Whether you seek the companionship of a 1-ounce Budgie bird or a 160-pound Caucasian Ovcharka dog, PetSmart
At first glance, the release was reasonably good. PetSmart's earnings rose 4.6% to $0.31 per share last quarter. Although comps were up a meager 0.8%, sales jumped over 5% to $1.31 billion. But margins were weaker, and what really spooked investors was the company's downward revision of full-year guidance. Following last night's announcement, PetSmart's stock was down over 10% today.
While both top and bottom lines improved, there were weaknesses in PetSmart's quarterly results. Both gross and operating margins contracted, disappointing investors who would prefer to see company fundamentals continue to improve rather than reaping below-the-line windfalls resulting from fluctuating tax liabilities and interest payments.
Although its pet services segment's sales jumped 10%, the segment makes up less than an eighth of PetSmart's total revenue. Pet services provide a way for the company to differentiate its retail business from stores like Wal-Mart
PetSmart now carries more than $500 million worth of capital lease obligations on its balance sheet, with just over $180 million in unrestricted cash. But that doesn't worry me as much as the ongoing sales pressure and margin reductions implied by management's revised guidance. It also doesn't help that anyone can walk into a Kroger
Once you factor in competition from privately held Petco, as well as wildcard sellers like Amazon.com
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