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Strong 1Q for PetSmart

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Higher sales and cost containment efforts facilitated PetSmart Inc. , the specialty retailer of products, services and solutions for pets, to post strong first-quarter 2012 earnings. The quarterly earnings of 85 cents a share jumped 39% from 61 cents delivered in the year-ago period. Moreover, the reported earnings handily surpassed the Zacks Consensus Estimate of 73 cents.

The company’s top line increased 9.4% year over year to $1,629.9 million, ahead of the Zacks Consensus Estimate of $1,599 million. However, unfavorable foreign currency fluctuations negatively impacted the sales by $2 million. Merchandise sales grew 9.5% to $1,439.6 million, whereas service sales increased 8.3% to $181 million. Other revenue in the quarter came in at $9.3 million, up 4.5% year over year.

Phoenix-based pet retailer, PetSmart’s comparable-store sales increased 7.4% in the quarter, driven by a 3.3% growth in comparable transactions.

The company’s innovative and differentiated products as well as its sustained effort to expand its portfolio of brands and assortments have helped to deliver healthy results. PetSmart has collaborated with Martha Stewart Living Omnimedia Inc. to launch different lines of pet products.

Benefiting from its top-line growth, gross profit marked an increase of 12.8% to $497.4 million. Moreover, gross margin expanded 90 basis points to 30.5%, reflecting a decline in cost of sales as a percentage of total revenue.

The company’s operating income was robust, showing a growth of 26.8% to $154.4 million. Besides, operating margin expanded 130 basis points to 9.5%, reflecting a decrease of 50 basis points in operating, general and administrative expenses as a percentage of total revenue.

During the quarter, PetSmart opened 14 stores and closed 5 stores bringing the total store count to 1,241 stores. The company also opened 3 PetsHotels and closed one during the quarter bringing the total count to 194 PetsHotels.

The company repurchased shares worth $175 million, distributed dividends totaling $15 million and incurred $36 million in capital expenditures during the quarter. It ended the quarter with cash and cash equivalents of $268.9 million, capital lease obligations of $496 million and shareholders’ equity of $1,099.5 million.

Guidance Raised

Based on the healthy results, the company raised its fiscal year guidance. Currently, the company expects earnings in the range of $3.19 to $3.31 per share, while comparable store sales are projected to increase in the mid-single-digit range, with total sales growth of 9% to 10%.  Gross margin is expected to expand by 65 to 75 basis points.

Earlier, the company forecasted earnings to be in the range of $3.02 to $3.16 for fiscal 2012. Comparable store sales were projected to increase in the range of 3% to 4%, with total sales growth of 7.5% to 8.5%.  Gross margin was expected to increase by 30 to 40 basis points.

For the second quarter of 2012, the company expects comparable store sales to increase in the mid-single-digits range, while earnings per share are expected to be in the range of 61 cents to 65 cents.

PetSmart holds a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating and reflects the consistent strong performance of the company as well as its positive outlook.

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