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PetMed Express Inc  (NASDAQ:PETS)
Q2 2019 Earnings Conference Call
Oct. 22, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Petmed Express Incorporated doing business as 1-800-PetMeds conference call to review the financial results for the second fiscal quarter ended September 30th, 2018. 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 and cats direct to the customer.

1-800-PetMeds markets its products through national advertising campaigns which direct consumers to order by phone or on the Internet, and aim to increase the recognition of the PetMed's family of brand names. 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.

Bruce Rosenbloom -- Chief Financial Officer

Thank you. I would like to welcome everybody here today. Before I turn the call over to Mendo Akdag, our President and Chief Executive officer, 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 the 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 President and Chief Executive Officer of 1-800-PetMeds. Mendo?

Menderes Akdag -- President and Chief Executive Officer

Thank you, Bruce. Welcome everyone. Thank you for joining us. Today we will review the highlights of our financial results, will compare our second fiscal quarter and six months ended on September 30, 2018 to last year's quarter and six months ended on September 30, 2017.

For the second fiscal quarter ended on September 30, 2018, our sales were $71.4 million compared to $66.7 million for the same period the prior year, an increase of 7%. For the six months ended on September 30, 2018, sales were $158.8 million compared to $146.4 million for the six months the prior year, an increase of 8.5%. The increases in sales were due to increases in reorder sales. The average order value was approximately $87 for the quarter compared to $85 for the same period last year.

For the second fiscal quarter, net income was $10.8 million or $0.52 diluted per share, compared to $8.8 million or $0.43 diluted per share for the same quarter the prior year, an increase to net income of 23%. And for the six months, net income was $23.3 million or $1.14 diluted per share compared to $18 million or $0.88 diluted per share a year ago, an increase to net income of 29%.

In addition to increased sales, the Tax Reform Act of 2017 helped to boost our earnings. Reorder sales increased by 11% to $61 million for the quarter compared to reorder sales of $55.1 million for the same quarter the prior year. For the six months, the reorder sales increased by 11% to $132.5 million compared to $119.5 million for the same period last year.

New order sales decreased by 11% to $10.4 million for the quarter compared to $11.6 million for the same period the prior year. For the six months, the new order sales decreased by 2% to $26.3 million compared to $26.8 million for the same period last year.

We acquired approximately 117,000 new customers in our second fiscal quarter compared to 134,000 for the same period the prior year. And we acquired approximately 286,000 new customers in the six months compared to 302,000 for the same period a year ago.

Approximately 85% of our sales were generated on our website for the quarter compared to 84% for the same period the prior year, which resulted in a 7.4% increase in online sales.

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 35.4% compared to 35.2% for the same period the prior year. And for the six months, our gross profit as a percent of sales was the same 34.8% compared to the same period a year ago.

Our general and administrative expenses as a percent of sales was down to 8.7% compared to 9.3% for the same quarter last year and for the six months, it was 8.3% compared to 8.5% for the six months the prior year. We were able to leverage this G&A with increased sales.

For the quarter, we spent $5.3 million in advertising compared to $4.5 million for the same quarter the prior year, an increase of 17%. For the six months, we spent $12 million in advertising compared to $10.8 million for the six months a year ago, an increase of 11%. The advertising cost for acquiring a customer was approximately $45 for quarter compared to $34 for the same quarter the prior year and for the six months, it was $42 compared to $36 for the six months last year. The increases were due to increases in advertising costs due to the more competitive environment. The increased advertising positively impacted reorder sales.

We had $87.1 million in cash and cash equivalents and $28.6 million in inventory with no debt as of September 30, 2018. Net cash from operations for the six months was $20.4 million compared to $18.3 million for the same period last year.

This ends the financial review. Operator, we are ready to take questions.

Questions and Answers:

Operator

(Operator Instructions) The first question comes from the line of Kevin Ellich from Craig-Hallum. Your line is now open.

Kevin Ellich -- Craig-Hallum -- Analyst

Good morning. I have a couple of questions for you guys, I guess.

Menderes Akdag -- President and Chief Executive Officer

Sure.

Kevin Ellich -- Craig-Hallum -- Analyst

And Mendo, I wanted to start off with the new customer adds of 117,000 and your customer acquisition cost of $45, which is a little bit higher than we are looking for. Is cost per impression going up or you're just increasing the amount that you're spending online? Can you talk about the competitive landscape that you previously mentioned in your prepared remarks?

Menderes Akdag -- President and Chief Executive Officer

Yes, the cost of impression is going up double digits due to the more competitive environment.

Kevin Ellich -- Craig-Hallum -- Analyst

Is that for key products or is it for kind of all products across the board?

Menderes Akdag -- President and Chief Executive Officer

I will say online.

Kevin Ellich -- Craig-Hallum -- Analyst

Okay. Online. Got you, going up double digits. Okay. Do you think that will moderate going forward, or do you think that's going to be the way it is for the foreseeable future?

Menderes Akdag -- President and Chief Executive Officer

It's difficult to tell. It's going to be depending on the competitiveness of the environment.

Kevin Ellich -- Craig-Hallum -- Analyst

Okay. And then, you know, this is the first -- your fiscal second quarter in the last couple of years where new customer sales were down on a year-over-year basis. Is that just due to the competitive landscape as well, or I guess how should we think about that going forward?

Menderes Akdag -- President and Chief Executive Officer

Well, I mean, the cost was up, advertising cost, due to the more competitive environment.

Kevin Ellich -- Craig-Hallum -- Analyst

Okay, great. And then switching to, if Bruce can jump on this, G&A did come in lower than we expected (technical difficulty) good cost management. How much more can you guys peel back in terms of costs and how low can that go, Bruce?

Bruce Rosenbloom -- Chief Financial Officer

Well, it's really as you would put, as Mendo mentioned, it's really dependent on sales. Obviously if sales increases that has an opportunity to further leverage our G&A expenses. We're going to continue to run the business as we've always run it. We are -- obviously we're very careful where we spend those dollars to make sure we're spending those dollars efficiently, but it's really more of a function of sales.

Kevin Ellich -- Craig-Hallum -- Analyst

Got it. And then, Mendo, last question for me. Gross margin (technical difficulty) it was actually up on a year-over-year basis versus last quarter where you saw that little decline. Are you seeing any changes in terms of the cost of purchasing products or like the cost of your sales?

Menderes Akdag -- President and Chief Executive Officer

Shift in sales to a higher-margin items continued in the quarter, offset by a more competitive marketplace.

Kevin Ellich -- Craig-Hallum -- Analyst

Got it. Okay, sounds good. Thanks guys.

Menderes Akdag -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. Next question comes from Erin Wright of Credit Suisse. Your line is now open.

Erin Wright -- Credit Suisse -- Analyst

Hey, thanks. On the gross margin, how should we think about the incremental benefit or traction you've historically seen from the next generation parasiticide products? Are you still seeing an incremental benefit there?

Menderes Akdag -- President and Chief Executive Officer

Yes, we are seeing an incremental benefit offset by more aggressive pricing.

Erin Wright -- Credit Suisse -- Analyst

Okay, thanks. And how should we think about the quarterly progression for the advertising spend? Are there any changes in your strategy on the advertising front at all?

Menderes Akdag -- President and Chief Executive Officer

We are working on an offline advertising plan. So we will probably invest some money on our brand offline.

Erin Wright -- Credit Suisse -- Analyst

Okay, great. And then could you breakdown, I guess, roughly how much of your revenue today is prescription products versus other?

Menderes Akdag -- President and Chief Executive Officer

We're not going to disclose that due to competitive reasons.

Erin Wright -- Credit Suisse -- Analyst

Okay. All right, that's fair. All right, thank you.

Menderes Akdag -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. The next question comes from David Westenberg of CL King. Your line is now open.

David Westenberg -- CL King -- Analyst

Hi. Thanks for taking the question. So you noted advertising impacting reorder sales. Can you remind us again why advertising impacts the reorder sales and maybe not so much why maybe it didn't impact new order sales the way you'd like it?

Menderes Akdag -- President and Chief Executive Officer

Well, we have -- obviously it's a reminder. If an existing customer sees our advertising, it's a reminder to reorder. So it helps from that perspective. It also may help activating inactive customers.

David Westenberg -- CL King -- Analyst

Could you say you might have got a lift for some -- maybe some inactive customers in that reorder sales or I don't know what you would be prepared to give in terms of qualitative or quantitative data on increasing inactives?

Menderes Akdag -- President and Chief Executive Officer

We're going to go -- we're going to work on that going forward actually. We always do, but will be more aggressive as far as activating inactive customers going forward.

David Westenberg -- CL King -- Analyst

Thank you so much. And we have seen an increase in buying outside the traditional veterinary channel. Seeing that's happening, do you think that there is maybe an impact for you guys to purchase maybe directly from more manufacturers on a go-forward basis or is there any opportunity to maybe lower your input costs?

Menderes Akdag -- President and Chief Executive Officer

It's a possibility, yes.

David Westenberg -- CL King -- Analyst

Great. Thank you. And then obviously the next generation flea and tick has really helped on the gross margin front. Anticipating in 2000 (ph) -- maybe late 2019 maybe 2020, we're going to probably see another flea, tick and heartworm kind of triple that should hit the market granted timelines can be finicky. However, what would do you anticipate the impact in terms of either gross margin or sales or any sort of way to think about how that might benefit the business?

Menderes Akdag -- President and Chief Executive Officer

It should have a positive impact. Having said that, the new generation medications have become also more competitive price wise.

David Westenberg -- CL King -- Analyst

All right. Thank you, guys. Have a nice day.

Menderes Akdag -- President and Chief Executive Officer

You are welcome.

Operator

Thank you. The next question comes from Anthony Lebiedzinski of Fidelity (ph) & Company. Your line is now open.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Yes, good morning. I'm actually at Sidoti, not Fidelity just to clarify. So as far as the advertising strategy, Mendo, can you talk about some offline ads? I believe you guys did some limited spots on TV during the quarter. Just wanted to see if you could expand on that and does that strategy of being offline also include some direct mail pieces or anything else that we should think about?

Menderes Akdag -- President and Chief Executive Officer

We did a test during the quarter and we'll probably continue that going forward. Yeah, it will be broadcast on direct mail print.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it, OK. And also in terms of just the AOV increasing again, is it just -- is this a continuation of the same shift toward higher price, higher margin products?

Menderes Akdag -- President and Chief Executive Officer

Yes, that is correct.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it, got it. Okay. All right. And given your tremendous cash flow generation, what are your thoughts on doing a meaningful share buyback?

Menderes Akdag -- President and Chief Executive Officer

That's up to the Board, that's on the agenda. So we'll see what happens.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Okay. All right. Thanks very much.

Menderes Akdag -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. (Operator Instructions) The next question comes from Kevin Ellich of Craig-Hallum. Your line is now open.

Kevin Ellich -- Craig-Hallum -- Analyst

Hey, guys. Just had a couple of follow-ups. You know, going back to your inventories, it looks like they've been building, Mendo. Are stockpiling as you see better pricing out (ph) in the marketplace now? And then as it relates to your cash flow, it looks like operating cash this quarter was actually down year-over-year and I don't know if Bruce can talk about some of the moving parts there and what's going to reverse next quarter.

Menderes Akdag -- President and Chief Executive Officer

The increase in inventory is due to better pricing, yes.

Kevin Ellich -- Craig-Hallum -- Analyst

Okay.

Bruce Rosenbloom -- Chief Financial Officer

As far as cash from operations, obviously we had a strong net income. The other fluctuations were timing, more so with inventory and payables. As Mendo noted we stocked up on inventory a little bit more during this quarter due to pricing opportunities. So it's more of a function of (inaudible).

Kevin Ellich -- Craig-Hallum -- Analyst

Got it. And then Mendo, I know this has probably been asked different ways this call, but with the competitive landscape should we see more promotional activity and discounting going forward? I think earlier this month you guys were running (ph) a promotion for existing customers that was a little bit maybe twice as much as you normally run. Just curious where that stands.

Menderes Akdag -- President and Chief Executive Officer

Yes, you will see more -- a little (ph) more promotions based on the competitiveness of the market.

Kevin Ellich -- Craig-Hallum -- Analyst

Okay. Great. Thanks, guys.

Menderes Akdag -- President and Chief Executive Officer

You are welcome.

Operator

Thank you. And now I'll turn the call over back to Mr. Mendo Akdag.

Menderes Akdag -- President and Chief Executive Officer

Thank you. For the remainder of fiscal 2019, we will continue to focus on increasing sales and further improving our service levels. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

Operator

Thank you for participating. You may now disconnect.

Duration: 22 minutes

Call participants:

Bruce Rosenbloom -- Chief Financial Officer

Menderes Akdag -- President and Chief Executive Officer

Kevin Ellich -- Craig-Hallum -- Analyst

Erin Wright -- Credit Suisse -- Analyst

David Westenberg -- CL King -- Analyst

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

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