Is PetSmart Headed Higher Yet?

With the industry's tailwinds at its back, the nation's largest pet retailer has few options but to grow and continue to deliver shareholder value.

Mar 7, 2014 at 2:13PM

Over the past five years, pet retailing giant PetSmart (NASDAQ:PETM) has stayed firmly in the good graces of the market, rising steadily for a cumulative gain of more than 250%. The reasons are hardly difficult, as the pet care industry is one of the fastest growing in retail and PetSmart is one of its biggest players. Lately, the company has expanded its product lineup to include premium goods, such as raw foods, to boost sales. With a recent beat on sales estimates and a 20% surge in earnings, the moves appear to be working well. For the full-year 2013, this marks the fourth consecutive annual period that PetSmart has grown its earnings in the double digits. Can investors expect this momentum to continue?

Numbers growl
Hitting earnings of $1.28 per share in its fiscal fourth quarter, PetSmart posted yet another strong quarter of double-digit gains. Interestingly, the retailer's sales climbed just 2.9%, while same-store sales crept up 1.2%. The quarter led to a full-year earnings jump of nearly 19%, with sales up 4.3% to $6.9 billion and same-store sales higher by 2.7%.

Factors driving the results are organic sales growth, gross margin enhancement, and EBIT margin.

Like nearly all retailers, PetSmart struggled to get customers in the door during the fourth quarter due to extreme weather and macroeconomic uncertainty, as evidenced by the relatively weak same-store sales. Still, the company managed to achieve pockets of success, including a record-breaking Black Friday and its largest e-commerce sales day ever on Cyber Monday.

PetSmart has been using private-label goods to help boost margins and now sees more than 26% of merchandise sales sourced from private and exclusive brands.

Looking ahead to the full year, the company expects continued slow but steady growth at the sales level, with 4%-6% revenue gains and 2%-4% same-store sales growth. Even in the current quarter, where many retailers have guided for continued tepidity, PetSmart management is confident that it will achieve positive comps.

Fundamentally strong
Aside from the operating level performance, PetSmart is a fundamentals-loving investor dream stock. It has more than $350 million in cash on the balance sheet with absolutely zero monies borrowed on its credit facility.

Demand-wise, things look great for the nation's largest pet retailer. Though it is a relatively mature market here in the United States, the pet retailing landscape remains highly fractured with independent retailers competing against the corporate ones.

People are spending more on vet services, grooming services, premium foods, and toys as an overwhelming majority of North American pet owners consider their pets as part of the family. Beyond its bread-and-butter retailing, PetSmart offers pet hotels, groomers, and in-house vets -- all quickly growing segments of the business.

For the foreseeable future, this is a great company. The stock isn't particularly cheap at 13.2 times expected forward earnings, but if management is able to hit its recurring goal of double-digit earnings growth, then investors are still getting a good deal. With great cash flow and the added bonus of a moderate 1.2% dividend, PetSmart is one retail stock that's looking like a sure bet.

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Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends PetSmart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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