I have to admit that when I saw Motley Fool Stock Advisor selection PetSmart
A summary of PetSmart's year-over-year financial performance can be found in our handy Fool by Numbers published earlier today. Aside from the soft earnings, which I'll talk about a bit more, the decline in gross margins really stands out. The culprit was an accident in the company's Phoenix distribution center. The accident was caused by a poor racking system and led to out-of-stock situations in the company's stores for higher-margin hard goods (non-consumables), and it meant additional investment in the distribution center for new, stronger racks.
Another item that stands out in PetSmart's quarter is $2.9 million in expenses for an acquisition the company ultimately chose not to pursue. Because Petco
One of the bright spots in the quarter was the sales results from PetSmart's service offerings. Overall sales of services were up 28%, which is on top of a 21% increase in the quarter last year. While PetSmart offers more of a variety in pet food and a number of higher-quality brands than you'll find in traditional retailers such as Wal-Mart
The final bit of good news in the quarter is that PetSmart continues to generate a great deal of cash. Through the first six months of the year, cash balances are up a little more than $60 million and the company finds itself sitting on a total of $390 million. But the really good news for shareholders is that PetSmart announced it intends to repurchase $250 million of its shares over the next 12 months. Assuming the repurchases are executed at prices similar to today's, that would be about 7% of the outstanding shares.
Considering PetSmart's cash-generating capabilities, I continue to find the shares quite attractive. Using a discounted cash flow model and fairly conservative growth estimates, I value the shares at around $29 each. If the company's investments in efficiency pay off, it's quite possible that my estimate will prove to be conservative. Add in the potential for a 7% contraction in the share count and that's a pretty attractive mix to consider investing in.
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At the time of publication, Nathan Parmelee owned shares in PetSmart, but had no interest in any of the other companies mentioned. Wal-Mart is a Motley Fool Inside Value selection. The Motley Fool has an ironcladdisclosure policy.