(By Rich Bieglmeier) PetSmart, Inc.
) is expected to report earnings after the market closes on Wednesday, August 15, 2012. Management will host the conference immediately afterwards.
Wall Street anticipates that PETM will earn $0.65 for its 2nd quarter. iStock expects the specialty retailer of products, services, and solutions for pets to report earnings that will exceed Wall Street's consensus number. The iEstimate is 66 cents – a 1 cent upside surprise.
In the last four years, the pet supplies store has beat the Street's consensus outlook 15 of 16 quarterly checkups, with one on target result. Shareholder almost fared as well in the days surrounding earnings as 10 of 16 profit announcements have seen shares rally.
The average return, when the stock turns green, is 6%, with a low of 1% and a max of 14.50%. The half-dozen times it wasn't so smart to own PetSmart for earnings, investors saw their holding's value trimmed by an average of 7.43%, with a max loss of 16.7% and the smallest drop was 2.7%.
iStock suspects the company will make it 16 out of 17 bullish eps surprises and provide upbeat guidance. According Theflyonthewall.com, "ITG Research's checks indicate PetSmart's Q2 same-store-sales are tracking in the range of +6%-+7% vs. consensus of +4%-+6.1%." If ITG is correct, then our iEstimate might prove to be light.
Based on view of the chart, the stock can go either way. Since the beginning of June, the specialty retailer's price has traded above $65, establishing closing support at the level on three, separate occasions.
The bit that concerns iStock is the possibility of a bearish right angle triangle emerging. Patterns of the sort are reversal patterns that tend to develop near tops, and PETM is within $2.50 of its 52-week high.
Worrying over the chart might prove to be unwarranted if the trend from the first quarter rolls into the second quarter. Profit margins increased as sales growth of 9.3% outpaced an 8% rise in cost of sales. Additionally, some of the red-flags we look for, like swelling inventories and accounts receivables, actually improved as percent of revenues in the first quarter, rising 5.8% and 6%, respectively.
According to August options activity, it appears as if the Street is hedging or betting against earnings with twice as many open interest in put contracts (5.984) versus call contracts (3008).
We think buying the stock and put options might be the smart way to trade PetSmart, Inc.'s (PETM) Wednesday earnings announcement. The August 65 put options last traded for $1.40, which is an insurance policy of $140 for every 100 shares of PETM.
If the stock pops more than $1.40 on earnings, you'll secure a profit on the trade. In the event earnings disappoint the street, then iStock believes support at $65 will fail, and the price could fall to $62-$58. In which case, the puts will have you covered for a minimal loss.