Foolish Forecast: PetSmart Not Yet Housebroken

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Seeing as the company has met or beat analyst estimates in every quarter of 2007 thus far, investors in pet-supplies superstore PetSmart (Nasdaq: PETM) are probably feeling frisky about this week's fourth-quarter earnings report. But come Wednesday afternoon, will Mr. Market be shaking a finger and scolding "bad kitty," or handing out catnip?

What analysts say:

• Buy, sell, or waffle? Eighteen analysts rate the stock, with eight of them telling investors to fetch some shares and buy and 10 saying sit, stay, and hold.
• Revenue. On average, they expect quarterly sales to grow 15% to $1.34 billion.
• Earnings. Profits are predicted to rise a bit slower, up 9% to $0.59 per share.

What management says:
Management is having a tough time getting PetSmart housebroken. The firm deposited a "present" in the middle of the Nasdaq's virtual trading floor in October -- then returned in January to drop another. We're now told to expect that the firm will report a total of between $1.94 and $1.98 per share in fiscal 2007 profits, and that about 25% of that profit came from a one-time, and unrepeatable, gain on the sale of a subsidiary.

Which explains in part how PetSmart has been beating all these estimates lately -- just before it misses one estimate, it issues an earnings warning, which convinces analysts to lower their estimate to a number that's easier to beat.

What management does:
OK, that sounds pretty bad. But ignore the relativistic beat/miss view for a moment, and look at this store from a more objective perspective.

Objectively, PetSmart is doing pretty darn good even without that one-time gain I mentioned above. In a rough retail environment that culminated most recently in Wal-Mart (NYSE: WMT) reporting just half a percent of same-store sales gains (ex-gasoline sales), and Target (NYSE: TGT) a same-store sales decline in January, PetSmart consistently extracts profit from the sales it makes. Both rolling gross and operating margins are a bit higher today than they were a year ago. The firm may not be as profitable (operationally) as lite-business-model rival PetMed Express (Nasdaq: PETS), but for a bricks-and-mortar business, PetSmart's not half bad.

Margins	4/06	7/06	10/06	1/07	4/07	7/07
Gross	30.7%	30.9%	30.9%	30.8%	31.1%	31%
Operating	7.7%	7.6%	7.7%	7.5%	7.8%	7.8%
Net	4.5%	4.3%	4.4%	5.8%	5.9%	5.8%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
Reviewing PetSmart's Q3 report back in November, fellow Fool Alyce Lomax pointed to concerns over "the competitive landscape, as well as what seems like a confusing financial picture, given the back-and-forth guidance and the one-time events figuring into its results" as all contributing to her lack of confidence in PetSmart. And if you caught our Motley Fool Stock Advisor team's November update on the stock, I think you'll agree that they're not too enthused either.

From my perspective, I have to say that the shares look enticingly priced. Even if you back out and ignore the one-time benefit discussed above, what we're looking at here is a firm likely to report $1.50 per share in profits on Wednesday, and selling at about 14 times current earnings. With most analysts of the opinion that PetSmart will grow at 16% going forward, the stock therefore carries a PEG of less than 1.0 -- making it appear a gift ...

... Or was that a present?