PETM

PetSmart, Inc (PETM)

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PetSmart, Inc. (PETM)

Q3 2009 Earnings Call

November 18, 2009 4:30 pm ET

Executives

David Cone – Vice President Investor Relations & Treasury

Robert F. Moran – President, Chief Executive Officer & Director

Lawrence P. Molloy – Chief Financial Officer & Senior Vice President

Analysts

Matthew Fassler – Goldman Sachs

Alan Rifkin – Bank of America Merrill Lynch

Michael Lasser – Barclays Capital

Analyst for Matt Nemer – Wells Fargo Securities LLC

David Mann – Johnson Rice & Company

Peter Benedict – Robert W. Baird & Co., Inc.

Michael Baker – Deutsche Bank Securities

[Christian Buss]

[Daniel Hopkin]

Mitchell Kaiser – Piper Jaffray

David Strasser – Janney Montgomery Scott LLC

Presentation

Operator

Welcome to the PetSmart third quarter 2009 analyst conference call. At this time all participants are in a listen only mode. Later, we’ll conduct a question and answer session and instructions for audio questions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference Mr. David Cone, Vice President of Investor Relations and Treasury.

David Cone

Welcome to PetSmart’s conference call to announce our results for the third quarter of fiscal 2009. With me on the call today are Chief Executive Officer and President Bob Moran as well as Chip Malloy, Senior Vice President and Chief Financial Officer. Bob will kick off the call with an overview of our third quarter results and 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 that 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

I am pleased to report our results for the third quarter was strong EPS growth and positive comparable store sales. I am proud of the dedication of our 46,000 plus associates who are driving impactful execution in expense management and strategic alignment throughout the organization. Our ability to deliver positive comp sales while still battling a challenging retail environment in a difficult inflationary comparison continues to show the strength of the PetSmart brand and the loyalty of our customers even in tough times.

For the third quarter earnings per share were $0.31 and comparable stores sales for sales in stores open at least a year remained in positive territory with growth of 3%. Comp transactions which we use as a proxy for traffic declined .9%. Overall, we are pleased with our performance for the third quarter and feel that we are well positioned to improve these trends going forward. Throughout the year we have remained focused on aligning the efforts of our organization while working on leveraging customer insights, improving merchandising capabilities and most importantly engaging our customers.

As we shared with you on our recent analyst day, we have made significant progress in each of these areas and I will update you with more details in a few moments. Before doing so, I’ll turn the call over to Chip who will provide more details on our financial performance for the quarter as well as our outlook for the remainder of the year.

Lawrence P. Molloy

Today, I will be reviewing our third quarter performance as well as providing guidance for the fourth quarter and full year. As Bob mentioned, earnings for the quarter were $0.31 per share, a 10.7% increase over the $0.28 per share for the third quarter of last year. Total sales for the quarter were $1.29 billion, up 3.5% from the same quarter last year. The increase in net sales included a favorable impact for foreign currency fluctuations of less than $1 million. Services sales which are included in total sales increased 8%.

Our comparable store sales grew .3% for the quarter while operating income was 5.5% of sales, a 30 basis point decline compared to 5.8% for the same period last year. Gross margins declined 110 basis points to 27.5%. Within the gross margin line, merchandise margins were down 160 basis points with mix representing 45% and rate representing 55% of the decline. Services provided a 15 basis point improvement primarily due to continued strength in grooming, our largest services business.

While our PetsHotel and training businesses remain a bit weak. Supply chain was favorable 45 basis points as we continued to experience benefits from lower fuel costs, improved productivity and transportation efficiencies in our network. Store occupancy was unfavorable by 10 basis points. Our decision to slow unit growth combined with lower negotiated rents through lease renewals and various rent abatement benefits have now allowed us to now establish a rent and occupancy base line that helps mitigate dilution in a relative low sales comp environment.

Operating, general and administrative expenses were 22% of sales for the quarter representing 80 basis points of leverage. We continue to benefit from lower advertising rates and we also leveraged other areas such as store labor, travel, depreciation and pre-opening expenses. During the quarter we opened seven new stores and closed three. We also opened five PetsHotels. This compares to 32 new stores and 11 PetsHotels in the third quarter of last year.

During the quarter we generated $91 million in operating cash flow and spent $28 million on capital expenditure projects. Year-to-date we have spent $87 million for cap ex projects which is more than a 55% reduction when compared to this time last year and we are projecting total cap ex spend for the year to be in line with our guidance of $115 to $125 million.

Read the rest of this transcript for free on seekingalpha.com