Oct 22, 2018
Executives
Bruce Rosenbloom - Chief Financial Officer Mendo Akdag - President and Chief Executive Officer
Analysts
Kevin Ellich - Craig-Hallum Erin Wright - Credit Suisse David Westenberg - CL King Anthony Lebiedzinski - Sidoti & Company
Operator
Welcome to the PetMed Express Incorporated doing business as 1-800-PetMeds Conference Call to review the financial results for the Second Fiscal Quarter ended September 30, 2018. 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 consumers. 1-800-PetMeds markets its products through national advertising campaigns, which direct consumers to order by phone or on the Internet and aimed to increase the recognition of the PetMed’s 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 Rosenbloom
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 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, Mendo Akdag, the President and Chief Executive Officer of 1-800-PetMeds. Mendo?
Mendo Akdag
Thank you, Bruce. Welcome everyone.
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, 2018 to last year’s quarter and 6 months ended on September 30, 2017. For the second fiscal quarter ended on September 30, 2018, our sales were $71.4 million compared to $66.7 million for the same period the prior year, an increase of 7%.
For the 6 months ended on September 30, 2018, sales were $158.8 million compared to $146.4 million for the 6 months the prior year, an increase of 8.5%. The increases in sales were due to increases in reorder sales.
The average order value was approximately $87 for the quarter compared to $85 for the same period last year. For the second fiscal quarter, net income was $10.8 million or $0.52 diluted per share compared to $8.8 million or $0.43 diluted per share for the same quarter the prior year, an increase to net income of 23%.
And for the 6 months, net income was $23.3 million or $1.14 diluted per share compared to $18 million or $0.88 diluted per share a year ago, an increase to net income of 29%. In addition to increased sales, the Tax Reform Act of 2017 helped boost our earnings.
Reorder sales increased by 11% to $61 million for the quarter compared to reorder sales of $55.1 million for the same quarter the prior year. For the 6 months, the reorder sales increased by 11% to $132.5 million compared to $119.5 million for the same period last year.
New order sales decreased by 11% to $10.4 million for the quarter compared to $11.6 million for the same period the prior year. For the 6 months, the new order sales decreased by 2% to $26.3 million compared to $26.8 million for the same period last year.
We acquired approximately 117,000 new customers in our second fiscal quarter compared to $134,000 for the same period the prior year and we acquired approximately 286,000 new customers in the 6 months compared to 302,000 for same period a year ago. Approximately, 85% of our sales were generated on our website for the quarter compared to 84% for the same period the prior year, which resulted in a 7.4% increase in online sales.
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 full-on winter being the off-season.
For the second fiscal quarter, our gross profit as a percent of sales was 35.4% compared to 35.2% for the same period the prior year and for the 6 months, our gross profit as a percent of sales was the same 34.8% compared to the same period a year ago. Our general and administrative expenses as a percent of sales was down to 8.7% compared to 9.3% for the same quarter last year and for the 6 months it was 8.3% compared to 8.5% for the 6 months the prior year.
We were able to leverage the G&A with increased sales. For the quarter, we spent $5.3 million in advertising compared to $4.5 million for the same quarter the prior year, an increase of 17%.
For the 6 months, we spent $12 million in advertising compared to $10.8 million for the 6 months a year ago, an increase of 11%. The advertising cost of acquiring a customer was approximately $45 for the quarter compared to $34 for the same quarter the prior year and for the 6 months it was $42 compared to $36 for the 6 months last year.
The increases were due to increases in advertising costs due to the more competitive environment. The increased advertising positively impacted reorder sales.
We had $87.1 million in cash and cash equivalents and $28.6 million in inventory with no debt as of September 30, 2018. Net cash from operations for the 6 months was $20.4 million compared to $18.3 million for the same period last year.
This ends the financial review. Operator, we are ready to take questions.
Operator
[Operator Instructions] The first question comes from the line of Kevin Ellich from Craig-Hallum. Your line is now open.
Kevin Ellich
Good morning. I have a couple of questions for you guys I guess.
And Mendo wanted to start off with the new customer adds of 117,000 and your customer acquisition cost of $45, which is little bit higher than we are looking for, is cost per impression going up or are you just increasing the amount that you are spending online, can you talk about the competitive landscape that you previously mentioned in your prepared remarks?
Mendo Akdag
Yes. The cost of impression is growing up double-digits due to the more competitive environment.
Kevin Ellich
Is that for key products or is it for kind of all products across the board?
Mendo Akdag
I will say online.
Kevin Ellich
Okay, online, got it, going up double-digits, okay. Do you think that will moderate going forward or do you think that’s going to be the way it is for the foreseeable future?
Mendo Akdag
It’s difficult to tell. It’s going to be depending on the competitiveness of the environment.
Kevin Ellich
Okay. And then this is the first fiscal second quarter in the last couple of years where new customer sales were down on a year-over-year basis, is that just due to the competitive landscape as well or I guess how should we think about that going forward?
Mendo Akdag
Well, I mean, the cost was up, advertising costs due to the more competitive environment.
Kevin Ellich
Okay, great. And then switching to if Bruce can jump on this, G&A did come in lower than we expected, so maybe some good cost management, how much more is can you guys peel back in terms of cost and how well can that go, Bruce?
Bruce Rosenbloom
Well, it’s really – as you put as Mendo mentioned, it’s really dependent on sales, obviously if sales increase that has an opportunity to further leverage our G&A expenses. We are going to continue to run the business as we have always run it.
Obviously, we are very careful where we spend as dollars to make sure we are spending those dollars efficiently, but it’s really more of a function of sales.
Kevin Ellich
Got it. And then Mendo last question for me, gross margin, it was actually up on a year-over-year basis versus last quarter we saw that little decline.
Are you seeing any changes in terms of the cost of purchasing products or the cost of your sales?
Mendo Akdag
Shift in sales through higher margin items continued in the quarter offset by a more competitive marketplace.
Kevin Ellich
Got it. Okay, it sounds good.
Thanks guys.
Mendo Akdag
You are welcome.
Operator
Thank you. Next question comes from Erin Wright of Credit Suisse.
Your line is now open.
Erin Wright
Great, thanks. On the gross margin, how should we think about the incremental benefit or traction you are historically seeing from the next generation parasiticide products, are you still seeing an incremental benefit there?
Mendo Akdag
Yes, we are seeing an incremental benefit offset by more aggressive pricing.
Erin Wright
Okay, thanks. And how should we think about the quarterly progression for the advertising spend, are there any changes in your strategy on the advertising front at all?
Mendo Akdag
We are working on an offline advertising plan. So we will probably invest some money on our brands offline.
Erin Wright
Okay, great. And then could you breakdown I guess roughly how much of your revenue today is prescription products versus other?
Mendo Akdag
We are not going to disclose that due to competitive reasons.
Erin Wright
Okay, alright. That’s fair.
Alright, thank you.
Mendo Akdag
You are welcome.
Operator
Thank you. The next question comes from David Westenberg of CL King.
Your line is now open.
David Westenberg
Hi, thanks for taking the question. So, you noted advertising impacting reorder sales, can you remind us again why advertising impacts the reorder sales and maybe not so much why, maybe it didn’t impact new order sales the way you like it?
Mendo Akdag
Well, we have obviously – it’s a reminder of our existing customer sees our advertising it’s a reminder to reorder. So, it helps from that perspective.
It also may help activating inactive customers.
David Westenberg
Could you say you remind about a lift for some maybe inactive customers in that reorder sales or I don’t know what could be prepared in terms of qualitative or quantitative data on increasing the inactives?
Mendo Akdag
We are going to work on that going forward. Actually, we always do, but we will be more aggressive as far as activating inactive customers going forward.
David Westenberg
Thank you so much. And we have seen an increase in buying outside the traditional veterinary channel seeing that, that’s happening do you think that there is maybe an impact for you guys to purchase maybe directly for more manufacturers on a go forward basis or is there any opportunity to maybe lower your input costs?
Mendo Akdag
It’s a possibility, yes.
David Westenberg
Great, thank you. And then obviously the next generation, flea and tick has really helped on the gross margin front anticipating in 2000, maybe late 2019, maybe 2020 we are going to probably see another flea, tick and heartworm kind of triple that should hit the market in the timelines can be finicky.
However, what would you anticipate the impact in terms of either gross margin or sales or any sort of way to think about how that might benefit the business?
Mendo Akdag
It should have a positive impact, having said that, new generation medications have become also more competitive price wise.
David Westenberg
Alright. Thank you, guys.
Have a nice day.
Mendo Akdag
You are welcome.
Operator
Thank you. The next question comes from Anthony Lebiedzinski of Sidoti & Company.
Your line is now open.
Anthony Lebiedzinski
Yes, good morning. I am actually at Sidoti not Fidelity just to clarify.
So as far as the advertising strategy, Mendo, can you talk about some offline adds, I believe you guys did some limited spots on TV during the quarter. Just wanted to see if you could expand on that and did that strategy being offline also include some direct mail pieces or anything else that we should think about?
Mendo Akdag
We did attach during the quarter and we will probably continue that going forward. Yes, we will be broadcast and direct mail print.
Anthony Lebiedzinski
Got it, okay. And also in terms of just the AOV increasing again, is it just a continuation of the same shift towards higher price, higher margin products?
Mendo Akdag
Yes that is correct.
Anthony Lebiedzinski
Got it, got it, okay, alright. And given your tremendous cash flow generation what are your thoughts on doing a meaningful share buyback?
Mendo Akdag
That’s up to the board. That’s on the agenda.
So we will see what happens.
Anthony Lebiedzinski
Alright. Thanks very much.
Mendo Akdag
You are welcome.
Operator
Thank you. [Operator Instructions] The next question comes from Kevin Ellich of Craig-Hallum.
Your line is now open.
Kevin Ellich
Hey, guys. Just had a couple of follow-ups.
Going back to your inventories, it looks like they have been building, Mendo, are you stockpiling as you see better pricing all-in in the marketplace now? And then as it relates to your cash flow, it looks like operating cash this quarter was actually down year-over-year?
And I don’t know if Bruce can talk about some of the moving parts there and what’s going to reverse next quarter?
Mendo Akdag
To increase the inventories due to better pricing, yes.
Kevin Ellich
Okay.
Bruce Rosenbloom
As far as cash from operations, obviously we had a strong net income. The other fluctuations were timing more so with inventory payables.
As Mendo noted, we stocked up on inventory a little bit more during this quarter due to pricing opportunities, so it’s more a function of that than anything else.
Kevin Ellich
Got it. And then Mendo I know this has probably been asked different ways this call, but with the competitive landscape, should we see more promotional activity in discounting going forward, I think earlier this month you guys are running a promotion for existing customers that was maybe twice as much as you normally run, just curious where that stands?
Mendo Akdag
Yes, you will see more promotions based on the competitiveness of the market.
Kevin Ellich
Okay, great. Thanks guys.
Mendo Akdag
You are welcome.
Operator
Thank you. And now, I will turn the call over back to Mr.
Mendo Akdag.
Mendo Akdag
Thank you. For the reminder of fiscal 2019, we will continue to focus on increasing sales and further improving our service levels.
This wraps up today’s conference call. Thank you for joining us.
Operator, this ends the conference call.
Operator
Thank you for participating. You may now disconnect.