such as California, Florida, Texas,
and others. Are there any new geographic markets that
you're making headway in, and if yes, what do you
attribute that to?
M. Akdag There is really no change. The reason the southern
states are stronger is due to the weather. Obviously,
fleas and ticks are fairly year round in Florida and
South California, and probably Texas, so that's the
reason for that. All our marketing is national, so we
don't do regional advertising.
B. Liu One more question and I'll get back in queue. What
was the approximate distribution according to the
venue for your advertising expenses in the fourth
quarter? And what kind of pricing trends did you see
during the fourth quarter with respect to things like
TV ads, and Internet search engines, and how are those
trends playing out this quarter?
M. Akdag For the March quarter, our cost was approximately $40
[cost to acquire a new customer], compared to $45 for
the same quarter prior year. And we did a little bit
more television advertising in the mix. It was 53% of
the advertising expenditures were television, compared
to 50% last year same quarter.
B. Liu How about the pricing trends in TV advertising and
Internet search engines?
M Akdag The Internet search engines, I will start with; the
pricing is going up. It has gone up considerably from
year-to-year, but having said that, it's all relevant,
so it's still cost effective for us. Television,
obviously the numbers speak for themselves. We were
at an acquisition coat of $40 for the quarter,
compared to $45, so there was a 10% improvement.
B. Liu Okay, thank you. I'll get back in queue.
Coordinator Thank you. Our next question comes from Frank
Gristina with Avondale Partners.
F. Gristina Thanks guys. Congrats on the cash flow and net income
in the quarter.
M. Akdag Thank you.
F. Gristina Obviously, Mendo, you're very focused on the bottom
line, but with the new customers in the quarter, I
think you added 80,000 new customers in the quarter;
that's 10,000 less than a year ago, and I was
wondering if you could talk about why the difference?
I know you started your marketing a month later, and
maybe that's it, maybe there's a high correlation
between your advertising and new customers, but if you
could talk about that, and then are you concerned that
you're obviously getting a lot of loyalty out of your
customer base, but if that new customer number starts
to slow down, you're not going to have many customers
to bring back. So, what are your thoughts on new
customer addition for the remainder, or for fiscal
2006, and maybe you could talk about the delta between
this year and last year with new customers? And then
I have some housekeeping questions.
M. Akdag Good question, Frank. The quarter, you've got to
realize that it's still our off-season, and this March
quarter, we were a lot more efficient. And also when
we start increasing the advertising is in the month of
March. March 2005 was a lot colder; the weather was a
lot colder than the prior year, March 2004. So it was
still our off-season and we will spend the money in
our peak season, typically, not our off-season.
We probably spent too much money in the March 2004
quarter. That's the reason for this quarter that it
came up less. As far as the long term, we're not
concerned with that. It's our off-season. It was a
colder March, so we'll just move on. We are
anticipating a slightly better television-advertising
environment this year, compared to last year. So
Exhibit 99.1 Page 3 - 7
we'll be more aggressive on television advertising
this year, but you have to realize it's a dynamic
environment, so it changes from month-to-month.
Sometimes it's tight; sometimes it loosens up. But
we'll see how it shapes up. I can tell you that we'll
attempt to spend about 17% to 20% of our sales on
advertising in fiscal 2006.
F. Gristina Great. How was your clearance in April for remnant,
or for TV? I mean was it good in the March quarter,
and how is it trending in April, if you can give me
that?
M. Akdag It was slightly better than last year, but in May it
tightened up, and we are expecting it to loosen up in
June.
F. Gristina And just one more question on the new customers, so
last year, last fiscal year you added 90,000 in March,
and then you went on to add 191,000 in June, so
there's clearly seasonality. Do you think that you
can go from 80,000 in March of this year to a number
better than 191,000, or are we--? I'm trying to
figure out if we're looking for kind of year-over-year
declines in new customers as you build that bottom
line.
M. Akdag We'll find that out in July, but as you know, we don't
-- I'm not going to get into speculation here. But we
will attempt to spend a little bit more in advertising
dollars this June quarter, than the last June quarter.
So it doesn't mean it will happen, but that will be
our attempt.
F. Gristina And then for housekeeping, your D&A went down
sequentially. Is there something going on? Did you
sell something, or some assets, or why did your D&A go
down so much? It's not a big swing, but--
M. Akdag Some of the infrastructure is getting older, so it's
fully depreciated.
F. Gristina Okay. And then employees at the end of the quarter?
M. Akdag Number of employees you mean?
F. Gristina Yes, sir.
M. Akdag That changes day-by-day, but Bruce will help me with
that.
F. Gristina And then the other one, Bruce, is unique customers for
the past two years, you've given that in the past
sometimes, for modeling purposes. I don't know if
last time it was 1.4 million?
B. Rosenbloom As far as the employees, we have 138 full time
employees and 46 part time or temporary employees.
F. Gristina And then the unique customers for the past two years,
sorry?
M. Akdag One point four million.
F. Gristina Okay, thanks. I'll get back in the queue if I have
another one.
M. Akdag No problem.
Coordinator Thank you. Our next question comes from Terese Fabian
with Sidoti and Company.
T. Fabian Hello, good morning.
M. Akdag Good morning.
Exhibit 99.1 Page 4 - 7
T. Fabian I have a question on your generic meds and the
introduction of new products you had last year. Are
you seeing any takeoff on the new products and can you
talk a little bit about that?
M. Akdag The new products, I mean we add a product just about
on average, once a week, so it depends on what you
mean with new products. If you're specifically
talking about insurance, we put a hold on that for
now. We are most likely going to change the company
that we're dealing with. Horse medications it's
growing, although we only did about $60,000 in sales
in the March quarter. It's got a potential to grow,
and we haven't really fully marketed it yet; we're
preparing for that. Other than that, as far as
generics, our brand is about 3% of our overall sales,
approximately, and we continue to add new generics as
we go along.
T. Fabian Great. Without asking you for guidance, I know you
often compare your industry to the contact lens direct
marketing sales. Is this sort of where you thought
you would be at this time in terms of where you are,
your direction, and your positioning?
M. Akdag The answer is yes. Yes, we are happy with where we
are at this point.
T. Fabian And may I just ask one more question about the
demographics of your customers who purchase, are you
doing any special advertising strategy to target
certain demographics?
M. Akdag We are looking at that as to what stations they watch,
etc. We're doing surveys. Our demographics is more
higher end, high end customers, upper middle class,
middle class, more young professionals, and empty
nesters. It's females, the ages range from 35 to 65.
There's a trend actually, in the U.S. for pets for
empty nesters and young professionals. People are
getting married later than in the past. So they are
using pets..
T. Fabian Pets, rather than kids.
M. Akdag That's right.
T. Fabian Do you think that you would break out your advertising
to target specific groups like that, beyond TV ads?
M. Akdag If we think it's going to be cost effective we will do
that, we'll do some tests. As you target more, it
gets a lot more expensive, so it depends on your
conversion rates, if that will work out or not, but we
will do some tests.
T. Fabian Okay, thank you.
M. Akdag You're welcome.
Coordinator Our next question comes from Frank Gristina with
Avondale Partners.
F. Gristina Thanks, guys. I don't get to talk to you too much, so
I want to hit you with as many questions now. Wal-
Mart launched a site a month ago or so, and I wanted
to get your thoughts on the competitive environment.
Wal-Mart's not your biggest competitor, the vets are,
but if you could talk a little bit about your thoughts
on Wal-Mart, if there's any product overlap? If you
feel like they're a potential threat? And then give
us an update on the vet environment; has the
environment gotten more receptive, less receptive?
Are they still -- are some vets still questioning your
medications or the use of online services?
M. Akdag As far as Wal-Mart is concerned, Wal-Mart always sold
the pet supplies that they made available on their Web
site in their stores, so that's really nothing new
under the sun. I was surprised that they waited this
long to make it available on their Web site, but they
service more low end products. The trend that we're
following is pets in the United States are no longer
considered a property, but are thought of more like
children, and this
Exhibit 99.1 Page 5 - 7
mindset is really driving more high end products, and
pet products that mirror what we want for ourselves.
And we're after the high-end customer, so we don't
really see Wal-Mart at this time as a competition.
As far as other competition is concerned, I mean it's
going to grow. Obviously, everybody's watching us and
saying, Wow, there's an opportunity here," and they're
attempting to jump on the bandwagon. And we just have
to stay one step ahead of the competition. We're
really focusing on health education content,
problem/solution, so we need to give additional value
to the customer. We cannot be just in a refill
business. We're going to have to give additional
value, and we have to take advantage of our
competitive strengths. We have a powerful brand name,
1-800-PetMeds. We spend a lot of money on it. We
give exceptional customer service. Make the customer
happy is our motto. And we're a licensed pharmacy to
conduct business in 49 states. That's a competitive
advantage. Everybody does not have a pharmacy
license.
F. Gristina And you guys are generating some cash flow now; you're
carrying more cash than normal, or it's just growing.
What are you plans for the cash? I mean shouldn't you
go to the 20% of sales on sales and marketing, and
really try to build the customer base, or what do you
do with all the cash?
M. Akdag There is going to be a tradeoff between cash and
inventory depending on buying opportunities, so when
there are promotions, that's when we attempt to buy.
So the reason why, at the end of March inventory was
$11.2 million was there was no promotions at that
time. So there is going to be a tradeoff between cash
and inventory. As far as using the dollars to grow
the business, certainly we're going to attempt to do
that.
F. Gristina Excellent. Thanks, guys.
M. Akdag You're welcome.
Coordinator Thank you. Our next question comes from Bernard Liu
with Noble Financial.
B. Liu Hi, a follow-up question, more along the lines of
marketing. You mentioned in your press release
regarding the more relevant personalized communication
with your customers. Can you provide more color into
that? And what kind of erosion or attrition rates do
you see with your current client base?
M. Akdag I'm not going to get into too much detail as far as
the communication is concerned, other than saying that
it will be more health education content involved
communicating with our customers. If we know if they
have any health problems, if the pet has any health
problems, obviously we want to speak relevant to that
when we are communicating with them. What was your
next question?
B. Liu Regarding erosion or customer attrition rates?
M. Akdag We use reorders as a percent of prior year's total
sales in dollars. And that for the year was about
73%, so that's the matrix we use to measure reorders.
And for the March quarter, it was 79%.
B. Liu Thank you.
M. Akdag You're welcome.
Coordinator Thank you. Our next question comes from Terese Fabian
with Sidoti and Company.
T. Fabian You had mentioned in the call that the weather in the
March quarter was colder than normal. Can you talk a
little bit about that?
Exhibit 99.1 Page 6 - 7
M. Akdag My understanding is average nationwide was about 48
degrees, compared to 55 degrees the prior March. It's
difficult to, when you're launching flea, tick, and
heartworm when it's snowing outside; it's not a good
time to advertise.
T. Fabian And in the past you've talked about monitoring of
competition on the Internet and about some fraud in
medication filled on the Internet. Can you talk about
that a bit?
M. Akdag We are hearing less of it right now, we continue to
monitor the competition, and if we come across any,
we're letting both authorities and the manufacturers
know about it, and it seems they're taking action, but
it's a maintenance item for us.
T. Fabian Thank you.
Coordinator Thank you. This concludes the question and answer
portion. I'd like to turn the call back over to our
host.
M. Akdag Thank you. According to the American Pet Products
Manufacturer's Association, pet spending in the Unites
States increased 5.9%, and reached $34.4 billion in
2004. There is a trend that pets in the U.S. are no
longer considered property, but are thought of more
like children, part of the family. This mindset is
driving pet owners to more high end products and pet
products that mirror what they want for themselves.
Our key opportunity is to take advantage of this and
leverage our brand name to continue to increase our
market share.
We'll do this by focusing our efforts in three areas.
One, optimizing our advertising media buys; two,
improving reorders with ongoing relevant and
personalized customer communications; and three,
expanding product offerings. This wraps up today's
conference call. Thank you for joining us. Operator,
this ends the conference call.
Coordinator Thank you. This concludes today's teleconference.
Thank you for your participation and have a great day.
Exhibit 99.1 Page 7 - 7