PetSmart Profits Despite Food Recall

Phil Francis, chairman and CEO, commented in the conference call that, "PetSmart delivered a solid performance in the first quarter despite a pet food recall unlike anything we have ever experienced in the industry." Francis described the recall as "frustrating, confusing and at times a bit scary," saying that it "hit close to home for many of our customers and for us," with the recall affecting 305 skus and 16 brands.

Francis attributed the company's solid financial performance in the face of adversity to an organizational structure that enabled PetSmart to address the recall quickly and efficiently. The company immediately removed the recalled products from the shelves and "worked with customers to help find alternatives and to find veterinary care," he said. Although the business performed well, he noted, "We saw customers grow increasingly wary of an expanding recall list and a lack of conclusive evidence of the cause," with some of them switching brands or cutting back on spending for pet foods by switching to homemade food. The customers' reactions had some impact on sales, he said, but added, "We believe that many of the reactions to the recall are short-term."

PetSmart's financial performance also resulted in part from the continuing growth at the chain, which opened 23 new stores and closed three locations during the first quarter of 2007, for a net gain of 20 new stores, compared with a net gain of 16 new stores in the same quarter last year. The company's growth strategy includes plans to open 100 net new stores this year.

PetSmart's first quarter 2007 results included aproximately $3.8 million, or three cents a share, in net after-tax expenses related to its exiting the State Line Tack product line. Another item that affected the bottom line during the first quarter was a net benefit of approximately $64 million, or 47 cents per share, from the sale of a portion of its shares in MMI Holdings Inc., the third-party operator of its in-store Banfield veterinary hospitals. PetSmart Inc. operates more than 928 stores in the US and Canada, a growing number of in-store PetsHotel cat and dog boarding facilities, and is an online provider of pet supplies and pet care information.