"Here, Petco (NASDAQ:PETC)! C'mon boy!" That's what we hear investors chant today, in anticipation of tomorrow's afternoon earnings release for Q4 and full-year 2005. But what will we be hearing tomorrow?

Likely: "Oh, no. Bad Petco. What do you think you're doing, trying to bring that mangy ol' earnings release into our nice, clean bull market? Shoo!" Or so the analysts tell us.

Wall Street Wisdom:

  • General consensus. Fourteen analysts follow Petco. Two of them like it (buy). One of them doesn't (sell). And everybody else is sitting on the fence (hold).
  • Revenues. Quarterly sales are expected to rise 9% to $536.9 million.
  • Earnings. Yet profits are expected to slide 18%. Analysts predict $0.45 per share.

Margin watch:
There aren't many clear trends to be found in Petco's margin history. Granted, across the board, gross, operating, and net margins are down a bit from where they were 18 months ago -- but not terribly so. In fact, as recently as six months ago, rolling net margins were only 10 basis points off their July 2004 levels.

Margins %

7/04

10/04

1/05

4/05

7/05

10/05

Gross

35

35.3

34.9

34.8

34.4

33.5

Op.

8.8

9

8.8

8.8

8.4

7.5

Net

4.4

4.4

4.5

4.5

4.3

3.8
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish forensics:
It's the cost of goods sold that's really weighing Petco down, or rather, their relation to the sales prices that Petco has been charging. Over the past six months, the cost of goods sold grew 14% versus the year-ago period, but sales were up only about 9%. In last quarter's earnings release, Petco clarified the relationship by blaming "greater than planned markdowns" as a primary factor that had been depressing its margins.

The good news: Most of Petco's bad news is limited to the top few lines of its earnings statement, where sales and cost of sales are laid out. Lower down the document, we saw that selling, general, and administrative expenses were only keeping pace with sales growth, not outrunning it. If and when Petco feels able to raise the prices on its wares, margins should be able to rise right quick.

Competitors:
Petco's archrival is the similarly named PetSmart (NASDAQ:PETM), a Motley Fool Stock Advisor selection. But the company also faces competition from every grocer in town, and on the outskirts, from discounters and warehouse stores like Wal-Mart (NYSE:WMT), BJ's (NYSE:BJ), and Stock Advisor pick Costco (NASDAQ:COST).

Fool contributor Rich Smith has no interest, short or long, in any company named above.