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PetSmart (Nasdaq: PETM  ) didn't have a dog of a quarter. Net revenues increased 9% to $1.1 billion. Earnings were up 40% to $0.35 per diluted share. Adjusting earnings to account for a net tax expense related to the company's decision to exit the State Line Tack equine product business, PetSmart's net income came in at $0.36 per share. (Adjusted earnings for the previous year's quarter were $0.27 per share.) Results were aided by a renegotiation of a contract with MMI Holdings, an entity which provides veterinary care in nearly 600 PetSmart locations and which the company has an interest in.

Not only do I like the bottom-line gain here, but I like the fact that margins improved across the board, both on a reported and on an adjusted basis. Same-store sales increased a decent 4%, and the core pet business grew 5% at comparable locations once you strip out the State Line Tack business. Pet service revenues really expanded, jumping more than 19%.

People do love their pets, and they love having a niche retailer to hang out at that can serve all their needs. In fact, management seems pretty confident about the potential of its stores: It opened a net 38 new locations during the quarter and has authorized a new share buyback plan. Sure, you can get pet supplies at places like Wal-Mart (NYSE: WMT  ) , Target (NYSE: TGT  ) , and Costco (Nasdaq: COST  ) , but a place like PetSmart -- which also competes with Petco -- can oftentimes be the first place a pet owner thinks of when  Spot needs something. That's valuable brand equity.

Let's get to valuation. OK, management believes between $2.08 and $2.10 per share is doable, but there is a caveat here -- PetSmart is expecting proceeds of $0.47 per share from the sale of some of the shares it owns in MMI Holdings, as discussed in the latest 10-K. So if we subtract $0.47 from $2.08, we get $1.61. Based on yesterday's closing price, this would give PetSmart's stock a P/E of 18.8. Analysts expect the retailer to grow perhaps 17% on a go-forward basis, according to Yahoo! Finance. On a PEG basis, that implies a valuation that, while certainly not exorbitant, isn't necessarily undervalued.

I like PetSmart's prospects. Again, people love their pets, and they're willing to spend money to pamper them. I don't think the valuation is too out of whack right now, but as always, perform your own due diligence.  

PetSmart is a proud member of the Motley Fool Stock Advisor recommendation list. Sign up for a free 30-day trial of the service with no obligation whatsoever. The Gardner brothers can help you construct a long-term, wealth-building portfolio.

Wal-Mart is a member of the Motley Fool Inside Value portfolio. Costco is also a Stock Advisor selection.

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Fool contributor Steven Mallas owns none of the companies mentioned. As of this writing, he was ranked 5,675 out of more than 60,000 investors in the Motley Fool CAPS system. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.

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