Wednesday, August 09, 2006

Calls of Note Part 3

- Banc of America expect a challenging Q2 when PetSmart (NASDAQ:PETM) reports results August 15. Firm estimates a 3% comp and EPS of $0.26, vs. consensus of $0.28 and mid single digit comp guidance. Notes they like the long term story but believe near term choppiness could present a better entry point.

ACNielsen POS data show accelerating pet consumables sales, but the data has a low 10-20% correlation with PETM comps. The data show a stronger 50% correlation with supermarket comps, which have been improving. And PETM does not even report POS to AC Nielsen.

Central Garden & Pet's (CENT) Q2 pet supply results were disappointing. Retailers cut discretionary goods orders in favor of consumables on weaker consumer demand. July rebounded, but that is more likely due to CENT's expanded Target (TGT) relationship and other share gains than underlying category strength.

CENT is rolling out 80 Animal Planet co-branded SKUs to TGT stores (1400+). This follows TGT's premium food line launch in February and suggests stepped up merchandising efforts for TGT in the space.

Hill's Science Diet Q2 trends were strong, but that is likely share shift as Iam's/Eukanuba cited competitive activity with its weak trends.

Firm's 3% comp estimate factors in 26% growth in energy FQ2. Their regression has a 91% correlation b/w PETM's comps and growth in energy over a 4-yr period (73% over a 5-yr period). Thinks any deviation from that trend would come at the expense of gross margin.

Maintains Neutral and $24 tgt.

Notablecalls: I don't think the weakness at PETM should come as any surprise to investors. The best shorting opportunity was presented when co's closest competitor PETC was acquired with a hefty premium on July 14. PETM gapped up almost 10% and then gave back the gain and then some. Would not be surprised to see some additional weakness ahead of Aug 15 but I think downside is somewhat limited. Unless PETM guides down for Q3 the shares should bounce.

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