PetMed Express, Inc.

Greetings and welcome to PetMed Express's third 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 and welcome to the PetMed Express fiscal third quarter 2025 earnings conference call. Certain information included during this call may contain 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 on information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. After results could differ materially from those projected. there can be no assurance that any forward-looking results will occur or be realized. And 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 of the operations or business or financial condition of pet meds. Pet meds undertakes no obligation to update publicly these forward-looking statements based on subsequent events, except as may be required by applicable law, regulation, or other competent legal authority. We have identified various risk factors associated with our operations in our most recent annual report and other filings for the Securities and Exchange Commission. Now, let me turn the call over to our CEO and President, Sandra Campos. Sandra?

Thank you, Reid, and welcome to everyone joining our call this afternoon. Following my remarks, Robin will provide a detailed overview of our financial results, after which we'll open the lines for your questions. Over the past nine months, I have emphasized that our focus remains steadfast on the strategic initiative pivotal to repositioning PetMeds and PetCareRx for long-term success. I have clearly outlined our vision to position pets as a leader in consumer pet healthcare. While we're still in the early stages of this transformation and have much more work ahead, I am pleased to report that we have made significant progress in validating our strategic direction. We're confident that the actions we're taking will drive differentiation and sustainable growth. Our highest priority has been to return the company to profitability. We achieved this by implementing cost-cutting measures and consolidation strategies to integrate PetCareRx operations into the PetMeds organization, targeting $5 million in annualized savings, and we remain on track to meet this milestone. For this quarter, Q3, We achieved $2 million in adjusted EBITDA, representing a $1.1 million improvement year over year, while lowering G&A expenses by $2.6 million compared to last year. As we continue to execute our turnaround strategy, we remain committed to driving shareholder value through growing our customer base, operational discipline, and financial efficiency. At Pets, we serve three core communities. First, our pet parents. We're continuously enhancing the digital shopping experience to provide convenient access to pet health solutions. Second, our veterinarian partners. Our investments in RX approval efficiency through an optimized vet portal are driving increased adoption and streamlined workflows. And third, the pets. Dogs, cats, and horses that we love and care for. Innovation is at the heart of our approach, ensuring that we offer proven, premium health solutions across all categories and life stages. Expanding our customer base and increasing market share remains a top priority. To grow and acquire customers as a digital retailer, we require a modernized tech stack and a seamless experience that meets evolving customer expectations. We have made meaningful progress in this area, including... website and mobile enhancements, where we executed a full website refresh in November and also relaunched our iOS and Android mobile apps. We implemented Buy Now Pay Later as a new payment option at checkout, expanding on affordable and accessible choices for our consumers. And in collaboration with our Veterinary Advisory Board, we continue to enhance our veterinary portal and also launched PetHealthMD.com, educational platform offering expert-backed pet health guidance. These improvements led to 84,000 gross new customers or 63,000 new customers that had orders shipped during the quarter. Our gross order average order value or AOV increased by 7% at $108 versus $101 last year and while our shipped order AOV rose by 4.3% of $97 versus $93 year-over-year. We are committed to pet health and wellness through product differentiation and best-in-class customer service. Our SKU optimization strategy ensures that we offer comprehensive health solutions across all life stages while maintaining strong margins and growth thresholds. To enhance efficiency, we eliminated 4,000 underperforming SKUs, making room for high-value products that align with our strategy and also resonate with consumers. Notably, our inventory efficiency has improved, with inventory turn rising to 1.5 in Q3 compared to 1.1 in Q2 and 0.9 last year. This improvement comes alongside a 66% reduction in total inventory on hand totaling $11.8 million at the end of our third quarter versus $34.6 million last year. During Q3, we advanced our customer call center operations by integrating an AI-driven workforce management tool to flex and scale our agent population and adapt to changing volumes. This helped us improve our key metrics, such as increased sales per agent of 18.8% and a 3.4% increase in AOV, average order value, for orders driven by the call center. During our last earnings call, I highlighted our focus on retention and the operational upgrades that laid the foundation for future growth. While we intended to ramp up performance marketing efforts in this quarter, we encountered a highly competitive and promotional holiday environment, particularly between Black Friday and year-end. With real-time insights, we made the strategic decision to prioritize margin protection over aggressive promotions, ending the quarter with $2.8 million less in gross advertising spend year over year. As a result, our sales and new customer acquisition during that period fell short of initial expectations. However, this intentional pivot was necessary in order to maintain financial discipline. Recognizing the need for a marketing strategic reset, we are refining our approach to ensure sustainable, profitable growth. Our top-of-funnel initiatives, such as radio and connected TV, continue to promote our Care U Trust message and establish brand authority and brand awareness. This is a long-term investment that we've recently begun and includes things like sports team partnerships, podcasts, billboards, and local pet adoption events, all of which we've done in this quarter. We are refining acquisition strategies by rolling out a new email design system and creating stronger segmentation, personalization, and dynamic content across our paid platforms. Early indicators show promise with revenue per email increasing 9% in the month of January. Engagement rates have increased quarter over quarter that would be inclusive of open rate, click-through rate, revenue per email. Through stronger content and more relevant branding, we believe this is a strong indicator of future conversion improvements. Beyond customer-facing upgrades, we have strengthened our core systems with strategic technology investments to ensure a resilient and secure digital ecosystem for customer data and privacy. Over the past seven months, we resolved OMS issues that previously impacted performance and continue to modernize our tech stack. In mid-November, we successfully replatformed our Autoship recurring subscription program without disruption and have seen improvements in Autoship sign-ups and credit card rejection rates. Although still in early age tracking, our new website performance shows PDP views increased by 30%, bounce rates declined by 6.5 basis points, and channel visits increased 7.6% year-over-year. This growth in visits was offset by lower conversion, and we're actively addressing those conversion rate challenges through search functionality improvements, PDP enhancements, and visible promotions. Looking ahead, while the competitive landscape remains dynamic, we are executing a discipline transformation that prioritizes the customer experience, from order placement to last mile delivery, while simultaneously enhancing the infrastructure necessary to support this. We believe these efforts will drive sustained growth, customer loyalty, and increased shareholder value. In the short term, we anticipate increased investments to enhance the customer engagement, customer acquisition, and the underlying infrastructure needed. We will continue to strengthen vendor partnerships and expand our portfolio with science-backed veterinary recommended products across our pharmacy, Rx products, OTC over-the-counter, and our food categories we remain focused on capturing our share of the companion animal health market by refining our customer experience optimizing our product mix and strengthening the customer acquisition strategies as we build a stronger more efficient organization we stay true to our core purpose ensuring pets have homes and live healthier happier lives this commitment extends beyond our business as we actively support shelters facilitate adoption events, and provide aid to pet communities impacted by the LA wildfires, reinforcing our dedication to pet welfare and the people who care for them. With that, I'll turn the call over to Robin for a more detailed review of our financial results. Thank you, Sandra. I will now provide an update on third quarter fiscal year 2025 results for the period ending December 31st, 2024. Net sales were $53 million, compared to $65.3 million in the same period last year, a 19% decline, primarily driven by a 34% reduction in gross advertising as we rebalanced for profitability. We welcomed approximately 63,000 new customers who received an order from us this quarter. Gross profit was $14.9 million versus $17.9 million last year. As a percent of sales, Gross profit this year was 28.1%, an 80 basis point improvement compared to the prior year quarter due to a favorable sales mix and lower discount activity, similar to what we saw in Q2. General and administrative expenses for the third quarter were $10.8 million versus $13.4 million last year, a 19.7% decrease. This year over year improvement was driven by a decrease in stock-based compensation expense, a decrease in payroll and payroll-related expense, and to a lesser extent, a decrease in credit card processing fees driven by lower sales. Our advertising expenses for the third quarter were $3 million compared to $5.8 million last year. This decrease can be mainly attributed to lower gross media spend and a higher proportion of that spend being funded by third-party partners. As Sandra mentioned, we purposely pulled back our marketing efforts to reset our marketing foundation and improve profitability for the quarter. Net loss for the third quarter was $700,000 or 3 cents per diluted share, a meaningful improvement compared to the net loss of $2 million or 10 cents per diluted share for the same period last year. Adjusted EBITDA of $2 million compared to $900,000 in the prior year period. Our balance sheet remains strong, and as of December 31, 2024, we had $50 million of cash and cash equivalents and no debt. We would now like to open the call for questions, and then after that, Sandra will provide some concluding remarks. Operator?