Oct 26, 2020
Operator
Good Morning. Welcome to the PetMed Express, Inc., doing business as 1-800-PetMeds, conference call to review the financial results for the second fiscal quarter for the quarter ended on September 30, 2020.
At the request to the company, this conference call is being recorded.
Operator
Founded in 1996, 1-800-PetMeds is America's most trusted pet pharmacy, delivering prescription and nonprescription pet medications and other health products for dogs, cats and horses direct to the consumer. 1-800-PetMeds markets its product through national advertising campaigns, which direct consumers to order by phone or on the Internet and aim 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.
Operator
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.
Unfortunately, due a personal matter, Mendo Akdag, our President and Chief Executive Officer, is unable to attend this morning's conference call.
Bruce Rosenbloom
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.
Bruce Rosenbloom
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.
Bruce Rosenbloom
Thank you for joining us, and we hope everyone is continuing to stay safe and healthy. During the September quarter, consumer demand settled down due to a combination of vet clinics and brick-and-mortar pet retailers opening up, and consumers having stocked up in the June quarter.
Bruce Rosenbloom
We have been open during our normal business hours without any material disruptions to our operations. We are still taking measures to ensure the health and safety of our dedicated employees by allowing them to work from home where possible and continuing with social distancing and enhanced disinfection in the workplace.
Bruce Rosenbloom
Also, we have not seen any major disruptions in our supply chain. However, we have experienced some delays in the delivery of the slow to medium moving inventory items.
Now we will compare our second fiscal quarter ended on September 30, 2020, to last year's quarter ended on September 30, 2019.
Bruce Rosenbloom
For the second fiscal quarter ended on September 30, 2020, our sales were $75.4 million compared to $69.9 million for the same period the prior year, an increase of 7.9%. For the 6 months ended on September 30, 2020, sales were $171.6 million compared to $149.9 million for the 6 months the prior year, an increase of 14.5%.
The increases in sales were due to increases in reorder sales for the quarter and increases for both new order and reorder sales for the 6 months.
Bruce Rosenbloom
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 $8.4 million or $0.42 diluted per share compared to $6.7 million or $0.33 diluted per share for the same quarter the prior year, an increase to net income of 26%.
And for the 6 months, net income was $16.2 million or $0.81 diluted per share compared to $12 million or $0.60 diluted per share a year ago, an increase to net income of 35%.
Bruce Rosenbloom
Reorder sales increased by 9.6% to $67.8 million for the quarter compared to reorder sales of $61.9 million for the same quarter of the prior year. And for the 6 months, reorder sales increased by 14.3% to $148.2 million compared to $129.6 million for the same period last year.
Bruce Rosenbloom
New order sales decreased by 5% to $7.7 million for the quarter compared to $8.1 million for the same period the prior year. And for the 6 months, new order sales increased by 15.4% to $23.5 million compared to $20.3 million for the same period last year.
We acquired approximately 96,000 new customers in our second fiscal quarter compared to 98,000 for the same period the prior year. And we acquired approximately 282,000 new customers in the 6 months compared to 238,000 for the same period a year ago.
Bruce Rosenbloom
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 season, with fall and winter being the off-season.
Bruce Rosenbloom
For the second fiscal quarter, our gross profit as a percentage of sales was 30.5% compared to 28.6% for the same period the prior year. And for the 6 months, our gross profit as a percentage of sales was 29% compared to 27.9% for the same period a year ago.
Bruce Rosenbloom
Gross margins improved by 190 basis points for the September quarter and by 110 basis points for the 6 months. The increases were due to the benefit of having direct relationships with all major manufacturers, and these manufacturers have minimum advertised price policies.
Also, our product mix shifted to higher-margin prescription medications during the September quarter compared to the June quarter.
Bruce Rosenbloom
General and administrative expenses as a percentage of sales were 9% for both the quarter and the same quarter last year. For the quarter, we spent $5.1 million in advertising compared to $4.8 million for the same quarter the prior year, an increase of 8%.
For the 6 months, we spent $14.2 million in advertising compared to $13.4 million for the 6 months a year ago, an increase of 6%. The advertising cost of acquiring a customer was approximately $54 for the quarter compared to $49 for the same quarter of the prior year.
And for the 6 months, it was $50 compared to $56 for the 6 months last year. The increase for the quarter was due to increases in advertising costs.
Bruce Rosenbloom
We had $106.3 million in cash and cash equivalents, and $21.5 million in inventory with no debt as of September 30, 2020. Net cash from operations for the 6 months was $15.2 million compared to $17.3 million for the same period last year.
This ends the financial review. Operator, we are ready to take questions.
Operator
[Operator Instructions] Our first question is from Erin Wright with Crédit Suisse.
Erin Wilson
What's your mix of over-the-counter versus prescription medications now? Has it meaningfully changed here?
And can you remind us of the profit profile, OTC versus prescription, and -- particularly given the MAP pricing strategy that has been implemented?
Bruce Rosenbloom
Sure thing. If you remember call in the June quarter, we saw an uptick in OTC, a bit -- a little bit more uncharacteristic increase, is a little bit -- it was different from our normal mix.
The September quarter was more of a normalized mix, although we did see a bit of an increase in Rx over OTC. And obviously, as we mentioned previously, prescription medications have a higher margin profile than the OTC products.
Erin Wilson
Would you say that prescription is over half now in ...
Bruce Rosenbloom
Over half of our total sales?
Erin Wilson
Yes.
Bruce Rosenbloom
Oh, yes, definitely, much more than half.
Erin Wilson
Okay. Great.
And then on the stickiness of the COVID-driven customer base, I guess how much of there is a paradigm shift to online versus just some stockpiling given COVID? I'm curious kind of how we should be thinking about sort of new customer growth over the balance of the year?
And what you're seeing in terms of that COVID-driven customer base?
Bruce Rosenbloom
Right. Overall, demand has settled down with the combination of the vet clinics and brick-and-mortar pet stores opening up and also, as you mentioned, consumers stocking up in the June quarter.
Also, our new website platform might have had a tempering negative effect on our natural search during the quarter, which may have negatively impacted our new order sales in the short-term and what we saw in the September quarter. We are now in the second phase of our e-commerce platform.
We are now focusing on redesigning our website and mobile app to optimize our customers' digital experience, which should improve our new customer conversion in the future. As far as COVID, I mean it's really an unknown right now.
Obviously, we're seeing cases increasing overall in majority of the states in the U.S. So we'll just have to see how that -- and how that -- how those trends overall affect our business.
As of right now, we did see demand settle down with the opening of those clinics in the retail stores. But overall, we've seen reorders become extremely strong, and it may also be because of the increased new customers that we were able to take in for the 6 -- for the first 6 months of our fiscal year.
Operator
Our next question is from Anthony Lebiedzinski with Sidoti & Company.
Anthony Lebiedzinski
So I guess my first question. So kind of looking back now at the first half of the fiscal year, you mentioned that there was some -- it sounds like some pull-forward of demand in the June quarter.
Anyway, you can possibly maybe try to quantify how much you think you saw a pull forward into the June quarter?
Bruce Rosenbloom
We usually don't like to quantify to give that information now. We do know what that number is internally.
Again, it's also -- as we mentioned, we were in the first phase of our website, our new e-commerce platform. And so that may have negatively impacted reorders as well.
So it's -- we have an estimate. There's a few assumptions involved with that.
But we're not really prepared to give that number out at this time.
Anthony Lebiedzinski
Okay. That's fair enough.
And then so as far as the second phase of the website improvement, when do you expect to have that completed?
Bruce Rosenbloom
Yes. Our target date is during this third quarter.
So hopefully, by the end of the year, we should be launched fully with both the redesign of the website and also the mobile app.
Anthony Lebiedzinski
Got it. Okay.
And then you mentioned ad spending being up. I know in the past, you've had increases in costs because of the election.
Was the increase in advertising spending because of that? Or was there something else going on?
Bruce Rosenbloom
It did have probably a small effect. But I think overall it was more of a normalized increase in overall keyword search.
That's majority of our online spend. Advertising costs increased during the quarter.
We saw increased competition as well with the vet clinics and also increased competition with online keyword searches as well. But we'll always attempt to be more aggressive during peak season when our demand is strong.
As you know, we have a flexible ad budget, and our advertising spending is also going to depend on the return on investment.
Anthony Lebiedzinski
Got it. Okay.
And then last question for me. So now you're moving into the off-season.
Typically, the gross margins for you guys are higher in the off-peak second fiscal -- second half of the fiscal year. So you had a nice improvement in the gross margin on a year-over-year basis as well as sequentially.
So with that in mind, should we expect further sequential improvement in the back half of the gross margin? Or how should we think about that?
Bruce Rosenbloom
We don't manage the margins quarter-to-quarter. As you know, we sort of look at margins on an annualized basis.
Meaning, annually, there's an opportunity for modest margin improvement year-over-year, and we expect that to continue. If there's an opportunity to maximize margins, we're going to go ahead and do that.
But also, we want to remain competitive on the -- with pricing and, of course, with MAP pricing in place. And we also want to be competitive with the other players in our space as far as promotions and offers.
So we'll see how it shapes up. But you're right, traditionally -- the trends have been historically that margins will rise during the off-season.
And that's also because we tend to see more of a shift to prescription over OTC during those time periods.
Operator
[Operator Instructions] Our next question is from Ben Rose with Battle Road Research.
Ben Rose
Few questions. First off, in terms of the advertising and promotion this quarter, was there anything done to perhaps incentivize or focus people more on the prescription side of the business?
Or was this just sort of a natural trend back to your typical mix of prescription versus OTC?
Bruce Rosenbloom
Yes. It was more of a movement to our typical trend.
And again, we've always -- we have seen a rising increase in our mix more towards prescription than over-the-counter. Obviously, veterinarians are recommending more prescription products more so than OTC.
And obviously, we prefer to be more skewed towards prescription, which have higher-margin profile. So it was more of a return to a normalized state, although I did mention prescription medications did see a bit of an uptick during this quarter, year-over-year.
I think June was more of an anomaly. I think it was more so with both brick-and-mortar and veterinarians having limited hours.
The new online -- new customers move towards online, and those online customers were purchasing over-the-counter products.
Ben Rose
Okay. Great.
And sorry, Bruce, just to clarify one thing you said about the website redesign in the first phase. Did you say that, that may have had a negative impact on the reorder rate this quarter?
Bruce Rosenbloom
Yes, it's possible. With that new e-commerce platform, it had a negative impact on our natural search.
So that took a while to get back to its normalized stage. We're there currently.
We expect with many of the changes we have made, we should see an improvement in our new customer conversion in the future.
Ben Rose
Okay. And on the inventory situation, it looks like you did work down quite a bit of inventory in the quarter, which was a concern of some heading into this quarter.
In your prepared remarks, you mentioned that there were some delays in the slow to medium moving items, which I guess, in the grand scheme of things is less concerning. Can you speak to just the overall supply chain environment, albeit heading into the weaker season, but just your speak to the confidence of your own ability to procure the lion's share of the medications that you need?
Bruce Rosenbloom
Right. Again, our inventory will fluctuate based on promotional buying opportunities.
We mentioned that back in the June quarter, we did make a conscious decision to stock up due to the uncertainty that COVID presented itself. Overall, when there's a cost advantage, we'll carry higher inventory.
During the pandemic, we did look to carry more inventory, to minimize any related delays. We did see those delays in some of our small to medium movers, more manufacture backorder-type delays, also shipment or lead time delays.
Some of those delays, we should be able to rectify with increased -- with an increased inventory purchase. Some we may not be able to.
They're more manufactured-driven delays. So we'll see.
Where we can stock up, we will. I would not expect the stock up like we saw in the June quarter, where inventories were in excess of $40 million.
But we will try to stock up inventory to make sure that we can minimize any type of COVID-related delays for our customers.
Operator
The next one is from Kevin Ellich with Ace Research.
Kevin Ellich;Ace Research LLC;Founder and Managing Partner
So going back to the new customers that you added for the quarter, was a little bit lower than we've seen for -- in your fiscal second quarter over the last several years. With the V-shaped recovery we've seen in vet visits in the September quarter, do you think this is more a function of competition?
Or what do you think is driving that?
Bruce Rosenbloom
I mean, again, competition does play a role. I think more importantly, it was the combination -- as I mentioned, the combination of vet clinics and brick-and-mortar pet stores opening up.
We also had that temporary negative effect on our natural search, which also affected possibly new customers as well. So as I mentioned, I think moving into the off-season, we definitely have an opportunity to improve on our new customers.
I think overall, for the 6 months, we are fairly satisfied with the result. We'll continue to make improvements and tweak advertising where need be.
And we'll see if we can rectify that temporary downswing.
Kevin Ellich;Ace Research LLC;Founder and Managing Partner
Got it. Got it.
And then it looks like -- one metric I'd track is new customer transaction size, which seems like it's been -- it's down a little bit this year. Do you think that's more a function of COVID, or is it MAP pricing or kind of all the above?
Bruce Rosenbloom
Yes. I'm not sure exactly what measures you're referring to.
But overall, those definitely have a play when it comes to new order average size. Also with new orders, we do tend to be a little bit more promotional to attract new customers, to be competitive with others in our space.
Kevin Ellich;Ace Research LLC;Founder and Managing Partner
Got it. Got it.
And then lastly, CapEx was a little bit higher this quarter. Is that a function of the website?
Just some seasonality spend?
Bruce Rosenbloom
Correct. Yes, 100%.
That was the website. And we really don't expect any material capital expenditures moving forward, more maintenance mode.
And I mean, overall, it should be fairly minimal.
Kevin Ellich;Ace Research LLC;Founder and Managing Partner
Got it. And then lastly, again, gross margin much better than expected.
I know, seasonally, Q2 is your strongest quarter probably of the year. Well, it's been a little indifferent in the last couple of years.
But do you think we'll continue to see that sort of strength for the remainder of the year?
Bruce Rosenbloom
As I mentioned to Anthony earlier, again, prices overall stabilized in the market with the manufacturers enforcing the minimum advertised price policies. Our product mix was different from what we saw in the June quarter.
So those all contributed to increase to our margins. The bottom line is if we have increased prescription sales, we're going to probably have higher margins.
The one area that could have a negative effect to margins would be promotions for new customers. So if we have a quarter where we're positive in new customers, that could have a negative impact on margins.
But where the gross margins end up, will be dependent on our product mix. And again, looking at it from quarter-to-quarter can be difficult.
But I think overall, year-over-year, we expect to see modest improvements in margins.
Operator
We have a follow-up from Erin Wright with Crédit Suisse.
Erin Wilson
Has anything changed in terms of your manufacturer relationships? I guess any new relationships?
Or is it relatively status quo? And were there increases in that pricing?
I guess how do those contracts typically work?
Bruce Rosenbloom
Right. Again, when we talk about the direct relationships with manufacturers, it's really talking about the large 5 manufacturers there.
We do have direct relationships, which -- many -- at least 2 or 3 were initiated in 2019. So yes, we do have contractual relationships with them.
They have been enforcing MAP pricing, which has stabilized prices in the online space. And what's helpful?
When they have their price -- when manufacturers increase their prices, they also increase MAP. So that also helps as well as far as margins and also the price inventory.
Erin Wilson
Okay. Great.
And then one last question here just on generics. I guess do you have any metrics on the generic prescription, dispensing rate versus brand?
And how has that changed at all given the manufacturer relationships?
Bruce Rosenbloom
Yes. And we do.
I mean not materially. I mean many of the manufacturers prefer us to promote their brands, and they will give us incentives to promote their brands, say, over generics.
But I would say our generics are up year-over-year. But overall, it's still about the same as a percentage of sales.
Erin Wilson
And there's still no, I guess, seamless way to do generic substitution, correct?
Bruce Rosenbloom
No. It doesn't.
The current rules and regulations -- the pharmacy rules and regulations definitely prohibit that seamless generic substitution that is present for human pharmacies and for human physicians. So if there is a change, we do have to go back to the vet for their approval.
So that does make it a little bit more difficult. But for the most part, our relationships with the vets are probably at the best point it's ever been.
Our authorization rates are probably at its current peak. And -- so when we do go back to the vets for generic substitute, more often than not, their answer is yes.
Operator
I will now turn our call back over to Bruce Rosenbloom, the company's Chief Financial Officer, for closing remarks.
Bruce Rosenbloom
Thank you. In fiscal 2021, we are focusing on redesigning our website and mobile app to optimize our customers' digital experience.
Thank you very much. This wraps up today's conference call.
Thanks for joining us. Operator, this ends the conference call.
Operator
Thank you all for participating in today's conference call. You may now disconnect.