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PetSmart Stock: An Earnings Preview

PetSmart (UNKNOWN: PETM.DL  ) will unleash earnings on Friday. Here's what you need to watch for in the company's results.

Tempered expectations
The first issue that needs to be addressed is whether the pet-centric retailer met Wall Street's expectations. Analysts project profits for PetSmart at $0.86 per share this quarter, up from $0.75 one year ago. The company projects its full-year 2013 earnings-per-share outlook in the range of $3.88-$3.98, up from the $3.55 it earned in 2012. Despite the expected increase in this year's figures versus 2012, these estimates were lowered just last month. I'll be looking to see if PetSmart met its slimmed third-quarter EPS and revenue estimates.

Sales growth
PetSmart's sales growth has outpaced the industry, with company net sales having increased 9% on average annually during the past five years. But PetSmart's current growth rate has weakened. Last quarter, same-store sales grew 3.4%, and sales for PetSmart services -- like boarding, training, grooming, and veterinary -- were up 7.3%. For the 2013 third quarter, PetSmart expects an even softer same-store sales growth figure between 2.2% and 2.5%, compared with its previous guidance of 3% to 4%. I'll be watching for what type of sales growth took place in the third quarter. Specifically, I'll be eyeing where PetSmart achieved growth, be it merchandise sales, sales from services, in-store, or online.

A unique retailing animal
Mainstream and e-retailing merchants Wal-Mart (NYSE: WMT  ) and (NASDAQ: AMZN  ) have aggressively entered the pet supply market with countless products, premium private-label dog food, free shipping, and two-day delivery promises. These retailers could bite into PetSmart's revenue, since 88% of the company's sales are derived from merchandise as opposed to services. But PetSmart's strengths lie in its strong brand and differentiation through its service offerings. Services not only drive PetSmart's margins substantially, but also deliver an in-store customer experience with which online businesses can't compete. As North America's largest provider of pet services, PetSmart has seen services sales grow more than 60% over the past five years.

Foolish takeaway
With the company returning nearly 500% to shareholders during the past half-decade, PetSmart investors have happily wagged their tails for years. But will PetSmart warm investors' hearts or, instead, offer a cold nose this quarter? Friday's earnings release will give us some indication.

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