PetSmart is Full of New Tricks

Regardless of economic conditions, it seems that Americans are still pretty excited about buying NFL jerseys for their dogs -- and also dog food, I guess. PetSmart (Nasdaq: PETM  ) announced its third-quarter earnings yesterday, and smashed analyst expectations. The specialty retailer turned in another excellent quarter, in a year of excellent quarters. The stock is now up 33% year to date, and looks like it's got plenty of room left to run. Here's everything investors need to know about the newest earnings release.

Third-quarter headlines
PetSmart's earnings per share grew 50% last quarter, to $0.75 -- analysts had been expecting only $0.63. That was driven by a sales increase of 9%, and a great same-store sales increase of 6.5%. The company attributed a lot of that increase to a 2.3% comparable transaction increase. It also had an 8% increase in service sales, which includes day care and grooming.

Operationally, PetSmart continues to fire on all cylinders. The company's operating margin increased 1.8 percentage points, to 8.6%, driven by a decrease in both cost of sales and in general costs. With the cash that it did spend, PetSmart opened 24 new stores and another pet hotel -- which is a really nice name for a boarding facility. With the strong sales, good cost cutting, and great bottom line growth, management felt confident in raising the company's full-year guidance to the $3.47 to $3.51 per share range. That's about a 4% increase on its previously published range.

What to look for in the fourth quarter
PetSmart is looking very well set up for the end of the year. I think there are two key areas for investors to watch, as the year progresses. First, PetSmart is expanding, albeit slowly, into some international locations. In this last quarter, it launched its Canadian website, and entered into a product agreement with a Korean pet company. While those are both toe-dipping exercises, when it comes to international business, they're also both very low risk operations. I'm hoping to see the strongest growth come from the Canadian side, where PetSmart operates less than 100 of its 1,269 stores . With an increase in brand awareness through the website, that number should be able to grow, and the existing stores should start to turn in higher revenue.

The second area to watch over the holidays is the growth of the pet hotels. With Christmas and Thanksgiving coming, people are going to be looking for places to house their pets while they're on the road. PetSmart now operates 195 pet hotels in selected locations. Those should start to fill up over the holidays, and generate additional in-store sales for the company. To help facilitate easy access, PetSmart has finished a national roll-out of its hotel call center, which allows customers to book their pets, give vaccination information, and modify reservations without having to go into the store, or take up valuable sales time from in-store employees.

The bottom line
PetSmart's excellent quarter wasn't a blip. The company has done well to manage its costs down, and grow sales through strong customer engagement. By increasing the number of ways it can sell to pet owners, it's making sure that it becomes everyone's one-stop pet shop. While it does compete with big names like Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) , those companies largely treat pet-related sales as add-ons, and offer little in the way of real competition, especially over the holidays, when the focus is on big-ticket items.

On top of its strong growth, PetSmart pays a consistent, if moderate, dividend. With so many pluses, PetSmart seems like a tempting buy, especially since it's only trading at a P/E of 22, which is only just over the industry average.

One last interesting tidbit that came out in the questions at the quarterly presentation. A Barclays analyst pointed out that, if you take out the extra week in this fiscal year, the company is actually predicting a slowdown in growth for the fourth quarter. That slowdown seems, if not unlikely, at least dubious. I wouldn't be surprised to see PetSmart thrash its own earnings forecast by a non-insubstantial amount.

PetSmart is one of these companies that gets some coverage, but not as much as it should. That means that investors who pay attention have a serious advantage. The Motley Fool has created a special free report covering a few of these overlooked companies called, 3 Stocks Wall Street's Too Rich to Notice. These are stocks that we all know are good, but we all continue to pass them by. Get your free copy today by clicking here.


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