PetSmart, Inc. (PETM)
Q4 2008 Earnings Call Transcript
March 4, 2009 4:30 p.m. ET

Executives

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

Analysts

Gary Balter - Credit Suisse
Brian Nagel - UBS
Matthew Fassler - Goldman Sachs
Michael Baker - Deutsche Bank Securities
Alan Rifkin – Bank of America
David Mann - Johnson Rice & Company
Matt Nemer - Thomas Weisel Partners
Christopher Horvers - J.P. Morgan
Dan Wewer - Raymond James

Presentation

Operator

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

Dave Cone – Vice President of Investor Relations

Good afternoon and welcome to PetSmart''s conference call to announce our results for the fourth quarter and for all of fiscal 2008. With me on the call today are Chairman and Chief Executive Officer Phil Francis, our President and Chief Operating Officer, Bob Moran, as well as Chip Molloy, Senior Vice President and Chief Financial Officer. Phil will kick off the call with an overview of our fourth quarter and full year results, then Chip will take you through the financial review of the quarter and the year, as well as our earnings guidance for next year, and Bob will provide a review of the operations of the business and provide insight into our upcoming year and finally we''ll take your questions. Please keep in mind everything we cover during today''s call, including the question-and-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 L. Francis – Chief Executive Officer

Thanks, Dave, and hello, everyone. As all of you are well aware, 2008 was a very challenging macroeconomic environment, both domestically and globally. News of a widespread economic downturn accelerated in the second half of the year, pushing consumer confidence to record lows and resulted in one of the most challenging holiday seasons for the retail industry in over 40 years. Despite those macroeconomic pressures, I''m proud to announce that PetSmart was still able to deliver both sales and EPS growth for the quarter when compared to the same period last year. Comparable store sales grew 3%, while earnings per share totaled $0.62 versus $0.59 in the fourth quarter of 2007. As a note, 2007 was a 53-week year and the fourth quarter included approximately a $0.07 benefit for the extra week. We''re also proud of the fact that we were able to deliver earnings for all of 2008 totaling $1.52 per share, which was in line with our original guidance provided last March.

Despite our strong performance for the quarter, we are not without our share of challenges. Comp transactions continued to be down a bit and there are fewer items in the customer''s basket. The obvious lack of discretionary spending has negatively impacted our higher-margin of hard goods business and portions of our services business. Grooming continues to be relatively strong, while Pet training has been a bit weaker. Additionally, our PetsHotel business, which includes boarding and day camp, has also shown some weakness. 2008 was a year when we focused heavily on lowering our cost structure without negatively impacting our relationship with our customers and our commitment to total lifetime care for every pet, every parent, every time. We removed non-customer facing tasks from our stores and drove efficiencies in our supply chain. We created a much more cost-conscious culture as we migrated from a mind-set of how much can we do, to how much can we afford to do. We also reduced our capital expenditures from a historical high of $294 million in 2007 to $238 million in 2008.

Our focus on cost reductions helped us mitigate a large portion of the merchandise margin degradation, caused by some of the weakness in sales of our higher-margin discretionary products. We''re now ready to begin our next step as 2009 begins our journey towards a deeper focus on the customer. Through extensive customer research and the data available from PetPerks, we better understand our customers needs and wants and are developing targeted strategies to drive incremental sales. We also believe we have a better understanding of how we can acquire new customers. Under the umbrella of total lifetime care for every pet, we expect to widen the differentiation between ourselves and our competitors. We are focused on providing more innovative products, increasing product speed to market, strengthening our relationship with Banfield, telling compelling stories about our products, and creating excitement in our stores for both customers and our selling associates. As a result, we believe we can continue to grow our market share and drive more productivity through our current stores, which Bob will speak to in just a few moments.

We are very fortunate here at PetSmart. We are a leader in an industry that services a strong emotional bond between pet parents and their loved ones. Our associates understand that bond and take pride in supporting it. We''re also very healthy financially. We ended the year with $126 million in cash on our balance sheet and zero debt excluding our leases. We have sufficient cash to run our operations without any additional borrowing, and our free cash flow is growing. We plan on reducing our capital expenditures by approximately 50% in 2009. In addition, the actions we have taken to date to reduce costs will continue to benefit us in 2009 and beyond. Despite the macro economy we expect to look back at this time as one that helped us focus on what is critical to strengthen our market position while solidifying our long-term growth potential. Our management team and associates remain committed to stay the course. We expect to efficiently use our capital, while remaining adaptable to our rapidly changing environment. As a result, we remain confident, that our strategy will produce long-lasting results and shareholder value.

With that, I''ll turn the call over to Chip to give you more detail on our financial performance for the quarter and the year, as well as our outlook for 2009.

Lawrence P. (Chip) Molloy – Chief Financial Officer

Thanks, Phil. Good afternoon, everyone. Today I will be reviewing our fourth quarter and fiscal year performance as well as providing our 2009 guidance. Before I get started I want to emphasize that I will speak in GAAP terms when comparing our performance to last year. As a reminder, fiscal year 2007 was a 53-week year and also included the one-time benefits from the sale of Banfield stock and the one-time write-offs associated with the exit of the State Line Tack business. Last year''s 53rd week provided approximately $90 million in incremental sales, $8 million of which were for services, and $0.07 in incremental EPS. The Banfield transaction provided $0.48 in incremental EPS. And the one-time costs associated with SLT negatively impacted EPS by $0.07.

As Phil mentioned, earnings for the quarter were $0.62 per share, which was at the high end of our guidance. This compares to $0.59 per share for the same period last year, which included the benefit from the 53rd week. 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. Our comparable store sales or sales in stores open at least a year grew 3% for the quarter. Operating income for the quarter was 10.5% of sales, a 65 basis point improvement when compared to 9.8% for the same period last year. Gross margin for the quarter declined 110 basis points to 30.5% of sales. The loss of the extra week this year negatively impacted 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.