Welcome to the PetMeds conference call to review the financial results for the first fiscal quarter ended June 30, 2022. At the request of the company, this conference call is being recorded. Founded in 1996, PetMeds is your trusted pet health experts, delivering prescription and nonprescription pet medications and other health products for dogs, cats and horses direct to the customer. PetMeds markets its products through advertising and promotional campaigns, which direct customers to order online or by phone, and which are intended to increase the recognition of the PetMeds brand name. PetMeds 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, and I'd like to welcome everybody here today. I would also 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 during this call 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 results could differ materially from those projected. The company undertakes no obligation to update these statements based on subsequent events. 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 CEO and President, Matt Hulett. Matt?

Thanks, Bruce. Good afternoon, and thank you for joining us for our fiscal 2023 first quarter call. As a reminder, PetMeds pioneered the online pet prescription business over 26 years ago, and this is a legacy of which everyone at PetMeds is very proud. As I approach the 1-year mark since taking over as CEO and President, I continue to believe that PetMeds is a terrific company with a talented and dedicated workforce, serving a large and loyal customer base that supports our vision that every pet deserves to live a long, happy, healthy life. My commitment to all of our stakeholders is to be open and transparent, particularly as it pertains to our progress with engineering the transformation of this iconic company. Today, I will break the call into 4 themes: one, an update on our core business; two, an update on our partner strategy; three, a major change to our management team; and four, the progress on our business transformation. So let's start with an update on our core business. As we mentioned in our last call, we saw a slow start to flea and tick season due to seasonally colder temperatures, which continued into the early part of the most recent quarter. Due to the high concentration of our business in flea and tick and heartworm medications, the slower sales of these products in the month of April, in particular, had a material impact on the quarter. Once warmer temperatures returned to much of the country, stimulating more normal flea and tick and heartworm medication demand from pet parents, we saw the expected rebound of a repeat base later in the back half of the quarter. First quarter sales were $70.2 million compared to sales of $79.3 million for the same period the prior year. And while…

Thanks, Matt. During the review of our financial results, we will compare our first fiscal quarter, which ended on June 30, 2022, to last year's quarter that ended on June 30, 2021. I would also like to highlight that we introduced new non-GAAP financial metrics during our last fiscal year, adjusted EBITDA and adjusted EBITDA per share. We decided to include these new metrics because they are key measures used by management and by our Board to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. Additionally, adjusted EBITDA and adjusted EBITDA per share provide a more accurate picture of our underlying profitability, and also take into account the more recent increases in noncash stock-based compensation and other expenses. Throughout our most recent fiscal year, we faced a unique situation comparing 2 totally different environments, between 2020 pandemic and 2021, mostly post pandemic. As we move forward into our current fiscal year, the year ending March 31, 2023, with our new marketing partnerships, agencies and processes, we expect to be much more efficient with our variable marketing spend, with improved results and with many of our highlighted initiatives firmly in place. For the current year, first quarter sales were $70.2 million compared to sales of $79.3 million for the same period in the prior year, a decrease of 11.5%. As Matt mentioned earlier, while we were disappointed with the sales decline year-over-year, we were encouraged by the sales trends we saw later in the June quarter. Reorder sales decreased by 7.8% to $63.3 million for the quarter ended June 30, 2022, compared to reorder sales of $68.7 million for the same quarter in the prior year using a consistent 36-month definition of a new customer. With the increasing AutoShip subscription adoption, we…

During our last earnings call, we revealed our long-term strategy with some degree of specifics. PetMeds is moving from being just a leading pet medication retailer to being a market leader in expert pet health care. We envision a world where the majority of vet services and pet care moved digitally. We are in the early days of this digital transformation, but it is coming rapidly. We believe that a digitally enabled and data-driven future will be the preferred mode of delivery for pet parents. We have taken important steps towards executing on our long-term strategy, starting with our recent announcement that we've made in the telemedicine space. The strategic pillars that we'll be executing on are: nutrition medications, wellness and care with data both driving and being at the heart of our services. Our recent announcement with Vester is the first building block of our care offering. During the last call, we discussed how this partnership is a real unlock in both technology and e-commerce integration, which provides a powerful combination that has never been introduced in the pet category. We see a panoply of upsides and opportunities, including first mainstream launch. We believe we are the first company to introduce pet telemedicine to the mainstream, connecting 2 million pet parent customers with over 70,000 veterinarians in the PetMeds network. Close the loop. Direct connect access to a telemedicine experience that closes the loop between a pet parent and a vet so that the prescription medication can be prescribed directly to a pet parent, in many cases without the need of an in-office visit. New revenue streams. This partnership creates new revenue streams within PetMeds and the potential for new revenue streams from traffic driven from investors platform. Go-to-market acceleration. Unique investment in partnership terms allow pets to accelerate…

[Operator Instructions] Our first question is from Erin Wright with Morgan Stanley.

Can you give us an update on where we stand now with the flea and tick season? Were those sales just lost? Or does it shift to the next quarter? And what are you seeing now on that front? And I think you used to give that quarterly seasonal weighting of what was considered seasonal products. I guess what does that cadence look like? Or what do you expect it to look like this year compared to historical trends from a seasonal mix perspective?

Erin, this is Matt. Thanks for the question. Great to hear from you. A couple of things about the quarter. It started out pretty slow, especially compared to March. And we indicated that March was slow due to seasonality around, the temperatures being cold, and it continued into April. And then it really progressively rebounded on our returning business through May, through June and continues through July. So we're pretty confident the parasiticide business of PetMeds is recovering very nicely. And that kind of maps to what we've seen in other supply chains and other partners that we've talked to. And it's very similar to what we've seen in the subsequent historical practices in the business since we've been around for 26 years. We have some -- a lot of data around this. To answer your question in a point of way, we view this as an extension to the season. Typically a 6-month season. We're heavily weighted towards flea, tick and heartworm and so we view the season being extended out versus contracting. Bruce, do you have any other follow-up comments?

No, Matt. I think you covered everything there.

Okay. Got it. And then more broadly, how are you thinking about pet spending and a tougher macro backdrop? And are you seeing any changes in customer behavior, for instance, in terms of trade down on products? Or are pet owners moving from 6 months flea and tick packs to 3 months? Or has anything else changed or would be indicative of a change in consumer?

Yes. Erin, it's a great question. and we hope to changes in the future. As you know, we're highly medication and heavily RX-focused. And the good news about that is customers are very brand-specific and brand loyal, intend to not trade down. We've maybe seen a little bit of impact on people trading down in terms of dosage, but not much. And at least this category, we're seeing not a lot of movement there. I think as we start thinking about broader consumable products, maybe food and other items, we'll see some of that trade down. But in terms of brand loyalty to RX, in particular, we have not seen a trade down behavior. Bruce, anything to add there?

Historically, when times have been tough, and again, I've been with the company through a few different downturns, you may see pet owners instead of buying a 6-month supply, buying a 3-month supply. So a trading down from that perspective or stretching out that medication. We haven't seen that yet, but that's some behaviors we have seen in the past. So just something that we'll keep tabs on. But as of right now, the data has not shown any significant changes.

Okay. And one just housekeeping question. Did you give new customer growth or total new customers acquired in the quarter?

We did. 69,000. And add on to that, Erin, since we are so highly concentrated to RX, particularly flea, tick and heartworm, April, just to be blunt, was not a great month to be acquiring those customers since the earth was pretty cold. So we were pretty getting very optimistic actually about our new customer acquisition initiatives underway, especially later in the quarter. So we expect to see good improvements throughout our calendar year on new customer acquisition. We're getting more optimistic there.

Our next question comes from Corey Grady with Jefferies.

I wanted to follow up on your customer acquisition initiatives. You test a new creative across the new channels during the quarter. Can you give us maybe more detail on the results you're seeing so far? And where you are in terms of the marketing transformation?

Corey, this is Matt. Thanks for your question. Thanks for hosting us recently your conference. It was fantastic. I won't go into the specific channels, but I think in the meta macro level, we're definitely seeing rates get to more normal and/or, in some cases, lower rates year-over-year, which is great news. What you typically see in some environments that get more macro challenge, but definitely on the performance marketing channels, we're definitely seeing more stabilization in some cases, reduction of rates. Some channels are still high. I think we all know the issues around social, but we're definitely seeing a rationalization in rates as I think growth-oriented companies have readjusted how they think about their media mix. I think that is only going to be a net beneficiary for PetMeds. And then that's kind of the macro. The micro on us is, as you know, and we spent some time talking about this at PetMeds for a long time is focused on lower the funnel aka performance marketing to its returning base. And since we had a new CMO, and new partners starting about 6 months ago on a new strategy, we've definitely moved that shift to lean more into our brand, and we've seen really strong results there. We expect those to continue. And over this calendar year, we expect to see net new customer growth due to those efforts, and we're feeling more optimistic about them. Did that answer your question, Corey?

Yes. It did. It's really helpful. And then for my second question, I just following up on the flea and tick. So given the known kind of flea and tick weakness coming into the quarter, how did the reorder sales come in relative to your expectations? And then have you guys seen any change in seasonality to the vet industry that would typically proceed a change in your reorder business?

Yes. Corey, thanks a lot for that. The first -- I'll answer the first question first with -- you asked me in April, how was I feeling about the quarter. I wouldn't have been very optimistic. And then subsequently, May and June, got a lot more optimistic. So the quarter recovered to where we were expecting it to be and that continues into July on the returning side. Again, the new customer acquisition side was a little slow to warm up because the buyers weren't there. And in terms of the vets cycle, we do tend to look a lot like the vet cycle in terms of concentration of revenue, but also the patterns for consumers with PetMeds is that the vet typically gets the first prescription, and we get the secondary. We actually haven't seen that as much as the things start to recover, that we are starting to see the similar cycles even with the seasonality with colder temperatures. So I don't think that's going to be much of a headwind for us as we come into this next quarter. Corey, I don't know if that answers your question or not?

It did. That's helpful.

[Operator Instructions] Our next question is from Anthony Lebiedzinski with Sidoti & Company.

As far as -- if I look at the traditional way of how PetMeds talked about advertising and new customer acquisition costs. So that looks like about $92 for the quarter. How should we think about that number kind of going forward? I know, Matt, you talked more about LTV to CAC. But I guess just for old-timers, covered the stock for a long time, how should we think about that on a go-forward basis?

Anthony, you're referring to $92 the absolute number for CAC.

Right. Yes. So if I take the advertising dollar amount divided by the new -- number of new customers, which was just disclosed as far as -- 69,000 you said. So that comes out to $92.

Yes. I just want to make sure we're looking at the same sum sheet. In terms of the absolute number for CAC, we actually are feeling better about that. If -- you're asking a directional question. So it's been higher for us, as you know, my first in a CMO for the business wasn't the best quarter for CAC for the company, and we hand that to a more fresh CMO. But the CAC number for us is stabilized and it's actually decreased a little bit due to this medium mix. So on a go-forward basis, we're not thinking about and targeting CAC is a metric that we talk about. But since it's easy to calculate, it's actually been relatively stable and going down. The LTV number has been pretty stable as well. But we hope over time with recurring revenue and a broader catalog that just goes up because we get more opportunity to sell more products and get more engagement and a broad array of products. So I think LTV goes up over time. And then I think right now, Anthony, to answer your point on question, I think $92 or maybe a little bit lower over time. It's been going down as we've gotten smarter about our media mix. And also, I think the current macro environment hasn't been increasing as much, which has worried us in the past. So I hope that's helpful. I don't peg it. I can't predict what absolute number is going to be other than we've seen market improvement month-over-month, week over week. And it's starting to stabilize in terms of price increases. So we're feeling better about the CAC environment.

Okay. That sounds good. Okay. So -- and I know it's still early as far as the relationship with Vester, but can you give us any sort of color as far as -- I don't know if you want to talk about the specifics, but as far as customers actually -- your own customers using Vester or vice versa, Vester customers using PetMeds to fill their orders. Can you give us any sort of additional color or details on that?

Yes. And the first integration we did was to embed PetMeds as a private label inside of Vester. Vester is a start-up. So really, they have a small amount of traffic right now. But it was a good [indiscernible] there at moment to determine whether it works or not. And a, it works. And b, customers are really delighted by the overall service, and I encourage everyone who's listening to try it, it's really fantastic. Secondarily, the big launch for us where volume will start increasing and also getting more exposure on the site, and our mobile products will be VETLIVE. And VETLIVE will be the Vester marketplace, private label inside of our PetMeds properties, and that will come in the next several months. That will be the opportunity for us to really do some interesting things. The first part is just to engage with pet telemedicine appointment live on the site. The secondary component is there's a whole host of other subservices that we're going to be launching. Some will be in AutoShip, and the others will be extended from their current platform. But the first goal is to get, let's say, in the next several months, VETLIVE up to our current customers. And then we'll start seeing a lot of usage there, Anthony. So first things first, we launched, and it worked. The second point is PetMeds should be getting that up live on our properties in the next 3 months.

Got it. Okay. And then lastly for me. So unlike a lot of other consumer companies where they're dealing with bloated inventories, your actually inventory is lower than last year and lower on a sequential basis. So that being said, I mean, do you feel like you have adequate inventory? Of course, there's still ongoing supply chain issues that we're hearing from other companies. So can you just talk about that as well?

Yes. Anthony, I'll take that question. This is Bruce. As you know, our inventory fluctuates from time to time, mostly due to opportunistic opportunities as far as buying. And as we mentioned in the last call, at the end of the March quarter, we had an opportunity to take on additional inventory at a reduced price. So we went ahead and pursued that. So we definitely were stocked up as of March 31. And sales, although recovering through the quarter, were still fairly slow in April. So I would say the inventory levels where they are right now, around $22 million, $23 million, probably a normalized level, maybe a little bit lower than maybe in past seasons, but not so off from where we'd like to be. And since we do have direct relationships with the manufacturers, lead times are cut, really short based on how we used to procure. So no concern there. We're always going to be opportunistic if there's going to be -- if we have an opportunity to buy at a reduced cost, we'll take advantage of that. And those usually come up traditionally at the end of the year, so around 12/31. So we'll see how it shapes up. But if there's an opportunity, we'll take advantage of it.

Our question-and-answer 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, operator. As you just heard, the future of PetMeds is much more expansive than just a prescription e-commerce company. We are building our strategy out and working hard to transform into a broader e-commerce and subscription brand that reflects and leverages our status as the trusted pet health experts. I will continue to detail our progress and look forward to providing you with updates in the not-too-distant future. As always, thank you to all of our employees, customers, partners, suppliers and investors for your continued confidence and support. Thank you for listening in. Operator, this ends the conference call.

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