PetMed Express, Inc. Price & Performance (PETS)

Certain information included during this call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And the Securities Exchange Act of 1934 as amended. May involve a number of risks and uncertainties. These statements are based on our beliefs, well as assumptions we have used based on 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 matter including any matter in respect of the operations or business or financial condition of PetMeds 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 other competent legal authority. We have identified various risk factors associated with our operations our most recent annual report and other filings with the Securities and Exchange Commission. 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, Robin will provide a detailed overview of our financial results after which we'll open the lines for your questions.

Over the past nine months, I have emphasized that our focus remains steadfast on the strategic initiatives pivotal to repositioning PetMed and PetCareRx for long term success. I have clearly outlined our vision to position While we're still in the early stages of this transformation and have much more work ahead, I am pleased to report that we have made significant progress in validating our strategic direction. We're confident that the actions we're taking will drive differentiation and sustainable growth. Our highest priority has been to return the company to profitability. We achieved this by implementing cost cutting measures and consolidation to integrate PetCareRx operations into the PetMed's organization targeting $5,000,000 in annualized savings and we remain on track to meet this milestone. For this quarter, Q3, We achieved $2,000,000 in adjusted EBITDA representing a $1,100,000 improvement Year over year, while lowering G and A expenses by $2,600,000 compared to last year. As we continue to execute our turnaround strategy, we remain committed to driving shareholder value through growing our customer base, operational discipline, and financial efficiency. PetMed parents. We're continuously enhancing the digital shopping experience to provide convenient access to pet health solutions. Second, our veterinarian partners Our investments in Rx approval efficiency through an optimized vet portal are driving increased adoption and streamline [indiscernible] And third, [indiscernible] Dogs, cats and horses, that we love and care for.

Innovation is at the heart of our approach, ensuring that we offer proven premium health solutions across all categories and life stages. Expanding our customer base and increasing market share remains a top priority. To grow and acquire customers, as a digital retailer, we require a modernized tech stack experience that meets evolving customer expectations. We have made meaningful progress in this area including website and mobile enhancements, where we executed a full website refresh in November and also relaunched our iOS and Android mobile apps. We implemented Buy Now Pay Later as a new payment option at checkout expanding on affordable and accessible choices for our consumers. And in collaboration with our veterinary advisory board, we're continuing to enhance our veterinary portal and also launched pethealthmd.com, an educational platform offering expert backed pet health guidance. These improvements led to 84,000 gross new customers or 63,000 new customers that had orders shipped during the quarter. Our gross order average order value or AOV increased by 7% at $108 versus $101 last year, while our shipped order AOV rose by 4.3%, of $97 versus $93 year over year. We are committed to pet health and wellness through product differentiation, and best in class customer service, Our SKU optimization strategy ensures that we offer comprehensive health across all life stages, while maintaining strong margins and growth thresholds.

To enhance efficiency, eliminated 4,000 underperforming SKUs making room for high value products that align with our strategy and also resonate with consumers. Notably, our inventory efficiency has improved. With inventory turn rising to 1.5 in Q3 compared to 1.1 in Q2 and 0.9 last year. This improvement comes alongside totaling $11,800,000 at the end of our third quarter versus $34,600,000 last year. During Q3, we advanced our customer call center operations by integrating an AI driven workforce management tool to flex and scale our agent population and adapt to changing volumes. Helped us improve our key metrics such as increased sales per agent of 18.8% a 3.4% increase in AOV average order value for orders driven by the call center. During our last earnings call, I highlighted our focus on retention, and the operational upgrades that laid the foundation for future growth. While we intended to ramp up performance marketing efforts, in this quarter, we encountered a highly competitive and promotional holiday environment particularly between Black Friday and year end. With real time insights, we made the strategic decision to prioritize margin protection over aggressive promotions ending the quarter with $2,800,000 less in gross advertising spend year over year.

As a result, our sales and new customer acquisition during that period fell short of initial expectations. However, this intentional pivot was necessary in order to maintain financial discipline. Recognizing the need for a marketing strategic reset, we are refining our approach to ensure sustainable profitable growth. Our top of funnel initiatives such as radio and connected TV continue to promote our Care You Trust message and establish brand authority and brand awareness. This is a long term investment. And we've recently begun and includes things like sports team partnerships, [indiscernible] billboards and local pet adoption events. All of which we've done in this quarter. We are refining acquisition strategies by rolling out a new email design system, and creating stronger segmentation, personalization and dynamic content across our paid platforms. Early indicators show promise with revenue per email increasing 9% in the month of January. Engagement rates have increased quarter over quarter that would be inclusive of open rate, click through rate, revenue per email. Through stronger content and more relevant branding. We believe this is a strong indicator of future conversion improvements. Beyond customer facing upgrades, we have strengthened our core systems with strategic technology investments to ensure a resilient, and secure digital ecosystem for customer data and privacy.

Over the past seven months, we resolved OMS issues that previously impacted performance and continued to modernize our tech stack. In mid November, we successfully replatformed our AutoShip recurring and have seen improvements in auto ship sign ups and credit card rejection rates. Although still in early age tracking, our new website performance shows PDP views increased by 30% bounce rates declined by 6.5 basis points and channel visits increased 7.6% year over year. This growth in visits was offset by lower conversion and we are actively addressing those conversion rate challenges through search functionality improvements PDP enhancements and visible promotions. Looking ahead, the competitive landscape remains dynamic, we we are executing a disciplined transformation that prioritizes the customer experience. From order placement to last mile delivery, while simultaneously enhancing the infrastructure necessary to support this. We believe these efforts will drive sustained growth customer loyalty and increased shareholder value. In the short term, we anticipate increased investments to enhance the customer engagement customer acquisition, and the underlying infrastructure needed. We will continue to strengthen vendor partnerships and expand our portfolio with science backed veterinary recommended products Across [indiscernible] Rx products OTC over the counter, and our food categories. We remain focused on capturing our share of the companion animal health market by refining our customer experience, optimizing our product mix and strengthening the customer acquisition strategies.

As we build a stronger, more efficient organization, we stay true to our core purpose, ensuring pets have homes, and live healthier, happier lives. This commitment extends beyond our business as we actively support shelters, and provide aid to pet communities impacted by the LA wildfires Reinforcing our dedication to pet welfare and the people who care for them. With that, I'll turn the call over to Robin for a more detailed review of our financial results. Thank you, Sandra. I will now provide an update on third quarter fiscal year twenty twenty five results for the period ending 12/31/2024. Net sales were $53,000,000 compared to $65,300,000 in the same period last year, a 19% decline primarily driven by a 34% reduction in gross advertising as we rebalanced for profitability. We welcomed approximately 63,000 new customers who received an order from us this quarter. Gross profit was $14,900,000 versus $17,900,000 last year. As a percent of sales, gross profit this year was 28.1% an 80 basis point improvement compared to the prior year quarter due to a favorable sales mix and lower discount activity, similar to what we saw in Q2. General and administrative expenses for the third quarter were $10,800,000 versus $13,400,000 last year a 19.7% decrease.

This year over year improvement was driven by a decrease in stock based compensation expense a decrease in payroll and payroll related expense and to a lesser extent, a decrease in credit card processing fees driven by lower sales. Our advertising expenses for the third quarter were $3,000,000 compared to $5,800,000 last year. This decrease can be mainly attributed to lower gross media spend and a higher proportion of that spend being funded by third party partners. As Sandra mentioned, we purposely pulled back our marketing efforts to reset our marketing foundation and improve profitability for the quarter. Net loss for the third quarter was $700,000 or $0.03 per diluted share a meaningful improvement compared to the net loss of $2,000,000 for the same period last year. Adjusted EBITDA of $2,000,000 compared to $900,000 in the prior year period. Our balance sheet remains strong As of 12/31/2024, we had $50,000,000 of cash and cash equivalents and no debt. We would now like to open the call for questions. And then after that, Sandra will provide some concluding remarks. Operator, Thank you.

We will now be conducting a question and answer session. And our first question comes from the line of Aaron Wright with Morgan Stanley.

Great, thanks. I wanted a quick housekeeping one before before I get into it. On the new customer or count numbers, I guess do you have just want to make sure we're comparing apples to apples kind of on a year year basis, but do you have growth rates around and how you're kind of defining the different categories from a customer standpoint?

From a customer perspective, on the new [indiscernible] we had 63,000 new customers in this quarter. [indiscernible] Okay. Okay. Just wanted to clarify that. And then on the SKU count rationalization, so does that meaningfully impact your overall kind of revenue growth or have you quantified that I mean, I assume it's underperforming SKUs, but how do we think about that? And then also the flow through from a mix perspective?

Yes. It actually did not really impact the revenues. A lot of those SKUs happen to be SKUs that were drop shipped from drop ship vendors. As well. And so they were not impactful. It was very minimal in terms of any impact over the year. But for the most part, when we look at the SKU optimization, it was [indiscernible] tracking to products that actually heads consistent sales over three, four five and six months time period. So anything beyond that that has not seen consistent sales was where we were reducing. So it was definitely not impacting our sales.

Okay, great. And then just thinking about sort of the underlying backdrop in the market, like how do you how would you characterize kind of the trends you're seeing from a customer per perspective and how they're responding maybe to price increases across kind of pet prescriptions that we've been seeing and hearing about even year to date? And how you're thinking about kind of the outlook of the market, just generally speaking, And then if I could sneak one last one in there. Just on the cost savings, obviously, you've executed on that. And what's left in terms of the lingering cost savings from the PetRx or PetCareRx transaction? Thanks. Let's start with the second one first. [indiscernible] as we look at our cost optimization and the strategies that we've employed on folding PetCareRx into the organization, we still have more that we are deliberately working on now and that not only just includes the first phase that we did and executed, which had to do with people, technology, some technology as well as some outsourced agencies that we're duplicating. But in addition to that now, as we go into Phase two and the second part of it, it actually is more of the technology reduction consolidation that actually will continue to show an improved balance in terms of what our expenditures are.

Do you want to add anything to Robin? No, that's right. That's right. And it's a strategy that will take us [indiscernible] a couple of quarters to execute. Sorry. Okay. So that was a question number two. Going back to question number one. It is without a doubt that the customer continues to be pressured. [indiscernible] as we know, we're seeing a bit more stabilization as it relates to adoption and pets in general. But we're still seeing that there are reduced visits to the veterinarian. There's some reduced prescriptions. We have not seen our UPTs on Rx and Pharmacy actually change from a year ago. So it's still they're still buying the same amount of time and frequency per year. So still about 2.7 times a year that the average prescription they're coming back to get a prescription again and that fluctuates based on seasonality, if per se, but yes, they are absolutely pressured in terms of where they're spending, how they're spending. And we are seeing a bit more as it relates to opening price points take over some of the more premium price points.

That said, we still have a higher household income consumer who spends who has a household income over $100,000 in that $100,000 to $150,000 and $150,000 plus thousand dollars household income is continuing to spend and does not have and is not exhibiting some of behavior that other customers are with regards to not being in compliance on the prescription and less than on their products. That relates specifically to pharmacy.

Okay. Thank you.

Thank you. Our next question comes from the line of Ryan Ayers with Lake Street Capital Markets. Please proceed with your question. Hey guys, thanks for taking my questions.

And Sandra, this is kind of a follow-up from the last question that you had as far as just what you're seeing across your core consumer and them kind of being a higher household come, but that said, I mean, we've now seen three consecutive quarters of over double digit revenue declines. I know you guys are pulling back a little bit on the marketing spend, which is impacting the revenue growth. But can you kind of talk about what else you're seeing here as far as driving the softness Well, our softness as it relates to where we've been and you've heard me talk about this a bit as well.

One of the reasons that we actually modernized our website is because we have not captured a younger, more millennial or Gen Z consumer.

So as we think about not only what's happening from a consumer behavior standpoint, people are taking longer to have children and or their PetMed are becoming their children and they're spending more in [indiscernible] and those pets or their children, essentially in the millennial and gen Z demographic. So we are modernizing, we are fine tuning our messaging, our content, all of the different platforms in which we are competing so that we can actually capture that customer. That's not where we've been as a business over many years.

So for us, we're actually transitioning that. And as we transition away from a core customer that may have been a little bit older, that new to one-eight hundred PetMed brand, because of all those many years, obviously twenty eight years worth of great heritage company has had.

We're trying to also make sure that we're capturing the millennial and Gen Z consumer who is spending, who is focused on more digital experiences, who is buying online, is accustomed to it, and that's what you're seeing now. As we've repositioned our marketing, and the efforts on marketing that goes into content It goes into the different channels in which we show up and we know and understand that this is going to take and require multiple touch points that the consumer is going to see [indiscernible] before they actually start to engage and then convert.

Got it. And then as we think about the rest of this year and into next year, when you guys are well capitalized with $50,000,000 of cash on the balance sheet, I mean, how are you evaluating investing more heavily into marketing, kind of running more promotions really to try to revenue growth back into the business or even just new customer growth back into the business. Any commentary there would be helpful.

Yes. We definitely think about capital allocation and of course how to drive our transformation faster As Sandra mentioned, right on the marketing front, we are resetting, I would say, that's a marketing foundation. So we want to do it in a way that's smart, that's going to be the most beneficial in terms of the ROI. We have to kind of set the foundation and get ready to go. Additionally, we're investing in our customer experience It's critically important that we have the right product assortment We can get to the customer faster and that the customers have ease of use on our site.

And so we're going to continue to make those foundational investments And then we can really would say, open the flood gates to some extent, right, and start spending more heavily in the marketing area. And Ryan, I would just add to what Robin said just to double click on this [indiscernible] in today's environment and the consumer expectations that you're going to get product day or within two days. And so she was just mentioning last mile delivery as another key target, key focus area for us. We are focused on that customer experience, which has so many different legs to this, and we need to make sure that we are delivering on a timely basis as well. So those investments are coming. We're actually investing in that in this quarter of Q4 as well as starting to increase more on marketing as we go forward.

Great. Thanks for taking my questions.

Thank you. And just to conclude, we have We have reached the end of the question and answer session. I'll now turn the call back over to CEO, Sandra Campos for closing remarks.

Thank you and thanks for the questions for the time and the support of PetMed. We understand that this is a transformation on many levels It is steady and the key initiatives that we discussed today are about prioritizing profitability and the customer growth. Lastly, I just want to thank all of our employees for their constant commitment and the dedication to our customers, the pets that we serve and to our shareholders. We look forward to continuing to update you on our progress during our next conference call. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.