PetSmart Q1 Earnings Beat, Revs Lag - Analyst Blog

PetSmart, Inc. PETM began fiscal 2014 with quarterly earnings of $1.04 per share, reflecting a year-over-year improvement of 6.1%. The reported earnings surpassed the Zacks Consensus Estimate by a couple of cents.

The company's innovative and differentiated products along with sustained efforts to expand its portfolio of brands and assortments aided results.

Delving Deeper
 
However, owing to the challenging consumer environment coupled with competitive headwinds, quarterly sales of $1,729.1 million came below management's expectations and also missed the Zacks Consensus Estimate of $1,772.0 million. On a year-over-year basis, sales inched up 1.1%.

By categories, Merchandise sales climbed nearly 0.6% to $1,519.0 million, while sales from Services segment were up 4.5% to $200.2 million. Other revenues in the quarter came in at nearly $10.0 million, up 3.4% year over year.

PetSmart's comparable-store sales (comps) for the quarter dipped 0.6%, with a 2.2% slip in comparable transactions. Comps were adversely affected by currency translations and inclement weather conditions.

The company's gross profit of $530.8 million was up 0.2% on a year-over-year basis. Gross margin shriveled 30 basis points (bps) to 30.7% due to distribution and warehouse expenses, particularly related to new distribution center openings.

Operating, general and administrative expenses fell to $359.1 million from $362.2 million last year and contracted 40 bps as a percentage of sales. The improvement was backed by lower travel and professional fees, partly offset by higher advertising expenses. Moreover, PetSmart witnessed a 20-bps improvement in earnings before tax margin, which came in at 9.2%.

Financials

The company ended the quarter with $301.3 million in cash, cash equivalents and restricted cash in addition to full availability under its credit facility, while total shareholders' equity stood at $1,071.3 million.

PetSmart's cash flow from operations was $137.0 million and incurred $32.0 million as capital expenditure. Additionally, reflecting its focus on boosting shareholder value, the company repurchased shares worth $130 million and paid out dividends worth $20 million during the reported quarter.

Store Update

This pet food and supplies departmental retailer introduced 7 new stores and 1 PetsHotel during the quarter, taking the respective counts to 1,340 and 200.

Looking Ahead

Considering the prevailing macroeconomic conditions and in concurrence with first-quarter results, the company anticipates a low-single digit rise in sales with relatively flat comps. Further, during fiscal 2014, it expects to generate cash flows from operations in the range of $600–$625 million.

The company forecasts fiscal 2014 earnings per share to lie in the band of $4.29–$4.39. The current Zacks Consensus Estimate for the same is pegged at $4.40 and may witness a downward revision.

For the second quarter, PetSmart projects earnings to range between 92–96 cents a share, while the Zacks Consensus estimate stands at 97 cents. Also, for the same period, the company envisions comps to remain flat or trend downward.

Although the company's first-quarter results were not so impressive, management remains focused on driving results by implementing efficient capital allocation, returning value to shareholders and managing expenses well. PetSmart is also taking several initiatives to enhance its omnichannel operations in order to tap online sales. Alongside, the company is focused on creating brand awareness by launching an influential and attractive brand campaign.

Other Stocks to Consider

PetSmart currently holds a Zacks Rank #4 (Sell). However, some better-ranked stocks in the same sector include ITOCHU Corporation (ITOCY), Office Depot, Inc. ODP and Foot Locker, Inc. FL, each carrying a Zacks Rank #2 (Buy).