EXHIBIT 99.1
PETMED EXPRESS, INC.
QUARTER ENDED SEPTEMBER 30, 2006
CONFERENCE CALL TRANSCRIPT
OCTOBER 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 second
fiscal quarter ended on September 30, 2006. 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, on-line, 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 now like to turn the call over to
the company's Chief Financial Officer, Mr. Bruce
Rosenbloom.
Bruce Rosenbloom: Thank you. I'd like to welcome everybody here
today. Before I turn the call over to Mendo
Akdag, 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 of the
Securities and Exchange Commission.
Now let me introduce today's speaker, Mendo
Akdag, the Chief Executive Officer and President
of 1-800-PetMeds. Mendo.
Mendo Akdag: Thank you, Bruce. Welcome everyone, and thank
you for joining us. Today we'll review the
highlights of our financial results. We'll
compare our second fiscal quarter and six months
ended on September 30, 2006, to last year's
quarter and six months ended on September 30,
2005.
Exhibit 99.1 Page 1 - 7
For the second fiscal quarter ended on September
30, 2006, our sales were $43.8 million compared
to sales of $38.7 million for the same period
the prior year - an increase of 13%.
For the six months ended on September 30, 2006,
sales were $94.5 million compared to sales of
$82.3 million for the six months the prior year
- an increase of 15%. The increase was primarily
due to increased retail reorders, offset by
decreased wholesale sales.
For the second fiscal quarter, net income was
$3.3 million, or 14 cents diluted per share,
compared to $2.7 million or 11 cents diluted per
share for the same quarter the prior year - an
increase to net income of 22%.
For the six months, net income was $8.1 million,
or 33 cents diluted per share, compared to $6.3
million, or 26 cents diluted per share a year
ago - an increase to net income of 29%.
Retail reorder sales increased by 23% to $28.1
million for the quarter, compared to retail
reorder sales of $22.9 million for the same
quarter the prior year. For the six months, the
reorder sales increased by 28% to $62 million,
compared to $48.6 million for the same period
last year.
Retail new order sales increased by 6% to $15.5
million for the quarter, compared to $14.7
million for the same period the prior year. For
the six months, the new order sales increased by
3% to $32 million, compared to $31.1 million for
the same period last year.
The slowdown in retail new order sales growth
may be attributable to increased advertising
costs to acquire new customers, and increased
price competition.
Wholesale sales were approximately $200,000 for
the quarter compared to $1.1 million for the
same quarter the prior year. For the six months,
wholesale sales were approximately $500,000
compared to $2.5 million for the same period a
year ago. The decrease was due to our decision
to limit wholesale sales to focus on retail
business.
We acquired 212,000 new customers in our second
fiscal quarter compared to 208,000 for the same
period the prior year, and we acquired 419,000
new customers in the six months compared to
425,000 for the same period a year ago.
Our average retail order was approximately $77
for the quarter compared to $74 for the same
quarter the prior year, and approximately 62% of
our sales were generated on our web site for the
quarter compared to 55% for the same period 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 seasons.
Exhibit 99.1 Page 2 - 7
For the second fiscal quarter our gross profit
as a percent of sales was 38.6% compared to
38.4% for the same period a year ago. For the
six months, our gross profit as a percent of
sales was 39.2% compared to 38.5% for the six
months a year ago.
The percentage increase can mainly be attributed
to decreases in wholesale sales, which have
lower gross profit margins. Our general and
administrative expenses as a percent of sales
were approximately 9.9% for both the second
fiscal quarter and for the same quarter the
prior year, and the G&A expenses as a percent of
sales were 9.3% for both the six months and the
September 30, 2006, and for the same six months
the prior year.
The company adapted financial accounting
standard 123R on April 1, 2006, resulting in
approximately $223,000 of stock option
compensation expense for the quarter, and
$446,000 for the six months, which increased the
G&A as a percent of sales by 1/2% for the
quarter and the six months.
For the quarter we spent $7.7 million in
advertising compared to $6.9 million for the
same quarter the prior year - an increase of
11%. For the six months we spent $16 million in
advertising compared to $14.5 million a year ago
- an increase of 10%.
Advertising cost of acquiring a customer for the
quarter was $36 compared to $33 for the same
quarter the prior year, and for the six months
it was $38 compared to $34 for the same period a
year ago. Our working capital increased by $8.9
million to $43.9 million since March 31, 2006.
The increase can mainly be attributed to cash
flow generated from operations.
We had $37.7 million in cash and $9.9 million in
inventory, with no debt as of September 30,
2006. Net cash from operations for the six
months was $14.2 million compared to $12.7
million for the same period the prior year - an
increase of $1.5 million.
Capital expenditures for the six months were
approximately $300,000. This ends the financial
review. Operator, we are ready to take
questions.
Coordinator: All right, very good now. We will now begin the
question and answer session. If anybody would
like to ask a question, please press star 1 on
your telephone keypad. To cancel your request,
press star 2. If you're on speakerphone
equipment, you may need to lift your telephone
receiver before making your selection. One
moment please for the first question to queue
up.
Our first question comes from Frank Gristina of
Avondale. Go ahead with your question please.
Frank Gristina: Good morning Mendo, Bruce.
Mendo Akdag: Good morning, Frank.
Exhibit 99.1 Page 3 - 7
Frank Gristina: Bruce, I was hoping you could break out the
different revenue lines, new reorder, wholesales,
just so - cause on the surface it seems like
maybe the new order business was down, but it's
actually the wholesale business that caused the
year-over-year decline in the, I guess, the
delta between total revenue and reorder revenue?
Bruce Rosenbloom: On total sales for the quarter?
Frank Gristina: Yes please.
Bruce Rosenbloom: The new orders were $15.5 million, reorders
$28.1, wholesale was approximately $200,000.
Frank Gristina: Two hundred thousand. And then in terms of -
can you give us an update what's going on in the
advertising environment? Do you feel like you
felt - I mean $36 CAC [customer acquisition cost],
8% inflation is not too bad. Do you feel like you
saw some political pressure there or how did you
manage to, I guess, keep that inflation down to
single digits?
Mendo Akdag: It was really not as bad as we anticipated, the
bottom line answer is.
Frank Gristina: And is it dissipating now, or I guess through
November we'll see, I guess, what pressure an
ad...
Mendo Akdag: It was not bad the first two weeks of October,
obviously we have two more weeks to go. So it
may tighten up a little bit.
Frank Gristina: Okay.
Mendo Akdag: But bear in mind that it's our off season.
Frank Gristina: Okay, and the last thing is what's the driver
of retail reorder sales, so up 23%? Is it new
products in the basket, is it some pricing?
What's driving that strong number?
Mendo Akdag: Continuous communication with our database.
Frank Gristina: Do a lot of direct marketing via email?
Mendo Akdag: Refills, upsells, and cross-selling, and through
both emails and direct mail.
Frank Gristina: And cross-selling, what exactly - does that
mean you were getting them to buy a new product,
something they didn't buy before so they're
going from Frontline and Heartgard to a bone and
joint medicine? Is that cross-selling?
Mendo Akdag: I would say so, but more vitamins, nutritional
supplements, toys, shampoo, conditioner, skin
care.
Frank Gristina: Great. Well thanks a lot. I'll get back in the
queue.
Exhibit 99.1 Page 4 - 7
Mendo Akdag: Okay.
Coordinator: Next question comes from Marcos Kaminis of
Kaminis Capital.
Marcos Kaminis: Hi, I have a couple - two questions. First
question is regarding the wholesale business.
I'm sorry I missed the prior year number for
that.
Mendo Akdag: The prior year for the quarter was $1.1 million,
and the current September quarter was $200,000.
Marcos Kaminis: Okay. So is this a run rate, this $200,000 level
that you're going to probably stick with? And
when will the comp number start to reflect the -
when will this be out of your comps?
Mendo Akdag: I think by next fiscal year it should be out of
the comps.
Marcos Kaminis: You've now - let's see. It affected last quarter,
it affected this quarter, is it going to affect
the coming quarter?
Mendo Akdag: Hold on one second. Possibly yes. It will.
Marcos Kaminis: Okay so, I mean when did you start it?
Mendo Akdag: As of the end of the March quarter. So we have
two more quarters to go that it will impact it.
After that it will be...
Marcos Kaminis: That's helpful. I mean I feel like it's an
economic value ad anyway, in the long run. The
other question I have now is what are your plans
for the use of cash? You have a nice cash store
building up.
You have a share repurchase plan - pretty large
share repurchase plan passed through the Board.
And are you thinking you might acquire smaller
competitors, or are you going to buy back
shares? What's your plan?
Mendo Akdag: We do not have a stock buy-back plan approved by
the Board.
Marcos Kaminis: You don't?
Mendo Akdag: That's not us.
Marcos Kaminis: Would you consider buying back shares? Are you
planning to maybe buy up some lists of some
smaller competitors?
Mendo Akdag: The board is considering all options, including
stock buy-back, dividends and acquisitions, so
when and if the board makes the decision,
obviously we'll let the public know.
Marcos Kaminis: Right, but, you know, what do you view as more
valuable?
Mendo Akdag: To me, personally?
Exhibit 99.1 Page 5 - 7
Marcos Kaminis: Yes.
Mendo Akdag: Probably stock buy-back.
Marcos Kaminis:Okay, thank you.
Mendo Akdag: You're welcome.
Coordinator: Next question comes from Anthony Lebczinski of
Sidoti and Company.
Anthony Lebczinski: Good morning, a couple of questions. Have
you made any changes to the advertising strategy,
and also is the mix of cable TV commercials
still the same, or are you doing a little bit
more of perhaps online advertising?
Mendo Akdag: We are probably doing a little bit more online
advertising. We really have not made any
strategic changes except probably our creatives.
We're coming out with new creatives which will
probably start running in January that we're
excited about. Other than that, we track all our
advertising and whatever is obviously paying off
we'll continue with that.
Anthony Lebczinski: Um, hmmm. And as far as the gross margin,
you had mentioned that the bulk of it, that the
gross margin expansion was because of the
wholesale revenue coming down and now as you
strip out the wholesale component, what was the
gross margin then?
Mendo Akdag: It was very similar to last year, probably a .1%
difference.
Anthony Lebczinski: Okay, and lastly, as far as the average
order size, it did increase this quarter versus
last year. What would you attribute that to?
Mendo Akdag: I would say about 60% is due to price increases,
passing the cost increases to the consumer, and
the other 40% upselling and cross-selling.
Anthony Lebczinski: Okay, thank you.
Mendo Akdag: You're welcome.
Coordinator: Once again, if anybody would like to ask a
question, that's star 1 on your telephone
keypad. Star 1 on your telephone keypad if you'd
like to ask a question. Our next question comes
from Kristine Koerber of JMP. Go ahead please.
Kristine Koerber: Yeah, hi. Can you give us a little more
color on pricing? I know you said you were
competitive on pricing during the quarter, what
you're seeing out there, and what you saw in the
environment during the quarter. Are we seeing
more competitors heating up the discounting?
Mendo Akdag: We really look at veterinarians. The market
share is coming from the veterinarians so we
compare ourselves to veterinarians and they have
been more price-competitive.
Exhibit 99.1 Page 6 - 7
Kristine Koerber: Has it been a lot? Are we talking 5%, 10%?
How much more aggressive were you during the
quarter?
Mendo Akdag: It's a highly fragmented market. There are about
20,000 veterinary practices, so there are a lot
of prices out there. On average what we charge -
on average we save the consumer about 10% to 15%
I would say. But bear in mind that we have free
shipping - free priority shipping we offer on
orders over $39, which majority of the orders
qualify.
Kristine Koerber: Okay, thanks.
Coordinator: Next question comes from Michael Friedman of
Noble Financial.
Michael Friedman: Yes, actually most of my questions have
been answered. Just a question on the inventory,
actually. Is there - are you finding it easier,
or harder to get inventory, or about the same?
Can you just give us a little color on that?
Mendo Akdag: I would say it's about the same. It has not
changed.
Michael Friedman: Thank you.
Mendo Akdag: You're welcome.
Coordinator: Once again, that's star 1 on your telephone
keypad if anybody would like to ask a question.
Star 1 on your telephone keypad. That's star 1 on
your telephone keypad if anybody would like to
ask a question. All right, we're showing no
further questions on the phone line. We'll turn
it back over to you, sir, for further comments.
Mendo Akdag: Thank you. We'll be focusing our efforts in
three areas, to capitalize on the pet industry's
growth trend. One, optimizing our advertising
media buys and creatives to capture additional
market shares; two, personalized communication
and health education content to build value for
our customers, to increase loyalty, and to
differentiate our brand, and help our customers
choose the right products for their pets'
conditions; and three, improving our current
service levels.
This wraps up today's conference call. Thank you
for joining us. Operator, this ends the
conference call.
Coordinator: Very good. Thank you. This concludes today's
conference call. We thank you for your
participation. You may disconnect at this time.
Exhibit 99.1 Page 7 - 7