Petco Q2
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Petco Q2
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
Petco Animal Supplies Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PETC)") else Response.Write("(NASDAQ: PETC)") end if %> UNION CITY, Ca., September 9, 1996/FOOLWIRE/ --- Petco reported Q2 1996 results last Thursday. Net sales for Q2 increased 64% to a record $103.6 million compared to $63.3 million in Q2 last year. Net earnings, excluding merger and non-recurring charges and related tax benefits, on a comparable basis increased 50% to $2.7 million or $0.17 per share for Q2. Including these charges, a net loss of $7 million was incurred for Q2, compared with net earnings of $1.8 million for the prior year quarter. All results for each period reported have been restated to reflect the acquisition of Pet Nosh, which was accounted for as a pooling of interests. Net earnings excluding the merger and non-recurring charges and excluding the Pet Nosh results for the quarter, would have been $0.18 per share, or a penny above analyst expectations. Pet Nosh was essentially break-even for the quarter, but the additional common shares resulted in the reported $0.17 per share for the quarter.
Comparable store sales continued their very strong performance with an 18.3% increase during Q2. This marks the 12th consecutive quarter of double-digit increases. Sales were again strong in all of their markets, with every region producing double-digit comp sales increases. They were particularly pleased with the Southern California region which posted comp sales growth in excess of 20%. The opening of PetsMart's large San Diego stores, which was accompanied by a very expensive advertising blitz did impact sales for a small number of surrounding stores, but the region still performed strongly. There were 5 stores that were directy impacted by PetsMart. In addition to PetsMart, they had another competitor open 2 stores and a third competitor open 1 store also this year, so they have also had an additional 200,000 square feet of their particular industry's category open in San Diego this year. And, despit that, their comps are positive which shows the market was expandable.
They compete directly with PetsMart in 70% of their locations. They have 3 strategies that they have utilized very well against PetsMart. The first one is location. Petco attempts to put their stores in the community shopping centers with the dominant grocery stores, rather than going into warehouse store districts where stores like Home Depot or Price/Costco are typically located. Second, 30% of the merchandise found in Petco is not found in a PetsMart store and that consists of two of the key food vendors, Nutro and Breeders' Choice, Premium Choice litter, and a number of other items. Third is the feel of the store. Petco has more of a specialty store feel. PetsMart is trying to copy that a little bit and go away from their base of being a warehouse store. Petco still has a much more service oriented, interactive approach than PetsMart stores.
They were particularly pleased with their overall sales performance given the weak flea and tick product season which took away some additional upside in sales for the quarter. They were able to replace the lost flea and tick product sales with sales of other high margin products. They continued to leverage down the percentage of sales in the consumable category, the food category, and move into higher percentages of other categories despite the decline of the flea and tick categories. They added some SKUs that they picked up in their acquisitions and learned better ways of displaying merchandise in the store to enable them to pick up additional sales in the category. They were able to take some categories that they are currently working on and expand them 20-25% just by changing the display technique or the SKUs that they carried. They are pleased with some of the merchandise changes that they have made so far this year and that has helped their mix, which also helps make up the shortfall from the flea and tick products from a margin point of view.
Gross profit came in at 25.9% for Q2, compared to 24.5% last year. This increase was principally due to the improved performance of the Rancho Cucamonga central distribution facility. The improvement over the last quarter reflected increasing margins being achieved for acquired stores as better buying is now passing through to gross margins, and there was a better seasonal sales mix.
Following the acquisition of Pet Nosh, PT Moran, and the four Hermann's Sporting Goods sites for a total of 20 stores and sites, and in line with expectations, merger and non-recurring charges of $14.9 million ($9.7 million after its related tax benefits) were recorded in Q2. These charges include transaction costs, costs attributable to lease cancellation and closure of duplicate or inadequate facilities, facility conversion costs, cancellation of certain contractual obligations, and other integration costs.
SIX MONTH RESULTS
For the first half of 1996, net sales increased 61% to $197.3 million, compared with $122.5 million in the same period last year. Net earnings excluding merger and non-recurring charges and related tax benefits on a comparable basis have increased 41% to $3.8 million or $0.26 per share for the year to date. Including these charges in Q2, a net loss of $5.9 million was reported for the first half of 1996, compared to net earnings of $2.7 million for the same period last year.
Comparable store sales have increased 18.3% for the 1996 year to date.
MERGER AND ACQUISITION ACTIVITY IN Q2
During Q2 they completed the acquisition of the Pet Nosh chain. Pet Nosh stores average 17,000 square feet and are located in New York, New Jersey, and Connecticut. Latest 12-month sales for the Pet Nosh were approximately $26 million. The size and location of these stores is excellent and presents Petco with the opportunity to close several smaller stores already in these markets. This is their first acquisition made for stock and accounted for as a pooling of interests. They would expect future acquisitions to be made for stock or, in certain circumstances, cash.
They are very pleased with the integration of both the Pet Nosh and PT Moran chains. The one change they have made, and they think they are prospering by it, is that they have come up with a merger and acquisition team. In order to focus more closely on the integration process they took one of their top regional managers (from Southern California) and put her in charge of the acquisition team. Underneath her they put approximately 5 people who have a variety of responsibilities, all related to making the integration process go more smoothly by coordinating the activities backstage and in the field, as well as paying attention to the cultural changes involved with going from one organization to the next for the acquired companies. They are very pleased how that has helped them in this process and they continue to make improvements. As each acquisition goes by it makes the process even more successful than the previous ones. Typically during a transition, stores are injured as you start changing the mix, sourcing, and everything else. The newest store for them, The Pet Nosh, last week had their best week of the year so they are encouraged that the effort they are making and the resources they have put at the disposal of trying to integrate this properly is paying results for them. They are still on track to convert the Pet Nosh stores in Q3.
Discussions continue with a number of other merger and acquisition candidates. There is nothing their legal advisors will allow them to comment on at this time.
NEW STORE ACTIVITY
During Q2 a total of 14 new stores were added to the chain. They opened 6 new superstores including 4 relocations out of a total of 5 stores closed and acquired 8 stores. They have now added 32 new stores on a year-to-date basis. Excluding acquisitions that may occur later this year, they are planning to have opened or acquired more than 60 stores by the end of this fiscal year. They have an exciting store opening plan for Q3, just in time to benefit from the Christmas selling season. They will be opening more tha a store per week with approximately 20 superstores planned for this quarter. With 6 superstores opened in August, the excitement has already begun. With the addition of the Pet Nosh stores in the New York area, their dominant market presence in the Northeast was further enhanced. They are very excited about the plans to open the 4 Hermann's Sporting Goods sites by the December holidays. They particularly look forward to the planned opening of Manhattan's first two superstores -- their Union Square and 86th & Lexington locations -- both in excess of 15,000 square feet, will be truly unique showcases in this significant market currently only really served by small stores. They expect the Philadelphia and Washington DC Hermann's sites to also be very strong superstores that will bolster their presence in these markets.
Arizona continues to be another strong market for them. They opened their tenth store there recently and currently have plans for an additional opening this year and at least two more openings in this market next year.
Their plans for 1997 include expansion into both the Midwest and the Rocky Mountain states. They believe each of these will be excellent markets for Petco and they look forward to continued expansion into new markets. They are going to be entering both of these markets whether they have or have not made acquisitions. Their current plans are to open three stores early in the Rocky Mountains, in the Denver area, next year. And they plan to have 8-10 stores there within the next year to year and a half. That is without acquisition and in addition they may be looking at acquisitions as well. They are looking to go into the Midwestern markets and will plan to have 15-20 stores there in the next 12-18 months without acquisitions. Their current expectation is that probably somewhere along the line they will be making an acquisition within the Midwest region as well. So they were going to enter these markets either in conjunction with or prior to acquisitions. They were holding off going into both markets until they could reach the point where it made sense for them to go in either with a large enough group of stores or to make an acquisition.
RECENT STORE MANAGERS MEETING AND TRADE SHOW
Last month they held the 6th annual store manager's meeting and trade show in Long Beach. All of Petco's field operations management, from store managers on up, met for four days of training in connection with a trade show in which products were promoted from more than 240 booths with vendors providing product training to Petco managers. With 6 chains acquired in the last year, this provided a great opportunity for the managers of those stores to meet with their peers and further cement the integration process. The meeting and trade show was a great success. The store management group returned to their home regions with increased enthusiasm for the Petco mission. * 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. |
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Copyright 1996, The Motley Fool |