Pets may be man's best friend, be they dogs, cats, lizards, or fish. But is PETsMART (NASDAQ:PETM) an investor's best friend? The pet retailer reported first-quarter numbers last week, and there's no sign this stock is going to the dogs.
Earnings at the pet retailer increased 40% to $44.7 million, or $0.30 per diluted share. It's worth noting that the results included a one-time $0.03-per-share benefit from a legal settlement, although the results still beat estimates (and its own lowered guidance from last quarter). Sales increased 13.4% to $796.3 million, while same-store sales grew 5.7% on top of strong same-store sales the year before.
Things have been good for PETsMART and its rival Petco (NASDAQ:PETCE), and that's not surprising, considering the way Americans view their pets these days. People love their pets, and they treat them well; these days, an animal companion is more like a member of the family than ever before. That's surely one of the reasons David Gardner made PETsMART a Motley Fool Stock Advisor pick.
On the other hand, you may ask how it is that pet retailers can do well when powerful discounters like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) sell pet goods for cheap. Indeed, Wal-Mart recently announced that it will sell a variety of pet supplies online.
The difference is that the industry lends itself better to the specialty retailer than to the discounter. Not only does PETsMART sell the usual things pets need -- food, leashes, litter boxes, toys -- but it also provides services like grooming, training, and even deluxe pet hotels. (That just goes to show how much people love their pets, but our society is busier than ever and we need that extra help.)
In that vein, PETsMART's pet-services segment's sales were up 20.8% in the first quarter. Gross margins increased 88 basis points to 31%, marking the 16th consecutive quarter of gross-margin increase. The company said its price-optimization software helped results, as did the fact that it's doing a better job of buying products to sell. Although we can't check out free cash flow since the company didn't provide a statement of cash flows with its earnings release, PETsMART also has a nice cushion of cash, cash equivalents at $109.2 million, and no debt.
Last quarter brought some anxiety for PETsMART shareholders, when the company gave a rather conservative outlook, announcing that it had to restate previous financial results because of new regulations pertaining to lease accounting. Although the company's management said in its conference call that it still has concerns about certain economic elements, like the high cost of gas, investors very likely took heart in what PETsMART delivered.
PETsMART doesn't exactly look cheap, trading at a forward P/E of 21. However, the company has been delivering, and the trends at hand make a fine argument that this is a company that's poised to capitalize on man's best friends over the long term.
For more on PETsMART and its rival, see the following Foolish content:
- Is rival Petco a stock with bark and bite?
- Last quarter, PETsMART wouldn't "stay."
- Yep, pet parents have been flocking to PETsMART.
PETsMART is a Motley Fool Stock Advisor pick; to find out more about some of Tom and David Gardner's favored stocks, click here. If you're only here for the pets, join other Fools who talk about their finned or four-legged family members on our Pet Lovers board.
Alyce Lomax does not own shares of any of the companies mentioned.
