PetSmart, Inc.: An Earnings Preview

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

Earnings expectations
The first issue that needs to be addressed is whether the pet-centric retailer met Wall Street's expectations. Analysts tag profits for PetSmart at $1.22 per share this quarter, down from $1.24 per share one year ago. The company projects its full-year 2013 EPS outlook in the range of $3.88 to $3.98, up from the $3.55 it earned in 2012. I'll be looking to see if the Phoenix-based retailer met its fourth-quarter and full-year 2013 EPS estimates.

Sales growth
PetSmart's sales growth has outpaced the industry, with company net sales having increased more than 8% on average annually from 2008 through 2012. Yet PetSmart's growth rate has since slowed. Last quarter, same-store sales grew 2.7%, compared to 3.4% for Q2 2013. Meanwhile, sales for PetSmart services -- like boarding, training, grooming, and veterinary -- were up 5.2%, down from 7.3% for Q2. For the fourth quarter, PetSmart expects same-store sales growth between 2.5% and 3.5%. I'll be looking for what type of sales growth took place in the fourth quarter and for the full year. Specifically, I'll be watching for where PetSmart achieved growth, be it merchandise sales, sales from services, in-store, and online.

Giant merchants circling the dog park
Mainstream and e-tailing merchants Wal-Mart and Amazon.com have aggressively entered the pet supply market with countless pet products, premium private-label dog food, free shipping, and two-day delivery guarantees. Since 88% of PetSmart's sales are derived from merchandise as opposed to services, these retailing giants could potentially bite into PetSmart's revenues.

Yet PetSmart's strengths lie in its strong brand and differentiation through its service offerings. Services not only drive PetSmart's margins substantially but also provide an in-store customer experience that online competitors can't touch. North America's largest provider of pet services knows this and is quickly growing its service offerings. PetSmart's services sales have grown 63% over the past five years, from $455 million in 2007 to $740 million in 2012.

Foolish final thoughts
With the company returning more than 250% to shareholders over the past five years, PetSmart investors' tails have happily wagged for years. Will PetSmart continue to warm investors' hearts or, instead, offer a cold nose this quarter? Monday's earnings release will give us some indication.

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