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spk07: Welcome to Pet Meds conference call to reveal the financial results for the second fiscal year ended September 26, 2022. At the request of the company, this call is being recorded. Founded in 1996, Pet Meds is a trusted pet health expert delivering prescription and non-prescription pet medications and other health products for dogs cats and horses direct to the customers pet meds market its product through advertising the promotion campaigns which directors direct customers to order online or by phone and which are intended to increase the recognition of pet meds brand name pet meds provides An attractive alternative for obtaining PEP medication 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, Brian, Mr. Brian Prevenu. Please go ahead.
spk00: Thank you, Operator. And I'd like to welcome everybody here today. to the PetMeds Express fiscal second quarter 2023 conference call. I would also like to remind everyone that the first portion of this conference call will be listened 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. Now, let me introduce our CEO and President, Matt Hewlett. Matt?
spk03: Our entire company of passionate pet lovers has rallied around our new vision that every pet deserves to live a long, happy, healthy life. To actualize this vision, PetMeds is shifting from being simply a leading pet medication retailer to being the pet health experts, a market leader in pet healthcare expertise. This is a natural and logical transition as for the last 26 years, millions of pet parents have chosen PetMed as their trusted partner in caring for their pets. For anyone new to the company, PetMed delivers prescriptions and non-prescription medications and pet supplies direct to the consumer. Our expert online pharmacy is an established and trusted brand as evidenced by the fact that we have served over 11 million customers over our company's operating history. I have now been CEO and President of PetMeds for a little over a year. And during this time, management has been executing on a very specific strategy to revitalize PetMeds. Over this last year, PetMeds has been in a rebuilding mode with a new and experienced management team, an updated strategy, and a revised overall approach to the market. We will break today's call into two themes. One, an update on our core business, and two, and an update on the progress of our business transformation. The headline for the quarter was that the overall business was stabilized on a year-over-year basis in terms of sales, led by a strong recovery of our repeat customer base. As we have discussed in previous earnings calls, Pet Med has a high concentration of our business in flea and tick and heartworm medications. Although Pet Med's last two quarters were impacted by a slow start to the flea and tick season, Due to unseasonably cold temperatures, we saw a solid rebound of our business during the mid to late part of last quarter, with warmer temperatures returning to much of the country. This stimulated more normal flea and tick and heartworm medication demand from pet parents in the second fiscal quarter when compared to the first fiscal quarter. I will provide an overview of our second quarter results. And then our CFO, Christine Chambers, will go into greater depth on our overall profitability later in the presentation. Second quarter sales were 65.4 million compared to sales of 67.4 million for the same period this prior year. We were encouraged to see the year-over-year sales gap close with our returning base essentially flat to our year-over-year trend. This trend reverses the double-digit decline we've experienced over the last few quarters. Our new customer count for the quarter was approximately 61,000, and our LTV to CAC for the quarter was 2.1. We saw continued improvements in our ability to attract new customers on a year-over-year basis. To reiterate, we believe LTV to CAC is a more meaningful measure of marketing value creation versus using PetMed's historical ROAS metrics. We expect to see customer lifetime value grow as we migrate more of our returning customers to our auto-ship and save subscription program and expand average order value over the life of our customers. Throughout today's call, we will detail the specific plan to expand our customers' basket. ChetMeds continues to invest in the business in the form of people and technology to modernize our company for future growth. For example, we have made additional investments in better data analytics, which is included in the 900,000 year-over-year increase in CapEx. Adjusted EBITDA was 7.1 million, down 2.8 million year-over-year, and net income was 2.6 million. The second thing we want to highlight is our business transformation and the strategy driving it. In the past month, we have very deliberately revitalized PetMed's mission, vision, cultural values, and strategy. We envision a world where the majority of vet services and pet care are enabled digitally, and we want to be at the forefront of this digital transformation. We as an industry are in the early days, but it is coming rapidly. We believe that a digitally enabled and data-driven future will be the preferred mode of healthcare delivery for pet parents. We see the pet healthcare moving digital and fast. Now, let us dive deeper into the details of 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 photos throughout this presentation, starting with this slide, which features my dog, Harry, a PetMeds customer since he was eight weeks old. Let us look at the current market and our perspective on the overall opportunity. PetMeds has historically been a lower growth, high dividend-based company. PetMeds also has an amazing set of core assets and capabilities that we plan on leveraging to restart the growth in the PetMeds business, including PetMeds is profitable with a strong balance sheet. We do not have any debt. We have approximately $97 million in cash as of September 3rd of 2022, and we are operating cash flow positive. Our brand is both widely known and trusted. Our own market research indicates that 55% of U.S. pet parents are aware of the PetMeds brand. Having a strong brand takes years to develop, and our customers tell us they look at PetMed as their trusted pharmacy and pet medication expert. We have over 26 years of experience as a pure play pet pharmacy, fully licensed in 50 states, delivering outstanding service and value. Our longstanding domain expertise in pharmacy is in what I would call the most complicated part of the pet ecosystem, which makes our progression into other segments much easier. This expertise as a pharmacy has also enabled us to establish very deep roots in the pet healthcare industry, and our decades-long 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 we have worked with over the company's history. Because of our industry-leading service relationships with vets, our prescription medication authorization rates are the highest they have ever been. which speaks volumes to the level of veterinarian cooperation we receive on a daily basis. Our customers love our brand and our service. Our NPS score is over 80, which puts us in the upper quartile alongside some of the most beloved brands in the world. We provide a 100% satisfaction guarantee to our customers, and we go the extra mile for our customers with genuinely empathetic and expert service. We don't just have a transactional interaction with our customers, We have built trusting, genuine relationships. Our customers view pet meds as a trusted pet health expert, and we take that responsibility seriously. To bring that to life for you, I wanted to highlight a recent interaction a pet meds customer had with Mandy, who is one of our incredible pet care representatives. After Mandy sensitively handled a situation where the customer needed some vital medications for her dog, the customer had this to say about her experience with pet meds. Quote, I happen to love your company the most because what you say is what you do. In other words, I know that you care about your patients, your customers, meaning the animals, and I know you care about their owners. And that does not exist in today's society. So thank you so very much. In particular, I'm also very proud to have heard Mandy's response to the customer, quote, I like to walk my talk. I'm a woman of my word. So I like working for a company that does exactly that as well, unquote. We're proud of our pet parent-centric culture, and we're proud of Mandy and her pet care team for providing fantastic service. Our auto-ship program continues to grow and expand. Approximately 39% of our revenue was recurring revenue derived from our auto-ship subscription program during the second quarter. This is a 15% increase on a sequential basis. Auto-ship continues to be a very strategic lever for pet meds. especially considering that the focus of PetMed's business has historically been solely focused on the prescription refill business. We continue to believe that we can expand from an RX-focused business to a model with recurring revenues that are consistently growing as a basis for LTV expansion via catalog expansion. We continue to have a large base of returning customers, which is a reflection of the service, quality, and value we deliver. Specifically, we have over 2 million pet parents who have purchased from us over the last two years. This loyalty can be evidenced by a returning customer base this last quarter. We have recently seen our reorder base stabilize, lapsing the COVID red bump we experienced in 2021. In addition, 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 month of September with approximately 39% of our sales enrolled in our auto-ship and save subscription program, and we anticipate this number will continue to rise. As we covered in our previous earnings calls, PetMeds operates in a vast and growing addressable market. The U.S. pet market is over $120 billion in sales. The addressable pet medication market where we participate today is over $10 billion and growing rapidly. PetMeds will be offering a more extensive assortment of products and services that addresses a broader addressable market across the pet wellness market. In addition to our investments in vet care, which is a $35 billion market, we plan to broaden our product catalog in consumables, a $48 billion market, and other services. While today at PetMeds the majority of our business is prescription focused, we expect our revenues to be more diversified over time as we address a broader range of our pet parents' needs. or as we like to think about it, from nose to tail. The pet space has proven to be a resilient vertical, even in recessionary times. Pet parents see their pets as an extension of their own families and increasingly demand more healthy pet care options. Pet parents are less likely to reduce their pet purchasing budget, especially in the consumable and medication categories. U.S. household pet ownership has increased over time, and today, 70% of U.S. households now own a pet. Those pet parents will need and seek health and wellness care provided by a trusted brand. Around 40% of pet parents spent more on wellness services and products in 2021 than in 2020, and we see this trend continuing. Consumers also now expect everything to be real-time, fast, and digital, a trend impacting every industry. The e-commerce channel continues to expand rapidly. We expect the pet vertical to follow this expansion just like we have seen in other digital e-commerce verticals. Today, our addressable market is largely dominated by offline sales, but we see the growing trend to purchase online as an opportunity and very favorable to us. We have also seen a real trend towards the digitization of pet healthcare just like we have 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, and they're reexamining the channels through which they access those products and services. We believe PetMeds is uniquely positioned to take advantage of these trends. Turning to slide nine, we discussed the four strategic pillars that we will be executing on, nutrition, medication, wellness, and care, with data both driving and being at the heart of our services. We now have exciting news on perhaps the most strategic bet, pet telemedicine. We now have pet telemedicine capability live on petmeds.com through our new service called VetLive. VetLive connects pet parents to thousands of licensed veterinarians ready to provide the best online vet services through video chat appointments 24-7. We believe that we are the only online retailer that offers pet telemedicine and that this offering strategically sets pet meds apart. We also believe pet telemedicine is going to be a huge consumer trend over time. not unlike what we have seen with other services like online and mobile food and delivery services. Expect to see more innovations and product catalog extensions occur over the coming quarters that will deepen the benefit of our strategic pillars. We have now been sharing our growth strategy with you for a little over a year, and we are now starting to fill in the pieces to build an enduring, profitable, and growing pet health company. I want to be crystal clear on those measures. During the last earnings call, I called out the critical initiatives and key measures to watch as an indication of our turnaround. Those strategic initiatives are continued migration of our business to a recurring subscription model. We have seen rapid progress here and we'll continue to see more recurring business that enables pet meds to be a more predictable business model. Pet telemedicine. We see this as a mega trend with the regulatory environment changing rapidly to allow pet parents to get quality and affordable virtual care and medication delivered over any digital device. Expansion of product catalog and services. There is a significant opportunity to incorporate a broader set of consumable products into our catalog. PetMeds will benefit by having more recurring and more regular visits over time and higher AOV and LTV. Our customers want this wider selection from us, and we're looking at opportunities to expand this capability rapidly. Improvements in new customer growth. As we expand our product catalog over the long term, PetMed Express will benefit from having a higher LTV and more operating leverage to acquire customers at scale. Unique and differentiated services via digital-based healthcare services. We have already talked about moving online with our long-term set of pet medications and veterinary care. We will continue to add more virtual care and wellness services that will contribute to loyalty or less customer churn and uniqueness in the market. In addition, PetMeds remains committed to pursuing acquisitions, partner investments, as well as strategic partnerships in order to accelerate our business transformation. Now, I would like to have Christine review our financials for the quarter.
spk08: Thanks, Matt. I want to begin by saying that I have loved my first 90 days here at PetMeds. I'm excited by the quality of our talent and passion our teams have for our customers and their pets. I'm very proud of our team's rapid response to Hurricane Ian and the financial support we were able to provide to the Gulf Coast Humane Society, helping hundreds of pets that lost shelter during the disaster. Our mission to ensure every pet lives a long and happy life could not be more alive. Let me turn to our financial results for the quarter ending September 30th, 2022, our second fiscal quarter 2023. My remarks will compare this year's quarterly results to the same quarter last year ending September 30th, 2021. For the current year, second quarter sales were 65.4 million compared to the sales of 67.4 million in the same period last year, a decrease of 3%. As Matt mentioned, we're closing the gap year over year. Repeat sales of 59.7 million for the quarter decreased 1.5% compared to the repeat sales of 60.6 million in the same period last year. The continued growth of our auto ship and save sales as a percentage of total sales continues to drive greater engagement and recurring revenue that strengthens our repeat sales base. As a percentage of sales, auto ship and save sales increased 15% sequentially from 39% in the quarter up from 34% in the prior quarter. We also welcomed approximately 61,000 new pet parents this quarter compared to 69,000 in the prior quarter. Gross profit as a percentage of sales of 28.2% declined 20 base points compared to the same quarter last year, a modest decline year over year. Net income was 2.6 million or 13 cents per diluted share for the second quarter of our fiscal year, 2023, compared to 6.3 million or 31 cents per diluted share for the same quarter last year. Adjusted EBITDA for the quarter was 7.1 million compared to 9.8 million for the same quarter last year. We had two non-cash items in the quarter, severance and a sales tax accrual. These were adjusted out of EBITDA to provide a more relevant view of operating performance. On a combined basis, these adjustments accounted for approximately $1.3 million expense in the quarter and are shown as add-backs to adjusted EBITDA. In addition, adjusted EBITDA add-backs are the non-cash expenditures, including stock compensation, interest income and expense, income taxes, depreciation, and amortization. A full reconciliation can be found in our 10Q. G&A spend, excluding the two non-cash items that I just mentioned, increased 2.5 million year over year. On a sequential basis, G&A is relatively flat. and continues to reflect the investments that are intentionally and strategically placed in support of our transformation and to fuel future growth. Advertising spend for the quarter was relatively flat year over year. In the quarter ending September 30th, 2022, we spent $1.4 million on CapEx expenditures at $900,000 compared to last year. with the majority of our spend relating to our e-commerce platform and our new data warehouse. We expect to see continued investment in capital expenditures at around the same levels for the remainder of the fiscal year 2023. We had 96.5 million in cash and cash equivalents and 34 million in inventory with no debt as of September 30th, 2022. The higher inventory levels at quarter end was the result of timing of inventory purchases. And finally, the board approved a quarterly dividend of 30 cents per share on the company's common stock that will be paid on November 30th, 2022 to shareholders of record at the close of business on November 18th, 2022. Please note that the declaration and payment of future dividends is discretionary. and will be subject to a determination by the Board of Directors each quarter. I will now turn the call back over to Matt for closing remarks.
spk03: Thanks, Christine. We have made substantial and measurable progress on our business transformation over the last several quarters and remain laser focused on execution. HEPMEDS has a strong market position and balance sheet as a basis for growth for this business transformation. As we have repeatedly said over the last several quarters, PetMeds is pursuing a vertical specialty retailer strategy. We aim to be pet parent's trusted pet health expert. As previously mentioned, there are four strategic pillars that are critical to executing this strategy. Now that we have the majority of the new people, process, and strategic elements of the business, we expect to deepen these four strategic pillars and focus on laser beam execution. This ends our prepared remarks. Operator, we are now ready to take questions.
spk06: Thank you.
spk07: To ask questions, please press star 1 on your phone. Please note that you may not be able to ask questions if you are listening via the webcast. You must dial directly into the call in order to ask a question.
spk06: Please hold while we look for questions. Our first question comes from Carly Grimdy with Jefferies.
spk07: Please go ahead.
spk01: Hey, thanks for taking my question. So I wanted to ask about your new initiatives to expand customer LTV. So you saw a nice pickup in auto ship penetration and you're building out assortment on the nutrition side. But maybe talk about how you're thinking about the rest of 2023 and then the milestones we should be watching as you're, for instance, building out nutrition.
spk03: Thanks for the question, Corey. This is Matt. I'll take this, and Christine, feel free to jump in. Yeah, if you think about that slide where we have the four of the five pause, we're going to go very deep on the assortment piece that we've mentioned. You know, right now you'll see, you know, LTP has been relatively stable, and CAC has, you know, increased year over year, primarily due to competitive pressures. You know, we changed our mix considerably in continue to test and learn, but really what we see as an opportunity is to be much more of a broader merchandiser of products outside of medication per the call. And so the things to look for there are LTV to CAC growing. I think look for that LTV number to grow. We've talked about a 1.5 LTV to CAC. Look for that LTV to increase. Especially helpful is LTV incorporates more auto-ship orders. On the consumable side, we'll be spending a lot more time in the coming quarters expanding particularly food. We have added some big brands already. The company is in early innings on getting good at selling non-medication products. So look for that. LTV expansion, sticking with that 1.5 LTV to CAC as a metric or better, and expanding our lines in the food. Does that answer your question, Corey?
spk01: It does. That's helpful. And then for my second question, I just wanted to follow up on the testing and learning phase on ad spend. So I know you're testing a more, I guess, like diversified approach compared to PetMed's historical focus more on, you know, bottom of the funnel marketing. But where are you in that process and how are you thinking about ad spend for the rest of the year, especially with LTV to CAC above your target range this quarter?
spk03: Yeah, great question. So we swung to a little bit more efficient than we were the previous quarter. Previous quarter was at 1.6 LTV to CAC, and we spent more in marketing as well. This quarter is 2.1. And it's highly fluctuating and highly variable based on what we're seeing in the market. You know, our advertising spend was about flat year over year. It was up kind of lower double digits. And what we're trying to do is figure out that right push-pull between getting awareness marketing and performance marketing to work. I would have us continue to focus on that. I think we're seeing some things that are good early indicators that we can start scaling. But we're going to be very rigorous around being efficient, not being an unprofitable marketer, and really making sure that the assortment and then the marketing really starts powering that LTV to CAC the way we want to at scale. I mean, right now I think you've seen us pretty much saying to investors and analysts that we've been flat year over year in terms of how we've been thinking about the spend. But I'm hoping that we can break that trend and start scaling that spend over time as performance comes in on these initiatives.
spk04: Very helpful. Thank you. Thank you.
spk06: Next question comes from Anthony.
spk07: Please go ahead.
spk02: Hi, good afternoon and thank you for taking the question. So, in terms of the expanded product selection, I know Matt, you've talked about the wanting to increase, obviously, the frequency of when customers purchase from your site. Can you share with us maybe as to what's your goal in terms of SKUs you want to get to or any sort of quantifiable metric like that? You mentioned also that you have more foods now. Will those be also drop shipped from manufacturers or will you take any inventory into your warehouse? How should we think about that?
spk03: Yeah, that's a great question. You know, we don't have a skew goal per se. We have a number of brands that we've been working with and targeting to bring in, some of which we have already and some of which are in our pipeline. And quite frankly, this is new muscle for the company. We just haven't been a company that has been particularly good at selling products other than medication. It's a big initiative for us, and we actually have some new hires that are specifically just focused on this. We're looking at a bunch of different options through distribution is clearly an option that we have and we do today. But we're also looking at selective buys that we inventory as well. So again, no real metric that you can put into a model per se until we roll this out or SKUs, but we'd like to have the top premium brands because we're known as a premium brand of pet health care provider. I don't see us as being the largest assortment of food, but we pick the most premium brands and working with them in a very bespoke way. And again, early innings on us getting good at that, but we're very focused on it.
spk02: Got it. Okay. And then just wondering as far as, you know, the advertising spending, just wondering if the political ad campaigning, has that perhaps maybe prohibited you from being as cost effective as you would like? Has that had any impact on your ability to advertise?
spk03: Oh, interesting question. We haven't seen an impact on that, but typically the order that we're in now that I'm not going to guide you obviously is one of our slower ones because of the seasonality related to flea and tick and heartworm, flea and tick and heartworm being the biggest concentration. of where we sell our products. So this isn't typically a big quarter for us, and we don't have, unfortunately, a huge assortment of non-medication products. So for us, to be honest, it's not a big quarter in terms of Black Friday sales and things that you'd see in other common retailers. In terms of the competitive environment for those types of products that we sell today, don't see an impact. But I would imagine we would as we start growing our assortment. and start competing with broader media campaigns in the market. But it's an interesting question. I haven't seen that for our business.
spk02: Okay, that's good to hear. And then lastly for me, as far as G&A expenses, it looks like backing out the severance charge, it looks like G&A expenses were up almost 50% on a year-over-year basis. How should we think about the rate of expense growth going forward here?
spk03: Yeah, that's a great question, Anthony. I'll hand this off to Christine.
spk09: Yeah, thanks, Anthony, for the question. So I think, like I mentioned, we have strategically put investment into our G&A expenses, into people, into some of our software and data analytics for us to be getting better data, for us to be getting better insights. Yeah, I think we've been very intentional and strategic about that. I think sequentially it's relatively flat, but to your point, year over year, excluding those one times, I think as I mentioned, G&A was up about $2.5 million. So up year over year, but sequentially relatively flat, and we'll probably lean into that as we go into this quarter and the next quarter. We do believe that's part of our transformation and will fuel growth in the future.
spk03: And I can add a little bit more color to that, Anthony, is, you know, for a relatively large retailer, we had a very small, and we don't break out where our G&A investments are, but I'll just give you a little color, maybe helpful. We had a very extremely small or almost nascent R&D department when I first started. And now we actually have a relatively large team that focuses on data science. and also has the ability to quickly roll out changes, A-B testing, optimization. So I think some of these G&A investments, the way I think about them and frame them in addition to what Christine said is we're getting the business to a place where we can start acting like a very agile and dynamic retailer. And so these were very kind of almost toolbox, seminal toolbox elements of investment. for this type of business. And we're feeling really good about the team. We're feeling really good about how we filled the team underneath some of these executives that we've hired. And there were really necessary investments so that we could really turn this business into a growth company. I just wanted to add a couple of pieces of color to the question, Anthony.
spk04: Okay, thank you, and best of luck. Thank you. Thank you. Thank you very much.
spk06: If you would like to ask a question, please press star one on your telephone keypad. Our question and answer portion of the call has ended.
spk07: I would like to turn the conference over to Matt Hewlett, the company's CEO, for closing remarks.
spk03: Thank you, operator. Thank you for joining our call today. I'm confident that the future we envision for PetMed, along with the foundation that we've been laying, will meet the market opportunity in unique and innovative ways and will lead to increased operating results and shareholder value. PetMed's brand, expertise, and reputation are unparalleled. Our balance sheet is strong. Our team is fantastic. I am more excited about the future than ever. Thank you for your continued support.
spk06: The conference has now concluded. Thank you for your participation. You may now disconnect.
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