Jan 22, 2018
Executives
Bruce Rosenbloom - Chief Financial Officer Mendo Akdag - President and Chief Executive Officer
Analysts
Kevin Ellich - Craig-Hallum Erin Wright - Credit Suisse Anthony Lebiedzinski - Sidoti & Company
Operator
Welcome to the PetMed Express Incorporated d/b/a 1-800-PetMeds conference call to review the financial results for the third fiscal quarter ended on December 31, 2017. 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 pets medication and other health products for dogs and cats direct to the customer. 1-800-PetMeds markets its products through the national advertising campaigns, which direct our consumers to order by phone or on the Internet, aimed to increase the recognition of PetMed family of brand names.
1-800-PetMeds provides an attractive alternative for obtaining pet medication 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, Bruce Rosenbloom.
Please go ahead.
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 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, our President and Chief Executive Officer of 1-800-PetMeds.
Mendo Akdag
Thank you, Bruce. Welcome everyone 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, 2017 to last year's quarter and nine months ended on December 31, 2016.
For the third fiscal quarter ended on December 31, 2017, our sales were $60.1 million compared to sales of $52.9 million for the same period the prior year, an increase of 13.7%. For the nine months ended on December 31, 2017, sales were $206.5 million compared to sales of $186.1 million for the nine months the last year, an increase of 10.9%.
The increases in sales were due to increases in new order and reorder sales. The average order value for the quarter was approximately $86 compared to $81 for the same quarter the prior-year.
For the third fiscal quarter, net income was $9.1 million or $0.44 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 88%. For the nine months, net income was $27.1 million or $1.33 diluted per share compared to $16.3 million or $0.80 diluted per share a year ago, an increase to net income of 66%.
The accelerated increase to net income was mainly due to higher gross profit margins. In addition, the new tax law helped boost our earnings for the quarter, by approximately $1.7 million or $0.08 diluted per share.
New order sales increased by 15.5% to $9.2 million for the quarter compared to $7.9 million for the same period the prior year. For the nine months, the new order sales increased by 12.7% to $36 million compared to $31.9 million for the same period last year.
Reorder sales increased by 13.4% to $50.9 million for the quarter compared to reorder sales of $44.9 million for the same quarter the prior-year. For the nine months, the reorder sales increased by 10.6% to $170.5 million compared to $154.2 million for the same period a year ago.
We acquired approximately 106,000 new customers in our third fiscal quarter compared to 99,000 for the same period the prior-year. And we acquired approximately 408,000 new customers in the nine months compared to 388,000 for the same period a year ago.
For the quarter, approximately 84% of our sales were generated on our website compared to 83% for the same quarter last year, which resulted in a 15% 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 third fiscal quarter, our gross profit as a percent of sales was 36.5% compared to 31.5% for the same period a year ago.
For the nine months, our gross profit as a percent of sales was 35.3% compared to 30.7% for the nine months a year ago. The shift in sales to new generation medications with higher margin, the trend we have seen in the prior three quarters, continued in the December quarter.
Our general and administrative expenses as a percent of sales was 9.7% for the quarter compared to 10.1% for the same quarter the prior-year. And for the nine months, it was 8.8% compared to 9.2% for the same period a year ago.
We were able to leverage the G&A with increased sales. For the quarter, we spent $4.1 million in advertising compared to $3.2 million for the same quarter the prior-year, an increase of 30%.
For the nine months, we spent $14.9 million for advertising compared to $13.3 million for the nine months a year ago, an increase of 12%. We increased advertising to stimulate new order sales.
Advertising cost of acquiring a customer for the quarter was $39 compared to $32 for the same of the prior-year. And for the nine months, it was $37 compared to $34 for the nine months of the prior-year.
The increase is mainly due to increases in advertising cost. We had $81 million in cash and cash equivalents and $21.9 million in inventory, with no debt as of December 31, 2017.
Net cash from operations for the nine months was $35.1 million compared to $31.6 million for the nine months last year. Due to the tax reform act of 2017, we're anticipating an effective income tax rate of approximately 34% for the March 2018 quarter and approximately 24% for the next fiscal year.
This ends the financial review. Operator, we're ready to take questions.
Operator
[Operator Instructions]. Our first question is coming from Mr.
Kevin Ellich from Craig-Hallum. Kevin, your line is now open.
Kevin Ellich
Thank you. Good morning, guys.
Mendo, I guess, I just wanted to start off with the gross margin. Another really strong quarter.
It doesn't seem like we're seeing much seasonality in the business these days, but should we start thinking that gross margins are going to continue expand by 200, 300, 400 basis points each quarter?
Mendo Akdag
We're in our off-peak season and typically gross margins are higher in off-peak season than the peak season. So, the comparisons are going to get tougher as we go along.
So, our gross margins increased in the last four quarters, like, 500 basis points, I guess, for the year. So, it will be tougher to continue that going forward.
Kevin Ellich
Got it. I would think in the off-season, you're not seeing as much in terms of the sales of the new generation or next generation products, but that trend has continued.
Would you say that's true?
Mendo Akdag
That is correct, yes. In the flea and tick category, there is a shift in sales from low-margin topicals to higher margin, next-generation medications, and that's really the main reason for increasing the gross profit margins.
Kevin Ellich
Okay. Yup, that makes sense.
And then, customer acquisition costs was up about 22% this quarter. Do you think that trend is going to continue?
I think you gave the reason being this higher advertising expense.
Mendo Akdag
Yes. There is a cost increase per impression.
So, I would anticipate that there is going to be some increase compared to the last year.
Kevin Ellich
Okay, great. And then, I guess, one quick one for Bruce.
Obviously, we're all expecting tax rate to come down in the next calendar year, but can you explain what the benefit was this quarter? How that happened?
Bruce Rosenbloom
Sure. As you know, we were a full 35% federal taxpayer.
What we have been applying has been a 35% rate for the first half of the year, for the first six quarters. Once the tax law was enacted, we're allowed to prorate that rate.
So, we had nine months of 35%, one month at 21%, which is a prorated 31.5%. We're able to apply that to the nine months and that's going to be the federal rate moving forward for the fourth quarter.
Once our fiscal year ends at March 31, 2018, we'll then apply for that full year of fiscal 2019 a 21% federal rate.
Kevin Ellich
Okay. But for fiscal 2019, you want us to use 24%.
Bruce Rosenbloom
Right. That's the blended effective rate that includes state tax as well.
Kevin Ellich
Okay, great.
Mendo Akdag
Yes. That includes state income tax.
Kevin Ellich
Okay. One last one for me.
Are you seeing any changes in the competitive dynamics or increased competition from any of the other online retailers?
Mendo Akdag
It's similar to the, I would say, prior two quarters. It's impacting our cost in advertising a little bit.
That's one of the reasons the cost is up in advertising.
Kevin Ellich
Okay, great. Thanks, guys.
Operator
Our next question is coming from Erin Wright from Credit Suisse. Erin, your line is now open.
Erin Wright
Great, thanks. How would you characterize your current relationship with third-party distributors as well your direct relationship with any on the vendor side?
I guess, have you been able to establish any sort of direct manufacturer relationship? Has anything changed meaningfully on that front to facilitate a, I guess, greater access to a more diverse portfolio?
Thanks.
Mendo Akdag
Our relationships with our vendors are very good, I would say. There is some changes happening, but we may disclose that in our 10-K in May.
Erin Wright
Changes as it relates to third-party distribution or manufacturer direct relationships?
Mendo Akdag
Direct relationships.
Erin Wright
Okay, thanks.
Bruce Rosenbloom
As far as access to products, we carry a full line of all the most popular pet medications. So, access isn't necessarily the issue.
You're just talking about more direct relationships.
Erin Wright
Right, okay. Great, thanks.
I guess, has anything changed in sort of your advertising strategy since the advertising spend has come up or is it just sort of a competitive response to the market at this point?
Mendo Akdag
With higher margins, we can afford to pay more to acquire a customer. So, our thresholds have changed a little bit due to the high margins.
Erin Wright
And then, on tax reform, I guess, I see the dividend hike today, but how should we think how this will impact your capital deployment priorities overall? Thanks.
Mendo Akdag
We're in maintenance stage now as far as capital deployment is concerned, so as far as our infrastructure is concerned. But during normal course of business, we do look at opportunities.
So, if something happens, obviously, you guys will hear about it.
Erin Wright
Do you anticipate that you will be active from an M&A standpoint? Are there opportunities or pipeline out there?
Mendo Akdag
I wouldn't call it an active. I would just say during normal course of business, we always looked at opportunities and will continue to do that.
Erin Wright
Okay, great. Thank you.
Mendo Akdag
You're welcome.
Operator
[Operator Instructions]. Our next question is coming from Anthony Lebiedzinski from Sidoti & Company.
Anthony, your line is now open.
Anthony Lebiedzinski
Thank you. Good morning.
And thank you for taking the questions. So, obviously, you've had a few quarters of very positive shift towards the higher-margin next generation medications.
Do you have any sense, Mendo, as to what percentage of your customers have already made that shift to the next generation medications?
Mendo Akdag
We do have some sense, but I'm not going to share that with you. So, I think the shift probably will continue for another couple of years.
Anthony Lebiedzinski
Okay, great. Thanks for that color.
And I was wondering if you could any sort of sense as to how much of your sales are coming from your mobile app and are there any planned improvements to the app that could perhaps make it even easier to customers to order?
Mendo Akdag
We're working on the second-generation of the app, which should go live, I believe, within the next six weeks. It's growing, but it's still not – still it's in the infancy.
But as the consumer using more and more of the mobile phone, we think it's going to be important for the future.
Anthony Lebiedzinski
Got it. Okay.
Thanks very much.
Operator
We show no further questions in queue at this time. I would like to hand the call over to the speakers.
Go ahead.
Mendo Akdag
Thank you. For the remainder of fiscal 2018, we'll continue to focusing 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.
Operator
And that concludes today's conference. Thank you for participating.
You may now disconnect.