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PetSmart's Q2 Was No Dog

Posted: Sep 03, 2008 07:54 AM by Glenn Curtis

Tickers in this Article: WMT, PETM

After perusing second quarter results released August 28 by pet supply retailer PetSmart (Nasdaq:PETM), I have mixed emotions about the stock. Here's what stood out to me:

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On The Positive Side
In the quarter ending August 3, the Arizona-based company reported earnings of $37.2 million or 30 cents per share. These numbers did not look too appealing at first glance given that in Q2 2007 the company booked a gain of $47.1 million or 35 cents per share.

However, the company noted in its report that Q2 2007 included $6.7 million of net benefits associated with reductions in insurance and stock-option expenses as well as favorable timing of rent reimbursement from MMI Holdings Inc., the third-party operator of PetSmart's in-store Banfield veterinary hospitals. Taking that information into account, the comparison appeared more favorable. In addition, the 30 cents per share was about two cents higher than Street expectations.

PetSmart's sales grew an impressive 11.2% from about $1.12 billion in Q2 2007 to $1.24 billion in the most recent quarter - slightly ahead of expectations. According to consensus estimates, $1.22 billion had been expected on average. (Read Surprising Earnings Results to learn how consensus estimates can send stocks moving.)

According to an August 28 Associated Press report, "The company said it expects to earn $1.51 to $1.59 per share for the year, reiterating earlier estimates." The investment community had projected earnings of $1.49 per share this year.

Comps also were favorable. In the period, PetSmart's comparable store sales rose 4%. That's good news because last year's Q2 results reveal it increased against another 4% gain.

For the record, Wal-Mart (NYSE:WMT), which sells pet-related goods, recently reported a 5% same-store improvement. Meanwhile Target posted a 0.4% decline in comps in its Q2. To be clear, those numbers factor in items other than pet supplies.

In short, all of this gives PetSmart some "Street cred" - it did perform well in spite of the tough economy. Its guidance could also cause the Street to raise its forecast going forward. (Explore the controversies surrounding companies commenting on their forward-looking expectations in Can Earnings Guidance Accurately Predict The Future?)

The "Negative"
In the most recent quarter, PetSmart reported 126.2 million weighted average shares outstanding - diluted. That compares to 135.5 million in Q2 last year. I speculate that the difference is due to stock repurchases. I rarely have a bone to pick with stock repurchases - it's often a terrific sign of a board's confidence in a company. In any case, by my math, had the company been operating on the same number of shares as it was in the comparable period last year, its earnings would have been about 27.5 cents per share - not overly exciting.

Very simply, this could cause some fence-sitting investors who run this calculation to beg off.

Bottom Line:
Overall, I was fairly impressed by PetSmart's results for Q2 and its forecast for the year.

For more on investing in this sector, read our related article 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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