When David Gardner originally recommended PETsMART (NASDAQ:PETM) to Motley Fool Stock Advisor subscribers, he cited the company's management among his reasons. I can see why.

I've often overlooked PETsMART, but the company's recent capital allocation makes me more curious about the business. Aside from paying a dividend, which I love to see, the company has begun repurchasing its shares in a meaningful way. Today PETsMART announced an extension of this effort.

These repurchases initially absorbed the rather large dilution created since 2001 by stock options. However, since 2004, the share count has been stable to slightly declining. The company's rate of dilution via stock options has slowed a great deal as PETsMART has matured. Last year, the possible dilution via option grants was 2%, quite reasonable for a company growing at PETsMART's pace.

The company's line of services, such as pet grooming, training, and pet hotels, has driven PETsMART's recent performance, helping to separate it from would-be big-box competitors like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). I haven't tried these services myself, but as a Jack Russell terrier owner (yes, I'm aware of the Parson's name change), I'm intrigued. My wife has lamented more than once that we should invest some cash in training little Kalia. Judging by PETsMART's performance, she's not alone in her thinking.

That said, shares in PETsMART and its competitor Petco (NASDAQ:PETCE) are not bargain-basement cheap at present. Both have P/Es exceeding 20. However, if you look deeper than the P/E, you'll find that PETsMART is a company with a large cash position, improving free cash flow performance, and a small dividend that has a lot of room to grow. You'll also find that the P/E at PETsMART makes the business appear slightly more expensive than it does on an enterprise value-to-free cash flow method of evaluation.

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Nathan Parmelee has no financial interest in any of the companies mentioned. You can view his profile here. The Motley Fool has an ironclad disclosure policy.