PetSmart (PETM) made good use of their annual Analyst Day this year, as they raised guidance for the third quarter and the full year. For the current quarter, PetSmart raised their EPS guidance to $.25 to $.29; this would easily outpace consensus estimates of $.22. Furthermore, the company has lifted their full year outlook to $1.43 to $1.51, which is also better than expectations. Management said that they are cautiously optimistic about the future citing better profit margins and lower expenses. Interestingly, just two months ago the company lowered their guidance for the third quarter and full year earnings, but apparently the quarter has gone a little better than anticipated.
At Ockham, we believe that in the third quarter corporate earnings have taken a backseat to revenue growth in terms of importance for this earnings season. For revenue, PetSmart did not offer any revisions, and instead maintained that they expect same store sales to be about flat in the upcoming quarter. We expect them to continue to push for higher margin service offerings in order to make each sales dollar go further (click chart to enlarge).
We are maintaining our Undervalued rating on PetSmart, as even after today’s 7% advantage we still think there is life in these shares. According to our methodology, it would not be a stretch to see this stock trading in the mid-$30’s in the coming year. PETM continues to trade well below their historically established levels of price-to-sales and price-to-cash earnings. Sales are growing modestly overall and earnings have held up much better than others in the retail industry. Furthermore, the company has an extremely impressive balance sheet, and management has continued to push for strong free cash flow. PetSmart probably does not have explosive growth potential, but they are one of the steadiest and recession resistant businesses is retail. Today’s upward revision to earnings guidance leads us to believe that management is performing respectably and this stock still holds appeal to long term investors.