Good morning. Welcome to the PetMed Express Incorporated, doing business as 1-800-PET-MEDS, conference call to review the financial results for the second fiscal quarter for the quarter ended on September 30, 2020. As per request of the company, this conference call is being recorded. Founded in 1996, 1-800-PET-MEDS is America’s most trusted pet pharmacy, delivering prescription and non-prescription pet medications and other health products for dogs, cats and horses direct to the consumer. 1-800-PET-MEDS market is product to 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-PET-MEDS provides an attractive alternative for obtaining pet medications in terms 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.

Thank you. I would like to welcome everybody here today. Unfortunately due to a personal matter, Menderes Akdag, our President and Chief Executive Officer is unable to attend this morning’s conference call. I would 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 in our most recent annual report and other filings with the Securities and Exchange Commission. Thank you for joining us, and we hope everyone is continuing to stay safe and healthy. During the September quarter, consumer demand settled down due to a combination of vet clinics and brick and mortar pet retailers opening up and consumers having stocked up in the June quarter. We have been open during our normal business hours without any material disruptions to our operations. We are still taking measures to ensure the health and safety of our dedicated employees by allowing them to work from home where possible and continuing with social distancing and enhanced disinfection in…

[Operator instructions] Our first question is from Eric Wright with Credit Suisse. Your line is open.

Great, thanks. What’s your mix of over-the-counter versus prescription medications now? Has it meaningfully changed here, and can you remind us of the profit profile OTC versus prescription, particularly given this MAP pricing strategy that has been implemented to date?

Sure thing. If you remember the call in the June quarter, we saw an uptick in OTC, a bit of a more uncharacteristic increase. It was different from our normal mix. The September quarter was more of a normalized mix, although we did see a bit of an increase in Rx over OTC, and obviously as we mentioned previously, prescription medications have a higher margin profile than the OTC products.

Would you say that prescription is over half now in terms of--

Over half of our total sales?

Yes.

Oh yes, definitely. Much more than half.

Okay, great. Then on the stickiness of the COVID-driven customer base, how much of there of a paradigm shift to online versus just some stockpiling given COVID? I’m curious how we should be thinking about new customer growth over the balance of the year and what you’re seeing in terms of that COVID-driven customer base.

Right. You know, overall demand has settled down with the combination of vet clinics and brick and mortar pet stores opening up, and also as you mentioned, consumers stocking up in the June quarter. Also, our new website platform might have had a temporary negative effect on our natural search during the quarter, which may have negatively impacted our new order sales in the short term and what we saw in the September quarter. We are now in the second phase of our ecommerce platform. We are now focusing on redesigning our website and mobile app to optimize our customers’ digital experience, which should improve our new customer conversion in the future. As far as COVID, it’s really an unknown right now. Obviously we’re seeing cases increasing overall in a majority of the states in the U.S., so we’ll just have to see how that--how those trends overall affect our business. As of right now, we did see demand settle down with the opening of those clinics and the retail stores, but overall we’ve seen reorders become extremely strong, and it may also be because of the increased new customers that we were able to take in for the first six months of our fiscal year.

Okay, great. Thank you.

Thank you for your question. Our next question is from Anthony Lebiedzinski with Sidoti & Company. Your line is open, sir.

Yes, good morning Bruce, and thanks for taking the questions. I guess my first question, looking back now at the first half of the fiscal year, you mentioned that there was--it sounds like some pull forward of demand in the June quarter. Any way you could possibly maybe try to quantify how much you think you saw pulled forward into the June quarter?

We usually don’t like to quantify to give that information. We do know what that number is internally. Again, it’s also--as we mentioned, we were in the first phase of our website, our new ecommerce platform, so that may have negatively impacted reorders as well, so we have an estimate, there’s a few assumptions involved with that, but we’re not really prepared to give that number out at this time.

Okay, that’s fair enough. As far as the second phase of the website improvement, when do you expect to have that completed?

Our target date is during this third quarter, so hopefully by the end of the year we should be launched fully with both the redesign of the website and also the mobile app.

Got it, okay. Then you mentioned ad spending being up. I know in the past you’ve had increases in costs because of the election. Was the increase in advertising spending because of that, or was there something else going on?

It did have probably a small effect, but I think overall it was more of a normalized increase in overall key word search. That’s the majority of our online spend. Advertising costs increased during the quarter. We saw increased competition with the vet clinics and also increases competition with online keyword searches as well. But we’ll always attempt to be more aggressive during peak season when our demand is strong. As you know, we have a flexible ad budget, and advertising spending is also going to return on the investment.

Got it, okay. Last question from me - now that you’re moving into the offseason, typically the gross margins for you guys are higher in the off-peak second half of the fiscal year, so you had a nice improvement in the gross margin on a year-over-year basis as well as sequentially. With that in mind, should we expect further sequential improvement in the back half of the gross margin, or how should we think about that?

We don’t manage the margins quarter to quarter. As you know, we sort of look at margins on an annualized basis. Annually, there’s an opportunity for modest margin improvement year-over-year and we expect that to continue. If there’s an opportunity to maximize margins, we’re going to go ahead and do that, but also we want to remain competitive with pricing and of course with MAP pricing in place, and we also want to be competitive with the other players in our space as far as promotions and offers. We’ll see how it shapes up, but you’re right - our traditionally--the trends have been historically that margins will rise during the offseason, and that’s also because we tend to see more of a shift to prescription over OTC during those time periods.

Got it, okay. Thank you.

Thank you for your question. As a reminder, if you would like to ask a question, please press star, one and record your name and company to ask a question. Our next question is from Ben Rose with Battle Road Research. Your line is open, sir.

Yes, thank you, and good morning, Bruce. A few questions. First off, in terms of the advertising and promotion this quarter, was there anything done to perhaps incentivize or focus people more on the prescription side of the business, or was this just a natural trend back to your typical mix of prescription versus OTC?

Yes, it was more the movement to our typical trend. Again, we have seen a rising increase in our mix more towards prescription than over-the-counter. Obviously veterinarians are recommending more prescription products more so than OTC, and obviously we prefer to be more skewed towards prescription which have higher margin profiles. It was more of a return to a normalized state, although I did mention prescription medications did see a bit of an uptick during this quarter year over year. I think June was more of an anomaly. I think it was more so with both brick and mortar and veterinarians having limited hours, the new online--new customers moved towards online and those online customers were purchasing over-the-counter products.

Okay, great. Sorry Bruce, just to clarify one thing you said about the website redesign in the first phase, did you say that that may have had a negative impact on the reorder rate this quarter?

Yes, it’s possible. With that new ecommerce platform, it had a negative impact on our natural search, so that took a while to get back to its normalized stage. We’re there currently. We expect with many of the changes we have made, we should see an improvement in our new customer conversion in the future.

Okay. On the inventory situation, it looks like you did work down quite a bit of inventory in the quarter, which was a concern of some heading into this quarter. In your prepared remarks, you mentioned that there were some delays in the slow to medium moving items, which I guess in the grand scheme of things is less concerning. Can you speak to just the overall supply chain environment - you know, albeit heading into the weaker season, but just speak to the confidence of your own ability to procure the lion’s share of the medications that you need.

Right. Again, our inventory will fluctuate based on promotional buying opportunities. We mentioned back in the June quarter, we did make a conscious decision to stock up due to the uncertainty that COVID presented. Overall when there’s a cost advantage, we’ll carry higher inventory. During the pandemic, we did look to carry more inventory to minimize any related delays. We did see those delays in some of our small to medium movers, more manufacturer backorder type delays, also shipment or retime delays. Some of those delays, we should be able to rectify with increased--with an increased inventory purchase, some we may not be able to - they are more manufacturer driven delays, so we’ll see. Where we can stock up, we will. I would not expect a stock-up like we saw in the June quarter, where inventories were in excess of $40 million, but we will try to stock up inventory to make sure that we can minimize any type of COVID-related delays for our customers.

Okay, great. Thanks very much.

You’re welcome.

Thank you for your question. Our next one is from Kevin Ellich with Ace Research. Your line is open.

Hey Bruce, thanks for taking the question. Going back to the new customers that you added for the quarter, it was a little bit lower than we’ve seen in your fiscal second quarter over the last several years. With the V-shaped recovery we’ve seen in vet visits in the September quarter, do you think this is more a function of competition, or what do you think is driving that?

Competition does play a role. I think more importantly it was the combination--as I mentioned, the combination of vet clinics and brick and mortar pet stores opening up. We also had that temporary negative effect on our natural search, which also affected possibly new customers as well. As I mentioned, I think moving into the offseason, we definitely have an opportunity to improve on our new customers. I think overall for the six months, we were fairly satisfied with the result. We’ll continue to make improvements and tweak advertising where need be, and we’ll see if we can rectify that temporary downswing.

Got it. Then one metric I track is new customer transaction size, which seems like it’s down a little bit this year. Do you think that’s more a function of COVID or is it MAP pricing, or all of the above?

Yes, I’m not sure exactly what measures you’re referring to, but overall those definitely have a play when it comes to new order advertise. Also, new orders, we do tend to be a little bit more promotional to attract new customers, to be competitive with others in our space.

Got it, and then lastly capex was a little bit higher this quarter. Is that a function of the website, just some seasonality spend?

Correct, 100%. That was the website, and we really don’t expect any material capital expenditures moving forward, more maintenance mode, and overall it should be fairly minimal.

Got it. Then lastly, again gross margin, much better than expected. I know seasonally Q2 is your strongest quarter probably of the year - well, it’s been a little different the last couple years, but do you think we’ll continue to see that sort of strength for the remainder of the year?

As I mentioned to Anthony earlier, again prices overall stabilized in the market with the manufacturers enforcing the minimum advertised price policies. Our product mix was different from what we saw in the June quarter, so those all contributed to increases to our margins. The bottom line is when we have increased prescription sales, we’re going to probably have higher margins. The one area that could have a negative effect to margins would be promotions for new customers, so if we have a quarter where we’re positive in new customers, that could have a negative impact on margins. But where the gross margins end up with be dependent on our product mix, and again looking at it from quarter to quarter can be difficult; but I think overall, year-over-year we expect to see modest improvements in margins.

Sounds good, thank you.

You’re welcome.

Thank you for your question. We have a follow-up from Erin Wright with Credit Suisse. Your line is reopened.

Great, thanks for taking the follow-up, Bruce. Has anything changed in terms of your manufacturer relationships - any new relationships or is it relatively status quo, and were there increases in MAP pricing? How do those contracts typically work?

Right. Again, when we talk about the manufacturers, direct relationships with manufacturers, it’s really talking about the large five manufacturers there. We do have direct relationships which many, or at least two or three were initiated in 2019, so yes, we do have contractual relationships with them. They have been enforcing MAP pricing, which has stabilized prices in the online space, and what’s helpful when they have their pricing--when manufacturers increase their prices, they also increase MAP, so that also helps as well as far as margins and also the price of inventory.

Okay, great. Thanks. Then a one-off question here, just on generics. Do you have any metrics on the generic prescription dispensing rate versus brands, and has that changed at all given the manufacturer relationships?

Yes, we do, and not materially. Many of the manufacturers prefer us to promote their brands, and they will give us incentives to promote their brands over generics. But I would say our generics are up year over year, but overall it’s still about the same as a percentage of sales.

And there’s still no, I guess seamless way to do generic substitutions, correct?

The current rules and regulations, the pharmacy rules and regulations definitely prohibit that seamless generic substitution that is present for human pharmacies and for human physicians, so if there is a change, we do have to go back to the vet for their approval. That does make it a little bit more difficult, but for the most part our relationships with the vets are probably at the best point it’s ever been. Our authorization rates are probably at a current peak, and so when we do go back to the vet for a generic substitute, more often than not that answer is yes.

Okay, great. Thank you.

Thank you Erin.

Thank you for your question. I will now turn our call back over to Bruce Rosenbloom, the company’s Chief Financial Officer, for closing remarks.

Thank you. In fiscal 2021, we are focusing on redesigning our website and mobile app to optimize our customers’ digital experience. Thank you very much. This wraps up today’s conference call. Thanks for joining us. Operator, this ends the conference call.

Thank you all for participating in today’s conference call. You may now disconnect.