Bears of this specialty pet retailer are declaring victory this week as the stock is off almost 15% from Monday's close. On Tuesday, the stock got hit 5%, along with many other specialty retailers as Dick's (NYSE:DKS) reported disappointing numbers. On Wednesday, the stock took another hit as bears took the chance to seize victory over the company's mediocre quarter. And today, as analysts come out with lower price targets for the company, shares are down yet again.
For many quarters now, analysts have been speculating that internet companies like Amazon.com would steal share from PetSmart. Though PetSmart reports having lost no share in the quarter, some analysts have come out to say that their thesis is now playing out. I think they are declaring victory prematurely.
First, while comparable sales were down 0.6%, 0.4% was due to weather and 0.4% was due to foreign currency fluctuation, meaning same store sales were basically flat for the quarter.
Second, many retailers have been communicating that the consumer environment has been weak thus far in 2014. For PetSmart to continue to grow sales and earnings in spite of that should be viewed positively.
Third, services continued to grow at a nice clip of 4.5%. Additionally, margins in the segment are at a record. The company will continue to benefit from expense leverage as sales continue to grow in the segment. Strength in this part of the business should continue to support robust product sales.
At under $56, the stock trades under 10x Enterprise Value to Free Cash Flow and 5.5x EV/EBITDA. In comparison, when Petco was purchased in 2006 by a private equity consortium, it was purchased for 8.2x EBITDA, roughly 50% higher than PetSmart's current valuation. PetSmart has a large and growing services business that Petco did not.
The stock is reacting as if the bottom has fallen out for the company when there is no indication of that from the recently reported quarter. The fact is that the company guided to sales and operating earnings growth in a weak retail environment. This is the best value I see in the market for a company with a market value over a billion dollars.
Disclosure: I am long PETM.