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PetMed Express Inc (NASDAQ:PETS)
Q3 2019 Earnings Call
Oct 21, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 last September 30th, 2019. 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 consumer. 1-800-PetMeds markets its products through national advertising campaigns, which direct consumers to order by phone or in the Internet and aim to increase the recognition of the PetMeds family of brand names. 1-800-PetMeds provide 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.

Bruce S. Rosenbloom -- Investor Relations, Treasurer and Chief Financial Officer

Thank you. I would like to welcome everybody here today. Before I turn the call over to Menderes 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 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 on our most recent Annual Report, and other filings with the Securities and Exchange Commission.

Now let me introduce today's speaker Menderes Akdag, the President and Chief Executive Officer of 1-800-PetMeds. Menderes?

Menderes Akdag -- President and Chief Executive Officer

Thank you, Bruce. Welcome and thank you for joining us. Before we start the review of our financial results, we are pleased to report that we now have direct relationships with all the major manufacturers, and these manufacturers have minimum advertised price policies, allowing a general pricing discipline in the market.

Now we will compare our second fiscal quarter and six months ended on September 30, 2019 to last year's quarter and six months ended on September 30, 2018. For the second fiscal quarter ended on September 30, 2019, our sales were $69.9 million compared to $71.4 million for the same period the prior year, a decrease of 2%. For the six months ended on September 30, 2019 sales were $149.9 million compared to $158.8 million for the six months the prior year, a decrease of 5.6%. The decreases in sales were due to decreases in new order sales, offset by increases in reorder sales for the quarter, and increases on both new and reorder sales for the six months. Sales were negatively impacted, by increased online competition and aggressive pricing in the market that forced us to reduce prices. As I just mentioned, the manufacturers minimum advertised price policies should bring in general pricing discipline into the market.

The average order value was approximately $85 for the quarter compared to $87 for the same period last year. The decrease was due to the price reductions. For the second fiscal quarter, net income was $6.7 million or $0.33 diluted per share compared to $10.8 million or $0.52 diluted per share for the same quarter of the prior year, a decreased diluted earnings per share of 36%. And for the six months, net income was $12 million or $0.60 diluted per share, compared to $23.3 million or $1.14 diluted per share a year ago. a decrease to diluted earnings per share of 48%.

In addition to decreases in sales, the decreases to net income were mainly attributable to lower gross profit margins due to price reductions.

Operating margins sequentially improved by 430 basis points in the September quarter compared to the June quarter. Reorder sales increased by 1.4% to $61.9 million for the quarter, compared to reorder sales of $61 million for the same quarter of the prior year. For the six months, the reorder sales decreased by 2.2% to $129.6 million compared to $132.5 million for the same period last year.

New orders sales decreased by 22% to $8.1 million for the quarter compared to $10.4 million for the same period the prior year. For the six months, the new order sales decreased by 23% to $20.3 million compared to $26.3 million for the same period last year.

We acquired approximately 98,000 new customers in our second fiscal quarter compared than 117,000 for the same period, the prior year and we acquired approximately 238,000 new customers in the six months, compared to 286,000 for the same period a year ago. The seasonality in our business is due to the proportional of flee, tick, and heartworm medications in our product mix. Spring and summer are considered peak season, with fall and winter being the off-season.

For the second fiscal quarter, our gross profit as a percent of sales was 28.6%, compared to 35.4% for the same period the prior year. And for the six months, our gross profit as a percent of sales was 27.9% compared to 34.8% for the same period a year ago. The percentage decreases can mainly be attributed to price reductions, in response to increased online competition.

Gross margin sequentially improved 130 basis points in the September quarter compared to the June quarter. As I mentioned in the beginning, we now have direct relationships with all the major manufacturers, which may help improve our gross margins in the future.

General and administrative expenses were up about $100,000 compared to the same quarter last year. For the quarter, we spent $4.8 million in advertising, compared to $5.3 million for the same quarter the prior year, a decrease of 10%. The decrease was due to the elimination of television advertising in the quarter.

For the six months, we spent $13.4 million in advertising, compared to $12 million for the six months a year ago, an increase of 11%. The increase for the six months was related to the readdition of television advertising in the June quarter. The advertising cost of acquiring a customer was approximately $49 for the quarter, compared to $45 for the same quarter of the prior year; and for the six months, it was $56, compared to $42 for the six months last year. The increases were due to increases in advertising costs, due to the more competitive environment.

We had $94.9 million in cash and cash equivalents and $19.1 million in inventory, with no debt as of September 30, 2019. Net cash from operations for the six months was $17.3 million, compared to $20.4 million for the same period last year.

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

Questions and Answers:

Operator

Certainly, we will now begin the question-and-answer session. [Operator Instructions]. One moment for the first question. Our first question is from Erin Wright of Credit Suisse. Your line is open.

Erin Wright -- Credit Suisse AG -- Analyst

All right, thanks. I'm curious, curious if you could speak to how the MAP pricing is being implemented and how that's playing out relative to your expectations? Is the pricing shaking out higher than expected, obviously the margin profile -- obviously said that to some extent. And then, what percentage of your overall sales are under MAP pricing and what percentage would you consider more flexible, in terms of promotional activity? Thanks.

Menderes Akdag -- President and Chief Executive Officer

MAP pricing on an average is higher than our -- are higher than our prior pricing.

Erin Wright -- Credit Suisse AG -- Analyst

And what percent of your sales, would you say are under those sort of MAP pricing strategies?

Menderes Akdag -- President and Chief Executive Officer

Much [Indecipherable] down.

Erin Wright -- Credit Suisse AG -- Analyst

Okay, great. And then can you speak to the latest on sort of the advertising strategies for you and marketing campaign. I guess, how should we be thinking about your advertising spend for the remainder of the year, in light of the competitive landscape and where do you stand now with the TV spot advertising strategy, particularly as we head into an election cycle? I'm just curious, your thoughts there. Thanks.

Menderes Akdag -- President and Chief Executive Officer

Our budget is about 10% higher than what we spent in the prior year. We are working on optimizing our advertising, and we intend to be more efficient with our advertising spending, Television advertising spending will likely be -- is going to be minimal for the next year.

Erin Wright -- Credit Suisse AG -- Analyst

Okay, great. Thank you.

Menderes Akdag -- President and Chief Executive Officer

You are welcome.

Operator

Thank you. Our next question is from Kevin Ellich from Craig-Hallum. Your line is open.

Kevin Ellich -- Craig-Hallum -- Analyst

Thanks, good morning. Menderes, so you said that you now have direct relationships with all the major manufacturers, did the Zoetis contract, did that go in effect just this morning, or when did that actually happen?

Menderes Akdag -- President and Chief Executive Officer

This month.

Kevin Ellich -- Craig-Hallum -- Analyst

Excuse me?

Menderes Akdag -- President and Chief Executive Officer

This month in October.

Kevin Ellich -- Craig-Hallum -- Analyst

Got you, got you. Okay, great. Great. And then, I mean clearly, we saw a nice improvement sequentially in the gross margin. Do you think we will continue to see a ramp sequentially with MAP or do you think -- I guess, can you give us any help in terms of how gross profit should kind of move forward -- improve from here?

Menderes Akdag -- President and Chief Executive Officer

We anticipate that it's going to improve from the September quarter. I think we'll have a better picture in the next two -- in the next couple of quarters.

Kevin Ellich -- Craig-Hallum -- Analyst

Got you, got you, OK. Any update on potential white label project -- white label deals maybe, with a big-box retailer like Target or Costco?

Menderes Akdag -- President and Chief Executive Officer

We do not have anything pending.

Kevin Ellich -- Craig-Hallum -- Analyst

Nothing pending? Are you in any discussions ?

Menderes Akdag -- President and Chief Executive Officer

Yeah.

Kevin Ellich -- Craig-Hallum -- Analyst

Okay. And then inventory and the balance sheet, clearly down sequentially, is this kind of the levels we should be thinking about, given your direct purchasing from the manufacturers?

Menderes Akdag -- President and Chief Executive Officer

When there is a cost advantage buying opportunity, we will carry higher inventories. So it will depend.

Kevin Ellich -- Craig-Hallum -- Analyst

Okay, got it. That makes sense. Bruce, really quickly, it looked like tax rate was a little bit higher than we were expecting, nothing major. But looks like it might have -- if it would have been 24%, like remodeling would have been $0.02, just wondering what was the bump up on tax rate?

Bruce S. Rosenbloom -- Investor Relations, Treasurer and Chief Financial Officer

Right. On the tax rate we -- every September quarter, we do have to reconcile our restricted stock compensation when they vest. And in the past, we've had what was called a windfall, which is actually a benefit for the last two or three years, because of the change in stock price, we actually had a charge of $322,000 in the quarter. So again, every September quarter, these restricted shares, they vest in July, and going forward that's when all of our restricted stock will probably be vesting, and so we'll have this type of charge. It could be a charge or could be a benefit, depending on the change in the stock price, from when the shares were issued, versus when they vest.

Got it. That makes a lot of sense. And then lastly Menderes, competition. Can you talk a little bit more about the competitive landscape, now that MAP is implemented, and then are you expecting any other major online retailers to jump into the pet prescription market ?

Menderes Akdag -- President and Chief Executive Officer

Prices are -- as we have said, prices are stabilizing in the market with manufacturers enforcing MAP policies. And as far as -- we are not aware of anybody else. But that doesn't mean, they are not planning on entering the market.

Kevin Ellich -- Craig-Hallum -- Analyst

Great. Thanks guys.

Operator

[Operator Instructions]. Our next question is from Anthony Lebiedzinski from Sidoti & Company. Your line is open.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Yes, good morning and thank you for taking the questions. So first, I was just wondering if you could perhaps comment on the progression of sales and gross margins during the quarter, was it kind of steady or was there a noticeable change between the months? And as far as the last manufacturer, that is now going to be selling directly, just wondering if you could perhaps comment on the percentages that you get from that manufacturer?

Menderes Akdag -- President and Chief Executive Officer

Yeah, we're not, we are not going to comment on that. And we're not going to get into month to month reporting.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Okay, got it. That's fair. And then as far as your advertising strategy, so is it safe to assume it's going to be digital only at this point?

Menderes Akdag -- President and Chief Executive Officer

Much more digital, yes. Majority is going to be digital.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Right, OK. So basically, the elimination of TV advertising was because, it was not cost efficient from your perspective, is that safe to say?

Menderes Akdag -- President and Chief Executive Officer

That is correct, yes.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. All right. And your outlook for just overall capital allocation priorities between buybacks and dividends, anything there you would like to comment on?

Menderes Akdag -- President and Chief Executive Officer

We don't have anything else at this time. We do look at acquisition opportunities during normal course of business.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay, and lastly, as far as your e-commerce website improvements that you're looking to do, kind of like what's the timing on that and what's the -- what do you expect to get out of that and what's the associated cost with that project?

Menderes Akdag -- President and Chief Executive Officer

It's about $5 million. The cost is -- we anticipate to be on the platform before the end of the year. And [Indecipherable] with us to improve the user experience, especially that becomes critical, with prices stabilizing, due to more, ease of use, speed, is the goal.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it, OK. And then just to clarify, is that the end of the calendar year or end of the fiscal year?

Menderes Akdag -- President and Chief Executive Officer

End of the calendar year.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

All right, got it. Okay. All right. Thanks and best of luck.

Menderes Akdag -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Kevin Ellich from Craig-Hallum. Your line is open.

Kevin Ellich -- Craig-Hallum -- Analyst

Menderes, I have one follow-up. So -- and I don't think you talked about this, but -- in the press release, you guys talked about the PetMeds rewards program. Just wondering kind of what the genesis of that was? And I guess does this really just mean you guys are really focused on reorder sales or can you give us a little bit of detail behind that program?

Menderes Akdag -- President and Chief Executive Officer

Objective is to increase customer retention, and it rewards the customers with higher purchases with additional discounts. Then there are also other benefits, which is [Indecipherable], free treats, free returns, educational articles, etcetera.

Kevin Ellich -- Craig-Hallum -- Analyst

Got it. Okay. Sounds good. Thank you.

Menderes Akdag -- President and Chief Executive Officer

You're welcome.

Operator

At this time there are no further questions. Mr. Akdag. You may proceed.

Menderes Akdag -- President and Chief Executive Officer

Thank you. For the remainder of fiscal 2020, we will continue to be price competitive and will focus on optimizing our marketing in this more competitive environment, and being more efficient with our advertising spending. In addition, we have been investing in our e-commerce platform, to better service our customers. This wraps up today's conference call. Thank you for joining us.

Operator, this ends the conference call.

Operator

[Operator Closing Remarks].

Duration: 19 minutes

Call participants:

Bruce S. Rosenbloom -- Investor Relations, Treasurer and Chief Financial Officer

Menderes Akdag -- President and Chief Executive Officer

Erin Wright -- Credit Suisse AG -- Analyst

Kevin Ellich -- Craig-Hallum -- Analyst

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

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