PetSmart Claws Its Way Up

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The first-quarter results from Motley Fool Stock Advisor selection PetSmart (Nasdaq: PETM) weren't show worthy, but they're more than good enough.

With the sale of the equine business completed during the quarter and a one-time gain from PetSmart's ownership shift in its in-store veterinary business, the income statement is a bit opaque. With these items factored in, the company earned $0.34 per diluted share compared to $0.30 a year ago. Sales were up 10%. After adjusting for one-time items, margins were comparable to last year. The company stated on its conference call that it generated approximately $110 million in operating cash flow, and the balance sheet is still flush with cash.

Financially, that's a good quarter for PetSmart, but it is made slightly more impressive by the bigger story during the quarter, which was the pet food recalls. As a pet owner, it seemed like a never-ending stream of bad news. Wet pet food made up the bulk of the recalls, but there were some dry foods recalled, and even higher-end mass retail brands from Procter & Gamble (NYSE: PG) -- such as Iams and Eukanuba -- had to issue recalls. This, as you might imagine, creates a problem for a retailer of pet food and other pet products, and it did disrupt PetSmart's business slightly. However, the company was proactive and used its Pet Perks program to alert customers about what was happening so that they could make informed decisions. In the long term, that's a smart move and should improve brand image, and I think P&G and other companies will help the cause by looking to maintain customers, too.

With Petco being taken private, PetSmart is now a bit harder to track in comparison to its competitors. Target (NYSE: TGT) and Wal-Mart (NYSE: WMT) and many grocery stores are popular shopping destinations for pet owners, and I even do some shopping for my Jack Russell Terrier, Kalia, on Amazon.com (Nasdaq: AMZN). But none of these companies are useful comparables to PetSmart. This is a problem without an easy solution other than looking for pet retail industry data and paying close attention to commentary from large retailers.

I have to admit I'm impressed with PetSmart's performance. I value the company in the ballpark of $35 per share, and one earnings report does little to change that, but that doesn't mean I'd be looking to sell here either. Given the company's slight competitive advantage, and because of its focus on pets and ability to execute, I'm willing to wait for the shares to trade significantly above what I think they're worth before considering selling.

Related Foolishness:

• Before the Call: PetSmart, Heel!
• PetSmart's Looking to Get Lean and Mean
• Fool on Call: PetMed's Growth Pains

Nathan Parmelee owned shares in PetSmart, but had no financial interest in any of the other companies mentioned. Amazon is a Stock Advisor recommendation and Wal-Mart is an Inside Value pick. The Motley Fool has an ironclad disclosure policy.