Wednesday afternoon, former Best Ideas Newsletter put option position PetSmart (click ticker for report: ) reported solid fourth quarter results offset by lackluster 2013 guidance. Revenue rose 15% year-over-year to $1.7 billion, falling just shy of consensus estimates. Earnings per share rose 36% year-over-year to $1.24 per share, exceeding consensus expectations by a few cents.
Same-store sales growth during the quarter was superb, rising 4.6%, though the growth rate was down sequentially from the 6.5% same-store sales growth rate in the third quarter. Management added some color on the cadence of the quarter, saying:
So we don’t typically talk about the inter-quarter, but I think it was a little volatile over the quarter, so it’s worth speaking to for now. The quarter started off slow primarily because of Sandy. We spoke to you guys on the call, we were at a point where we could talk about that and started out slow. It came back as expected, really comfortable through most of the quarter. And then, right towards the end of the quarter, it sort of lightened up a little bit and that flowed into the beginning of this quarter. So traffic is not as strong as it was. However, we’re encouraged just of recent — sequentially, this quarter has gotten better each week, and we’re encouraged just the recent performance has improved.
The company is forecasting same-store sales growth of just 2-4% in 2013, which management described as “comps on comps on comps,” blaming the guidance on the tough comparison. Nevertheless, we believe sales growth won’t be too robust in 2013.
Gross margins were also strong, growing 120 basis points year-over-year to 31.6% thanks to a 110 basis point decline in merchandise costs. We don’t see much margin upside, and we think the company has reflected that in its guidance. SG&A was stable, falling 20 basis points year-over-year to 19.8%, resulting in operating margins of 11.8% for the quarter—much higher than the 20.9% the firm achieved for the full year. This resulted in free cash flow of $558 million, up 23% compared to the year prior.
Looking ahead, earnings per share guidance of $3.76-$3.92 disappointed the Street, which had a consensus estimate of $3.93 per share. This, on top of sales growth of just 2%-4%, makes it harder to justify the firm’s premium valuation. Capital expenditures will also be between $140 million to $150 million, a slight increase compared to 2012. Free cash flow could remain strong, which we believe management will use to aggressively repurchase shares like they did in 2012.
Although we think PetSmart is in a relatively strong position, we believe shares look fairly valued at this time. The firm registers a poor score of 4 on the Valuentum Buying Index (our stock-selection methodology), but we’re not actively looking to reestablish a put option position on the company in the portfolio of our Best Ideas Newsletter at this time.