Welcome to PetMed's Conference Call to review the Financial Results for the Second Fiscal Year ended September 30, 2022. [Operator Instructions] Founded in 1996, PetMed is your trusted pet health expert delivering prescription and nonprescription pet medications and other health products for dogs, cats, and horses direct to the customers. PetMed markets its products through advertising and promotional campaigns, which directs customers to order online or by phone and which are intended to increase the recognition of PetMed's brand name. PetMed provides an attractive alternative for obtaining pet medication 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. Brian Prenoveau. Please go ahead.

Thank you, operator. And I'd like to welcome everybody here today to the PetMed Express fiscal second quarter 2022 conference call. [Operator Instructions] 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. Now let me introduce our CEO and President, Matt Hulett. Matt?

Our entire company of passionate pet lovers has rallied around our new vision that every pet deserves to live a long, happy, healthy life. To actualize this vision, PetMed is shifting from being simply a leading pet medication retailer to being the pet health experts, a market leader in pet healthcare expertise. This is a natural and logical transition. As for the last 26 years, millions of pet parents have chosen PetMed as their trusted partner and caring for their pets. For anyone new to the company, PetMed delivers prescriptions and nonprescription medications and pet supplies direct to the consumer. Our expert online pharmacy is an established and trusted brand, as evidenced by the fact that we have served over 11 million customers over our company's operating history. I have now been CEO and President of PetMed for a little over a year. And during this time, management has been executing on a very specific strategy to revitalize PetMed. Over this last year, PetMed has been in a rebuilding mode with a new and experienced management team, an updated strategy and a revised overall approach to the market. We will break today's call into 2 themes; one, an update on our core business and 2, an update on the progress of our business transformation. The headline for the quarter was that the overall business was stabilized on a year-over-year basis in terms of sales, led by a strong recovery of a repeat customer base. As we have discussed in previous earnings calls, PetMed has a high concentration of our business in flea and tick and heartworm medication. Although PetMed's last 2 quarters were impacted by a slow start to the flea and tick season due to unseasonably cold temperatures, we saw a solid rebound of our business during the mid…

Thanks, Matt. I want to begin by saying that I've loved my first 90 days here at PetMed. I'm excited by the quality of our talent and passion our teams have for our customers and their pets. I'm very proud of our team's rapid response to Hurricane Ian, and the financial support we were able to provide to the Gulf Coast Humane Society, helping hundreds of pets that lost shelter during the disaster. Our mission to ensure every pet lives a long and happy life could not be more alive. Let me turn to our financial results for the quarter ending September 30, 2022, our second fiscal quarter 2023. My remarks will compare this year's quarterly results to the same quarter last year ending September 30, 2021. For the current year, second-quarter sales were $65.4 million compared to the sales of $67.4 million in the same period last year, a decrease of 3%. As Matt mentioned, we're closing the gap year-over-year. Repeat sales of $59.7 million for the quarter decreased 1.5% compared to the repeat sales of $60.6 million in the same period last year. The continued growth of our AutoShip & Save sales as a percentage of total sales continues to drive greater engagement and recurring revenue that strengthens our repeat sales base. As a percentage of sales, AutoShip & Save sales increased 15% sequentially from 39% in the quarter, up from 34% in the prior quarter. We also welcomed approximately 61,000 new pet parents this quarter compared to 69,000 in the prior quarter. Gross profit as a percentage of sales of 28.2% declined 20 basis points compared to the same quarter last year, a modest decline year-over-year. Net income was $2.6 million or $0.13 per diluted share for the second quarter of our fiscal year 2023 compared to…

Thanks, Christine. We have made substantial and measurable progress on our business transformation over the last several quarters and remain laser-focused on execution. PetMed has a strong market position and balance sheet as a basis for growth for this business transformation. As we have repeatedly said over the last several quarters, PetMed is pursuing a vertical specialty retailer strategy. We aim to be pet parents trusted pet health expert. As previously mentioned, there are 4 strategic pillars that are critical to executing this strategy. Now that we have the majority of the new people, process and strategic elements of the business, we expect to deepen these 4 strategic pillars and focus on laser beam execution. This ends our prepared remarks. Operator, we are now ready to take questions.

[Operator Instructions] Our first question comes from Corey Grady with Jefferies.

I wanted to ask about your new initiatives to expand customer LTV. So we saw a nice pick up in AutoShip penetration and you're building out assortment on the nutrition side, but maybe talk about how you're thinking about the rest of 2023 and then the milestones we should be watching as you're, for instance, building out nutrition?

Thanks for the question, Corey. This is Matt. I'll take this. And Christine, feel free to jump in. Yes, if you think about that slide where we have the 4 of the 5 pause, we're going to go very deep on the assortment piece that we've mentioned. Right now, you'll see LTV has been relatively stable and CAC has increased year-over-year primarily due to competitive pressures. We changed our mix considerably and continue to test and learn. But really what we see is an opportunity is to be much more of a broader merchandiser of products outside of medications per the call. And so the things to look for there are LTV to CAC growing. I think look for that LTV number to grow. We've talked about a 1.5 LTV to CAC. Look for that LTV to increase, especially helpful as LTV incorporates more AutoShip orders. On the consumables side, we'll be spending a lot more time in the coming quarters expanding particularly food. We have added some big brands already. The company is in early innings on getting good at selling non-medication products. So look for that LTV expansion, sticking with that 1.5 LTV to CAC is a metric or better and expanding our lines in the food. Does that answer your question, Corey?

It does. That's helpful. And then for my second question, I just wanted to follow up on the testing and learning phase on ad spend. So I know you're testing a more diversified approach compared to PetMed's historical focus more on bottom-of-the-funnel marketing. But where are you in that process? And how are you thinking about ad spend for the rest of the year, especially with LTV to CAC above your target range this quarter?

Yes, great question. So we swung to a little bit more efficient than we were the previous quarter. Previous quarter was at 1.6 LTV to CAC and we spent more in marketing as well. This quarter is 2.1 and it's highly fluctuating and highly variable based on what we're seeing in the market. Our advertising spend was about flat year-over-year. It was up lower double digits. And what we're trying to do is figure out that right push-pull between getting awareness marketing and performance marketing to work. I would have us continue to focus on that. I think we're seeing some things that are good early indicators that we can start scaling. But we're going to be very rigorous around being efficient, not being an unprofitable marketer, and really making sure that the assortment and then the marketing really starts powering that LTV to CAC the way we want to at scale. Right now, I think you've seen us pretty much saying to investors and analysts that we've been flat year-over-year in terms of how we've been thinking about the spend, but I'm hoping that we can break that trend and scaling that spend over time as performance comes in on these initiatives.

The next question comes from Anthony Lebiedzinski with Sidoti & Co.

So in terms of the expanded product selection, Matt, you talked about wanting to increase obviously the frequency of when customers purchase from your site. Can you share with us maybe as to what's your goal in terms of SKUs you want to get to or any quantifiable metric like that? You mentioned also that you have more foods now. Will those be also drop shipped from manufacturers or will you take any inventory into your warehouse? How should we think about that?

That's a great question. We don't have a SKU goal per se. We have a number of brands that we've been working with and targeted to bring in, some of which we have already and some of which are in our pipeline. And quite frankly, this is new muscle for the company. We just haven't been a company that has been particularly good at selling products other than medication. It's a big initiative for us and we've actually have some new hires that are specifically just focused on this. We're looking at a bunch of different options through distribution as clearly an option that we have and we do today. But we're also looking at selective buys that we inventory as well. So again, no real metric that you can put into a model per se until we roll this out, or SKUs, but we'd like to have the top premium brands because we're known as a premium brand of pet healthcare provider. I don't see us as being the largest assortment of food, but we pick the most premium brands and working with them in a very bespoke way. And again, early innings on us getting good at that, but we're very focused on it.

Got it. Okay. And then just wondering as far as the advertising spending, just wondering if the political ad campaigning, has that perhaps prohibited you from being as cost effective as you would like, or has that had any impact on your ability to advertise efficiently?

Interesting question. We haven't seen an impact on that. But typically, the quarter that we're in now that I'm not going to guide to obviously is one of our slower ones because of the seasonality related to flea and tick and heartworm, flea and tick and heartworm being the biggest concentration of where we sell our products. So this isn't typically a big quarter for us. And we don't have, unfortunately, a huge assortment of non-medication products. So for us, to be honest, it's not a big quarter in terms of Black Friday sales and things that you'd see in other common retailers. In terms of the competitive environment for those types of products that we sell today, I don't see an impact. But I would imagine we would as we start running our assortment and start competing with broader media campaigns in the market. But it's an interesting question. I haven't seen that for our business.

Okay, that's good to hear. And then lastly for me, as far as G&A expenses, looks like backing out the severance charge, looks like G&A expenses were up almost 50% on a year-over-year basis. How should we think about the rate of expense growth going forward here?

That's a great question, Anthony. I'll hand this off to Christine.

Yes, thanks, Anthony, for the question. So I think like I mentioned, we have strategically put investment into our G&A expenses, into people, into some of our software and data analytics for us to be getting better data, for us to be getting better insights. And, yes, I think we've been very intentional and strategic about that. I think sequentially, it's relatively flat. But to your point year-over-year, excluding those one-times, I think as I mentioned, G&A was about $2.5 million, so up year-over-year, but sequentially relatively flat. And we'll probably lean into that. As we go into this quarter and the next quarter, we do believe that's part of our transformation and will fuel growth in the future.

And I can add a little bit more color to that, Anthony, is for a relatively large retailer, we had a very small and we don't break out where our G&A investments are, but I'd just give you a little color that would be helpful. We were in a very extremely small nascent R&D department when I first started, and now we actually have a relatively large team that focuses on data science and also has the ability to quickly roll out changes, AV testing, optimizations. So I think some of these G&A investments, the way I think about them and frame them in addition to what Christine said is, we're getting the business to a place where we can start acting like a very agile and dynamic retailer. And so these were very kind of almost toolbox, [indiscernible] toolbox elements of investments for this type of business. And we're feeling really good about the team. We're feeling really good about how we filled the team underneath some of these executives that we've hired. And there were really necessary investments so that we could really turn this business into a growth company. I just wanted to add a couple of pieces of color to the question, Anthony.

[Operator Instructions] Our question-and-answer portion of the call has ended. I would like to turn the conference over to Matt Hulett, the company's CEO, for closing remarks.

Thank you, operator. Thank you for joining our call today. I'm confident that the future we envision for PetMed, along with the foundation that we've been laying, will meet the market opportunity in unique and innovative ways and will lead to increased operating results and shareholder value. PetMed's brand, expertise and reputation are unparalleled. Our balance sheet is strong. Our team is fantastic. I am more excited about the future than ever. Thank you for your continued support.

The conference has now concluded. Thank you for your participation. You may now disconnect.