PetSmart's Pullback Is A Buying Opportunity

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Lackluster retail results have inspired recent headlines such as "Tepid U.S. Retail Sales Raising Doubts About Economy " and "Consumer Caution Hits Sales at U.S. Retailers."

The latest wave of quarterly financial results has exposed the challenges many retailers face. Profits dropped 13% at Target (NYSE: TGT ) for the quarter ended that Aug. 3, compared with the same period last year .

Wal-Mart's (NYSE: WMT )same-store sales -- revenues from stores open for more than one year -- slumped 0.3%. Same-store sales at Abercrombie & Fitch (NYSE: ANF ) dropped 10%. Macy's (NYSE: M ) , Dick's Sporting Goods (NYSE: DKS ) , Amazon.com (Nasdaq: AMZN ) and Staples (Nasdaq: SPLS ) all missed Wall Street 's expectations in the most recent financial reporting period.

A few retailers, however, bucked the trend. PetSmart (Nasdaq: PETM ) was one of them. On Aug. 21, PetSmart reported earnings of 89 cents a share for the quarter ended Aug. 4, up 25% compared with the same quarter last year. This beat analysts ' expectations by 3 cents a share. Same-store sales grew 3.4%, while total revenue increased 5.3%.

PetSmart raised its earnings guidance for 2013 to a range of $3.88 to $3.98 per share, up from previous estimates of $3.82 to $3.94 per share. The company also reaffirmed its commitment to drive total shareholder returns of 13% to 18% annually.

© PetSmart Store Support Group
While many retailers have recently reported dismal earnings, PetSmart was able to buck the trend.

On this stellar news, the share price of PETM dropped roughly 5%.

PetSmart's profit margin improved over the same quarter last year. Its gross margin remained essentially flat. But during the conference call , one analyst harped on PETM's 55-basis-point margin contraction on merchandise sales. The company explained that a problem with its tropical fish inventory and a cat product promotion negatively impacted its merchandise margins. The cat product promotion has since ended, and the fish supply issue has been resolved.

Yet the analysts had trouble letting go of this one metric.

The analyst that seemed most focused on the merchandizing margin contraction was from a well-known advisory firm. The firm downgraded PETM to a "hold" from a "buy" back in January 2009 and hasn't upgraded it since. Shares of PETM have gained roughly 200% since then. I have to wonder whether the analyst wasn't just looking for something to dislike just to support his firm's thesis.

Action to Take --> Sometimes analysts are too smart by half, focusing on a brush stroke instead of the big picture. I think this could be the case with PetSmart. The company proved once again that it is resilient, even when consumers are cautious.

The overall market could continue to be pressured over the next month or two. A potential change to U.S. monetary policy and a possible budget fight in Congress could make for skittish investors. But if you have been looking for an opportunity to purchase PETM and have a longer time horizon, I view the recent pullback as a buying opportunity.





The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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