PetSmart Earnings Call Nuggets: Merchandise Margins and Food Category

PetSmart Inc. (NASDAQ:PETM) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Merchandise Margins

Michael Baker – Deutsche Bank: Couple of questions. First on the gross margin on the 55 basis point decline in merchandise margins, is that mix, is that pricing pressure, could it be anything related to more online sales and the need to not make as much profit on shipping either because it’s pass-through, because it’s free. If you could dwell into that a little bit. Thanks.

David K. Lenhardt – CEO: It’s David. To answer your last question, in terms of any online impact affecting our margins, we did not see any impact and it was not a result of that. It was driven by both margin and rate – mix and rate. On the mix side, what we saw during the quarter is our services business overperformed driven by grooming and at the same time, we saw our aquatics business, which has a higher gross margin rate, underperform. That was partially driven by live fish supply issues we had through the quarter and that resulted in stocks that were below our target inventory levels and in that business we know that live fish are the key driver of consumables and hardgoods attachment rates in that category. So, that was the mix side. And then on the rate side, we did run a number of traffic driving promotions in our cat consumables business during the quarter. Those did not have the impact we expected and we stopped those at that point.

Michael Baker – Deutsche Bank: A follow-up and then another question. Is that aquatics out of stock, is that coming back and then if I could ask just one more topic on your channel exclusive food, could you remind us what percent of your total food that is, total consumable, total food, total sales (where you want to) quantify for us?

David K. Lenhardt – CEO: Yes. On the aquatics side, Mike, we have taken action and are working with our vendors on our fish supply chain and we expect to see improvement in this quarter. In terms of the channel exclusive mix, we’re continuing to see that right around 75% of our total food business.


Food Category

David Strasser – Janney Montgomery Scott: I wanted to follow up on that and talk a little bit about the food category. And I went in and out a little bit on the last question – the answer to the last question. But I was talking about the – you had talked about the gourmet food being about 75% of the overall food business, you talked about that in the past. And as you sort of look forward and look at the opportunities in that category, where can that go as far as the Gourmet business as a percentage of the overall food business? You know, as we look forward are we near towards the top or towards the cap on that number? Can I continue to go higher and really continue to help the ticket?

David K. Lenhardt – CEO: David, it’s David. I think you are talking about channel exclusive food. And as we look at that, we don’t think we’re at the end of that runway at all. We continue to see with the humanization of pets that as our merchants innovate as we partner with our vendors to innovate and bring human trends into the pet category, we have continued to see that our customers respond. And I think you’ve seen this year, we feel very good about that innovation. We continue to add product in space to brands like Blue Buffalo to our own proprietary brands like Simply Nourish. We’re bringing a new form factors like Casseroles to the market. There are other trends our there like fresh food that customers are looking for. And so as we think about this natural trend, I think we absolutely continue to see runway in front of us. The other piece I would say to you is while channel exclusive is 75% of our business, when you look at that penetration outside of our stores, it’s around 30%. So there’s a great deal of pet customers out there that are still not using channel exclusive foods…

Carrie Teffner – SVP and CFO: From a Q3, Q4 standpoint I think what you should expect is continue to see some leverage in the back half and specifically to Q3, kind of think of that growing relatively in line with sales.

Brian Nagel – Oppenheimer: And then as a follow-on question on different topic maybe a bigger picture question, but I think someone asked you online competition, but just – maybe this is more for Dave – we see anything new with respect to online competition out there pricing-wise, new entrance anything more competitive for us competitive.

David K. Lenhardt – CEO: I’d say in general no, I think you are seeing some players out there changing around their shipping office or the threshold office, but I think in general we have seen a relatively kind of consistent environment. We continue to see our business outperform our online business outperformed the total market growth which we believe is growing at about 12% to 14%. We’re continuing to focus on our broader omnichannel strategy. A piece of that is e-commerce as well as the influence in building new capabilities. On the e-commerce side, we continue to make improvements to the website. We continue to improve the navigation. In the last quarter, we launched new webpages for all of our services businesses, and we now have the capability, when you get online, if you bought before, we are giving you much more personalized recommendations. So, I think we continue to see our website improve and we continue to see our growth outperform the overall market.