Petco Earnings Dip

Petco's net earnings for the second totaled $18 million, or 31 cents per diluted share, compared with net earnings of $19.3 million, or 33 cents per diluted share, in the year-earlier period. Sales grew to $482.7 million versus $438.5 million in last year's second quarter, with comparable store sales increasing on top of a 6.7% increase in the second quarter of 2004.

James Myers, Petco's CEO, said in the conference call that customer traffic "was soft at the start of the quarter and deteriorated sharply as we progressed through July." Although a number of factors were at work, Myers said, the most notable were "higher gas prices and the impact of related headlines on consumer behavior."

Petco surveys show that customers are consolidating their shopping trips. "Our good customers are remaining loyal, but they are not always making that second or third trip to Petco that usually leads to sales of the more discretionary items," that are more profitable, Myers said.

Other factors affecting Petco's second-quarter performance included increased distribution costs and higher year-over-year occupancy costs stemming from the greater number of store openings in the last few quarters. The company opened a net of 11 new stores in the second quarter, counting relocations and closings, and remodeled 14 stores into its new Pisces format. It is on track to open 70 new stores for the year and to remodel up to 50 stores.

In answer to an analyst's question, Myers said that price competition from stores like Target, Petsmart and Wal-Mart was not a significant factor in the company's latest quarterly performance. "We've been conducting extensive research," Myers said, and "the No. 1" reason that the surveys identified was that shoppers are consolidating trips, with price ranking relatively far down the list.