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PetSmart Downgraded; Analyst Sees Slowing Sales

The Associated Press

NEW YORK (AP) — PetSmart Inc. shares slid Thursday after a Goldman Sachs analyst downgraded the pet supplies retailer despite its better-than-expected earnings in the first quarter.

Goldman analyst Matthew Fassler said the Phoenix-based company has "executed well," with strong sales and earnings compared to the rest of the retail sector and well-controlled costs. Its stock has outperformed the broader S&P 500 index in the past year, falling 3 percent instead of the 36 percent decline in the benchmark.

However, the company has little to drive its shares higher, given that recent same-store sales increases have been driven by food inflation and promotions, which don't add to profit margins. As inflation drops and foot traffic trends slowed in spring, he said, there's not much room for more growth in same-store sales.

Same-store sales are sales at stores that have been open for at least one year. Those sales are considered an important measure of retailer health because they show growth at older stores rather than newly opened ones.

The government said that consumer prices were flat in April, but excluding energy and food prices, were up 0.3 percent, the biggest increase in nine months. Further, the dollar's decline this spring and rising gas prices can propel inflation.

Fassler downgraded the company from "Buy" to "Neutral" but kept a $25 price target.

For the first quarter, PetSmart said on Wednesday its same-store sales grew 3.9 percent, helping drive profit growth of 12 percent from last year.

The company earned $46.3 million, or 37 cents per share, on revenue of $1.33 billion. Analysts polled by Thomson Reuters had expected earnings of 30 cents per share on revenue of $1.35 billion.

PetSmart said it expected a full-year profit between $1.42 and $1.52 per share and low-single-digit same-store growth.

Goldman expects 1.4 percent same-store growth for the year and earnings of $1.52 per share.

PetSmart shares tumbled $1.83, or 8.2 percent, to $20.47 in morning trading.