EXHIBIT 99.1
PETMED EXPRESS, INC. CONFERENCE CALL
THIRD QUARTER FINANCIAL RESULTS
February 9, 2004
5:00 p.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 quarter ended
December 31st, 2003. 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 medications and health and
nutritional supplements for dogs and cats direct to
the consumer.
1-800-PetMeds markets its products through national
television, online, and direct mail advertising
campaigns, which directs the consumers to order by
phone or on the Internet, and aim to increase
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. You may begin.
B. Rosenbloom Thank you. First, I would like to welcome
everyone here today. Before I turn the call over to
Mendo, I would also 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 of 1-800-PetMeds. Mendo...
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M. Akdag Welcome, everyone, and thank you for joining
us. We'll first review the highlights of our
financial results. We'll compare our third fiscal
quarter and nine months ended on December 31st, 2003,
to last year's quarter and nine months ended on
December 31st, 2002.
For our third fiscal quarter ended on December 31st,
2003, sales were $17.2 million, compared to sales of
$11.1 million for the same period the prior year.
This was a 55% increase in sales. For the nine
months, sales were $72.5 million, compared to $40.1
million for the same period the prior year, an
increase of 81%. The increases were primarily due to
increased reorders and increased advertising. For the
nine months ended on December 31st, 2003, we shipped
over one million orders at the average order size of
$72.
For the third fiscal quarter, net income was $1.2
million, $.05 per diluted share, compared to
$435,000, $.02 per diluted share a year ago, an
increase of 182%. For the nine months, net income was
$4.5 million, $0.19 per diluted share, compared to
$1.5 million or $0.07 per diluted share a year ago,
an increase of 190%.
Our reorder sales increased by 90%, to $11.4 million
for the quarter, compared to reorder sales of $6.0
million for the quarter a year ago. For the nine
months, the reorder sales increased by 103%, to $36.8
million, compared to $18.1 million for the same
period a year ago.
There is seasonality in our business, due to the
flea, tick and heartworm medications that we sell.
Our third fiscal quarter was our off season.
For the third fiscal quarter, our gross profit as a
percent of sales was 41%, compared to 43% for the
same period the prior year. For the nine months, our
gross profit as a percent of sales was 40%, compared
to 43% a year ago. The decrease was mainly due to our
free shipping promotion, a portion of which was
offset by increases to our product pricing.
Our general and administrative expenses as a percent
of sales decreased to 13.5% for the quarter, compared
to 16.3% for the same quarter the prior year; and for
the nine months, the G&A decreased to 11.1%, compared
to 14.6% a year ago. The improvement was due to
economies of scale gained with increased sales, and
also almost 50% of our customers placed their order
on our Web site, compared to 40% for the same period
the prior year.
We spent $2.6 million in advertising for the quarter,
compared to $2.1 million for the same quarter a year ago,
an increase of 24%. For the nine months, we spent $13.6
million for advertising, compared to $8.8 million a
year ago, an increase of 55%. Cost of acquiring a
customer for the quarter was about $32, compared to
$29 for the same quarter a year ago; and for the nine
months, it was $28, which stayed the same compared to
$28 for the same period a year ago.
99.1 page 2 - 9
If we look at our balance sheet, our inventory substantially
increased to $13.6 million. We took advantage of some buying
opportunities, preparing for spring, our peak season. Our
working capital increased by $6.4 million, to $9.4 million,
since March 31st, 2003, our fiscal year-end; and our net
worth increased by $6.2 million, to $11.7 million at the
same time period. Both increases were due to increases in
net income, and the exercise of stock options. Overall, we
are pleased with the results.
A few other points: We got listed on the NASDAQ national
market in January 2004. This was an achievement of a major
milestone for us. We enhanced our Web site by adding the
"Ask the Veterinarian" feature, and we are in the process of
adding product comparison charts to assist consumers with
the selection of medication. We'll be launching a new
advertising campaign for spring. We are in the process of
fine-tuning our warehouse to increase our fulfillment
capacity from 10,000 orders a day to approximately 13,000 to
15,000 orders a day.
Operator, we are ready to take questions.
Coordinator Thank you. One moment, please, while the questions register.
Our first question comes from Bob Albanes.
B. Albanes I'd just like to ask a question about any problems we see
with vet or vet clinics issuing prescriptions,
and what are we doing in that area?
M. Akdag What I can tell you is the majority of the
veterinarians cooperate with us, and the minority
that doesn't cooperate, that is already reflected in
the numbers. So it has improved in the last one year;
the cooperation has improved in the last one year.
B. Albanes You don't see this as a problem in the
future?
M. Akdag We believe that at the end of the day, the
consumers call the shots, and if they want to
purchase their pet medications from another channel,
they're going to do that. Nobody can stop it. We
expect that to improve in the future.
B. Albanes Thank you.
Coordinator Our next question comes from Brett Bisinelli with Reed
Conner.
B. Bisinelli I have a question on the growth in your
business and where you see that coming from. Do you
think it's mainly coming just from the growth in the
market and the amount of pets out there? Or are you
taking share away from the established vets, and -
I'm just curious, too, in that respect, if you think
it's coming more from the chains, or probably more
from the mom-and-pop or single facilities? Thanks.
M. Akdag Traditionally, the medications that we dispense
have only been available through veterinarians. We're
a new alternative distribution channel, and the
channel will grow, we believe. Our estimate is that
the mail-order channel, which includes us, has
probably about 5% of the market share right now, and
if you look at human pharmacies, about 18% are
serviced by mail order. If you look at contact
lenses, about 20%, probably over 20%, is serviced by
mail order.
99.1 page 3 - 9
So we believe it's a new category, and we believe that the
category is going to grow, we're projecting, to 15 to 20% of
the market, based on human pharmaceuticals and contact
lenses. So regardless of whether the overall market grows or
not, we believe our category is going to continue to grow.
B. Bisinelli When do you think you can achieve that 15 to 20% share for
your industry?
M. Akdag Time will show. We probably right now have 60% of the
category; that's our estimate. This is a guesstimate, and
we'll see what happens.
B. Bisinelli Then, my final question is, I was wondering on the leverage,
if you can speak to that, and SG&A. You mentioned the
increased advertising coming up, and I was just wondering
really how scalable that is, the incremental dollar that
falls to the bottom line. Thanks.
M. Akdag As I pointed out, for the nine months, G&A decreased by about
3%, and obviously that's due to increase really in sales,
and I'm not counting advertising in that. I would say
probably half the G&A is variable and half is fixed. So it
is scalable, obviously.
B. Bisinelli Thank you very much.
Coordinator Our next question comes from Jeff Marciniak with Annex
Wealth Management.
J. Marciniak First of all, congratulations on a terrific quarter and nine
months.
M. Akdag Thank you.
J. Marciniak My question is related also to the market. Who do you see as
your prime competitors, the companies that make up that 40%
that comprises the rest of the market in the mail-order
channel?
M. Akdag There is about two dozen mail order companies. They're
privately held. We really don't have much information about
them; we just watch their marketing activities. There are
about two dozen companies.
Coordinator Our next question comes from Bill Block with WAB Capital.
B. Block I've got a couple of questions. One, it looks like for the
third quarter that your new orders were up only about 13.7%,
and it seems to me that this could have been disappointing,
because it took something like, as you said, $31 or $32 of
advertising for acquisition costs, versus $29 a year earlier
for the same period. I was wondering if you could comment on
this.
M. Akdag It's not unusual, it fluctuates. Our cost of acquiring a
customer has fluctuated in the past between $25 to $35, so
it's not an unusual swing, if you look at it for nine
months. Although we spent 55% more in advertising, our cost
of acquisition stayed the same at $28, so -
B. Block But what about for the third quarter?
M. Akdag I understand that, but it is going to fluctuate. It's more
meaningful if you look at a longer period of time.
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B. Block And how do you view the - I guess so far what's
happening this quarter, have new orders increased more
rapidly than the 13.7% to date?
M. Akdag I'm not going to comment on the current
quarter.
B. Block Okay. Those were my questions.
Coordinator Our next question comes from John Loeb, a private investor.
J. Loeb First of all, congratulations on a brilliant
record and brilliant progress. I only have one
question: I noticed that for the nine months, your
sales were up 81%, but for the third quarter, it was
only up - when I say "only," its fantastic - 55%. Can
you explain the difference there? Did that show that
the growth is beginning somewhat to slow?
M. Akdag That is related to, how much money we spent on
advertising. If you look at the advertising spending
in the third quarter, it was up only 24% from the
prior year. If you look at nine months, how much we
spent on advertising, it was up 55% from the prior
nine months. So it's directly related to how much
money we spent in advertising. It was an off-season
for us, so we were not aggressive.
J. Loeb I see. When you say overall, your sector is mail order,
did you say?
M. Akdag Yes.
J. Loeb 20%. Now, who makes up the - what is the other
80%?
M. Akdag The majority - it's not right now 20%. Our estimate right
now is about 5%. What we are projecting is that
it will increase to 15 to 20% of the market -
J. Loeb The whole mail-order section?
M. Akdag Yes, in the next five years.
J. Loeb Then, you project in the remaining, 80% will stay with
direct sales from the veterinarian?
M. Akdag It will be veterinarians and retailers.
J. Loeb Right, and you're taking this as a similar
comparison with the lens business, but isn't it
possible that you will get more than 20%? Is it
possible for this category?
M. Akdag Obviously, anything is possible. I mean, with
Internet, consumers are becoming more comfortable
ordering through the Internet that could increase. I
don't know. But we're just giving you some facts as
far as the human pharmaceutical mail-order category
and contact lens mail-order category.
J. Loeb Right. Thank you very much, and congratulations.
M. Akdag Thank you.
Coordinator Our next question comes from Paul Svetz with Capital Flows.
P. Svetz Congratulations.
M. Akdag Thank you.
99.1 page 5 - 9
P. Svetz The human pharmaceutical mail-order
distributors have benefited as they've gotten scale
from discounting associated with volume purchases,
and also advantages in the generic side, where
there's more than one offering. Are you yet at a
large enough scale to begin to benefit from those
things, and do you plan to benefit from them in the
future?
M. Akdag We probably will benefit in the future, but
probably the market will be also more competitive, so
we'll be probably passing it to the consumer. It's
possible that our margins can improve a few points,
but as a target, we use 40%, for the nine months
number, our gross profit number, was 40%.
P. Svetz Thank you.
Coordinator Our next question comes from David Centa, a private
investor.
D. Centa Congratulations, gentlemen, another excellent
quarter. What I wanted to ask about was, Mendo, can
you characterize basically which drugs customers need
prescriptions for, and where the convenience factor
is for the consumer in ordering pet medications
overall?
M. Akdag Prescription items, you mean?
D. Centa Both.
M. Akdag The main categories are, number one is really
flea and tick control products, which are
nonprescription. The second category is heartworm
medications. They are prescription items, they
require a prescription. The third category is bone
and joint care. I would say about probably - some of
that is prescription, some of it is nonprescription.
D. Centa What was the last category? I'm sorry. What did
you say?
M. Akdag Bone and joint care, arthritis.
D. Centa Okay.
M. Akdag The obvious convenience for the consumer is
that we deliver it right to their home. As far as
prescriptions are concerned, most of the time we do
the work for them. What we do when we take an order
is we get the veterinarian's name and phone number,
and we contact the veterinarian for them, and ask for
an authorization. So they don't have to go and pick
up a prescription.
D. Centa With respect to the flea and tick medications, are you
competitive, or do you beat on a price basis the
non-veterinarian source of those products?
M. Akdag We believe we are competitive. You have to take
into account that we offer free shipping on orders
over $49, and we certainly give superior service, we
believe, to the consumer.
D. Centa Are those flea and tick medications available
at any pet store?
M. Akdag No. Some of them carry it, some of them don't.
D. Centa All right, thank you.
Coordinator Our next question comes from Bill Smith with
CIBC-Oppenheimer.
99.1 page 6 - 9
B. Smith Gentlemen, congratulations on a fantastic quarter, as far
as I can tell. I have about three or four quick
questions I'll get out, and I'll shut up and listen.
Number one, I wanted to know your current number of
customers. Also, what your customer retention rate is; and
at what point you assume a customer isn't a
live and viable customer anymore. At what point do you say,
hey, they ordered once or they ordered twice,
but they're not ordering and their pet's gone, or they're
unhappy with the service. Then finally, are you
offering any forward guidance as far as customer
acquisition or earnings per share for the coming fiscal
year?
M. Akdag I will start with the last, that's the easy
one. No, we are not offering any guidance. As far as
customers are concerned, you have to realize, our
database is very new. It's about two years old. We
have about one million customers, unique customers,
who have purchased from us in the last 18 months, and
we use 18 months; really, we can even use 24 months.
How we measure the reorders is, the correlation that
we look at is, reorders as a percent of prior year's
total sales. For the fiscal year ended March 31st,
2003, that number was 81%. For the nine months ended
on December 31st, 2003, that number improved to 92%.
That's the correlation that we look at to measure
reorders.
B. Smith And you're not comfortable with, say, by the end of 2004,
we'd like to have 1.4 million customers, or 1.6
million customers? That's just a number you want us to just
go ahead and pluck from the air?
M. Akdag That's going to depend on how much money we spend on
advertising. How we are acquiring customers is
through advertising.
B. Smith Right.
M. Akdag I can tell you, we're going to be very
aggressive going into spring, and we're going to
spend a lot of money in advertising. I'm not prepared
to give any specific numbers at this time.
B. Smith I appreciate it. Thank you.
M. Akdag No problem.
Coordinator We have a follow-up question from David Centa, private
investor.
D. Centa The projections about, or the assumption that the
advertising directly results in new customers, is based
on what?
M. Akdag We are direct-response advertisers, and so we
measure all of our advertising. We look at how much
new orders and how much revenue we're getting in new
orders, and how many customers we are acquiring. So
of course it's directly related. In any projection,
in any model, you have to have - the advertising
drives the new orders, so you can look at, for
example, we spent in advertising $13.6 million for
the first nine months, and the reorders were -
D. Centa 92% or whatever?
99.1 page 7 - 9
M. Akdag Well, the reorders were $36.8 million, so the difference
between
$72.5 million and $36.8 million was new orders. And
those new orders were generated through the
advertising, the $13.6 million that we spent. So
you've got to look at that. It's about $2.60. So for
every dollar we spent on advertising, we got $2.60 in
new-order sales. So there's a direct correlation.
Then, you have to also make an assumption on
reorders, what are the reorders going to be; and I
gave you some historical numbers as far as reorders
as a percent of prior year's total sales. As I said,
it was 81% for the fiscal year ending March 31st,
2003; and for the first nine months of this fiscal
year, it was 92%. So the assumptions are really, how
much - for every dollar we spend, how much are we
going to get on new orders; and what is our reorder
rate going to be? So those are going to dictate the
top line.
D. Centa Right, okay.
M. Akdag Does that help?
D. Centa Yes, it does, thanks. Can you give me some
historical perspective on what took place in the
contact lens market with regard to, were the
companies creating the market, kind of like what you
guys are doing, or were there legal things happening,
or things going on in the business that consumers
gravitated towards purchasing from a direct marketer?
I mean, how did that kind of happen?
M. Akdag It's really a similar model. Advertising grew the business.
It was the driving force of acquiring
customers.
D. Centa What was the impetus, though? I mean, had laws
changed where these optometrists had to give out the
prescriptions, or what happened there? Or did people
identify it as a business, or what?
M. Akdag Recently, there is a federal regulation now,
which passed recently - I'm not sure it's currently
active or not, but it passed recently - and it
requires the optometrist to give a prescription to
the consumer prior to dispensing it themselves. But
that just happened -
D. Centa Yes, I heard it just happened last week or
something.
M. Akdag But the mail-order business existed for a long,
long time, so -
D. Centa Okay, so you weren't in the business when that
was taking place?
M. Akdag No. It's been about four years I've been out of
the business right now. There were some states, state
attorneys general filed a lawsuit against the
manufacturers, and some optometric associations, and
some are actually optometrists, I believe, which was
made on the basis of antitrust or anti-competitive
behavior. I'm sure that's public information. You can
look that up if you're interested.
D. Centa Mendo, do you have any updates on your suppliers and
whether you're able to go direct, or if that is in the
future?
M. Akdag I have no updates.
99.1 page 8 - 9
D. Centa Okay, thank you.
Coordinator At this time I'd like to turn the call back over to Mr.
Akdag for any closing remarks.
M. Akdag Thank you. We would like to close with giving
you a brief big picture on long-term prospects of the
company. We are a leader in a new category, in an
estimated $3 billion industry, offering the consumers
savings and convenience on pet medication. There is a
strong demand from pet owners for our channel of
distribution. This may accelerate, with consumers
becoming more comfortable with ordering through the
Internet.
We have a powerful brand name - 1-800-PetMeds. We
have shown a dramatic growth model in the last two
and a half years. We have an experienced management
team in place, and we have the operating technology
infrastructure in place to continue to grow the
business. We are very pleased with the results so
far, and we are excited about the future prospects of
the company. Thank you for joining us.
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