How Will PetSmart (PETM) Stock Be Affected By Removal Of China Made Treats?

NEW YORK (TheStreet) -- PetSmart Inc. (PETM) has decided to follow in the footsteps of its rival Petco and stop selling cat and dog treats made in China, due to concerns the products are making animals sick, the Associated Press reports.

The FDA has investigated the claims but were not able to prove the treats were causing the illnesses in pets.

However, since 2007 the FDA has received over 4,800 complaints of illnesses in pets and over 1,000 reports of dog deaths after the animals ate chicken, duck, or sweet potato jerky treats made in China, AP said.

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PetSmart said it will have the treats off store shelves by March 2015, while Petco plans to have the treats gone by the end of this year.

Separately, PetSmart stock was down today after the company reported weak guidance for its 2014 second quarter and full year.

Shares of PetSmart closed lower -8.31% to $57.02 on Wednesday.

TheStreet Ratings team rates PETSMART INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate PETSMART INC (PETM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its notable return on equity, good cash flow from operations, growth in earnings per share and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Specialty Retail industry and the overall market, PETSMART INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • Net operating cash flow has slightly increased to $273.91 million or 2.81% when compared to the same quarter last year. In addition, PETSMART INC has also modestly surpassed the industry average cash flow growth rate of -4.54%.
  • PETSMART INC's earnings per share improvement from the most recent quarter was slightly positive. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, PETSMART INC increased its bottom line by earning $4.03 versus $3.55 in the prior year. This year, the market expects an improvement in earnings ($4.47 versus $4.03).
  • The current debt-to-equity ratio, 0.50, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that PETM's debt-to-equity ratio is low, the quick ratio, which is currently 0.54, displays a potential problem in covering short-term cash needs.
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 4.6%. Since the same quarter one year prior, revenues slightly dropped by 4.0%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • You can view the full analysis from the report here: PETM Ratings Report

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