PETMED EXPRESS, INC.
QUARTER ENDED SEPTEMBER 30, 2007
CONFERENCE CALL TRANSCRIPT
OCTOBER 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 second fiscal quarter
ended on September 30, 2007. At the request of the
Company this conference is being recorded. Founded
in 1996, 1-800-PetMeds is America's Largest Pet
Pharmacy, delivering prescriptions 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 medication
in terms of convenience, price, ease of ordering and
rapid home delivery. At this time I'd like turn the
call over to the Company's Chief Financial Officer,
Mr. Bruce Rosenbloom.
B. Rosenbloom: Thank you and good morning. I would 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 with 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.
M. Akdag: Thank you, Bruce. Welcome everyone. Thank you for
joining us. Today we will review the highlights of
our financial results. We'll compare our second
fiscal quarter and six months ended on September 30,
2007, to last year's quarter and six months ended on
September 30, 2006.
For the second fiscal quarter ended on September 30,
2007, sales were $51.5 million compared to sales of
$43.8 million for the same period the prior year, an
increase of 18%. For the six months ended on
September 30, 2007, sales were $110.6 million
compared to $94.5 million for the six months the
prior year, an increase of 17%. The increase was
due to increased retail reorders and new orders,
offset by decreased wholesale sales. For the second
fiscal quarter, net income was $4.5 million or $0.18
diluted per share compared to $3.3 million or $0.14
diluted per share for the same quarter the prior
year, an increase to net income of 37%. For the six
months, net income was $10.7 million or $0.44
diluted per share compared to $8.1 million or $0.33
diluted per share a year ago, an increase to net
income of 33%. Retail reorder sales increased by
25% to $35.0 million for the quarter compared to
retail reorder sales of $28.1 million for the same
quarter the prior year. For the six months, the
reorder sales increased by 21% to $75.0 million
compared to $62.0 million for the same period last
year. Retail new order sales increased by 6% to
$16.5 million for the quarter compared to $15.5
million for the same period the prior year. For the
six months, the new order sales increased by 11% to
$35.5 million compared to $32.0 million for the same
period last year. We acquired approximately 222,000
new customers in our second fiscal quarter compared
to 212,000 for the same period the prior year, and
we acquired approximately 458,000 new customers in
the six months compared to 419,000 for the same
period a year ago.
Exhibit 99.1 Page 1 of 5
Our average retail order was approximately $79 for
the quarter compared to $77 for the same quarter the
prior year, and approximately 65% of our sales were
generated on our website for the quarter compared to
62% for the same period the prior year. Our
Internet sales increased by 23% to $33.7 million for
the quarter compared to Internet sales of $27.4
million for the same quarter the prior year. For
the six months, the Internet sales increased by 24%
to $71.6 million compared to $57.6 million for the
same period last 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.
For the second fiscal quarter, our gross profit as a
percent of sales was 38.1% compared to 38.6% for the
same period a year ago. For the six months, our
gross profit as a percent of sales was 38.3%
compared to 39.2% for the six months a year ago. The
percentage decrease can be attributed to increased
product costs and freight costs.
Our general and administrative expenses as a percent
of sales were approximately 10.3% for the second
fiscal quarter compared to 9.8% for the same quarter
the prior year, and the G&A expenses as a percent of
sales were 9.9% for the six months ended on
September 30, 2007, compared to 9.3% for the same
six months the prior year. The percent increase can
mainly be attributed to stock based compensation
expenses. Also for the six months, the adoption of
"FIN 48" during the June quarter resulted in
approximately $386,000 of one-time uncollected sales
tax expense in a State where for tax purposes, it
was determined that the Company had established
nexus.
For the quarter, we spent $8.1 million in
advertising compared to $7.7 million for the same
quarter the prior year, an increase of 5%. For the
six months, we spent $16.6 million in advertising
compared to $16.0 million a year ago, an increase of
4%. Advertising cost of acquiring a customer for
the quarter was $36 for both the second fiscal
quarter and the same quarter the prior year, and for
the six months, it was $36, compared to $38 for the
same period a year ago.
Regarding the income tax provision, during the June
quarter, it was determined that the Company was no
longer a full taxpayer in the State of Florida, due
to the fact that nexus was established in another
state. This event triggered a lower effective tax
rate in the fiscal year ended March 31, 2007, and
for the June and September quarters. The company
also recognized an approximate $134,000 income tax
benefit due to the disqualifying disposition of
certain incentive stock option exercises during the
quarter ended on September 30, 2007. Going forward,
we are anticipating an estimated tax rate reduction
of approximately 1.5% compared to last fiscal year.
Our working capital increased by $11.4 million to
$62.0 million since March 31, 2007. The increase
can mainly be attributed to cash flow generated from
operations. We had $52.2 million in cash and
temporary investments and $15.0 million in inventory
with no debt as of September 30, 2007. Net cash
from operations for the six months was $12.8
million. In accordance with our share repurchase
program, we repurchased approximately 70,000 shares,
paying approximately $992,000 during the quarter,
and for the six months we repurchased approximately
187,000 shares, paying approximately $2.5 million.
Capital expenditures for the six months were
approximately $314,000. This ends the financial
review. Operator, we're ready to take questions.
Coordinator: Thank you. At this time if you would like to ask a
question, please press Star 1 on your touchtone
phone. You will be announced prior to asking your
question. To withdraw your question you may press
Star 2. Once again, at this time please press Star 1
to ask a question. One moment please.
Our first question comes from Mr. Michael Cox from
Piper Jaffray.
M. Cox: Good morning, congratulations on the quarter.
M. Akdag: Thank you, Michael.
Exhibit 99.1 Page 2 of 5
M. Cox: My first question is on the reorder sales and the
strength you saw in that segment of your business,
the strongest we've seen in a few quarters here. I
was wondering if you could speak to the success
there. If it was a function of reallocating some
advertising dollars in the quarter?
M. Akdag: We're doing a better job of communicating with our
customer base; we're communicating more often,
staying in front of them basically.
M. Cox: Okay, thanks, and on the inventory in the quarter,
showed a fairly sizable jump versus last year's end
of the 2Q, I was wondering if you could comment on
that. If there was just a timing in place of the
acceptance orders?
M. Akdag: We take advantage of all the promotions so our
inventory is going to fluctuate. I would say it was
more that last year's same quarter, it was lower
than it should have been.
M. Cox: Okay, that's helpful. Then lastly on the gross
margin, I was hoping you could comment on the impact
that freight cost had on the gross margin, that
piece specifically.
M. Akdag: What, the freight pieces you mean?
M. Cox: Yes, in terms of the year-over-year decline in gross
margin.
M. Akdag: I see. It's probably half of the.it's about 50 basis
points reduction in gross profit. I would say about
half of that is due to freight and half of it is due
to product cost increases.
M. Cox: Okay, great, thank you very much.
M. Akdag: You're welcome.
Coordinator: Thank you. Our next question comes from Anthony
Lebiedzinski from Sidoti and Company. Anthony, your
line is open.
A. Lebiedzinski: Yes, good morning. My question was whether or not the
weather had any impact on your sales. One of the
large specialty retailers lowered their guidance,
deciding that the warmer weather. I was wondering
if you had any comment in regards to that.
M. Akdag: No, I have no comments. I do not know the answer to
that, so I'm not going to speculate.
A. Lebiedzinski: Okay and I was wondering if there was a change of the
mix of advertising between TV, on-line and print in
the quarter versus last year.
M. Akdag: There was no material change.
A. Lebiedzinski: Okay, and what are your thoughts on the current
advertising environment?
M. Akdag: We are in our off season now, so it's not as
critical as it was for the June and September
quarters. It typically tightens up as we get into
the holidays and so December quarter usually is not
a good time for direct response advertisers and
luckily also there's less demand for our products,
so we're in our off-peak season. So, we're not
anticipating any major impact.
A. Lebiedzinksi: Okay, and lastly, as far as the tax rate, what's
the expected tax rate for the rest of the year? I
missed your comments before.
M. Akdag: We're anticipating about 1.5% less than the prior
year's tax rate.
A. Lebiedzinski: Okay, thank you.
M. Akdag: You're welcome.
Exhibit 99.1 Page 3 of 5
Coordinator: Thank you, once again, if you would like to ask a
question, please press Star 1 on your touchtone
phone. One moment please for the next question.
Thank you, our next question comes from Kristine
Koerber from JMP Securities.
Jennifer: Hi, this is Jennifer filling in for Kristine.
Question for you, new customer growth a little
lighter than you were expecting. Was there any
reason for this?
M. Akdag: We buy remnant space on TV, which means we are not
guaranteed clearance and we were a bit generous to
make sure that we cleared. So, the cost of
acquiring a customer, if you look at it, was the
same at $36 and we spent about 5% more than the same
quarter last year and grew 6%.
Jennifer: Okay, thanks.
Coordinator: Once again, to ask a question, please press Star 1.
One moment please. Your next question comes from Mr.
Michael Friedman from Noble Financial.
M. Friedman: Hi, good morning. Question about G&A. Do you expect
that to stay steady as a percentage of sales or can
you give us a little color on where you expect that
line item to be for the remainder of the year?
M. Akdag: The Board granted additional restricted stock to
employees and independent Board members and we are
seeing a percent increase that can mainly be
attributed to stock-based compensation expenses.
So, it depends on if there are any additional grants
or not. We are not anticipating any for this fiscal
year.
M. Friedman: Okay, so as a percentage of sales, I guess
everything would depend on what the stock options
are going to do, but did you say you're not
anticipating a material change in G&A basically?
M. Akdag: That is correct. Obviously quarter to quarter it
fluctuates, so we are higher, for the six months; we
were higher about 60 basis points. So, I would
assume going forward for this next six months that
it will be slightly higher than last year.
M. Friedman: Okay, I'm sorry. Is that on a whole-dollar basis or
on a percentage basis?
M. Akdag: It's on a percentage basis.
M. Friedman: Percentage basis, okay. Can you tell us a little bit
about the Betty White campaign in use? Is that going
better than you had originally anticipated, as good
as originally anticipated, can you just give us a
little flavor for that?
M. Akdag: Well, the numbers don't lie obviously, for the
September quarter the results were the same as the
same quarter last year, so . . . .
M. Friedman: Okay.
M. Akdag: So, you can draw your own conclusion.
M. Friedman: Okay. Can you just give us a little flavor for the
competitive environment - the veterinarians getting
more price competitive or are you seeing more
Internet competition - anything along those lines?
M. Akdag: I would say the competition is similar to last year.
It's not much different.
M. Friedman: Okay, thank you.
M. Akdag: You're welcome.
Exhibit 99.1 Page 4 of 5
Coordinator: Thank you. Our last question today comes from Mr.
Michael Cox from Piper Jaffray. Mr. Cox, your line
is open, sir.
M. Cox: Yes, thank you, just one quick follow up. On the
last conference call you mentioned that you were
revamping your website. I was wondering if that was
in fact completed in the quarter and if there are
any benefits that we should expect from that going
forward?
M. Akdag: We're still not live with the new platform. We
decided to wait for the upgrade that is newly
available, before we go live. The reason obviously
we're going to the new platform is for scalability,
personalization and better customer service. So,
the time will show obviously if that reflects in the
numbers once we go live.
M. Cox: And do you have an anticipated date that you would
go live with that site at this point?
M. Akdag: Well, last time I said weeks and we're still not
live. So, I'm hesitant to give you any date at this
time.
M. Cox: Okay, great. Thank you very much.
M. Akdag: You're welcome.
Coordinator: That was the last question, sir.
M. Akdag: Thank you. We'll be focusing our efforts in three
areas to capitalize on the pet industry's 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 and thank you for joining us.
Operator, this ends the conference call.
Coordinator: Thank you. Thank you for participating in today's
conference call. All parties may disconnect at this
time.
Exhibit 99.1 Page 5 of 5