Source: PetSmart.

Investors in PetSmart (UNKNOWN:PETM.DL) stock were wagging their tails on Tuesday after the close, as the company delivered improving financial performance for the third quarter of 2014 and an encouraging outlook for fiscal 2015. Let's go over the main numbers and considerations regarding PetSmart's latest earnings report.

Improving revenues
Total sales during the quarter ended on Nov. 2 increased 2.6% to $1.74 billion, better than the $1.73 billion Wall Street analysts forecasted on average. 

Comparable-store sales were flat during the quarter. The average ticket increased 2.4%, but that jump was offset by an equal decline in comparable transactions.

While flat comparable-store sales don't sound like reason for optimism, it's important to keep in mind that this figure represents a material improvement in comparison with the 0.5% decline in same-store sales the company announced in the second quarter of fiscal 2014. 

PetSmart ended the quarter with a total of 1,387 stores, versus 1,352 locations at the start of the period.

Services sales grew 6% to $195.3 million, or 11.2% of total revenues, an increase versus 10.9% of sales coming from services in the same quarter last year. As long as services continue outgrowing merchandise sales, they should become a growing piece of the pie for PetSmart over time, and that could be a positive in terms of overall revenue growth.

Margins are holding on well
Gross profit margin was 29.4% of sales during the quarter, a decline in comparison with 29.8% in the same quarter during 2013, but not too bad considering that the company is operating in a challenging and aggressively promotional retail environment. 

Operating, general, and administrative expenses represented 20.8% of revenues, in line with the year-ago quarter. Operating margin was 8.7% of sales during the last quarter, flat versus the third quarter of fiscal 2013.

Reported net income came in at $92.2 million, flat on a year-over-year basis. Adjusted net income, which excludes one-time costs from the company's restructuring program, were $102.2 million, an annual increase of 10.8%.

GAAP diluted earnings per share were $0.92, up 4.5% over the third quarter of 2013. Adjusted earnings per share came in at $1.02, a healthy year-over-year increase of 15.9%, and comfortably better than the $0.96 Wall Street analysts expected on average.

PetSmart produced $125.3 million in cash flows from operations during the quarter, investing $37.1 million in capital expenditures and distributing $19.4 million in dividends. The balance sheet looks quite healthy, with $254.8 million in cash and equivalents and no borrowings against its credit facility.

Outlook and comments
CEO David Lenhardt sounded quite happy with the company's improvements during the quarter and its prospects for a sustained turnaround:

As our review of strategic alternatives continues, we remain focused on our four growth strategies and profit improvement program to continue to deliver value for customers and shareholders. I am pleased with our progress to date across our four growth strategies, and in taking decisive actions to deliver expected annualized pre-tax cost savings of $200 million under our profit improvement program.

Management is planning to reduce $200 million in annual costs through a deep restructuring of the company's cost base. PetSmart expects to achieve approximately 60% of those savings in fiscal 2015, while the remaining 40% is scheduled for fiscal 2016. During the last quarter, the company realized overhead cost reductions of $20 million in connection with this program.

For the fourth quarter of fiscal 2014, management expects slightly positive comparable sales growth and adjusted earnings per share in the range of $1.34 to $1.38. Wall Street is forecasting earnings per share near the high end of the company's guidance, with an average estimate of $1.37 per share.

Guidance for the full fiscal 2015 looks particularly encouraging, as management expects to deliver comparable-store sales growth in the low single digits and an increase in earnings per share in the mid-teens. If the company can deliver according to guidance, it would suggest a fairly strong recovery for PetSmart over the coming quarters.

In all, PetSmart delivered broadly good news in its latest earnings report. While it's not completely out of the woods in terms of sales, the company seems to be moving in the right direction. Strong guidance for the coming year was the big positive in the report, but it also will set the bar higher for PetSmart in the middle term.