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Petsmart Earnings Call, Second Quarter 2008
Author: Maclintosh Kuhlengisa
123jump.com
Last Update: 6:17 PM ET September 05 2008

123Jump:


The specialty pet retailer of services and solutions delivered earnings of $37 million or 30 cents a share, down 21% from $47.1 million or 35 cents a share in 2007 on higher interest expenses. Revenue totaled $1.2 billion up 11.2% from last year as comparable store sales grew 4%. The firm has taken the decision to slow store and PetsHotel growth going forward to balance the investment between the productivity of the current asset base and driving market share gains.


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This summary is based on the second quarter fiscal 2008 earnings call conducted by Petsmart Inc. (PETM) on August 28, 2008.

Management:

- Chairman of the Board & Chief Executive Officer: Philip L. Francis
- President & Chief Operating Officer: Robert F. Moran
- Chief Financial Officer & Senior Vice President: Lawrence P. Molloy
- Director Investor Relations: Tawni Adams

Key Investors Issues

- The firm delivered earnings of $37.2 million or 30 cents a share, down 21% from $47.1 million or 35 cents a share in 2007.
- Revenue totaled $1.2 billion up 11.2% from last year’s second quarter as comparable store sales grew 4%.
- The firm purchased 850,000 shares for $20 million.

Second Quarter Highlights

The firm delivered earnings of $37.2 million or 30 cents a share, down 21% from $47.1 million or 35 cents a share in 2007 on higher interest expenses.

- Revenue totaled $1.2 billion up 11.2% from last year’s second quarter as comparable store sales grew 4% on top of 4% comp growth for the same period last year.
- Operating income was 6.1% of sales down 150 basis points from last year driven entirely by the pressure on gross margin.
- Gross margin declined approximately 150 basis points to 29.5% of sales.

Warehouse distribution costs were unfavorable by 35 basis points as a result of opening the full line replacement Reno distribution center and pressure from rising fuel prices.

- Merchandise margins were unfavorable by 10 basis points and services margins were flat to the second quarter of last year.
- Operating, general and administrative expenses were 23.4% or flat when compared to the same period of last year.
- Various cost savings including reduced store expenses and fewer professional fees provided a net benefit of approximately 80 basis points this year.
- Net interest expense as a percentage of sales compared to the sale period last year increased 45 basis points.

This was primarily the result of the funds required to execute the accelerated stock repurchase that both reduced investments in short term securities that provide interest income and increased our debt interest.

- The firm generated $90 million in operating cash flow, spent $66 million for capital projects and purchased 850,000 shares for $20 million.
- It ended the quarter with $58 million of total cash and cash equivalents, $32 million of debt on the balance sheet and 126.6 million shares outstanding.

Strategic Oversight:

- The firm opened 32 net new stores and 14 new PetsHotels during the quarter and is on track to build between 100 and 104 net new stores and 45 PetsHotels for the year.
- It brought the replacement full line Reno distribution center online with great success and expect to complete the implementation of a better labor management system in the US stores this year.
- The firm is now targeting capital investment to be in the range of $180 million to $200 million a year and expect to build between 60 and 65 net new stores in 2009 and between 50 and 60 stores in 2010 and beyond.
- The reduction in investment spending will give the ability to balance the focus of the capital and human resources between improving the productivity of current assets and building new assets that create long term shareholder value.

Deliverables:

- More promotional marketing mix can drive a value message to customers in this tight tough environment.
- The PetPerks database allows the firm to track promotional offers and focus only on those that are most profitable and merchants have continued their work on the good, better, best strategy in an effort to give pet parents what they want at a price point they can afford.
- The firm will continue to try to mitigate the margin pressure through forward buys on products, streamlining processes and making the distribution network more efficient.
- It is on target to complete the implementation of the new labor management system in US stores by the end of 2008.

Fiscal 2008 Outlook:

- The firm expects to deliver third quarter earnings per share between 25 cents and 29 cents and comparable store sales of mid-single digits.
- For the full year it now expects comp sales of mid-single digits and earnings outlook is in line with the previous projection of $1.51 to $1.59 per share.

Key questions and answers from the second quarter earnings call conducted by Petsmart Inc. (PETM) on August 28, 2008.

Matt Nemer (Thomas Weisel Partners): What sort of consumer behavior have you noticed?
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