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PetSmart's Q3 Bark And Long-Term Bite

Posted: Nov 25, 2008 07:53 AM by Glenn Curtis

Tickers in this Article: TGT, WMT, PETM

Mecca for all things pets, Arizona-based PetSmart (Nasdaq:PETM) recently issued solid third-quarter earnings results despite an economic climate that can only be described as dismal.

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Pet Smarts
According to its 10-K, PetSmart employs about 21,000 full-time employees as of early February. And, according to its most recent quarterly earnings, PetSmart operates more than 1,100 stores in the U.S. and Canada that range in size from 19,000 to 27,000 square feet each. In addition to pet merchandise for dogs, cats, birds, fish, reptiles and other small pets,
PetSmart offers boarding facilities at more than 100 of its locations as well as grooming, adoption and veterinary services at others. (Learn more about the 10-K at Fundamental Analysis: Introduction.)

Quarterly Bark
In the period ended November 2, PetSmart earned 28 cents per share, an increase of 5 cents over the 23 cents per share it earned during the same period last year. In addition, the company beat analyst expectations by 2 cents per share. The health of the stock may be illustrated further by the fact that shares rose more than 10% on Thursday from the previous close, a day when the Dow Jones Industrial Average was off more than 400 points.

Beyond its bottom line, PetSmart has other attractive features, including an operating margin that increased to 5.8% over the 5.3% it experienced during the same period last year. A solid revenue line - up 12.1% from the same period last year - and a lower percentage of selling, general and administrative expenses contributed to strength in this area.

PetSmart's sales and margin performances are impressive in light of a continually worsening economy. However, whether or not the company can maintain solid sales results is yet to be seen, given that it could lose some foot traffic to the likes of Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), both of which stock pet-related merchandise. However, PetSmart's strength against its competitors is the multiple services it offers at its locations, creating a virtual one-stop shop where pet owners can purchase supplies, have their pets groomed or seek veterinary services under one roof.

Long-Term Bite?
Comparable store sales were up 5.4% during the quarter compared to comps of 1.4% in Q3 2007. However, PetSmart's full-year guidance of $1.49 to $1.52 per share falls below the $1.51 to $1.59 per share the company stated in its Q2 earnings release. Although 2009 projections are not spectacular, they are respectable given that shares currently trade around $15, or 0.38 times sales, according to Yahoo! Finance.

With all of that in mind, the fact that insiders have not been big buyers of the stock in the open market lately is cause for concern. Furthermore, PetSmart is currently trading at the disappointing lower end of its 52-week trading range.

Bottom Line
Based on its sales line, operating margin and EPS number, PetSmart turned out a solid third quarter. However, the dearth of insider buying and competition from discount retailers could prove problematic down the road.

To learn more about stocks in this sector, read Analyzing Retail Stocks.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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