This summary is based on the fourth quarter fiscal 2008 earnings call conducted by Petsmart Inc. (PETM) on March 4, 2009.
Management:
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Chairman of the Board & Chief Executive Officer: Philip L. Francis
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Chief Financial Officer & Senior Vice President: Lawrence P. (Chip) Molloy
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President & Chief Operating Officer: Robert F. Moran
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Vice President of Investor Relations & Treasury: Dave Cone
Key Investors Issues
- Earnings were $78.4 million or 62 cents per share, 4% up from $75.5 million or 59 cents per share in the prior year.
- Total sales were $1.36 billion, up 2.3%.
Full Year Highlights:
- Earnings were $192.7 million or $1.52 a share, down from $256 million or $1.99 a share in the prior year.
- Sales totaled $5.07 billion, an increase of 8.4% compared to last year.
– The firm opened 112 new stores and closed 8, which included opening 8 stores and closing 3 in the fourth quarter.
Fourth Quarter Highlights
Earnings were $78.4 million or 62 cents per share, 4% up from $75.5 million or 59 cents per share for the same period last year due to revenue growth.
- Total sales for the quarter were $1.36 billion, up 2.3% from the same quarter last year, while services sales, which are included in total sales, increased 6.9% to $131 million for the quarter.
– Comparable store sales or sales in stores open at least a year grew 3% for the quarter with operating income of 10.5% of sales, a 65 basis point improvement when compared to 9.8% for the same period last year.
- Gross margin declined 110 basis points to 30.5% of sales with the loss of the extra week this year negatively impacting margin by approximately 50 basis points.
Merchandise margins were down 100 basis points, primarily due to sales mix, while services provided 30 basis points of benefit.
- Store occupancy was unfavorable 55 basis points due to the growth in new stores, while supply chain costs were favorable 65 basis points due to improve productivity in distribution centers.
- Occupancy was also affected by the realization of the benefits from the investments made in the network over the course of the last two years.
- Operating, general and administrative expenses were 20.1% of sales for the quarter, a 175 basis point improvement from the same period last year on improved efficiency.
- Improvements in expenses are from the new labor management system, which was rolled out to all U.S. stores in 2008 as well as renegotiated maintenance and service contracts and reduced professional fees.
It generated $421 million in operating cash flow and spent $238 million in capital expenditures.
- The total capital spend was $47 million below the original budget and $56 million below the peak of $294 in 2007 as a result of tightening processes for approving capital projects while working to reduce overall spend.
- During the year, the firm also repurchased $50 million of PetSmart stock and distributed $15 million in dividends.
- It ended the year with average inventory per store of $525,000, up 5.6% from the end of last year, driven both from inflation and decisions to make select forward buys that provided economic benefits.
Operational Insights:
- During the year, the firm focused heavily on lowering the cost structure without negatively impacting the relationship with customers and the commitment to total lifetime care for every pet, every parent, every time.
- It removed non-customer facing tasks from the stores and drove efficiencies in the supply chain, creating a much more cost-conscious culture.
- Petsmart reduced its capital expenditures from a historical high of $294 million in 2007 to $238 million in 2008.
- The focus on cost reductions helped mitigate a large portion of the merchandise margin degradation caused by some of the weakness in sales of higher-margin discretionary products.
Under the umbrella of total lifetime care for every pet, we expect to widen the differentiation between the firm and its competitors.
- The firm is focused on providing more innovative products, increasing product speed to market, strengthening its relationship with Banfield and telling compelling stories about its products.
- As a result, the company believes it can continue to grow its market share and drive more productivity through the current stores.
The firm continued to experience a drop in comp transactions, which is used as a proxy for traffic, and there were slightly fewer items in the customer''s basket.
- The reduced units were offset by inflation and pricing strategies, with the inflation impact less than the third quarter, but still greater than the historic levels of 2% to 2.5%.
- The firm made some organizational changes to better align merchandise and supply chain strategies.
- PetSmart is currently working to simplify its approach by reducing the number of brands offered to better establish household names while increasing the number of products to successfully gain more market share.
- Vendors are working closely with the firm to fund promotions throughout the stores which will contribute to the ability to increase basket size and attract new customers to the stores.
Fiscal 2009 Outlook:
- For the year, the firm anticipates low single-digit comps, total sales growth in the mid to high single digits, and services growth in the mid to high single digits.
- It expects earnings per share of $1.40 to $1.50.
- It anticipates an operating margin decline of 60 to 70 basis points, driven primarily from continued gross margin degradation.
- Capital expenditures to be $115 to $125 million, which is a reduction of approximately 50% when compared to 2008, with 80% of that CapEx to build 40 to 42 net new stores, 20 PetsHotels and other remodel-type products.
