PetMed Express Q1 2025 Earnings Call Transcript

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Provided by Quartr
August 6, 2024

There are 5 speakers on the call.

Operator

Greetings and welcome to PetNet 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.

Operator

You may begin.

Speaker 1

Thank you, operator. And I'd like to welcome everybody here today to the PatMedxXpress fiscal Q1 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.

Speaker 1

Actual results could differ materially from those projected. There can be no assurance that any forward looking results will occur or be realized. Nothing contained in this presentation is or should be relied upon as a representation or warranty as to any future matter, including any matter in respect to the operations or business or financial condition of PetMeds. 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 have identified various risk factors associated with our operations in our most recent annual report and other filings with the Securities and Exchange Commission.

Speaker 1

Now, let me turn the call over to our CEO and President, Sandra Campos. Sandra?

Speaker 2

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 Q1 of our fiscal year 2025, it's important to note that Q1 results reflect a transition quarter for the company. May was my 1st full month as CEO and during the quarter we added several highly experienced executives from top tier retail backgrounds. 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 June.

Speaker 2

As we continue to strengthen our organizational leadership, we're also excited to welcome Doug Kralik as our new Chief Accounting Officer starting August 19. That 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 Menon and Leah Soliban as new independent directors. Their extensive 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 $150,000,000,000 pet care market.

Speaker 2

Today, I'll begin with a review of our recent performance and the results from the Q1. 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 PetMeds and PetCareRx towards growth and profitability. Our focus is on enhancing operational performance, optimizing our cost structure, invigorating 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 improvements, which began in the latter half of the quarter.

Speaker 2

We've made strong progress on key cost reduction initiatives, including the consolidation and streamlining of operations between PetMeds 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 wait 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 pets' well-being and longevity.

Speaker 2

For Q1 fiscal year of 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've 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 3 years.

Speaker 2

Utilizing that existing definition, we reported 75,000 new customers in the Q1 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 Q2, 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 remains steadfast on the strategic initiatives that are pivotal to repositioning PetMeds and PetCareRx for long term success. Since the 1st week of July, we have seen positive indicators that validate the commercial, operational and financial actions that are being taken.

Speaker 2

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 3 months, my focus has been on optimizing our organizational structure and engaging with our stakeholders, both internally and externally.

Speaker 2

I've dedicated substantial time to 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.

Speaker 2

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 PetMeds 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're transforming PetMeds 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 consolidation of PetMeds and PetCareRx for operational efficiencies, reducing costs across both organizations and a continued focus on maintaining a healthy liquidity position.

Speaker 2

In the second half of Q1, we initiated these efforts, resulting in approximately $5,000,000 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 $53,000,000 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 July, while driving processes and technology improvements and positively influencing our customer experience were top of mind.

Speaker 2

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 and 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 understanding our customer experiences firsthand.

Speaker 2

This quarter, I spoke directly with valued customers like Michelle and Mike, who told me that they have been loyal patrons for more than 5 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 sprung 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.

Speaker 2

Our focus is on implementing solutions that resolve these issues swiftly while also preventing the 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 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.

Speaker 2

In the past 5 weeks, we have achieved several important and 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 wellness and grooming franchise with Wellgroomed, whose mission aligns with ours in providing comprehensive and affordable pet wellness solutions. 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.

Speaker 2

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 $5,000,000 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 both organizations. 2nd, our fulfillment centers and pharmacies in New York and Florida will operate independently while ensuring that our people, processes and technologies are standardized across both locations, thus improving the speed of prescription authorizations and the speed of delivery of orders to our customers. 3rd 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.

Speaker 2

From a technology perspective, we're concentrating on several key areas to drive both immediate and long term improvements. 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 customer homes. This includes increasing the number of pharmacy technicians to expedite approval rates and streamlining the connection between veterinary clinics and our pharmacy to reduce the friction. Over the past 3 weeks alone, our pharmacy teams have reduced queue times by 30 6% and are now processing our orders with greater efficiency. We are just beginning to tap into the long term potential of pet meds and PetCareRx.

Speaker 2

This is underscored by the work that we've done over the past few months. Our annual revenues currently represent only of the U. S. Pet market, which grew 7% in 2023 and has exceeded $150,000,000,000 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.

Speaker 2

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 to Christine so that she can cover the Q1 results in more detail.

Speaker 3

Thank you, Sandra. I'll now provide an update on the Q1 fiscal year 2025 results for the quarter ending June 30, 2024. Sales were $68,000,000 compared to $78,200,000 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 4th quarter.

Speaker 3

The decrease year over year was primarily due to the higher promotional activity in the most recent quarter as customers used discounts more frequently. Adjusted EBITDA reflected a loss of $1,500,000 compared to adjusted EBITDA of $3,100,000 for the same period last year. The decrease was driven by lower gross profit. Net income for the 1st quarter was $3,800,000 or $0.18 per diluted share compared to a net loss of $1,100,000 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 4,600,000 dollars offset by a year over year decrease in stock compensation expense of $10,000,000 related to the recapture of expense from the departure of the previous CEO and other executives.

Speaker 3

Turning to the balance sheet. As of June 30, 2024, we had $46,000,000 of cash and equivalents and no debt. As Sandra mentioned, early in August, we have $53,000,000 of cash. We would now like to open the call for questions and after that Sandra will provide some concluding remarks. Operator?

Operator

And our first question will come from Ryan Myers of Lake Street Capital Markets. Please go ahead.

Speaker 4

Hey guys, thanks for taking my questions. First one for me, I was 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 into the business despite any macro pressures that the business might be seeing out there?

Speaker 2

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 have 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 promotion, coupons and other factors that would actually decrease their price on a product.

Speaker 2

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 their 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 $150,000,000,000 sector in this industry. And we know who are the total addressable market is. We know who our customers are. And we are very confident So a lot of the technology, a lot of the marketing strategies, a 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.

Speaker 2

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 do have currently.

Speaker 4

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 slowing decline throughout the rest of this year, given you guys have seen some sort of stabilization?

Speaker 2

Yes. We're seeing the stabilization from revenues versus 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.

Speaker 2

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 metric that I mentioned before changing from Okay

Speaker 4

Okay. And your deal has

Speaker 2

also increased versus last year as well.

Speaker 4

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

Speaker 2

We previously mentioned that we had implement the 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 times 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.

Speaker 2

We've started to address it already. We've improved these greatly. Our call times are back down to and the 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 that 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, hold times, our order management system that was impacting some self-service for customers' accounts on AutoShip, 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.

Speaker 4

Got it. Thank you for taking my questions.

Speaker 2

Thank you.

Operator

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

Speaker 2

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.

Speaker 2

Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

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Earnings Conference Call
PetMed Express Q1 2025
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