Most quarterly earnings releases bore me.
All the numbers and rote commentary come in, and generally there aren't many important changes to consider. Most companies just keep on truckin', and when things are going well, there's nothing wrong with that.
But every so often you'll run across a company where things are going well, and then the company ups the ante with some new things to think about. When this happens, it's time to sit up, pay attention, and give the new information some real thought. Last night's earnings release from Motley Fool Stock Advisor selection PetSmart (NASDAQ:PETM) was just such an earnings release, so let's dig in -- after we take a look at the results.
The results themselves weren't a knock-your-socks-off performance. For the year, sales increased 12.6%, with same-store sales increasing 5% and sales from services increasing 26%. The result on the bottom line wasn't quite as good, though, as margins decreased. With a number of items that I believe are one-time in nature offsetting each other, the company earned $1.33 per diluted share, compared to $1.17 per share last year with one-time items removed.
Looking ahead to next year, the company's guidance is for more profitability growth than I had anticipated. The guidance is for $2.03 to $2.05 per diluted share, but in this number there are also one-time items, such as a gain from the sale of its equine business, which we'll explore a bit more shortly. Knocking all these items out, I calculate that the company is guiding to $1.58 to $1.60 per diluted share on a comparable basis. That's about 19% better than this year's performance, and a good 5% higher than I had assumed.
The most interesting information isn't in the financial results, and it points to improving margins over time. For one: The company believes it can continue its investments in growth and start to see some leverage on its operating expenses. This is important, and it makes the company's mid-single-digit same-store sales guidance potentially much more profitable.
The second item is that the company will sell its equine business, State Line Tack. This means the company will exit a business that is only 2% of its sales, but less profitable than its core business, and that space can be reallocated to more profitable sales. It also allows PetSmart to open additional pet hotels by converting existing space, so the company doesn't have to build new space for the equine sales area or a pet hotel in order to expand this service. This helps improve the investment part of the equation for a services offering that is already twice as profitable as the core business.
These moves by PetSmart come at a time when Petco has recently become a private company. That may mean Petco is a more focused competitor -- because it doesn't have to deal with the requirements of being a publicly traded company -- but it also means it is now more leveraged, which limits some of its flexibility to spend on developing new ideas. These moves also help accelerate store redesigns at PetSmart and further differentiate what PetSmart sells from what Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and local grocery stores such as Kroger (NYSE:KR) are able to offer customers.
I now need to revisit my valuation for PetSmart. I had previously had the company pegged at $33 to $36 a share, but the company guidance for next year is slightly better than I expected, and the changes at the company should lead to slightly better margins and cash generation than I initially expected.
Where I'll end up after rethinking some of my assumptions isn't terribly important to me right now. I find it far more interesting at the moment that the shares are getting cheaper while everything being communicated says the business will get stronger. If the recent volatility causes these shares to continue falling, I may actually end up buying more.
For more on companies catering to critters, check out:
- Pampered Pets Pave PetSmart's Profitable Path
- VCA Anatech: Guide Dog
- Fool on Call: PetMed's Growth Pains
PetSmart is a Motley Fool Stock Advisor recommendation. To find out why, you can take a 30-day free trial. Wal-Mart is a Motley Fool Inside Value recommendation.
At the time of publication, Nathan Parmelee owned shares of PetSmart and had a beneficial interest in shares of Wal-Mart. He had no financial interest in any of the other companies mentioned -- but that's nothing personal. He was ranked 136th out of 23,636 CAPS investors. The Motley Fool has an ironclad disclosure policy.
