Petmed Express Inc

NASDAQ:PETS

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, everyone, and thank you for joining the PetMed Express Second Quarter Earnings Conference Call. My name is [ Shamali ], the operator for today's call.

I would now like to pass the conference over to our host, Mr. Brian Prenoveau, Investor Relations. Sir, the floor is now yours.

[Brian Prenoveau, executive]

Thank you, operator. I'd like to welcome everybody here today to the PetMed Express Fiscal Second Quarter Earnings Call. I would also 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 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. 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 to the operations or business or financial condition of PetMeds. 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 other competent legal authority. We have identified various risk factors associated with our operations in our most recent annual report and other filings within the Securities and Exchange Commission.

Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release we issued this afternoon.

Now let me introduce our CEO and President, Matt Hulett. Matt?

[Matthew Hulett, executive]

Thank you, Brian. Thank you to everyone for making the time today to participate in our earnings call. For today's earnings call, I would like to focus my remarks on our operational advancements and overall progress. .

For the quarter ending September 30, 2023, PetMeds delivered sales of $71 million compared to sales of $65.4 million in the prior year, an increase of 9% year-over-year, reflecting our recent acquisition of PetCareRx. Our AutoShip & Save and Pet Plus programs grew to 51% of our revenue during this last fiscal quarter, a substantial increase from 39% of revenue for the same time last year. Later in the operating section, we will be discussing the significant improvements that we are making to the platform and program.

This quarter delivered our fourth consecutive quarter of year-over-year growth in new customers. We added 75,600 new customers during the quarter, representing a 25% increase year-over-year. This growth includes new customers from the core PetMeds business as well as the contribution from the addition of PetCareRx's new customers. While we were excited about the sequential growth in new customers, we continue to face challenges with stabilizing the core PetMeds returning customer base. Returning customers accounted for sales of $62.4 million during the quarter, reflecting growth of 4.5% year-over-year. However, this growth was solely attributable to the addition of the PetCareRx business. While we do not break out our sales between the core PetMeds and PetCareRx brands, the returning PetMeds customer base is still declining at approximately the same single-digit rate from the previous quarter. And while this decline is less than it was a year ago, we have not yet achieved a stabilized returning customer base.

Stabilizing the core returning customer base remains a top priority for us. We believe the combination of selling more consumable products to our existing customers and enhancing our recurring subscription platform offering is key to this challenge. As such, our immediate focus is on adding additional products to the basket, migrating more of our repeat business to our AutoShip & Save program and expanding on our operating initiatives currently underway to create deeper relationships with our returning base.

Lastly, PetMeds is not immune to the overall market conditions. Based on our own data, the pet industry data, as well as discussions with our supplier partners, we have seen some softness in our core returning customer base in terms of reduced spending. PetMeds pioneered the direct-to-consumer pet prescription space over 27 years ago based on a value proposition, and we have a large base of price-conscious pet parents in our active customer base.

We have also seen some specific categories and products in the prescription space that have come under pressure, contributing to the softness in our year-over-year numbers. While we feel that PetMeds' current mix being largely in the prescription health care business is more resilient to macroeconomic pressures, we are certainly not immune to them. We believe that our diversification into new consumable categories and our continued push into our core value positioning provide an opportunity to grow over the long term.

Next slide, please. PetMeds is making strong progress on our strategy to evolve the business from our legacy as a prominent pet medication retailer to our future where pet parents recognize PetMeds as their most trusted pet health experts. Our pet health care strategy revolves around 4 key pillars: medication, care, nutrition and wellness. PetMeds is focused on integrating and executing on our newly acquired partnerships and assets to offer a broader range of products and services to our core PetMeds customer base on a recurring basis. Our suite of products and services is attractive because pet owners are increasingly gravitating towards brands that are deeply committed to the overall health and well-being of their pets. And we're proud to be that brand.

We have been very clear as to the significant milestones that represent the key performance indicators for our transformation into a growth-oriented business. These indicators are providing more, bringing more products to our customers beyond our core medication business. In particular, expanding into food and other consumable nutrition products, which will help stabilize our core returning customer base. Continued gains in recurring revenue, year-over-year increases in new customers, meeting and exceeding market growth rates for the entire PetMeds business.

I would now like to highlight the key operational achievements from this last quarter. Under the strategic theme of expanding our product offerings beyond our core prescription business, PetMeds is poised to service a more dynamic and increasingly competitive market. I'm excited to announce significant improvements to our core infrastructure that will improve PetMeds' ability to support our expansion into a multi-category company, as well as expand our core subscription services to our pet parents.

To add a bit more color, management has been working in parallel on upgrading the core e-commerce business systems while investing in new assets and capabilities to expand our relationship with our customers. We are currently rolling out enhancements to certain legacy systems that will enable the business to scale more quickly, delight customers and will unlock value for PetMeds.

To provide even more detail, we are implementing a new modern order management system. This platform will allow us to more efficiently track sales, process orders, manage inventory, and streamline fulfillment across multiple distribution locations.

While on the topic of technology investments and upgrades, during our last earnings call, we mentioned that we implemented a new e-mail and CRM platform. PetMeds now has the capability to personalize promotions and campaigns based on customer type within the PetMeds ecosystem, thus enabling us to begin expanding wallet share across the large base of PetMeds' primarily prescription-based customer base.

For example, we can target different types of pet parents with specific offers and recommendations based on their unique wants and needs. These infrastructure upgrades will play a pivotal role as PetMeds returns to being a growth business. Growth in recurring subscription revenue is essential to our strategy, and these investments have enabled us to develop the second generation of our AutoShip & Save program.

Now let's move on to what these investments mean for enabling PetMeds to have more recurring subscription revenue. Our new AutoShip & Save capability will enhance the current capabilities to include more pet parent control over their ordering experience, including activities like controlling the subscription duration, pausing a subscription, and changing the quantity of an order. We strongly believe that these changes will result in a greatly enhanced customer experience.

In addition, we will soon make available an exciting new value-add capability. Specifically, this means that our [ VetLive ] functionality, which connects pet parents to licensed veterinarians over a digital connection 24/7, will be available for all of our AutoShip & Save customers on a complementary basis. We firmly believe that providing access to integrated expert services, in addition to expanding our product catalog, provides real differentiation in the pet market. We believe this differentiation really materializes when we integrate our capabilities into one integrated pet parent experience with virtual vet services, integrated insurance, and curated health and wellness products all in 1 place.

I've already reported on our growth in net new customers. The area that I would like to highlight is that we see continued growth in the acquisition of new customers. PetMeds has historically had a very deep but limited product catalog specifically focused on the pet prescription space. Today and in the future, we are leaning into a broader product catalog to include more nutrition and wellness offerings that can address a greater share of pet parents' needs.

In terms of meeting and exceeding industry growth rates, we firmly believe that adding more differentiation in the form of unique services like [ VET Live ] combined with a broader catalog of products outside of prescription medication, enables us to stabilize our returning pet parent base, attract and retain new customers, and to expand our overall sales. As mentioned, we are actively introducing premium and prescription food to our extensive base of over 2 million pet parents. This represents a huge opportunity to increase the basket size, which should lead to increases in lifetime value and overall retention of our customer base.

Last quarter, we were excited to introduce the Purina product line, and now our [ Royal Canine ] retail line of products have been recently added to our growing pet food catalog. In addition, I'm excited to announce that we are now live with our pet insurance offering. As you may recall, our new insurance offering is powered by our partnership with a leading insurance company, Pumpkin Insurance, which is now majority owned by JAB Holdings. We envision that the introduction of our insurance product will be viewed as a valuable offering by our expansive community of over 2 million pet permits.

As you can see, we've made substantial progress this past quarter. Now I'd like to hand the presentation over to Christine.

[Christine Chambers, executive]

Thanks, Matt. Today, I will report our Q2 fiscal 2024 results for the quarter ending September 30, 2023. As a reminder, this will be the second quarter of combined results including the acquisition of PetCareRx as compared to results for PetMeds only for Q2 fiscal 2023.

Next slide, please. Second quarter sales were $71 million compared to sales of $65.4 million in the same period last year, growth of 9% year-over-year. This growth was due to the incremental sales from the acquisition of PetCareRx, increased PetMeds legacy new order sales, partially offset by declines in PetMeds' legacy reorder sales.

As Matt previously mentioned, we continued our trend of net new customer growth year-over-year, both organically with growth in PetMeds' legacy new customer sales and inorganically with the combination of PetCareRx. However, we continued to experience a single-digit decline in PetMeds' legacy reorder sales. This decline was relatively flat to the decline in the prior quarter.

We welcomed approximately 65,600 new pet parents this quarter compared to 60,700 in the prior year. This represents new customer growth of 25% year-over-year and reflects both organic and inorganic growth. In addition, reorder sales of $62.2 million for the quarter increased 4.5% compared to the reorder sales of $59.7 million in the same period last year. The growth can be attributed to the acquisition of PetCareRx, partially offset by declines in PetMeds' legacy reorder sales.

With the acquisition of PetCareRx, we also added $2.4 million of revenue associated with our PetCareRx membership programs.

We've continued to grow our recurring revenue, including AutoShip & Save sales and PetCareRx membership sales as a percentage of total sales. This drives greater engagement and strengthens our recurring sales base.

As Matt mentioned, recurring sales as a percentage of total sales was 51% in the quarter, up sequentially from 49% in the prior quarter and up from 39% for the same period last year. Gross profit for the quarter as a percentage of sales was 28.3%, compared to 28.2% in the same quarter last year and 28.8% in the prior quarter.

G&A increased $2.5 million year-over-year, in part due to the combination of PetCareRx as well as strategic investments in PetMeds' legacy third-party expenses, offset by nonrecurring G&A expenses in the prior year. Net loss for the second quarter was $70,000 or $0.00 per diluted share, compared to net income of $2.6 million or $0.13 per diluted share for the same period last year.

Adjusted EBITDA for the quarter was $3.2 million, compared to $7.1 million in the same quarter last year. Increased gross profit of $1.6 million was offset by an increase in operating expenses, in part due to the combination of PetCareRx, as well as strategic investments in PetMeds' legacy third-party expenses and net advertising expenses.

Turning to Slide 7, we ended the quarter with $53.5 million of cash on our balance sheet and no debt. As we do each quarter, we evaluate our capital allocation policy. This quarter, we carefully considered our current financial position and our financial needs with the commitment to allocate capital in a manner that will best position PetMeds for sustainable long-term growth and enhanced value.

With those factors in mind, today we are announcing that we will be suspending our dividend payment effective the quarter ending September 30, 2023. The suspension of the dividend will allow us to strategically invest in our core business, including investing in infrastructure that will enable us to ramp up our technology capabilities, enhance our marketing efforts, and offer competitive and innovative solutions to our customers, as well as to invest in growth opportunities. In turn, this will enable us to build recurring revenue through a growing customer base. And for the balance of the year, we will continue to focus efforts on setting up the expanded product catalog to drive future organic growth.

Maximizing shareholder value over the long term is a key priority, which requires fiscal discipline and prudent capital allocation. We will continue to balance the need for capital to fuel growth opportunities with the opportunity to return capital to shareholders.

I will now turn the call back over to Matt for some concluding remarks prior to Q&A.

[Matthew Hulett, executive]

In summary, PetMeds is in an important and promising phase of growth and transformation. We're not just a single category pet prescription business anymore. We're evolving into a comprehensive pet health brand. Four pillars anchor this vision: medication, care, nutrition and wellness. .

Our focus on newly acquired partnerships and assets that allows us to offer a wider product range and recurring services to our core customer base, reinforcing us as the brand deeply committed to overall pet wellness. We are about to deploy our new infrastructure with new order management platform improvements and upgraded AutoShip & Save program and added features like [ Vet Live ] and integrated insurance to offer an unmatched pet parent experience. Plus our expanded product catalog with top-tier brands like Purina and [ Royal Canine ] promises even more growth. We are confident that these investments culminate in increasing the overall value that we provide to our customers. More frequent recurring interactions, combined with a broader set of products and services will equate to a more stabilized core PetMeds business, as well as offer a platform for new growth.

We're thrilled about the strides we've made and even more excited for what's ahead. This transformation isn't just good for us. It's great for our over 2 million pet parents and their fur babies.

With these statements, we conclude our prepared remarks for today. Operator, we are now prepared to take questions. Thank you.

[Operator]

[Operator Instructions] And our first question comes from the line of Ryan Meyers with Bake Street Capital.

[Ryan Meyers, analyst]

First one for me. I wonder if you could just provide us with a little bit of commentary on what new customer spend looks like relative to legacy customers as you guys call it. Just want to kind of get an understanding if we're starting to see some of this cross-selling take place. I know you just added Purina, you talked about [ Royal Canine ]. Just want to try to get a good understanding as far as these new customers that are coming on to the platform. Are they starting to purchase adjacent products? Just trying to get a good understanding there would be helpful.

[Matthew Hulett, executive]

I can take that one, Ryan. Thanks for the question. Yes, just a couple of things to unpack from your question. One is really our food go-to-market in terms of introducing food at scale to our overall base really just started this quarter, and that includes awareness campaigns in our packaging, e-mails, customized offers. And that's kind of statement one.

Statement two, really, we do see the introduction of food starting to take hold for new customers since those customers are targeted primarily on AutoShip offers, we have the opportunity to attach food when we have that first initial transaction with those customers. So we are seeing some traction with new customers.

And then for returning customers as we start positioning ourselves as a broader pet health expert, it's going to take some time to get the awareness up that we're a brand that introduces something other than prescription medication. But we're really excited about some of the early signals that we've seen.

[Ryan Meyers, analyst]

Got it. That's helpful. And then now with the dividend gone, what's your guys' #1 priority here as far as capital allocation goes forward? And where do you think, now that you don't have to pay that dividend, you can put some more money back in the business? It would be helpful to understand that.

[Christine Chambers, executive]

Yes. Ryan, thanks so much for the question. So as you know, we fundamentally believe in the continued growth in the pet e-commerce sector and reallocating capital will give us this financial flexibility to really aggressively pursue opportunities in this space. So we believe that the reinvestment will provide returns to our shareholders in the long term. And as you know, we're really in the midst of implementing this comprehensive growth strategy that will give us the opportunity to invest in those technological advancements, product diversification, and really take advantage of this growing e-commerce market.

We also want to ensure that we have the cash for working capital, to ensure, as we scale and grow, that we can run smoothly, and we have the CapEx options that will help fuel growth.

[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.

[Matthew Hulett, executive]

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. We have greatly accelerated our operating road map. And we look forward to sharing our progress as we go to market with products and services that positively change the lives of our pet parents and pets. Thank you for your continued support. .

[Operator]

And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.