Investors might be looking to smack the CEO of pet supply chain Petco (NASDAQ:PETC) on the nose with a rolled-up copy of TheWall Street Journal today. Not only did the company miss lowered guidance, but management also indicated the company would come in below its peg next quarter as well.
Petco's third-quarter results really aren't all that much different from what we've seen for a little while now. There was OK top-line growth (revenue up about 8%, comp-sales up about 1.5%), but margins got chewed up like a slipper thrown into the puppy pen. Gross margins skidded almost four full percentage points, and the operating margin fell by about 3.5 points. That, in turn, translated into a greater-than-one-third drop in operating income and a 37% decline in reported net income.
Of course, there were some culprits in the quarter. Management blamed higher-than-expected markdowns for pecking away profits by about $0.03 to $0.04 per share, and a shift in product mix seemingly hurt gross margins. Unfortunately, the company also tried to blame some of its problems on the cost of gas. Bad managers! Bad! Bad!
Jokes at the company's expense aside, there might be some value here. Trailing free cash flow isn't all that impressive on the surface, but most investors who use cash flow-based valuation methodologies will tell you to adjust the capital expenditures number to differentiate between "growth capex" and "maintenance capex." If you do that, Petco actually looks like it might be an interesting value.
Certainly, it's not all about the cash flow, though. The company has a good competitor in PetSmart (NASDAQ:PETM), which happens to look slightly undervalued in its own right. And, of course, there are places like Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and TractorSupply (NASDAQ:TSCO), where pet owners can go to get some or perhaps everything they need -- to say nothing of the local mom-and-pops that my ferrets tend to patronize.
Petco is worth a look, but investors who do so should keep a bit of skepticism in their back pockets. I'm not a fan of retail managers who blame sales shortfalls on gas prices, nor am I always a fan of buying stocks where the estimates keep coming down. Still, a value is a value, and if Petco is left out in the cold too long, it may be worth adopting into your portfolio.
If you're looking for companies that have retained their intrinsic value, despite the beating they've taken on Wall Street, take a free trial subscription to Motley Fool Inside Value and check out chief analyst Philip Durell's latest picks, plus all of his past recommendations. PetSmart is aMotley Fool Stock Advisorrecommendation.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). With six furry kibble-eating machines of his own, he knows all about buying pet supplies.
