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Despite the prevalence of macroeconomic headwinds in the retail environment, PetSmart, Inc.’s (PETM - Snapshot Report) second-quarter 2014 quarterly earnings of 98 cents per share rose 10.1% year over year and came ahead of management’s prior projection of 94-96 cents.

Moreover, earnings beat the Zacks Consensus Estimate of 94 cents on the back of its constant focus on customers and derived benefits from the sustained growth in the specialty network.

Delving Deeper
 
Net sales climbed 1.4% to $1,729.9 million, coming below the Zacks Consensus Estimate of $1,733.0 million. PetSmart’s comparable-store sales (comps) for the quarter dipped 0.5%, with a 2.6% slip in comparable transactions.

By categories, Merchandise sales inched up nearly 0.8% to $1,505 million, while sales from the Services segment were up 4.7% to $214.3 million. Other revenues in the quarter came in at nearly $10.7 million, up 20.6% year over year.

The company’s gross profit of $515.1 million remained almost flat year over year. However, gross margin shriveled 40 basis points (bps) to 29.8%. Operating, general and administrative expenses fell to $352.2 million from $358.7 million last year and contracted 60 bps as a percentage of sales.

Financials

The company ended the quarter with nearly $323 million in cash, cash equivalents and restricted cash with no borrowings under its credit facility, while total shareholders’ equity stood at $1,159.8 million.

PetSmart’s cash flow from operations was $92 million and it incurred $36 million as capital expenditure. Additionally, reflecting its focus on boosting shareholder value, the company paid out dividends worth $19 million during the reported quarter. However there were no share repurchases made during the quarter.

Acquisitions

With the earnings release, the company announced its plans to acquire Pet360, which is a user friendly web resource for pet parents. This acquisition, which is expected to close in Sep 2014, is likely to enable PetSmart to tap online sales and emerge as a leader in the online retail environment. With Pet360, which comprises various ecommerce sites, PetSmart will be able to enrich its customers’ experience and strengthen its foothold in the omnichannel world.

Looking Ahead

Considering the prevailing macroeconomic conditions and in concurrence with the second-quarter results, the company reiterated its fiscal 2014 outlook. It continues to expect a low-single digit rise in sales with relatively flat comps. Further, during fiscal 2014, it expects to generate cash flows from operations in the range of $600–$625 million.

The company still forecasts fiscal 2014 earnings per share to lie in the band of $4.29–$4.39. The current Zacks Consensus Estimate for the same is pegged at $4.33 per share.

For the third quarter, PetSmart projects earnings to range between 93 - 97 cents a share, while the Zacks Consensus Estimate stands at 95 cents. Also, for the same period, the company envisions comps to remain flat or trend downward.

In a separate press release, the company stated that on the basis of management’s assessment of the company’s business since spring last year, it intends to consider several strategic plans to boost shareholder value, with the sale of the company being a probable option.

However, the company stated that irrespective of the outcome of its business assessment, it will continue to cater to its customers’ needs and maintain its focus on enhancing sales and margins in the future.  Also, the company plans to undertake various performance improvement initiatives, which are aimed at generating cost savings, widening product range, developing its omnichannel network and enhancing customer experience.

Other Stocks to Consider

PetSmart currently carries a Zacks Rank #3 (Hold). However, other better-ranked stocks in the same sector include Citi Trends, Inc. (CTRN - Analyst Report), The Men's Wearhouse, Inc. (MW - Snapshot Report), each carrying a Zacks Rank #1 (Strong Buy) and Barnes & Noble, Inc. (BKS - Snapshot Report), with a Zacks Rank #2 (Buy).
 

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