PetSmart (NASDAQ:
PETM) is getting at least 2 downgrades this morning following weaker than expected results and guidance out last night:
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Credit Suisse (NYSE:
CS) is
downgrading PETM to Neutral from Outperform as, unlike other industry leaders, PETM is not only seeing sales slow, but is seeing margins decline as its mix deteriorates. Taking away the earnings upside moves PETM down on firm's investment attractiveness scale. Firm is lowering their price target to $21.
Investment case: PetSmart has always been a tween’er that has moved on its own results. It does not offer the cyclical due to its food sales that investors looking for an economic uplift can find in many of firm's names. Nor does it offer the secular story that CSFB's DIY auto names do. However, the growth of services, lower expense growth and premium food inflation seemed enough to keep this stock beating expectations. That is no longer the case, with PETM losing some of the inflation push from premium, facing some pricing battles in commodity and watching its high margin hard goods comp more negatively. That makes for a less attractive near term story.
Catalysts:
The near term catalyst for the downgrade was management’s lowering of second half earnings guidance while leaving sales guidance the same. That points to weaker than expected margins in the key hard goods category for Christmas as well as more competitive pressures than previously projected. CSFB believes that they will have opportunities into next year to revisit this well managed chain.
Lower comps in 2H as expected, but a headwind for stock: As CSFB's shows above, PETM’s quarter over quarter relative stock performance has historically been tied to its same store sales growth. While it has been well documented that comps would be weaker in 2H as PETM anniversaries the significant inflation benefit it got last year and now even less inflation. Therefore, they believe it will be difficult for its stock to outperform as comps get worse, particularly as most other retailers show sequentially better comps against easing comparisons in 2H.
