PETS - NASDAQ

Greetings and welcome to PetMed Express First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder this conference is being recorded. It is now my pleasure to introduce your host Reed Anderson with ICR. You may begin.

Thank you, operator, and I'd like to welcome everybody here today to the PetMed Express fiscal first quarter 2025 earnings conference call. Certain information that will be included during this call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934 as amended 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 results could differ materially from those projected. There can be no assurance that any forward-looking results will occur or be realized and nothing contained in this presentation is or should be relied upon as a representation or warranty as to any future matters, including any matter in respect of the operations or business or financial condition of PetMed. PetMeds undertakes no obligation to update publicly these forward-looking statements based on subsequent events, except as may be required by applicable law, regulation or competent legal authority. We've 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 turn the call over to our CEO and President, Sandra Campos. Sandra?

Thanks, Reed, and thank you to everyone for joining our conference call this afternoon. Following my remarks, Christine will provide an overview of our financials, after which we will open the lines for your questions. As we close out the first quarter of our fiscal year 2025, it's important to note that Q1 results reflect a transition quarter for the company. May was my first full month as CEO. And during the quarter we added several highly experienced executives from top-tier retail background. We added a new Chief Marketing Officer, a new Chief Operating Officer and a new Chief Digital and Technology Officer all of whom joined our executive ranks in May and June. As we continue to strengthen our organizational leadership, we're also excited to welcome Doug Krulik as our new Chief Accounting Officer starting August 19th. Doug brings more than 20 years of leadership experience in accounting operations, compliance and internal controls, aligning with our focus on enhancing operational excellence and strengthening financial governance. Additionally, we've been strategic in adding new independent directors to the Board and we're pleased to welcome Justin Mennen and Leah Solivan as new Independent Directors. Their extensive expertise in digital technology, innovation and cybersecurity will greatly benefit our transformation efforts and will help us address the significant long-term opportunities in this $150 billion pet care market. Today I'll begin with a review of our recent performance and the results from the first quarter. However, my primary focus will be on the strategic initiatives that we are implementing to reposition the company for future success. Our new leadership team is taking significant actions in key areas to drive PetMed and PetCareRx towards growth and profitability. Our focus is on enhancing operational performance, optimizing our cost structure, integrating customer growth and ultimately improving shareholder returns. To be clear, the Q1 financial results do not fully reflect the positive impact of the new team's improvement, which we can in the latter half of the quarter. We've made strong progress on key cost reduction initiatives, including the consolidation and streamlining of operations between PetMed and PetCareRx. Additionally, our new team has begun to advance our customer growth strategies through an evolution of our site, introducing enhanced creative and engaging messaging and targeted effective media spend. Our recent technology improvements will create incremental value through the development of a more seamless customer journey and will facilitate order speed to delivery. We're gaining momentum and we're seeing early signs of improvement in these key leading indicators including increased order values, reduced call weight and handling times and improved margins just to name a few. These key indicators reflect the reversal of previous trends and further validate our strategy to create an ecosystem of products and services for pet’s well-being and longevity. For Q1 fiscal year 2025, our results were below expectations with sales down 13% compared to last year as well as a 230 basis point decrease in gross margin. This decline reflects broader macroeconomic factors, higher consumer promotional usage and specific technological challenges which have and are being addressed. As a bright spot, operational efficiency improved as evidenced by a 20% improvement in inventory turns and an 11% reduction in our ending inventory versus last year. Since I have come on board, I have looked at and will continue to look at all of our metrics to make sure that they align with our competitive set. Several years ago, we redefined what constitutes a new customer, defining it as a customer who had not purchased from us in three years. Utilizing that existing definition we reported 75,000 new customers in the first quarter of fiscal 2025 on the 10-Q. These new customers were achieved despite a 20% strategic reduction, in media spend and that resulted in an 8% improvement in customer acquisition costs. Starting in the second quarter, we will officially update this metric to be more in line with retail industry standards which typically measures new customers on a 12-month cycle. Our focus renames steadfast on the strategic initiatives that are pivotal to repositioning PetMed and PetCareRx for long-term success. Since the first week of July we have seen positive indicators that validate the commercial, operational and financial actions that are being taken. For example, compared to last year our web visits increased by 4%, due to a focus on organic search engine optimization and we had a conversion rate uplift by 12%, as a result of optimization of digital customer experiences. Along with these key metrics, that will continue to improve conversion our media spend was strategically reduced by 20% compared to last year. We have focused our efforts on revising our overall marketing strategy including the realignment of outside agency partners in order to convert leads more efficiently. As a result of these efforts as well as others our average order value and our gross margin have improved month-over-month compared to last year. Over the past three months, my focus has been on optimizing our organizational structure and engaging with our stakeholders both internally and externally. I've dedicated substantial time understanding customer experiences and addressing the operational challenges in our pharmacy, customer call center and fulfillment centers. Our new executive leadership team has been actively involved with me in shaping our transformation strategies. These strategies aim to drive efficiencies, grow our customer base, expand our market share and stabilize our infrastructure. Key elements include an enhanced tech stack, improved data architecture, system upgrades and a modernized customer experience through better site navigation, improved cart and checkout processes and strong SEO-SEM initiatives. Additionally we are implementing a product strategy that includes SKU rationalization and optimization and have negotiated for improved costs across the supply chain. I've engaged with key vendors, strategic partners and many of you are investors to align efforts and drive forward our shared goals. In all of my interactions, I've consistently communicated one message. Our performance over the last several years is not acceptable and the combined enterprise of PetMed and PetCareRx has significant potential for improvement. While the turnaround will take time we believe we are on a clear path to restoring the company to profitable growth with early indicators confirming that our recent actions are yielding positive results. Building on our 28-year legacy and our strong brand equity we are transforming PetMed and PetCareRx into a dynamic ecosystem for pet products and services tailored to meet the evolving needs of today's consumers. During our Q4 earnings call in June, I outlined priorities including the consolidation of PetMeds and PetCareRx for operational efficiencies, reducing costs across both organizations and a continued focus on maintaining a healthy liquidity position. In the second half of Q1, we initiated these efforts, resulting in approximately $5 million in annualized cost savings which we will realize over the coming months. Our balance sheet remains strong and as of the beginning of August we have $53 million in cash and remain debt free. Our focus is firmly on profitability, while enhancing top line revenues. By adopting a more disciplined approach to operating expenditures we are actively reducing our operating expenses. Customer retention initiatives were a priority in June and July, while driving processes and technology improvements and positively influencing our customer experience were top of mind. We will be launching our new acquisition marketing campaigns in August, and we believe that these in combination with the other strategic actions that we're taking will position us to accelerate sales growth and further enhance our profitability. Delivering high-quality customer interactions at every touch point is crucial to our success as a retailer. To achieve this, we're investing in advanced technology-driven marketing solutions designed to enhance every aspect of our customer experience. Our efforts are focused on ensuring that each interaction is seamless, personalized and engaging reflecting our commitment to excellence in customer service. I've partnered directly with our frontline customer success teams to gather invaluable feedback from our customers and users and I've been deeply involved in understanding our customer experiences firsthand. This quarter I spoke directly with valued customers like Michelle and Mike, who told me that they have been loyal patrons for more than five years. Mike highlighted his appreciation for our prescription approval process and Michelle expressed her dog Harper's joy at receiving the surprise treats in every auto ship delivery. Many of our loyal customers have expressed the strong connection that they have with our brand. However, our recent technology disruptions have also provided us with valuable insights into some less positive customer experiences and I spoke directly with several of those customers as well. We have strong into action and are actively addressing both the immediate problems and their underlying causes including issues with order tracking and delivery, delays in our order management system and challenges with self-service such as making changes to orders. Our focus is on implementing solutions that resolve these issues swiftly while also preventing their recurrence in the future. This disruption in the customer experience underscores a vital takeaway, while our brand equity which has been built over 28 years continues to resonate powerfully with our loyal customers we must elevate every interaction for every customer. As I mentioned, we have already begun modernizing our technology for a more streamlined and efficient experience and we are accelerating our delivery process to ensure more timely service. These efforts will both enhance our operational effectiveness and reinforce the trust our customers place in us. In the past five weeks we have achieved several important strategic milestones. We launched 350 SKUs of Hill's and Royal Canin Rx Food an initiative that was in the works for many months and enhanced our competitive position by expanding our prescription food offering. This launch also included a complementary telehealth visit through our strategic partner Vetster which has also seen incremental growth this quarter. Secondly, we're developing strategic partnerships to enhance our ecosystem recently cementing a partnership with a rapidly growing pet moment and grooming franchise as well-groomed whose mission aligns with ours in providing comprehensive and affordable pet wellness solution. We will be integrating grooming and wellness services with our product offerings and the PetMeds and PetCareRx products will be integrated into their company's wellness recommendation engine. This partnership will broaden our brand equity as we continue to meet the customers where they are. It's equally important to reiterate that our efforts to consolidate brands and streamline operations are well underway and the steps we've taken have reduced our operating expenses as I mentioned by approximately $5 million on an annualized run rate basis some of which will be reinvested into growth initiatives. First from an operations perspective we've consolidated our buying IT, digital and marketing teams into a single unified team across those organizations. Second, our fulfillment centers and pharmacies in New York and Florida will operate independently while ensuring that our people, processes and technologies are standardized across those locations thus improving the speed of prescription authorizations and the speed of delivery of orders to our customers. Third and notably, as of July 15, we have modernized our legacy call center system to a state-of-the-art call center technology with an effort to support customer service. From a technology perspective we are concentrating on several key areas to drive both immediate and long-term improvement. For instance, we're accelerating the provider authorization process through our veterinary portal to enable faster Rx approvals while also increasing the speed of order delivery to our customers' homes. This includes increasing the number of pharmacy technicians to expedite approval rate and streamlining the connection between veterinary clinics and our pharmacy to reduce the friction. Over the past three weeks alone our pharmacy teams have reduced few times by 36% and are now processing our orders with greater efficiency. We are just beginning to tap into the long-term potential of PetMed and PetCareRx. This is underscored by the work that we've done over the past few months. Our annual revenues currently represent only a fraction of the U.S. pet market which grew 7% in 2023 and has exceeded $150 billion annually, with a significant portion driven by veterinary care and prescription medication. We aim to ensure sustained growth and a thriving customer community with disciplined execution of our broad roadmap. We are confident that these strategic initiatives that we are diligently implementing across all departments will drive growth, enhance profitability, and will boost key customer satisfaction metrics. With that, let me hand the call over to Christine, so that she can cover the first quarter results in more detail.

Thank you, Sandra. I'll now provide an update on the first quarter fiscal year 2025 results for the quarter ending June 30 2024. Sales were $68 million compared to $78.2 million in the same period last year, a 13% decline driven by lower prescription medication sales. We welcomed approximately 75,000 new customers this quarter, a decrease from approximately 86,000 new customers in the same period last year. Gross profit margin was 26.4% compared to 28.8% in the same quarter last year and 27.3% in the fourth quarter. The decrease year-over-year was primarily due to the higher promotional activity in the most recent quarter as customers use discounts more frequently. Adjusted EBITDA reflected a loss of $1.5 million compared to adjusted EBITDA of $3.1 million for the same period last year. The decrease was driven by lower gross profit. Net income for the first quarter was $3.8 million or $0.18 per diluted share compared to a net loss of $1.1 million or $0.06 per diluted share for the same period last year. The change year-over-year was primarily due to lower gross profit of $4.6 million, offset by a year-over-year decrease in stock compensation expense of $10 million related to the recapture of expense from the departure of the previous CEO and other executives. Turning to the balance sheet. As of June 30th, 2024, we had $46 million of cash and equivalents and no debt. As Sandra mentioned, early in August we have $53 million of cash. We would now like to open the call for questions. And after that, Sandra will provide some concluding remarks. Operator?

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Ryan Meyers of Lake Street Capital Markets. Please go ahead.

Hi guys. Thanks for taking my questions. First one for me just wondering if you can provide a little bit more detail on some of the macro pressures that you guys saw during the quarter that kind of ultimately drove the 13% revenue decline. And then maybe your level of confidence of being able to drive growth back in the business despite any macro pressures that the business might be seeing out there?

I'll take that Ryan. So, first as it relates to macro pressures, there are fewer -- the pet owners are going to the veterinary clinics on a less frequent basis therefore getting less prescriptions and lower prescription than they had in the past. That's one macro issue. We're seeing definite pressure with the consumers as it relates to their spend. And they're just even listening to the customer calls that I've been on for multiple days, I've heard an increased request for promotions, coupons, and other factors that would actually decrease their price on a product. Those are definitely macro issues that are affecting the spend both even though our auto ship is at 56% of our total business, it's definitely affecting what the customers are thinking and how they're thinking about the spend for their animals as well as themselves. As it relates to how confident we feel, again, one of the things that I mentioned is that we are barely scratching the surface at this point in terms of this very large $150 billion sector in this industry. And we are -- we know who are the total addressable market is we know who our customers are and we are very confident in the way that we're actually going about now segment in these customers and being able to truly create a more engaging and seamless experience for them. So, a lot of the technology a lot of the marketing strategies a lot of the customer service that we are delivering and changing to be able to deliver more seamless frictionless and speedier deliveries to the customers. Those we feel very strongly are going to capture more customers and not only new customers but going to continue to increase the frequency of the customers that we can have currently.

Got it. And then if we think about -- you said a little bit of stabilization towards the end of the quarter and then I would presume here into Q2. So maybe how should we think about the revenue if not growth or kind of a slowing decline throughout the rest of this year given you guys have seen some sort of stabilization?

Yes. Well we're seeing the stabilization from revenues this is conversion rates as well as the margins. So the margins have been improving as well month-over-month. So we've seen a consistent uptick from April, May, June to July the gross margin part. So that's actually a very positive improvement as well. On the sales piece, we're seeing a week-over-week continuation to improve. So our conversion rate is continuing to stay pretty consistent and also stabilize, which is an important factor. And on the metrics that I mentioned before changes from a new customer standpoint, as we look at our unique customers and unique transactions over the past two months they've also continued to increase -- also increased versus last year as well.

Okay. Got it. And then last question for me. You called out some technology issues that drove a little bit of a softness during the quarter. Just wondering if you can provide a little bit more detail around what those technology problems were.

We previously mentioned that we had implemented a new order management system earlier in this year January to February. And with that, we had some disruptions that started -- that raised some initial challenges with the customers and that ended up actually having longer hold and wait time for our customer call center as well as our pharmacy that was taking place at the end of the fiscal year going into Q1 of this fiscal year. So April, May, we were seeing those starting to be reduced a bit, but they were pretty significant hold times and wait times. And of course, as we're getting veterinary clinics calling in for pharmacy prescription approvals that was also impacting them as well. But we've already been addressing them. We've started to address it already. We've improved these greatly. Our call times are back down to -- and handle times are actually back down to a very, very normal rate at this point. And we've also -- with the call center technology that I mentioned been able to improve the time and the ability for our veterinary clinic partners to be able to contact our pharmacy and have those prescriptions approved as well on a more-timely basis. So these things that we have seen as it relates to wait time, pull times our order management system that was impacting self-service for customers' accounts on auto ship. Those have been addressed and are being addressed, and we're continuing to look deeply and dive a little bit deeper in terms of each and every area that a customer experiences so that we can improve upon those.

Got it. Thank you for taking my questions.

Thank you.

This concludes our question-and-answer session. I would like to turn the call back over to Sandra Campos for any closing remarks.

Well, thank you for your time and interest in PetMeds and PetCareRx, we greatly appreciate your support. Although, we're still in the early stages of our transformation, as I mentioned, we are already making steady progress on many of the key initiatives discussed today that will drive growth and improve profitability. I want to thank all of our employees for their commitment and dedication to our pet families, their ongoing passion for our business and their understanding and rapid execution of our new priorities. We look forward to updating you on our progress during our next conference call, and we will also be attending a number of investor events during the back half of this year and look forward to seeing you there. Thank you.