EXHIBIT 99.1
PETMED EXPRESS, INC.
QUARTER ENDED DECEMBER 31, 2005
CONFERENCE CALL TRANSCRIPT
JANUARY 23, 2006 AT 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 third fiscal quarter ended on December 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 nonprescription pet
medications and other health products for dogs, cats, and
horses, direct to the customer. 1-800-PetMeds markets its
products through national television, online, and direct
mail advertising campaigns, which direct customers 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 everyone here today.
Before I turn the call over to Mendo, our Chief Executive
Officer and President, 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, Chief
Executive Officer and President of 1-800-PetMeds. Mendo.
M. Akdag Thank you, Bruce. Welcome, everyone. Today we'll review
the highlights of our financial results. We'll compare our
third fiscal quarter and nine months ended on December 31,
2005 to last year's quarter and nine months ended on
December 31, 2004.
For the third fiscal quarter ended on December 31, 2005,
sales were $25.9 million compared to sales of $20.8 million
for the same period the prior year, an increase of 25%. For
the nine months ended on December 31, 2005, sales were
$108.2 million compared to $84.8 million for the nine months
the prior year, an increase of 28%. The increase was
primarily due to increased retail reorders, retail new
orders, and wholesale sales.
Exhibit 99.1 Page 1 - 7
For the third fiscal quarter, net income was $2.7 million or
$0.11 diluted per share, compared to $2 million or $0.08
diluted per share for the same quarter the prior year, an
increase to net income of 37%. For the nine months, net
income was $8.9 million or $0.37 diluted per share, compared
to $5.6 million or $0.23 diluted per share a year ago, an
increase to net income of 60%.
Retail reorder sales increased by 25% to $18.1 million for
the quarter compared to reorder sales of $14.5 million for
the same quarter the prior year. For the nine months, the
reorder sales increased by 29% to $66.7 million, compared to
$51.7 million for the same period a year ago.
Retail new order sales increased by 26% to $7.3 million for
the quarter compared to $5.8 million for the same period the
prior year. For the nine months, the new order sales
increased by 22% to $38.4 million, compared to $31.6 million
for the same period last year.
Wholesale sales were approximately the same, $500,000, for
the quarter ended on December 31, 2005 and 2004. For the
nine months, wholesale sales were $3.1 million, compared to
$1.6 million for the same period a year ago.
We acquired approximately 105,000 new customers in our third
fiscal quarter compared to 85,000 for the same period the
prior year; and we acquired approximately 530,000 new
customers in nine months compared to 430,000 for the same
period a year ago.
Our average retail order was approximately $74 for the
quarter and approximately 57% of our sales were generated on
our Web site. 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 seasons.
For the third fiscal quarter our gross profit as a percent
of sales was 39.7%, compared to 40.6% for the same period a
year ago. For the nine months, our gross profit as a
percent of sales was 38.8%, compared to 40% for the nine
months a year ago. The percentage decrease can mainly be
attributed to increases to our product and freight costs;
discounts given to our customers; and increases in wholesale
sales, which have lower gross profit margins for the nine
months.
Our general and administrative expenses as a percent of
sales decreased to 11.8% for the quarter, compared to 12.2%
for the same quarter the prior year; and for the nine
months, the G&A decreased to 9.9% compared to 10.3% a year
ago. The improvement shows a continued leverage of the G&A.
For the quarter, we spent $3.2 million in advertising
compared to $2.6 million for the same quarter the prior
year, an increase of 21%. For the nine months, we spent
$17.7 million for advertising compared to $16.0 million a
year ago, an increase of 11%.
Advertising cost of acquiring a customer for the quarter
improved to approximately $30, compared to $31 for the same
quarter the prior year; and for the nine months, it was $33,
compared to $37 for the same period a year ago.
Our working capital increased by $9.9 million to $31.9
million since March 31, 2005. The increase can mainly be
attributed to cash flow generated from operations. We had
$26.6 million in cash, and $11.6 million in inventory, with
no debt as of December 31, 2005. Net cash from operations
for the nine months was $13.5 million compared to net cash
from operations of $3.5 million for the same period last
year, an increase of $10 million. Capital expenditures for
the nine months were approximately $250,000.
Exhibit 99.1 Page 2 - 7
This ends the financial review. Operator, we're ready to
take questions.
Coordinator Thank you, one moment while the questions register,
please. Our first question comes from Bernard Liu with
Noble Financial.
B. Liu Good morning, gentlemen, nice quarter. Your orders for new
customers are generally lower than for the reorder
customers. To what extent does that represent more
aggressive price concessions to capture the incremental
customer?
M. Akdag We have been aggressive, but not really this quarter.
Typically we're more aggressive in our peak seasons, spring
and summer, and less aggressive price-wise in our off
seasons, fall and winter. But we spent more money,
obviously; we spent about 21% more in advertising than we
did the same quarter the prior year, and as I pointed out,
the cost of acquisition was slightly lower than last year
also.
B. Liu Okay. You did mention the impact of increased product and
freight costs on gross margin. How much of your shipping is
via the U.S. Postal Service versus private carriers like
FedEx; and was there any impact of fuel surcharges for the
private carriers, and if so, to what extent were you able to
pass those on to your customers?
M. Akdag A vast majority of our shipments are U.S. Postal Service,
priority mail. We do charge if we use FedEx for overnight
and two-day delivery; we do charge for it, so that is not
free of charge. Otherwise, we offer free shipping on our
standard priority mail, on orders over $39. But on two-day
air and overnight, we charge the consumer.
B. Liu Okay. So basically, if there's any fuel surcharge, is that
passed on to the consumer?
M. Akdag We pretty much probably break even roughly from what we
charge the consumer and what our cost is on overnight and
two-day shipments.
B. Liu One more question and I'll get back in queue. You showed
some real nice top-line growth for a seasonally weak
quarter, and considering you had the hurricane impacts
during the quarter. How much of that growth do you think
came from holiday seasonal items that you may not have had
in the prior year?
M. Akdag Not a significant amount. We've done a better job this year
compared to last year on holiday items. But I would say
it's not really significant.
B. Liu Thank you, I'll get back in queue.
Coordinator Our next question comes from Rusty Hoss with Roth
Capital Partners.
R. Hoss Good morning. Can you talk a little bit about the
inventory? It looks like it's down about 14%, and obviously
showing good top-line growth and maintaining a good
inventory level. Can you just elaborate on that a little
bit?
M. Akdag Our inventory levels are going to depend on buying
opportunities. If there are promotions out there, we
sometimes buy up to a six month supply of inventory. So it
depends on really the environment and the buying
opportunities, what our inventory levels are going to be.
Exhibit 99.1 Page 3 - 7
R. Hoss Okay. On the gross margin side, I think you had mentioned
wholesale sales were at about the same level they were this
quarter last year, so gross margin was down a little bit;
and I'm curious as to what's the breakout, or can you just
elaborate a little bit on the gross margin contraction from
pricing versus shipping costs?
M. Akdag I would say probably roughly half of the decrease is due to
product and freight cost increases, and the other half about
discounts given to customers.
R. Hoss Okay. Last question: Can you talk a little bit about the
advertising outlook, what you see this quarter, given that
the Olympics are starting here shortly?
M. Akdag It's really difficult to tell. It's our off season, so
we're not too concerned with it at this time. Our peak
season starts in spring, so we really don't know how much
it's going to impact us, to be honest with you.
R. Hoss Okay, thank you.
Coordinator Our next question comes from Anthony Lebiedzinski with
Sidoti Company.
A. Lebiedzinski Good morning. A couple of questions. You obviously
had to deal with the hurricane and I was wondering if you
could elaborate as far as if there was any significant
changes to - let's say if you didn't have the hurricane, if
there were a few things, maybe the top line, that would have
been better, and bottom line; and also, what kind of steps
have you taken to sort of prevent you having to deal with
lost backup and so on?
M. Akdag As far as sales, the top line, is concerned, it is really
difficult to tell how much impact it did have. I'm sure it
had some impact. At least we lost momentum and we shut down
our advertising for a week to two weeks, our TV advertising,
at that time. And our Website was down about two days, and
our call center was down approximately four days. But it's
really difficult to tell what kind of - it had some impact,
but it's difficult to quantify it.
As far as preparing for the future, we're going to add more
redundancy to our infrastructure. Redundancy additions to
our infrastructure, we'll probably take place in the quarter
that we are in, the March quarter.
A. Lebiedzinski What's your cap ex outlook for the rest of the year?
M. Akdag We pretty much moved all the cap ex that we were planning on
spending in the next fiscal year to this quarter, due to the
hurricane; so my guess would be right now about $400,000 to
$500,000 we'll spend in this quarter.
A. Lebiedzinski And the U.S. Postal Service has actually just
increased their rates, so what are your plans as far as
dealing with this situation, whether you'll see some product
pricing increases, or what are your thoughts on that?
M. Akdag We have already done some increases to our product pricing
to pass the cost increases to the consumer.
A. Lebiedzinski Also, as far as the gross margin, just sort of getting
back to the previous question, as I look at the first three
quarters of this fiscal year, your gross margin has
contracted from the year-ago periods. Are we at sort of the
sustainable levels here, or what would you say, what would
be a sustainable gross margin at least on an annualized
basis?
Exhibit 99.1 Page 4 - 7
M. Akdag There will continue to be pressures on gross profit as a
percent on the margins. We are going to be focused on
really gross profit dollars, not gross profit percent.
A. Lebiedzinski Okay, thank you.
Coordinator Our next question comes from Frank Gristina with
Avondale Partners.
F. Gristina Good morning. Nice quarter. A couple of questions.
Mendo, what did your ad rates do year over year for TV?
Were they flat, were they up in the single digits, or even
declining given all the dollars moving to the Internet?
Then, what was your mix of ad spend, TV relative to other
areas?
M. Akdag I know we've been generous with that information in the
past, but we're going to discontinue giving the breakdown of
our advertising, due to competitive reasons.
F. Gristina Okay. What about in terms of the pricing year over year?
Is that also competitive?
M. Akdag It is. We buy remnant space on television, so it depends on
inventory availability. It's really supply/demand.
F. Gristina Okay. Then you see the Olympics coming; the Olympics
are out of your key season, so you're not as worried about
that driving up the rates in remnant, or reducing the amount
of remnant inventory?
M. Akdag It's difficult to tell. It's more really viewer ship; it's
not really the rate. But you have less viewer ship on
stations, obviously, that do not show the Olympics. So
that's the issue. So we look at it how much we're paying
per viewer, or per 1,000 viewers, is the way we do the math.
F. Gristina Okay. You mentioned competition embargoing some data
here. Is there anybody that's picked up steam in recent
quarters that you're looking at?
M. Akdag No, we're not aware of anybody picking up steam. It's more
that veterinarians now are more price-competitive than they
used to be.
F. Gristina I know we were, but are you surprised by the number of
new customers you added in this slow quarter? What would
you attribute that to? Is there any referrals going on,
some viral component that would add more customers than
expected, at a lower price? In addition to that, are there
any surprise items that these new customers are buying?
Historically they're buying Frontline and then they go to
Heartgard or flea and tick and then go to heartworm. Is
there something else that they're buying that's surprising
you a little bit?
M. Akdag We have add-ons to the orders, nutritional supplements; and
holiday items, we've done a little better job this year
compared to last year, same quarter. But mainly, the
advertising, we spent more money. We spent $600,000 more
this quarter compared to last year, same quarter; and it was
more efficient and more effective, the bottom line.
F. Gristina Great. Then, last question: You have a lot of cash
now in your cap ex, at the most could be a million dollars
in the next 12 months, or you're going to front-end-load a
lot of that into this March quarter. But what do you plan
on doing with all that cash? Doesn't it make sense to do a
stock buyback or make some acquisitions or really blow out
the marketing, if it's that efficient, and just add a lot
more customers than you've done historically?
Exhibit 99.1 Page 5 - 7
M. Akdag The board is considering all the options that you mentioned,
including doing nothing. So obviously, when and if we
decide to take action, we'll let the market know.
F. Gristina Okay, thanks a lot. Congratulations.
Coordinator Our next question comes from Mark Rupe with Canaccord Adams.
M. Rupe You mentioned that the vets are being more price-
competitive. Just curious to see how the relationship with
the vets has progressed, if it's still very difficult; and
then also I'd be curious to learn whether there's any status
updates with any of the state lawsuits; I know Texas is the
remaining one out there. I came across a couple of actions
recently; I'm just curious to see how that's progressing.
M. Akdag As far as veterinarians, I would say it is getting slightly
better, but it's still challenging. As far as Texas is
concerned, it's still pending. It's difficult to assess
really any possible outcome at this time. But I can tell
you that allegations are for past conduct and not for
current conduct, so it would not impact our current
operation, whatever the outcome is.
M. Rupe Got it, okay. Have you considered hiring a lobbyist?
M. Akdag Yes, we do consider hiring lobbyists.
M. Rupe Okay, perfect. Thank you.
Coordinator Our next question comes from Michael Perna with AAD
Capital.
M. Perna Good morning, congratulations, gentlemen, it was a great
quarter. Could you please just tell me, what percentage of
your revenues now are you having to match other people's
prices? Just in running some random spot checks, it seems
as if Petco.com in particular has become a bit more
aggressive on the Frontline SKU's.
M. Akdag My guess would be about 10% of the calls, there is a price
issue that's being brought up. But keep in mind that we're
a licensed pharmacy, which most retailers are not, including
Petco. It's more convenient to purchase both prescription
and over-the-counter items from one source.
M. Perna Okay, great. Thank you very much.
Coordinator Our next question comes from Ken Smith with Munder
Capital.
K. Smith On the Web traffic you get, how much of that comes direct to
your URL; how much comes from affiliates or other sources?
M. Akdag Unfortunately, we don't give that information out, due to
competitive reasons.
K. Smith Okay, thanks.
Coordinator We have an additional question from Bernard Liu with
Noble Financial.
Exhibit 99.1 Page 6 - 7
B. Liu A quick follow-up on your ad purchasing dynamics: When you
do purchase ad space, how far in advance is it purchased?
Because you did mention that during the hurricane you shut
down advertising, and if memory serves me right, I did - I
guess it might have been a few days afterwards - I did see a
number of PetMed advertisements on the Weather Channel. And
if that's so, to what degree to you think you got some
increased viewer ship from something like that on a national
basis? Thank you.
M. Akdag We shut the advertising down right after the hurricane. I
think the hurricane was on a Monday, and we were able to
shut it down probably by Friday. So I'm not sure when you
saw the commercials, but the majority were shut down. We
can do it fairly quickly, but it takes a week once you make
the decision. It could take up to a week to shut it down.
B. Liu When you buy the ad space, how far in advance do you buy it?
M. Akdag It depends. On television, we buy it monthly, and there are
certain - if we are buying on network, we buy in advance,
about three months in advance. But the majority of the
cable, we buy monthly, but we can revise it on a weekly
basis. And print, obviously you need more lead time. Print
takes 60 to 90 days.
B. Liu Thank you.
Coordinator We have an additional question from Frank Gristina with
Avondale Partners.
F. Gristina Two more questions: I had asked about referrals from
existing customers. Do you track that? I don't think it
could do anything but scare the competition if you answer;
but are you getting some viral component with the people
that are joining, now that your installed base is as large
as it is?
M. Akdag Yes, we do get referrals. It's difficult to quantify, but
even if we could, I wouldn't tell you.
F. Gristina Fair enough. Last question: Your net margins are
expanding year over year in spite of the gross margin
pressure, which was expected. At 10.3%, where do you see
this - I mean, you've run this business for a while and
similar businesses in the past. Where do you see your net
margin normalizing, or can you tell, because the dynamic
with this particular model might be a little different than
those in the past.
M Akdag I can give you some insight, that there will continue to be
pressures on the gross profit margins as a percent; and
there's going to be leverage on G&A and possibly on the
advertising line. So hopefully we'll offset it and maybe
we'll gain a point or two.
F. Gristina Okay. Thanks a lot.
Coordinator I show no further questions and would like to turn it
back for any closing remarks.
M. Akdag Thank you. We'll be focusing our efforts in two areas to
capitalize on the pet industry's growth trend: One,
improving reorders with personalized communication and
health education content; to build value for our customers;
to differentiate our brand; and help our customers choose
the right products for their pet. And two, expanding our
product offerings with new high-end products, with a focus
on lifetime of wellness for pets.
This wraps up today's conference call. Thank you for
joining us.
Exhibit 99.1 Page 7 - 7