This summary is based on the third quarter fiscal 2008 earnings call conducted by PetSmart Inc. (PETM) on November 19, 2008.
Management:
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Chairman of the Board & Chief Executive Officer: Philip L. Francis
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President & Chief Operating Officer: Robert F. Moran
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Chief Financial Officer & Senior Vice President: Lawrence P. (Chip) Molloy
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Vice President of Investor Relations & Treasury: David Cohen
Key Investors Issues
- Income of $35.8 million or 28 cents per share was 21.7% higher than $29.5 million or 23 cents a share in 2007.
- Revenue totalled $1.3 billion, up 12.1% from last year.
Year To Date Highlights:
- Revenues were up 11% to $3.7 billion.
- Income came in at $114 million or 82 cents a share, down 38%.
Third Quarter Highlights
The firm delivered earnings of $35.8 million or 28 cents per share, which was 21.7% higher than $29.5 million or 23 cents a share in the same period last year on revenue growth and expense reduction.
- Revenue totaled $1.3 billion, up 12.1% from last year as comparable store for sales grew 5.4% on top of 1.4% at comp growth for the same period last year.
- The firm opened 32 net new stores to finish with 1,107 stores.
- It also opened 11 new PetsHotels and finished the quarter with 132.
- Operating income was 5.8% of sales, an improvement of approximately 50 basis points compared to the same period of last year.
Gross margin declined 110 basis points to 28.6% of sales as merchandise margins were down 60 basis points from the sales mix shift and services margins were down 10 basis points.
- Store occupancy was unfavorable by 50 basis points due to the growth in new stores, while the supply chain costs were favorable by 10 basis points as the firm anniversaried the start up of the new distribution center in Noonan.
- The leverage of the supply chain was in spite of an increase in fuel rate costs that averaged 35% higher than the same period last year.
- Operating general and administrative expenses were 22.8% for the quarter, or down 155 basis points when compared to the same period of last year.
- Positive impacts to expenses included cost savings initiatives, such as new store labor management processes, reduced professional fees, re-negotiated maintenance contracts, and a reduction in supplies.
PetSmart generated $46 million in operating cash flow and spent $68 million for capital projects.
- It ended the quarter with $54 million of total cash and cash equivalents and $50 million of debt on the balance sheet.
- Inventory per store was $553,000, up 3.6% from the same period of last year, driven primarily by inflation as the firm managed inflationary pressures by bringing down inventory levels to match customer demand.
- The firm still has 25 million remaining of the current $300 million share purchase authorization.
Operational Metrics:
- Services growth rate dropped to 15.2% for the quarter, and now makes up 10% of sales.
- There has been a decline in the frequency of trips in grooming and the PetsHotel has started to slow consistent with trends in the human travel industry.
- Hard goods penetration was 35%, down from 38% last year, and live goods business has remained unchanged compared to last year at 3% of the business.
- The firm has completed the labor management system rollout in all of the U.S. stores and efficiencies in the supply chain are helping to reduce cost.
Fiscal 2008 Outlook:
- In the fourth quarter, the firm expects to deliver earnings per share between 59 cents and 62 cents and comparable store sales in the low to mid single digits.
- The firm is reducing its capital spend from $285 million this year to between $115 and $125 million next year.
- Going forward, PetSmart plans to build the cash position to a minimum $125 million and be essentially self-financing prior to any additional share re-purchases.
Key questions and answers from the third quarter earnings call conducted by PetSmart Inc. (PETM) on November 19, 2008.
Matthew Fassler (Goldman Sachs & Co.):
Can you explain further on expense management efforts?
Lawrence P. (Chip) Molloy: That was really a function of things like headcount management, trimming professional fees, our insurance costs are coming down. We renegotiated all of our contracts, our store maintenance contracts.
