Earnings Call: Q1 2022

Jul 26, 2021

Welcome to the 1-eight 100 PetMeds Conference Call to review the financial results of the 1st fiscal quarter ended on June 30, 2021. At the request of the company, this conference call is being recorded. Founded in 1996, 1-eight 100 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 consumers. 1-eight 100 PetMeds markets its products through national advertising campaigns, which direct consumers to order by phone or on the Internet and which aim to increase the recognition of the PetMeds family's brand name. 1800 PetMeds provides an attractive alternative of 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. I'd like to remind everyone that the first portion of this conference call will be listen only until this 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 fiscal year 2019. For today's conference call, Gianfugrone, Archivore's Chairman is joining us. Now we will review the financial results. We will compare our 1st fiscal quarter ended on June 30, 2021 fiscal year. So last year's quarter ended June 30, 2020, and in some cases refer back to pre pandemic time periods as well. In our Q1 of fiscal 2022, we faced a unique situation. We are coming off a very strong June quarter last year That was primarily driven by increased e commerce demand as a result of the pandemic, causing many retail stores to Stores and veterinarians were reopening, the advertising market was rapidly recovering with surging demand, dramatically driving up the cost of advertising On a per impression basis, as a result, even the overall advertising spending for the quarter increased over the prior period, We delivered fewer ad impressions than in prior years. Our total net advertising for our income statement did in fact decrease due to increased cooperative marketing rebates, which were earned in the quarter. For the 1st fiscal quarter ended on June 30, 2021. Sales were $79,300,000 compared to sales of $96,200,000 for the same period the prior year, A decrease of 17.6 percent, but sales were relatively flat versus the quarter ended June 30, 2019 prior to the pandemic. The decreases in sales was due to decreases in both new order and new order sales. Our sales were mainly impacted by a much more competitive market and a crowded advertising space with substantially higher costs who were unable to visit their veterinarians during the pandemic. We believe the increase in veterinarian visits was primarily due to pet owners needing to visit their veterinarians for their pet's annual exam and to renew their prescriptions. Since some pet owners purchase medications directly from their vets during their visit, the company believes this negatively impacted sales And especially real world sales during the quarter. Our real world sales decreased by 11.8% to $70,900,000 for the quarter Compared to realtor sales of $80,400,000 for the same quarter last year. While for the quarter ended June 30, 2019, Our reorder sales were $67,700,000 We would expect to see stronger reorder sales in the back half of fiscal twenty twenty two As we anticipate more prescriptions being refilled. A positive trend to highlight for the quarter was the continued increase in our average order size. Our average order value was approximately $95 for the quarter compared to $89 for the same quarter last year $86 for the quarter ended June 30, 2019. The increase in the OD can be attributed to a shift in our product mix To more higher priced prescription items and less lower priced over the counter items, with prescription items having a higher gross margin profile in comparison to over the counter items. As I mentioned earlier, quarter ended June 30, 2021, the advertising market was extremely competitive. And this increased demand drove up ad prices dramatically. As a result, our advertising spending was less efficient than usual And delivered fewer ad impressions than in prior years. Because of this, we believe our advertising spending was less effective in the most recent quarter. Fiscal year 2019 and its ability to track new customers. New order sales decreased 47 percent to $8,400,000 for the quarter compared to $15,800,000 for the same quarter of the prior year. We acquired approximately 92,000 new customers in our 1st fiscal quarter Compared to $186,000 for the same period the prior year. However, we anticipate that advertising prices should revert back to more normal levels as the pandemic further subsides, which would increase the efficiency and effectiveness of our media spending and thereby continue to help us gain new customers. Encouragingly, reorder sales in the most recent quarter, While down versus a year ago, we're up approximately 5% compared to the same period in 2019 pre pandemic. Quarter. For the 1st fiscal quarter, net income was $4,400,000 or $0.22 diluted per share Compared to $7,800,000 or $0.39 diluted per share for the same quarter last year, a decrease to net income of 43%. There was a one time charge of $717,000 related to the CEO separation agreement, Which was incurred in the quarter. The company also incurred an additional $260,000 related to brand and marketing consulting fees within the quarter. For the 1st fiscal quarter, our gross profit The percentage decrease for the quarter can be attributed to some of the major manufacturers shifting their funding from discounting product costs 2 cooperative marketing rebates. There may be an opportunity to improve gross margins in the second half of fiscal year twenty twenty two If the shift to prescription medications continue. During the balance of this year, We'll also continue investing in our e commerce platform to better service our customers by adding additional features to our website to further drive sales. For example, like Auto Ship and Save, which was recently launched on our website about a week ago, our customers responded very positively Enrollments in Auto Ship and Save was very strong in its 1st week. We expect many more of our reorder sales to eventually transition year. We had $111,800,000 in cash and cash equivalents year 2019,200,000 in inventory with no debt as of June 30, 2021. The Board of Directors also declared a quarterly dividend of $0.30 per share on the company's common stock. The dividend will be payable on August 13, 2021 to shareholders of record at the close of business on August 6, 2021. The company continues to be committed to returning capital to our stockholders. However, the declaration of payment of future dividends is discretionary and will be subject to a determination by the Board of Directors each quarter following its review of the company's financial performance. This ends the financial review. Let me turn it over to Jian, our Board Chairman to say a few words. Thank you, Bruce, and good morning, everyone. So I'd like take this opportunity to make a few comments about the future of the company, which despite the challenges of the most recent quarter, I believe remains exceedingly bright. So why do I say that? Well, there are numerous reasons. First, I would point out that the pet care market is growing rapidly and many consumers have become new pet owners during the pandemic. 2nd, the markets rapidly shifting to online buying where TechMed strives. 3rd, Many new products and services, which are often driven by technology and other innovations, are being introduced. And we anticipate making some selective strategic equity investments in these innovative enterprises by leveraging some of the capital that we have on hand. 4th, We plan on revamping our marketing positioning and increasing our product offerings. We'll do that along with retooling our marketing strategies and tactics fiscal year, our customer base and ensure that the company's success will continue in tomorrow's digital world. And finally, we're enhancing our leadership with 2 new experienced directors up for auction by our shareholders this year. Our shareholder meeting is later this week. The search for a new CEO is well underway. We're seeing some very, very interesting candidates, and we anticipate being able to make an announcement there in the near future. So bottom line, we believe that the company's finest hours lie ahead. At this point, Let me recognize Mendo Aqdag, outgoing CEO, who's led the company for over 20 years, and we thank him for his leadership I'm wishing well in its future endeavors. I'd also like to thank our over 200 dedicated employees, many of whom who have been with us for more than a decade. So to sum up, today, the company is in an enviable financial position. We have a very strong balance sheet with $111,000,000 in cash and cash equivalents and no debt. And this provides us with the financial resources we believe are necessary to accomplish ambitious growth objectives. We are the leader in our space. We celebrated our 25th anniversary this year, and we've been operating profitably now for over 2 decades. We're proud that since the company's inception, we have served more than 11,000,000 customers. And since declaring our first dividend back in 2,009, We've returned over $200,000,000 to our shareholders and dividends. In conjunction then with these accomplishments, we are, as I think you can tell, Very excited by the opportunities that lie ahead for the company. So that ends our prepared remarks. And now Bruce and I would be happy to take your questions. So operator, we're now ready to take questions. Our first question comes from Ben Rose with Battle Road Research. Your line is open. Yes. Good morning, gentlemen. A few questions. It's been several months since you hinted at The potential to introduce new products. I was hoping, either Bruce or Gianni, if you could give us some insight into What kind of products you might be thinking of? Are these complementary to pen medications? Are they Sort of adjacent segments that you might be addressing? Yes. I think just I'll make a couple of comments first then. I'm sure you have some as well. I think that the market that we're in, which is really the health and wellness market, But there are a lot of products that we could add to our product mix, but still remain within full definition of the market. There are also, as I mentioned in my comments, innovative technology based products that are coming along that we may be able to carry in our product mix. So I would imagine that the new CEO is going to be taking a very hard look at what can be done to expand the product line while taking care that the weight, if you will, of the products doesn't cause us a problem with the cost of shipping. To our website. Most recently, we've added more Rx and high end food SKUs, premium dog food SKUs, Gives us a better chance for profitability. But we're always exploring additional ways to acquire new customers, to many partnership, fulfillment or any value added services, other new opportunities within the pet health space, as Shihan mentioned. That will be our focus this year, and we'll give you more information in the later part of the year when we have something to report. Okay. And if I may, just a couple of more. One strategic question was noted your Desire to potentially make selective strategic investments, does this mean that you'd be looking more to invest in Other companies as opposed to acquiring them outright? Well, we've always looked Aggressively in acquisition and other investment opportunities in the past. There's always seemed to be a little gap between The expectation of both the buyer and the seller, but we plan to be aggressive this year. And based on our press release and all of the comments we made today, I would probably say yes. I'm sorry. Yes. From my perspective, I spent a lot of years in the technology sectors, and it's pretty clear that technology is rapidly accelerating in the pet care market broadly, often in times of And examples of new services. And I think that selective investments in those types of products, Coupled within the ability to introduce them broadly to our customer base represents a pretty attractive opportunity that I think We should be pursuing. Okay. That certainly makes sense. And then if I may, finally, The AutoShip and Save, Bruce, can you start can you comment on how long that's been available? Did I hear you say that it's just been available in the Last week or has it been if you just let us know when that started? Correct. Yes, it was launched last week or maybe 8 or 9 days ago. We're really excited. I mean, we've been looking to add this for some time. Our customers have been asking for this feature, Especially for the customers who order monthly medications. That's pretty critical, I think. I think or we anticipate AutoShip will continue to drive future reorder sales and it will also strengthen our relationship with our customer base. Okay. Thank you very much. You're welcome. Erin Wright with Credit Suisse. Your line is open. I have a quick follow-up on that last question on AutoShift. What percent of customers do you anticipate will use the offering or what's the goal there Just based on the mix of business that's considered more chronic therapy or preventatives, would it be purely focused on some of that monthly flea and tick medication or other categories of what percentage of your customers do you anticipate that targeting? Yes. I don't think we're going to give any specific targets or internal targets at this time. But as you know, Aaron, the overwhelming majority of what we sell, the Especially in the prescription medications are those monthly, every 3 months, every 6 months. So that would qualify for a large portion of our Yes, Vince. So we'll give more updates as we go along, but we're very excited about the launch. Okay, great. And then how would you characterize the flea and tick season this year? I guess, what are you seen across that category of products this quarter. And how would you characterize the shift that you're seeing between the prescription only products and the over the counter flea and tick products and how that's impacting your business financially. Right. We really have seen it's been a tale of 2 different years. I mean last year, we saw a greater amount of over the counter products and that's because many of the pet stores and Obviously, veterinarians, pet stores and other brick and mortar stores were closed. So typically, we saw an unusual lift Over the counter products last year. This year was back to more normalized levels between the breakdown between Rx and OTC. Okay. Thanks. And then given some of the ad spend dynamics you were referring to, how should we be thinking about the quarterly progression of advertising spend for the balance of the year? And separately for the balance of the year as well, should we anticipate further additional cost associated with the brand and marketing consulting fees similar to what was incurred in the Q1? Right. That's a good question. When you look at overall ad spend for the quarter, it was in fact slightly up versus a year ago. However, when we looked at the net number, of course, with the manufacturer rebates that we received, You're looking at the income statement and you see a decline in ad spend. We were aggressive with advertising, but the environment was a Very difficult environment. On a per impression basis, costs increased significantly as a result The crowded advertising landscape, which of course delivered fewer overall ad impressions. Going forward, we will continue to be aggressive with our ad spending. Our budget is flexible. So depending on ROI, we may adjust it from time to time. Rapid changes in that advertising landscape requires some real time adjustments. I think overall, like I said, ad fiscal year. And we'll continue to be aggressive going forward. And I think as we move into the second half of the year, Traditionally, as we get out of season, we have some better opportunities on the ad front historically. Bruce, just to add, I just had a couple of comments. One of the things that is increasingly possible and especially with digital media is to examine the degree to which there's an overlap across the different channels. Because if one doesn't do that, one risks delivering just increasing number of impressions to the same number of people. And I think there's a significant opportunity for us to review that in greater detail and make more informed decisions About where to put our ad dollars. So I'm not sure at this point how that would shake out, But I do in terms of the total dollars spent. So I think there are some pretty compelling opportunities to increase The efficiency and effectiveness of Alameda spend. And the consulting fees, will those continue? Fiscal year? That's something that we'll be considering as the year progresses. I mean, a lot will depend on When we bring new leadership in and what his preference will be. And if there is, we'll let you know if it's a material amount. Okay. Thank you. Anthony Lebiedzinski with Sidoti and Company. Your line is open. Thank you, and good morning and thanks for taking the question. So Yes. My first question is for you, Gian. Thank you for joining the call here. Nice to get a perspective from the Board of Directors. So As you look to hire a new CEO, what are the top qualities that you're looking for your new leader? Fiscal year. Just wanted to get your perspective. Yes. That's a good question. So I think that there's Definitely certain experiences that we would look at as being important. Ecommerce senior executive leadership of an ecommerce business is important. If we can add to that experience in the pet care markets, I'd say that's also important, but I would rank the e commerce experiences as being the most important there. Somebody who has A desire and some experience in transformations of companies. And what's interesting at this point in time is that It used to be that digital transformations would be applied to companies that weren't yet digital. I think that Increasingly today, we're seeing given the rate of change of digital technology, we're seeing some significant opportunities to revamp The operations of companies that are already digital. And so somebody who's been through transformations and has that kind of experience, That would also be pretty important to us. So I think that I think those, I would say, yes, the most important categories that we're looking for. Got it. Okay. Yes, that's very helpful. And I guess we'll stay tuned for The announcement in regards to that. So PetMed additionally has had a very strong cash rich debt free balance sheet. Just wondering from the Board's perspective, are you looking to maintain that same type of capital allocation or would you be willing to do anything differently with new leadership? Yes, that's another good question. Yes, certainly, if you look at PetMeds as An Internet based company, its profitability has been surprisingly strong, right, given the number of companies within the tech space certainly that are out there Growing rapidly, but not yet making a profit. So I personally think that continuing to be nicely profitable is Important, and I think that can be achieved. And I think we kind of established a roadmap for how to achieve that. In any situation in my experience where you have a change at the CEO level. It's very possible that there might be some investments required in the short term To establish the new strategic plan and the new path forward. But I would hope that, that would be done, let's say, in a short term temporary basis that then leads to an acceleration in both top line and bottom line growth. Hope that helps. Yes. Okay. Yes. Yes, for sure. And then in terms of the ad spending, Would you say, are you still going to be more mostly digital, you think? Or will you do more TV, kind of just probably thinking about the different media channels as far as Advertising is concerned. What are your thoughts there? Yes. So obviously, one of the trends that's just accelerated dramatically In large part because of the pandemic is Connected TV, right, over the top distribution of content, A lot of it, which is content that was being distributed on legacy TV and continues to be, but now it's increasingly being delivered over the top. It's getting a significant audience. And so I don't think we can ignore it. I think it's important to look at the as always to look at the demographics of the users of these different video channels. That said, I can certainly refer back to work we did at comScore, extensive work looking at the effectiveness of static display ads versus video. And it's pretty clear that video was significantly more effective. So I would imagine that There are some really attractive opportunities for us to put some money against connected TV and over the top and maybe to broaden our investments in Vidyo. And I'd certainly encourage the new CEO to look at those kinds of opportunities. But digital, I mean, over the top TV is digital, right, when all is said and done. And so there's kind of this transition from what was TV content distributed over the air or via cable and now that's being distributed digitally. So the term digital becomes broader in today's world. But I think that there are significant opportunities that we should be pursuing there. Got it. Okay. And lastly for me, as far as the loyalty program, have you Can you give us an update what you've seen there and whether you expect to make any changes to that going forward? With the loyalty plan, listen, we're always looking to improve on any of our Anything that we have, especially with concerns to the website. We're very happy with the performance of the plan. To date, it has helped reorder sales from our initial launch. But I think with adding auto shipping phase in conjunction with our loyalty plan. And the loyalty plan may change too. It's not necessary the way we initially launched it may not be the way That plan will be working in the future. So I think As we move forward, we'll see some changes. And when we make those changes, we'll let you know. Got it. All right. Well, thank you and best of luck. Thank you. I'm showing no further questions. Mr. Rosenberg, Mr. Porgone, I'll turn the call back over to you. Okay. Thank you. This wraps up today's call. We really appreciate your time. Thank you for joining us. Operator, this ends the conference call. Thank you for participating. You may now disconnect.