PetSmart's Mixed Earnings Send Shares Lower

PetSmart (NASDAQ: PETM  ) , the leading pet products and services retailer in the United States, has just released its fourth-quarter report to complete fiscal 2013. The results were mixed in comparison with expectations and PetSmart shares initially reacted by moving higher, but their direction has since turned negative. Let's take a deeper look into the report and decide if this weakness is our opportunity to buy or if we should avoid this stock for now.

Source: Motley Fool Flickr

The results 
PetSmart released its fourth-quarter report before the market opened on March 5. Here's an overview of the results and a year-over-year comparison:

Metric Reported Expected
Earnings Per Share $1.28 $1.21
Revenue $1.80 billion $1.83 billion

Source: Benzinga

PetSmart's earnings per share increased 3.2% and revenue decreased 4.4% year-over-year; however, the fourth quarter of 2012 contained an extra week. On a 13-week comparative basis, earnings per share increased 19.6% and revenue increased 2.9%. Comparable-store sales increased 1.2%, as merchandise and other sales grew 3% and services sales rose 2.6%. Also, gross profit increased 3.8% to $566 million and the gross margin declined 20 basis points to 31.4%. These made for a great set of statistics and the company followed these results by providing a solid outlook on fiscal 2014...

Outlook on the year ahead
In the report, PetSmart also provided guidance for the fiscal year ahead. Here is what it expects to see:

  • Earnings per share of $4.42-$4.54, an increase of 10%-12.9%
  • Revenue of $7.19 billion-$7.33 billion, an increase of 4%-6%
  • Comparable-store sales growth of 2%-4%
PetSmart's expectations landed right in-line with analysts' expectations which called for earnings per share in the range of $4.22-$4.60 on revenue of $7.2 billion-$7.4 billion. In our earnings preview, the three most important things we wanted to watch for were a solid earnings report, a 2014 outlook that was in-line with expectations, and the gross margin staying above 31%; PetSmart delivered on all of these. The market reacted by sending shares lower, but I believe PetSmart will rebound and slowly make its way back to its 52-week high, which it sits more than 12% below today. 

Source: PetSmart

 

Nothing to see here...
PetMed Express  (NASDAQ: PETS  )  is one of PetSmart's largest competitors, but it lacks growth or the ability to take any more market share. To refresh your memory, PetMed Express does business under the name 1-800-PetMeds, and it operates entirely online and over the phone. This setup gives the company a low-cost way to make sales, but it also makes it difficult for the company to bring in new customers without immense spending on advertising.

Source: 1-800-PetMeds

In PetMed Express' quarterly report on Jan. 21, the company reported that earnings per share were flat at $0.23 and revenue increased 1% to $50.10 million. These statistics do not show a company on the path of growth and they provide proof to support the idea that the company has reached its potential in the market.

The problem with PetMed's business model is that when people buy pet products, especially food and treats, they tend to trust brick-and-mortar stores more due to the recent deaths associated with products manufactured in China. Also, the lack of physical stores restricts the company from accessing the highly profitable services side of the business, such as grooming, boarding, and adoption.

Customers who shop at a PetSmart store can do all of this while knowing that the company monitors all of its products for safety, and more importantly, customers can bring their pets along to interact with others. For these reasons, I would avoid PetMed Express indefinitely and only consider PetSmart as a viable option in retail.

Source: MWI Veterinary Supply

Another way to play pet industry growth
If you are not sold on PetSmart as an investment but you are looking for exposure to the pet industry, take a look at MWI Veterinary Supply (NASDAQ: MWIV  ) . As its name implies, MWI supplies veterinarians with everything that they could possibly need, from cotton swaps and nail clippers to surgical instruments and ultrasound machines. The company released its quarterly results on Feb. 6, so here's an overview of what it accomplished:

Metric Reported Expected
Earnings Per Share $1.45 $1.41
Revenue $687.3 million $697.0 million

Source: Zacks

MWI's earnings per share increased 9.9% and revenue increased 19.9% year-over-year, driven by growth in its new Diagnostics Unlimited program. In addition to the strong results, the company reaffirmed its outlook on fiscal 2013 which calls for earnings growth of 10.5%-14.5% on revenue growth of 23%-25%. MWI represents a great opportunity because as the pet industry grows, so will the demand for pet health care; anyone who owns a pet knows that the pet itself costs very little in comparison with the vet bills you will face to keep the pet healthy. MWI Veterinary Supply is my second-favorite investment option in the pet industry, so take a deeper look if you prefer it over PetSmart. 

The Foolish bottom line
PetSmart has delivered in its fourth-quarter report and pointed toward solid growth in fiscal 2014. The industry leader's stock has reacted by moving lower, but I believe it will turn around and head higher over the course of the year. In addition to possible price appreciation, the company will return cash to shareholders via its healthy 1.2% yield and its current share repurchase program. Foolish investors should strongly consider taking advantage of this weakness by initiating positions right now and holding onto them for several years.

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