PetSmart Inc. (PETM, Financial) reported estimate-beating results for the fourth quarter of fiscal 2014. The company logged adjusted EPS of $1.43 a share, way ahead of the company’s own guidance of $1.34-$1.38 a share as well as the consensus estimate figure of $1.37 a share. PetSmart’s adjusted earnings for 2014 also beat consensus estimates to clock $4.47 a share. The specialty pet retailer attributed the upbeat performance to its customer-centric agenda as well as benefits derived from its enduring pursuit of growth-related strategies.
Growth across segments boosts revenue
PetSmart reported a 6% growth in net sales to $19.13 billion during the fourth quarter, on the back of a 2.6% rise in comparable-store sales or sales in stores open at least one year (inclusive of online sales) and a 6% rise to $17.05 billion in sales of merchandise. Earnings, inclusive of one-time items, stood at $1.32 per share, up 3.1% compared to the prior-year quarter. The company also saw sales from its Services division grow 6.8% during the quarter to $198.2 million.
Source: GuruFocus
While PetSmart’s GAAP earnings before tax grew 3.2% to $210.3 million during Q4 2014 compared to the prior-year quarter’s figure of $203.7 million, GAAP net income grew 0.4% to $132.1 million. Although PetSmart’s gross profit increased 5.4% year-over-year to $596.6 million, gross margin dipped 20 basis points to 31.2%. Concurrently, while operating income rose 3% year over year to $223 million, the company saw its operating margin dropping 30 basis points to 11.7%.
For the full fiscal 2014, PetSmart logged 2.8% growth to nearly $71.11 billion in revenues resulting in a 6% rise in earnings, inclusive of one-time items, to $4.26 per share compared to 2013.
PetSmart competes with the privately held PETCO Animal Supplies Stores Inc. as well as retailers such as Walmart (WMT, Financial) and Target (TGT, Financial) in the pet supplies market.
Cost-saving initiatives pay off
PetSmart initiated a profit improvement program during the third quarter of FY 2014, aimed at restructuring its cost base to drive future profitability. The company realized savings of around $6 million during the quarter under the program, taking the overall savings for fiscal 2014 to $8 million. Consequently, PetSmart ended the fourth quarter with almost $444.2 million in cash and cash equivalents, with no borrowings under its credit facility. The pet retailer announced that it was on track towards achieving the target of $200 million in annualized cost savings by 2016 end. Overall shareholders’ equity at the end of the fourth quarter stood at $13.70 billion.
While PetSmart reported cash flow from operations of $678.1 million, the company incurred $141.4 million in capital expenditure, including one-time charges of around $7.9 million related to the profit improvement program during the fourth quarter. Additionally, the company bought back $130 million worth of share and distributed around $77.7 million in dividend payouts during the quarter in keeping with its focus on enhancing shareholder value.
Source: GuruFocus
PetSmart did not announce its outlook for 2015 owing to its imminent acquisition in Q1 2015 by a consortium led by BC Partners. As per the definitive agreement entered into by the related parties in December 2015, the acquisition price for PetSmart was set at $83 per share.
Final thoughts
PetSmart’s strong run in the fourth quarter and full-fiscal 2014 combined with the company’s enduring strategies towards cost saving and boosting shareholder confidence makes it an attractive option for investors. However, the company is set to be taken over by a business consortium in the first quarter of 2015. Consequently, although experts project a healthy annual earnings growth rate of 12.36% for the company over the next five years, the PetSmart stock currently carries "hold" guidance. Investors would do well to wait as watch as the year pans out for the company post acquisition.
