FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

PETsMART, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PETM)") else Response.Write("(NASDAQ: PETM)") end if %>
10000 North 31st Avenue, Suite C100
Phoenix, AZ 85051
(602) 944-7070

UNION CITY, Ca., November 26, 1996/FOOLWIRE/ --- Petsmart released third quarter 1996 results last week. Revenues for the period were $340 million, a year over year increase of 28%. Comparable store growth was superb and continues their year-long trend. They reported 12.5% year over year growth. This is compared to their own internal plan of approximately 10%. For comparison, last year's 1995 Q3 comps were 12%, so they are already cycling on a strong base. The company reported net income of $11.2 million or $0.10 per share which is a penny above consensus estimates. This is on a base of 110,850,000 shares versus the consensus estimate of 107 million shares. So they not only beat the consensus on a per share basis, it included a higher number of outstanding shares. The $0.10 per share for Q3 1996 compares to, on an operating basis excluding last year's merger and non-recurring charges, $0.05 per share. So, they had a 28% expansion of revenues and a 100% year over year expansion of income.

PROFIT MARGINS. They continued their second quarter trend of gross profit expansion on a year over year basis. They are very pleased with the 160 basis point improvement versus the third quarter of 1995 and they are starting to cycle some of the early benefits of the PetStuff and Petfood Giant acquisitions of last year. The drivers behind their expansion in gross profit continue to be the same as the second quarter -- improved product costs for their acquisitions (particularly PetStuff) and improved product mix during the quarter particularly in the service areas resulting in a consumables trend that is very favorable year over year. They are also experiencing continued occupancy leverage and are also seeing a margin expansion in their catalog business.

OPERATING EXPENSES. They had excellent expense management for the third quarter. Their store operating expenses for 1996 in the third quarter ran 17.8% of sales versus 18.4% for the same period last year, resulting in a 60 basis point year over year improvement. Their G&A expenses yielded a 23 basis point improvement year over year.

STORE COUNT/NEW STORES. They finished the quarter with 311 stores. They opened 12 new stores during the third quarter, two more than planned. They are very satisfied with their quarter ending inventory situation. They feel they are well prepared for the 25-30 new stores that will be opening in the first quarter of 1997. They also are pleased that their fourth quarter readiness in terms of preparedness for holiday sales as it an all-time high. They genuinely don't want to miss out at the business on any high margin fourth quarter sales. They are also happy that they are successful in the startup of their third distribution center in Phoenix and also the expansion of their Columbus distribution center, also the startup of their Canadian stores -- the collective part of their two distribution center expansions and their Canadian stores generated an additional $25 million inventory commitment. They used a different size store in Canada because the background work they did on the Canadian market showed that the pet demographics were different in Canada as a result of the higher density housing stock. They elected to use a 22,500 square foot store there, which they think is appropriate for that market and certainly dominant relative to other competitors up there. The prevailing large operator in that marketplace has several hundred locations of pet foods and pet supplies and their stores are 2,000-3,000 square feet. They are running ahead of the US model in terms of new stores up there and they are very pleased with that in terms of initial startup.

They continue to enjoy 49% accounts payable leverage against their internal plan of 40%. And, as a business they are in the enviable position that their product mix is not vulnerable to any seasonal shifts or expansion trends. They are in a non-glamorous product category which includes products like cat litter and dog food.

VETERINARY HOSPITALS. They had the best quarter ever for their veterinary business. They finished the quarter with 164 hospitals in their stores, so they are now crossed over the 50% mark in terms of the number of Petsmart stores that offer veterinary services. Petsmart itself owns 56 of those hospitals. At year end they expect 170 of their stores to have hospitals. Petsmart's veterinary hospital strategy is very different in the context that the Petsmart veterinary service strategy is designed to be a complementary business strategy to the existing Petsmart store. They build hospitals that cycle up and actually build new client bases. The first year of a Petsmart veterinary hospital does about $250,000 which is the average volume for a veterinary hospital in America, and Petsmart does lose some money in the first year. They get up to about $450,000 the second year and breaks even. The third year it moves up to about $650,000 and conversion rates jump to high single digits. And, four year and older hospitals run between $850,000 and $1 million a year and can convert up to 20%. So, looking at the mature impact of a veterinary hospital on Petsmart's store, using the fact that they have 5,000-6,000 customers per week running through the Petsmart store, it actually adds $1 million plus of additional revenue to the site with no expansion of square footage and increases the gross operating profit of the store by 100 basis points. From that standpoint, it is a very complementary strategy and a very distinct strategy that is different from typical veterinary service companies.

REGIONAL PERFORMANCE. All 6 of their US regions had excellent results. The stars among the regions include the Northeast, Southwest, and the West Coast. Looking at the West Coast region, they think their excellent results there were driven in great part by their very gratifying results in their San Diego 40,000 square foot mega-store concept.

PROPRIETARY PETFOOD BRAND. During the tail end of the third quarter, they were successful in rolling out a repositioned corporate brand of super premium food, their Authority Premium petfood brand, which they completely reformulated and repackaged during the quarter. It includes an entirely new dog food line, new packaging, the introduction for the first time of a canned line, and this is an important product line for them as a driver for sales and gross margins in 1997 and beyond.

UPDATE ON PET CITY ACQUISITION. Earlier in the quarter they announced the agreement for the acquisition of all of the outstanding stock of Pet City, the largest European pet specialty retailer. They think this is a very exciting transaction for their business and their shareholders because in one stroke they were able to gain the dominant position in the UK market. At year end, Pet City will operate between 55 and 57 stores and they anticipate, given their real estate activity and lease commitments that 15-18 months from now they will operate approximately 100 stores in the UK. The Pet City transaction is a very exciting transaction just on the UK basis alone, but looking to the larger European marketplace, that is a market that is equal to the size of the North American market in dollar value, but is growing at a very fast rate. They think they have an excellent entry point through this acquisition to not only the UK but also continental Europe. The market is slightly less developed than the North American market. There are big differences country to country. They are aware of one 6-store chain in France that is public. There are a variety of single store operators in Germany that are starting to open some larger format stores (7,000-8,000 square feet). So the logical entry points are to look for 3 main factors -- obviously where there is an adequate pet population, an adequate middle class to support that population, and the percentage of calories that are fed through commercially prepared pet foods as opposed to table scraps. They will not impose a US or a UK solution on, for example, a French retail opportunity. They will try to do the best thing for each individual country. They are very pleased that they have a veteran management team in place at Pet City. From a growth perspective, the Pet City acquisition and the implicit European expansion doubles the size of the market available for Petsmart to grow in. The synergies between their businesses are very significant and include the abilities for both businesses to do global sourcing together, allow Pet City to leverage Petsmart's experience in terms of pet healthcare, also allows Pet City to leverage Petsmart's experience in various Petsmart programs including their distribution logistics practices, their private label program, their proprietary associate training programs, and their retail service concepts which include veterinary services, grooming, pet photography studios, their children's learning center concept, and dog obedience schools. As they look at the transaction, they are very pleased with the cost per location. It is very comparable with other US acquisitions they've made and this is in spite of the fact that it includes UK real estate which is at a much higher premium than US real estate. It is a very low risk transaction to their shareholders as the Pet City stores are already profitable at store level. The transaction is expected to close on December 18th and management looks at this as a non-dilutive transaction in 1997 and then after that accretive.

OUTLOOK FOR FOURTH QUARTER AND NEXT YEAR. As they look at the fourth quarter, now that they are in the third week of the quarter, they had a very successful opening in Canada. They had originally planned to open 5 stores in the Toronto area. They were able to exceed their expectations and actually open 8 stores. Although early into the game they are already slightly ahead of their sales plan for the quarter, they are delighted with the consumer response. For the fourth quarter, including the Canadian stores, they will open a total of 9 new stores and expect to finish the year with 320 North American stores, approximately 55 Pet City stores for a year-end balance in 1996 of 375 stores. Next year they will open 60 stores in the US, between 8 and 10 in Canada, and somewhere between 20 and 35 in the UK. They are committed to 20% plus square footage growth per year.

COMPETITION FROM SUPERMARKET CHAINS. An issue that came up in the Q&A was that there is a regional supermarket chain in the Upstate New York area called Wegman's that has done what a number of other supermarket chains have done throughout the years in trying to hold onto their pet food business. It started first with Kroger back in 1990 and then the White supermarket chain for years has been in the pet supply business. Petsmart believes that Wegman's, watching the White supermarket chain, has decided that they would experiment with a pet supply store, a small store adjacent to one of their shopping centers. With that they have put Science Diet as a brand of product into that pet supply store. From Petsmart's standpoint, this is very consistent with Colgate-Palmolive's distribution strategy. The Kroger organization failed and decided to get out of that business. Petsmart doesn't believe that White is very happy with their SuperPets position right now. And, they think Wegman's is experimenting with this without particular conclusion. The stores are very small, about 2,000 square feet, and Petsmart has done very well against it. There is a little bit of misinformation here in that the fact that the pet supply store is owned by a supermarket chain has led some people erroneously to the conclusion that this "pet store only" product (Science Diet) is in a grocery store.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.