PetSmart Begging for Treats

 | Nov 21, 2013 | 11:00 AM EST
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Back in March I wrote that PetSmart (PETM) was in the doghouse. The company had just lowered guidance. The stock bottomed in the low $60s as management pointed toward a weak finish to fiscal year 2013.

But the stock saw a big rebound. The shares are up 20% since April 1, and investors are expecting Friday's fiscal third-quarter report to at least match lowered guidance. For the October quarter, the company has guided to revenue of $1.7 billion and earnings per share of $0.86. That works out to 4.4% revenue growth. For the full year, the company is expected to report sales of $6.973 billion, up 3.2%, and for earnings of $3.96 per share.

If the company matches guidance -- and if it does not lower fourth-quarter estimates -- this year's growth will amount to half of last year's rate. The company has cut its comparable-store-sales forecast to between 2.2% and 2.5%, down from the prior range of 3% to 4%. What happened? PetSmart used to be a reliable high-single-digit grower.

Last month at the annual analyst meeting, management talked a lot about resetting some parts of the store. Hard goods, for example, needed to be reorganized with new fixtures and signage. New brands and new assortments of existing brands are needed to grow the shopping basket. Because it's losing sales to lower-priced Internet retailers, the company is focused on driving sales with differentiated products. Items like leashes, toys, grooming supplies and flea and tick products have become a low-margin battleground.

Sales in the specialty pet department are also undergoing changes. In order to drive "new pet acquisition," PetSmart has partnered with National Geographic to brand guinea pigs and bearded dragon starter kits. In an effort to increase customer loyalty, the company continues to build out its proprietary brands of dog food and specialty items.

Management is also continuing to innovate by offering "creative" dog-grooming services. For instance, you have the option of dying your dog pink or offering seasonal grooming packages, such as dying your dog orange and dressing him up for Halloween.

In order to drive traffic into the stores, the company has embarked on an aggressive television and social media campaign. Redesigned emails are driving 30% higher clicks. The company tracks more than 35 million customers, and 90% of sales are linked to specific customers.

For fiscal 2013, the company expects to end the year with 57 net new stores. Among these, 20% are set to have the new "micro" store format.

Investors seem impressed with the changes and have bought the stock anticipating better results ahead. I'm not so sure. Year to date, the stock has massively underperformed the S&P 500. Unless management can reaccelerate the top line, I think the stock will stay in that doghouse.



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