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PetSmart, Inc. (PETM)

Q2 2011 Earnings Call

August 17, 2011 4:30 PM ET

Executives

Dave Cone – Vice President, IR and Treasury

Bob Moran – President and CEO

Chip Molloy – Senior Vice President and CFO

Analysts

Chris Horvers – JPMorgan

Matthew Fassler – Goldman Sachs

Alan Rifkin – Barclays Capital

Gary Balter – Credit Suisse

David Mann – Johnson Rice

Matt Nemer – Wells Fargo Securities

Mike Baker – Deutsche Bank

Michael Lasser – UBS

Scot Ciccarelli – RBC Capital Markets

Brian Nagel – Oppenheimer

Peter Benedict – Robert Baird

Dan Binder – Jefferies & Company

Presentation

Operator

Good afternoon, ladies and gentlemen. And welcome to PetSmart’s Second Quarter 2011 Analyst Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Dave Cone, Vice President of Investor Relations and Treasury.

Dave Cone

Good afternoon. And welcome to PetSmart’s conference call to announce our results for the second quarter of fiscal 2011. With me on the call today are 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 and then Chip will take you through the financial review of the quarter, as well as our guidance for the remainder of the year. 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.

Bob Moran

Thanks, Dave, and hello, everyone. We are pleased to report another quarter of solid earnings growth. For the second quarter earnings per share were $0.54, up 32% when compared to $0.41 for the same period last year. Comparable store sales or sales in stores open at least a year grew 5% and comp transactions which we use as a proxy for traffic were up 2%.

The continued momentum that we experienced during the quarter validates the work that we are doing and continues to propel us forward when our journey to becoming a best-in-class specialty retailer, with a focus on differentiation through exclusive offerings and our unmatched customer experience. We are giving our pet parents even more compelling reasons to shop our stores. While the macro economy still faces a number of challenges, we believe we are well-positioned to continue to execute on our strategic priorities and deliver shareholder value.

In a few moments, I will update you on some of our accomplishments during the second quarter and where we are focused going forward, but before doing so, I will turn the call over to Chip.

Chip 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 $0.54 per share, which represents 32% growth when compared to $0.41 for the same period last year. Comparable store sales growth was 5% and comp transactions were positive for the fifth consecutive quarter at 2%.

Total sales for the quarter were $1.5 billion up 7%. The increase in total sales included a favorable impact from foreign currency fluctuations of $6 million. Services sales, which are included in total sales increased 7.6% to $178 million. Other revenue, which is also included in total sales was $9 million, representing reimbursements from Banfield for the space they utilized in our stores. The sales mix for the quarter including consumables at 52.2%, hardgoods at 33.6%, services at 12%, live pets at 1.7% and other revenue at 0.6%.

Gross margins for the second quarter improved 90 basis points to 29.4%. Within the gross margin line, merchandise margins increased 70 basis points, driven by the continuation of increase sales of a higher margin mix of products within the key categories, improvements and shrink, and anniversary of the rawhide and live good resets that took place during the second quarter of last year.

Services contributed 10 basis points to gross margin rate, while store occupancy and supply chain were each favorable 5 basis points.

Operating, general and administrative expenses were 22%, representing 10 points of deleverage compared to the same period last year. Year-over-year increases in OG&A expenses were primarily due to store growth, planned incremental advertising spend focused on our differentiated offerings and incentive compensation.

Overall, earnings before tax increased $96 million or 6.5% of sales. This represents 24% growth and a 90 basis point improvement compared to the second quarter of last year. The tax rate for the quarter was 39.2%.

During the quarter we opened eight new stores and closed three. We also opened one PetsHotels, bringing our totals to 1,197 stores and 185 hotels. We ended the quarter with average inventory for store of $533,000 or flat when compared to the second quarter of last year. During the quarter we generated $109 million in operating cash flow, we spend $20 million on capital expenditures, distributed $14 million in dividends and repurchased $63 million of PetSmart stock. Depreciation and amortization expense for the quarter was $60 million.

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