What to Watch for in PetSmart's Earnings

Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

PetSmart (NASDAQ: PETM) will report earnings from its most recent quarter on Nov. 14. Since 2009, the company has met or beat expectations every quarter, with a total of nine upside surprises.

The average analyst estimate for PetSmart is $0.63 per share in earnings, an increase of 26% from the same period a year ago. This is up $0.02 per share since PetSmart released its Q2 earnings report three months ago and beat analysts’ estimates by $0.06 per share. The company has beaten analysts’ earnings estimates for four straight quarters.

Analysts project an 8% increase in revenue from the year-earlier quarter to $1.62 million. This is in-line with PetSmart’s previous three quarters of sales, which were all between $1.62 million and $1.64 million.

The company is the leading name in pet products; however, it has been facing increased competition from a couple of big retailers in recent years.

First, Wal-Mart (NYSE: WMT) started increasing its focus on pet supplies in 2008 and has steadily pushed sales of the segment for the past four years. The company now poses a serious threat to both local pet stores and national chains like PetSmart.

Second, Amazon.com (NASDAQ: AMZN) is making a foray into the quickly growing pet supplies segment of retail. Aside from its core retail site sporting thousands of pet products, Amazon launched wag.com last year. The website sells over 10,000 pet supplies, and customers receive free two-day shipping for orders over $49. Amazon’s infrastructure of warehouses allows the site to store and ship such a wide range of products.

Here’s what I will be looking for in PetSmart’s upcoming earnings release to ensure that the company stays ahead of the competition.

1)   Gross Margin

Last quarter, PetSmart increased its gross margin 80 basis points year-over-year to 30.2% of revenue. Look for continued gross margin improvement from the company this quarter as they push sales in high-margin products and in-store services.

In October of last year, the company reported gross margin of 28.6%. In the previous three quarters the company has reported gross margins over 30% each quarter. While the October numbers might not match those levels, I’d be very happy with anything above 29.3%.

2)   In-Store Service Sales

In-store services, such as pet training, grooming, boarding, and veterinary services, are PetSmart’s competitive advantage over big stores like Wal-Mart and Amazon that are attempting to encroach on PetSmart’s market. Positive sales growth in this category is a great sign that the company will continue to stay competitive as big box stores and online retailers attempt to move into the market.

The pet product and services industry is growing at a pace of 3% to 5%. I’d like to see PetSmart’s service sales growth faster than that. Last quarter, pet services made up 11.8% of total revenue. Increasing that number is important, as services like grooming and veterinary services can be particularly sticky, driving recurring revenue streams.

3)   High-End Merchandise Sales

Since 2009, when the U.S. was just entering a recession, PetSmart has started offering many new upscale products to pet owners, such as organic food and specialty pet furniture. The idea of high-end merchandise in a recessionary economy seems counter intuitive, but PetSmart’s earnings results show that the strategy works.

Today, pet supplies is one of the fastest growing segments of retail. PetSmart looks to continue grabbing the high-end of the market, and allow companies like Wal-Mart and Amazon compete on price at the low-end. Thus, it’s important to see strong growth in sales of these high-margin, high-end products from PetSmart. 

While PetSmart may not break down its merchandise sales into premium and discount products, the evidence will be in its margins. Last quarter, merchandise gross margin improved 5 basis points year-over-year. I’d like to see greater improvement this quarter as a sign of increased high-end merchandise sales.

4)   Same Store Sales Growth

Same store sales is a great indicator of how well PetSmart is fending off competition from Wal-Mart and Amazon. Last quarter, PetSmart grew comps by 7% year-over year. That’s a fantastic number considering the pet products and services segment is growing around 4% annually.

PetSmart’s ability to continue attracting customers through either unique products or excellent services will keep it ahead of the competition. I’m looking for a number in the mid-to-high single digits in terms of SSS to indicate that the company is outpacing the industry and maintaining customers in the face of increased competition.

I’m looking forward to another solid earnings report from the current market leader in pet products. Hopefully, the company will give us good news, and every indication that it is continuing to beat out the competition from non-specialty stores.

adamlevy owns shares of Amazon.com. The Motley Fool owns shares of Amazon.com and PetSmart. Motley Fool newsletter services recommend Amazon.com and PetSmart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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