Bruce Rosenbloom - Chief Financial Officer Mendo Akdag - President and Chief Executive Officer

Kevin Ellich - Craig-Hallum Erin Wright - Credit Suisse Anthony Lebiedzinski - Sidoti & Company

Thank you. 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 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?

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

Today, we will review the highlights of our financial results. We will compare our second fiscal quarter and six months ended on September 30, 2017 to last year’s quarter ended six months ended on September 30, 2016.

For the second fiscal quarter ended on September 30, 2017, our sales were $66.7 million compared to $60.8 million for the same period the prior year, an increase of 9.7%. For the six months ended on September 30, 2017, sales were $146.4 million compared to $133.3 million for the six months the prior year, an increase of 9.8%.

The increases in sales were due to increases in new order and reorder sales. The average order value was approximately $85 for the quarter compared to $82 for the same period last year.

For the second fiscal quarter, net income was $8.8 million or $0.43 diluted per share compared to $4.9 million or $0.24 diluted per share for the same quarter the prior year, an increase to net income of 79%. And for the six months, net income was $18 million or $0.88 diluted per share compared to $11.5 million or $0.56 diluted per share a year ago, an increase to net income of 57%.

The accelerated increase in net income was mainly due to higher gross profit margins and during the quarter, there was an income tax benefit of approximately $800,000 or $0.04 diluted per share related to stock-based compensation. New order sales increased by 8.8% to $11.6 million for the quarter compared to $10.7 million for the same period the prior year.

For the six months, the new order sales increased by 11.7% to $26.8 million compared to $24 million for the same period last year. Reorder sales increased by 9.9% to $55.1 million for the quarter compared to reorder sales of $50.1 million for the same quarter the prior year.

For the six months, the reorder sales increased by 9.4% to $119.5 million compared to $109.3 million for the same period last year. We acquired approximately 134,000 new customers in our second fiscal quarter compared to 131,000 for the same period the prior year.

And we acquired approximately 302,000 new customers in the six months compared to 289,000 for the same period a year ago. Approximately, 84% of our sales were generated on our website for the quarter compared to 82% for the same period the prior year, which resulted in a 12.3% increase in online sales.

The seasonality in our business is due to the proportional 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 35.2% compared to 29.7% for the same period the prior year. And for the six months, our gross profit as a percent of sales was 34.8% compared to 30.4% for the same period a year ago.

The shift in sales to higher margin items in the flea, tick and heartworm categories the trend we have seen in the last two quarters continued in the September quarter. Our general and administrative expenses as a percent of sales was down to 9.3% compared to 9.5% for the same quarter last year.

And for the six months, it was 8.5% compared to 8.9% for the six months the prior year. We were able to leverage the G&A with increased sales.

For the quarter, we spent $4.5 million in advertising compared to $4.4 million for the same quarter the prior year. For the six months, we spent $10.8 million in advertising compared to $10.1 million for the six months a year ago.

The advertising cost of acquiring a customer was approximately $34 for the quarter compared to $33 for the same quarter the prior year and for the six months, it was $36 compared to $35 for the six months last year. We had $68.4 million in cash and cash equivalents and $23 million in inventory with no debt as of September 30, 2017.

Net cash from operations for the six months was $18.3 million compared to $27.8 million for the same period last year. The decrease was mainly due to increases in inventory.

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

Good morning. Thanks for taking the questions.

Mendo, I guess I want to start off with gross margin strength can you give us a little bit more color as to what’s driving that? Are we talking specifically about the oral flea and tick products?

And then can you give us a breakdown of your mix of prescription versus OTC?

The main driver is there is a shift from topicals, which have low margins to oral medications in the flea and tick category. And the prescriptions are the majority of the business.

I mean, are we talking 51% or 75% now?

We are not going to disclose that.

Okay. And then can you talk about – did you see any impact from the hurricane in terms of impact on your sales or costs of having to put an extra – over time and things like that?

We see some impact, negative impact on sales. It’s difficult to quantify.

It probably impacted more of the new orders.

More new orders. Okay, great.

And then one thing on the balance sheet I thought payables was down about $6 million sequentially, positive impact on your cash flow, Bruce, do you have any color on what was going on with payables this quarter?

No, I mean, more timing, inventory and payables is more timing with our company, so really no further comment on that.

Okay. And then what about the tax rate going forward, should we use this level or is it going to bounce back to the 37% rate do you guys have been historically at?

Right. As you know, we had a one-time tax benefit around $800,000 in the quarter due to the difference between the fair market price of the shares at grant date versus the actual price of investing.

So we may have something similar in the March quarter as well. It’s probably somewhere in the middle.

It depends on the stock price.

Really does.

Okay, got it. And then two last ones, new customer transaction size looks like it was up over 6% again this quarter, should we expect that to continue, do you think that’s really due to the new products and just what are you guys seeing in the market?

And then lastly, Mendo, any thoughts on potential competition saw something out of PetSmart a few weeks ago wondering what you think about competition on the horizon?

We anticipate spending more on advertising. So, we will see what happens.

As far as the PetSmart pharmacies go, based on our numbers, we have not seen any material impact so far. So, we will see what happens.

Also, they have been in the pharmacy business for a few years through a subsidiary I guess it appears they are re-branding.

Okay, great. It sounds good.

Thanks, guys.

You’re welcome.

Great, thanks. Given the sort of the seasonality across the business, how should we be thinking about the quarterly progression of the gross margin trend in the coming quarters ahead of potentially the slower flea and tick month?

It appears the gross margin improvement is going to continue compared to last year, I should say, but it’s going to depend on also how the competition behaves price wise.

I guess and what other drives outside of flea and tick could be, I guess, offsetting in the event there is slow down with the seasonal progression or typical slowdown?

You are talking about the gross margins?

Correct.

Well, historically, we had tick category had the lowest gross margin, so if the mix is less of flea and tick that doesn’t necessarily mean it will negatively impact gross margin.

Okay. And then you have had success I guess it seems of your flea and tick medications is that I guess how sustainable is that or how is your access to those types of products?

We do have access to them. There is no problem from that perspective.

There is a shift to oral medications from topical.

And any sort of changes from a supply chain standpoint in terms of your relationships with distributors or even directly with manufacturers?

There is. I would say, there is no material change at this time.

Okay, alright. Thank you so much.

You are welcome.

Yes, good morning and thank you for taking the questions.

Good morning.

As far as the gross margin expansion the other category that you highlighted was the heartworm category, can you speak to that a little bit more specifically what you are seeing there and any further color on that? And I will have a follow-up.

It’s just the category is growing.

Okay. And then as far as the new order sales growth, it decelerated sequentially from the June quarter, anything to beat into that or was it just maybe some timing perhaps of your advertising spending.

Anything you can add on that?

The hurricanes might have had a negative impact, especially on new orders and less on reorders. And also we spend about – it was relative – our spending in advertising was relatively flat compared to the same quarter last year.

Got it, okay. Any – I may have missed this, but any sort of – as far as impact from the hurricanes that you could sight to?

It’s difficult to quantify, but there was some negative impact probably more on new orders and less on reorders.

Got it, okay. And then Bruce just wanted to clarify so the tax issue that, that was related to ASU 2016 09 is that was that in reference so?

Yes.

Okay, thank you.

You are welcome.

Great, thanks. Just a quick follow-up on advertising spend.

I guess can you speak to kind of how your strategy has evolved in terms of advertising over the past kind of year and what you anticipate kind of in the coming quarter as I think you previously said that it should increase year-over-year. I guess, is that still the case?

Thanks.

Yes. I would say that’s still the case.

We anticipate that we are going to spend more on advertising compared to the last fiscal year.

I was just going to ask how the strategies over the past have evolved over the last year?

I would say, it’s similar to last year as we are doing a little bit more targeted advertising, but it’s similar to I would say last fiscal year. We are just doing more of it.

Great, thank you.

You are welcome.

Thank you. For the remainder of fiscal 2018, we will continue to focus on increasing sales and improving our service levels.

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

Operator, this ends the conference call.