My first presentation as an equity analyst was focused on the exciting growth story of PETsMART (NASDAQ:PETM). Of course this was many years ago, but it appears that the fundamentals and growth strategy of the leading pet supply and services chain has gone through many tests, including today's wobbly earnings release.
The competition in the $31 billion pet product industry is very segmented, but all you have to do is look toward PETsMART and rival Petco (NASDAQ:PETC) for leadership guidance. Companies such as Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and Costco (NASDAQ:COST) have claimed small pockets of the $13 billion market for pet food and treats but do not offer the expended services of industry leader PETsMART.
PETsMART's pet services, such as grooming, are three times more profitable than the products sold in its core store. These services have consistently grown above the company's 20% target and should do so for at least the next few years. The company is also testing a pet hotel/boarding concept that will provide a "Doggy Day Camp" sort of environment for pets and should extend the company's solid community reach.
PETsMART's second-quarter results showcased the company's 14th consecutive quarter of year-over-year gross margin expansion. However, sales were lower than expected ($806 million vs. the $815 million expected), and its same-store sales grew only 5.4%, which was below the forecasted 6% to 7% increase. Second-quarter earnings were boosted by an $8 million nonrecurring tax benefit that was offset by a "similar amount of various expenses," leading to questions about the quality and strength of the company's earnings. Investors weren't impressed with the ambiguity, sending shares down nearly 4.5% to around $28.50.
In 2003, PETsMART trained more than 250,000 dogs and groomed or bathed 4.4 million dogs. The company is likely to build on this trend and expects same-store sales to increase 7% and earnings to increase about 24% in 2004.
However, credibility is important on Wall Street, and it looks like PETsMART lost a little chunk of it today. I would defer any investment in the company until it clears up its flea problem and would look to potential top dog Petco as man's best friend.
Fool contributor Phil Wohl spent more than 12 years on Wall Street and now concentrates his writing on more fictional characters. He has no stake in any firm mentioned above.
