PetSmart Feels No Pain From Ecommerce Takeover

PetSmart (NASDAQ: PETM  ) has been a market favorite for some time now as pet spending continues to rise. Still posting double-digit year-over-year gains, the company is outperforming on nearly every metric, including increased guidance in the latest quarter. The market reacted mutedly, as if it were expecting the earnings beat to be even greater, but it's hard to refute the fact that this is one retailer not yet threatened by industry disruption. In two years the stock is up more than 60%, and valuation is still fair given the company's growth prospects. Should you consider an investment in this pet store juggernaut?

Earnings recap
In its fiscal third quarter, PetSmart barked up a more than 17% gain year over year in net income, and leapt two cents ahead of analyst EPS estimates with $0.88 per share. The top line grew slowly but respectably at 4% to just under $1.7 billion. Same-store sales grew a healthy 2.7%, while gross and operating profit grew due to margin expansion.

The company has done a great job at expanding its offerings to drive higher transactions and reach new customers. This is evident in the outsize bottom-line growth, compared to the top. PetSmart opened 16 new stores and closed down three.

Looking ahead, management favorably narrowed its EPS guidance on all fronts. For the full year, the company now expects $3.94to $3.98. For the final quarter of the year, management is looking for $1.19 to $1.23 per share along with 2.5% to 3.5% same-store sales growth. To- line sales are expected to contract slightly, though that is mainly due to an extra week in last year's fourth quarter.

All in all, things looked pretty good for PetSmart -- but have investors missed their chance for big gains?

Stable growth
Investors looking to mimic the company's five-year return of more than 300% likely won't get what they want, but that isn't to say that PetSmart's growth days are behind it. The company has a large footprint on the national retail landscape, but it is still building out new stores and seeing encouraging growth in its existing ones. PetSmart also has more than 100 PetHotel boarding facilities, with an opportunity to expand that business dramatically.

At less than 17 times forward earnings, PetSmart isn't a cheap stock, but it's not expensive for its category or its growth capability. The company competes directly with privately held Petco, which makes comps somewhat difficult, but it also is in competition with big retailers such as Target and Wal-Mart. Both trade a good bit cheaper than PetSmart on a forward earnings basis, but they are not pure plays in the high-growth pet goods industry.

Though not a pick for bargain hunters, PetSmart remains an appealing one for growth seekers.

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