This summary is based on the second quarter fiscal 2007 earnings call conducted by PetSmart Inc. (PETM) on August 16, 2007.
Management
President and Chief Executive Officer: Philip Francis
Acting Chief Financial Officer: Raymond Storck
Chief Operating Officer: Robert Moran
Key Investors Issues
- The earnings per share rose to 35 cents from 25 cents in the prior year quarter.
- Quarterly sales rose to $1.12 billion from $1.02 billion in the previous year.
- The Board has approved an additional $300 million stock repurchase authorization.
- For the third quarter, the company estimates earnings of 21 cents to 23 cents per share.
Second Quarter Fiscal 2007 Financial Highlights
The consolidated net income was $47.1 million or about 35 cents a share for the second quarter of 2007.
That includes about a penny in that loss related to the firm’s exit from the State Line Tack business. The net loss includes accelerated depreciation on assets and cost to re-merchandise the equine sections in the stores. Without those items, the second quarter earnings were 36 cents a share.
The company exceeded guidance due to a benefit related to the re-negotiation of a contract with MMI Holdings Inc, which resulted in a change in the timing of Banfield rent recognition. Some of this impact will reverse in the third and fourth quarters, but it will be a net positive for the year. In addition, the firm has some favorable results in insurance expense based on updated actuarial estimates, due to recent positive trends in claim activity.
In the second quarter of 2006, the firm earned 27 cents per share, excluding $2.9 million or about a penny per share of expenses related to a potential acquisition, $1.8 million or about another penny per share in costs to re-rack a distribution centre, and adjustment to cost-to-sales related to a change in accounting practice from early pay discounts and the tax benefit.
At $1.1 billion, the company’s total sales were up 9.4% in the second quarter compared with $1 billion in the same period last year.
The comparable store sales, or sales in stores open at least a year, grew 4% for the quarter. That is on top of 4.9% growth in the second quarter of last year. Comparable store sales in core business, excluding the State Line Tack business that the company is exiting, grew at 5% for the quarter.
The company continued to grow square footage during the quarter, and the firm opened 38 net new stores in the quarter including the acquisition of stores in Canada.
Gross margins were 31% for the quarter, with no material impact for the exit of the State Line Tack business.
That’s a 53 basis point improvement compared to pro forma gross margins of 30.4% for the second quarter of last year. Part of that margin expansion is due to the timing of how the firm recognizes rent payments under the newly renegotiated contract with MMI. Some of that benefit will reverse in the back half of the year.
Gross margins continue to benefit from the company’s work to optimize prices and negotiate favorable terms with its suppliers. The company is sourcing its products smarter, making an assortment decisions that benefit both the customer and its margin, and the firm saw some expansion from product mix for the quarter. Those improvements were offset by dilution from increasing penetration of services and strong redemptions from the Pet Perks program. In addition, the company experienced increased costs year-on-year on its supply chain, for line haul rates and fuel surcharges. The company also incurred some cost to ensure the successful start-up of its Atlanta based distribution centre, which started shipping this quarter.
With the changes in the MMI contract and trends in merchandising margin, the firm anticipates gross margin expansion for the year to be 25 to 30 basis points compared to the prior year, which is up from the previous targets of flat to 20 basis points of expansion. That does not include the impact of the exit of the State Line Tack business, or the benefit of the 53rd week.
Operating general and administrative expenses were 23.4% of revenue in the second quarter.
Excluding the costs associated with exiting the State Line Tack business, operating general and administrative expenses were 23.1% for the quarter. That compares pro forma operating general administrative expenses of 23.5% in the second quarter of 2006.
The firm had some favorable results in insurance expense. Those results were partially offset by higher advertising expenses compared to the prior year. The company continued to feel good about its goal of 20 to 25 basis points of expense leverage for the year and that does not include the impact of the exit of the State Line Tack business or the benefit of the 53rd week.
