PetSmart Punished for Conservative Guidance

PetSmart (PETM) saw net income increase 24% in their fiscal first quarter, as results handily topped Wall Street’s view. The pet products retailer generated revenue of $1.4 billion or 5% better than a year ago thanks to new store additions and favorable exchange rate fluctuations. Net income was $55.6 million or 46 cents per share, and analysts had forecasted 43 cents per share on $1.38B in sales. Same store sales grew by 2.8% and they opened 14 new stores bringing the total to 1160 locations. Management had previously stated that they planned to open between 40 and 42 new stores in 2010.

Despite the earnings beat, shares tumbled in early action trading as low as $30.10 but PETM has recovered to just 2% down through the morning. The reason for the early weakness was the company’s outlook for the second quarter in which management guided for 33 to 37 cents of profit per share. Analysts were expecting 36 cents, so the outlook spooked some. Furthermore, PETM admitted that margins would likely fall in the current quarter as sales growth in consumables is outpacing growth in hardgoods (leashes, collars, accessories) which carry better margins. With that said, PetSmart does see full year results pointed higher as they now expect full year earnings of $1.82 to $1.92, which easily outshines analysts estimates for $1.83 per share.

The last few times we have written about PetSmart we have reiterated our Undervalued view of this specialty retailer as fundamentals improved in spite of a tough economy (spending on pets has proven to be less discretionary than many believed). However, after the stock has appreciated above $31 we are less enthusiastic about its valuation and a few months ago we downgraded the stock to Fairly Valued. PetSmart is trading within its historically normal price-to-cash earnings and price-to-sales ranges as the market has finally rewarded PETM for its steady growth. For this reason, we are not recommending long term investors buy the stock unless it were to slip back into the mid twenty dollar range.

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