3 Things to Watch for in PetSmart's Earnings Release

PetSmart (NASDAQ: PETM  ) will unleash earnings this Wednesday. Here's what you need to watch for in the company's results.

Source: Wikimedia Commons.

Great expectations
The first issue that needs to be addressed after earnings are released is whether the pet-centric retailer met Wall Street's expectations. Analysts tag profits for PetSmart at $0.86 per share this quarter, up from $0.71 per share one year ago. PetSmart projects its full-year 2013 EPS outlook near $3.95, up from the $3.55 it earned in 2012. The company's second-quarter projected revenue is $1.71 billion, 6% greater than the $1.62 billion year-earlier figure. I'll be looking to see if PetSmart hit its Q2 EPS and revenue estimates out of the dog park.

Sales growth
Pet industry sales are currently topping $60 billion annually, and are expected to exceed $74 billion by 2015. PetSmart's sales growth has been outpacing the industry. Over the past five years, the company's net sales have increased 9% on average annually. And PetSmart's current growth rate still makes investors salivate. Just last quarter, same store sales grew 3.5%, and sales for PetSmart services -- like boarding, training, and grooming -- were up close to 6%. I'll be watching for what type of sales growth took place in the second quarter. Specifically, I'll be looking for where PetSmart achieved growth (merchandise sales versus services, in-store versus online).

Positioning and differentiation
PetSmart is the undisputed alpha male of the pet-retailing space. It boasts key strengths that distinguish the company from competitors, namely its strong brand and differentiation through services. The company continues to grow its number of merchandising products and menu of pet services.

While pet products are the main focus of pet-centric retailers, mainstream and e-retailing merchants like Wal-Mart (NYSE: WMT  ) and Amazon.com (NASDAQ: AMZN  ) are taking a bite out of the pet supply market. Last year, Wal-Mart unleashed its first private-label premium dog food, allowing consumers buying it online to either obtain site-to-store delivery with no shipping costs, or free direct shipping for orders above $45. Meanwhile, Amazon's Wag.com features 20,000 pet products, 20% off a first order, free shipping on orders over $35, and a two-day delivery promise . Big-box stores and e-retailers could potentially bite into PetSmart's revenues, since 88% of PetSmart's sales are derived from merchandise (as opposed to services). In response, PetSmart has substantially increased its online presence by adding thousands of SKUs to its site .

These online threats also represent a key reason for PetSmart's push to increase its services sales. Services not only drive PetSmart's margins substantially, but also offer an in-store customer experience that online competitors can't compete with. PetSmart's services sales have grown more than 60% in the past five years, and the company is North America's largest provider of pet services . Grooming and training are available in all of PetSmart's roughly 1,300 locations, with an increasing number of stores also offering veterinary clinic services, pet day care, and boarding.

Foolish bottom line
PetSmart shareholders have happily wagged their tails for a while now. The company has returned 220% to stockholders over the past five years, more than four times that of the Nasdaq during that same period. Will PetSmart continue to warm investors' hearts? Wednesday's earnings release will give us some indication.

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