Petco Guidance Disappoints

Shares of Petco ( PETC) fell Friday after the company guided first-quarter net income lower, piquing the concern of analysts.

The guidance took the shine off the company's fourth quarter, in which earnings rose 29%, excluding items, beating the Wall Street consensus.

CIBC World Markets analyst Dan Wewer cut Petco's investment rating to sector performer from sector outperformer. The analyst said he is cautious on the company's future same-store sales in 2004 and sees likely EPS deceleration to up 21% in 2004, compared with a 31% rise in 2003. Wewer also discontinued his $36 price target.

"We are more conservative given slower same-store sales momentum while expenses are rising," Dewer said in a research note Friday. He noted that same-store sales at the company increased 5.6% in 2003, compared with an 8% rise in 2002. (CIBC World Markets does investment banking for Petco and also makes a market in the company's shares.)

Legg Mason analyst David Schick agreed, saying the company's same-store sales increase in the fourth quarter of 5.6% represents a slowdown because it compared with a 6% rise in the fourth quarter of 2002. He had been expecting a 6.8% increase.

"Petco's fourth-quarter results were solid but slightly disappointing relative to bullish expectations," said Schick, who has a hold rating on the company. "It now seems more imperative that Petco show some comp acceleration against easier first-quarter 2003 comparisons." (Legg Mason makes a market in Petco's securities.)

The shares were lately down $1.19, or 3.8%, at $29.91 after falling as much as 7% in Friday premarket trading.

Petco said Thursday after the bell that it sees it sees first-quarter earnings at 24 cents to 25 cents a share, with same-store sales increasing 5% to 6% in the first quarter. Analysts, however, were calling for 26 cents a share. The company earned 19 cents a share in the prior-year period.

Including additional expansion costs from future store openings and remodels, the company sees a profit of $1.45 to $1.46 a share in 2004, which compares with earnings of $1.18 a share in 2003. Analysts were expecting $1.46 a share, on average. In full-year 2004, the company expects same-store sales to increase 5% to 6%.

Additionally, the company had announced that fourth-quarter earnings were $20.9 million, or 36 cents a share, which included a charge of $10.6 million, or 11 cents a share, for debt retirement costs from a senior notes tender offer. The results compared with a profit of $19.4 million, or 33 cents a share, a year ago.

Before the charge, the company reported earnings rose to $27.4 million, or 47 cents a share, compared with $21.3 million, or 37 cents a share, in the prior-year period. Analysts had been expecting 44 cents a share. Total sales in the quarter increased 12.4% to $455.7 million.

The company opened 63 stores in 2003 and remodeled 50 during the quarter. It said it plans to remodel an additional 75 in 2004.

Gross profit margin in the fourth quarter improved 290 basis points to 35.9% in the quarter, compared with 33% for the fourth quarter of 2002.

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