PetSmart Inc. (PETM)
Q3 2008 Earnings Call Transcript
November 19, 2008 5:30 p.m. ET

Executives

David Cone – Vice President of Investor Relations & Treasury
Philip L. Francis – Chairman of the Board & Chief Executive Officer
Robert F. Moran – President & Chief Operating Officer
Lawrence P. Molloy – Chief Financial Officer & Senior Vice President

Analysts

Matthew Fassler – Goldman Sachs & Co.
Alan Rifken – Merrill Lynch
Gary Balter – Credit Suisse
David Mann – Johnson Rice & Company
Matt Nemer – Thomas Weisel Partners
Peter Benedict – Wachovia Capital Markets
Michael Baker – Deutsche Bank North America
Christopher Horvers – JP Morgan
David Cumberland – Robert W. Baird & Co
Dan Wewer – Raymond James & Associates
Brian Nagel –UBS
Joe Feldman – Telsey Advisory Group

Presentation

Operator

Good day ladies and gentlemen and welcome to the PetSmart third quarter 2008 analyst’s conference call. (Operator instructions) At this time all participants are in a listen-only mode. Later we’ll have a question-and-answer session and instructions will be given at that time. If anyone should require assistance during the conference please press * then 0 on your touchtone telephone. As a reminder this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. David Cone, Vice President of Investor Relations & Treasury. Mr. Cone you may begin.

David Cone – Vice President of Investor Relations

Good afternoon and welcome to PetSmart’s conference call to announce our results for the third quarter of Fiscal 2008. With me on the call today are Chairman & Chief Executive Officer, Phil Francis, our President & Chief Operating Officer, Bob Moran, as well as Chip Molloy, Senior Vice President & Chief Financial Officer.

Phil will kick off the call with and overview of our third quarter results, then Chip will take you through the financial review of the quarter, as well as our earnings guidance, and Bob will provide a review of the operations of the business, and finally we’ll take your questions. Please keep in mind everything we cover during today’s call, including the question & answer session, is subject to the Safe Harbor Statement for forward-looking information you’ll find in today’s news release.

Thanks and I’ll now turn the call over to Phil.

Philip Francis – Chief Executive Officer

Thank you, Dave and hello everyone. The world has gone through striking changes since we spoke about our second quarter results, but our commitment to delivering on our targets and building a business model that can deliver ongoing and sustainable returns for our shareholders has not changed. Our performance for the quarter was in line with our guidance. Earnings per share were $0.28, up 21.7% when compared to the same period last year. And comparable store sales or sales in stores open at least a year grew at 5.4%. The unique blend of staples and discretionary items inherent to our business model has allowed s to manage through this challenging environment and deliver on our guidance for the quarter.

But we’re not without our share of challenges. We continue to see top line strength coming from our ability to pass inflation through to the customer. Our average ticket was up 6.2% in the third quarter, including a 690 basis point inflation benefit to comp sales. Last year our average ticket was up 3.5% and included a 225 basis point inflation benefit. Comp transactions which were used as a proxy for traffic decreased 0.9%, slightly better than the 1.7% decline we saw in the second quarter. We continue to experience weakness in our higher margin, more discretionary hard goods business and our services sales growth had dropped to 15.2% for the quarter from 20.4% in the second quarter. For the first time, we’re seeing some weakness across all three of our services businesses, Grooming, Training, and the PetsHotel.

Like many other retailers, we believe the weakening economy is impacting the discretionary spending of pet parents a bit. But these challenges don’t require that we change our commitment to our shareholders or our customers. In fact, our management team and our associates are more focused than ever on efficiently using our capital and emerging from this challenging time as a stronger player. We have a number of things working in our favor that make us confident we can deliver. The pet industry continues to be one of the most attractive in retail. Pet parents continue to show that their emotional bond is powerful enough to keep pet spending in the budget. While it was the worst retail sales month in a number of years, PetSmart delivered 4.1% comp sales growth in October. Clearly when you’re fortunate enough to be operating in this kind of an industry, you have to be prepared to defend your position. We believe that PetSmart business model is well-positioned to do just that.

Our total lifetime care strategy was built to flourish in boom times and to withstand the challenging times. Our less discretionary consumables business makes up over 50% of our sales and continues to be an important traffic driver. Our knowledgeable associates and our services offerings help us differentiate from our competition and position us as a source for solutions to pet parenting challenges. Our newly mature customer relationship marketing program based on our PetPerks database helps us with customer recapture and driving trips for more casual customers. Both efforts are difficult for our competition to counter and years of experience offering solutions for pet parents gives our brand credibility. So it all comes down to our ability to execute and drive this business to deliver what it is capable of producing.

We recognized a year ago that our expense structure precluded us from delivering the leverage necessary to continue to grow earnings with a weakening top line. So we’ve had a year to begin tightening up on our day-to-day expenses and addressing our fixed cost structure. We’re pleased with our initial progress and expense management and as a result of the evolving competitive landscape and economic outlook we’re going to pull back even further on our capital spending in 2009. We now expect to spend between $115 and $125 million in capital in 2009. That will include the opening of 32 net new stores, all of which have a signed lease agreement and many of which are currently under construction. We also expect to build approximately 20 new PetsHotels next year, most of which will be in new store locations. The reduction in new investments will further reduce the near-term burden on our earnings, and will allow us to generate additional free cash flow.

We have a healthy balance sheet today. The generation of additional cash further increases our flexibility and allows us to be well-positioned to deliver in uncertain economic times. Our business model has recently shown some resilience, though we’re not immune to the pressures of the slowing economy. The magnitude of the recent downturn may prove to be greater than we can fully mitigate with smart expense management and slowing on capital spending. We’ll continue to do everything in our power to deliver ongoing growth to our shareholders, but we do expect the next year to be challenging.

With that I’ll turn the call over to Chip to give you more detail on our financial performance for the quarter and our outlook for the remainder of the year.