PetSmart (PETM) is scheduled to report third quarter earnings on November 22 and analysts currently expect growth on both the top and bottom lines. The company's stock has widely underperformed the overall market year-to-date, rising just 5.56%. Let's take a look and see if this underperformance is an opportunity or if we should wait and see what the company has to say when it reports.
Pet paradise
PetSmart is the largest specialty retailer of pet products, services, and solutions. Its stores carry all the pet products you need, along with grooming, training, and adoption services. The company currently operates 1,301 stores in the United States, Canada, and Puerto Rico.
What you may not know
You may not know that PetSmart also operates PetsHotels, Doggie Day Camps, and has animal hospitals connected to the majority of its stores. PetsHotels are overnight boarding facilities and there are currently 196 operating today. Doggie Day Camp is like day care for your dog. This may seem ridiculous, but many people treat their animals like humans and will pay up for it. Finally, there are Banfield Pet Hospitals located in 60% of PetSmart's stores. These hospitals within a store provide a full range of basic health care for your pets as well as emergency services. PetSmart owns a 20.5% equity stake in the operator of these hospitals, which may grow as more locations are added.
Source: King Retail Solutions.
Results due out
The current consensus estimates call for steady growth in both earnings per share and revenue. Here's an overview of the expectations:
| Metric | Expected | 3Q 2012 |
| Earnings Per Share | $0.86 | $0.75 |
| Revenue | $1.72 billion | $1.63 billion |
These expectations would result in earnings per share growing 14.7% and revenue rising 5.6% year-over-year. Besides these key metrics, the most important statistic to watch for will be PetSmart's comparable-store sales growth. Back in October, it narrowed and lowered its comparable-store growth guidance for the third quarter to 2.2%-2.5% from 3%-4%. It will also be important to look for margin expansion and guidance for the fourth quarter.
I believe an earnings beat is in the making here driven by increased consumer spending and will likely result in the company raising its fourth quarter guidance. I expect better-than-expected same-store sales growth to be reported due to increased traffic and higher average sales per customer. I also expect that the company will report significant margin expansion on lowered costs. If all of this comes true, PetSmart could easily push back toward its 52-week high.
Internet-based competition
PetMed Express (PETS 13.48%) and Amazon (AMZN -0.83%) are the top Internet-based competitors to PetSmart. PetMed Express provides pet supplies and products while also being a top product information provider. It carries most major brands and hand-selects the healthiest products for its customers. It is home to the largest network of veterinary pharmacists in the world which makes its website a great source for pet medications and advice.
Amazon carries thousands of pet products as well, but does not offer the advice side. It is a good place to go if you already know what you want or just need a reorder. With all of this said, PetSmart is the dominant player for many reasons, but these stick out the most to me:
- Pets are like children to most people, so going to an actual store, shopping, and asking questions to find the best products is very important.
- With all of the issues of treats made in China killing cats and dogs in the United States, it is more important than ever to make sure you know what you are buying and that the products are not counterfeit or poisonous; PetSmart monitors all of the products it carries closely.
- People love taking their pets to the store, making it like a field-trip for the animals.
- Having a physical location allows for the adoption services, grooming, training, and veterinarian services to be possible.
The Foolish bottom line
PetSmart is the top player in the pet product and service industry. The industry has grown every year since 1994, according to the American Pet Products Association, showing strength even in recessionary times. PetSmart's stock has under-performed year-to-date, but I believe this is an opportunity for value investors looking for a long-term investment. Watch this one closely and consider initiating a position on any weakness going into or after the report after doing your own Foolish analysis.
