SELL SIGNALS UPDATE: Petsmart Goes to the Dogs
Analyst: Chris Bulkey (2/24/99)
Petsmart (NASDAQ: PETM) reported fourth quarter
and full year earnings yesterday that prompted BT Alex
Brown to downgrade the shares to buy from strong buy.
On January 28th we issued a sell signal on Petsmart
suggesting that the proposed turnaround would take longer
than analysts were forecasting. It seems that we were
right. BT Alex Brown admitted that the profit growth they
had expected to begin this year will be delayed until at least
fiscal 2000.
When we wrote our original Petsmart story, the stock was
at $9.06. It was recently quoted at $8.13. Click here to read
our initial pan of Petsmart.
Net sales for the quarter rose 13.9% to $510.6 million with
comparable store sales up an anemic 5.1%. These weak
sales figures came during the strongest season of the year
-- a troubling sign.
Bow Wow, Mate
The U.K. business continues to be a drag with same store
sales up 0.8% for the quarter. Dain Rauscher and BT
Alex Brown both indicated that the company is
considering strategic alternative for the U.K. business. This
does not surprise us, as we suggested that this business had
been sucking wind for some time now, and a sale would
likely be imminent.
Earnings came in at $0.15 per share, matching consensus
estimates, up from $0.05 per share (excluding one-time
charges) in the prior year's period. Gross margin improved
120 basis points to 27.2%, but did not improve to the degree
analysts had expected.
Operating leverage continues to be non-existent in
Petsmart's business model. A BT Alex Brown report
indicated that management aggressively cut operating
expenses during the quarter, which added 'a few cents' to
the bottom line. Sales were weak, and management had to
cut costs aggressively to meet earnings estimates during the
strongest quarter of the year. That certainly does not sound
like a company whose business is gaining momentum and is
poised for a turnaround.
The most gratifying news (from our bearish standpoint)
during the quarter was the weak performance of the direct
marketing subsidiary, Petsmart Direct, where sales fell
18%. Some of the bullishness behind analysts'
recommendations, over the past month, was predicated
upon positive catalysts coming from news surrounding
e-commerce sales. We told investors that the strategy was
not progressing well, and that it made very little sense to us
from a strategic standpoint. One of the reasons behind BT
Alex Brown's downgrade was 'sluggish' e-commerce sales
-- again no surprise to us.
Consensus estimates are still forecasting $0.39 per share
for fiscal 1999, which will likely be trimmed down as
analysts sit down with management and reevaluate the
state of business, especially the struggling U.K. and
Internet businesses. Dain Rauscher Wessels has kept
Petsmart at strong buy after the earnings citing it as an
aggressive play.
In this week's Earnings Watch column, IIOnline's Tom
Byrne offered a 'No Thumbs' opinion on Petsmart's
earnings. He predicted the company would meet estimates,
which it did, however he expected that the stock might go
up a little.
Bottom Line:
The shares are currently down $0.88, or 9.7%, to $8.13.
Perhaps Dain Rauscher is bidding for the business of
advising Petsmart on strategic alternatives, as we simply do
not see these shares as anything close to a buy. We
reiterate our sell recommendation on Petsmart.
iionline.com
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