Welcome to the PetMed Express, Inc., doing business as 1-800-PetMeds conference call to review the financial results for the first fiscal quarter ended June 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 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. You may begin.
Thank you. Good morning. I would like to welcome everybody here today. Before I turn the call over to Mendo Akdag, our President and Chief Executive Officer, I would 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. 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. 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. Let me introduce today's speaker, Mendo Akdag, the President and Chief Executive Officer of 1-800-PetMeds. Mendo.
Thank you, Bruce. Welcome, everyone, and thank you for joining us. Today, we will review the highlights of our financial results. We'll compare our first fiscal quarter ended on June 30, 2019 to last year's quarter ended on June 30, 2018. For the first fiscal quarter ended on June 30, 2019, sales were $80 million compared to sales of $87.4 million for the same period the prior year, a decrease of 8.5%. The decrease in sales was due to decreases in new order and reorder sales. Sales were negatively impacted by increased online competition and aggressive pricing in the market that forced us to reduce prices. Our average order value was approximately $86 for the quarter, compared to $90 for the same quarter last year. The decrease was due to the price reductions.
For the first fiscal quarter, net income was $5.3 million, or $0.26 diluted per share, compared to $12.6 million or $0.62 diluted per share for the same quarter last year. A decrease to diluted earnings per share of 57%. In addition to decreases in sales, the decrease to net income for the quarter was mainly attributable to lower gross profit margins due to price reductions and higher advertising expenses. New order sales decreased by 23% to $12.2 million for the quarter, compared to $15.9 million for the same quarter the prior year. Reorder sales decreased by 5% to $67.7 million for the quarter, compared to reorder sales of $71.5 million for the same quarter last year. We acquired approximately 140,000 new customers in our first fiscal quarter, compared to 169,000 for the same period the prior year.
Approximately 84% of our sales were generated on our website for the quarter, compared to 85% for the same period last year. 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-season. For the first fiscal quarter, our gross profit as a percent of sales was 27.3%, compared to 34.3% for the same period a year ago. The percentage decrease can mainly be attributed to price reductions in response to increased online competition. We made further progress on having direct relationships with the major manufacturers in the current quarter, which may help improve our gross margins in the future. Our general and administrative expenses were down approximately $400,000 for the quarter compared to the same period last year.
We spent $8.6 million in advertising for the quarter compared to $6.7 million for the same quarter the prior year, an increase of about 29%. The increase was due to the re-addition of television advertising. Advertising cost of acquiring a customer for the quarter, defined as total advertising expenses divided by total new customers acquired, was approximately $62, compared to $40 for the same quarter a year ago. The increase was due to the re-addition of television advertising. We had $83.4 million in cash and cash equivalents and $30.2 million in inventory, with no debt as of June 30, 2019. Cash from operations for the quarter was negatively impacted by an $8.8 million increase in inventory, the result of cost advantage inventory buys we made during the quarter. We intend to return to normal inventory levels in future quarters. This ends the financial review.
Operator, we are ready to take questions.
We will now begin the question and answer session. If you would like to ask a question, you may press star followed by the number one. Please unmute your phone and record your name slowly and clearly when prompted. Your name is needed to introduce your question. To cancel your request, press star two. Please stand by for our first question. Our first question comes from Kevin Ellich from Craig-Hallum. Please proceed.
Good morning. Thanks for taking my questions.
Of course.
Mendo, gross margin down almost 700 basis points year-over-year. A little bit lower than what we were expecting. Wondering, where do you think that could bottom out? Or do you think this is the bottom with some of your initiatives you're putting in place and the changing on the marketing front?
We think this may be the bottom out. We expect the pricing to stabilize in the market going forward. The reason for that is the manufacturers are opening up, and they have minimum advertised price policies, which should allow the general pricing boost of one of the markets.
Got it. We noticed towards the end of Q1, you introduced some volume-based discounts. By our math, it looks like it's 5%-10%. How much impact do these discounts have on gross margins if they remain in place?
Again, we anticipate that the gross margins should improve in the future quarters, and you will get a better feel for it, I think, in the next six months.
Okay. Next six months. That answers another one of my questions. Going back to your comment about the initiatives, purchase from major manufacturers. Are you buying from all of the major manufacturers now, and do you have contracts in place? If not, when do you think that'll happen, and how much should that help your gross margin?
There's only one manufacturer left. We're anticipating that that's going to happen in the next two months. By the end of September, or latest by the end of the year, we anticipate having direct relationships with all the major manufacturers.
Okay. Is this something that's been going on across the industry with all of the e-commerce retailers like yourself? Or is this pretty much unique to PetMed Express?
They're opening up to all of that process.
Okay. Got it. In the press release, you talked about investments you plan to make in your e-commerce platform to be more competitive. I guess, how much do you plan to spend this year, and how long will those investments take?
Our current budget is about $5 million. We are anticipating to get on the new platform before the end of the year. Probably, it's going to be late November or early December of 2019. Our goal is to improve the user experience.
Okay. Got it. That's helpful. Is there increased functionality that you plan to introduce? I guess, can you give us a little bit of color as to what the new platform will provide to improve the customer experience?
The higher personalization or hyper-personalization. Easier to use, speed-
Okay
upselling, cross-selling capabilities. It will be easier also to add additional services, et cetera.
Got it. Last one for me is, in the press release, again, you talked about optimizing marketing to be more competitive. I guess, are you still planning to do more TV advertising this year? I think in your K, you said you expect advertising should be about 10% of sales this fiscal year. Is that still the target?
We intend to be more efficient with our advertising spending. At this time, we paused television advertising. We may retest it, but it may be lower than that. For example, we'll give you a better color in the 10-Q.
Okay. That's helpful. I'll jump back in queue. Thanks.
Thank you. Our next question comes from Anthony Lebiedzinski from Sidoti & Company. Please proceed.
Good morning, and thank you for taking the questions. You talked about the planned e-commerce platform improvements. Just wondering if you guys have any other strategies to try to recapture some past customers and better retain current customers aside from the e-commerce?
Right. Price reductions negatively impacted the reorders. The marketing campaign we ran was not as effective. We should be able to do better with our current customers. Our Net Promoter Score is at 83%. It actually improved from last year. We should be able to do better.
Got it. Okay. In terms of the increase in inventory, you mentioned also that you are now buying directly from another vendor. I just wanted to clarify, is the increase in inventory because of the now direct purchase relationship, or is that separate?
Separate.
All right. Just wanted to get your thoughts as far as your cash flow priorities and capital allocation strategies. You were certainly active in doing your share repurchase during the quarter. Just wanted to get an update as to how you guys are thinking about cash flow usage.
We still have, I believe, approximately $29 million remaining in our stock buyback plan, and we're paying dividends, $0.27 per quarter. We're investing, as we pointed out, on our e-commerce platform.
Got it. Okay. Thank you very much.
You're welcome.
Thank you. Once again, participants, to ask a question, you may press star followed by the number one. Please unmute your phone and record your name slowly and clearly when prompted. Our next question comes from Erin Wright of Credit Suisse. Please proceed.
Thanks. Can you speak to where you're seeing most of the competition from, is it Chewy.com, or is it the Vetsource and Vets First Choice platforms, or is it both? Is it across all product categories or more on the OTC versus prescription side? Just wanted to get a sense of the competitive landscape. Thanks.
Yeah. The biggest competition is really coming, the impact is coming from online competitors, it's pretty much all the way across both prescription and OTC.
Okay. Are there other types of initiatives or offerings that you could leverage to drive new and existing customer growth, promotions that maybe aren't solely price-based, or offerings such as AutoShip, for instance, on OTC products? Does that make sense in your view?
We do have an Easy Refill program, which is very similar to AutoShip. Instead of a negative option, it's a positive option. The customer has to confirm the order before we would ship. It's very similar to an AutoShip program, except it's a positive option.
Okay. Then you spoke to the better manufacturer relationships, and I guess how much of your product as it stands today is procured through the gray market, through other third-party distributors, versus direct from manufacturers? Do you anticipate that soon you'll be able to procure all your product direct from manufacturers, or will you have this sort of hybrid model as you see fit? Thanks.
It will be 100%, we believe, we are anticipating in the next two to three months. 100% direct.
Great. Thank you.
You're welcome.
Thank you. Our next question comes from Kevin Ellich of Craig-Hallum. Please proceed.
Hey, Mendo. Forgot to ask a couple of things.
Sure.
I guess first, you guys filed an 8-K a couple of weeks ago, that modified your employment agreement. Just wondering, what was the driver behind that?
Yeah, I'm not going to comment on that.
Okay. Wondering, we know that there are some other companies in the industry working with some of the major retailers. Wondering if you guys have had any discussions or thoughts about providing any sort of white label services.
We did have conversations with the retailers, but that's all I'm going to say at this time.
Okay. Sounds good. Thank you.
You're welcome.
Thank you for your questions. Back to you, Mr. Mendo Akdag.
Thank you. In fiscal 2020, we'll continue to be price competitive, and we'll focus on optimizing our marketing in this more competitive environment and being more efficient with our advertising spending. In addition, we'll be 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.
Thank you for participating in today's conference. You may disconnect at this time.