Why PetSmart's Sell-Off Is a Buying Opportunity

The Bureau of Labor Statistics reported last year that nearly three-quarters of all U.S. households own pets. In all, there are about 218 million pets in the United States. And it goes without saying that all those furry companions need food, grooming, and health care.

The amount of money Americans spend on their furry friends to keep them happy and healthy is truly shocking. On average, U.S. households spend around $500 apiece each year to care for their pets. In all, Americans fork over more than $61 billion on their pets every year.

Taking all of this into account, it looks like PetSmart (NASDAQ: PETM  ) should have no trouble pleasing Wall Street. But that's not what happened after it released its first-quarter earnings and outlook for the current quarter. In fact, PetSmart shares dropped 10% in the aftermath of its quarterly report because it missed analyst expectations.

Don't be too quick to show PetSmart the door. It's still growing profits, and the strong underlying tailwinds of the pet-care industry should provide plenty of future growth to come...once the short-term headwinds subside.


source: PetSmart website

PetSmart's earnings report was one for the dogs
PetSmart unveiled first-quarter results that were fairly good but weren't good enough to prevent investors from running for the exits. Earnings per share clocked in at $1.04, representing 6% growth. However, revenue growth totaled just 1%, and same-store sales, which measure sales at locations open at least one year, declined 0.6% year over year.

Even more disappointing was the company's top-line outlook for the second quarter and full year. PetSmart sees the possibility for same-store sales to fall again this quarter. For 2014, management expects flat same-store sales and total revenue growth only in the low single digits.

This represents a significant reduction in the company's prior forecast. Management previously expected 2%-4% same-store sales growth for the full year. PetSmart also cut its earnings projections for 2014. The company now expects to earn $4.34 per share this year, down from $4.48 per share previously.

There's no doubt PetSmart is seeing weakness in its customer base. Primarily, PetSmart believes consumers are pinching pennies more than usual, especially in light of the frustratingly slow economic recovery in the United States. In addition, it's likely the brutally harsh winter weather resulted in softness in the last quarter. But these issues look like minor bumps in the road rather than something more serious.

Execution is keeping PetSmart going
Despite tepid sales growth last quarter and weak expectations going forward, PetSmart is still solidly profitable and will remain so. That's because management is keeping a tight lid on expenses. PetSmart generates a 30% gross profit margin.

In addition, PetSmart is boosting earnings per share with its aggressive share- buyback program. Last quarter alone, PetSmart spent $130 million on share repurchases. These buybacks are effectively reducing the number of shares outstanding and creating value for shareholders.

Plus, even with its lowered profit forecast for the remainder of the year, PetSmart will still generate solid earnings growth. If it manages to hit the midpoint of its EPS guidance, the company will post 8% earnings growth in 2014 versus the prior year.

Bet on man's best friends
Normally I would be critical of a company achieving profit growth purely through cost cuts amid falling revenue. That's usually a red flag because sales are the lifeblood of any retailer. But the fundamental tailwinds of PetSmart's industry should alleviate those concerns.

As mentioned previously, Americans don't hesitate to shell out the necessary cash for the health and well-being of their furry friends. That's not going to change any time soon, unless of course people stop the age-old practice of domesticating animals. But that doesn't seem likely.

For that reason, PetSmart seems like a health-care play as much as a consumer- goods play. People can't simply stop buying their animals food, health care, and grooming products. That's why the slowdown currently affecting PetSmart should be short term in nature, and the recent sell-off looks to be a good opportunity.

Will this stock be your next multi-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

 


Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 27, 2014, at 9:18 AM, Interventizio wrote:

    This company's shares are for 99% in the hands of institutional investors. This is a deal breaker for me now.

  • Report this Comment On May 27, 2014, at 2:45 PM, rciura wrote:

    Interventizio,

    I agree that such a high level of institutional ownership, and a low level of insider ownership, isn't an ideal scenario. At the same time, that doesn't necessarily mean the company is mismanaged, or that it doesn't represent a good investment opportunity. But thank you for reading, and Fool on!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2970286, ~/Articles/ArticleHandler.aspx, 11/24/2014 4:53:09 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement