Welcome to PetMed's conference call to review the financial results for the second fiscal quarter ended on September 30, 2021. At the request of the company, this conference call is being recorded. Founded in 1996, PetMed is America's most trusted pet pharmacy, delivering prescription and nonprescription pet medications and other health products for dogs, cats and horses direct to the customer. PetMed markets its products through national advertising campaigns which direct customers to order by phone or on the Internet to increase the recognition of the PetMed brand name. PetMed provides an attractive alternative for obtaining pet medications in terms of convenience, price and ease of ordering and rapid home delivery. At this time, I'd like to turn the call over to the company's Chief Financial Officer, Mr. Bruce Rosenbloom.

I would like to welcome everybody here today. 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. Let me now introduce our newly appointed CEO and President, Matt Hulett. Matt?

Thanks, Bruce. Good morning, and thank you for joining us. My name is Matt Hulett, and I'm the new CEO of PetMed. I'm incredibly honored and enthusiastic to join this iconic company, and I'm excited to be on this earnings call today. I would like to begin by thanking Bruce Rosenbloom for acting as interim Chief Executive Officer prior to my arrival. Before we update you on our progress on Q2, I would like to first share my personal thoughts and motivations regarding why I'm so optimistic about PetMed in our future. First, I'd like to introduce you to my dog, Harry, who's featured on this slide. He's the latest addition to our family and he's also a puppy. In fact, Harry is the first dog for my family. Our family had no idea what we were getting ourselves into. It's like having a newborn again, and as many of you fellow pet parents know, puppies can be challenging. We also can't imagine not having Harry in our lives, and we think of him as a member of our family. Personally, it is fulfilling to be involved in an organization where you can spend your time and energy on a business that has a positive social impact on society, while you are focused on generating returns for shareholders. Now that we've established my personal connection to the business, I'd like to spend some time walking through the rationale as to why I believe PetMed is a great long-term investment. Having a large addressable market is important. It enables more optionality for new brands and products to be developed. It provides more opportunity to develop a myriad of go-to-market strategies, targeted at different cohorts of customer segments. This also means that there's room for more market participants and for those market…

Thanks, Matt. Now we'll review the financial results. We will compare our second fiscal quarter ended on September 30, 2021 to last year's quarter ended on September 30, 2020. And in some cases, we'll refer back to September 30, 2019. Similar to the quarter ended June 30, 2021, we faced a unique situation comparing 2 totally different environments between 2020 pandemic and 2021 post pandemic. We were coming off a strong September quarter last year, which was primarily driven by increased e-commerce demand as a result of the pandemic, which caused many retail stores to close and many veterinarians to be unavailable. However, during the most recent quarter, while the pandemic was abating and retail stores and veterinarians were open for business, the advertising market continued to surge with increased demand, dramatically driving up CPC and CPM rates by more than 50%. As a result, we spent approximately 33% less in advertising due to these cost increases. For the second fiscal quarter ended on September 30, 2021, sales were $67.4 million compared to sales of $75.4 million for the same period the prior year, a decrease of 10.7%. But sales were only down 3.6% versus the quarter ended September 30, 2019, prior to the pandemic. The decrease in sales was due to decreases in both new order and reorder sales. Our sales were negatively impacted by a much more competitive market in a crowded advertising space with substantially higher costs compared to the same quarter last year. In addition, during the past 6 months, there was a dramatic increase in veterinarian visits by both pet owners who are unable to visit their veterinarian during the pandemic. We believe the increase in veterinary visits was primarily due to pet owners needing to visit their veterinarians for their pet exams and to…

[Operator Instructions] And our first question is from Anthony Lebiedzinski from Sidoti.

Yes. So welcome, Matt, and welcome back Bruce, too. So as far as new order sales. I mean, obviously, you guys did have certainly felt the impact of the advertising market being lower. But the -- kind of what gives you confidence that things will bounce back in the back half of the fiscal year? Just curious as to what's driving that. And maybe, perhaps, are you seeing some good results -- better results so far in the current quarter? I was just wondering about your confidence level about your ability to bounce back with the new order sales.

Anthony, this is Matt. And thanks for the question. Great to hear from you again. And then Bruce, feel free to chime in. A couple of things about that. One is, I would say that we're taking a small bite too fast approach to looking at our new customer acquisition. We basically rewired our entire marketing partnerships and agencies in the last, I would say, well, I've been here 2 months, though, we've done that in the last 4 weeks. And that will be rolling out very soon. So we're looking at our capital allocation spend to where we spend. I think we've been spending too aggressively in some channels where we haven't seen the return and we haven't been taking advantage of new sources of traffic where we actually think we have a lot of advantage. That's one. Two, is we're spending a lot more time rewiring our system and databases around tracking our customers better and really focusing on reengagement. And for rates in general, we are seeing some changes to the rates out there. I think some of the channels like Facebook have obviously gotten more expensive due to the loss of first-party data due to the Apple IDFA decision. So those are some channels that obviously, I think, are just still getting hotter in terms of increased CPMs and CPCs. But in others, we're seeing favorable trends. So it depends on the channel. But for us, we're really looking at each channel and seeing how we get incrementality out of each channel, which is different than what we did in the past.

Okay. Got it. Okay. And then in terms of your gross margins, you did mention that you have been shipping more items like specialty dog, which obviously is much heavier than the typical pet medication. So as we look to refine our models here, like how should we think about it as you -- on the one hand, it sounds like you're doing a good job with increasing your AOV, but how is the margin -- gross margin impact going to be because of that?

Yes, Anthony, I'm going to take that question, if you don't mind. As far as our margins to those past quarter, we have, as we maybe have spoken off-line before, but our vendors shifted funding to our co-op marketing in lieu of discounting products and just negatively impacted our gross margins during the quarter. And it will probably be like that going forward where instead of getting price discounts off the price of the items or the inventory, these rebates and these promotions are going to be below the line as a -- in the advertising line item. So as far as moving forward with gross margins, that you'll see that as an overriding factor. But however, as we've also seen our ship moving back to more prescription than OTC, we do expect a positive trend in margins moving forward because of that going back to some sense of normalcy pandemic versus post-pandemic when it comes to our mix shift of items.

Okay. Got it. And then so in terms of the capital allocation, just curious to get your thoughts, Matt, as far as looking at pets for years, the company has a been a company with a lot of cash in growing the dividend and started maintaining a very healthy cash position. Just wanted to get your thoughts about that as should we -- how should we think about that, especially the dividend? What are your thoughts there?

Yes, I think there are several things to unpack there. It's a great question. I've been a long listener of Pet's earnings calls as well. So I'll try to give a slightly different answer. I'd say with the dividend, we're always looking at that, and it's always subject to change, but we've been pretty consistent with the dividend and nothing to announce here, obviously. But to your cash question, with over $100 million in cash with interest rates being so low, there -- I think there's a lot of opportunities in this space to deploy cash and allocate capital more efficiently to get higher returns. There's also a lot of businesses in the pet ecosystem that, fortunately, in this market, different than other verticals, there's a lot of ways to partner, a lot of ways to look at M&A as well. So we're certainly going to be looking at those in the future since we do have such a large cash position. And lastly, it's a little early for me to articulate the strategy. I have been around for 2 months. I think the first 4 weeks felt like 6 months because there was a lot to do and learn and now I'm kind of settling in and feeling better about things. But yes, I think there's a lot of opportunity to deploy capital differently, especially given the tailwinds in pet ownership. So that's kind of a nonanswer answer, Anthony, other than I think we're taking a fresh look at that. And I would expect that we will make some decisions in the coming quarters that we'll obviously update everyone on.

And our next question is from Steph Wissink with Jefferies.

The first is I wanted to just go back to some of the comments in your prepared remarks around vet visits. And I think I heard you correctly that there's an inverse correlation, meaning when vet visits go up, you tend to see vets sell prescription and OTC directly and so your business feels that impact. Is that the right way to think about it? Or is there a net second derivative where in follow-up to those primary prescriptions, you'll start to see some of the secondary prescription refills in your business?

Steph, this is Bruce. Let me address that question. Really, the vet visit information is really to try to give an understanding of what we were seeing last year versus this year. Last year, during the pandemic, virtually all the vet offices were closed. And there really wasn't many alternatives where our pet owners can turn to for medications and many were trying online pet medications for the first time. And so that was definitely something that we welcomed last year. This year, all those clinics were open for business, and they're making up for lost time. So they are making sure -- if they haven't seen that pet in a 12-month period, they're enforcing and making sure that pet owners coming into their clinic. So it's almost a resetting of the prescription cycle. And many of the pet owners are going to the vet, buying there. And then we're in line for the refill, and we can sort of do our data. We know when it's time for a reorder, and we'll go ahead and market for that reorder -- subsequent reorder. And we expect to see that in the second half of this fiscal year is what I was referring to earlier in the call.

Okay. Got it. And then my second question is on ad spend. I think you mentioned both that you expect advertising prices to revert. I'm curious if you could just give us a sense of do you expect them to go back to pre-pandemic levels on a purchasing price basis? Or do you still expect there to be a bit of inflation post pandemic? And related to that, I think you also used the word -- words less efficient. Can you maybe talk a little bit about what you're doing to tweak your marketing mix or your marketing plans out over the next couple of quarters to try to improve some of the efficiency even if the costs remain a little bit elevated?

Yes. And I'll take your second question first. Couple of things. I would say, overall, the way in which we've been purchasing media is going to change significantly. We're looking at new and have actually implemented new marketing partners to help us with that, that specialize in specific areas of media. I won't get into the channels themselves. But obviously, Google, Facebook, Connected TV, there's a lot of options out there. And I think the way we've configured media spend to date needed a fresh pair of eyes. So that's one. Two is just adding more data around the decisions that we're making around our media buys was another, I'd say, quick win that we've implemented. And then, lastly, to your first question, media rates have been dancing around quite a bit. I was in the language learning space prior to this with Rosetta Stone, and we took advantage of favorable rates during the pandemic because advertisers were leaving things like brand advertising to performance. I would say going into the holiday season, it's too early to tell since it's a very competitive time to be buying advertising. But I would say that I'm a little bit more optimistic about rates than I was when I started 2 months ago.

[Operator Instructions] Our next question is from Ben Rose with Battle Road Research.

Yes. And I know we haven't had a chance to meet, Matt, but I look forward to meeting you post call. A couple of questions with regard to pet health advice. In -- on your slides, Matt, you talked about the growth in the telehealth market. And I was just curious to know what thoughts you have with regard to the Ask the Vet service that you offer now and whether you envision that being expanded in some way or perhaps being monetized in some way in the future?

Ben, looking forward to catching up in subsequent conversations. Yes, I'm really excited about the pet telehealth space. There's been a lot of innovation in the space. There's a lot of different start-ups that I actually talked to personally in the space to get some advice. I think the way I'd start is I always try to evaluate businesses not only on the TAM and the timing and the kind of the fundamentals, but also the customer relationships. An inordinate amount of our customers are wanting additional services from us. They almost -- they're giving us permission to give them more advice than we are today because prescriptions are, in a way, the milk at the back of the proverbial store with the customer because they see PetMed as the expert in pet health care. It just so happens as the customer is leaving the store, we're not providing a lot of expert experience yet. And so I keep pet telehealth as us being very well positioned to add additional services that we don't do today because customers really view us as that specialty pharmacy. They're not viewing us as the major retailer with lots of different services. We're not known for selling food. We're not selling -- we're known for selling dog toys. We're known for providing expert advice. And so for pet telehealth, well, the market is really small. I see is an opportunity to engage with our AutoShip customers in really unique ways, and then sell them additional services. So nothing to announce, but we're certainly going to be doing a lot of testing even this quarter on this topic, which I hope -- hopefully, I'll be able to talk to you about next time.

Okay. Great. And with regard to the company's relationships with the veterinarian community in vet clinics, this is the first time that I've heard you quantify the number of veterinarians and clinics that you work with and find that to be an intriguing opportunity. I was curious to know plans that you have to perhaps reduce friction with the veterinarians or to improve relationships with them?

Yes, Ben, thanks for noticing that. And it was intentional to put that in there because I was quite surprised when I first started the company. We have a vet portal that's used today. I've seen other competitors in the space "numbers". And I think some might be surprised that we have a larger network than most. I think our relationship with vets has been a little confrontational, to be honest, over the stand of the company when we first started because we are the pioneers in the space. I think when we would go to the veterinarian conferences, we are probably the least likely to be welcomed. And I think now there's other players in the space, and we've kind of opened the door for them. And I think we're kind of seen as a more friendly player in the space, to be honest. Our vet verification rates are as high as they've ever been. I think there's a lot of things we could do in our best portal to make the veterinarian's life easy. We're very sympathetic to veterinarians. They are overworked. They have some of the highest suicide rates of any profession. And I think that there's a lot we could do to be a better friend to the vet. And our vet portal, I think, has a great start, but I think there's a lot of opportunity to automate what they do in their clinics. And we're going to be pro-vet in terms of how we approach the market. Our intent is not to be anti-vet.

And our questions-and-answers portion of the call has ended. I would now like to turn the call back to Matt Hulett, the company's CEO, for his concluding remarks.

Thank you. I want to reiterate what Bruce just covered in his financial highlights section. We are disappointed with our sales results for the quarter. But after my 2 months on the job, I'm confident there is much we can do and will do to improve our business growth. To be clear, in a market that's growing, PetMed needs to be -- to make the necessary changes to our operating playbook to take advantage of the market trend. In my first weeks here, I've listened in on countless customer service calls, engaged with over 20 pet industry leaders, brief research analysts and have engaged with our own main pharmaceutical partners. I've already seen in a lot of core areas that we can and have already begun to improve in this business, and these include the following: using more data insights to acquire and retain customers; better segmentation of our customer base in order to drive more mass personalization of our offers and services; improved new customer acquisitions through a different allocation of variable marketing spend; expanded product and services that are already being demanded by our customers. Since I've only been with PetMeds for a short period of time, I'm not ready yet on today's call to provide a comprehensive future strategy or capital allocation plans for the business, and that would be premature. However, I do have a 90-day and 180-day plan that I presented to our Board of Directors, and I'll be sharing more about our vision and strategy with you during our Q3 earnings call. But I'll say this today. We firmly believe that we can take advantage of the large market tailwinds, leverage the main core strengths we highlighted today and execute on a broader strategic vision for the company. We look forward to briefing you in the coming quarters on our strategy and our progress. Thank you for listening in. Operator, this ends the conference call.

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