Options Trade – PetSmart (PETM) - Wednesday, March 06, 2013

PetSmart, Inc. (PETM): A Smart Investment to Make Today

Set To Report Another Upside Surprise!

**OPTION TRADE: Buy the PETM Jul 2013 65.000 call (PETM130720C00065000) at or under $4.40, good for the day. Place a protective stop limit at $2.00 and a pre-determined sell at $8.00.

by Ian Harvey

March 06, 2013

Introduction

Americans spend over $50 billion annually on their pets, and this number continues to grow. Forbes has said that 92% of people spent the same amount or more on their pets during the recent recession, which means that not only is the industry growing, but it is recession proof. PetSmart (NASDAQ: PETM) is the perfect way to play the growth in this industry, and there are many reasons to make this options trade.

Even investors (and a great many of them are institutional) have taken a liking to this specialty pet retailer, bidding the stock up to current prices around $65 — that’s more than double its price in 2010 and triple what shares were going for back in 2009.

Bear in mind, since about June of last summer, PetSmart has plateaued, and it’s actually headed in the wrong direction in 2013, down 4% year-to-date vs. an 8% climb for the S&P 500. Consider that a good thing, though, as it presents a buying opportunity for this pet-lover’s stock as PETM is expected to essay another upbeat performance when it reports its fourth-quarter financial results on Feb.6.

About PetSmart

Arizona-based PetSmart is the largest pet superstore operator in the U.S. with annual revenues of more than $6 billion. The company operates more than 1,300 pet stores in the U.S. and Canada.

PetSmart's stores have all of the pet products you need, along with grooming, training, and adoption services. This is the most well-known part of the company, but they also operate PetsHotels and Doggie Day Camps.

PetsHotels are overnight boarding facilities for people heading out on trips or who just cannot watch their dogs or cats for a period of time. There are 195 in-store facilities to date, and this number will continue to grow. These "hotels" are staffed by hand-picked professionals and hold the PetSmart name, giving the pet owners much more peace of mind than with other boarding facilities.

Doggie Day Camp is like daycare for your dog, in which they will play with other dogs and PetSmart associates, all while under close supervision.

Finally, there are Banfield Pet Hospitals located in 60% of stores. This pet hospital provides a full range of health care services as well as emergency services. PetSmart owns a 20.5% equity stake in the operator of these hospitals.

Financial Growth and Earnings

PetSmart reported third quarter earnings on Nov. 14, 2012. In this quarter, they recorded earnings per share of $0.75 compared to analyst expectations of $0.63. This is also a 50% increase year-over-year. In the quarter, comparable store sales increase 6.5%, total sales rose 9%, and sales of services grew 8%. Guidance for the full year was raised as management expects total sales to increase 10%-11% for the year.

Since reporting its third quarter results, the stock has gained 1.15 percent and 16 percent in the last one year. The stock, which has been trading 16.5 times its 2013 consensus earnings estimate, has surged 57 percent in the past two years and an enormous 242 percent in the past five years.

PetSmart has grown revenue every quarter since 2009, making for 21% annualized growth in the past five years and translating to 11 straight quarters of earnings growth.

Wall Street expects PetSmart to earn $1.21 a share, according to analysts polled by Thomson Reuters. The consensus estimate implies 33 percent growth from last year when PETM earned 91 cents a share. The company sees fourth-quarter earnings of $1.16 to $1.20 a share.

PetSmart's earnings have managed to top Wall Street expectations in all of the preceding four quarters, with upside surprise ranging from 1.1 percent to 19 percent. On average, the company has reported profit growth of 31 percent in the past four quarters.

After a very successful run over the past several quarters, PetSmart has set the bar high, and that it needs to maintain comps in the mid-single digit range or higher while its string of EPS beats heightens expectations on the bottom line.

Quarterly revenues are projected to rise 15.4 percent to $1.89 billion from $1.64 billion a year-ago. The company has recorded average sales growth of 9 percent in the last four quarters, while comps growth has been in mid-single digits.

The company's gross margin holds steady at 30 percent and set to rise at least 100 basis points in the quarter on occupancy leverage and strong merchandise margins. In the past four quarters, the operating margin has fared between 9.5 percent and 10.4 percent.

For the full year, analysts estimate earnings of $3.53 a share on revenue of $6.77 billion, representing an increase of 38.4 percent and 10.7 percent, respectively, from last year. The company sees 2012 earnings of $3.47 to $3.51 a share, comparable store sales growth of 6 to 7 percent, and total sales growth in the 10 to 11 percent range.

This pet superstore is expected to earn $3.93 in 2013 and $4.48 in 2014. This represents an 11.6% growth from 2012 and 14% growth from 2013. These growth rates are not as high as the 38% from 2011 to 2012, but with the rate they are going, it is expected that management will raise expectations in their next report.

Niche Market

PetSmart is the leader in a niche space: pet products. Sure, there’s privately owned PetCo and local animal boutiques, but it’s not a terribly crowded landscape. Even big-box retailers like Target (NYSE: TGT), grocery stores like Safeway (NYSE: SWY) and Internet retailers like Amazon (NASDAQ: AMZN) — which also sell goods for pets — don’t offer the same experience.

Also, even with these strong competitors, such as Amazon, PetSmart is still the leading online provider of pet supplies and information. As a brick and mortar store, PetSmart offers the personal interactions and services that most of us prefer when caring for our pets, and also gives our pets a place to go and feel welcome. I believe they will continue to have a stronghold in this industry.

Services Provided

PetSmart isn’t just sales. The company also owns 195 PetsHotels (dog and cat boarding facilities) and Doggie Day Camps. It’s a multibillion-dollar market — and growing. Overall spending on such grooming, boarding, hotels and pet-sitting services for pets grew nearly 10% last year alone. Toss in training classes, grooming and adoption shows, and you can see how that not only lures folks in and pays the bills, but creates a lasting loyalty.

What better way to prepare for a PetSmart training class than to buy treats and training gear from PetSmart? Plus, you can believe that any owner who adopts a pet at PETM will be hard-pressed not to be loyal to the place where they first laid eyes on their bundle of fur and joy.

Analysts

Over the past 30 days, four analysts have increased their quarterly earnings estimate on the company while the consensus estimate remained unchanged at $1.21 a share in the past 90 days.

Out of 24 analysts covering the stock, 10 have a "buy" or strong buy," while thirteen of them recommend "hold." Only one analyst has a “sell" rating on the stock, which has been trading between $54.20 and $72.75 during the past 52-weeks.

Conclusion

PetSmart is sitting on 7% same-store sales growth as of last quarter and has been popping up new stores — PETM has added roughly 50 net locations in each of the past three years. There’s also room to add more “hotels,” and to run north of the border. For now, PetSmart only has 70 stores and five PetsHotels in Canada — a drop in the bucket compared to its total 1,250 locations.

Expanding north is a strategy that PetSmart has under consideration which can set itself apart from rivals and snatch up the growing spending power up north.

Therefore, based on the facts above the following options trade is recommended…..


**OPTION TRADE: Buy the PETM Jul 2013 65.000 call (PETM130720C00065000) at or under $4.40, good for the day. Place a protective stop limit at $2.00 and a pre-determined sell at $8.00.

UPDATE

Play PetSmart (PETM) Calls Again

Thursday, March 07, 2013

The pet supply retailer, PetSmart (PETM), posted earnings of $1.24 a share on revenue of $1.88 billion against expectations for $1.21 a share on sales of $1.89 billion. In addition, the company handed in current-quarter and full-year 2013 guidance that topped expectations. Still, shares slumped in extended-hours trading.

PetSmart Inc. shares dropped Wednesday evening, coming under pressure after the pet-products retailer issued a dim view of yearly results.

PetSmart, which runs nearly 1,300 pet stores in the U.S., Canada and Puerto Rico, forecast 2013 earnings of $3.76 to $3.92 a share and sales growth of 2% to 4%. Those projections were below the Thomson Reuters consensus estimates of $3.93 a share in earnings and 5% revenue growth.

The company’s outlook for first-quarter earnings of 92 cents to 98 cents a share compared with expectations of 94 cents a share.

However, I do believe there is definitely an over-reaction to these results, and have not changed my opinion since recommending this option.

Therefore, with the reduced cost to buy into this option at the present moment, and to cover the drop in yesterday’s recommendation, I recommend the following action…..

**OPTION TRADE: Buy the PETM Jul 2013 65.000 call (PETM130720C00065000) at or under $2.20, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $4.50.


”Success is simple. Do what's right, the right way, at the right time.”


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Options traders win because they are successful.



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