Seeking Alpha
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
We got our "correction" in PetSmart (PETM). And then some. Ipredicted PetSmart was overdue for a pull back last January. The market reacted negatively to PetSmart's earning report. After hours,PetSmart fell almost 7% on a disappointing 2013 earnings outlook. The pet company expects to earn $3.76 to $3.92, under $3.93 consensus.
A correct response to PetSmart's forecast? After all, the high end ofPetSmart's range was only a penny below 2013 analyst forecasts. The quarter earnings actually beat by a penny.
Still, PetSmart sports a 20 PE. You have to keep proving your worth when you have a high valuation. PetSmart inserted serious doubt about its ability to deliver.
There were other concerns. PetSmart store comps came in light at 4.6%, under its own forecast. Going forward, PetSmart predicted 2 to 4% comp increases in 2013. Management noted 2013 would be up against tough comparisons. And its CFO spoke of weaker traffic in the quarter. Just more signs of a potential slowdown at PetSmart.
Credit Suisse hit it on the head in the call, noting the data suggested: "Hey, things are going to be a little bit slower that we'll be more conservative for 2013."
Usually PetSmart gives rosier guidance in its fourth quarter. Last year,PetSmart guided 2012 well above analyst expectations. Then, PetSmart predicted $3.02 to $3.16 beating the consensus outlook of $3.01. In its fourth quarter 2010, PetSmart gave in-line guidance for 2011 matching analyst hopes ($2.23 to $2.35 per share vs $2.32).
It could be the culprit in all this is too high expectation rather than a tough slog ahead. Either way, analysts and shareholders be warned: A little less exuberance might be warranted.
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To me, that's what it is, given the numbers reported. The comps are concerning, but 4.6% is hardly "bad", and comps are predicted to grow still. Not great, but not a decline or flat.
Is 20 PE "high", especially for specialty retail? Compared to some companies, it looks pretty tame.
Oddly, there was a study the other day that Petsmart has a bigger problem with "showrooming" (people shopping on their phones while looking in the store) than Best Buy.
Link:
http://onforb.es/W7r9A1
"It’s no secret that showrooming, when shoppers browse brick-and-mortar stores to check out potential purchases, only to buy them later from online merchants like Amazon at lower prices, has retailers running scared.
Think Best Buy and Target have the most to fear? Think again: It’s Bed Bath & Beyond and PetSmart that should be pushing the panic button."
I'd never think of looking on the phone to buy pet food cheaper while in Petsmart. If I'm there, it's because I need to get something then and there. Weird.
Yeah, that was a surprising bit of data for sure. Would be nice to see what products/services those respondants were showrooming for. Was it just some of the pet products (and which ones) or is it extending to looking for private/local groomers and dog trainers/puppy classes?
I'm willing to give them a break on this one. They have certainly proved their ability to deliver over the past few years. Beat and raise has almost become the standard, which is probably why the stock took such a beating after hours.
As a lontime PETM sharehoder, I think they got a little too far ahead of themselves on valuation. Compared to their historical metrics, it was tough to justify the stock price without baking in a decent beat of the earnings. I guess that wasn't in the cards this quarter.
Still my favorite company in a growing sector.
1. Yes it's true. Last year management guided to 3.02 - 3.16, above analyst expectations. They then proceeded to crush those estimates and ended up at 3.55 for the year. So I don't think they generally give 'rosier guidance'. In fact they typically give conservative guidance.
2. You twisted what Credit Suisse said from a question into a statement ("Hey, things are going to be a little bit slower that we'll be more conservative for 2013"). BTW - Here is what Credit Suisse says in their new analyst report today "The bottom line after analyzing Q4 results and listening to last night’s conference call is that we believe that PETM is one of the more intriguing growth stories in our space. As we have seen before, sometimes due to misunderstandings or misperceptions, there are good opportunities to own great companies at attractive prices. That seems to be the case with PETM as the market appears to be overreacting (based on last night’s aftermarket sell-off) to guidance that in our
view seems reasonable and exceedable." They mantained their $78 price target. They don't seem to pessimistic to me.
3. You also said management spoke of weaker traffic in the quarter. In fact what they said is it started off slow and has picked up every week since then. The analyst even said "Okay, that's helpful. That sounds very familiar to actually a number of retailers. ".
4. In your other article you said Operating Margins might start to decline. They haven't. They were up 120 basis points on the quarter and 100 basis points Y/Y. They are guiding for flat to slightly up for 2013.
For 1st Q they guided their high end above analyst expectations. You might also want to note that with the planned management transition after the next quarter they are likely being extremely cautious in their guidance. They also mentioned that they achieved overall profitability in their Pets Hotels business. Another sign contrary to what you say that their high margin service businesses don't have much room to run. In addition to opening 45-50 full size stores they will also be opening 12 'micro' stores (around 6 - 7.5k sq. ft) which will have less SKU's but have the other services like grooming, pet training, and adoptions.
You also mention in your other article that due to the payroll tax reversion people are probably trading down to stores like Walmart, Target, etc. I doubt that's true, but it certainly wouldn't explain why people continue to trade up to Premium and Super Premium foods at Petsmart. Also if anyone believes that the economy is in a recovery phase and not heading back to recession, Petsmart is a great way to play a job and housing recovery (management even alluded to being helped by higher housing sales).
So anyway, this will be my first and last post on this article, but I just thought I'd give those reading it the other side of the story (also the story that doesn't contain statement taken out of context by the author).
You misread the article's intent.
The takeaways of the piece:
1. My prediction was correct. PETM needed a correction. The analysts and shareholders were way too exuberant.
2. High expectation played a big role. That's been crushed.
Frankly, now that PETM has come in, it's looking a bit appetizing.
By the way, there were no misstatements.
1. Your comment about beating 2012's outlook has nothing to do with the article.
2. Credit Suisse did make that statement in the call.
3. The CFO noted "So traffic is not as strong as it was." He and I are referring to the quarter reported. You are talking to the start of this quarter.
4. No misstatements here. I expect margins to erode. They haven't yet.