Menderes Akdag - Chairman, President and CEO Bruce Rosenbloom - CFO

Kevin Ellich - Piper Jaffray Erin Wilson - Bank of America Merrill Lynch Michael Kupinski - Noble Financial Anthony Lebiedzinski - Sidoti & Co. Mitchell Bartlett - Craig-Hallum

Thank you. I would like to welcome everybody here today.

Before I turn the call over to Menderes 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 the 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 in our most recent annual report and other filings with the Securities and Exchange Commission.

Now let me introduce today’s speaker, Menderes Akdag, the President and Chief Executive Officer of 1-800-PetMeds. Menderes?

Thank you, Bruce. Welcome everyone.

Thank you for joining us. Today, we will review the highlights of our financial results.

We’ll compare our second fiscal quarter and six months ended on September 30, 2014 to last year’s quarter and six months ended on September 30, 2013. For the second fiscal quarter ended on September 30, 2014, sales were $57.6 million compared to $60.5 million for the same period the prior year, a decrease of 4.8%.

For the six months ended on September 30, 2014, sales were $130.1 million compared to $134.7 million for the same six months the prior year, a decrease of 3.4%. The decreases in sales were due to decreases in new order and reorder sales.

The weakness in demand for flea and tick topicals negatively impacted sales. The average order value was approximately $75 for the quarter compared to $73 for the same quarter the prior year.

Excluding a one-time charge for an IT-related discontinued project for the second fiscal quarter, net income was $3.8 million or $0.19 diluted per share compared to $4.2 million or $0.21 diluted per share for the same quarter of the prior year. And for the six months, net income was $8.8 million or $0.44 diluted per share compared to $8.9 million or $0.44 diluted per share a year ago.

The one-time IT-related discontinued project charge was $1.7 million before taxes and the net after-tax impact of this charge was $1.1 million or $0.05 diluted per share. The discontinued project was for a new software platform.

We concluded that it was not in the best interest of the company to proceed with it. We decided to stay with and upgrade our current platform.

Reorder sales decreased by 4.6% to $46.6 million for the quarter compared to reorder sales of $48.9 million for the same quarter the prior year. For the six months, reorder sales decreased by 2.5% to $105.1 million compared to $107.9 million for the same period last year.

New order sales decreased by 5.6% to $11 million for the quarter compared to $11.6 million for the same period the prior year. For the six months, the new order sales decreased by 6.8% to $25 million compared to $26.8 million for the same period last year.

We acquired approximately 152,000 new customers in our second fiscal quarter compared to 169,000 for the same period the prior year, and we acquired approximately 336,000 new customers in the six months compared to 376,000 for the same period a year ago. Approximately 80% of our sales was generated on our Website for the quarter compared to 79% for the same period the prior year.

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 offseason.

For the second fiscal quarter, our gross profit as a percent of sales was 32.1% compared to 31.8% for the same period the prior year. For the six months, our gross profit as a percent of sales was 32.5% compared to 32.1% for the same period a year ago.

The percentage increases can be attributed to a shift in sales to higher margin items. Our general and administrative expenses were lower by approximately $120,000 for both the quarter and the six months.

For the quarter, we spent $6.9 million in advertising compared to $7 million for the same quarter the prior year. For the six months, we spent $16.8 million in advertising compared to $17.4 million during the same period a year ago.

The advertising cost of acquiring a customer was approximately $45 for the quarter compared to $41 for the same quarter the prior year. For the six months, it was $50 compared to $46 for the six months the prior year.

The increases were due to advertising cost increases. We had $50.2 million in cash and short-term investments and $20.5 million in inventory with no debt as of September 30, 2014.

Net cash from operations for the six months was $23.6 million compared to $24.4 million for the same six months last year. This ends the financial review.

Operator, we are ready to take questions.

Good morning. Thanks.

Menderes, I’ve got a few question for you. I guess starting off with your comments about demand for flea and tick topicals being a little weak, do you think – is that due to the new products that have come to the market, like NexGard and Bravecto , the oral medications, do you think that’s having the impact?

That’s having some impact on topicals, but the data we have is that overall market is down.

Overall, market’s down. Do you have any idea why the overall market’s down?

The season started late. That’s probably why.

The weather is impacting it.

Okay. But I mean now vets are recommending people even in the northern part of the country where I live give flea and tick medication to their pets year round, so that really shouldn’t have a major impact, should it?

Well, everybody is not listening to the vets.

Okay, that’s a fair point. And then, I guess you called out in the press release focusing on improving marketing efforts to drive sales in '15, is there anything specific that you can call out or is it just more advertising?

We are putting more emphasis on database marketing. We’re running some tests.

We’re doing some database analysis. Really, the full implementation will be next spring.

Next spring, okay. Should we expect advertising costs to increase then next year?

All I can tell you is currently our advertising cost has been up per impression, mid to high single digit.

Mid to high single digit, okay, that’s good. And then last question for me, your customer acquisition costs went up I think 10% you said to $45 or so, and you said that was due to advertising cost increases.

Is that across the board between both online and TV, and I guess how are you thinking about the mix between the two on a go-forward basis?

It’s across the board. Actually online increase was higher than the TV cost increase.

Okay. Do you think that’s sustainable?

We hope so, we’ll see.

Okay. Thank you.

Thank you.

Can you speak to the details on the IT-related project? Why did you see sort of the need to change your platform initially, and what made you stop the project, and should we anticipate additional costs associated with the new project going forward?

We’ve concluded that it was not the best interest of the company to proceed with it. We thought it wasn’t going to be – we recently concluded that it was not going to work for us.

So that’s why we’re sticking to our current platform which works. We’re on an older version of the platform, so we’re in process of upgrading that to the new version.

Okay. And then it seems one of your competitors has been sold, another Drs.

Foster & Smith that’s apparently up for sale. Can you give us an update of your capital deployment strategy in light of the sort of shifts or commotion in the market?

When does it make sense to look at potential acquisitions or valuations? Are they unrealistically high still out there?

In normal course of business, we always look at the opportunities.

Okay. Thanks.

You’re welcome.

Thank you. Menderes, I was wondering why do you think that advertising yields are not higher?

There are two things. Overall, market is down and advertising costs are up.

So do you believe that there is an issue with creative or do you think – and in terms of the overall market, isn’t the pet population, I guess, increasing? I guess the households with pets are actually increasing?

Why do you think the market is down then?

On the flea and tick category, the weather is playing a role. That’s the data we have on it from independent sources, so the weather obviously is playing a role as far as…

And in terms of creatives, do you think you have the right creative or…?

Again, we don’t think it’s creative related. The demand was weak for the flea and tick topicals, and our cost per impression on advertising was up.

Okay. And in terms of the generics for flea and tick, you had indicated that the margins are higher for the generics.

Do you think that you’re price competitive? Do you think that you should be bringing down the price to gain the market share or what do you – what could be be the strategy there to kind of turn that ship around?

We do price testing, price sensitivity testing, and we price ourselves accordingly. We’ll consider reducing the prices if needed based on data.

In terms of the higher customer average order size going up, was that related to any accessories being sold or what was – just people buying more flea and tick products or what drove that number?

Sales shifting to higher priced items.

Away from flea and tick or – because typically flea and tick would be a lower-priced item I would think unless they were buying that full year – were they buying more for the year or were they buying – I’m just trying to give it flavor on what drove the number?

More prescription with high priced brands and there is slight increase in the doses that they were buying also.

Just like decreasing the doses.

Increase not decrease.

Increase, okay. In terms of accessories, what did that percentage of revenue increase in the quarter?

There was no increase actually. We have not focused on it.

Okay. All right, those were all my questions.

Thank you.

You’re welcome.

Thank you. Good morning.

Just to follow up on some previous questions, so as far as the prescription business and just wanted to get a better sense of how that business did in the quarter plus also over-the-counter medications other than flea and tick, can you just give us a sense as how sales of those products performed?

Prescription business was up, it was healthy and overall TC was down.

Okay, got it. And when looking at your sales results, reorders versus new orders, I mean clearly this was a quarter down here, but as far as your new order sales have struggled for past few quarters.

Last time there was an increase was looks like first quarter fiscal '14. So I know you guys have talked about changing some things and focusing on marketing efforts, but can you give us just a better sense as to how we should think about the trends for the new order sales going forward?

We’ll attempt to increase it obviously that’s what we’re working on. We’ll see what happens.

Okay, but what exactly are you, as far as trying to get those to improve, is it just mixing up the medium mix a little bit or changing, tweaking the creative? I mean, can you just give us a little bit better sense as to how you’re proceeding with that?

Right. We’re putting more emphasis on database marketing actually to really improve reorders, so we can afford to pay more for a new order customer.

Okay. Thank you.

Good morning. Menderes, I wonder if you would address – I know the overall market for flea and tick is weak, but do you think you’re losing market share?

Your orders were down in aggregate 7%, 7.3% using your ALBs that you talked about. There has obviously been a shift away from brand towards your own private label and then you’re talking about prescription being way up versus – not way up but prescription is up versus flea and tick that was – or OTC that was down obviously pretty hard, so all aggravating that 7% order decline pretty aggressively.

Maybe you have the industry statistics but it seems like that the industry for flea and tick wouldn’t be down 10%, 15% year-over-year. So are you losing market share?

The data we have on flea and tick topicals is that it’s down actually 11% according to IRI and there’s a shift to oral medications and combo products, which are prescription meds.

Could you address private label in the quarter how it did versus your branded?

Actually the private label was down.

Okay. So the margin increase came from holding price on the branded side as well.

Prescription meds have higher margins.

Was that shift towards prescription pretty dramatic year-over-year?

We disclose that once a year, so I’m not going to get into specifics. I have told you directionally.

So you don’t think you’re losing market share is the conclusion?

We think we are holding it unless we have our own data. So based on the data we got, we don’t think so.

Thank you.

Hi, I just had a couple of follow-ups and actually some have been addressed in terms of the competitive landscape. Just wondering if you’ve been successful at acquiring any supply of these new medications, the orals that you talked about that have come to market?

Currently, there are no issues for us to get any product, so that’s going to stay.

Great. Thank you.

You’re welcome.

Thank you. For the fiscal year 2015, we are focusing on improving our marketing efforts to increase sales.

This wraps up today’s conference call. Thank you for joining us.

Operator, this ends the conference call.