PetSmart, Inc. (PETM)

F1Q12 Earnings Call

May 22, 2012 4:30 pm ET

Executives

April Lenhard – Head of Investor Relations

Robert F. Moran – Chairman of the Board & Chief Executive Officer

David K. Lenhardt – President & Chief Operating Officer

Lawrence P. Molloy – Chief Financial Officer & Executive Vice President

Analyst

Matthew J. Fassler – Goldman Sachs

Alan Rifkin – Barclays

Christopher Horvers – JP Morgan

David Mann – Johnson Rice & Company

Gary Balter – Credit Suisse

Matt Nemer – Wells Fargo Securities, LLC

Michael Baker – Deutsche Bank Securities

Michael Lasser – UBS

Daniel Binder – Jefferies & Co.

Daniel Hofkin – William Blair & Company

Peter Keith – Piper Jaffray

Scot Ciccarelli – RBC Capital Markets

Presentation

Operator

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Welcome to PetSmart’s first quarter 2012 analyst conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference Ms. April Lenhard, Head of Investor Relations.

April Lenhard

Welcome to PetSmart’s conference call to announce our results for the first quarter of fiscal 2012. With me on the call today are Chairman and Chief Executive Officer Bob Moran, our President and Chief Operating Officer David Lenhardt, as well as Chip Molloy, Executive Vice President and Chief Financial Officer. Bob will kick off the call with an overview of our results and then Chip will take you through the financial review as well as our earnings guidance. David will review the operations of the business and provide insight to the remainder of the 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 Bob.

Robert F. Moran

We are pleased to report another quarter of solid earnings growth. For the first quarter earnings per share were $0.85 up 39% when compared to $0.61 for the same period last year. Comparable store sales for sales in stores open at least a year grew 7.4% and comp transactions which we use as a proxy for traffic were up 3.3%. Our performance in the first quarter was due to the strength across all three merchandising categories: consumables; hard goods; and live goods as well as across services.

The PetSmart brand is strong, it is recognizable and it resonates with our customers. By focusing on solutions we provide the broadest assortment with unmatched customer experience all at great value helping our pet parents help their pets living long, healthy, and happy lives. And through our partnership with PetSmart Charities approximately 1,100 pets are adopted each day in our stores. We are proud to be able to partner with PetSmart Charities, the largest funder of animal welfare efforts in all of North America that help save lives of homeless pets and ensure that pets stay in happy homes which is why we proud offerings like the new adoption kits and puppy starter kits with valuable coupons for products and services.

Our knowledgeable associates are always available to answer any pet parent’s questions. I am proud of the success we have been able to achieve due to our hardworking and dedicated associates and our focus on providing innovative and differentiated solutions at great value further solidifying our position as the leading pet specialty retailer.

Now, I would like to turn the call over to Chip.

Lawrence P. Molloy

Today I will be reviewing our first quarter performance as well as providing guidance for the second quarter and full year. As Bob mentioned, earnings for the quarter were $0.85 per share which represents 39% growth when compared to $0.61 for the same period last year. Comparable store sales growth was 7.4% and comp transactions were positive for the eighth consecutive quarter at 3.3%.

Total sales for the quarter were $1.6 billion up 9.4%. The increase in total sales included an unfavorable impact from foreign currency fluctuations of $2 million. Services sales, which are included in total sales increased 8.3% to $181 million. Other revenue, which is also included in total sales was $9 million representing reimbursements from Banfield for the space they utilize in our stores. The sales mix for the quarter included consumables at 53.1%; hard goods at 33.4%; services at 11.1%; live pets at 1.8%; and other revenue at 0.6%.

Gross margins for the first quarter were up 90 basis points to 30.5%. Within the gross margin line, merchandise margins increased 15 basis points while services added 10 basis points to the overall rate. Store occupancy and supply chain were favorable 55 and 10 basis points respectively.

Operating, general and administrative expenses were 21% representing 40 basis points of leverage compared to the same period last year. Overall, earnings before tax increased to $140 million or 8.6% of sales. This represents 31% growth and 140 basis point improvement. The tax rate for the quarter is 34.4%. We expected a relatively low rate of between 35% and 36% coming into the quarter due to the impact the Banfield dividend has on the overall rate and some expected favorable settlements with states and municipalities. Both of those were slightly better than expected resulting in an additional 100 basis points of favorability.

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