PetMed Express, Inc.

Welcome to the PetMeds conference call to review the financial results for the first fiscal quarter ended June 30, 2022. At the request of the company, this conference call is being recorded. Founded in 1996, PetMeds is your trusted pet health expert delivering prescription and non-prescription pet medications and other health products for dogs, cats, and horses direct to the customer. PetMeds markets its products through advertising and promotional campaigns which direct customers to order online or by phone and which are intended to increase the recognition of the PetMeds brand name. 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 Rosenblum.

Thank you, and I'd like to welcome everybody here today. I'd also like to remind everyone that the first portion of this conference call will be listed only until the question and answer session, which will be later in the call. Also, certain information that will be included during this call 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 results could differ materially from those projected. The company undertakes no obligation to update these statements based on subsequent events. 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 CEO and President, Matt Hewlett. Matt?

Thanks, Bruce. Good afternoon, and thank you for joining us for our fiscal 2023 first quarter call. As a reminder, PetMeds pioneered the online pet prescription business over 26 years ago, and this is a legacy of which everyone at PetMeds is very proud. As I approach the one-year mark since taking over as CEO and President, I continue to believe that PetMeds is a terrific company with a talented and dedicated workforce, serving a large and loyal customer base that supports our vision that every pet deserves to live a long, happy, healthy life. My commitment to all of our stakeholders is to be open and transparent, particularly as it pertains to our progress with engineering the transformation of this iconic company. Today, I will break the call into four themes. One, an update on our core business. Two, an update on our partner strategy. Three, a major change to our management team. And four, the progress on our business transformation. So, let's start with an update on our core business. As we mentioned in our last call, we saw a slow start to flea and tick season due to seasonally colder temperatures, which continued into the early part of the most recent quarter. Due to the high concentration of our business in flea and tick and heartworm medications, The slower sales of these products in the month of April in particular had a material impact on the quarter. Once warmer temperatures returned to much of the country, stimulating more normal flea and tick and heartworm medication demand from pet parents, we saw the expected rebound of a repeat base later in the back half of the quarter. First quarter sales were 70.2 million compared to sales of 79.3 million for the same period the prior year. And while we are disappointed with the overall sales results for the quarter, We are encouraged by the sales generated from our returning base of customers in mid-May and June. Adjusted EBITDA for the first quarter was down 10% year-over-year. We haven't produced the results in net new customer growth, but I remain optimistic that the combination of the new team, new media allocation, and refreshed creative will start to stimulate profitable new customers. Expanding from a business that was primarily optimized to market to existing customers to a business that also includes a focus on generating new customers will take some time. The slow start to our flea and tick season this spring also had an impact on our ability to attract new customers. There were simply fewer buyers for our seasonally sensitive product catalog. However, we did start to see improvements in new customer acquisition towards the end of the quarter. We continue to invest in our infrastructure, including processes, systems, and people And you will note that general and administrative expenses increased on a year-over-year basis. These are very targeted investments, which we strongly believe will grow long-term shareholder value. In fact, we have partnered with a number of well-seasoned third-party resources known and trusted by me and my team, particularly with regard to turnaround, to cost efficiently and quickly improve our e-commerce site delivery, usability testing, data analytics capability, and more. For instance, we have just enabled a new data warehouse that we call Pet House. That gives us deep insights into our first-party data that spans our 26 years. On the marketing front, we've intentionally kept our variable marketing spend relatively flat year over year. Again, since April was slower due to unseasonably low temperatures, we determined that it wasn't prudent to spend against slower demand. Our LTV to CAC number will be dynamic but profitable as we test and learn. Our new customer count for the quarter was approximately 69,000 and our LTV to CAC for the quarter was 1.5. To reiterate, we believe LTV to CAC is a more meaningful measure of the marketing value creation versus using PetMed's traditional ROAS metric. We expect to see this LTV to CAC number grow as we migrate more of our returning customers to our auto ship subscription program and as we expand average order value over the life of our customers. Our auto ship program continues to grow. Approximately 34% of our revenue was recurring revenue derived from our auto ship subscription program during the June quarter. We will be announcing some exciting new enhancements to our subscription program that we will address later on. During our last earnings call, we discussed our recent investment in partnership with Vexter, a pet telehealth company that connects pet parents with licensed veterinarian professionals all over North America. Today, we are even more excited about this partnership and are making a ton of progress on our go-to-market and partner integration. I will spend more time detailing the progress later on this call. We are rapidly moving on the execution of our pet health expert strategy, with the first building block of the strategic pillar being telemedicine. We have many other initiatives and partnerships underway that we plan to disclose at a future date. Lastly, I would like to announce a significant new addition to the team and executive to the company. Over the last several quarters, we've spent a great deal of time discussing our new strategy, processes, product, and people. In terms of people, we have invested in an expanded leadership team that has experience with both digital transformation and scaling a company. We have added several new executives in the last six months. I am pleased and excited the latest member of my team, Christine Chambers, who officially joins us as PetMed's new Chief Financial Officer on August 3rd. You will get the chance to hear from Christine on our next call, as, of course, she will be participating in our earnings calls going forward. Christine is a seasoned finance professional with extensive experience transforming public and private companies. She was most recently the Chief Financial Officer at Real Networks. Prior to this, Christine and I worked together closely when she was the Senior Vice President of Finance at Rosetta Stone Incorporated. She has extensive and relevant experience that I am confident will help PetMed start to regain growing market share, and I'm personally delighted that Christine is joining our executive team. The Board of Directors and I would like to thank Bruce Rosenblum for his myriad of contributions to PetMed for over 20 years. With an intense dedication to the company, Bruce has made a substantial impact as the Chief Financial Officer for over 20 years. The Board of Directors and all of the team members at PetMed thank him for his service. Bruce will be officially staying on for several months in a consultative capacity to ensure a smooth operational handoff. Thank you, Bruce, for all you've done. Now, let us dive deeper into the details with the presentation material. As always, we like to feature pictures of our customers and employees' pets in our slide decks. You will see many original pictures throughout this presentation, starting with this slide, which features my dog, Harry, a PetMeds customer since he was eight weeks old. Let us start with a look at the current market and a perspective on the overall opportunity. As we covered in our previous earnings calls, PetMeds operates in a very large and growing addressable market. The total U.S. pet market is over 100 billion in annual sales, and it is expected to reach 120 billion by 2024. The addressable pet medication market where we participate today is approximately 10 billion and also growing rapidly. We are actively working on improving and growing our core business in that addressable market, while also setting our sights on expanding our addressable market into the broader wellness market, which is estimated to be over 30 billion. Today, we are one of the leading and most trusted pet pharmacies. Pet meds is also an important part of the strategy of many of the pet platforms and players in the industry. As I have learned, there are not many truly reliable online prescription providers for these pet platforms and players to partner with, which puts us in an enviable position. Our core asset and demonstrated competency around prescriptions enables us to move much more quickly to execute on a broader pet health expert strategy. We also operate in a market that is growing with underlying behavioral trends that are favorable to digital retailers, and it is a great time to be in a pet business. We also know that the pet vertical is more resilient than other verticals when there's a financial downturn. In particular, it is a great time to be a retailer that is focused on essential consumables. U.S. household pet ownership has increased over time, and today, seven out of 10 U.S. households have a pet. In a post-COVID world, those pet parents are going to need and will seek out health and wellness care provided by a trusted brand. PetMeds is uniquely positioned to take advantage of this trend. Pet parents see their pets as an extension of their own families, and they are increasingly demanding more healthy pet care options. We see this as a positive trend for pet meds and an opportunity for growth. Similarly, aligned with the trends in human health, pet parents are thinking through the entire spectrum of their pet's care, from diet to veterinary services and from infancy through old age. While some well-known retailers enter the market by means of pet food first and then expanded, Pet med started first in the most difficult RX end of the market, and we are now expanding out. To that end, we intend to move much more aggressively this year in expanding our product assortment and catalog. We see significant compounding upside in the form of increasing recurring sales, increasing customer loyalty, and increasing share of wallet by providing a broader non-medication product assortment to pet owners. Lastly, the pandemic accelerated the increasing trend for the digitization of healthcare. Specifically in the pet market, regulations related to in-person veterinarian visits and prescription fulfillment were temporarily waived for the first time during COVID. And these services moved online in unprecedented ways. PetMeds is ahead of the curve on this trend with our strategic partnership and investment in pet telemedicine with Vetster. With this groundbreaking partnership, we believe we are enabling the first real mainstream pet telemedicine platform and the one that will prove to be an accelerator of widespread adoption of pet telemedicine. During the last earnings call, we discussed some key pet meds differentiators. I want to reiterate those because they are important, and I believe they provide a real edge for a company's transformation. First, our brand is both widely known and trusted. Our own market research indicates that 55% of U.S. pet parents are aware of the pet meds brand. Having a strong brand takes years to develop, and our customers look to PetMed as their trusted pharmacy and pet medication expert. We will be leaning more into the brand in our external communication with more dynamic and relevant messaging and new channels to take advantage of our large brand goodwill. Second, we have strong operational and quality efficiency as a pharmacy. The customer care integration with our pharmacy is world-class. which ensures that customers get their products delivered as promised quickly and accurately. Additionally, our VET partners reliably receive quality service delivered through our VET platform. We'll be looking to expand our VET network and provide enhanced service to them with new technology delivered through our partnership with Vetster. Our deep experience with the VET community is a significant competitive advantage. We have one of the largest direct-to-consumer vet networks in the online retail space with over 70,000 veterinarians that we have worked with over the company's history. Currently, our online vet portal has 17,000 active veterinarians and vet clinics. As I said in earlier earnings calls, this is a core capability and a unique asset because it enables us to expand our fulfillment capability as we scale our business. Our intent is to drive incremental revenue through a powerful platform offered to our vet partners in the near future. We view vets as our partners in jointly providing a greater way of pet health services to pet parents. To that end, we will continue working together holistically to improve vets' ability to care for pets. Ultimately, we believe if we help vets, the profits for both the vets and for pet meds will follow. Our pet pharmaceutical category expertise is something I view as a towering strength. Many retailers can sell dog food, but few can provide medication and sound health advice at scale. As I've said before, being a differentiated pet medication provider allows PetMeds to excel in our health and wellness offering and continue to be viewed as trusted pet health experts, especially as the market continues to become even more competitive. PetMeds currently enjoys a close and strategic bond with our many supply partners. and those relationships have developed over time to become even more strategic. We have direct relationships with all of our major suppliers, and we work together closely to effectively market their products to our customer base. Our customer service and overall customer centricity ethos permeates our culture and is demonstrated throughout our team. We provide a 100% satisfaction guarantee, and we go the extra mile for our customers with truly empathetic and expert service. We don't just have a transactional interaction with our customers. We have built trusting, genuine relationships. Our customers view PetMed as a trusted pet health expert, and we take that responsibility seriously. I recently had the pleasure of receiving an email directly from a customer concerning a phenomenal interaction with one of our customer care reps. Here is what they had to say. Dear Mr. Hewlett, The purpose of my letter is to bring your attention to my experience with a member of your team, Jennifer, during my call with your company yesterday. Having the need to reorder Riley's, my dog, monthly meds, I called your company yesterday and was connected to Jennifer. Her knowledgeable professionalism and patience with me were outstanding. Being disabled without income and living on my savings, I had a lot of questions about different meds and the different ways I might be able to save some money. I am sure My time with Jennifer probably extended past company policy regarding time. As most places you call, they rush you on and off the phone, only wanting to take an order and get to the next customer. This was not the case. I had a lot of questions, and Jennifer was so patient and kind and assured me she was there to help me and that she was going to do it. Her time with me on the phone yesterday was a great example of her dedication to PetMed and her love for helping others. I'm very impressed and thankful for her time and patience with me. Again, thank you for your company's outstanding service. With the many different choices that are available to us to choose our meds for our animals, I can tell you it's the folks like Jennifer that will keep them coming back. Should I have an opportunity to refer others, be assured it's Pet Meds where I will be sending them to. Jennifer is a perfect example of our employees' dedication to our customers and their pets' well-being. And I'm delighted to share this story and recognize Jennifer and all of her colleagues for their exemplary customer service. PetMeds has historically been a somewhat low growth, yet high dividend based company. And we are proud to have created and returned so much value to our shareholders. We are intent, however, upon becoming a higher growth company to create even more value. And we believe we are in a great position to do that. PetMeds is profitable with a pristine balance sheet. We do not have any debt. We have approximately 105.4 million in cash and cash equivalents as of June 30th, 2022, and we are cash flow positive. PetMeds is moving much of our business from a transactional direct-to-consumer model to a subscription business. Subscription businesses are clearly compelling business models due to their predictable and stable recurring cash flows. As I mentioned at the beginning of the call, We ended the June quarter with approximately 34% of our customers enrolled in ordering via our auto ship and save subscription program. We continue to have a large base of returning customers, which is an indication of the quality service and the value that we deliver. We are fortunate to have a large base of 2 million pet parents that have purchased from us over the last two years. We have over 26 years of experience as a pure play pet pharmacy, fully licensed in 50 states. delivering outstanding service and value. This domain experience is what I would call the more complicated part of the pet ecosystem, which makes our progression into other segments much easier. Our customers just love our brand and our service. Our NPS score is over 80, which puts us in the upper quartile along with some of the most beloved brands in the world. Now, I'd like to have Bruce review our financials for the quarter.