May 8, 2017
Executives
Bruce Rosenbloom – Treasurer, Chief Financial and Accounting Officer Mendo Akdag – President and Chief Executive Officer
Analysts
Kevin Ellich – Craig-Hallum Capital Group Anthony Lebiedzinski – Sidoti & Company
Operator
Thank you, everyone, and welcome to the PetMed Express Incorporated doing business as 1-800-PetMeds Conference Call to review the financial results for the fourth fiscal quarter and fiscal year ended March 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 pet medications and other health products for dogs and cats direct to the customer. 1-800-PetMeds markets its products through national advertising campaigns, which direct customers to order by phone or on the Internet and to 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. At this time, I’d like to turn the call over to the Company’s Chief Financial Officer, Mr.
Bruce Rosenbloom. Bruce, you may begin.
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 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, President and Chief Executive Officer of 1-800-PetMeds. Mendo?
Mendo Akdag
Thank you, Bruce. Welcome, and thank you for joining us.
Today, we will review the highlights of our financial results. We’ll compare our fourth fiscal quarter and fiscal year ended on March 31, 2017 to last year’s quarter and fiscal year ended on March 31, 2016.
For the fourth fiscal quarter ended on March 31, 2017, our sales were $63 million compared to sales of $55.4 million for the same period the prior year, an increase of 14%. For the fiscal year ended on March 31, 2017, sales were $ 249.2 million, compared to $234.7 million for the prior fiscal year, an increase of 6.2%.
The increases in sales for the quarter and the fiscal year were due to increases in new order and reorder sales. The average order value was approximately $86 for the quarter compared to $83 for the same quarter the prior year.
For the fourth fiscal quarter, net income was $7.5 million or $0.37 diluted per share, compared to $5.4 million or $0.27 diluted per share for the same quarter the prior year, an increase to net income of 38%. For the fiscal year, net income was $23.8 million or $1.17 diluted per share compared to $20.6 million or $1.02 diluted per share a year ago, an increase to net income of 16%.
The accelerated increase in net income for the quarter was mainly due to increases in gross profit margin as a result of sales shifting to higher-margin items. New order sales increased by 17% to $10.9 million for the quarter compared to $9.4 million for the same period the prior year.
For the fiscal year, new order sales increased by 10% to $42.9 million compared to $39.1 million for the prior year. Reorder sales increased by 30% to $52.1 million for the quarter compared to reorder sales of $46 million for the same quarter the prior year.
For the fiscal year, reorder sales increased by 5.5% to $206.3 million compared to $195.6 million for the prior year. We acquired approximately 126,000 new customers in our fourth fiscal quarter compared to 116,000 for the same period the prior year.
And we acquired approximately 514,000 new customers in the fiscal year compared to 489,000 for the prior year. For the quarter, approximately 83% of our sales were generated on our website compared to 82% for the same period the prior 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 seasons, with fall and winter being the offseasons.
For the fourth fiscal quarter, our gross profit as a percent of sales was 35.1% compared to 31.9% for the same period a year ago. For the fiscal year, our gross profit, as a percent of sales was 31.8% compared to 32.5% for the prior year.
The percentage increase for the quarter can mainly be attributed to a shift in sales to higher-margin items, and the percentage decrease for the year can mainly be attributed to additional discounts given to customers to increase sales. Our general and administrative expenses, as a percent of sales, was 8.9% for the quarter compared to 9.3% for the same quarter the prior year, and for the fiscal year, was relatively flat at 9.2% compared to 9.1% for the prior year.
For the quarter, we were able to leverage the G&A with increased sales. For the quarter, we spent $4.4 million in advertising compared to $3.7 million for the same quarter the prior year, an increase of 17%.
For the fiscal year, our spending was $17.7 million for advertising compared to $21.8 million for the prior fiscal year, a decrease of 19%. The decrease for the year was due to us discontinuing advertising that was not cost-effective.
Advertising cost of acquiring a customer for the quarter was approximately $35 compared to $32 for the same quarter the prior year. And for the fiscal year, it was $34 compared to $45 for the prior fiscal year.
We had $58.7 million in cash and cash equivalents, and $20.2 million in inventory, with no debt as of March 31, 2017. Net cash from operations for the fiscal year was $47.2 million compared to $21.1 million for the prior fiscal year.
The majority of the increase was due to an increase in accounts payable and a reduction in inventory, in addition to an increase in net income. Capital expenditures were $10.6 million for the fiscal year, updating our infrastructure in our new facility.
This ends the financial review. Operator, we’re ready to take questions.
Operator
Thank you. We’ll now begin the question-and-answer-session of today’s conference.
[Operators Instructions] And first question is coming from Kevin Ellich. Your line is now open.
Kevin Ellich
Good morning, Mendo. Thanks for taking the questions just a few for you.
Starting with gross margin, you called out product mix shifts. Could you give us a little bit more color, in terms of what you’re seeing?
Are you guys selling more of the oral flea and tick products? Can you give us any specifics behind I guess, any of that shift?
Mendo Akdag
All I’m going to say is there’s a shift to new generation medications.
Kevin Ellich
Okay. That’s fine.
And then, customer acquisition cost did increase about 8% as you called out. What drove that increase?
Is it really the – I know you guys are shifting to more online advertising versus TD, but what drove that increase? And how should we think about that going forward?
And I have one follow-up.
Mendo Akdag
In the quarter, we spent about 17% more in advertising. So when you spend more usually, it’s going to be less cost-effective.
So the cost typically increases.
Kevin Ellich
There was – just to be clear, there was no shift back to TV or anything like that?
Mendo Akdag
No.
Kevin Ellich
Okay, great. And then the competitive landscape, just wondering what’s going on or what’s your view is given Amazon announced they’re shutting down Quidsi, which has wag.com and then Chewy got acquired by Pet Smart, so what’s your big picture for the business and the industry?
Mendo Akdag
As far as the M&A [indiscernible] it depends on what they do differently, if anything. So it remains to be seen.
The competition was fairly similar in the March quarter to what we experienced same period last year. And as I pointed out, there’s the shift to new generation medication.
Kevin Ellich
Okay. Thank you.
Mendo Akdag
You’re welcome.
Operator
Thank you. The next question is coming from Erin Wright from Credit Suisse.
Erin, your line is now open.
Unidentified Analyst
Hi, this is actually Hong on for Erin. Thanks for taking the questions.
And just a couple from us. Can you talk about sort of what drove the uptick in new customers this quarter?
Was it sort of the new advertising initiative or better attraction on existing advertising? Do you think it’s clearly, it’s on the underlying demand trends and drove broader pet ownership?
And should this be the run rate that we think about going forward?
Mendo Akdag
We spent more in advertising, about 17% more. And the weather was probably warmer and it might have played a role, West Coast was colder, but the rest of the country was warmer compared to the same quarter last year.
Unidentified Analyst
Okay, great. Thank you.
And how much of your prescription business is generics? And do you sort of think they played a meaningful role?
Mendo Akdag
We do not disclose that.
Unidentified Analyst
Okay, great. Thanks for taking my questions.
Mendo Akdag
You’re welcome.
Operator
Thank you. The next question is coming from Anthony Lebiedzinski from Sidoti & Company.
Anthony, your line is now open.
Anthony Lebiedzinski
Thank you. Good morning.
Just a couple of questions, and thanks you for taking the question. So first, I just wanted to get little bit more as far as reasons for the average order value increase.
Mendo Akdag
It’s higher-priced items, the sales shift to higher-priced items.
Anthony Lebiedzinski
Okay. And as far as the – looking at the gross margin increase and then you called out in the script, meant obviously for the quarter higher-margin items drove that.
However, if I look at the first quarter through the third quarter, you did have pressure on the gross margin due to additional discounts. So kind of going forward, how should we think about it, the gross margin?
Is the – is this trend towards higher-margin items sustainable? Or is this more of a – kind of a one-off quarter?
And then how are you thinking about discounting on a go-forward basis?
Mendo Akdag
Going forward, it’s going to depends on the sales product mix and how the competition behaves, pricewise. So it’s difficult to say.
Anthony Lebiedzinski
Right, right. Now in the past, typically, you’ve seen lower margins in your summer because of the flea and tick season.
Is that something that you still anticipate?
Mendo Akdag
That trend should continue. Yes, we do anticipate that.
Anthony Lebiedzinski
Okay, great. And lastly, just as a quick balance sheet question.
So you called out the increase in accounts payable, it’s quite a bit higher versus a year ago. Was this just a timing issue?
Or is there anything else there that we should know about?
Mendo Akdag
I would say just the timing issue. Do you have anything else?
Yes, just the timing issue.
Anthony Lebiedzinski
Okay, all right. Thank you.
Mendo Akdag
You’re welcome.
Operator
[Operator Instructions] Our next question on queue is coming from Kevin Ellich. Kevin, your line is now open.
Kevin Ellich
You guys have answered a lot of the questions, but just one on cash flow. Clearly a very strong cash flow quarter for you guys.
Could you prioritize your – the uses, you had to pay down many debt? And then Bruce, could you put any goalpost around expectations for your free cash flow this year and CapEx?
Mendo Akdag
As you know, we are paying dividends, so it’s $0.20 for this quarter now. We have a stock buyback plan, which we haven’t used in a while.
We have – our CapEx, it’s going to be in a maintenance mode, it will probably be, just to give you a rough idea, $0.5 million to $1 million range for this fiscal year.
Kevin Ellich
Is that quarterly or for the full year, Mendo?
Mendo Akdag
For the full year.
Kevin Ellich
For the full year, got you. And then lastly, do you have any target objective for advertising spend for the year?
Mendo Akdag
We are anticipating that we’re going to spend more money on advertising compared to the last fiscal year. We will carry out that will depend on return on investment.
Kevin Ellich
Can you tell us what the benchmark or hurdle is that you’re looking for that return?
Mendo Akdag
No. I’m not going to comment on that.
Kevin Ellich
Thank you.
Mendo Akdag
You’re welcome.
Operator
We show no further questions on queue. I will turn the call over then to Mendo.
Mendo Akdag
Thank you. In fiscal 2017, we are focusing on continuing to increase sales and improve our service levels.
This wraps us today conference call. Thank you for joining us.
Operator, this ends the conference call.
Operator
That concludes today’s conference. Thank you for your participation.
You may disconnect at this time.