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PetSmart Announces Second Quarter 2014 Results

Earnings up 10.1% to $0.98 per Share; Total Sales up 1.4%

Affirms Guidance for Fiscal Year 2014

Company to Acquire Pet360; Leading Online Pet Specialty Retailer

Outlines Cost Reduction Program and Other Performance Improvement Initiatives

PHOENIX--(BUSINESS WIRE)--Aug. 19, 2014-- PetSmart, Inc. (NASDAQ:PETM) today announced financial results for the second quarter of 2014, and affirmed guidance for fiscal year 2014. The Company also announced a definitive agreement to acquire Pet360, the premier online pure play pet specialty retailer, for $130 million with the possibility of additional performance-based payments totaling up to $30 million by the end of 2016.

Second Quarter Results

Earnings of $0.98 per share were up 10.1% compared to $0.89 per share in the second quarter of 2013. Net income increased 5.1% to $98.1 million, compared to $93.4 million in the prior year period.

Net sales for the second quarter of 2014 increased 1.4% to $1.7 billion. Comparable store sales, or sales in stores open at least one year, including online sales, decreased 0.5%, with comparable transactions decreasing 2.6%. Services sales, which are included in net sales, grew 4.7% to $214 million.

In the second quarter, the company generated $92 million in cash flows from operating activities, invested $36 million in capital expenditures, distributed $19 million in dividends, and made no purchases of PetSmart stock. The company ended the quarter with $323 million in cash, cash equivalents and restricted cash, and it had no borrowings against its credit facility.

Said David Lenhardt, President and Chief Executive Officer, “While we face many of the same headwinds affecting other retailers, we continue to deliver extraordinary value to our customers and achieve strong earnings and cash flows. We are focused on leveraging our competitive strengths, including superior customer focus and loyalty, and capitalizing on the continued growth of the specialty channel. We have already begun implementing a broad range of performance improvement initiatives following the Board’s detailed review of our business over the last several months.”

Acquisition of Pet360

Commenting on the Pet360 transaction, Lenhardt said: “We are delighted to announce our planned acquisition of Pet360, the most comprehensive online resource for pet parents. This transaction is a smart and efficient way to make PetSmart a leader in the online retail space. As discussed previously, although online sales are still a relatively small part of the pet products industry, we expect them to become a more relevant source of revenue in the future. Combining PetSmart’s unparalleled strengths in traditional outlets with Pet360’s established digital footprint will perfectly position PetSmart to capitalize on this evolution and enhance our ability to serve pet parents across all distribution channels.”

Pet360 is an integrated media company dedicated to connecting pet parents with the information, products and advice they need to raise happy, healthy pets. The Pet360 network is comprised of more than nine of the top pet websites and reaches over 12 million pet parents per month, making Pet360 the most comprehensive source for online pet information and products in the U.S. Its family of premium brands includes Pet360.com – the most comprehensive online resource for pet parents; petMD.com – the world’s largest digital resource for pet health information; PetFoodDirect.com – the leading online retailer of pet food, medications and supplies; and BlogPaws – the largest professional network of pet bloggers and social media enthusiasts. The company is headquartered outside Philadelphia, PA.

Combining Pet360’s family of e-commerce websites, digital media programs and content sites, with PetSmart’s existing web platform and store network will immediately allow PetSmart to provide customers a rich omni-channel information and shopping experience. It also brings industry leading talent to PetSmart, along with cost savings opportunities through increased scale, merchandise assortment and valuable web platform and fulfillment capabilities.

The transaction is expected to close in September, subject to customary closing conditions, including receipt of regulatory approvals.

Performance Improvement Initiatives

PetSmart has the platform, strategy and resources to maintain and grow its competitive advantage and drive enhanced shareholder value creation going forward. Following the Board’s comprehensive business review begun last Spring, the Company has developed a multi-faceted plan aimed at driving growth and profitability in the future. The plan includes a variety of performance improvement initiatives that will allow it to deliver near and long-term results and continue to deliver strong returns for shareholders.

To that end the Company has embarked on a broad cost reduction program that will fundamentally restructure the cost base of the Company. The program will target all areas of the business, including, in order of magnitude, cost of goods sold, logistics, sourcing, store operating costs and overhead. The Company expects to realize these savings before the end of fiscal 2015 and will provide additional details about the program and targets next quarter.

At the same time, the Company is steadfastly focused on ensuring that PetSmart is well positioned for the long-term and to that end is focused on the following growth initiatives:

• Strengthening our leadership position as the destination for pet food: Broadening our offering of grocery store and mass brands to drive new customers into stores; evolving our channel-exclusive offering to take advantage of ongoing industry innovation; and introducing focused marketing designed to highlight our breadth of assortment and value;

• Growing our proprietary and exclusive products and services: Introducing additional proprietary and exclusive brands aimed at keeping customers in our stores and building greater loyalty; and growing our services business through continued investments in people and technology which enhance the customer experience;

• Further developing omni-channel capabilities: Aggressively competing for customers online and taking advantage of PetSmart’s unrivaled scale and distribution infrastructure to provide customers a 360-degree shopping experience; and

• Developing a more personalized customer experience: Building a compelling, personalized, and connected customer experience, through strengthened CRM capabilities and an enhanced loyalty program, which reinforces the strength of our brand and highlights our unique value proposition.

Said Lenhardt, “Even with today’s separate announcement on exploring strategic alternatives for the Company, our team remains 100% committed to driving the business forward for the benefit of our customers and shareholders. Everything we are doing is aimed at continuing to build unparalled customer loyalty through innovation and creating a best-in-class, more personalized customer experience. We are also instituting more effective pricing and promotion strategies, improving cost and margin discipline and better leveraging our unrivaled scale and distribution infrastructure.”

Fiscal Year 2014 Guidance

Based on the Company’s year-to-date results and outlook for the remainder of the year in light of the consumer environment and competitive market, the Company affirmed its fiscal year 2014 outlook. This guidance does not include the impact of the Pet360 acquisition or the benefits or costs associated with the cost improvement initiatives outlined above.

  • Comparable store sales relatively flat
  • Net sales growth in the low-single digits
  • Earnings per share between $4.29 to $4.39
  • Operating cash flow between $600 to $625 million

Third Quarter 2014 Guidance

  • Comparable store sales growth flat to slightly down
  • Earnings per share of $0.93 to $0.97

Conference Call Information

PetSmart management has scheduled a teleconference for 10:00 a.m. EDT on August 20, 2014 to discuss results for the second quarter 2014. This teleconference will be webcast live for all investors at www.petm.com. The webcast will be available until the company announces results for the third quarter of 2014. In addition, you can listen to the call live by dialing 866-814-1933 (within the United States and Canada) or 703-639-1365 (for international callers), code 1642743.

A phone replay will be available through September 20, 2014, 11:59 p.m. EDT, at 888-266-2081 in the United States and Canada, or at 703-925-2533 for international callers, code 1642743. The announcement will also be archived at www.petm.com.

About PetSmart

PetSmart, Inc. (NASDAQ: PETM) is the largest specialty pet retailer of services and solutions for the lifetime needs of pets. The company employs approximately 53,000 associates and operates approximately 1,352 pet stores in the United States, Canada and Puerto Rico, 200 in-store PetSmart® PetsHotel® dog and cat boarding facilities and is a leading online provider of pet supplies and pet care information (http://www.petsmart.com). PetSmart provides a broad range of competitively priced pet food and pet products; and offers dog training, pet grooming, pet boarding, PetSmart Doggie Day Camp SM day care services and pet adoption services. Through its in-store pet adoption partnership with PetSmart Charities® and PetSmart Charities® of Canada, PetSmart has helped save the lives of more than 5.7 million pets since 1994. PetSmart Charities, Inc. and PetSmart Charities of Canada (collectively “PetSmart Charities”) are independent, nonprofit organizations that save the lives of homeless pets and reduce shelter intake through spay and neuter efforts. In 2013, nearly 440,000 dogs and cats found homes through PetSmart Charities’ adoption centers in all PetSmart stores and by sponsoring community adoption events. PetSmart Charities is the leader in granting money to help pets in need, with more than $34 million given in 2013 throughout North America.

Forward-looking statements

This news release contains forward-looking statements concerning our expectations for future performance, including the statements comprising our 2014 guidance and the statement regarding the exploration of strategic alternatives. These "forward-looking statements" are based on currently available information, operating plans and projections about future events and trends. They inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements. Such risks and uncertainties include, but are not limited to: uncertain outcome, impact, effects and results of PetSmart’s exploration of strategic alternatives; changes in general economic conditions; conditions affecting customer transactions and average ticket including, but not limited to, weather conditions or other seasonal events; our ability to compete effectively; disruption of our supply chain; our ability to effectively manage our growth and operations; changes in our cost structure; and changes in the legal or regulatory environment. There can also be no assurance that the exploration of strategic alternatives will result in a transaction or any other assurance regarding the likelihood that the process will result in any transaction or other strategic change or the timing thereof. Undue reliance should not be placed on such forward-looking statements as they speak only as of the date hereof, and we undertake no obligation to update these statements to reflect subsequent events or circumstances except as may be required by law. For additional information on these and other factors that arise when investing in PetSmart, please see our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K.

 
PetSmart, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share and store data)
(Unaudited)
 
          Thirteen Weeks Ended       Thirteen Weeks Ended       Twenty-Six Weeks Ended       Twenty-Six Weeks Ended
August 3, 2014     % of Sales August 4, 2013     % of Sales August 3, 2014     % of Sales August 4, 2013     % of Sales
               
Merchandise sales $ 1,505,003 87.0 % $ 1,492,457 87.5 % $ 3,024,009 87.4 % $ 3,001,829 87.9 %
Services sales 214,279 12.4 % 204,707 12.0 % 414,434 12.0 % 396,284 11.6 %
Other revenue   10,657       0.6 %   8,833       0.5 %   20,628       0.6 %   18,480       0.5 %
 
Net sales   1,729,939       100.0 %   1,705,997       100.0 %   3,459,071       100.0 %   3,416,593       100.0 %
 
Cost of merchandise sales 1,062,446 61.4 % 1,040,814 61.0 % 2,114,090 61.1 % 2,077,928 60.8 %
Cost of services sales 141,719 8.2 % 141,130 8.3 % 278,398 8.1 % 275,219 8.1 %
Cost of other revenue   10,657       0.6 %   8,833       0.5 %   20,628       0.6 %   18,480       0.5 %
 
Total cost of sales   1,214,822       70.2 %     1,190,777       69.8 %   2,413,116       69.8 %     2,371,627       69.4 %
 
Gross profit 515,117 29.8 % 515,220 30.2 % 1,045,955 30.2 % 1,044,966 30.6 %
 
Operating, general, and administrative expenses   352,165       20.4 %   358,670       21.0 %   711,245       20.6 %   720,898       21.1 %
 
Operating income 162,952 9.4 % 156,550 9.2 % 334,710 9.7 % 324,068 9.5 %
 
Interest expense, net   (12,890 )     -0.7 %   (12,828 )     -0.8 %   (26,073 )     -0.8 %   (25,996 )     -0.8 %
 
Income before income tax expense

and equity income from Banfield

150,062 8.7 % 143,722 8.4 % 308,637 8.9 % 298,072 8.7 %
 
Income tax expense (58,037 ) -3.4 % (54,493 ) -3.2 % (116,629 ) -3.4 % (110,040 ) -3.2 %
 
Equity income from Banfield   6,091       0.4 %   4,139       0.2 %   9,874       0.3 %   7,751       0.2 %
 
Net income $ 98,116       5.7 % $ 93,368       5.5 % $ 201,882       5.8 % $ 195,783       5.7 %
 
Earnings per common share:
Basic $ 0.99   $ 0.90   $ 2.03   $ 1.89  
Diluted $ 0.98   $ 0.89   $ 2.02   $ 1.87  
 
Weighted average shares outstanding:
Basic 99,226 103,474 99,215 103,390
Diluted 99,689 104,512 99,766 104,547
                                                             
Stores open at beginning of each period 1,340 1,289 1,333 1,278
Stores opened during each period 13 12 20 25
Stores closed during each period   (1 )   -     (1 )   (2 )
Stores open at end of each period             1,352                 1,301                 1,352                 1,301        
 
 
PetSmart, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except par value)
(Unaudited)
 
        August 3,     February 2,     August 4,
2014 2014 2013
 
Assets
Cash and cash equivalents $ 251,757 $ 285,622 $ 281,554
Short-term investments - - 3,087
Restricted cash 71,226 71,226 71,226
Receivables, net 79,446 72,685 69,118
Merchandise inventories 793,364 740,302 770,268
Deferred income taxes 71,940 71,945 62,859
Prepaid expenses and other current assets   107,156     76,463     115,319  
 
Total current assets 1,374,889 1,318,243 1,373,431
 
Property and equipment, net 954,109 952,955 951,499
Equity investment in Banfield 31,851 33,577 29,678
Deferred income taxes 103,011 110,408 98,162
Goodwill 41,659 41,140 43,031
Other noncurrent assets   60,228     65,645     54,105  
 
Total assets $ 2,565,747   $ 2,521,968   $ 2,549,906  
 
Liabilities and Stockholders' Equity
Accounts payable and bank overdraft $ 246,995 $ 255,251 $ 248,467
Accrued payroll, bonus, and employee benefits 146,513 160,008 163,494
Accrued occupancy expenses and deferred rents 73,624 81,867 72,829
Current maturities of capital lease obligations 70,072 66,887 64,449
Other current liabilities   250,756     230,332     221,150  
 
Total current liabilities 787,960 794,345 770,389
 
Capital lease obligations 449,873 451,597 454,673
Deferred rents 61,528 65,932 68,856
Other noncurrent liabilities   106,590     116,312     108,649  
 
Total liabilities   1,405,951     1,428,186     1,402,567  
 
Stockholders' Equity:
Preferred stock; $.0001 par value - - -
Common stock; $.0001 par value 17 17 17
Additional paid-in capital 1,547,068 1,515,333 1,487,860
Retained earnings 2,335,983 2,173,005 1,989,401
Accumulated other comprehensive (loss) income (858 ) (2,159 ) 2,475
Less: Treasury stock   (2,722,414 )   (2,592,414 )   (2,332,414 )
 
Total stockholders' equity   1,159,796     1,093,782     1,147,339  
 
Total liabilities and stockholders' equity $ 2,565,747   $ 2,521,968   $ 2,549,906  
 

Source: PetSmart, Inc.

PetSmart, Inc.
Investor Relations
April Lenhard, 623-587-2025
or
Sard Verbinnen & Co
Brandy Bergman / Bryan Locke / Margaret Popper
212-687-8080

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