Most of the time, I find little to get excited about in a company's quarterly results. Same goes for the first-quarter results that Motley Fool Stock Advisor selection PetSmart (NASDAQ:PETM) reported last week.
The competitor to Petco (NASDAQ:PETC) and retail jacks-of-all-trades such as Target (NYSE:TGT) reported a 12% sales increase. Diluted earnings per share climbed 11%, after backing out benefits from a legal settlement in the prior year. With the legal settlement included, the results were flat with last year. Services continue to be an important part of the mix; they now make up almost 10% of sales, and they grew by 26.8% in the quarter. (Our Fool by Numbers summary has all the gory details.)
On the balance sheet, the main item that stands out in the quarter is the company's working capital management. Both inventory and accounts receivable increased more quickly than sales. At this point, I'm not terribly concerned by either. The inventory increase wasn't large, and the company stated on its conference call that it stemmed from a strategic decision to keep more consumables such as dog food in stock. The large percentage increase in accounts receivable does bear watching, but given that it's on such a small base, and not really material in relation to sales, I see no reason to get worked up about it now.
Fools should definitely pay attention to the company's store openings through the rest of the year. In the first quarter, the company opened 20 new stores and closed four, for a net of 16 more stores. For the year, the company aims to open 90 new stores. The store openings, and same-store sale gains in the neighborhood of 3%, are vital if the company wants to hit its targets this year. Rather than focusing on any single same-store sales figure, I recommend watching the company's cash flows and available free cash flow. Those unencumbered cash flows determine a business's true value, and PetSmart has done quite well on this measure the last few years.
I take some flak here at Fool HQ from a friend of mine who is a steadfast value investor. He argues that a company like PetSmart will ultimately get squeezed out by larger retailers such as Target. That's hardly a groundless argument, since Target has proven to be a great merchandiser. But in the end, I think people will shop at PetSmart for pet goods, for the same reason people shop at Home Depot (NYSE:HD) for tools and Staples (NASDAQ:SPLS) for office supplies. The big boys are good for the basics, but when you want variety or are looking for something unique, the more specialized retailers are the better bet. Since people love to spoil their pets, I think the PetSmarts of the world are safe; I'm less certain about the smaller pet shops that lack their larger rivals' purchasing scale and don't differentiate themselves.
My only caveat here is to wait and see if prices dip by another 10%-15%. That would lend a margin of safety to PetSmart's valuation. With the way the market is going lately, that drop may not be too far off.
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Nathan Parmelee owns shares in PetSmart but has no financial interest in any of the other companies mentioned. Home Depot is a Motley Fool Inside Value recommendation. The Motley Fool has an ironclad disclosure policy .
