PetSmart Profit Tops View, To Seek Strategic Alternatives; Stock Up

(RTTNews) - Pet products retailer PetSmart Inc (PETM), Tuesday reported an increase in second-quarter profit, aided by a marginal climb in sales and improved operating margins. Quarterly earnings topped Wall Street estimates, while sales matched their estimates.

Moving forward, PetSmart provided its forecast for the third quarter, the midpoint of which is indicated to top analysts' estimates. The retailer also reaffirmed its outlook for the full year.

PetSmart said it will explore strategic alternatives, including a possible sale, bowing to pressure from activist investor Jana Partners LLC and other shareholders that the company sells itself. To assist in the process, PetSmart has been working with those including JP Morgan Securities LLC.

PetSmart also said it will acquire Pet360, an online resource for pet parents, for $130 million, with the possibility of performance-based payments of up to $30 million by the end of 2016.

Pet360 is an integrated media company that provides information, products and advice on pets. Its network comprises of more than nine of the top pet websites and reaches over 12 million pet parents per month.

PetSmart, based in Phoenix, Arizona, reported second-quarter net earnings of $98.12 million or $0.98 per share, compared with $93.37 million or $0.89 per last year.

On average, 24 analysts polled by Thomson Reuters expected earnings of $0.94 per share for the quarter. Analysts' estimates typically exclude special items.

Sales for the second quarter grew marginally to $1.73 billion from $1.71 billion in the prior year. Twenty-three analysts had consensus sales estimate of $1.73 billion for the quarter.

Comparable store sales fell 0.5 percent for the quarter.

PetSmart has been able to show favorable results for the past few quarters, but concerns do linger over volatile consumer environment and intense competition. But specialty retailers overall have been facing some pressures, forcing even big companies to rethink their strategy.

PetSmart's results were also hurt by gross margin that dropped to 29.8 percent from 30.2 percent last year, but operating margin was up 20 basis points at 9.4 percent.

For the third quarter, PetSmart projects earnings of $0.93 to $0.97 per share and comparable store sales anticipated to grow flat to slightly down. Analysts currently expect earnings of $0.94 per share for the quarter.

For fiscal year 2014, the company continues to expect earnings of $4.29 to $4.39 per share, sales growth in the low-single digits, and relatively flat comparable store sales.

Analysts currently expect earnings of $4.32 per share and sales to grow 2 percent for the year.

At the end of the quarter, PetSmart operated 1,352 stores.

On July 3, hedge fund Jana Partners LLC revealed a 9.9 percent stake in PetSmart and said it would urge the company to seek alternative options, including a possible sale.

Jana believes the shares of PetSmart are undervalued and represent an attractive investment opportunity.

Earlier this year, Jana successfully pressured engineering and construction services firm URS Corp (URS) to merge with rival Aecom Technology Corp (ACM) for $4 billion.

Last year, Jana pushed Safeway Inc (SWY) to review strategic alternatives, and in March, Safeway agreed to be acquired by private equity firm Cerberus Capital Management LP for about $9.4 billion.

PetSmart stock closed Tuesday at $69.70, up $1.26 or 1.84%, on a volume of 4 million shares on the Nasdaq. In after hours, the stock gained $4.30 or 6.17%, to trade at $74.00.