Is PetSmart an Investor's Best Friend?

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Judging by its third-quarter results, it appears PetSmart (Nasdaq: PETM) hasn't gone to the dogs as badly as some of us have thought it might, given the tough economy. Still, there are reasons to wonder if the stock's spike today might be a little too optimistic.

Third-quarter net income increased 21% to $35.8 million, or $0.28 per share. Revenue increased 12.1% to $1.3 billion, with same-store sales up an impressive 5.4%. Even its services segment, which I've been skeptical about in the past in light of the current difficult environment for consumers, increased 15.2% to $127.8 million, although a story a colleague recently told me about a local PetSmart's boarding service makes me wonder how many people have had similar experiences, trying it once and then never doing so again.

PetSmart didn't share the kind of ominous tidings that retailers like Best Buy (NYSE: BBY) and even Wal-Mart (NYSE: WMT) have passed along recently, although PetSmart admitted it is "not immune to the pressures of a slowing economy." The company has decided to cut back on capital expenditures in 2009 and focus on the offerings that differentiate it from the competition.

Although it did beat analysts' expectations with the third-quarter results, PetSmart lowered its guidance for 2008. It now expects earnings of $1.49 per share to $1.52 per share, compared to its old guidance for earnings of $1.51 per share to $1.59 per share.

Still, it certainly wasn't the type of unpleasant quarter retailers like Whole Foods Market (Nasdaq: WFMI) and Starbucks (Nasdaq: SBUX) have shared recently.

Last May, I had a bad feeling about PetSmart. I was pretty well convinced that strapped consumers would flock to discounters like Wal-Mart and Target (NYSE: TGT) because of the economic climate. So far it looks as if that hasn't really come to pass for the Motley Fool Stock Advisor pick, although its stock price has taken quite a drubbing since May.

I'm not convinced PetSmart's out of the woods yet, like many other retailers who are looking at nothing but tough times ahead. Last night after market close I noted the stock had dropped 42% in a year (not counting today's impressive pop), and given surprising resilience in recent quarters, I can see why many investors are snapping it up at such beaten-down levels. However, given the terrible environment for consumer spending, I can't shake all my previous doubts on this stock's ability to outperform despite the downturn.  

More retail tidings that have alarmed investors recently:

• Wal-Mart's recent guidance gives reason to question whether it's really recession-proof.
• It may be called Best Buy, but apparently nobody's buying.
• Whole Foods' quarter continues to be dogged by a poor economy, and Wild Oats.
• Some people think Starbucks is nearing its demise.