This summary is based on the first quarter fiscal 2008 earnings call conducted by PetSmart, Inc. (PETM: chart) on May 21, 2008.

Management:

Chairman and Chief Executive Officer: Philip Francis
President and Chief Operating Officer: Robert Moran
Senior Vice President and Chief Financial Officer: Lawrence (Chip) Molloy

Key Investors Issues

- EPS were 32 cents per share compared to 78 cents per share last year.
- Net income fell to $41.2 million from $106.7 million in the year-earlier quarter
- Revenue rose 9% to $1.2 billion.

First Quarter Highlights

Comparable store sales, or sales at stores open at least a year, grew 2.9%, and earnings per share were 32 cents.

Top line performance came in higher than expected. That was helped by an increase in inflation which was partially offset by continued weakness in traffic.

Comparison transactions which the company uses as a proxy for traffic decreased 2.3%, while average ticket increased 5.2%. PetSmart comparable store sales tend to be driven by changes in comparison transactions. The company first saw comparison transactions fall off last year in the third quarter, with the worse performance in the fourth quarter at -2.6%, but it saw some rebound from that low in the first quarter of 2008. Average ticket generally increases between 3% and 5%, so the increase in the average ticket for the quarter is trending higher than is normal, much of that is coming from inflation.

The company saw sales benefit from inflation of about 4.3%, which compares to 1.5% for the same period of last year.

- Of all categories, consumables were the most impacted by inflation because of the increased cost of grains. As a result, sales mix shifted towards consumables. Consumables made up about 45% of sales, up from 43% at this time last year. This category has always been an important driver and has historically been less discretionary than hard goods business.
- Hard goods were 41% of sales, down from 44% in the first quarter of last year. The hard goods category includes supplies for dogs, cats, and specialty pets. Specialty includes species like fish, reptiles, and birds, and specialty accounted for the majority of the weakness. The company has seen a corresponding weakness in specialty lab good which made up about 3% of sales.
- Services made up about 11% of sales, up from the 10% last year. That represents solid growth of 21.6%. Training, which is by far the smallest part of service business, has experienced weakness. The company continues to see strength in the larger services business, grooming, as well as highly differentiated PetsHotels day camps. Even in this more challenging economic environment, these services appear to be in need for customers.

Revenue totaled $1.2 billion, up 9.1% from last year’s first quarter.

- Operating income was 6.6% of sales, down 30 basis points from the first quarter of last year.
- The company continues to see pressure in gross margins, partially offset by improvements on the expense line. Gross margins declined approximately 100 basis points to 29.4% of sales.
- Rent and occupancy costs were unfavorable to gross margins by 55 basis points.
- Warehouse and distribution costs were unfavorable by 65 basis points as a result of opening new replacement Reno distribution center, ramping up Newnan distribution center that was open last year, and pressure from rising fuel prices.

- The company had 30 basis points of margin dilution from the increasing penetration of the services business, while merchandise margins were down 30 basis points. The company had a benefit of approximately 10 basis points as it anniversaried obsolescence costs incurred last year from exiting State Line Tack business and other items.
- Operating, general, and administrative expenses were 22.8%, an improvement of approximately 80 basis points, compared to the same period of last year.
- Improvements were driven by leveraging store expenses, reductions in professional feeds, fewer costs associated with closing stores during the period, and the anniversary of the cost associated with exiting the State Line Tack business last year.
- Net interest expense, compared to the same period last year, increased 30 basis points as a percentage of sales. The increase was primarily the result of the funds required to execute last year’s accelerated stock repurchase that both reduced investments in short-term securities that provide interest income and increased debt interest.

- The company generated $118 million in operating cash flow, spent $60 million for capital projects, and purchased approximately 1.5 million shares for $30 million.
- The company ended the quarter with $56 million of total cash and cash equivalents, $26 million of borrowings on revolver, and 127.3 million shares outstanding.
- The company opened 35 net new stores in the United States and Canada to finish the quarter with 1043 stores, and opened 10 new PetsHotels and finished the quarter with 107.

Second Quarter 2008 Outlook

The company expects to deliver earnings per share between 26 cents per share and 30 cents per share, and the company is projecting low single digit comparable store sales which are on top of a 4% comparable store sales last year. The second quarter of fiscal 2007 included a net benefit in gross margin of approximately $4 million from favorable timing on rent reimbursement from Banfield. The company had a combined benefit of approximately $7 million in expenses from the impact of a reduction in insurance accruals and a reduction in stock-based compensation expenses.

Fiscal 2008 Outlook

- The company expects comparable store sales of low to mid single digits for the full year, and earnings guidance of $1.51 to $1.59 per share.
- The company expects gross margins to continue to be pressured but to a lesser degree, as it begins to leverage warehouse and distribution network and anniversary the mixture that started towards the end of the third quarter last year. On the expense side, the company is continuing to focus on managing cost and running the business efficiently to offset the pressure on margins.
- The company is on track to spend no more than target of $285 million on capital projects for all of 2008, and has $45 million remaining of current $300 million share repurchase authorization.

Key questions from the first quarter earnings call conducted by PetSmart, Inc. on May 21, 2008.