PetMed Express, Inc. ($PETS)

Greetings, and welcome to the PetMed Express Fiscal Fourth Quarter 2026 Financial Results Conference Call. [Operator Instructions] It's now my pleasure to introduce your host, Reed Anderson with ICR. Thank you, you may now begin.

Thank you, and welcome to the PetMed Express Fiscal Fourth Quarter 2026 Earnings Conference Call. With us on the call today are Leslie Campbell, PetMed's Chairman, Interim CEO and President; and Doug Krulik, Interim Principal Financial Officer and Chief Accounting Officer. 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 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. 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 on Form 10-K and other filings with the Securities and Exchange Commission. Now let me turn the call over to Leslie Campbell, PetMed's Chairman of the Board and Interim CEO and President.

Thank you, Reed, and welcome to everyone joining our call this afternoon. Following my remarks, Doug will provide a detailed overview of our financial results. Fiscal year 2026 was a pivotal year for PetMed Express, during which we made significant financial, operational and cultural improvements that are aimed to put the company back on track for sustainable long-term results. While our full year results reflect the challenges we faced, particularly in the first half of the year, I'm pleased to report that we made substantial progress in the second half of the year in stabilizing our core business and strengthening our foundation for future value creation. In the second half of the year, we also regained critical regulatory compliance with the filing of our Form 10-K for fiscal year 2025 in October and the completion of our fiscal year '26 Q1 and Q2 quarterly filings in December. In December, we also announced the change in our external auditor firm to Baker Tilly U.S. LLP, effective for our third quarter ended December 31, 2025, and we then successfully held our Annual Shareholder Meeting for fiscal year 2025 in January. You'll see in today's 10-K filing, we also made meaningful progress in improving our internal controls, fully remediating 3 previously disclosed material weaknesses, tone at the top, complex accounting issues and income taxes. Although Doug will speak to our financial results in a moment, I'd like to provide a little bit of additional detail now. Our net sales for the full fiscal year 2026 were down 21.1%, but we saw a slowing of year-over-year revenue decline in Q3 and again in Q4, with Q4 being down 15.6% compared to the prior year or 17.8% adjusted for the settlement of our New York State sales tax liability. We also began to see green shoots in the second half of the year in important areas like prescription medication sales, prescription and nonprescription food sales and autoship sign-ups, and we were pleased to deliver a sequential quarterly increase in fourth quarter net sales, our first Q4 sequential quarterly increase since fiscal year 2024, demonstrating some positive momentum. These improvements, while modest, signal that the strategic and operational initiatives we implemented in the back half of fiscal 2026 are beginning to take hold. Our full year fiscal 2026 results also include several significant nonrecurring accounting entries, including a $26.7 million noncash goodwill impairment reported in Q1 and a $2.1 million wholesale inventory write-down reported in Q3 related to an initiative that was an unsuccessful departure from our core business. We also incurred nonrecurring legal, professional and executive severance costs totaling $4.5 million in fiscal year 2026 related to the whistleblower investigation previously disclosed in our fiscal year 2025 Form 10-K filed in October. However, during fiscal year 2026, we also made meaningful progress on cost reduction efforts including exiting underperforming vendor relationships over the second half of the year that will yield approximately $6.1 million in annualized savings. We also successfully settled our New York state sales tax liability in Q4, resulting in a $2.8 million decrease to net loss in fiscal year 2026. While we were working on these financial improvements, we also made significant operational improvements, strategically reorganizing to optimize headcount productivity in our pharmacy, call center and distribution centers, improving both operational performance and customer experience. Compared to a year ago, our cost structure is now lower and more aligned with the size of the business, while important customer-facing operational metrics are much improved. Finally, we completed several important technology and infrastructure initiatives, including the successful implementation of a new ERP system, a new fraud prevention system and a new call center technology, which serves as the backbone of our phone system. These implementations modernize our tech stack, significantly improve our operations and are critical to providing exceptional service to our customers. With these major initiatives now behind us, we will continue to prioritize website and user experience optimization while significantly reducing operational risk. We also hit a notable company milestone in January when we celebrated PetMed's 30th year anniversary. As part of our anniversary celebration, we were really proud to recognize over 40 employees who've been with the company for more than 10 years, half of whom by the end of this year, will actually have been with the company more than 20 years. This long-tenured employee base speaks not only to a workforce deeply committed to our mission, but one with true expertise that can only be earned by individuals serving customers in the pet health industry for decades. Leveraging this talented and long-tenured employee base, this year, we reorganized our leadership structure, creating a Chief Growth Officer role to align marketing, buying and merchandising and site merchandising. We also made several key internal promotions across distribution, customer care and pharmacy operations, a strong reflection of the depth of talent across the company. To further support the commitment and dedication of our employees, we meaningfully expanded our employee benefits coverage. And as a result of our renewed focus on culture, we saw our employee satisfaction ratings substantially increase. Looking ahead, we plan to build on this year's financial, operational and cultural improvements as an important foundation for our future. We will continue to focus on operational excellence, driving sustainable long-term results and delivering value for shareholders. We intend to do this in part through improved customer retention by leveraging our operational and technology improvements and also by expanding our market footprint through B2B relationships, utilizing our membership programs as well as our white label pharmacy fulfillment services like our recently announced Master Services Agreement with Rural King. We believe these offerings represent a significant opportunity to leverage our deep pharmacy expertise and infrastructure to reach more customers through our partners. Finally, before we move to Doug's presentation of the financials, I want to update you on the status of the unsolicited offers the company received several months ago. In December 2025, the company received 2 unsolicited publicly disclosed nonbinding preliminary proposals to acquire all of the outstanding common stock of the company at prices ranging from $4 to $4.25 per share. These nonbinding proposals were subject to customary conditions, including the satisfactory completion of due diligence and the negotiation and execution of a mutually acceptable definitive agreement. The Board, consistent with its fiduciary duties and in consultation with its financial and legal advisers, carefully evaluated the 2 proposals and solicited interest from other potential strategic and financial sponsors. Following this process and after careful deliberation and consideration of the alternatives, the Board determined that it is in the best interest of the company and its stockholders not to proceed with either of the publicly announced proposals and consequently, PetMeds is continuing to operate as an independent publicly traded company. However, the Board remains open to considering inbound indications of interest that may be received in the future with respect to a potential transaction and will continue to act in accordance with its fiduciary duties to evaluate any such proposals should they arise. As we enter fiscal year 2027, we are confident that the foundation we have built through operational cleanup, cost optimization, technology modernization and strategic partnerships positions us well for the long term. We remain deeply committed to our mission of ensuring pets live longer, healthier and happier lives, and we are focused on delivering value for our shareholders through disciplined execution of our strategic priorities. With that, I'll turn the call over to Doug Krulik for a more detailed review of our financial results. Doug?

Thank you, Leslie. Net sales for the fourth quarter were $42.8 million compared to $50.8 million in the same period last year, a 15.6% decline, primarily driven by a decline in prescription medication sales. Despite this decline in Q4, we saw a modest sequential improvement from Q3, driven by improvements in prescription medication and autoship sales, indicating positive momentum as we closed out the year. Gross profit was $13.9 million compared to $15.2 million last year. As a percent of sales, gross profit this year was 32.6% compared to 29.9% in the prior year, a 270 basis point improvement. This improvement was primarily driven by the impact of our settlement of the New York sales tax liability. General and administrative expenses for the fourth quarter were $11.4 million versus $12.5 million last year, an 8.6% decrease. This year-over-year improvement was driven by cost optimization efforts. Advertising expenses for the fourth quarter were $5.8 million compared to $5.4 million last year. This increase was driven by the presentation of co-op funds we received from our vendors this quarter. Depreciation and amortization was $2.4 million for the fourth quarter compared to $2.1 million in the prior year period, reflecting continued investments in technology infrastructure. Net loss for the fourth quarter was $4.1 million or $0.19 per diluted share compared to a net loss of $11.6 million or $0.56 per diluted share for the same period last year. Adjusted EBITDA loss was $2.8 million compared to a loss of $1.9 million in the prior year period. Now I'll briefly comment on the full year 2026 results. For the full fiscal year, net sales were $179 million compared to $227 million in the prior year, a 21.1% decline, primarily driven by a decline in prescription medication sales. Net loss for the full fiscal year was $57.3 million or $2.74 per diluted share compared to a net loss of $6.3 million or $0.30 per diluted share in the prior year. The increase in net loss was driven by several items, including the $26.7 million noncash goodwill impairment charge reported in Q1, the $2.1 million wholesale inventory write-down reported in Q3 related to an initiative that was not part of our core business, lower gross profit resulting from decreased net sales and increased G&A expenses driven by the nonrecurrence of an $8.7 million onetime stock compensation reversal in fiscal year '25. We also incurred nonrecurring legal, professional and severance costs totaling $4.5 million related to the whistleblower investigation and related matters. Adjusted EBITDA for the full fiscal year was negative $15.4 million compared to positive $0.7 million in the prior year. Turning to our balance sheet. As of March 31, 2026, we had $21.4 million in cash and cash equivalents and no debt. With that, I'll turn the call back to Leslie for closing remarks.

Thanks, Doug, and thank you to all the attendees for your time and interest today in PetMeds. We are really grateful for the support of all of our shareholders and have, in particular, appreciated the opportunity to communicate with a number of you throughout this past year. I also want to thank our employees for their genuine commitment to serving our customers every day. And of course, a big thank you to our loyal customers and their veterinarians who trust us to be part of helping their pets live longer, healthier, happier lives. 2026 was a pivotal year for PetMeds, during which we made significant progress in stabilizing our core business and strengthening our foundation. Thank you again for allowing us to share these results with you today, and we look forward to updating you on our progress next quarter.

Thank you. And with that, ladies and gentlemen, this conference has now concluded. We thank you for attending the PetMed Express Fiscal Fourth Quarter 2026 Financial Results Conference Call. You may now disconnect your lines.