This summary is based on the third quarter fiscal 2007 earnings call conducted by PetSmart Inc. (PETM: chart) on November 14, 2007.

Chief Executive Officer: Phil Francis
Chief Operating Officer: Bob Moran
Chief Finance Officer: Chip Molloy
Investor Relations: Tawni Adams

Key Investors Issues

- The earnings per share were flat at 23 cents over the prior year.
- Quarterly revenue increased from $1.03 billion in prior year to $1.12 billion.
- For fiscal 2007, the company is projecting earnings per share of $2.05 to $2.09.
- PetSmart’s board approved a $300 million stock purchase authorization, which will be available through August 2009.

Third Quarter Fiscal 2007 Financial Highlights

The consolidated net income was $29.5 million or 23 cents per share for the third quarter of 2007.

That includes a negative impact of $4.7 million pretax related to the exit of the State Line Tack business. This net expense includes accelerated depreciation of assets, severance, and cost to remerchandise the former equine sections of the stores.

By controlling the costs to remerchandise this space and taking fewer markdowns to sell through the remaining inventory, the company managed expenses to below the $7 million that it had previously estimated. Also included in the third quarter results was a $5.5 million pre-tax benefit for the recognition of gift card breakage. The program is relatively new, and we now have sufficient historical redemption information necessary to recognize breakage. The benefit in the third quarter was for the firm’s portfolio of gift card balances from the beginning of the program until now. On a go forward basis, the company will continue to recognize gift card breakage but the annual impact is unlikely to be material.

At $1.12 billion, the total sales increased 7.8% from the same period last year.

The comparable store sales or sales in stores open at least a year grew 1.4% for the quarter. That''s on top of the 6.8% comp growth in the third quarter of last year, which was the highest comp quarter for 2006. The total sales growth was also fueled by 106 net new stores open since the third quarter of last year, which was a 12% increase.

The exit of the State Line Tack business cost the firm approximately 1.2% of same store sales for the quarter. The company came into the quarter expecting some impact as it cleared out product from the State Line Tack business and remerchandised the space. The company accelerated the remerchandising and at the end of the quarter, the firm was fully reset with fast-moving and top-selling products in all of its stores. The firm is seeing sales in these 180 stores ramp back up and believes that it is in a good position heading into the holiday season.

The pet food recall had some lingering effects on the top line for the quarter; however, the company is making progress. At the end of the quarter, the firm had 108 SKUs of the total 305 recalled back on its shelves. The management expects vendor to add back an additional 163 SKUs by the early part of next year. The remaining SKUs, about 34, will not be returning to the shelves, because the vendor has chosen to rebrand, reformulate or discontinue the product.

The unseasonably warm weather impacted certain categories of the company’s business. Dog skiwear tends to sell better when the weather cools off, but beyond that beds, apparel, outdoor containment, heating accessories and consumables typically ramp up as the weather turns cooler. In the early part of the fourth quarter, the firm was seeing promising trends from cold weather categories and expect this momentum to continue through the holiday season.

The fires on the West Coast had a minimal impact on the business for the quarter. Only two of the firm’s stores were briefly closed while 34 stores were impacted indirectly as a result of evacuations, road closures and warnings about people and pets staying inside because of the smoke. The company evacuated pets in affected stores to safe locations. This work was especially important for birds who are sensitive to air quality issues.

The total square footage increased from 20.3 million to 22.5 million or 11%. In addition, the firm opened 30 new Pets Hotels since the third quarter of last year which is a 53% increase year over year. The firm expects to open an additional 16 net new stores and ten Pets Hotels in the fourth quarter.

Gross margins declined 11 basis points to 29.7% for the quarter.

Merchandise margins improved in all three primary categories, dog, cat and specialty. Merchandise margins continue to benefit from the firm’s work to optimize prices and negotiate favorable terms with its suppliers. The firm is sourcing its products smarter and making assortment decisions that benefit both the customer and margin. Those benefits are offset by increased occupancy costs associated with new stores and dilution from increasing penetration of the firm’s services businesses.

Operating, general and administrative expenses were 24.4% or flat compared to the third quarter of last year.

That includes the 39 basis points increase for the exit of the State Line Tack business and a benefit of 49 basis points from the gift card breakage.

The net interest expense increased 47 basis points compared to the third quarter of 2006; the increase was primarily the result of the accelerated share repurchase and increase in capital leases. The funds required for the stock repurchase both reduced the firm’s investments in short-term securities that provide interest income and increased the debt interest. In addition, the firm’s new store growth increased not only its operating leases but also its capital leases, resulting in an increase in interest expense.