PetMed Express [PETS] Conference call transcript for 2021 q3
2021-10-25 21:23:02
Fiscal: 2022 q2
Company Representatives: Matt Hulett - Chief Executive Officer Bruce Rosenbloom - Chief Financial Officer
Operator: Welcome to the PetMeds Conference Call to Review the Financial Results for the Second Fiscal Quarter ended on September 30, 2021. At the request of the company, this conference call is being recorded. Founded in 1996, 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. PetMeds markets its products through national advertising campaigns, which direct consumers to order by phone or on the Internet to increase the recognition of the PetMeds brand names. PetMeds provides an attractive alternative of obtaining pet medications in terms of convenience, price and 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.
Bruce Rosenbloom: I would like to welcome everybody here today. 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. 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 the 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. Let me now introduce our newly appointed CEO and President, Matt Hulett. Matt.
Matt Hulett: Thanks Bruce. Good morning and thank you for joining us. My name is Matt Hulett, and I’m the new CEO of PetMed. I'm incredibly honored and enthusiastic to join this iconic company and I'm excited to be on this earnings call today. I would like to begin by thanking Bruce Rosenbloom for acting as Interim Chief Executive Officer prior to my arrival. Before we update you on our progress on Q2, I would like to first share my personal thoughts and motivations regarding why I am so optimistic about PetMed’s and our future. First, I’d like to introduce you to my dog Harry who’s featured on this slide. He is the latest addition to our family and he is also puppy. In fact, Harry is the first dog for my family. Our family had no idea what we were getting ourselves into. It's like having a newborn again and as many of you fellow pet parents know, puppies can be challenging. We also can't imagine not having Harry in our lives and we think of him as a member of our family. Personally it is fulfilling to be involved in an organization where you can spend your time and energy on a business that has such positive social impact in society, while you're focused on generating returns for shareholders. Now that we've established my personal connection to the business, I’d like to spend some time walking through the rationale as to why I believe PetMed is a great long term investment. Having a large addressable market is important. It enables more optionality for new brands and products to be developed; it provides more opportunity to develop a myriad of go-to-market strategies, targeted different cohorts of customer segments. This also means that there's room for more market participants and for those market participants to co-exist and flourish. The pet industry's total addressable market is very large and it is growing. Currently it is over $100 billion and the service addressable pet medication market where we participated to-date is approximately $10 billion. We are one of the leading pet pharmacies today and as such, I see a future where we can extend our already sizable customer reach, combined with our widely respected and known brand into additional segments of the total pet care market as our future vision comes fully into focus. In addition to the benefits of participating in a large market, the market timing is also considerably favorable. Pet ownership has always been high in the United States, but we have seen an increase in pet ownership, especially due to the macro effect of COVID-19. Pet ownership has surged to record highs and now seven out of 10 US households own a pet. Those new and existing pet parents will need more pet medications and other related healthcare services for their pet family members. As we have seen in other digital e-commerce verticals, the adoption curve of digitization of retail is a favorable tailwind. This pulls forward a digital based retail experiences, has now given customers a taste of the future and has created new buying habits of purchasing more products and services online. Today our addressable market is largely dominated by offline sales and we see the trend to purchase online is clearly very favorable to us. Pet parents see their pets as an extension of their own family and they are increasingly demanding more healthy pet care options for their furry friends. We see this as a positive trend for PetMeds and an opportunity. For example, we have increased the number of products that we carry and have started to include specialty dog food and higher end wellness products, which we believe have contributed to the increase in our average customer order value. Lastly, just like we've seen in the human healthcare market, COVID-19 accelerated the increasing trend for the digitization of healthcare. In fact, in the pet market for the first time regulations related to in-person veterinary visits and prescription fulfillment were temporarily waive and moved online in unprecedented ways. We think this opens the door to the acceleration of digital based telehealth services. As I look at the business, there are several key competitive advantages that we can leverage in the future. First, our brand is widely known and trusted. Having a strong brand takes years to develop and our customers look to PetMeds as their trusted pharmacy and as their pet medication experts. Second, we have strong operational and quality efficiency as a pharmacy. Our customer care integration with our pharmacy is world class, which ensures that customers get their products delivered quickly, but also accurately and our vet partners receive high quality fulfillment and service delivered through our vet platform. Our deep experience with the vet community is a latent competitive advantage. We currently have one of the largest direct-to-consumer vet networks in the online retail space. PetMeds has a large network of over 70,000 veterinarians that we have worked with over the company's history. Our online vet portal currently has 17,000 veterinarians and vet clinics. This is a core capability, an asset, because it enables us to expand our fulfillment capability as we scale our business. Our prescription medication authorization rates are the highest they have ever been which speaks volumes to the level of veterinarian cooperation we received. Our pet pharmaceutical category expertise is something that I view as a unique strength. Being a differentiated provider allows PetMeds to focus our offering, especially as the market continues to get even more competitive. Again, more come on where we see our brand and business growing in the coming months. PetMeds has long enjoyed close bonds with many of our supplier partners. Those relationships have developed over time to become even more strategic. Today we have direct relationships with all of our major suppliers and we partner with them to market their products to our customer base. Our customer service and overall customer centricity ethos permeates our culture and our team. I personally sat in on hours of phone calls between our customers and our service agent, and I've never experienced such a tightly integrated and empathetic customer centric organization in my entire career. We don't just have a transactional interaction with our customers, we have built trusted relationships. Before we comment on our earnings performance, I would like to reiterate several compelling reasons to invest and to continue to invest in PetMeds. PetMeds has several core fundamentals that are compelling, including a strong balance sheet. We do not have debt, we have over $100 million in cash and we are cash flow positive. We have a long history of providing shareholder returns though our dividend and a strong return on equity that has been historically over 30%. We have started to build a recurring subscription based through our customers with a program which we just recently launched in July this year, through our new AutoShip & Save program where we are building higher lifetime value and recurring relationships with our customers. In September approximately 20% of our customers signed up and ordered via our AutoShip & Save subscription program, and that number continues to rise. Our customers responded very positively and enrollment in AutoShip & Save has increased steadily throughout the quarter. We expect many of our reorder sales to eventually transition to AutoShip & Save by the end of our fiscal year, which will only continue to strengthen our relationship with our customers. We also continued to have a large base of returning customers, which is an indication of the quality of service and the value that we deliver to our customers. So to sum up the core company strengths, we have over 25 years of experience as a pure play pet pharmacy only licensed in 50 states, delivering fantastic service as value which is recognized by our customers and continues to be rewarded with their loyalty. Our NPS score is over 80, which puts us in the upper quartile, along with some of the most beloved brands in the world. We are a direct-to-consumer brand with a rapidly growing addressable market and we have successfully serviced more than 2 million active customers over the last two years. Now, I would like to have Bruce Rosenbloom, our Chief Financial Officer to review our financials for the quarter.
Bruce Rosenbloom : Thanks Matt. Now we’ll review the financial results. We will compare our second fiscal quarter ended on September 30, 2021 to last year's quarter ended on September 30, 2020, and in some cases we’ll refer back to September 30, 2019. Similar to the quarter ended June 30, 2021, we faced the unique situation comparing two totally different environments between 2020 pandemic and 2021 post pandemic. We were coming off a strong September quarter last year, which was primarily driven by increase in commerce demand as a result of the pandemic, which caused many retail stores to close and many veterinarians to be unavailable. However, during the most recent quarter, while the pandemic was abating and retail stores and veterinarians were open for business, the advertising market continued to surge with increased demand, dramatically driving up CPC and CPM rates by more than 50%. As a result, we spent approximately 33% less in advertising due to these cost increases. For the second fiscal quarter ended on September 30, 2021 sales were $67.4 million compared to sales of $75.4 million for the same period in the prior year, a decrease of 10.7%, but sales were only down 3.6% versus the quarter ended September 30, 2019 prior to the pandemic. The decrease in sales was due to decreases in both new order and reorder sales. Our sales were negatively impacted by a much more competitive market and a crowded advertising space with substantially higher costs compared to the same quarter last year. In addition during the past six months there was a dramatic increase in veterinarian visits by both pet owners were unable to visit their veterinarian during the pandemic. We believe the increase in veterinary visits was primarily due to pet owners needing to visit the veterinaries for their pet exams and to renew their prescriptions. Since some pet owners purchased medications directly from their vets during their visit, the company believes this negatively impacted sales and especially reorder sales during the quarter. We were disappointed with our sales results during the quarter, however sales were trending more positive in the months of August and September 2021, when you compared them to August and September 2019. Reorder sales decreased by 80.5% to $62 million to the quarter compared to reorder sales of $67.8 million for the same quarter last year, while for the quarter ended September 30, 2019 our reorder sales were $61.9 million. Encouragingly reorder sales in the most recent quarter while down versus a year ago, were up slightly compared to 2019 pre-pandemic. We would expect to see stronger reorder sales in the back half of fiscal 2022 as we anticipate more prescriptions being renewed. A positive trend to highlights for the quarter was a continued increase in our average order size. Our average order value was approximately $92 for the quarter compared to $87 for the same quarter last year and $85 for the quarter ended September 30, 2019. The increase in AVO can be attributed to a shift in our product mix to more prescription items and less over the counter items with prescription items having a higher gross margin profile in comparison to over the counter items. As I mentioned earlier, during the quarter ended September 30, 2021, the advertising market was extremely competitive, and this increased demand drove our bad prices dramatically. As a result our advertising spending was less efficient than usual and delivered fewer impressions than in prior years. In terms of this we believe our advertising spending was less effective in the most recent quarter and its ability to attract new customers. New order sales decreased by 30% to $5.4 million for the quarter compared to $7.7 million for the same quarter in the prior year. We acquired approximately 65,000 new customers in our second fiscal quarter, compared to 96,000 for the same period in the prior year. However, we anticipate that advertising prices should revert back to more normal levels as the pandemic further subsides, which should help increase the efficiency and effectiveness of our media spending, and thereby continue to help us gain more new customers in the future. We are also in the process of reevaluating many of our current marketing relationships, which has resulted in changing some of our marketing partners with the expectation of improved marketing efficiency and results. For the second fiscal quarter, net income was $6.3 million or $0.31 diluted per share compared to $8.4 million or $0.42 diluted per share for the same quarter last year, a decrease to net income of 25%. For the second fiscal quarter, our gross profit as a percentage of sales was 28.5% compared to 30.5% for the same period a year ago. The percentage decrease for the quarter can be attributed to some of the major manufacturers shifting their funding from discounting product costs to cooperative marketing rebates. There may be an opportunity to improve gross margins in the second half of fiscal year 2022 if the shift to prescription medications continue. We had $106.6 million in cash and cash equivalents and $19.7 million in inventory with no debt as of September 30, 2021. The Board of Directors also declared a quarterly of dividend of $0.30 per share on the company’s common stock. The dividend will be payable on November 19, 2021 to shareholders of record at the close of business on November 8, 2021. The company continues to be committed to returning capital to our stock holders; however, the declaration and payment of future dividends is discretionary and will be subject to a determination by the Board of Directors each quarter following its review in the company’s financial performance. This ends the financial review. Operator, we are now ready to take questions.
Operator: . And our first question is from Anthony Lebiedzinski from Sidoti. Please proceed with your question.
Anthony Lebiedzinski : Yes, good afternoon, and thank you for taking the question. So welcome Matt and welcome back Bruce. So as far as new order sales, I mean obviously you guys did have certainly felt the impact of the advertising market being lower. But kind of what gives you confidence that things will bounce back in the back half of the quarter or fiscal year. I’m just curious as to what's driving that. I mean maybe perhaps are you seeing some good results, better results so far in the current quarter. Just wondering about your confidence level about your ability to bounce back with the new order sales.
Matt Hulett: Anthony, this is Matt and thanks for the questions. Great to hear from you again; and then Bruce feel free to chime in. A couple of things about that; one is, I would say that we are taking a small bite to fast approach to looking at our new customer acquisition. We basically have rewired our entire marketing partnerships and agencies in the last, I would say – while I’ve been here two months though. We’ve done that in the last four weeks, and that we’ll be rolling out very soon. So we're looking at our capital allocation spend to where we spend. I think we’ve been spending too aggressively in some channels, where we haven't seen a return and we haven't been taking advantage of new sources of traffic, where we actually think we have a lot of advantage, that’s one. Two is, we are spending a lot more time rewiring our system and databases around tracking our customers better and really focusing on reengagement. And for rates in general, we are seeing some changes to the rates out there. I think some of the channels like Facebook have obviously got more expensive due to the loss of first party data due to the Apple IDFA decision. So those are some channels that obviously I think are just still getting hotter in terms of increased CPM and CPC. But in others we are seeing favorable trends. So it depends on the channel, but for us we are really looking at each channel and seeing how we get incrementality of each channel, which is different than what we did in the past.
Anthony Lebiedzinski : Okay, got it, okay. And then, in terms of your gross margins, now you did mention that you have been shipping more items like specialty dog , which obviously is much heavier than the typical pet medication. So as we look to align our models here, like how should we think about as you – on the one hand it sounds like you you're doing a good job of increasing your AOV, but how is the gross margin impact going to be because of that.
Bruce Rosenbloom: Yeah Anthony, I’m going to take that question if you don’t mind. As far as our margins to the past quarter, we have as we may have spoken offline before, but our vendors shifted funding to our CoOp marketing in lieu of discounting products and you know just negatively impacted our gross margins during the quarter, and it will probably be like that going forward, where instead of getting price discounts off the price of the items or the inventory, these rebates or these promotions are going to be below the line as in the advertising line item. So as far as moving forward with gross margins, you will see that as an overwriting factor, but however as we also see in our shift moving back to more prescription and OTC, we do expect a positive trend in margins moving forward, because of that going back to some resemblance of normalcy, pandemic versus post-pandemic when it comes to our mix shift of items.
Anthony Lebiedzinski : Okay. Got it and then of the capital allocation, just curious to get your thoughts Matt as far as looking at pets. For years you know the company has been a company with a lot of cash and growing the dividend and started maintaining a very healthy cash position. I just wanted to get your thoughts about that as to you know, how should we think about that, especially the divided, what are your thoughts there?
Matt Hulett: Yeah, I think there’s several things to unpack there, it’s a great question. I've been a long listener of past earnings calls as well, so I'll try to give a slightly different answer. I’d say with the divided, we’re always looking at that and – but it's always subject to change, but we've been pretty consistent with the dividend and nothing to announce here obviously. But to your cash question, you know with over $100 million in cash with interest rates being so low, you know I think there's a lot of opportunities in this space that deploy cash and allocate capital more efficiently to get higher returns. There's also a lot of businesses in the pet eco system that fortunately in this market different than other verticals, there's a lot of ways to partner, a lot of ways to look at M&A as well, so we're certainly going to be looking at those in the future, since we do have such a large cash position. And lastly, it’s a little early for me to articulate the strategy. You know I’ve been around for two months. I think the first four weeks felt like six months, because there was a lot to do and learn and now I'm kind of settling in and feeling better about things. But yeah, I think there's a lot of opportunity to deploy capital differently, especially given the tailwinds in pet ownership. So that's kind of a non-answer answer Anthony, other than I think we're taking a fresher look at that and I would expect that we will make some decisions in the coming quarters that we’ll obviously update everyone on.
Q - Anthony Lebiedzinski: Got it, okay. Well, thanks and best of luck going forward.
A - Matt Hulett: Great! Thanks Anthony.
Operator: And our next question is from Steph Wissink with Jefferies. Please proceed with your question.
Steph Wissink : Hi everybody! Thanks for taking our questions. The first is, I wanted to just go back to some of the comments in your prepared remarks around vet visits and I think I heard you correctly that there is an inverse correlation, being when vet visits go up, you tend to see vet sell prescription in OTC directly and so your business feels that impact. Is that the right way to think about it or is there a net second derivative where in follow up to those primary prescriptions you'll start to see some of the secondary prescription refills in your business?
Bruce Rosenbloom: Hi Steph! This is Bruce. So now let me address that question. It really – the vet visit information was really to try to give an understanding of what we were seeing last year versus this year. Last year during the pandemic, virtually all the vet offices were closed, and there really wasn't many alternatives where our pet owners could turn to for medications and many were trying online pet medications for the first time, and so that was definitely something that we welcomed last year. This year all those clinics are opened for business and they are making up for lost time. So you know they are making sure that they haven't seen that pet a 12 month period, they are enforcing and making sure that pet owner is coming into their clinic. So it's almost a resetting of the prescription cycle and many of the pet owners are going to the vet, buying there and then went online for the refill and we can sort of you know through our – through our data we know when it's time for a re-order and we'll go ahead and market for that reorder, subsequent reorder, and we expect to see that in the second half of this fiscal year is what I was referring to earlier in the call.
Steph Wissink : Okay, got it. And then my second question is on ad spend. I think you mentioned both, that you expect advertising prices to revert. I’m curious if you could just give us a sense or do you expect them to go back to pre-pandemic levels on a purchasing price basis or do you still expect there to be a bit of inflation post pandemic. And related to that, I think you also used the words less efficient. Can you maybe talk a little bit about what you're doing to tweak your marketing mix or your marketing plans out over the next couple of quarters to try to improve some of the efficiency, even if the costs remain a little bit elevated.
Matt Hulett: Yeah, and I'll take your second question first. A couple of things; I would say overall the way in which we've been purchasing media is going to change significantly. We're looking at new and have actually implemented new marking partners to help us with that, that specialize in specific areas of media. I won't get into the channels themselves, but you know obviously Google, Facebook, Connected TV, there's a whole lot of options out there and I think the way we’ve configured media spent today, you know with a fresh pair of eyes, so that’s one. Two is, just adding more data around decisions that we're making around our media buys with another, I’d say quick plan that we've implemented. And then lastly to your first question, you know media rates have been dancing around quite a bit. You know I was in the language learning space prior to this with Rosetta Stone and we took advantage of favorable rates during the pandemic, because advertisers were leaving things like brand advertising to performance. I would say, you know going into the holiday season it's too early to tell since it’s a very competitive time to be buying advertising, but I would say that I’m a little bit more optimistic about rates than I was when I started two months ago.
Steph Wissink : Okay, that's great. Thank you for the help.
A - Matt Hulett: Thank you.
Operator: Our next question is from Ben Rose with Battle Road Research. Please proceed with your question.
Ben Rose : Yes, good afternoon, and I know we haven't had a chance to meet Matt, but I look forward to meeting you post call. A couple of questions with regard to pet health advice. On your slides Matt you talked about the growth in the telehealth market and was just curious to know what thoughts you have with regard to the ‘Ask the Vet’ service that you offer now and whether you envision that being expanded in some way or perhaps being monetized in some way in the future.
A - Matt Hulett: Hey Ben! Looking forward to catching up in subsequent conversations. Yeah, I'm really excited about the pet telehealth space. There's been a lot of innovation in this space. There's a lot of different start-ups that I had actually talked to personally in this space to get some advice. I think the way I’d start is, I always try to evaluate. This is not only on the TAM and the timing and the kind of the fundamentals, but also the customer relationships. An inordinate amount of our customers are wanting additional services from us. They are almost – they are giving us permission to give them more advice than we are today, because prescriptions are in a way the milk in the back of the proverbial store with the customer, because they see PetMed as the expert in pet healthcare. It just so happens as the customer is leaving the store, we're not providing a lot of expert experience yet. And so I see pet telehealth as us being very well positioned to add additional services that we don't do today, because customers really view it as that specialty pharmacy. They are not viewing us as you know the media retailer with lots of different services. We’re not known for selling food, we’re not known for selling dogs, we are known for providing expert advice and so for pet telehealth, while the market is really small, I see it's an opportunity to engage with our AutoShip customers in really unique ways, and then sell them additional services. So nothing to announce, but we're certainly going to be doing a lot of testing, even this quarter on this topic, which hopefully I'll be able to talk to you about next time.
Ben Rose : Okay, great. And with regard to the company's relationships with the veterinarian community and vet clinics, you know this is the first time that I’ve heard you quantify the number of veterinarians and clinics that you work with, and find that to be an intriguing opportunity. I was curious to know, plans that you have to perhaps reduce friction with the veterinarians or you know to improve relationships with them.
A - Matt Hulett: Yeah Ben, thanks for noticing that, and it was intentional to put that in there, because I was quite surprised when I first started the company. We have a vet portal that’s used today. I've seen other competitors in this space quote numbers and I think it might – this one might be a surprise that we have a larger network than most. I think our relationship with vets has been a little complication to be honest over the span of the company when we first started, because we are the pioneers in this space. I think when we would go to the veterinarian conferences, we are probably the least likely to be welcome, and I think now there's other players in this space and we’ve kind of opened the door for them and I think we're kind of seen as a more friendly player in this space to be honest. Our vet verification rates are high as they’ve ever been. I think there’s a lot of things we can do in our vet portal to make the veterinarians life easy. You know we're very sympathetic to veterinarians. They are overworked; they have some of the highest suicide rates of any profession, and I think that there's a lot we can do to be a better friend to the vet. And our vet portal I think has a great start, but I think there's a lot of opportunity to automate what they do in their clinics, and you know we're going to be pro-vet in terms of how we approach the market. Our intent is not to be anti-vet.
Ben Rose : Okay, thank you very much.
Matt Hulett: Thanks Ben.
:Operator: And our questions-and-answers portion of the call has ended. I would now like to turn the call back to Matt Hulett, the company's CEO for his concluding remarks.
Matt Hulett: Thank you. I want to reiterate what Bruce just covered in his financial highlights section. We are disappointed with our sales results for the quarter, but after my two months on the job, I'm confident there's much we can do and will do to improve our business growth. To be clear, in a market that’s growing, PetMed needs to make the necessary changes to our operating playbook to take advantage of the market trends. In my first weeks here I listened in on countless customer service calls, engaged with over 20 pet industry leaders, researched analysts and engaged with our own main pharmaceutical partners. I've already seen a lot of core areas that we can and have already begun to improve in this business and these include the following: Using more data insights acquired to retain customers, better segmentation of our customer base in order to drive more mass personalization of our offers and services; improved new customer acquisitions with a different allocation of variable marketing spend; expanded product and services that are already being demanded by our customers. Since I've only been with PetMed for a short period of time, I'm not ready yet on today's call to provide a comprehensive future strategy or capital allocation plan for the business and that would be premature. However, I do have a 90 day and 180 day plan that I presented to our Board of Directors and I'll be sharing more about our vision and strategy with you during our Q3 earnings call. But I will say this today, we firmly believe that we can take advantage of a large market tailwinds, leverage the main core strengths we highlighted today and execute on a broader strategic vision for the company. We look forward to briefing you in the coming quarters on our strategy and our progress. Thank you for listening in. Operator, this ends the conference call.
Operator: Thank you. This ends today's conference call. You may disconnect your lines at this time. Thank you for your participation.
