This summary is based on the fourth quarter fiscal 2007 earnings call conducted by PetSmart Inc. (PETM) on March 5, 2008.
Management:
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President and Chief Operating Officer: Robert F. Moran
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Chairman and Chief Executive Officer: Philip L. Francis
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Senior Vice President and Chief Financial Officer: Chip Molloy
- [Manager of Investor Relations: Tawni Adams
Key Investors Issues
- Net income increased 40% to $258.7 million, or $1.95 a share, from $185.1 million or $1.33 a share in 2006.
- Sales were up 22% to $458.7 million as comparable store sales grew 2.4 %,
- The firm purchased $9.8 million shares including $7.0 million shares under an accelerated share repurchase program.
Fourth Quarter Highlights
- Net income declined 2% to $75.4 million, or 59 cents a share from $76.9 million, or 56 cents a share in the prior year.
- Revenue increased 13.8% to $1.33 billion from prior year’s fourth quarter.
- Comparable store sales grew 0.8% against a growth of 4.6% in 2006.
Full Year Highlights:
Sales increased 10.4% to $4.67 billion from $4.23 billion in the prior year as comparable store sales growth was 2.4%.
- Comparable store traffic was down 2.6% and the customers spent less on hard goods, due to the pressure of uncertain economy and dramatic drop in consumer confidence in spending.
- The company continued to face some weakness from its decision to exit the State Line Tack business and believes it still has some work to do to win back some of the sales from the pet food recall.
- The company saw strength in its consumables and services business, but it was not enough to offset weakness in other categories.
Earnings were $258.7 million or $1.95 a share, up 39.8% from $185.1 million or $1.33 a share in 2006 following a strong top-line performance, excluding the benefits for the extra week, the MMI transaction and costs associated with the exit of the SLT business.
- Rent and occupancy costs which make up approximately 13% of the cost of sales, were unfavorable to gross margins by 90 basis points.
- Warehouse and distribution costs which total approximately 7% of the cost of sales, were unfavorable by 30 basis points
- The company had 30 basis points of margin dilution from the increasing penetration of the services business, while the merchandise margins were down 20 basis points.
- The declines were partially off set by a 50 basis point benefit due to the 14th week.
Operating, general and administrative expenses were 21.8% for the period for a 10 basis point improvement compared to the same period of last year.
- The fourteenth week gave the company a ten basis point benefit which was off set by a 10 basis point negative impact from the exit of the State Line Tack business.
- As a percentage of sales, the net-interest expense, compared to the same period last year, increased 40 basis points, primarily the result of the funds required to execute accelerated stock repurchase that both reduced investments in short-term securities that provide interest income and increased the debt interest.
Due to the improvement in the firm’s inventory, it generated 15% growth or $333 million in operating cash flow for the year
- The company ended 2007 with average inventory per store of $497,000.00, down 7.4% from $537,000.00 per store at the end of 2006.
- $294 million or 6.3% of sales in capital for the year was spent, which compares with $241 million or 5.7% of sales for 2006, and of the $294 million, approximately 77% was spent for new stores, PetsHotels and store related projects and 23% for supply chain, IT and other infrastructure improvements.
- The accelerated stock repurchase program was completed and the firm reduced its outstanding share count by 776,000 shares.
- During the year, $9.8 million shares were brought, including $7 million, under the ASR, and $225 million of the current $300 million share repurchase authorization were used.
Operational Highlights:
The firm built a highly competitive business model through investing in stores, remodels, PetsHotels, distribution facilities, IT infrastructure and operating initiatives, and this has deliver impressive top and bottom-line performance.
- $294 million or approximately 6.3% of sales was spent, and plans to slow its capital spending as it continued to manage expenses by focusing on consistency in execution in more than 1000 of its stores.
- A number of new processes and policies were introduced, aimed at making the company’s operations more efficient; from how we work with vendors at the front end of the supply chain, to how it manages merchandise inside the store.
- The company keeps looking for ways to drive top-line growth and maximize the performance of its current asset base.
The total lifetime care strategy of providing solutions to every pet parent that enters the company’s store remained the touch stone of the business.
