PetSmart (PETM) unleashed third-quarter earnings on Friday. Here's what you need to know about the company's results.
Rough results
The pet-centric retailer boasted third-quarter earnings per share of $0.88, ahead of analysts' expected $0.86 per share. The company posted third-quarter revenue of $1.7 billion, 4% better than the $1.63 billion year-earlier figure. Although PetSmart hit its earnings and revenue estimates, it lowered guidance for the rest of the year. Full-year 2013 EPS is expected to come in around $3.94 to $3.98. Results weren't enough to receive praise from investors. Shares were trading down more than 2% after Friday's announcement.
Until recently, PetSmart's historical growth rate had been like a scratch behind investors' ears. During the past five years, PetSmart's net sales have increased 9% on average annually, outpacing the industry. Yet third-quarter same-store sales grew 2.7%, down from the prior quarter's 3.4%. Meanwhile, sales for PetSmart's important services segment, which includes grooming, boarding, training, and veterinary services, were up 5.2%, compared to 7.3% growth in the second quarter. Clearly, even PetSmart's very profitable services sales, which have grown roughly 60% in the past five years, are slowing.
Dog-tired or legs to run?
While PetSmart has been the undeniable alpha male of pet retailing for years, many shareholders question how long the company can continue its growth trajectory. Some investors are circling for fresh opportunities in the lucrative pet industry.
One idea is based on the premise that pet owners are more willing than ever to spend the necessary costs to ensure the health of their four-legged family members. Because pet parents often either forgo pet insurance or buy just enough to cover catastrophic events, nearly all of the cost of pet medicines and vaccinations comes directly out of pet owners' wallets. As a result, Zoetis (ZTS -0.71%), which Pfizer spun off in one of the biggest IPOs of 2013, is uniquely positioned to profit from this huge opportunity in the animal-health market. With more than $4 billion in annual revenue, Zoetis is the largest stand-alone company totally devoted to pet medicines and vaccines.
Foolish takeaway
PetSmart has warmed investors' hearts for years. While it still boasts a strong brand, differentiation through services, and mouthwatering opportunities for international expansion, shareholders question how long the company can continue its growth trajectory. Investors searching for another way to play the profitable pet market should consider Zoetis. It's more of a niche market, but this animal-health company offers an exciting way to participate in a roaring industry.
