Welcome to the PetMed Express, Inc. doing business as 1-800-PetMeds conference call to review the financial results for the third fiscal quarter ended December 31, 2018. 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 nonprescription pet medications and other health products for dogs and cats direct to the consumer. 1-800-PetMeds markets its products through national advertising campaigns, which direct consumers to order by phone or on the Internet, and aim to increase the recognition of the PetMeds' family of brand names. 1-800-PetMeds provides an attractive alternative for obtaining pet medications in term of convenience, price, ease of ordering and rapid home delivery. At this time, I would like to turn the call over to the company's Chief Financial Officer, Mr. Bruce Rosenbloom. Please go ahead.

Good morning. Welcome to the PetMed Express conference call. As requested, this -- at the request of the company, this conference call is being recorded. I'd like to welcome everyone today. Before I turn the call over to Mendo, our Chief -- our President and Chief Executive Officer, I'd 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 on our most recent annual report and other filings with the Securities and Exchange Commission. Now let me introduce today's speaker, Menderes Akdag, President and Chief Executive Officer of 1-800-PetMeds. Mendo?

Thank you, Bruce. Welcome, everyone, and thank you for joining us. Today, we will review the highlights of our financial results. We'll compare our third fiscal quarter and 9 months ended on December 31, 2018, to last year's quarter and 9 months ended on December 31, 2017. For the third fiscal quarter ended on December 31, 2018, our sales were flat at $60.1 million compared to sales for the same period the prior year. For the 9 months ended on December 31, 2018, sales were $218.9 million compared to sales of $206.5 million for the 9 months last year, an increase of 6%. The increases in sales for the 9 months were due to increases in reorder sale. The average order value for the quarter was approximately $84 compared to $86 for the same quarter the prior year. The decrease was due to more aggressive pricing. For the third fiscal quarter, net income was $7.8 million or $0.38 diluted per share compared to $9.1 million or $0.44 diluted per share for the same quarter the prior year, a decrease to net income of 14%. For the 9 months, net income was $31.1 million or $1.52 diluted per share compared to $27.1 million or $1.33 diluted per share a year ago, an increase to net income of 15%. The decrease to net income for the quarter was mainly due to lower gross profit margin. Reorder sales increased by 4.6% to $53.3 million for the quarter compared to reorder sales of $50.9 million for the same quarter the prior year. For the 9 months, the reorder sales increased by 9% to $185.9 million compared to $170.5 million for the same period a year ago. New order sales decreased by 26% to $6.8 million for the quarter compared to $9.2 million for the…

[Operator Instructions] And our first question comes from Kevin Ellich from Craig-Hallum.

So a few questions. I guess, let's start off with the competitive landscape. Clearly, there's lot of pricing competition out there from some of the other online retailers and maybe even the vet channel themselves. Wondering what you're doing or what you plan to do to offset or mitigate the competition of you then just continuing the discount and offer a lower price.

We're going to be competitive price-wise. And we'll increase advertising and use our competitive strengths. Prescription sales are much more difficult operationally compared to over-the-counter. We have 20-plus years of experience dispensing prescription, and we're known to the public as pet medication experts. Also we have great service. We have the best guarantee in the markets. Our net promoter score is at 81%, so we'll use our strengths to get our shareholder market.

Got it. Okay. And then gross margin down 420 basis points on a year-over-year basis. Clearly, there -- I assume the pricings had an impact there, plus we he saw a nice acceleration in the gross margin over the last 12, 18 months. Are we at a new level? Or do you think we should see gross margin tick back up with the peak season coming up in the next couple months?

It is going to depend on the competitiveness of the market, so it's difficult to say.

Okay. That's helpful, kind of. And then sales -- your marketing and advertising efforts, you talk about increasing advertising, but yet the actual spend itself was down on a year-over-year basis and sequentially. I mean, how will you manage that? And how should we think about the different media venture that you're planning to go after?

We're going to increase advertising offline, so our advertising mostly was online during the December quarter. So we'll add offline advertising in this quarter that we're in.

Okay. And then new order sales was up, but it's decelerated a bit. And then new customer acquisitions as well as new customer acquisition costs continue to go up, while the number of new order sales are going down. Do you think that's going to continue for the foreseeable future? I guess, how should we think about that going forward?

There was a double-digit cost increase online -- on the online advertising during the quarter, so it will depend on how we deal with the offline advertising.

Okay. And then lastly, 2 last quick ones for me. Ability to source products, can you comment at all about inventory and purchasing directly to manufacturers? Are you seeing more of that? Has that changed over the last 3 months since the last time we spoke to you?

It has not changed in the last 3 months.

Okay. And then lastly, balance sheet. Balance sheet cash continues to build. Wondering what the plans are for uses of your free cash flow and debt and cash on hand.

Currently, we're paying dividends and we have about $10 million remaining in our stock buyback plan. And also we do look at acquisition opportunities during the normal course of business.

And our next question comes from Anthony Lebiedzinski from Sidoti & Company.

So just wanted to ask about the performance of the next-generation medications. If you could just kind of -- I don't know if you are prepared to give us any [Audio Gap] performance of those products. But any color as to what you're seeing as far as the adoption rate, whether that's slowing or not, that'd be very helpful.

It's increasing, but the shift slowed down. And also newer generation medications have become more price competitive.

Got it. Okay. And as far as your product strategy, so you -- obviously, when you move to your new facility, you significantly upgraded your infrastructure. Certainly, you have the capacity there to bring in some new products. So just wondering, do you have any plans to perhaps add some new product categories to try to offset some of the competition that you're seeing in your core products?

Not at this time. Our focus is going to continue to be medications.

Got it. Okay. All right. And then I guess, I was -- given your cash position and your recent performance, I was surprised that there was no announcement about a share buyback program. If you could just -- I know you addressed this in the previous question, but maybe if you could expand on that as to what the board's thoughts are on that.

I don't want to speak for the board, so we'll let the market know and if it happens.

And our next question comes from Erin Wright from Crédit Suisse.

Where are you at now with the transition to offline advertising? And is it a complete shift is what you anticipate? Or will we see gradual over time and how you expect sort of that transition to resonate and relative to your prior offline advertising strategy? And how is that sort of strategy transitioning relative to your expectations?

First of all, it's not going to be a shift. It's going to be an add-on, additional advertising offline. It will likely mainly going to be television and some direct mail print.

Okay. And then you've mentioned potential M&A. I mean, does -- when do acquisitions just make more sense for you? Is it just compounded valuation? Or what is the acquisition pipeline potentially look like?

It comes down to valuation.

Do you see any sort of meaningful opportunities out there at all?

Not at this time.

Okay. And then lastly, do you have any sort of early signs on the flea and tick season for this year with just weather patterns that you're seeing or initial feedback from customers?

Well, at this time, weather is cold, so it is what it is. But typically, flea and tick season starts in March, so we'll see how the weather is in March.

[Operator Instructions] And our next question comes from Kevin Ellich from Craig-Hallum.

Mendo, just a couple of follow-ups. So first, average order size of $84 declined 2.3% year-over-year. I think that's the first time in several years we've seen a decline. Wondering if it's just the pricing environment, the competitive environment or is there anything else going on why average order size declined?

It's the pricing. So it's the price reduction that caused it.

Okay. That's helpful. And then just wondering if you can comment at all about how January and the year started off for you guys, if the competitive landscape is still what it was or if it's gotten even more competitive since the quarter ended. Just curious if you have any color you can share with us.

It's about the same as how it was in the December quarter.

And as of the moment, we show no further questions in queue. I would now like to turn the call over to President and CEO, Mendo Akdag, for the closing remarks.

Thank you. In 2019, we will continue to be aggressive with pricing and promotions and increase advertising to stimulate sales. This wraps up today's conference call. Thank you for joining us. Operator, this ends the conference call.

And that concludes the conference for today. Thank you for your participation. You may disconnect now.