UBS Still on the Sidelines Following PetSmart's (PETM) Q3 Report; Boosts PT to $77

UBS boosts its price target of PetSmart (Nasdaq: PETM) from $71 up to $77 while maintaining a Neutral rating.

Analyst Michael Lasser commented, Against our model, PETM's flat comp of was consistent with our est (& above the cons. of -0.2%). Traffic remained under heavy pressure at -2.4%, consistent with 1H. Its $1.02 adjusted EPS well exceeded the 3Q'14 EPS guidance of $0.93 to $0.97. The beat was driven by better than expected OG&A leverage of 94 bps to 19.8% (vs. UBSe 20.4%), partially offset by GM contraction of -34 bps to 29.4% (vs. UBSe 29.5%). We took the $16.1 mm of one-time charges related to Profit Improvement out of OG&A, which had a $0.10 impact on EPS. We think it's best to stay on the sidelines.

Lasser continued, With the results, PETM provided details of its expense savings plan amid a Reuters report that KKR and CD&R were planning a joint bid for PETM, while Apollo and BC Partners were considering a separate offer. The company expects to save $200 mm (equal to 270-280 bps of op. margin & EPS of $1.25), with $120m of it to be achieved in '15. As a result of this program, it guided to mid-teens EPS growth in '15, implying a ~$5 adj EPS (well above the prior consensus of $4.64). This suggests that it will drop much of the savings to the bottom line next year even as it's 4Q outlook implies that it will have to make steep margin investments in order to generate a modestly improving comp. Perhaps the strategy is to maximize the potential bidding price as the review process unfolds and let public shareholders enjoy some of the fruits of the actions that a sponsor might take. Also, it's likely to push its stock price higher, which would create a more valuable currency if it were to attempt to acquire Petco. As we see it, the situation is becoming fascinating, but less analyzable.

For an analyst ratings summary and ratings history on PetSmart click here. For more ratings news on PetSmart click here.

PetSmart closed at $73.62 yesterday.

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