PetMed Express, Inc.

Greetings and welcome to PetNet Express first quarter financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Reed Anderson with ICR. You may begin.

Thank you, Operator. I'd like to welcome everybody here today to the Pat Meds Express Fiscal First Quarter 2025 Earnings Conference Call. 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 and the Securities Exchange Act of 1934 as amended 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. There can be no assurance that any forward-looking results will occur or be realized. Nothing contained in this presentation is or should be relied upon as a representation or warranty as to any future matter, including any matter in respect to the operations or business or financial condition of pet meds. PetMeds undertakes no obligation to update publicly these forward-looking statements based on subsequent events, except as may be required by applicable law, regulation, or competent legal authority. 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 turn the call over to our CEO and President, Sandro Campos. Sandro?

Thanks, Reid, and thank you to everyone for joining our conference call this afternoon. Following my remarks, Christine will provide an overview of our financials, after which we will open the lines for your questions. As we close out the first quarter of our fiscal year 2025, it's important to note that Q1 results reflect a transition quarter for the company. May was my first full month as CEO, and during the quarter we added several highly experienced executives from top-tier retail backgrounds. We added a new chief marketing officer, a new chief operating officer, and a new chief digital and technology officer, all of whom joined our executive ranks in May and June. As we continue to strengthen our organizational leadership, we're also excited to welcome Doug Krulik as our new chief accounting officer starting August 19th. Doug brings more than 20 years of leadership experience in accounting operations, compliance, and internal controls, aligning with our focus on enhancing operational excellence and strengthening financial governance. Additionally, we've been strategic in adding new independent directors to the board, and we're pleased to welcome Justin Menon and Leah Solivan as new independent directors. Their extensive expertise in digital technology, innovation, and cybersecurity will greatly benefit our transformation efforts, and will help us address the significant long-term opportunities in this $150 billion pet care market. Today, I'll begin with a review of our recent performance and the results from the first quarter. However, my primary focus will be on the strategic initiatives that we are implementing to reposition the company for future success. Our new leadership team is taking significant actions in key areas to drive PetMeds and PetCareRx towards growth and profitability Our focus is on enhancing operational performance, optimizing our cost structure, invigorating customer growth, and ultimately improving shareholder returns. To be clear, the Q1 financial results do not fully reflect the positive impact of the new team's improvements which began in the latter half of the quarter. We've made strong progress on key cost reduction initiatives, including the consolidation and streamlining of operations between PetMeds and PetCareRx. Additionally, our new team has begun to advance our customer growth strategies through an evolution of our site, introducing enhanced creative and engaging messaging, and targeted effective media spend. Our recent technology improvements will create incremental value through the development of a more seamless customer journey, and will facilitate order speed to delivery. We're gaining momentum, and we're seeing early signs of improvement in these key leading indicators, including increased order values, reduced call weight and handling times, and improved margins, just to name a few. These key indicators reflect a reversal of previous trends and further validate our strategy to create an ecosystem of products and services for pets' well-being and longevity. For Q1 fiscal year of 2025, our results were below expectations, with sales down 13% compared to last year, as well as a 230 basis point decrease in gross margins. This decline reflects broader macroeconomic factors, higher consumer promotional usage, and specific technological challenges which have and are being addressed. As a bright spot, operational efficiency improved as evidenced by a 20% improvement in inventory turns and an 11% reduction in our ending inventory versus last year. Since I've come on board, I have looked at and will continue to look at all of our metrics to make sure that they align with our competitive steps. Several years ago, we redefined what constitutes a new customer, defining it as a customer who had not purchased from us in three years. Utilizing that existing definition, we reported 75,000 new customers in the first quarter of fiscal 2025 on the 10Q. These new customers were achieved despite a 20% strategic reduction in media spend, and that resulted in an 8% improvement in customer acquisition costs. Starting in the second quarter, we will officially update this metric to be more in line with retail industry standards, which typically measures new customers on a 12-month cycle. Our focus remains steadfast on the strategic initiatives that are pivotal to repositioning PetMeds and PetCareRx for long-term success. Since the first week of July, we have seen positive indicators that validate the commercial, operational, and financial actions that are being taken. For example, compared to last year, our web visits increased by 4% due to a focus on organic search engine optimization, and we had a conversion rate uplift by 12% as a result of optimization of digital customer experiences. Along with these key metrics that will continue to improve conversion, our media spend was strategically reduced by 20% compared to last year. We have focused our efforts on revising our overall marketing strategy, including the realignment of outside agency partners in order to convert leads more efficiently. As a result of these efforts, as well as others, our average order value and our gross margin have improved month over month compared to last year. Over the past three months, my focus has been on optimizing our organizational structure and engaging with our stakeholders, both internally and externally. I've dedicated substantial time to understanding customer experiences and addressing the operational challenges in our pharmacy, customer call center, and fulfillment centers. Our new executive leadership team has been actively involved with me in shaping our transformation strategies. These strategies aim to drive efficiencies, grow our customer base, expand our market share, and stabilize our infrastructure. Key elements include an enhanced tech stack, improved data architecture, system upgrades, and a modernized customer experience through better site navigation, improved cart and checkout processes, and strong SEO-SEM initiatives. Additionally, we are implementing a product strategy that includes SKU rationalization and optimization and have negotiated for improved costs across the supply chain. I've engaged with key vendors, strategic partners, and many of you, our investors, to align efforts and drive forward our shared goals. In all of my interactions, I've consistently communicated one message. Our performance over the last several years is not acceptable, and the combined enterprise of PetMed and PetCareRx has significant potential for improvement. While the turnaround will take time, we believe we are on a clear path to restoring the company to profitable growth with early indicators confirming that our recent actions are yielding positive results. Building on our 28-year legacy and our strong brand equity, we're transforming PetMeds and PetCareRx into a dynamic ecosystem for pet products and services tailored to meet the evolving needs of today's consumers. During our Q4 earnings call in June, I outlined priorities including the consolidation of PetMeds and PetCareRx for operational efficiencies, reducing costs across both organizations, and a continued focus on maintaining a healthy liquidity position. In the second half of Q1, we initiated these efforts, resulting in approximately $5 million in annualized cost savings, which we will realize over the coming months. Our balance sheet remains strong, and as of the beginning of August, we have $53 million in cash and remain debt-free. Our focus is firmly on profitability while enhancing top-line revenues. By adopting a more disciplined approach to operating expenditures, we are actively reducing our operating expenses. Customer retention initiatives were a priority in June and July, while driving processes and technology improvements and positively influencing our customer experience were top of mind. We will be launching our new acquisition marketing campaigns in August, and we believe that these, in combination with the other strategic actions that we're taking, will position us to accelerate sales growth and further enhance our profitability. Delivering high-quality customer interactions at every touchpoint is crucial to our success as a retailer. To achieve this, we're investing in advanced technology-driven marketing solutions designed to enhance every aspect of our customer experience. Our efforts are focused on ensuring that each interaction is seamless, personalized, and engaging, reflecting our commitment to excellence in customer service. I've partnered directly with our frontline customer success teams to gather invaluable feedback from our customers and users, and I've been deeply involved in understanding our customer experiences firsthand. This quarter, I spoke directly with valued customers like Michelle and Mike, who told me that they have been loyal patrons for more than five years. Mike highlighted his appreciation for our prescription approval process, and Michelle expressed her dog Harper's joy at receiving the surprise treats in every auto ship delivery. Many of our loyal customers have expressed a strong connection that they have with our brand. However, our recent technology disruptions have also provided us with valuable insights into some less positive customer experiences, and I spoke directly with several of those customers as well. We have sprung into action and are actively addressing both the immediate problems and their underlying causes, including issues with order tracking and delivery, delays in our order management system, and challenges with self-service, such as making changes to orders. Our focus is on implementing solutions that resolve these issues swiftly while also preventing their recurrence in the future. This disruption in the customer experience underscores a vital takeaway. While our brand equity, which has been built over 28 years, continues to resonate powerfully with our loyal customers, we must elevate every interaction for every customer. As I mentioned, we have already begun modernizing our technology for more streamlined and efficient experience, and we are accelerating our delivery process to ensure more timely service. These efforts will both enhance our operational effectiveness and reinforce the trust our customers place in us. In the past five weeks, we have achieved several important and strategic milestones. We launched 350 SKUs of Hills and Royal Canin RxFood, an initiative that was in the works for many months, and enhanced our competitive position by expanding our prescription food offering. This launch also included a complimentary telehealth visit through our strategic partner, Vetster, which has also seen incremental growth this quarter. Secondly, we're developing strategic partnerships to enhance our ecosystem, recently cementing a partnership with a rapidly growing pet wellness and grooming franchise, Well Groomed, whose mission aligns with ours in providing comprehensive and affordable pet wellness solutions. We will be integrating grooming and wellness services with our product offerings, and the PetMeds and PetCareRx products will be integrated into their company's wellness recommendation engine. This partnership will broaden our brand equity as we continue to meet the customers where they are. It's equally important to reiterate that our efforts to consolidate brands and streamline operations are well underway, and the steps we've taken have reduced our operating expenses, as I mentioned, by approximately $5 million on an annualized run rate basis, some of which will be reinvested into growth initiatives. First, from an operations perspective, we've consolidated our buying, IT, digital, and marketing teams into a single unified team across both organizations. Second, our fulfillment centers and pharmacies in New York and Florida will operate independently while ensuring that our people, processes, and technologies are standardized across both locations, thus improving the speed of prescription authorizations and the speed of delivery of orders to our customers. Third, and notably, as of July 15th, we have modernized our legacy call center system to a state-of-the-art call center technology with an effort to support customer service. From a technology perspective, we're concentrating on several key areas to drive both immediate and long-term improvements. For instance, we're accelerating the provider authorization process through our veterinary portal to enable faster Rx approvals while also increasing the speed of order delivery to our customers' homes. This includes increasing the number of pharmacy technicians to expedite approval rates and streamlining the connection between veterinary clinics and our pharmacy to reduce the friction. Over the past three weeks alone, our pharmacy teams have reduced queue times by 36% and are now processing our orders with greater efficiency. We are just beginning to tap into the long-term potential of PetMed and PetCareRx. This is underscored by the work that we've done over the past few months. Our annual revenues currently represent only a fraction of the U.S. pet market, which grew 7% in 2023 and has exceeded $150 billion annually with a significant portion driven by veterinary care and prescription medications. We aim to ensure sustained growth and a thriving customer community with disciplined execution of our broad roadmap. We are confident that these strategic initiatives that we are diligently implementing across all departments will drive growth, enhance profitability, and will boost key customer satisfaction metrics. With that, let me hand the call to Christine so that she can cover the first quarter results in more detail.