First-quarter 2010 earnings per share (EPS) of PetSmart, Inc. (PETM) jumped 24% year over year to $0.46, exceeding the Zacks Consensus Estimate of $0.43 per share, driven by a blend of better-than-expected comparable store sales (comps) and gross margin. Net income was $55.6 million in the quarter, an increase of 20% from $46.3 million in first-quarter 2009.

First-Quarter 2010 Performance

Total revenues were $1.4 billion, an improvement of 5.1% from the year-ago period, on the heels of 2.8% comps growth in the quarter. Traffic declined 0.4%, although it improved markedly on a 2- and 3-year basis (up 210 basis points and 240 basis points, respectively). The fall in transactions was offset by an increase in average ticket following the introduction of flea and tick products as well as a surge of customers within product categories moving toward higher quality products.

Gross margin improved 60 basis points year over year to 29%, mainly aided by store occupancy and supply chain efficiency leverage during the quarter, and offset by a negative impact related to the services business and the Banfield accounting change. Merchandise margins improved 55 basis points in the quarter, driven by fewer promotions and sales of higher-margin goods within the product categories, offset by a mix pressure from lower margin on flea and tick sales and a modest shift toward food and consumables.

PetSmart opened fourteen new stores and closed three stores during the quarter. The company also opened three Pets Hotels, bringing the total store count to 1,160 stores and 165 hotels.

Financials

PetSmart ended the quarter with $288 million in cash balance, generated operating cash flow of $86 million and spent $31 million on capital expenditures.

The company enhanced its shareholders’ value by distributing $12 million in dividends and repurchasing $107 million of stock.

Outlook

For 2010, PetSmart increased its EPS guidance to the range of $1.82 to $1.92, which was $0.09 ahead of its previous range of $1.73 to $1.83, driven by slightly higher comps (low- to mid-single-digits versus the previous guidance of low-single-digits). The company also initiated its second-quarter 2010 EPS guidance range of $0.33 to $0.37 on the back of low- to mid-single-digit comps.

The company expects operating income to leap 50 to 70 basis points for second-quarter 2010 and 30 to 50 basis points for the full year on a year-over-year basis.

We believe PetSmart is well positioned with new merchandising and marketing strategies, low prices and excellent service. The company is executing impressively despite a challenging macro environment with more positive sales trends in hard goods. The company re-engineered its strategy to reduce store openings and focus on profitability. We see longer-term margin benefits from a recovery in hard goods and growth in the private label business.
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