PETS - NASDAQ

Greetings and welcome to PetMed Express Second 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 second 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's. PetMed's 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?

Thank you, Reed, and welcome to everyone joining our call this afternoon. Following my remarks, Robyn will provide a more detailed overview of our financial results, after which we'll open the floor to questions. I've been in the CEO role for six months and in that time we've sharpened our focus on core priorities and targeted operational initiatives, strategically expanding our vision to become a leader in consumer pet healthcare. Through our products and services, we aim to be essential partners for pet parents, supporting them and enhancing their pet's wellness and longevity. I want to reemphasize that our focus remains steadfast on the strategic, operational and financial initiatives that are pivotal to repositioning PetMed and PetCareRx for long term success. I am pleased to report several positive developments this quarter. We improved gross margin year-over-year and sequentially and achieved a $3.6 million sequential increase in adjusted EBITDA. Additionally, G&A operating expenses declined underscoring the impact of our cost reduction initiatives which are on track to deliver the $5 million in annualized savings as we communicated last quarter. These improvements contributed to an increase in net income and earnings per share and reflect our commitment to building a strong financial and operational foundation for long term growth. Beyond our financial progress, we've made significant strides on key priorities in our strategic plans with a strong focus on cost efficiency and operational excellence. First, our management team. With the addition of our new CFO, Robyn D'Elia, who joined in mid-September, our refreshed executive team is now complete. Robyn brings over 24 years of financial leadership experience from Bed Bath & Beyond, where she played a key role during sustained periods of exponential growth, helping the company expand from a regional retailer into a multibillion dollar national enterprise. Her expertise in financial discipline, operational rigor and technical accounting aligns perfectly with our strategic objectives at PETS. Second, the consolidation of PetMed's and PetCareRx across functions and continued cost optimization. We streamlined resources across both organizations and I'm pleased to report that this initiative is largely complete. As previously mentioned, we're on track to achieve the $5 million in annualized cost savings we outlined and with the elimination of redundancies that contributed to margin improvements in Q2. We continue to assess our cost structure for additional opportunities to reduce expenses and we expect to operate at a lower cost base going forward. Third, operational excellence. While operational excellence is an ongoing initiative, we're encouraged by early wins across the organization including year-over-year gains in average order value and gross margin in this quarter. These early indicators reflect a shift towards greater efficiency and a stronger focus on customer centric value. We prioritize seamless customer service across every touchpoint. For instance our customer call center. Our improvements have led to a 4.5-star customer rating on Trustpilot as end of October versus 1.5 stars at the beginning of June. The team under Caroline Conegliano's leadership has been vigilant about providing a positive customer experience. While we still have opportunities during the third quarter, we have been able to improve phone abandonment rate by 41% while focusing on our staffing model and enhanced training to increase service levels and upskill agents. Technology. We strengthened our tech stack with improved data architecture, upgraded business intelligence reporting, added central fill pharmacy routing and enhanced cybersecurity. This quarter we also strengthened our relationship with veterinarians, a critical stakeholder for PETS, by redesigning our prescription flow which has led to a user increase of 9%. Rebranding. Our updated tagline Care You Trust is now reflected across the PETS brands. We have a new look inclusive of color and visual imagery and a new brand voice on all platforms. Modernized website. Our website has been relaunched with a modern UX UI interface design. The new site provides a personalized, streamlined shopping experience enabling customers to find products more quickly and easily navigate the purchase journey. I am proud of the tech team under Umesh Sripad's leadership and in partnership with software development partner Encora who worked expeditiously to deliver an upgraded and stable platform. With this solid foundation, we can now enhance the user experience by adding an AI enhanced product recommendation engine, Buy Now, Pay Later solutions, cross-sell upsell capabilities along with our updated mobile app, all of which are planned to go live in Q3. While it's still early to quantify all of the related KPIs, we anticipate positive trends including lower bounce rates, higher conversion rates and increased order value. As a consumer focused pet healthcare company, we stay closely attuned to our customer's needs. We've refined our product assortment to align more closely with consumer demand and recurring shopping intent by reducing redundancy while adding exclusive and new products, several of which we plan to launch before Black Friday. These foundational improvements set the stage for our next phase focused on growth initiatives. First, marketing will play a pivotal role here. After emphasizing retention and operational upgrades in Q1 and Q2, we're now prepared to increase investment in our gross marketing spend to drive new customer acquisition along with reengaging lapsed customers. Next, our new content site, pethealthmd.com launching later this month will focus on rich educational content, SEO and driving additional new customer growth. Additionally, strategic partnerships that expand our ecosystem for pets well-being and longevity are key to our long term growth strategy. These currently include telehealth through Vetster, pet insurance and grooming services. Through all of these efforts, we've gained a deeper understanding of our market positioning and the evolving needs of our customers. Our stellar pharmacy business remains one of our strategic differentiators. The PETS value lies in the unique advantages of our RX pharmacy with expert pharmacists and licensed technicians who have decades of experience with the company. Importantly, our pharmacy licenses across all 50 states gives us a competitive advantage. We prioritize autoship as a means to create convenience and recurring revenue that drives long term value for our customers and our shareholders. With the RX business at the center of our value proposition, we see a substantial opportunity to broaden our positioning as a trusted consumer pet healthcare company. This enhances our growth potential and aligns with our mission of helping pets live healthy and happy lives. We've developed deep knowledge and expertise over nearly 30-years and continue to be trusted by millions of customers. While the turnaround will take time, we're encouraged by the early key indicators that show we are on a clear path to restoring the company to profitable growth and increasing shareholder value. Before I conclude my remarks, I want to acknowledge the efforts of our team, our customers, and the local communities that supported animal shelters and rescues in need after experiencing nearly back to back hurricanes between September and October. At PETS we are proud to have contributed our time and financial resources by distributing product donations across various locations in our home state of Florida and are providing financial support to shelters located in additional states that were impacted. These organizations are a vital part of our extended ecosystem and we greatly appreciate their commitment to improving animal welfare. With that, I will turn it over to Robyn to discuss our financial results in more detail.

Thank you, Sandra. I will now provide an update on second quarter fiscal year 2025 results for the period ending September 30, 2024. We welcomed approximately 77,000 new customers this quarter. Sales were $60 million compared to $71 million in the same period last year, a 16% decline reflecting continued consumer pressure as well as an intentional reduction in our marketing investment as we rebalanced for profitability. Gross Profit margin was 29.1%, an 80 basis point improvement compared to the prior year quarter and up 270 basis points sequentially. The year-over-year increase in the gross profit margin was primarily due to a favorable sales mix and lower discount activity. General and administrative expenses for the second quarter were $10.5 million versus $12 million last year, a 12.3% decrease. This year-over-year improvement was driven by a decrease in stock based compensation expense which was primarily related to an executive departure. Also contributing to the benefit were lower payroll and payroll related expenses and lower transaction processing fees partially offset by higher professional fees. Included as a benefit to G&A for the second quarter were sales tax settlements of $1.2 million and $1.3 million for this year and last year respectively. Our advertising expenses for the second quarter were $4.6 million compared to $5.5 million last year. On a gross spend basis, this 20% reduction reflects an intentional decrease in our marketing investment as we rebalanced for profitability and solidified our go-forward brand strategy. Net income for the second quarter was $2.3 million or $0.11 per diluted share compared to net income of $0.7 million or $0.03 per diluted share for the same period last year. The improvement in net income was mostly driven by a $1.4 million tax benefit in the latest quarter. Adjusted EBITDA of $2.1 million compared to $3.4 million in the prior year period and improved sequentially versus the $1.5 million adjusted EBITDA loss we reported in the first quarter, reflecting continued progress on cost reduction initiatives. Our balance sheet remains strong and as of September 30, 2024 we had $52 million of cash and cash equivalents and no debt. We would like to now open the call for questions and then after that Sandra will provide some concluding remarks. Operator?

[Operator Instructions] Our first question comes from Ryan Meyers with Lake Street Capital. Please proceed with your question.

Thanks for taking my questions. First one for me. I know you guys don't give guidance and aren't giving guidance, but if we think about the two consecutive quarters of double digit revenue decline, maybe how should we think about the growth rate for the second half of the year? Have you guys seen any sort of stabilization in the top line of the business? I know you're making a decent amount of marketing investments, but just directionally, how should we think about the growth rate in the second half of the year?

Yes, thanks Ryan for asking the question. So first of all, as we mentioned, we intentionally reduced the marketing spend, but we are pushing now going after full customer acquisition and that will happen in the third quarter, as well as the fourth quarter. That goes along from top of the funnel to the bottom of the funnel activities which will be brand awareness focused and transactional focused around all the products that we have, our key product differentiators and our key campaign for Q3, which will take us straight through the holidays. So as we look to the stabilization of where we are now, we focused on our lapsed customers, we focused on retaining customers, and now it's really about the new customer growth. So that's where we're pushing all of our marketing efforts starting in the Q3 time period and really accelerating that more so as we go into Q4, there'll be a substantial increase from Q3 going into Q4.

Okay, got it. And then thinking about gross margin for the quarter, obviously that came in pretty healthy. Should we kind of look at that as a sustainable rate going forward? Is there going to be any changes from Q3 and Q4? Maybe how should we think about where the gross margin came at for the quarter and how we should look at that for the rest of the year?

Yes. So gross margin for the quarter, as we indicated was up 80 basis points. But we're heading into a heavier promotional period, as Sandra indicated. And I think historically, if you look at our trending, it is - Q3 is a lower quarter from a gross margin perspective. So I think I would just kind of follow our trending in the past just knowing that we're going to more heavily invest in our marketing.

Got it. And then last question for me. Thinking about kind of some of the macro dynamics impacting the business. Walk us through that, is it just you're not seeing as many customers maybe ordering as many products as they have before. Customers are ordering products from a different competitor. Just kind of walk us through those.

Sure. The customers feel very pressured. That is something that we're seeing consistently, whether it's through the visits that we have and the time they're spending on the site or the comments and questions and ask for promotional codes as they're coming onto our customer call center site. Additionally, when we do have promotions and it has been a very heavily promotional environment, if you look at just across our competitive set, that's when we actually have a lot more conversion during those time periods. So we know the customer is showing us and telling us that they are looking for more promotional codes and more heavily discounted products. So that we're definitely seeing, we do believe, and we continue to speak with not only our veterinary advisory board, but also within our own pharmacy and the calls that we're getting from both veterinary clinics as well as the customers that there are not as - they're not as compliant as they've been in the past as it relates to the medication and they are reducing frequency to the veterinary clinics overall. So that is definitely impacting us a bit more. But that's why we're focusing now on the new customer growth and the new customer acquisition.

Great. Thank you for taking my questions.

Thank you.

This concludes the question-and-answer portion of our call. I will now turn it back to Sandra for closing remarks.

Thank you. And thank you for your time and interest in PetMed's and PetCareRx. We really appreciate your support. Although we're still in the early stages of our transformation, as I mentioned, we have made steady and measurable progress on many of the key initiatives discussed today that will improve customer experience, drive new customer growth and improve profitability. I want to thank all of our employees for their commitment and the dedication to our core mission, their ongoing passion for pet health and wellness, and their understanding and rapid execution of our new priorities. We do look forward to updating you on our progress during our next conference call, and we thank you very much.