PetSmart in the Doghouse

 | Mar 07, 2013 | 1:00 PM EST
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Last night PetSmart (PETM) beat the fiscal fourth-quarter earnings estimate by $0.03 per share, but guidance for the first quarter put the stock in the doghouse. Investors have been trained to expect strong same-store sales performance from PetSmart, but it appears comparisons are moderating. From the body language on the call, there will be no treats in the coming fiscal year.

I've been concerned about PetSmart's valuation for some time, and have been hesitant to buy more shares. Now you know why.

As the only public pet superstore, PetSmart has been a great way to play this growing sector. In the last five years the stock has risen more than 230%. The mixed guidance clouded the picture for this well-run retailer.

PetSmart reported that fourth-quarter revenue rose 14.7% to $1.88 billion. Comparable-store sales grew 4.6%, and comp transactions -- used as a proxy for store traffic -- were up 1.2%. This was the 11th consecutive quarter of rising store traffic. Earnings per share totaled $1.24, up 36%.

Consumables, which represent things like pet food and treats, comprised 53.5% of sales. Hard goods, such as toys, represented 34.2%, while services grew 10.3%. The live-pet business grew just 1.5% in the quarter. Gross margins rose 1.2% to 31.6%. Merchandise margins were 40.3%, and services were 2.8%. 

For the full fiscal year, the company earned $3.55, up 39%. Same-store sales increased 6.3%. The total top line came in at $6.8 billion, up 11%.

But what really knocked the stock down after-hours was the forward guidance. Management told investors to expect a slowdown in comps for the first quarter and implied the rest of year would be somewhat slower. The company is starting its third year of increasing same-store sales, and is having difficulty wringing out more growth. Half of the store sales are in food, and apparently the pets of America can only eat so much!

Analysts were estimating comps in the 4% range -- and management guided to between 2% and 4%. New store launches, and only one new PetHotel, are not enough to drive the company forward. Management is relying on things like exciting new merchandise and a revamped reptile section to grow the business.

I'm sure the stock will get hit with a host of downgrades today. I didn't hear anything on the call that would get me to put new money into PetSmart; we'll have to see how the first quarter plays out. The company has begun experimenting with a smaller store format -- just 6,000 to 7,500 square feet. If the new format works out, perhaps it will drive growth in the future. But, for now, those that are long the stock will have to lick their wounds.

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