PetSmart Announces Second Quarter 2014 Results

PetSmart, Inc. (NASDAQ:PETM) today announced financial results for the second quarter of 2014, and affirmed guidance for fiscal year 2014. The Company also announced a definitive agreement to acquire Pet360, the premier online pure play pet specialty retailer, for $130 million with the possibility of additional performance-based payments totaling up to $30 million by the end of 2016.

Second Quarter Results

Earnings of $0.98 per share were up 10.1% compared to $0.89 per share in the second quarter of 2013. Net income increased 5.1% to $98.1 million, compared to $93.4 million in the prior year period.

Net sales for the second quarter of 2014 increased 1.4% to $1.7 billion. Comparable store sales, or sales in stores open at least one year, including online sales, decreased 0.5%, with comparable transactions decreasing 2.6%. Services sales, which are included in net sales, grew 4.7% to $214 million.

In the second quarter, the company generated $92 million in cash flows from operating activities, invested $36 million in capital expenditures, distributed $19 million in dividends, and made no purchases of PetSmart stock. The company ended the quarter with $323 million in cash, cash equivalents and restricted cash, and it had no borrowings against its credit facility.

Said David Lenhardt, President and Chief Executive Officer, “While we face many of the same headwinds affecting other retailers, we continue to deliver extraordinary value to our customers and achieve strong earnings and cash flows. We are focused on leveraging our competitive strengths, including superior customer focus and loyalty, and capitalizing on the continued growth of the specialty channel. We have already begun implementing a broad range of performance improvement initiatives following the Board’s detailed review of our business over the last several months.”

Acquisition of Pet360

Commenting on the Pet360 transaction, Lenhardt said: “We are delighted to announce our planned acquisition of Pet360, the most comprehensive online resource for pet parents. This transaction is a smart and efficient way to make PetSmart a leader in the online retail space. As discussed previously, although online sales are still a relatively small part of the pet products industry, we expect them to become a more relevant source of revenue in the future. Combining PetSmart’s unparalleled strengths in traditional outlets with Pet360’s established digital footprint will perfectly position PetSmart to capitalize on this evolution and enhance our ability to serve pet parents across all distribution channels.”

Pet360 is an integrated media company dedicated to connecting pet parents with the information, products and advice they need to raise happy, healthy pets. The Pet360 network is comprised of more than nine of the top pet websites and reaches over 12 million pet parents per month, making Pet360 the most comprehensive source for online pet information and products in the U.S. Its family of premium brands includes – the most comprehensive online resource for pet parents; – the world’s largest digital resource for pet health information; – the leading online retailer of pet food, medications and supplies; and BlogPaws – the largest professional network of pet bloggers and social media enthusiasts. The company is headquartered outside Philadelphia, PA.

Combining Pet360’s family of e-commerce websites, digital media programs and content sites, with PetSmart’s existing web platform and store network will immediately allow PetSmart to provide customers a rich omni-channel information and shopping experience. It also brings industry leading talent to PetSmart, along with cost savings opportunities through increased scale, merchandise assortment and valuable web platform and fulfillment capabilities.

The transaction is expected to close in September, subject to customary closing conditions, including receipt of regulatory approvals.

Performance Improvement Initiatives

PetSmart has the platform, strategy and resources to maintain and grow its competitive advantage and drive enhanced shareholder value creation going forward. Following the Board’s comprehensive business review begun last Spring, the Company has developed a multi-faceted plan aimed at driving growth and profitability in the future. The plan includes a variety of performance improvement initiatives that will allow it to deliver near and long-term results and continue to deliver strong returns for shareholders.

To that end the Company has embarked on a broad cost reduction program that will fundamentally restructure the cost base of the Company. The program will target all areas of the business, including, in order of magnitude, cost of goods sold, logistics, sourcing, store operating costs and overhead. The Company expects to realize these savings before the end of fiscal 2015 and will provide additional details about the program and targets next quarter.

At the same time, the Company is steadfastly focused on ensuring that PetSmart is well positioned for the long-term and to that end is focused on the following growth initiatives:

• Strengthening our leadership position as the destination for pet food: Broadening our offering of grocery store and mass brands to drive new customers into stores; evolving our channel-exclusive offering to take advantage of ongoing industry innovation; and introducing focused marketing designed to highlight our breadth of assortment and value;

• Growing our proprietary and exclusive products and services: Introducing additional proprietary and exclusive brands aimed at keeping customers in our stores and building greater loyalty; and growing our services business through continued investments in people and technology which enhance the customer experience;

• Further developing omni-channel capabilities: Aggressively competing for customers online and taking advantage of PetSmart’s unrivaled scale and distribution infrastructure to provide customers a 360-degree shopping experience; and

• Developing a more personalized customer experience: Building a compelling, personalized, and connected customer experience, through strengthened CRM capabilities and an enhanced loyalty program, which reinforces the strength of our brand and highlights our unique value proposition.

Said Lenhardt, “Even with today’s separate announcement on exploring strategic alternatives for the Company, our team remains 100% committed to driving the business forward for the benefit of our customers and shareholders. Everything we are doing is aimed at continuing to build unparalled customer loyalty through innovation and creating a best-in-class, more personalized customer experience. We are also instituting more effective pricing and promotion strategies, improving cost and margin discipline and better leveraging our unrivaled scale and distribution infrastructure.”

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