Thank you. Good morning.

I would like to welcome everybody here today. Before I turn the call over to Mendo Akdag, our President and Chief Executive Officer, I would 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 in this press conference 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 future results may vary significantly based on a number of factors that may cause the actual results or events to be materially different from future results, performance or achievements expressed or implied by these statements.

We have identified various risk factors associated with our operations on our most recent annual report and other filings with the Securities and Exchange Commission. Now, let me introduce today's speaker, Mendo Akdag, President and Chief Executive Officer of 1-800-PetMeds.

Mendo?

Thank you Bruce. Welcome, everyone, and thank you for joining us.

Today, we will review the highlights of our financial results. We will compare our first fiscal quarter ended on June 30, 2019 to last year's quarter ended on June 30, 2018.

For the first fiscal quarter ended on June 30, 2019, sales were $80 million compared to sales of $87.4 million for the same period the prior year, a decrease of 8.5%. The decrease in sales was due to decreases in new order and reorder sales.

Sales were negatively impacted by increased online competition and the aggressive pricing in the market that forced us to reduce prices. Our average order value was approximately $86 for the quarter compared to $90 for the same quarter last year.

The decrease was due to the price reductions. For the first fiscal quarter, net income was $5.3 million or $0.26 diluted per share compared to $12.6 million or $0.62 diluted per share for the same quarter last year, a decrease to diluted earnings per share of 57%.

In addition to decreases in sales, the decrease to net income for the quarter was mainly attributable to lower gross profit margins due to price reductions and higher advertising expenses. New order sales decreased by 23% to $12.2 million for the quarter compared to $15.9 million for the same quarter if the prior year.

Reorder sales decreased by 5% to $67.7 million for the quarter compared to reorder sales of $71.5 million for the same quarter last year. We acquired approximately 140,000 new customers in our first fiscal quarter compared to 169,000 for the same period the prior year.

Approximately 84% of our sales were generated on our website for the quarter compared to 85% for the same period last year. The seasonality in our business is due to the proportion of flee, tick, and heartworm medications in our product mix.

Spring and summer are considered peak seasons with fall and winter being the off-season. For the first fiscal quarter, our gross profit as a percent of sales was 27.3% compared to 34.3% for the same period a year ago.

The percentage decrease can mainly be attributed to price reductions in response to increased online competition. We made further progress on having direct relationships with the major manufacturers in the current quarter, which may help improve our gross margins in the future.

Our general and administrative expenses were down approximately $400,000 for the quarter compared to the same period last year. We spent $8.6 million in advertising for the quarter compared to $6.7 million for the same quarter the prior year, an increase of about 29%.

The increase was due to the re-addition of television advertising. Advertising cost of acquiring a customer for the quarter, defined as total advertising expenses divided by total new customers acquired, was approximately $62 compared to $40 for the same quarter a year ago.

The increase was due to the re-addition of television advertising. We had $83.4 million in cash and cash equivalents and $30.2 million in inventory, with no debt as of June 30, 2019.

Cash from operations for the quarter was negatively impacted by an $8.8 million increase in inventory, the result of cost-advantaged inventory buys that we made during the quarter. We intend to return to normal inventory levels in future quarters.

This ends the financial review. Operator, we are ready to take questions.

Good morning. Thanks for taking my questions.

Mendo, gross margin down almost 700 basis points year-over-year. Little bit lower than what we were expecting.

Wondering where do you think that could bottom out or do you think this is the bottom with some of your initiatives you're putting in place and the changing on the marketing front.

We think this may be the bottom out. We expect the pricing to stabilize in the markets going forward.

And the reason for that is the manufacturers are opening up. They have minimum advertised price policies which should allow a general pricing discipline in the market.

Got it. Got it.

And then, we noticed towards the end of Q1, you introduced some volume-based discounts. By our math, it looks like it's 5% to 10%.

How much impact do these discounts have on gross margins if they remain in place?

Again, we anticipate that the gross margins should improve in the future quarters and you will get a better feel for it, I think, in the next six months.

Okay. So, next six months.

That answers another one of my questions. And then, going back to your comment about the initiative to purchase from major manufacturers, are you buying from all of the major manufacturers now?

And do you have contacts in place? If not, when do you think that will happen?

And how much should that help your gross margin?

There is only one manufacturer left, and we are anticipating that that's going to happen in the next two months. So, by the end of September or latest by the end of the year, we anticipate having direct relationships with all the major manufacturers.

Okay. And is this something that's been going on across the industry with all of the e-commerce retailers like yourself or is this pretty much unique to PetMed Express?

They're opening up to all the pet pharmacies.

Okay. Got it.

Got it. And then, in the press release, you talked about investments you plan to make in your e-commerce platform to be more competitive.

I guess, how much do you plan to spend this year and how long will those investments take?

Our current budget is about $5 million. We are anticipating to get on the new platform before the end of the year, probably it's going to be late November, early December of 2019, and our goal is to improve the user experience.

Okay, got it. That's helpful.

Is there, like, increased functionality that you plan to introduce? I guess, can you give us a little bit of color as to what the new platform will provide to improve the customer experience?

Higher personalization, more hyper personalization, ease of use, speed…

Okay.

Upselling/cross-selling capabilities. It will be easier also to add additional services, et cetera.

Got it, got it. And then last one from me is, in the press release, again, you talked about optimizing marketing to be more competitive.

I guess, are you still planning to do more TV advertising this year? I think, in your K, you said you expected to be about – advertising should be about 10% of sales this fiscal year.

Is that still the target?

We intend to be more efficient with our advertising spending. At this time, we paused television advertising.

We may retest it, but it may be lower than 10%, but we'll give you a better color in the 10-Q.

Okay, that's helpful. I'll jump back in queue.

Good morning and thank you for taking the questions. So, you talked about the planned e-commerce platform improvements.

Just wondering if you guys have any other strategies to try to recapture some past customers and better retain current customers aside from the e-commerce site improvements?

Right. Price reductions negatively impacted the reorders, and the marketing campaign we ran was not as effective.

So, we should be able to do better with our current customers. Our net promoter score is at 83%.

It actually improved from last year. So, we should be able to do better.

Got it, okay. And then, in terms of the increased inventory, so you mentioned also that you are now buying directly from another vendor.

So, is this – just wanted to clarify, is the increase in inventory because of the now-direct purchase relationship or is that separate?

Separate.

All right. And then, as far as your – just wanted to get your thoughts as far as your cash flow priorities and capital allocation strategies.

You were certainly active in doing your share repurchases during the quarter. So, just wanted to get an update as to how you guys are thinking about cash flow usage?

We still have, I believe, about approximately $29 million remaining in our stock buyback plan, and we are paying dividends, $0.27 per quarter. And we're investing, as we pointed out, on our e-commerce platform.

Got it. Okay, thank you very much.

You're welcome.

Great. Thanks.

So, can you speak to where you're seeing most of the competition from? Is it chewy.com or is it the Vetsource and Vets First Choice platforms or is it both?

And is it across all product categories or more on the OTC versus prescription side? Just want to get a sense of the competitive landscape.

Thanks.

Yeah. The biggest [indiscernible] to competition is really coming – the impact is coming from our online competitors.

And it's pretty much all the way across both prescription and OTC.

Okay. And then, are there other types of initiatives or offerings that you could leverage to drive new and existing customer growth, promotions that really aren't solely priced based or offerings such as AutoShip, for instance, on OTC products?

Does that make sense in your view?

We do have an easy refill program which is very similar to AutoShip, instead of a negative option, it's a positive option. So, the consumer has to confirm the order before we would ship, but it's very similar to an AutoShip program, except it's positive option.

Okay. And then, you spoke to the better manufacturer relationship.

And, I guess, how much of your product, as it stands today, is secured to the grain market, through other third-party distributors versus direct from manufacturers? Do you anticipate that soon you'll be able to procure all your products direct from manufacturers or will you have this sort of hybrid model as you keep it [ph]?

Thanks.

It will 100%, we believe, in the next – we are anticipating in the next two to three months. 100% direct.

Thank you.

You're welcome.

Hey, Mendo. Forgot to ask a couple of things.

So, I guess, first, you guys filed an 8-K couple of weeks ago that modified your employment agreement. Just wondering what was the driver behind that.

Yeah. I'm not going to comment on that.

Okay. And then, wondering, we know that there is other companies in the industry working with some of the major retailers.

Wondering if you guys have had any discussions or thoughts about providing any sort of white label services.

We did have conversations with retailers, but that's all I'm going to say at this time.

Okay. Sounds good.

Thank you.

You're welcome.

Thank you. In fiscal 2020, we will continue to be price competitive and we will focus on optimizing our marketing in this more competitive environment and being more efficient with our advertising spending.

In addition, we will be investing in our e-commerce platform to better service our customers. This wraps up today's conference call.

Thank you for joining us. Operator, this ends the conference call.