PetSmart Reports Results for the Fourth Quarter and Fiscal 2007

PetSmart, Inc. (NASDAQ: PETM), today reported net income of $75.4 million, or $0.59 per diluted share, for the fourth fiscal quarter of 2007. That compares with net income of $76.9 million, or $0.56 per diluted share, for the fourth quarter of fiscal 2006. Net income for the fourth quarter of 2007 excluding the 14th week and the costs to exit the State Line Tack business was $0.52 per share.

Net sales for the 14-week fourth quarter of 2007 increased 13.8 percent to $1.33 billion, compared to the 13-week fourth quarter of 2006. The impact of the 14th week on net sales was approximately $90 million. Comparable store sales -- or sales in stores open at least a year -- grew 0.8 percent in the fourth quarter, on top of 4.6 percent in the same period in 2006. During the 14-week fourth quarter, pet services sales were $123.4 million, up 26.9 percent from the 13-week fourth quarter of last year.

For the quarter, operating income as a percent of sales decreased 120 basis points to 9.8 percent driven by relatively slower top-line growth combined with increased costs associated with expansion and infrastructure investments. Gross margins declined 120 basis points to 31.7 percent of sales which reflected a challenge with leveraging fixed expenses in occupancy and supply chain with a weaker top line. Operating, general and administrative expenses improved 10 basis points to 21.8 percent.

"Like many retailers, we experienced relatively weak traffic and sales trends in the fourth quarter. Our fixed expense structure made it difficult to leverage expenses with the weaker top line," said Phil Francis, chairman and CEO. "We recognize that if we want to deliver ongoing earnings growth we have to deliver a more balanced approach between the near term economic realities and investing for the future. That means that we will slow our capital spending, focus on consistency and execution in our stores and continue to look for ways to maximize the performance of our current asset base."

2007 Fiscal Year Results

For all of fiscal 2007, the company reported net income of $258.7 million, or $1.95 per diluted share. That compares with fiscal 2006 net income of $185.1 million, or $1.33 per diluted share. Fiscal 2007 earnings excluding the 53rd week, the benefit for the first quarter MMI transaction and costs associated with the exit of the SLT business were $1.47 per share.

PetSmart generated $4.67 billion in net sales in the 53-week fiscal 2007, up from $4.23 billion in net sales for the 52-week fiscal 2006. Comparable store sales grew 2.4 percent in 2007, on top of 5 percent growth in 2006. For the 53-week fiscal 2007, pet services generated $458.7 million in revenue, or 22 percent growth over the 52-week fiscal 2006.

Cash Flow and Financial Condition

The company maintained its strong financial position and its flexibility to continue to support long-term growth initiatives. For the year, cash flows from operating activities increased 15 percent to $333 million. Capital expenditures totaled $294 million, higher than last year, primarily due to accelerated new store and PetsHotel growth. As of February 3, 2008, the company had cash and cash equivalents of $58 million and long-term debt of $30 million. Merchandise inventories totaled $501 million. Average inventory per store was $497,000, down 7.4 percent when compared to the end of fiscal 2006.

2007 Highlights

--  Opened 97, acquired 18 and closed 15 stores
--  Opened 35 new PetsHotels
--  Opened a replacement distribution center in Newnan, Georgia
--  Exited the State Line Tack business
--  Sold a portion of shares in MMI Holdings, Inc.
--  Purchased 9.8 million shares including 7.0 million shares under an
    accelerated share repurchase program
--  Paid quarterly dividends of $0.03 per share

2008 Guidance

--  Total sales growth: High single digits for the first quarter and for
    the year
--  Comparable store sales growth: Flat to low single digits for the first
    quarter and low single digits for the year
--  Operating income percentage: Relatively flat as a percentage of sales
    for the full year
--  Net interest expense: Approximately $15 million per quarter
--  Income tax rate: 38 to 39% for both the first quarter and full year
--  Earnings per share: In the range of $0.29 to $0.33 for the first
    quarter and in the range of $1.51 to $1.59 per share for the full year
--  Capital expenditures: $285 million or lower
--  Net new stores: 100 to 104 for the full year
--  PetsHotels: 45 for the full year

Conference call information

PetSmart management has scheduled a teleconference for 4:30 p.m. (EST) today to discuss results for the fourth quarter and all of 2007 as well as the current outlook. This teleconference will be Web-cast live for all investors at www.petm.com or www.streetevents.com . The Web-cast will be available until the company announces results for the first quarter of 2008. In addition, you can listen to the call live by dialing 866-837-9781 (within the United States and Canada) or 703-639-1419 (for international callers), code 1199006. A phone replay will be available through March 21, 2008, at 888-266-2081 in the United States and Canada, or at 703-925-2533 for international callers, code 1199006.