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PetMed Express Inc  (NASDAQ:PETS)
Q3 2018 Earnings Conference Call
Jan. 22, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Welcome to the PetMed Express Incorporated doing business as 1-800-PetMeds Conference Call to review the financial results for the Third Fiscal Quarter ended December 31, 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 consumers.

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 PetMeds 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. Please go ahead.

Bruce Rosenbloom -- Chief Financial Officer, Treasurer

Good morning. Welcome to the PetMed Express conference call. At the request of the Company, this conference call is being recorded. I'd like to welcome everyone today. Before I turn the call over to Mendo, 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 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've 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, President and Chief Executive Officer of 1-800-PetMeds. Mendo?

Menderes Akdag -- President, Chief Executive Officer, Director

Thank you, Bruce. Welcome, everyone, and thank you for joining us. Today, we will review the highlights of our financial results. We will compare our third fiscal quarter and nine-months ended on December 31st, 2018 to last year's quarter and nine months ended on December 31st, 2017.

For the third fiscal quarter ended on December 31st, 2018, our sales were flat at $60.1 million compared to sales for the same period in the prior year. For the nine months ended on December 31st, 2018, sales were $218.9 million, compared to sales of $206.5 million for the nine-months last year, an increase of 6%.

The increases in sales for the nine-months were due to increase in reorder sales. The average order value for the quarter was approximately $84 compared to $86 for the same quarter in the prior year. The decrease was due to more aggressive pricing.

For the third fiscal quarter, net income was $7.8 million or $0.38 diluted per share compared to $9.1 million or $0.44 diluted per share for the same quarter in the prior year, a decrease to net income of 14%. For the nine months, net income was $31.1 million or $1.52 diluted per share compared to $27.1 million or $1.33 diluted per share a year ago, an increase to net income of 15%. The decrease to net income for the quarter was mainly due to lower gross profit margins.

Reorder sales increased by 4.6% to $53.3 million for the quarter compared to reorder sales of $50.9 million for the same quarter in the prior year. For the nine months, the reorder sales increased by 9% to $185.9 million compared to $170.5 million for the same period a year ago.

New order sales decreased by 26% to $6.8 million for the quarter compared to $9.2 million for the same period the prior year. For the nine-months, the new order sales decreased by 8.3% to $33 million compared to $36 million for the same period last year. Increased online competition negatively impacted our new order sales during the quarter.

We acquired approximately 81,000 new customers in our third fiscal quarter compared to 106,000 for the same period the prior year and we acquired approximately 366,000 new customers in the nine months compared to 408,000 for the same period a year ago. The seasonality in our business is due to the proportion of flea, tick and heartworm medications in our product mix. Spring and summer are going to the peak season with fall and winter being the off seasons.

For the third fiscal quarter, our gross profit as a percent of sales was 32.3% compared to 36.5% for the same period a year ago. For the nine months, our gross profit as a percent of sales was 34.1% compared to 35.3% for the nine months a year ago. The decreases were due to additional discounts given to customers during the quarter.

Our general and administrative expenses were flat at $5.8 million compared to the same quarter last year. General and administrative expenses as a percent of sales was 8.7% for the nine months compared to 8.8% for the same period last year.

For the quarter, we spent $3.6 million in advertising compared to $4.1 million for the same quarter in the prior year, a decrease of 12%. For the nine months, we spent $15.6 million for advertising compared to $14.9 million for the nine months a year ago, an increase of about 5%. The decrease for the quarter was due to a lower than expected response to our online advertising.

Advertising cost of acquiring a customer for the quarter was $45 compared to $39 for the same quarter in the prior year. And for the nine months, it was $43 compared to $37 for the nine months in the prior year. The increases were due to increases in advertising costs as a result of a more competitive market.

We had $93.2 million in cash and cash equivalents and $32.2 million in inventory with no debt as of December 31st, 2018. Net cash from operations for the nine months was $32 million compared to $35.1 million for the nine months last year. The decrease included an $8.8 million negative impact from the timing of income tax payments.

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

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions) And our first question comes from Kevin Ellich from Craig-Hallum. Your line is now open.

Kevin Ellich -- Craig-Hallum -- Analyst

Hey, Mendo. Good morning. So, a few questions, I guess let's start off with the competitive landscape. Clearly there's a lot of pricing competition out there from some of the other online retailers and maybe even the vet channel themselves, wondering what you're doing or what you plan to do to offset or mitigate the competition other than just continuing the discount and offer lower price?

Menderes Akdag -- President, Chief Executive Officer, Director

We're going to be competitive price-wise and we'll increase advertising and use our competitive strengths. Prescription sales are much more difficult operationally compared to Over-the-Counter. We have 20-plus years of experience dispensing prescriptions and we are known to the public as pet medication experts. Also, we have great service. We have the best guarantee in the market. Our net promoter score is at 81%. So we'll use our strengths to get our share of the market.

Kevin Ellich -- Craig-Hallum -- Analyst

Got it. Okay. And then, gross margin, down 420 basis points on a year-over-year basis. Clearly there -- I assume the pricing is having the impact there plus we saw a nice acceleration in the gross margin over the last 12 to 18 months. Are we at a new level or do you think we should see gross margin tick back up with flea and tick season coming up in the next couple of months?

Menderes Akdag -- President, Chief Executive Officer, Director

It is going to depend on the competitiveness of the market, so it's difficult to say.

Kevin Ellich -- Craig-Hallum -- Analyst

Okay, that's helpful, kind of -- and then sales -- your marketing and advertising efforts, you talk about increasing advertising but the actual spend itself was down on a year-over-year basis and sequentially. I mean how will you manage that and how should we think about the different mediums that you're planning to go after?

Menderes Akdag -- President, Chief Executive Officer, Director

We're going to increase advertising offline. So, our advertising mostly was online during the December quarter. So we'll add offline advertising in this quarter that we are in.

Kevin Ellich -- Craig-Hallum -- Analyst

Okay. And then, new order sales was up, but it decelerated a bit, and then new customer acquisitions as well as new customer acquisition costs continue to go up while the number of new order sales are going down. Do you think that's going to continue for the foreseeable future? Or I guess, how should we think about that going forward?

Menderes Akdag -- President, Chief Executive Officer, Director

There was a double digit cost increase on the online advertising during the quarter. So it will depend on how we deal with the offline advertising.

Kevin Ellich -- Craig-Hallum -- Analyst

Okay. And then lastly -- two last quick ones from me. Ability to source products, can you comment at all about inventory and purchasing directly from manufacturers, are you seeing more of that. Has that changed over the last three months, since the last time we spoke to you?

Menderes Akdag -- President, Chief Executive Officer, Director

It has not changed in the last three months.

Kevin Ellich -- Craig-Hallum -- Analyst

Okay. And then lastly balance sheet. Balance sheet cash continues to build, wondering what the plans are for uses of your free cash flow and cash on hand.

Menderes Akdag -- President, Chief Executive Officer, Director

Currently, as you know, we're paying dividends and we have about $10 million remaining in our stock buyback plan. Also, we do look at acquisition opportunities during the normal course of business.

Kevin Ellich -- Craig-Hallum -- Analyst

Okay. Great, that's helpful. Thanks so much.

Menderes Akdag -- President, Chief Executive Officer, Director

You're welcome.

Operator

And our next question comes from Anthony Lebiedzinski from Sidoti & Company. Your line is now open.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Good morning again. Thank you for taking the questions. So, just wanted to ask about the performance of the next generation medications, if you could just kind of -- I don't know if you are prepared to give us any quantification of the performance of those products, but any color as to what you're seeing as far as the adoption rate, whether that's slowing or not, that'd be very helpful.

Menderes Akdag -- President, Chief Executive Officer, Director

It's increasing but the shift slowed down, and also newer generation medications have become more price competitive.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay, thank you for that. And as far as if your product strategy, so obviously when you move to your new facility, you significantly upgraded your infrastructure. Certainly you have the capacity there to bring in some new products. So just wondering if you have any plans to perhaps add some new product categories to try to offset some of the competition that you're seeing in your core products?

Menderes Akdag -- President, Chief Executive Officer, Director

Not at this time. Our focus is going to continue to be medication.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it, OK, all right. And then I guess I was -- given your cash position and your recent performance; I was surprised that there was no announcement about a share buyback program. If you could just -- I know you addressed this in the previous question, but maybe if you could expand on that as to what the Board's thoughts are on that?

Menderes Akdag -- President, Chief Executive Officer, Director

I don't want to speak for the Board, so we'll let the market know when and if it happens.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it, OK. Thank you.

Menderes Akdag -- President, Chief Executive Officer, Director

You're welcome.

Operator

And our next question comes from Erin Wright from Credit Suisse. Your line is now open.

Erin Wright -- Credit Suisse -- Analyst

Great, thanks. Where are you at now with the transition to offline advertising and is it a complete shift is what you anticipate or will this be gradual over time and how you expect sort of that transition to resonate relative to your prior offline advertising strategy. And how is that sort of strategy transitioning relative to your expectations? Thanks.

Menderes Akdag -- President, Chief Executive Officer, Director

First of all, it's not going to be a shift. It's going to be an add-on, additional advertising offline will likely mainly going to be television and some direct mail prints.

Erin Wright -- Credit Suisse -- Analyst

Okay, thanks. And then you've mentioned potential M&A, I mean just, when do acquisitions just make more sense for you? Is it just valuation -- it comes down to valuation or what is the acquisition pipeline potentially look like?

Menderes Akdag -- President, Chief Executive Officer, Director

It comes down to valuation.

Erin Wright -- Credit Suisse -- Analyst

Do you see any sort of meaningful opportunities out there at all?

Menderes Akdag -- President, Chief Executive Officer, Director

Not at this time.

Erin Wright -- Credit Suisse -- Analyst

Okay. And then lastly, do you have any sort of early signs on the flea and tick season for this year with just weather patterns you are seeing or initial feedback from customers?

Menderes Akdag -- President, Chief Executive Officer, Director

Well at this time, weather is cold. So it is what it is. But typically flea and tick season starts in March. So we'll see how the weather is in March.

Erin Wright -- Credit Suisse -- Analyst

Okay, great. Thank you.

Menderes Akdag -- President, Chief Executive Officer, Director

You're welcome.

Operator

(Operator Instructions) And our next question comes from Kevin Ellich from Craig-Hallum. Your line is now open.

Kevin Ellich -- Craig-Hallum -- Analyst

Hey Mendo, just a couple of follow ups. So, first, average order size of $84 declined 2.3% year-over-year. I think that's the first time in several years we've seen a decline. Wondering if it's just the pricing environment and the competitive environment or if there is anything else going on, you know why average order size declined?

Menderes Akdag -- President, Chief Executive Officer, Director

It's the pricing. So it's the price reduction that caused it.

Kevin Ellich -- Craig-Hallum -- Analyst

Okay, that's helpful. And then, just wondering if you can comment at all about how January and the year started off for you guys, if the competitive landscape is still what it was or if it's gotten -- becoming more competitive since the quarter ended? Just curious if you have any color you can share with us.

Menderes Akdag -- President, Chief Executive Officer, Director

It's about the same as how it was in the December quarter.

Kevin Ellich -- Craig-Hallum -- Analyst

It's about the same as how it was in the December quarter.

Menderes Akdag -- President, Chief Executive Officer, Director

You're welcome.

Operator

And as of the moment, we're showing no further questions in queue. I would now like to turn the call over to President and CEO Mendo Akdag for the closing remarks.

Menderes Akdag -- President, Chief Executive Officer, Director

Thank you. In 2019, we will continue to be aggressive with pricing and promotions, and increase advertising to stimulate sales. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

Operator

And that concludes the conference for today. Thank you for your participating. You may disconnect now. Thank you.

Duration: 19 minutes

Call participants:

Bruce Rosenbloom -- Chief Financial Officer, Treasurer

Menderes Akdag -- President, Chief Executive Officer, Director

Kevin Ellich -- Craig-Hallum -- Analyst

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Erin Wright -- Credit Suisse -- Analyst

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