When it comes to earnings season, Mr. Market can really throw shareholders for a loop. Unless the business in question reports a clear beat in both revenue and net income, it's almost impossible to tell how its share price will respond. A prime example of this phenomenon can be observed by looking at PetSmart (NASDAQ:PETM).
After the pet retailer reported revenue that failed to impress but profits that blew past estimates, shares fell 1.5% on a day that the S&P 500 index came just shy of breaking even. Taking all of this into consideration, should the Foolish investor consider gobbling PetSmart's shares at a discount, or is the business bound for tough times ahead?
PetSmart's results were mixed but good!
For the quarter, PetSmart reported revenue of $1.8 billion. This represents a 4% decline compared to the year-ago quarter; but after taking into consideration the extra week of operations the company booked in 2012, its revenue actually rose 3%. At face value, this rise in sales may appear attractive. But when you consider that the business fell short of the $1.83 billion that analysts expected, it makes sense that investors weren't particularly thrilled.
In terms of profits, the business did far better. For the quarter, PetSmart reported earnings per share of $1.28. This blew away the $1.21 that analysts expected and even crushed last year's $1.24. After subtracting the company's extra week of profits last year, its earnings actually rose 20% from $1.07.
The disparity between PetSmart's revenue growth and earnings growth stems mostly from a reduction in share count. Over the past year, management bought back nearly 5% of the company's shares outstanding. This, combined with a modest improvement in the business' selling, general, and administrative expenses, allowed it to soar past estimates.
But how has the company fared over the long term?
Over the past five years, PetSmart had a nice run. Between its 2009 and 2013 fiscal years, the company saw its revenue rise an impressive 30% from $5.3 billion to $6.9 billion. This jump in sales was due, in part, to a 16% increase in the number of locations in operation from 1,149 in 2009 to 1,333 by the end of its 2013 fiscal year.
Looking at profitability, the company did even better. Over this five-year period, PetSmart saw its net income jump 112% from $198.3 million to $419.5 million. For the most part, the company's improved bottom line was attributable to higher sales, coupled with its cost of goods sold falling from 71.5% of sales to 69.4%, while its selling, general, and administrative expenses fell from 21.6% of sales to 20.6%.
Although slightly different, an interesting comparable is PetMed Express (NASDAQ:PETS). Operating at 1-800-PetMeds, the company is built upon the idea of providing pharmacy products and services for pet owners. Unfortunately, unlike PetSmart, the concept hasn't received much attention in recent years, as evidenced by revenue rising only 4% from $219.4 million in 2009 to $227.8 million in 2013.
In terms of profitability, PetMed Express did even worse. Over the past five years, the company saw its net income decline by 25% from $23 million to $17.2 million. Despite seeing rising sales, the company was negatively affected by its cost of goods sold, which rose from 61.1% of sales to 66.2%.
Another pet-centric business that the Foolish investor should consider is Central Garden & Pet (NASDAQ:CENT). Although the business operates in both pet and garden products, 52% of revenue came from its pet operations in 2013. Just like PetMed Express, though, the company's fundamentals are anything but great. Between 2009 and 2013, Central Garden & Pet's revenue rose only 2% from $1.61 billion to $1.65 billion.
From a profitability perspective, the business did even worse, with net income of $65.9 million turning into a net loss of $1.9 million. The primary driver behind the company's lackluster profits was an increase in its cost of goods sold, which rose from 67.3% of sales to 71.9%.
Based on the data provided, it looks as though PetSmart has had an excellent run but that revenue growth is beginning to slow. However, the company's profits are thriving and shareholders who believe in PetSmart's vision will likely be rewarded if the business continues to post attractive profits.
Its position stands in stark contrast to other pet-oriented businesses like PetMed Express and Central Garden & Pet, both of which have had mediocre revenue results and experienced significant declines in profitability. For this reason alone, the Foolish investor would be wise to look further into either of its peers before making an investment.
Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends PetSmart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.