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Momentum

Following robust first-quarter results, PetSmart, Inc. (PETM - Snapshot Report) has witnessed 21 upward revisions out of 22 estimates for the current fiscal year. The specialty retailer of products, services and solutions for pets became a Zacks #1 Rank (Strong Buy) on May 24, just two days after its earnings announcement.

Adding further momentum to the stock was the recent news of an 18% hike in the quarterly dividend to 16.5 cents, and the announcement of a new $525 million share buyback plan. All these positive factors led shares of PetSmart to a new 52-week high of $69.82 on June 19, before closing at $69.36. Shares are up approximately 38.1% so far this year.

Fabulous Quarter, Upbeat Guidance

On May 22, PetSmart posted first-quarter earnings of 85 cents per share, surpassing the Zacks Consensus Estimate of 73 cents by 16.4%. The result also jumped 39% from prior-year earnings of 61 cents. Higher sales and cost containment efforts benefited the quarter.

Total sales of $1,629.9 million handily beat the Zacks Consensus Estimate of $1,599 million and rose 9.4% year over year, reflecting sales increases across merchandise (up 9.5%) and service (up 8.3%). Other revenue climbed 4.5% from the prior-year quarter. Operating income surged 26.8% to $154.4 million, whereas operating margin expanded 130 basis points to 9.5%.

The company’s innovative and differentiated products, as well as its sustained effort to expand its portfolio of brands and assortments, led to the healthy results. PetSmart has collaborated with Martha Stewart Living Omnimedia Inc. (MSO) to launch different lines of pet products.

Raised Guidance Leads to Growing Estimates

Buoyed by better-than-expected results, management raised its fiscal 2012 earnings guidance to between $3.19 and $3.31 from the earlier guidance of $3.02 to $3.16. For the second quarter, earnings are projected between 61 cents and 65 cents per share. PetSmart now envisions a fiscal 2012 total sales increase of 9% to 10%, which are 150 basis points above its earlier projection.

In the past 30 days, the Zacks Consensus Estimate for fiscal 2012 rose 5.1% to $3.29 per share on the back of upward revisions from 21 out of 22 estimates. The current estimate, which dovetails with the higher end of the company’s guidance range, implies year-over-year growth of 29%.

For fiscal 2013, the Zacks Consensus Estimate is $3.66 per share, exhibiting an increase of 4.9% in the last 30 days, aided by 20 upward revisions out of 22 estimates. The current estimate portrays year-over-year growth of 11.2%.

Valuation Stretched, Yet Lucrative

PetSmart currently trades at a forward P/E of 21.1x, reflecting a 2.9% premium to the peer group average of 20.5x. Also, on a price-to-book basis, shares trade at 6.9x, a 90.4% premium to the peer group average of 3.6x. Given the company’s compelling fundamentals, the premium valuation is justified and well supported by its long-term estimated EPS growth rate of 16.3%.

With respect to return on equity (ROE), the stock looks attractive. It has a trailing 12-month ROE of 27.6%, which is substantially above its peer group average of 17.4%. This implies that the company reinvests its earnings more efficiently than its peer group.

Strong Chart

Shares of PetSmart had been trading in the range of approximately $50.00 to $59.00 between January 3 and May 22, 2012. It broke that range on May 23 following its strong first-quarter 2012 results and started inching closer to its 52-week high. In fact, the stock has been consistently trading above its 200-day moving average since October 10, 2011. It has also remained above the 50-day moving average since May 23, 2012.

Volume is fairly strong, averaging roughly 1,216K daily. PetSmart has outperformed the S&P 500 since April 12, 2012. The year-to-date return for the stock is 38.1%, compared with the S&P 500’s return of 6.3%.

Founded in 1986 and based in Phoenix, Arizona, PetSmart offers products, services, and solutions for pets. The company operates over 1,241 pet stores in the United States, Canada, and Puerto Rico, and more than 194 in-store PetSmart PetsHotel cat and dog lodging amenities. The company is also one of the leading online providers of pet supplies and information related to pet care.

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