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PetSmart, Inc. (PETM)

F2Q09 Earnings Call

August 19, 2009 4:30 pm ET


Dave Cone - Investor Relations

Robert F. Moran - President, Chief Executive Officer, Director

Lawrence P. Molloy - Chief Financial Officer, Senior Vice President

Philip L. Francis - Executive Chairman of the Board


Christopher Horvers - JP Morgan

Matthew Fassler - Goldman Sachs

Alan Rifkin - Banc of America Securities Merrill Lynch

Michael Lasser - Barclays Capital

Gary Balter - Credit Suisse North America

Michael Baker - Deutsche Bank North America

David Mann - Johnson Rice & Company

Brian Nagel - Analyst

Peter Benedict - Robert W. Baird & Co.



Good day, ladies and gentlemen, and thank you for standing by and welcome to the PetSmart second quarter fiscal year 2009 analyst conference call. (Operator Instructions) Now I would like to turn the program over to our speaker, Mr. Dave Cone. Sir, please go ahead.

Dave Cone

Good afternoon and welcome to PetSmart's conference call to announce our results for the second quarter of fiscal 2009. With me on the call today are Executive Chairman Phil Francis; our Chief Executive Officer and President, Bob Moran, as well as Chip Molloy, Senior Vice President and Chief Financial Officer.

Bob will kick off the call with an overview of our second quarter results, then Chip will take you through the financial review of the quarter as well as our earnings guidance. Bob will provide a review of the operations of the business and finally, we'll take your questions.

Please keep in mind everything we cover during today's call, including the question-and-answer session, is subject to the safe harbor statement for forward-looking information you'll find in today's news release.

Thanks, and I'll now turn the call over to Bob.

Robert F. Moran

Thanks, Dave. First I would like to take a moment to thank Phil Francis for his tremendous work at PetSmart as our Chief Executive Officer over the past 10 years. Phil has been a great leader, mentor, and a personal friend. His efforts have produced significant value to our shareholders. I am now honored to have this same opportunity.

So let’s move on to the business -- all of us have seen glimmers of hope in the macro environment; however, reports of recent weakness in retail industry sales, especially in more discretionary areas, and volatility in consumer confidence have challenged the idea that the retail customer is ready to return to levels at or near previous spending habits. Despite the weak retail environment, I am pleased to report that we’ve delivered second quarter earnings per share of $0.31 compared to $0.30 in the same period last year. Comparable store sales, or sales in stores open at least a year were slightly less than expected with growth of 0.8%. Our traffic was down only slightly for the quarter, as evidenced by comp transactions of a negative 0.5%.

The large benefit that we have experienced from food inflation over the last several quarters have slowed significantly. However, we are finally beginning to see that an overall deceleration in the decline of comp units and with that, I will turn it over to Chip.

Lawrence P. Molloy

Thanks, Bob and good afternoon, everyone. Today I will be reviewing our second quarter performance, as well as providing guidance for the third quarter and full year. As Bob mentioned, earnings for the quarter were $0.31 per share. This compares to $0.30 per share for the second quarter of last year. Total sales for the quarter were $1.31 billion, up 5.4% from the same quarter last year. The increase in net sales was partially impacted by $8.6 million in unfavorable foreign currency fluctuations.

Services sales, which are included in total sales, increased 10.2%. Our comparable store sales, or sales in stores open at least a year, grew 0.8% for the quarter. Operating income was 5.6% of sales, a 50 basis point decline compared to 6.1% for the same period last year.

Gross margin declined 130 basis points to 28.2%. Within the gross margin line, merchandise margins were down 165 basis points, with mix representing 50% and rate representing 50% of the decline.

Services provided 15 basis points of improvement, primarily due to continued strength in grooming, our largest services business. Our Pet’s Hotels and training businesses remain soft.

Store occupancy was unfavorable 45 basis points, driven by top line weakness in the second quarter. We continue to see some success in lower rents in line with market conditions, as well as obtaining rent abatements by exercising our site specific tenant rights in a number of retail centers.

Despite the top line weakness, our supply chain performance was favorable 65 basis points from the benefit of lower fuel costs, improved productivity, and transportation efficiencies in our network.

Operating, general and administrative expenses were 22.6% of sales for the quarter, an 85 basis point improvement from the second quarter of last year. Overall advertising dollar spend was flat for the same period last year, which is helping to drive a portion of the leverage. As expected, we have seen declining advertising rates providing us with increased efficiencies in our spend.

We are also starting to see the benefits of moderating store openings, resulting in lower pre-opening expenses, and we continue to benefit from a cost conscious culture, as travel and supply costs are also down.

Our effective tax rate was 36.4% for the quarter compared to 40.4% in the same period last year. This change was primarily driven by reductions in certain tax, state tax liabilities and tax exempt gains from our deferred compensation plan, which we do not expect to continue in the back half of the year.

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