This summary is based on the first quarter fiscal 2007 earnings call conducted by PetSmart Inc. (PETM: chart) on May 16, 2007.

Chairman and Chief Executive Officer: Philip Francis

Chief Accounting Officer and Acting Chief Financial Officer: Ray Storck

President and Chief Operating Officer: Robert F. Moran

Key Investors Issues

- Earnings per share increased to 78 cents compared to 30 cents in prior year.
- Quarterly revenue increased to $1.11 billion from $1.01 billion in last year.
- The company bought back 914,000 shares in Q1 at an average price of $29.55 per share.
- For all of 2007, the firm expects earnings per share of $2.03 to $2.05.

First Quarter Fiscal 2007 Financial Highlights

The consolidated net income was $106.7 million or about 78 cents per share for the first quarter of 2007.

That includes 3 cents in net loss related to the firm’s exit from the State Line Tack business. The net loss includes inventory write-downs, accelerated depreciation on assets and re-merchandising expenses offset by the net proceeds from the sale of the brand name, customer lists, inventory and certain other assets related to her equine Internet and catalog business. Also included in the first quarter 2007 results is a net benefit of 47 cents related to the sale of shares of MMI. Without those items, the earnings were 34 cents a share for the quarter.

The top line for the quarter was solid despite some uncertainty related to the recall.

At $1.11 billion, the total sales were up 9.9% in the first quarter compared with $1.01 billion in the same period last year. The comparable store sales where sales of stores open at least a year grew 4% for the quarter on top of 3.7% growth in the first quarter of last year. The firm opened 20 net new PetSmart stores in the quarter, each of which was in the Eagle II format.

Gross margins were 30.5% for the quarter compared to 30.7% for the first quarter of last year.

Excluding the loss from the exit of the State Line Tack business, gross margins were 30.6% for the first quarter of 2007. The firm continues to benefit from its work to optimize prices and negotiate favorable terms with its suppliers. Those improvements were offset by dilution from increasing penetration of services and strong redemptions from its successful PetPerks program.

In addition, the company experienced increased costs year-on-year in its supply chain, the line haul rates, fuel surcharges and supplies. The firm also incurred some of the startup costs for its Georgia distribution center this quarter. The management continues to believe that flat to 20 basis points of gross margin improvement for the year is about right. That does not include the impact of the exit of State Line Tack business or the benefit of the 53rd week.

Operating, general and administrative expenses were 23.6% of revenue in the first quarter.

Excluding the costs associated with exiting the State Line Tack business, operating, general and administrative expenses came in at 23.2% of revenue for the first quarter versus 23.3% in the first quarter of 2006.

While the firm incurred some costs related to the recall, it managed to allocate its resources efficiently and leverage expenses for the quarter. The firm continues to feel good about its goal of 20 to 25 basis points of expense leverage for the year. That does not include the impact of the exit of the State Line Tack business or the benefit of the 53rd week.

PetSmart brought its inventory balances down in the first quarter, without the need for markdowns.

In addition, the firm sold some of its state line tack inventory with the sale of assets related to the equine, Internet and catalog business. Looking forward, the company still believes that it has good inventory and will not need to use markdowns to continue to sell through it. There could be some fluctuation in inventory balances, as the firm ramps up its new distribution center in Atlanta and continues to sell through its State Line Tack inventory. In addition, the firm is planning to change the way it does business with one of its large vendors in the second quarter. The firm will be bringing their product through its distribution network instead of it being delivered directly to its stores as it is today. This could cause a minor fluctuation through the transition.

- Capital expenditures were $59 million in the first quarter while depreciation and amortization were about $46 million. The firm is on track to have between $250 million and $260 million in capital expenditures for the year.
- Cash provided by operating activities was $110 million in the first quarter, and the firm ended the quarter with total cash, cash equivalents and short-term investments of $363 million.
- The company bought back 914,000 shares in the first quarter at an average price of $29.55 per share. So far, the company has used about $187 million of its current $250 million purchase authorization, which is available to it through August of 2007.