PETM

PetSmart, Inc (PETM)

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PetSmart, Inc. (PETM)

Q3 2011 Earnings Call

November 16, 2011 4:30 p.m. EST

Executives

Dave Cone – VP of IR and Treasury

Bob Moran – President and CEO

Chip Molloy – SVP, CFO

Analysts

Matthew Fassler – Goldman Sachs

Chris Horvers – JPMorgan

David Mann – Johnson Rice

Alan Rifkin – Barclays Capital

Seth Sigman – Credit Suisse

Mike Baker – Deutsche Bank

Michael Lasser – UBS

Peter Benedict – Robert Baird

Dan Binder – Jefferies & Co.

Operator

Good afternoon, ladies and gentlemen, and welcome to PetSmart’s Third Quarter 2011 Analyst Conference Call.

At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will be given at that time. If anyone should require operator assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host for today, 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 third quarter of fiscal 2011. With me on the call today are President and Chief Executive, 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 third 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 third quarter, earnings per share were $0.50, up 32% when compared to $0.38 for the same period last year. Comparable store sales or sales in stores opened at least a year grew 6.1% and comp transactions, which we use as a proxy for traffic, were up 2.2%.

The favorable momentum that we’ve experienced during the quarter validates the work that we are doing and continues to move us forward on our journey to becoming a best-in-class specialty retailer. At PetSmart, we are committed to delivering solutions through a broad assortment and an unmatched customer experience all at great value. But it’s our differentiation that makes us the leading pet specialty retailer and sets us apart from the competition. And 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 third quarter and where we are focused going forward. But before doing so, I will turn the call over to Chip.

Chris Molloy

Thanks, Bob, and good afternoon everyone. 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 $0.50 per share, which represents 32% growth when compared to $0.38 for the same period last year. Comparable store sales growth was 6.1% and comp transactions were positive for the sixth consecutive quarter at 2.2%.

Total sales for the quarter were $1.5 billion, up 8%. The increase in total sales included a favorable impact from foreign currency fluctuations of $3 million. Services sales, which are included in total sales, increased 9% to $161 million. Other revenue which is also included in total sales was $9 million, representing reimbursements from Banfield for the space they utilize in our stores. The sales mix for the quarter included consumables at 53.3%, hard goods at 33.6%, services at 10.8%, live pets at 1.7%, and other revenue at 0.6%.

Gross margins for the third quarter improved 60 basis points to 28.6%. Within the gross margin line, merchandise margins decreased 10 basis points while services added 5 basis points to the overall rate. Store occupancy and supply chain were favorable, 45 and 20 basis points, respectively. Operating, general and administrative expenses were 21.8%, representing 20 basis points of leverage 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 higher incentive compensation.

Overall, earnings before tax increased to $87 million or 5.8% of sales. This represents 26% growth and an 80-basis-point improvement compared to the third quarter of last year. The tax rate for the quarter was 38.8%.

During the quarter, we opened 15 new stores and closed two. We also opened four pets hotels, bringing our totals to 1,210 stores and 189 hotels. We ended the quarter with average inventory per store of $585,000, or flat when compared to the third quarter of last year.

During the quarter we generated $124 million in operating cash flow. We spent $28 million on capital expenditures, distributed $16 million in dividends, and repurchased $70 million of PetSmart stock. Depreciation and amortization expense for the quarter was $58 million.

We ended the quarter with $333 million in cash, cash equivalents and restricted cash, and zero borrowings on our credit facility. We are very pleased that we continue to deliver strong operating results while maintaining a health balance sheet.

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