Bruce Rosenbloom - CFO Menderes Akdag - President and CEO

Kevin Ellich - Piper Jaffray Mitch Bartlett - Craig-Hallum Anthony Lebiedzinski - Sidoti & Company

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 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. Mendo?

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

Today, we will review the highlights of our financial results. We’ll compare our third fiscal quarter and nine-months ended on December 31, 2015 to last year’s quarter and nine-months ended on December 31, 2014.

For the third fiscal quarter ended on December 31, 2015 sales were $50.9 million, compared to sales of $49.3 million for the same period the prior year, an increase of 3.3%. For the nine months ended on December 31, 2015, sales were relatively flat at $179.3 million compared to sales of $179.4 million for the nine-months the prior year.

The increase in sales for the quarter was due to increases in new order and reorder sales. The average order value for the quarter was approximately $78 compared to $76 for the same quarter the prior year.

For the third fiscal quarter, net income was $4.9 million or $0.24 diluted per share, compared to $4.8 million or $0.24 diluted per share for the same quarter the prior year, an increase to net income of 1.9%. For the nine-months, net income was $15.1 million or $0.75 diluted per share, compared to excluding a one-time charge for a discontinued project $13.6 million or $0.67 diluted per share a year ago, an increase to net income of 12%.

Reorder sales increased by 2.8% to $43.3 million for the quarter, compared to reorder sales of $42.2 million for the same quarter the prior year. For the nine-months the reorder sales increased by 1.6% to $149.6 million compared to $147.2 million for the same period a year ago.

New order sales increased by 6.8% to $7.6 million for the quarter, compared to $7.1 million for the same period the prior year. For the nine-months, the new order sales decreased by 7.5% to $29.7 million compared to $32.2 million for the same period last year.

We acquired approximately 98,000 new customers in our third fiscal quarter, compared to 96,000 for the same period the prior year, and we acquired approximately 374,000 new customers in the nine-months compared to 432,000 for the same period a year ago. For the quarter, approximately 81% of our sales were generated on our website compared to 80% for the same quarter last 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 season with fall and winter being the off season.

For the third fiscal quarter, our gross profit as a percent of sales was 32.9% compared to 34.7% for the same period a year ago. For the nine-months, our gross profit as a percent of sales was 32.7% compared to 33.1% for the nine-months a year ago.

The percentage decrease for the quarter can be attributed to a more aggressive pricing and increases in product cost on short term brands. Our general and administrative expenses were relatively flat for the quarter and the six months.

For the quarter, we spend $4 million in advertising, compared to $4.3 million for the same quarter the prior year. For the nine-months, we spent $18.1 million for advertising, compared to $21.1 million for the nine-months the prior year.

Advertising cost of acquiring a customer for the quarter was $41 compared to $45 for the same quarter the prior year, and for the nine-months, it was the same $49 compared to the nine-months the prior year. We had 62.7 million in cash and short-term investment and $18.9 million in inventory with no debt as of December 31, 2015.

Net cash from operations for the nine-months was $22.6 million compared to $29.5 million for the nine-months the prior year. The decrease was mainly due to a smaller reduction in inventory compared to the last year.

On January 19, 2016, we completed the purchase of the property located in Delray Beach, Florida. The purchase price was $18.5 million.

The property is approximately 14.6 acres with two buildings totaling approximately 185,000 square feet. There are currently two tenants occupying about 88,000 square feet.

We intend to occupy the remaining 97,000 square feet later this year, as our principal offices and distribution center. This ends the financial review.

Operator we are ready to take questions.

Just a few questions Mendo, I guess starting off with gross margin, could you talk about your comment about more aggressive pricing, which products are you becoming more aggressive in your pricing and is that something you plan to continue. And then on the other hand, which products are you seeing cost increase that affected your gross margins during the quarter.

We were aggressive with our pricing overall, and we are not going to get into the specifics of the brands that the cost increased. There were some discounts available to us on short term brands for the last December a year ago and it was not available this year, but we are not going to get in to the specifics.

Also we had higher sales in the flea category, which has lower margins.

Okay, and would those be branded flea products or your generic or both?

Both.

Okay, great. And then the comments on seasonally warm weather which we all saw in the December quarter, just to make sure that I understand it correctly, that’s helping because when the weather is warmer people are still using flea and tick medication.

Is that the right way of your parasiticides?

That is correct, yes.

Okay, so that’s really kind of a one-time benefit that you got this quarter that we really won’t see the next quarter.

Depends on the weather.

Right. Well, thank god you guys have gotten some - well there’s been some snow on the Northeast and what not and also Nashville.

Right, they got pummeled with snow too. So then going on to the new facility and the property purchased, congratulations on that.

What’s the timing of when you plan to move in to that building, and I don’t know if Bruce could answer, what’s the cost associated with moving the headquarters and the distribution center. Will you keep your other facility up and running how does that work?

And then also you mentioned, two tenants occupying 88,000 square feet, will you be collecting rental income from them or lease payments.

Yes, we will be collecting lease payments from them. We intend to move later this year; it will probably be later either September, November, somewhere around those lines, when the property is ready for our operations.

Okay, and is there any cost like higher G&A associated with that Bruce.

There will be some cost associated with the move, but we don’t really think it will be anything that’s too material going forward, we don’t expect to see.

Okay. And then on the lease payments anything that you could call, in terms - will that show up in your other income line and will that be meaningful?

It will be meaningful and it will show up below the line correct, in other incomes. There will also be some expenses associated with it as well.

Okay. And then lastly Mendo, with the presidential election coming up here, will we continue to see a greater shift to a more online advertising, how do you guys think about the split, you’ve done a great job of managing your advertising spend relative to our expectations.

Just wanted to see what you’re seeing in the remnant market and how you plan to manage this as advertising costs could go up.

We are becoming less dependent on television, and we are moving from early mass marketing towards one-to-one marketing. So we anticipate that trend is going to continue.

So we are not expecting a significant impact.

Impressive quarter as far as I was concerned, because looking back in my model you have to go back to 2006 to see an advertising cost line as low as it was that you reported in this quarter, when the business was half the size. And I also see the big reduction in the gross margins so I see the trade-off that you’re making here.

But just how was that possible that you can continue to reduce advertising and maintain or grow your top line?

We were more efficient with regard to higher response to our advertising, and as I pointed out to, we are doing more database marketing more one-to-one compared to mass marketing that we used to do in the past. So I think that’s helping us.

What is that you’re talking about, the one-to-one marketing?

Personalized marketing.

Your customer base or your larger pool of customers that you--.

More relevant, more personalized is all I’m going to tell you, both to our obviously customer database and also to any inquiries, any potential customer.

And in order to put this quarter in to context, it being more warmer unseasonably warmer in the Q3 time period, what did that contribute to the flea and tick sales. How much of a driver was that in the quarter?

It was a significant driver.

In inventories, can you comment about the ability to be opportunistic in this time period, on both the flea and tick and the other side of the business the prescription side?

Opportunities come and go and we’ll take advantage of that when they are there, so nothing really different than previous year so far this year.

That’s what I wanted to hear.

First on the new order sales, was that driven mostly by flea and tick or maybe if you could just shed some color on that? I know looking back a year ago, your new order sales were down 7.5%, so just wondering how much of the easy comparison also helped you achieve a meaningful sales increase.

The flea and tick are up, so we had pretty nice size of growth in the flea category overall, so that helped the new orders and the reorders.

And then as far as the new facility that you will move in to later this year, may be Bruce can you help us understand what’s the incremental depreciation expense that we should be looking for, and as far as the lease payments how do we model that in the other income, if you could just quantify anything that would certainly help us.

We’re predicting, again at this point, we are still working through our estimates. But we got a fairly good hold on the numbers and we feel that the additional incremental revenue that we’re going to receiving is going to be very similar to the offset and increase in depreciation.

And what’s that average life of the building as far as how are you going to be depreciating that over 20 years, what’s the time, so we can --.

It’s somewhere in that range and we’re not going to really go in to the specifics right now. But we’ll add more color in our next conference call for your end, once everything, but we just closed on the building recently.

But that’s probably right maybe a little bit more in 20 years. But we’ll get those specifics down the road.

Bruce just a follow-on that conversation, you spent this money on the distribution facility, largely because you could lower your cost by doing so, is that a fair statement? Will you lower your operating cost apart from all the other cash --?

Yes, for the long term, that’s really the goal, it will definitely be a financial advantage to us. But there will also be some expenses at least in the short run as well that we’re going to have to take on with this facility, but net-net we should be in a better financial position long term.

Short term up, long term down on operating is what I heard you say, is that?

Yes, it’s reasonable.

Going forward, we are focusing on improving our marketing efforts to increase sales and profitability. This wraps up today’s conference call.

Thank you for joining us. Operator, this ends the conference call.