PetSmart, Inc. (NASDAQ:PETM) unleashed earnings after the market closed on Wednesday. The pet-centric retailer announced strong results, but the market didn’t like what it heard. Why did the retailer’s stock tumble?
In the dog house
If you look at PetSmart, Inc. (NASDAQ:PETM)’s reported numbers, you might scratch your head at the market’s reaction. Same-store sales and margins continued to grow. For the quarter, same-store sales increased 4.6%. For the year, same-store sales grew 6.3%. Gross margin improved to 31.6% from 30.4%. Earnings were up 36% to $1.24 per share for the quarter. Analysts pegged earnings at roughly $1.21 per share on $1.89 billion in revenue. Instead, revenue increased 15% to $1.88 billion, a hair shy of what Wall Street wanted. The most recent quarter marks the 12th straight that PetSmart, Inc. (NASDAQ:PETM) has reported double-digit profit growth. Return on invested capital, which currently stands near 33%, increased in 2012 and has doubled since 2008.
Even though sales growth has greatly outpaced the $52 billion pet care industry, PetSmart, Inc. (NASDAQ:PETM) expects slower revenue growth in 2013. On every other metric, the company closely met or exceeded Wall Street’s expectations. So why was the stock essentially banished to the backyard?
Like we’ve seen in the past, the market has super-high expectations for growth stocks like PetSmart, Inc. (NASDAQ:PETM). Last summer Chipotle Mexican Grill, Inc. (NYSE:CMG) reported revenues that fell short of expectations, and the stock plummeted 22% on the news. Just the year prior, the fiery burrito maker was crowned the top performing restaurant stock in the S&P 500.
Brand experts Interbrand deemed Lululemon Athletica inc. (NASDAQ:LULU) the fastest growing brand in 2012. Then, in mid-January of this year, the company reported improved fourth-quarter revenue and earnings guidance. The athletic apparel maker’s stock dropped nearly 9% the week following the announcement.
Sometimes hot growth stocks just can’t cut a break. And with the Dow trading at an all-time high, investors are demanding absolutely flawless corporate results.
Circling the dog park
Even though PetSmart, Inc. (NASDAQ:PETM) has plenty of bark and bite, it still faces challenges. As we increasingly consider Mr. Snuggles a member of the family (and not just an animal), we’re demanding the best for him by seeking out higher-quality pet foods. PetSmart, Inc. (NASDAQ:PETM) sells prescription and various levels of premium pet food to meet this growing demand. These foods carry roughly twice the margins than their lower-tier counterparts. But big dog competitors are licking their chops.