Good morning. Welcome to the PetMed Express Incorporated, doing business as 1-800-PetMeds conference call to review the financial results for the second fiscal quarter for the quarter ending on September 30, 2020. At the request of the company, this conference call is being recorded. Founded in 1996, 1-800-PetMeds is America's most trusted pet pharmacy, delivering prescription and non-prescription pet medications and other health products for dogs, cats, and horses direct to the consumer. 1-800-PetMeds markets its product 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.
Thank you. I would like to welcome everybody here today. Unfortunately, due to a personal matter, Menderes Akdag, our President and Chief Executive Officer, is unable to attend this morning's conference call. 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 in our most recent annual report and other filings with the Securities and Exchange Commission. Thank you for joining us, and we hope everyone's continuing to stay safe and healthy. During the September quarter, consumer demand settled down due to a combination of vet clinics and brick-and-mortar pet retailers opening up and consumers having stocked up in the June quarter. We have been open during our normal business hours without any material disruption to our operations.
We are still taking measures to ensure the health and safety of our dedicated employees by allowing them to work from home where possible and continuing with social distancing and enhanced disinfection in the workplace. Also, we have not seen any major disruptions in our supply chain. However, we have experienced some delays in the delivery of the slow to medium moving inventory items. Now, we will compare our second fiscal quarter ended on September 30, 2020 to last year's quarter ended on September 30, 2019. For the second fiscal quarter ended on September 30, 2020, our sales were $75.4 million compared to $69.9 million for the same period the prior year, an increase of 7.9%. For the 6 months ended on September 30, 2020, sales were $171.6 million compared to $149.9 million for the 6 months the prior year, an increase of 14.5%.
The increases in sales were due to increases in reorder sales for the quarter and increases for both new order and reorder sales for the six months. 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 $8.4 million, or $0.42 diluted per share, compared to $6.7 million or $0.33 diluted per share for the same quarter the prior year, an increase to net income of 26%. For the six months, net income was $16.2 million, or $0.81 diluted per share, compared to $12 million or $0.60 diluted per share a year ago, an increase to net income of 35%. Reorder sales increased by 9.6% to $67.8 million for the quarter, compared to reorder sales of $61.9 million for the same quarter the prior year.
For the six months, reorder sales increased by 14.3% to $148.2 million compared to the $129.6 million for the same period last year. New order sales decreased by 5% to $7.7 million for the quarter, compared to $8.1 million for the same period the prior year. For the six months, new order sales increased by 15.4% to $23.5 million compared to $20.3 million for the same period last year. We acquired approximately 96,000 new customers in our second fiscal quarter compared to 98,000 for the same period the prior year. We acquired approximately 282,000 new customers in the six months compared to 238,000 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 considered peak season, with fall and winter being the off-season.
For the second fiscal quarter, our gross profit as a percentage of sales was 30.5%, compared to 28.6% for the same period the prior year. For the six months, our gross profit as a percentage of sales was 29%, compared to 27.9% for the same period a year ago. Gross margins improved by 190 basis points for the September quarter and by 110 basis points for the six months. The increases were due to the benefit of having direct relationships with all major manufacturers, and these manufacturers have minimum advertised price policies. Also, our product mix shifted to higher-margin prescription medications during the September quarter compared to the June quarter. General and administrative expenses as a percentage of sales were 9% for both the quarter and the same quarter last year.
For the quarter, we spent $5.1 million in advertising, compared to $4.8 million for the same quarter the prior year, an increase of 8%. For the six months, we spent $14.2 million in advertising compared to $13.4 million for the six months a year ago, an increase of 6%. The advertising cost of acquiring a customer was approximately $54 for the quarter, compared to $49 for the same quarter the prior year, and for the six months, it was $50 compared to $56 for the six months last year. The increase for the quarter was due to increases in advertising costs. We had $106.3 million in cash and cash equivalents and $21.5 million in inventory with no debt as of September 30, 2020. Net cash from operations for the six months was $15.2 million, compared to $17.3 million for the same period last year. This ends the financial review, operator.
We are ready to take questions.
Thank you, Mr. Rosenbloom. At this time, if you would like to ask a question, please press star one on your touch-tone phone. Please ensure that your line is unmuted, and please record your name and company to be introduced. Once again, please press star one at this time to ask a question. Our first question is from Erin Wright with Credit Suisse. Your line is open.
Okay, thanks. What's your mix of over-the-counter versus prescription medications now? Has it meaningfully changed here? Can you remind us of the profit profile, OTC versus prescription, and particularly given this MAP pricing strategy that has been implemented? Thanks.
Sure thing. If you remember call in the June quarter, we saw an uptick in OTC. A bit of a more uncharacteristic increase. It was different from our normal mix. The September quarter was more of a normalized mix, although we did see a bit of an increase in Rx over OTC. Obviously, as we mentioned previously, prescription medications have a higher margin profile than the OTC products.
Would you say that prescription is over half now in terms of?
Over half of our total sales?
Yes.
Oh, yes. Definitely much more than half.
Okay, great. Then on the stickiness of the COVID-driven customer base, I guess how much of there is a paradigm shift to online versus just some stockpiling given COVID? I'm curious how we should be thinking about new customer growth over the balance of the year and what you're seeing in terms of that COVID-driven customer base.
Right. As you mentioned, consumers stocking up in the June quarter. Our new website platform might have had a temporary negative effect on our natural search during the quarter, which may have negatively impacted our new order sales in the short term and what we saw in the September quarter. We are now in the second phase of our e-commerce platform. We're now focusing on redesigning our website and mobile app to optimize our customers' digital experience, which should improve our new customer conversion in the future. As far as COVID, it's really an unknown right now. We're seeing cases increasing overall in the majority of the states in the U.S., we'll just have to see how those trends overall affect our business.
As of right now, we did see demand settle down with the opening of those clinics and the retail stores. Overall, we've seen reorders become extremely strong, it may also be because of the increased new customers that we were able to take in for the first six months of our fiscal year.
Okay, great. Thank you.
Thank you for your question. Our next question is from Anthony Lebiedzinski with Sidoti & Company. Your line is open, sir.
Good morning, Bruce, and thanks for taking the questions.
Good morning.
I guess my first question, looking back now at the first half of the fiscal year, you mentioned that there was some, it sounds like some pull forward of demand in the June quarter. Any way you could possibly maybe try to quantify how much you think you saw pull forward into the June quarter?
We usually don't like to quantify to give that information out. We do know what that number is internally. Again, it's also, as we mentioned, we're in the first phase of our website, our new e-commerce platform, and so that may have negatively impacted reorders as well. We have an estimate. There's a few assumptions involved with that, but we're not really prepared to give that number out at this time.
Okay, that's fair enough. As far as the phase 2 of the website improvement, when do you expect to have that completed?
Yeah. Our target date is during this third quarter, hopefully by the end of the year, we should be launched fully with both the redesign of the website and also the mobile app.
Got it. Okay. You mentioned ad spending being up. I know in the past, you've had increases in cost because of the election. Was the increase in advertising spending because of that, or was there something else going on?
It did have probably a small effect, I think overall, it was more of a normalized increase in overall keyword search. That's the majority of our online spend. Advertising costs increased during the quarter. We saw increased competition as well with the Vet clinics and also increased competition with online keyword searches as well. We'll always attempt to be more aggressive during peak season when our demand is strong. As you know, we have a flexible ad budget, and our advertising spending is also going to depend on the ROI.
Got it. Okay. Last question from me. Now that you're moving into the off-season, typically the gross margins for you guys are higher in the off-peak second half of the fiscal year. You had a nice improvement in the gross margin on a year-over-year basis as well as sequentially. With that in mind, should we expect further sequential improvement in the back half of the gross margin, or how should we think about that?
We don't manage the margins quarter-to-quarter. As you know, we sort of look at margins on an annualized basis. Annually, there's an opportunity for modest margin improvement year-over-year, and we expect that to continue. If there's an opportunity to maximize margins, we're going to go ahead and do that. We want to remain competitive with pricing and, of course, with MAP pricing in place, and we also want to be competitive with the other players in our space as far as promotions and offers. We'll see how it shapes up. You're right. The trends have been historically that margins will rise during the off-season, and that's also because we tend to see more of a shift to prescription over OTC during those time periods.
Got it. Okay. Thank you.
You're welcome.
Thank you for your question. As a reminder, if you would like to ask a question, please press star one and record your name and company to ask a question. Our next question is from Ben Rose with Battle Road Research. Your line is open, sir.
Yes, thank you. Good morning, Bruce.
Morning, Ben.
A few questions. First off, in terms of the advertising and promotion this quarter, was there anything done to perhaps incentivize or focus people more on the prescription side of the business, or was this just sort of a natural trend back to your typical mix of prescription versus OTC?
It was more of a movement to our typical trend. We have seen a rising increase in our mix more towards prescription than over-the-counter. Obviously, veterinarians are recommending more prescription products, more so than OTC. We prefer to be more skewed towards prescription, which have higher margin profiles. It was more of a return to a normalized state. Although I did mention prescription medications did see a bit of an uptick during this quarter year-over-year. I think June was more of an anomaly, and I think it was more so with both brick and mortar and veterinarians having limited hours. The new customers moved towards online, and those online customers were purchasing over-the-counter products.
Great. Sorry, Bruce, just to clarify one thing you said about the website redesign in the first phase. Did you say that that may have had a negative impact on the reorder rate this quarter?
Yes, it's possible. With that new e-commerce platform, it had a negative impact on our natural search, that took a while to get back to its normalized stage. We're there currently. We expect with many of the changes we have made, we should see an improvement in our new customer conversion in the future.
On the inventory situation, it looks like you did work down quite a bit of inventory in the quarter, which was a concern of some heading into this quarter. In your prepared remarks, you mentioned that there were some delays in the slow to medium-moving items, which I guess in the grand scheme of things is less concerning. Can you speak to just the overall supply chain environment? Albeit heading into the weaker season, just speak to the confidence of your own ability to procure the lion's share of the medications that you need.
Right. Again, our inventory will fluctuate based on promotional buying opportunities. We mentioned that back in the June quarter, we did make a conscious decision to stock up due to the uncertainty that COVID presented itself. Overall, when there's a cost advantage, we'll carry higher inventory. During the pandemic, we did look to carry more inventory, to minimize any related delays. We did see those delays in some of our small to medium movers. More manufacturer backorder type delays. Also, shipment or lead time delays. Some of those delays we should be able to rectify with an increased inventory purchase. Some we may not be able to. They're more manufacturer-driven delays. We'll see. Where we can stock up, we will. I would not expect a stock-up like we saw in the June quarter, where inventories were in excess of $40 million.
We will try to stock up inventory to make sure that we can minimize any type of COVID-related delays for our customers.
Okay, great. Thanks very much.
You're welcome.
Thank you for your question. Our next one's from Kevin Ellig with Ace Research. Your line is open.
Hey, Bruce. Thanks for taking the question. Going back to the new customers that you added for the quarter, it was a little bit lower than we've seen in your fiscal second quarter over the last several years. With the V-shaped recovery we've seen in vet visits in the September quarter, do you think this is more a function of competition, or what do you think is driving that?
Competition does play a role. I think more importantly, it is, as I mentioned, the combination of vet clinics and brick-and-mortar pet stores opening up. We also had that temporary negative effect on our natural search, which also affected possibly new customers as well. As I mentioned, I think moving into the off-season, we definitely have an opportunity to improve on our new customers. I think overall for the six months, we were fairly satisfied with the result. We'll continue to make improvements and tweak advertising where need be, and we'll see if we can rectify that temporary downswing.
Got it. It looks like one metric I track is new customer transaction size, which seems like it's down a little bit this year. You think that's more a function of COVID, or is it MAP pricing, or kind of all the above?
Yeah. I'm not sure exactly what measures you're referring to. Overall, those definitely have a play when it comes to new order advertise. Also, with new orders, we do tend to be a little bit more promotional to attract new customers to be competitive with others in our space.
Got it. Lastly, CapEx was a little bit higher this quarter. Is that a function of the website, just some seasonality spend?
Right. Yeah, 100%. That was the website. We really don't expect any material capital expenditures moving forward. More maintenance mode. Overall, it should be fairly minimal.
Got it. Lastly, again, gross margin much better than expected. I know seasonally Q2 is your strongest quarter probably of the year. Well, it's been a little indifferent the last couple of years. Do you think we'll continue to see that sort of strength for the remainder of the year?
As I mentioned to Anthony earlier, prices overall stabilized in the market with the manufacturers enforcing the Minimum Advertised Price policies. Our product mix was different from what we saw in the June quarter. Those all contributed to increases to our margins. Bottom line is, if we have increased prescription sales, we're going to probably have higher margins. The one area that could have a negative effect to margins would be promotions for new customers. If we have a quarter where we're positive in new customers, that could have a negative impact on margins. Where the gross margins end up will be dependent on our product mix. Again, looking at it from quarter to quarter can be difficult. I think overall, year-over-year, we expect to see modest improvements in margins.
Sounds good. Thank you.
You're welcome.
Thank you for your question. We have a follow-up from Erin Wright with Credit Suisse. Your line is reopened.
Great. Thanks for taking the follow-up, Bruce.
Sure.
Has anything changed in terms of your manufacturer relationships, I guess any new relationships, or is it relatively status quo? Were there increases in that pricing? I guess, how do those contracts typically work?
Right. Again, when we talk about the direct relationship with manufacturers, it's really talking about the large five manufacturers there. We do have direct relationships, at least two or three were initiated in 2019. Yeah, some we do have contractual relationships with them. They have been enforcing MAP pricing, which has stabilized prices in the online space. What's helpful when manufacturers increase their prices, they also increase MAP. That also helps as well as far as margins and also the price inventory.
Okay, great. Thanks. One last question here just on generics. I guess, do you have any metrics on the generics prescription dispensing rate versus brand and how has that changed at all given the manufacturer relationships?
Yeah, we do. Not materially. Many of the manufacturers prefer us to promote their brands, they will give us incentives to promote their brands, say, over generics. I would say our generics are up year-over-year. Overall, it's still about the same as a percentage of sales.
There's still no, I guess, seamless way to do generic substitution, correct?
Yeah. The current rules or regulations, the pharmacy rules or regulations, definitely prohibit that seamless generic substitution that is present for human pharmacies and for human physicians. If there is a change, we do have to go back to the vet for their approval. That does make it a little bit more difficult. For the most part, our relationships with the vets are probably at the best point it's ever been. Our authorization rates are probably at its current peak. When we do go back to the vet for a generic substitute, more often than not, their answer is yes.
Okay, great. Thank you.
Thank you, Erin.
Thank you for your question. I will now turn our call back over to Bruce Rosenbloom, the company Chief Financial Officer, for closing remarks.
Thank you. In fiscal 2021, we are focusing on redesigning our website and mobile app to optimize our customers' digital experience. Thank you very much. This wraps up today's conference call. Thanks for joining us. Operator, you can end the conference call.
Thank you all for participating in today's conference call. You may now disconnect.