Oct 21, 2013
Executives
Bruce S. Rosenbloom - Chief Financial Officer, Principal Accounting Officer and Treasurer Menderes Akdag - Chief Executive Officer, President, Director and Member of Investment Committee
Analysts
Kevin K. Ellich - Piper Jaffray Companies, Research Division Mitchell O.
Bartlett - Craig-Hallum Capital Group LLC, Research Division Erin E. Wilson - BofA Merrill Lynch, Research Division Michael A.
Kupinski - Noble Financial Group, Inc., Research Division Ross Taylor - CL King & Associates, Inc., Research Division Anthony C. Lebiedzinski - Sidoti & Company, LLC
Operator
Good morning, good afternoon and evening. Welcome to the PetMed Express, Inc., doing business as 100 -- 1-800-PetMeds, conference call to review the financial results for the second fiscal quarter ended on September 30, 2013.
At the request of the company, this conference call is being recorded. Founded in 1996, 1-800-PetMeds is America's largest pet pharmacy delivering prescription and non-prescription pet medications and other health products for dogs and cats direct to the customer.
1-800-PetMeds markets its products through national television, online, direct mail and print advertising campaigns, which direct consumers to order by phone or on the Internet and aim to increase the recognition of the PetMeds family of brand names. 1-800-PetMeds provides an attractive alternative for obtaining pet medications 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, Mr. Bruce Rosenbloom.
Bruce S. Rosenbloom
Good morning. I'd 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've 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 today's speaker, Mendo Akdag, the President and Chief Executive Officer of 1-800-PetMeds. Mendo?
Menderes Akdag
Thank you, Bruce. So welcome, everyone, and thank you for joining us.
Today, we will review the highlights of our financial results. We will compare our second fiscal quarter and 6 months ended on September 30, 2013, to last year's quarter and 6 months ended on September 30, 2012.
For the second fiscal quarter ended on September 30, 2013, sales were $60.5 million compared to $58.1 million for the same period the prior year, an increase of 4%. For the 6 months ended on September 30, 2013, sales were $134.7 million compared to $127.1 million for the 6 months the prior year, an increase of 6%.
The increases were due to increases in reorder sales for the quarter and the 6 months and increases in new order sales for the 6 months. The average order value was approximately $73 for the quarter compared to $72 for the same quarter of the prior year.
For the second fiscal quarter, net income was $4.2 million or $0.21 diluted per share compared to $4 million or $0.20 diluted per share for the same quarter the prior year, an increase to earnings per share of 3%. For the 6 months, net income was $8.9 million or $0.44 diluted per share compared to $8 million or $0.40 diluted per share a year ago, an increase to earnings per share of 12%.
Reorder sales increased by 5.3% to $48.9 million for the quarter compared to reorder sales of $46.4 million for the same quarter of the prior year. For the 6 months, the reorder sales increased by 6.3% to $107.9 million compared to $101.5 million for the same period last year.
New order sales were relatively flat at $11.6 million for the quarter compared to $11.7 million for the same period the prior year. For the 6 months, the new order sales increased by 4.7% to $26.8 million compared to $25.6 million for the same period last year.
We acquired approximately 169,000 new customers in our second fiscal quarter compared to 177,000 for the same period the prior year. And we acquired approximately 376,000 new customers in the 6 months compared to 374,000 for the same period a year ago.
Approximately 79% of our sales were generated on our website for the quarter compared to 77% for the same period the prior year, which resulted in a 7.3% increase in our online sales for the quarter compared to the same quarter last year. The seasonality is -- the seasonality in our business is due to the proportion of flea, tick and heartworm medications in our product mix.
Spring and summer are considered peak seasons, with fall and winter being the off seasons. For the second fiscal quarter, our gross profit as a percent of sales was 31.8% compared to 33.3% for the same period the prior year.
And for the 6 months, our gross profit as a percent of sales was 32.1% compared to 32.8% for the same period a year ago. The percentage decreases can be attributed to increases in product costs and additional gift discounts given to customers.
Our general and administrative expenses as a percent of sales was 9.1% for the quarter compared to 9.2% for the same period a year ago. And for the 6 months, it was 8.4% compared to 8.9% for the same period a year ago.
We leveraged a G&A with increased sales. For the quarter, we spent $7 million in advertising compared to $7.4 million for the same quarter the prior year.
For the 6 months, we spent $17.4 million in advertising compared to $17.3 million during the same period a year ago. The advertising cost of acquiring a customer was $41 for the quarter compared to $42 for the same quarter the prior year.
For the 6 months, it was $46, which was the same as the 6 months the prior year. We had $51.4 million in cash and short-term investments and $17.3 million in inventory, with no debt, as of September 30, 2013.
Net cash from operations for the 6 months was $24.4 million compared to $15.7 million for the 6 months the prior year. The majority of the increase was due to decrease in inventory.
This ends the financial review. Operator, we are ready to take questions.
Operator
[Operator Instructions] Kevin Ellich with Piper Jaffray.
Kevin K. Ellich - Piper Jaffray Companies, Research Division
Just a couple of questions here, Mendo. I guess, starting off with the gross margins being a little bit lower than we expected.
You made the comments about increasing product costs and discounts. Was there any specific product that you could call out?
And are you expecting these costs to continue to be higher for the rest of the year? And can you talk about discounts or promotions that you guys are running at this time as well?
Menderes Akdag
The product costs, typically, the major brand manufacturers increase their prices on an annual basis, and we typically wait till the off-peak season to pass it to the consumer. As far as promotions are concerned, we had run some aggressive promotions during the September quarter, and we will probably continue to do that in this quarter.
Kevin K. Ellich - Piper Jaffray Companies, Research Division
Got it. Okay.
And then on the advertising expense, it was a little bit lower than we expected in total and as a percent of revenue. Are you still on track to kind of hit what was in your filings for expected advertising expense for the full year?
Menderes Akdag
I doubt that we have anything in our filings. We probably have a percent that we are showing.
Probably, it's going to be lower than that. Television inventory was tighter in the September quarter than what we anticipated, and that's the reason we had spent less.
Kevin K. Ellich - Piper Jaffray Companies, Research Division
Okay, okay, so not a function of -- got it, so just market dynamics, understood. And then you continue to build up the cash balance on the balance sheet.
Just wondering what you plan to do with that. Can you lay out kind of your vision over the next 6, 12, 24 months for uses of cash?
Menderes Akdag
It's, you know, we are paying dividends. And we also have a stock buyback for that.
I believe we have about still $10 million remaining.
Kevin K. Ellich - Piper Jaffray Companies, Research Division
About $10 million, okay. And what about the competitive landscape, have you noticed any heightened or increased competition?
Menderes Akdag
I can probably say there is no -- there was no, I should say, material change in the competitive environment compared to last year.
Operator
Mitch Bartlett with Craig-Hallum Capital Group.
Mitchell O. Bartlett - Craig-Hallum Capital Group LLC, Research Division
I was looking at your inventory line, and it's down both quarter-over-quarter and year-over-year. Just wondering what the opportunity buy environment is right now.
Menderes Akdag
Our inventory will fluctuate based on promotional buying opportunities. The low inventory means there was no advantage for us to stock up.
Mitchell O. Bartlett - Craig-Hallum Capital Group LLC, Research Division
So what should we think about? I mean, back to the gross margin question and kind of modeling for the rest of the year, what should we kind of think about as far as your ability to drive gross margins?
You said promotions will continue to be somewhat aggressive in the back half of this year. And couple that with the inventory question.
Menderes Akdag
We pass some of the product cost increases to the consumer. That will happen in the December quarter.
We'll work on improving the gross margins. And there are some opportunities, and we'll see where it ends up.
Mitchell O. Bartlett - Craig-Hallum Capital Group LLC, Research Division
Specifically on gross margins. In the Q1, Q2 periods, seasonal flea & tick.
When you get into Q3 and Q4, does the pressure come off the gross margins because flea & tick was more promotional than the rest of the merchandise mix?
Menderes Akdag
Yes, that's a reasonable observation on your part. There's a shift in product mix during off-peak seasons that helps with the margins.
Mitchell O. Bartlett - Craig-Hallum Capital Group LLC, Research Division
And I notice that VetSource continues to expand, adding PetSmart here recently. Anything that you know of kind of regulatory or otherwise that is going on in that front?
Menderes Akdag
No, I don't know.
Operator
Erin Wilson with Merrill Lynch.
Erin E. Wilson - BofA Merrill Lynch, Research Division
Could you give us an update on the supplies and accessories business and how that's progressing?
Menderes Akdag
It's still growing double digit at this time.
Erin E. Wilson - BofA Merrill Lynch, Research Division
Would that be still contributing to some sort of gross margin pressure?
Menderes Akdag
The gross margin is lower [ph] on pet supplies. It will a little bit, yes.
Erin E. Wilson - BofA Merrill Lynch, Research Division
Okay. And then asking another question on inventories, they were sequentially lower and lower year-over-year.
Should we be expecting a sequential build near term?
Menderes Akdag
It depends on promotional buying opportunities. If there's an opportunity, we'll increase the inventory.
Erin E. Wilson - BofA Merrill Lynch, Research Division
And on capital deployment, I mean, any changes in strategy here? Should we expect any acquisitions in the -- on the table in the future?
Or is the acquisition pipeline still just not that robust?
Menderes Akdag
We don't have anything else at this time other than dividends, and we do have about $10 million still remaining in our stock buyback plan.
Operator
Michael Kupinski with Noble Financial.
Michael A. Kupinski - Noble Financial Group, Inc., Research Division
I just kind of wanted to flesh out the heavy promotions that you had in September. I believe you had 30% off all products.
And I was wondering, how did that influence the average order size in the quarter? For instance, without the promotions, was the average order size running -- if you could just give me an idea what it was running in the first part of the quarter versus the month of September when you were really kind of fleshing out the 30% off promotions.
Menderes Akdag
We are not going to get into monthly reporting. As I pointed out, our average order value for the quarter was about $73 compared to $72 for the same quarter last year.
Michael A. Kupinski - Noble Financial Group, Inc., Research Division
Yes, Mendo, I wasn't really asking for, like, the month-to-month but more from the perspective of, obviously with the 30% off promotions, were you seeing the average order sizes higher?
Menderes Akdag
I'm not going to comment of our -- on our promotions, due to competitive reasons.
Michael A. Kupinski - Noble Financial Group, Inc., Research Division
Okay. And in terms of television advertising in the quarter, obviously, TV advertising, a little lighter than what I was expecting.
Was that a function of the pricing that you were seeing in the quarter? Or is it just that you cut back a little bit on the advertising?
Menderes Akdag
Television inventory was tighter than what we anticipated, although we offered more than what we did last year. Also, I can say that demand for OTC flea & tick category was softer, so we were not as aggressive during the later part of the quarter.
Michael A. Kupinski - Noble Financial Group, Inc., Research Division
Okay. And so if we looked at the advertising environment going into the next quarter, what -- are -- is inventory still remain fairly tight, or are you seeing pricing -- can you give us just an outlook for the advertising environment right now?
Menderes Akdag
It's really difficult to say, so I'm not going to speculate.
Michael A. Kupinski - Noble Financial Group, Inc., Research Division
Okay. In terms of your advertising budget going into next year, do you anticipate that you're going to see more aggressive advertising into the next quarter?
Or do you think that it's going to be kind of, like, a little bit less than what it...
Menderes Akdag
We do -- in dollars, we do have a higher budget to spend.
Operator
[Operator Instructions] Ross Taylor with CL King.
Ross Taylor - CL King & Associates, Inc., Research Division
I wanted to ask about the average order size. It was up a little bit year-over-year in the quarter, and that's the second quarter in a row that, that's occurred.
But what was driving some of the increases here in the September quarter? Because consistently, your average order size has been down year-over-year for a couple of years now, and I just wondered what maybe changed particularly this quarter to drive the increase.
Menderes Akdag
A combination of higher-priced items and more items in an order.
Ross Taylor - CL King & Associates, Inc., Research Division
Okay. And the more items in an order, is that kind of driven by the success of just driving accessories purchases, or is there something else at work?
Menderes Akdag
Yes, we have other pet supplies that we are offering.
Ross Taylor - CL King & Associates, Inc., Research Division
Okay. And my last 2 questions relate to the prescription med business.
Number one, I just wondered if you could make any comments about Sentinel and whether that is coming back as you expected? And second part of the question, I was just curious if you could make any comments about how the prescription business grew versus the OTC or the remainder of your business?
Menderes Akdag
The Sentinel came into market, I believe, in the June quarter, so -- and it's doing well. The prescription business has been strong so far, but we'll give the specifics at the end of the year.
Operator
Anthony Lebiedzinski from Sidoti & Company.
Anthony C. Lebiedzinski - Sidoti & Company, LLC
In response to an earlier question, Mendo, you had mentioned that you see some opportunities to -- within the gross margin line, yet you're certainly going to do more promotions. So I was just wondering if you could just comment on what those opportunities may be.
Menderes Akdag
Passing the cost increases to the consumer is one. Reducing cost is a possibility.
And we also attempt to shift sales to higher-margin items.
Anthony C. Lebiedzinski - Sidoti & Company, LLC
The -- like the generics and private label?
Menderes Akdag
That is correct, yes.
Anthony C. Lebiedzinski - Sidoti & Company, LLC
Okay, good. And also, as far as the average order size, I know you touched on that, I mean, what do you think as far as the sustainability of the increased average order size?
Menderes Akdag
It is -- it is probably real, so we will probably be able to continue to slightly improve it from the prior year.
Anthony C. Lebiedzinski - Sidoti & Company, LLC
Got it. Okay.
And also, just looking at prior to this quarter, your G&A expenses were down 5 quarters in a row. However, they were up somewhat in the September quarter.
So how should we think about modeling G&A expenses going forward?
Menderes Akdag
If it's -- if we can grow the top line, there is still some leverage in the G&A.
Anthony C. Lebiedzinski - Sidoti & Company, LLC
Okay, but as far as the -- in terms of dollar amounts, do you expect that to go up? Or like I said, 5 -- you had 5 quarters of...
Menderes Akdag
It depends on -- some of the expenses are variable in the G&A with the sales, so it will go up with sales if the sales go up.
Operator
Your last question comes from Mitch Bartlett with Craig-Hallum Capital Group.
Mitchell O. Bartlett - Craig-Hallum Capital Group LLC, Research Division
Yes, I just wonder kind of if you could go back over your philosophy. It seems like you spend to a customer acquisition cost and then maybe cut it off if it starts to drift too much beyond that.
What is the philosophy? You have a healthy profitability, why not spend more aggressively?
Menderes Akdag
Well, there are 2 things that needs to be there. One, as you know, we advertise direct response on television, which we buy random space.
And if the television inventory -- random space, I should say, inventory is not available, it is very difficult to clear, the price difference is not 5%, 10%. Number two, demand was lower for OTC during the later part of the quarter, so it's not wise to spend a lot of money -- paying more when the demand is lower.
Mitchell O. Bartlett - Craig-Hallum Capital Group LLC, Research Division
And why did the demand come off? Just to...
Menderes Akdag
The demand was lower than what it was last year.
Mitchell O. Bartlett - Craig-Hallum Capital Group LLC, Research Division
Because maybe they bought ahead earlier or last quarter...
Menderes Akdag
It's possible. Or maybe less fleas is a possibility, too.
It was more...
Mitchell O. Bartlett - Craig-Hallum Capital Group LLC, Research Division
Okay. So no need to crank up the advertising because it would materially pop the...
Menderes Akdag
If the environment is right, we are going to -- I mean, we do have higher budgets. And if the environment is right and if there is remnant space available, we'll be very aggressive.
If not, it's not wise to do it. So it depends on the environment.
Operator
And now I would like to turn the call over to Mr. Mendo Akdag.
Menderes Akdag
Thank you. Going forward, we're focusing on improving our gross profit margins while continuing to expand our product offerings.
This wraps up today's conference call. Thank you for joining us.
Operator, this ends the conference call.
Operator
Thank you for your participation. The call has concluded.
You may disconnect at this time.