Participants

Reed Anderson; Investor Relations; ICR, LLC

Sandra Campos; President, Chief Executive Officer, Director; Petmed Express Inc

Robyn D'elia; Chief Financial Officer; Petmed Express Inc

Erin Wright; Analyst; Morgan Stanley

Ryan Meyers; Analyst; Lake Street Capital Markets

Presentation

Operator

Greetings, and welcome to PetMed Express third quarter financial results conference call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Reed Anderson with ICR. You may begin.

Reed Anderson

Thank you, and welcome to the PetMed Express Fiscal Third Quarter 2025 Earnings Conference Call. Certain information included during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934 as amended that may involve a number of risks and uncertainties. These statements are based on our beliefs as well as assumptions we have used based on 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. There can be no assurance that any forward-looking results will occur or be realized and nothing contained in this presentation is or should be relied upon as a representation or warranty as to any future matter, including any matter in respect of the operations or business or financial condition of PetMeds.
PetMeds undertakes no obligation to update publicly these forward-looking statements based on subsequent events, except as may be required by applicable law, regulation or other competent legal authority. 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 turn the call over to our CEO and President, Sandra Campos.

Sandra Campos

Thank you, Reed, and welcome to everyone joining our call this afternoon. Following my remarks, Robyn will provide a detailed overview of our financial results, after which we'll open the lines for your questions. Over the past 9 months, I have emphasized that our focus remains steadfast on the strategic initiatives pivotal to repositioning PetMed and PetCareRx for long-term success. I have clearly outlined our vision to position Pets as a leader in consumer pet health care. While we're still in the early stages of this transformation we have much more work ahead, I am pleased to report that we have made significant progress in validating our strategic direction.
We're confident that the actions we're taking will drive differentiation and sustainable growth.
Our highest priority has been to return the company to profitability. We achieved this by implementing cost-cutting measures and consolidation strategies to integrate PetCareRx operations into the PetMeds organization targeting $5 million in annualized savings, and we remain on track to meet this milestone. For this quarter, Q3, we achieved $2 million in adjusted EBITDA representing a $1.1 million improvement year-over-year, while lowering G&A expenses by $2.6 million compared to last year. As we continue to execute our turnaround strategy, we remain committed to driving shareholder value through growing our customer base, operational discipline and financial efficiency.
At Pets, we serve 3 core communities. First, our pet parents. We're continuously enhancing the digital shopping experience to provide convenient access to pet health solutions. Second, our veterinarian partners, our investments in Rx approval efficiency through an optimized vet portal are driving increased adoption and streamline workflows. And third, the pets, dogs, cats and horses that we love and care for.
Innovation is at the heart of our approach, ensuring that we offer proven premium health solutions across all categories and life stages.
Expanding our customer base and increasing market share remains a top priority to grow and acquire customers as a digital retailer, we require a modernized tech stack and a seamless shopping experience that meets evolving customer expectations. We have made meaningful progress in this area, including website and mobile enhancements, where we executed a full website refresh in November and also relaunched our iOS and Android mobile apps. We implemented by now pay later as a new payment option at checkout, expanding on affordable and accessible choices for our consumers.
And in collaboration with our Veterinary Advisory Board, we continue to enhance our veterinary portal and also launched pethealthmd.com, an educational platform offering expert backed pet health guidance. These improvements led to 84,000 gross new customers or 63,000 new customers that had orders shipped during the quarter. Our gross order average order value, or AOV, increased by 7% at $108 versus $101 last year, while our shipped order AOV rose by 4.3% of $97 versus $93 year-over-year.
We are committed to pet health and wellness through product differentiation and best-in-class customer service. Our SKU optimization strategy ensures that we offer comprehensive health solutions across all life stages while maintaining strong margins and growth thresholds. To enhance efficiency, we eliminated 4,000 underperforming SKUs, making room for high-value products that align with our strategy and also resonate with consumers.
Notably, our inventory efficiency has improved with inventory turn rising to 1.5% in Q3 compared to 1.1% in Q2 and 0.9% last year. This improvement comes alongside a 66% reduction in total inventory on hand totaling $11.8 million at the end of our third quarter versus $34.6 million last year.
During Q3, we advanced our customer call center operations by integrating an AI-driven workforce management tool to flex and scale our agent population and adapt to changing volumes. This helped us improve our key metrics such as increased sales per agent of 18.8% and a 3.4% increase in AOV, average order value for orders driven by the call center.
During our last earnings call, I highlighted our focus on retention and the operational upgrades that laid the foundation for future growth. While we intended to ramp up performance marketing efforts in this quarter, we encountered a highly competitive and promotional holiday environment, particularly between Black Friday and year-end. With real-time insights, we made the strategic decision to prioritize margin protection over aggressive promotions, ending the quarter with $2.8 million less in gross advertising spend year-over-year.
As a result, our sales and new customer acquisition during that period fell short of initial expectations. However, this intentional pivot was necessary in order to maintain financial discipline. Recognizing the need for a marketing strategic reset, we are refining our approach to ensure sustainable profitable growth.
Our top of funnel initiatives, such as radio and connected TV continue to promote our Care You Trust message and establish brand authority and brand awareness. This is a long-term investment that we've recently begun and includes things like sports team partnerships, podcasts, billboards and local pet adoption events, all of which we've done in this quarter.
We are refining acquisition strategies by rolling out a new e-mail design system and creating stronger segmentation, personalization and dynamic content across our paid platforms. Early indicators show promise with revenue per e-mail increasing 9% in the month of January. Engagement rates have increased quarter-over-quarter, that would be inclusive of open rate, click-through rate, revenue per e-mail through stronger content and more relevant branding. We believe this is a strong indicator of future conversion improvements.
Beyond customer-facing upgrades, we have strengthened our core systems with strategic technology investments to ensure a resilient and secure digital ecosystem for customer data and privacy. Over the past 7 months, we resolved OMS issues that previously impacted performance and continue to modernize our tech stack. In mid-November, we successfully replatformed our AutoShip recurring subscription program without disruption and have seen improvements in AutoShip sign-ups and credit card rejection rates.
Although still in early age tracking, our new website performance shows PDP views increased by 30%, bounce rates declined by 6.5 basis points and channel visits increased 7.6% year-over-year. This growth in visits was offset by lower conversion, and we are actively addressing those conversion rate challenges through search functionality improvements, PDP enhancements and visible promotions.
Looking ahead, while the competitive landscape remains dynamic, we are executing a disciplined transformation that prioritizes the customer experience from order placement to last-mile delivery while simultaneously enhancing the infrastructure necessary to support this. We believe these efforts will drive sustained growth, customer loyalty and increased shareholder value. In the short term, we anticipate increased investments to enhance the customer engagement, customer acquisition and the underlying infrastructure needed.
We will continue to strengthen vendor partnerships and expand our portfolio with science-backed veterinary recommended products across our pharmacy Rx products, OTC over-the-counter and our food categories. We remain focused on capturing our share of the companion animal health market by refining our customer experience, optimizing our product mix and strengthening the customer acquisition strategies. As we build a stronger, more efficient organization, we stay true to our core purpose, ensuring pets at homes and with healthier, happier lives.
This commitment extends beyond our business as we actively support shelters, facilitate adoption events and provide aid to pet communities impacted by the L.A. wildfires, reinforcing our dedication to pet welfare and the people who care for them.
With that, I'll turn the call over to Robyn for a more detailed review of our financial results.

Robyn D'elia

Thank you, Sandra. I will now provide an update on third quarter fiscal year 2025 results for the period ending December 31, 2024. Net sales were $53 million compared to $65.3 million in the same period last year, a 19% decline primarily driven by a 34% reduction in gross advertising as we rebalanced for profitability. We welcomed approximately 63,000 new customers who received an order from us this quarter. Gross profit was $14.9 million versus $17.9 million last year.
As a percent of sales, gross profit this year was 28.1% an 80 basis point improvement compared to the prior year quarter due to a favorable sales mix and lower discount activity similar to what we saw in Q2.
General and administrative expenses for the third quarter were $10.8 million versus $13.4 million last year, a 19.7% decrease. This year-over-year improvement was driven by a decrease in stock-based compensation expense, a decrease in payroll and payroll-related expense, and to a lesser extent, a decrease in credit card processing fees driven by lower sales.
Our advertising expenses for the third quarter were $3 million compared to $5.8 million last year. This decrease can be mainly attributed to lower gross media spend and a higher proportion of that spend being funded by third-party partners. As Sandra mentioned, we purposely pulled back our marketing efforts to reset our marketing foundation and improve profitability for the quarter.
Net loss for the third quarter was $700,000 or $0.03 per diluted share, a meaningful improvement compared to the net loss of $2 million or $0.10 per diluted share for the same period last year. Adjusted EBITDA of $2 million compared to $900,000 in the prior year period. Our balance sheet remains strong, and as of December 31, 2024, we had $50 million of cash and cash equivalents and no debt.
We would now like to open the call for questions. And then after that, Sandra will provide some concluding remarks. Operator?

Question and Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Erin Wright with Morgan Stanley.

Erin Wright

I wanted a quick housekeeping one before I get into it. On the new customer or customer count numbers, I guess do you have -- I just want to make sure we're comparing apples-to-apples kind of on a year-over-year basis, but do you have growth rates around those and how you're kind of defining the different categories from a customer standpoint?

Robyn D'elia

From a customer perspective, on the new customer, what we shared is that we had 63,000 new customers in this quarter with shipped orders, correct?

Erin Wright

Okay. Just wanted to clarify that. And then on the SKU count rationalization, so does that meaningfully impact your overall kind of revenue growth? Or have you quantified that? I mean I assume it's underperforming SKUs, but how do we think about that and then also the flow-through from a mix perspective?

Sandra Campos

Yes. It actually did not really impact the revenues. A lot of those SKUs happen to be SKUs that were drop shipped from drop-ship vendors as well. And so they were not impactful. It was very minimal in terms of any impact over the year.
But for the most part, when we look at the SKU optimization, it was about tracking to products that actually had consistent sales over 3, 4, 5 and 6 months time period. So anything beyond that, that had not seen consistent sales is where we were reducing. So it was definitely not impacting our sales.

Erin Wright

Okay. Great. And then just thinking about sort of the underlying backdrop in the market, like how would you characterize kind of the trends you are seeing from a customer perspective and how they're responding maybe to price increases across kind of pet prescriptions that we've been seeing and hearing about even year-to-date and how you're thinking about kind of the outlook of the market just generally speaking. And then if I could sneak one last one in there, just on the cost savings. Obviously, you've executed on that.
And what's left in terms of the lingering cost savings from the PetCareRx transaction?

Sandra Campos

Let's start with the second one first. So as we look at our cost optimization and the strategies that we've employed on folding PetCareRx into the organization, we still have more that we are deliberately working on now and that not only just includes the first phase that we did and executed which had to do with people, technology -- some technology as well as some outsourced agencies that were reduplicating. But in addition to that now, as we go into Phase II and the second part of it, it actually is more of the technology reduction consolidation that actually will continue to show an improved balance in terms of what our expenditures are. Do you want to add anything, Robyn?

Robyn D'elia

No, that's right. That's right. And it's a strategy that will take us over a couple of quarters to execute.

Sandra Campos

Sorry. Okay. So that was question number two. Going back to question number one. It is without a doubt that the customer continues to be pressured and as we know, we're seeing a bit more of stabilization as it relates to adoption and pets in general.
But we're still seeing that there are reduced visits to the veterinarian. There's some reduced prescriptions. We have not seen our UPTs and Rx and pharmacy actually change from a year ago. So it's still -- they're still buying the same amount of times on frequency per year.
So it's still about 2.7x a year that the average prescription they're coming back to get a perception again, and that fluctuates based on seasonality, especially as we talk about flea and tick season per se. But yes, they are absolutely pressured in terms of where they're spending, how they're spending, and we are seeing a bit more as it relates to opening price points take over some of the more premium price points.
That said, we still have a higher household income consumer who spends -- who has a household income over $100,000 and that $100,000 to $150,000 and $150,000-plus household income is continuing to spend and does not have and is not exhibiting some of the same behavior that other customers are with regards to not being in compliance on the prescription and less spend on their products. That relates specifically to pharmacy.

Operator

Our next question comes from the line of Ryan Meyers with Lake Street Capital Markets.

Ryan Meyers

And Sandra, this is kind of a follow-up from the last question that you had as far as just what you're seeing across your core consumer and then kind of being a higher household income, but that said, I mean we've now seen 3 consecutive quarters of over double-digit revenue declines. I know you guys are pulling back a little bit on the marketing spend, which obviously is impacting the revenue growth. But can you kind of talk about what else you're seeing here as far as what's driving the softness?

Sandra Campos

Well, our softness as it relates to where we've been, and you've heard me talk about this a bit as well. One of the reasons that we actually modernized our website is because we have not captured a younger, more millennial or Gen Z consumer. So as we think about not only what's happening from a consumer behavior standpoint, people are taking longer to have children and/or their pets are becoming their children and they're spending more on their children -- on those pets that are their children, essentially in the millennial and Gen-Z demographic.
So we are modernizing, we're fine-tuning our messaging, our content, all of the different platforms in which we are competing so that we can actually capture that customer. That's not where we've been as a business over many years. So for us, we're actually transitioning that. And as we transition away from a core customer that may have been a little bit older, but new to 1-800-PetMeds brand because of all of those many years, obviously, 28 years worth of great heritage the company has had. We're trying to also make sure that we're capturing the millennial and Gen Z consumer who is spending, who is focused on more digital experiences, who's buying online, is accustomed to it, and that's what you're seeing now.
As we've repositioned our marketing and the efforts on marketing that goes into content, it goes into the different channels in which we show up, and we know and understand that this is going to take and require multiple touch points that the consumer is going to see our brands before they actually start to engage and then convert.

Ryan Meyers

Got it. And then as we think about the rest of this year and into next year, I mean you guys are well capitalized with $50 million of cash on the balance sheet. I mean, how are you evaluating potentially investing more heavily into marketing, kind of running more promotions really to try to drive revenue growth back into the business or even just new customer growth back into the business? Any commentary there would be helpful.

Robyn D'elia

Yes. We definitely think about capital allocation and, of course, how to drive our transformation faster. As Sandra mentioned, right on the marketing front, we are resetting, I would say, the marketing foundation. So we want to do it in a way that's smart, that's going to be the most beneficial in terms of the ROI. We have to kind of set the foundation and get ready to go.
Additionally, we're investing in our customer experience. It's critically important that we have the right product assortment, we can get to the customer faster and that the customers have ease of use on our site. And so we're going to continue to make those foundational investments. And then we can really, I would say, open the flood gates to some extent, right, and start spending more heavily in the marketing area.

Sandra Campos

And Ryan, I would just add to what Robyn said, just to double click on this point in order for us to be competitive in today's environment and the consumer expectations is that you're going to get product same-day, next day or within 2 days. And so she was just mentioning last mile delivery as another key target key focus area for us. We are focused on that customer experience, which has so many different legs to this, and we need to make sure that we are delivering on a timely basis as well. So those investments are coming. We're actually investing in that in this quarter of Q4 as well as starting to increase more on marketing to go forward.

Operator

Thank you. And this does conclude we have the -- we have reached the end of the question-and-answer session. I'll now turn the call back over to the CEO, Sandra Campos for closing remarks.

Sandra Campos

Thank you. And thanks for the questions, for the time and the support of PetMeds. We understand that this is a transformation on many levels. It is steady and the key initiatives that we discussed today are about prioritizing profitability and the customer growth. Lastly, I just want to thank all of our employees for their constant commitment and the dedication to our customers, the pets that we serve and to our shareholders.
So we look forward to continuing to update you on our progress during our next conference call. Thank you.

Operator

Thank you. This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.