EXHIBIT 99.1
PETMED EXPRESS, INC.
QUARTER ENDED DECEMBER 31, 2006
CONFERENCE CALL TRANSCRIPT
JANUARY 22, 2007 AT 8:30 A.M. ET
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, 2006. At
the request of this 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 and direct mail
advertising campaigns which direct consumers to
order by phone or on the Internet, and aim to
increase their 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. Sir, you may go ahead please.
Bruce Rosenbloom: Thank you. I would like to welcome everyone
here today. 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 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.
Welcome and thank you for joining us, today.
We will review the highlights of our financial
results and we will compare our third quarter
and nine months ended on December 31, 2006 to
last year's quarter and nine months ended on
December 31, 2005.
For the third fiscal quarter ended on December
31, 2006, sales were $31.4 million compared to
sales of $25.9 million for the same period the
prior year, an increase of 21%. For the nine
months ended on December 31, 2006, sales were
$125.8 million compared to sales of $108.2
million for the nine months the prior year, an
increase of 16%. The increase was primarily
due to increased retail reorders and new orders
offset by decreased wholesale sales. For the
third quarter, net income was $2.8 million, or
$0.11 diluted per share compared to $2.7
million, or $0.11 diluted per share for the
same quarter the prior year, an increase to net
income of 3%. For the nine months, net income
was $10.8 million, or
Exhibit 99.1 Page 1 - 7
$0.44 diluted per share compared to $8.9
million, or $0.37 cents diluted per share a
year ago, an increase to net income of 21%.
Retail reorder sales increased by 22% to $22.1
million for the quarter compared to reorder
sales of $18.1 million for the same quarter the
prior year. For the nine months, the reorder
sales increased by 26% to $84.1 million
compared to $66.7 million for the same period a
year ago. Retail new order sales increased by
27% or $9.2 million for the quarter compared to
$7.3 million for the same period the prior
year. For the nine months, the new order sales
increased by 7% or $41.2 million compared to
$38.4 million for the same period last year.
Wholesale sales were approximately $70,000 for
the quarter compared to $500,000 for the same
quarter the prior year. For the nine months,
wholesale sales were approximately $500,000
compared to $3.1 million for the same period a
year ago. The decrease was due to our decision
to limit wholesale sales to focus on our retail
business.
We acquired approximately 130,000 new customers
in the third quarter, compared to 105,000 for
the same period the prior year, and we acquired
approximately 550,000 new customers in the nine
months, compared to 530,000 for the same period
a year ago. Our average retail order was
approximately $75 for the quarter, compared to
$74 for the same quarter the prior year, and
approximately 63% of our sales were generated
on our web site for the quarter compared to 57%
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 the
fall and winter being the off seasons.
For the third fiscal quarter our gross profit
as a percentage of sales was 40.8% compared to
39.7% for the same period a year ago. For the
nine months, our gross profit as a percentage
of sales was 39.6% compared to 38.8% for the
nine months a year ago. The percentage increase
can mainly be attributed to decreases in
wholesale sales, which have lower gross profit
margin and a shift in our product mix to higher
margin items.
Our general and administrative expenses as a
percentage of sales increased to 12.8% for the
quarter compared to 11.8% for the same quarter
the prior year, and for the nine months, the
G&A increased to 10.2% compared to 9.9% a year
ago. The company adopted FAS 123R on April 1,
2006, resulting in approximately $223,000 of
stock option compensation expense for the
quarter and $669,000 for the nine months, which
increased general and administrative expenses
as a percentage of sales by 0.7% for the
quarter and 0.5% for the nine months. For the
quarter, we maintained higher staff levels than
we usually do during our off season, or off
peak seasons, in an effort to ensure that we
have experienced staff that will be able to
offer better service during our upcoming peak
season.
For the quarter we spent $4.8 million in
advertising compared to $3.2 million for the
same quarter the prior year, an increase of
50%. For the nine months, we spent $20.8
million for advertising compared to $17.7
million a year ago, an increase of 17%.
Advertising costs of acquiring a customer for
the quarter was approximately $37 compared to
$30 for the same quarter the prior year, and
for the nine months it was $38 compared to $33
for the same period a year ago. We were more
aggressive to capture market share during the
quarter compared to the same quarter the prior
year.
Exhibit 99.1 Page 2 - 7
Our working capital increased by $11.6 million
to $46.6 million since March 31, 2006. The
increase can mainly be attributed to cash flow
generated from operations. We had $38.2
million in cash, $10 million in inventory and
with no debt as of December 31, 2006. Net cash
from operations for the nine months was $15.1
million compared to net cash from operations of
$13.5 million for the same period last year, an
increase of $1.6 million. Capital expenditures
for the nine months were approximately
$824,000.
This ends the financial review. Operator,
we're ready to take questions now.
Coordinator: Thank you and at this time if you would like to
ask a question, simply press star one on your
telephone touch pad. To withdraw your question,
please press star two. One moment while the
questions register please. Thank you. Our first
question comes from Michael Cox with Piper
Jaffray.
Michael Cox: Good morning. Thanks a lot. My first question
is on the advertising environment through your
fiscal third quarter obviously you went through
the election period. I was just wondering if
you could comment on the ad environment leading
up to the election and then coming out of that
election.
Mendo Akdag: This is Mendo Akdag, by the way. The
advertising environment was actually better
than we anticipated and we cleared more than we
anticipated. So as you could see we spent a lot
more money, about 50% more, for the quarter
compared to last year's same quarter. We were
more aggressive to capture market share.
Michael Cox: As we look forward, should we expect the same
level of aggressiveness moving toward market
share in terms of ad spend moving higher at
that same rate?
Mendo Akdag: Likely, yes. We will be more aggressive.
Michael Cox: Okay, and I was wondering if you could give any
early read on the new ad campaign that you
launched at the start of this year.
Mendo Akdag: It's a little too soon to tell, but we are
cautiously optimistic.
Michael Cox: Okay. My last question is on your share buy
back. It doesn't look like there was any
activity in the course of the quarter. I was
just wondering in terms of timing if there's -
if we should expect you to be more aggressive
here in your fiscal fourth quarter?
Mendo Akdag: We have not done any purchasing in the quarter.
It's really, it's up to, it's at the company's
discretion and it's subject to market
conditions. There is a committee that decides
that, so obviously if any transaction takes
place we'll let the public know.
Michael Cox: Okay. Great. Thank you very much.
Coordinator: Thank you. Our next question comes from Michael
Friedman with Noble Financial.
Michael Friedman: Hi. Going back to the spokesperson issue, is
there a reason why you brought somebody on -
Betty White - now? Is there something in the
market that sparked that decision? Could you
give us a little more color on that?
Exhibit 99.1 Page 3 - 7
Mendo Akdag: Obviously, we want to improve the efficiency of
our advertising. We want to get more response,
and that's one of the things, obviously we
could do was to hire a celebrity as a
spokesperson and that's what we have done.
Michael Friedman: But why now? Does that indicate that it's
tougher to acquire new customers? Or, I mean is
there a particular reason or you just feel that
this is the right moment to move into that
phase?
Mendo Akdag: Well, if you look at our nine months growth,
it's 16%, so we'd like to grow higher than that
so that was one of the factors in the decision.
Michael Friedman: Okay, and you mentioned you're going to be a
little bit more aggressive on the advertising
spend. Can you give us a time frame? Is that
the next - this current quarter or the next
several quarters? Can you just give us a little
more color on that?
Mendo Akdag: I can tell you that in the next - I would say
probably three quarters we're going to be more
aggressive than we have been in the last year.
Michael Friedman: So would it be fair to say that year over year
advertising spend may be up 50%? Is that what
you're saying?
Mendo Akdag: That's a little too aggressive. I would not
expect 50%, no.
Michael Friedman: Can you narrow it down a little bit more for
us? What do you guys think?
Mendo Akdag: I prefer not to. We have flexible budgets and
depending on the market conditions we like to
have the flexibility. So, I'd prefer not to
give you any numbers.
Michael Friedman: Okay. I'll get back in the queue. Thank you.
Coordinator: Thank you. Our next question comes from Rusty
Hoss with Roth Capital Partners.
Rusty Hoss: Yeah, hey guys. Can you maybe talk a little bit
about the customer acquisitions channel in
terms of both the split between television -
obviously that's still a majority - but also
what you might be doing on the Internet, online
advertising and also other traditional sources
of advertising to acquire customers?
Mendo Akdag: A majority of the money we spend on TV. Online
is second probably. We do paid searches,
affiliate programs, we do have banner ads all
over the Web and we do have some print and
direct mail presence. We don't like to break it
down due to competitive reasons. I'd prefer
not to give you any further details.
Rusty Hoss: But when you talk about being more aggressive
in advertising, is it going to be what - across
those channels or is one channel going to be
more of a focus?
Mendo Akdag: The television and online I would say.
Rusty Hoss: Okay. Second question is on the retail reorder
versus new order, the reorder was pretty
constant with what it was last year, but the
new order was about 10 points higher.
Exhibit 99.1 Page 4 - 7
And I'm wondering as we look at the next couple
of quarters should we assume that some of those
new order sales will then become repeat orders
and therefore there will be a shift back to a
retail reorder higher growth rate?
Mendo Akdag: Of course as we have a larger customer base,
reorders should go up. It depends on again how
much money we are spending in advertising to
acquire new customers will dictate the mix.
Rusty Hoss: Okay. Thank you.
Mendo Akdag: You're welcome.
Coordinator: Thank you. Our next question comes from
Kristine Koerber with JMP Securities.
Kristine Koerber: Hi. Can you just talk about the competitive
environment and was there a lot of discounting
going on during the quarter? And then also you
mentioned G&A up because of higher staff
levels. Was that most of the G&A increase? And
I'm assuming we can expect continued increases
in G&A going forward, correct?
Mendo Akdag: Typically in the off season, our December
quarter, there is less competition actually
because it's off season and it's more the
market is a lot more competitive during our
peak season which is the June and September
quarters. As far as the G&A, we carried higher
staff levels than we usually do and the reason
for that was that we wanted to have experienced
staff, less turnover, so we can be able to
service the customer better during our peak
season.
Kristine Koerber: But that - we're at a higher base now so we
should assume that going forward then on the
G&A, or do you pull back?
Mendo Akdag: That means there will be more fixed than
variable. That's what it means.
Kristine Koerber: Okay. Thank you.
Mendo Akdag: You're welcome.
Coordinator: Thank you. Once again, to ask a question please
press star one. To withdraw your question it's
star two. Our next question comes from Anthony
Lebiedzinski with the Principal Global
Investors.
Anthony Lebiedzinski: Good morning. Yeah, this is Anthony
Lebiedzinski from Sidoti & Company.
Mendo Akdag: Good morning.
Anthony Lebiedzinski: Good morning, Mendo - a couple of
questions. In regards to the last question I
had a follow-up. The G&A expenses - are you
from now on more committed to providing higher
staff levels to give more service so is it
right to assume that you're going to be
carrying more G&A going forward than you have
in the past? Is that a change in strategy so
that we should expect that, you know, G&A
expenses will be trending higher?
Mendo Akdag: It would be trending higher during our off
seasons. It shouldn't be trending higher during
our peak seasons.
Exhibit 99.1 Page 5 - 7
Anthony Lebiedzinski: Got it. Okay, that's helpful. And also as
far as the advertising environment maybe you
can give us a sense of how that's now in this
current quarter, and also how do you expect new
customer acquisition costs to be trending over
the next few quarters?
Mendo Akdag: It's really too soon to tell as far as current
quarter is concerned. We are anticipating a
little better advertising environment, more
favorable to direct response advertisers this
year. Having said that, you never know, I've
been surprised before.
Anthony Lebiedzinski: Okay, and as far as the Cap Ex that has
gone up quite a bit over this year, where do
you see that for the entire year? And any early
read as to the next fiscal year as far as Cap
Ex?
Mendo Akdag: The reason the Cap Ex is up is we're working on
a new e-commerce platform and there was a one-
time investment there. I think it's going to be
about probably the million dollar range and we
have I believe $400,000 to $500,000 possibly to
spend on it. Next year it will be more
maintenance mode. I would say $300,000 to
$500,000.
Anthony Lebiedzinski: Okay, that's helpful. Thank you.
Mendo Akdag: You're welcome.
Coordinator: Thank you. I would like to make a correction.
Mr. Lebiedzinski was from Sidoti. The next
question comes from John Curti with Principal
Global Investors.
John Curti: Good morning. My question has to do with gross
margin. I was wondering if you could isolate
the positive impact of having lower wholesale
sales on gross margins, as well as the impact
of a shift to higher margin products. I'm
trying to get a little better understanding
there how the mix plays out.
Mendo Akdag: Sure. For the quarter, the wholesale impact
was 40 basis points, so the rest was a shift in
product mix. For the nine months, the
wholesale impact was 50 basis points, so the
difference, the 30 basis points was due to
shift in product mix.
John Curti: What was it again for the nine months? I'm
sorry, 50 basis points?
Mendo Akdag: Fifty basis points were due to wholesale - a
decrease in wholesale.
John Curti: Could you talk a little bit more about then
what's going on with the mixed shift then and
do you anticipate that that's going to
continue?
Mendo Akdag: We will attempt that, ultimately, obviously the
consumer decides. We will attempt that, but I
would. During peak season I would anticipate
pressures in gross profit margins.
John Curti: All right. Thank you very much.
Mendo Akdag: You're welcome.
Coordinator: Thank you. I'd like to turn the call over to
Mr. Bruce Rosenbloom for any closing
statements, please.
Exhibit 99.1 Page 6 - 7
Bruce Rosenbloom: Thank you. We will be focusing our efforts in
three areas to capitalize on the pet industries'
growth trend: one, capturing additional market
share; two, increasing reorders with personalized
communication and health education content; 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: Thank you. This concludes today's teleconference.
Thank you for your participation. You may
disconnect. Thank you.
Exhibit 99.1 Page 7 - 7