Wells Fargo Likes PetSmart After Strong Earnings (PETM)

Wells Fargo Securities likes PetSmart, Inc. PETM after the company reported a solid quarter and beat earnings expectations. It has a $35-$37 price target on shares of PetSmart. It rates shares at Outperform. In the research report Wells Fargo writes, "PetSmart delivered a nice earnings beat, mostly on lower operating expenses versus very conservative guidance, and raised 2H guidance slightly above the Street. More importantly the company's comments dismissed two persistent concerns among investors: 1) inflation/deflation was nonexistent this quarter and isn't expected to impact results for the remainder of the year, and 2) the company’s decision not to compete with Wal-Mart price "rollbacks" didn't appear to have a meaningful impact on traffic (growth in comp transactions ticked higher by 120bp from 1Q to 2Q). Going forward, our thesis on PetSmart is that the company offers a nice mix of safety in consumables (51% of sales) and the 10% FCF yield, along with upside potential from improved merchandising in non-consumables. Specifically, we believe new products launches like Martha Stewart Pets could rebrand the company as a smart but also fashionable place to shop for pets. Guidance still appears conservative and doesn’t include any share repurchase activity, although the company plans to "be back in the market" in the 2H. We reiterate our Outperform rating and are raising our FY10 estimates from $1.90 to $1.96 and our FY11 estimates from $2.10 to $2.17. We are raising our valuation range from $34-$36 to $35-$37." Shares of PetSmart, Inc. closed at $30.15 yesterday.