PetSmart Inc PETM
Q1 2013 Earnings Call Transcript
Transcript Call Date 05/22/2013

Operator: Good afternoon, ladies and gentlemen, and welcome to PetSmart's First Quarter 2013 Analyst Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference Ms. April Lenhard, Director of Investor Relations.

April Lenhard - IR: Good afternoon, and welcome to PetSmart's conference call to announce our results for the first quarter of fiscal 2013.

With me on the call today are, Chairman and Chief Executive Officer, Bob Moran; President and Chief Operating Officer, David Lenhardt; as well as Chip Molloy, Executive Vice President and Chief Financial Officer. Bob will kick off the call with an overview of our results, and then Chip will take you through the financial review as well as our earnings guidance. David will review the operations of the business, and provide insights into the remainder of the year and finally we'll take your questions.

Please keep in mind, everything we cover during today's call, including the question-and-answer session, is subject to the Safe Harbor statement for forward-looking information you'll find in today's news release.

Thanks and I'll now turn the call over to Bob.

Robert F. Moran - Chairman and CEO: Thanks April, and good afternoon, everyone. We are pleased to report another quarter of solid earnings growth. For the first quarter, earnings per share were $0.98 up 15% when compared to $0.85 for the same period last year. Comparable store sales, or sales in stores open at least a year, grew 3.5% and comp transactions, which we use as a proxy for traffic were up 0.8%.

As the industry leader our focus on providing solutions for the lifetime needs of pets through an innovative merchandizing assortment, a suite of differentiated services offerings and a unique in-store experience has kept our pet parent customers highly engaged with our brand, resulting in positive comparable store sales growth and transaction growth. We are privileged to have the most passionate associates in the industry who engage with our pet parent customers to help them help their pets live long, healthy and happy lives.

Through our partnership with PetSmart Charities, we continue to make a real impact in our local communities by providing space in our stores for adoptable pets to find loving homes. We are proud to be able to help even more homeless pets with the launch of our exclusive new Tommy Bahama pets clothing and toy line. 5% of the purchase price of each limited edition item available exclusively at PetSmart through August will be donated to PetSmart Charities in the United States and Canada to help save homeless pets.

Switching gears, I would like to update you on our CFO search. I am pleased to report that last week we announced that Carrie Teffner will be joining the Company as Senior Vice President and Chief Financial Officer on June 3, 2013. Carrie brings more than 20 years of financial management experience to PetSmart. Most recently as Executive Vice President and Chief Financial Officer at Weber-Stephen Products, a leading manufacturer and exporter of barbecue grills and outdoor room products worldwide.

Before I turn the call over to Chip, I'd like to take the opportunity to thank Chip for his service and contributions as CFO over the past 5.5 years. Chip has been a tremendous asset to PetSmart and his contributions have been integral in helping PetSmart become the Company we are today. We wish him all the best. Chip will be assisting with the CFO transition over the coming weeks and months, and will stay with the Company as a Special Advisor through March of 2014

With that, I will now turn the call over to Chip.

Chip Molloy - EVP and CFO: Thanks, Bob, and good afternoon, everyone. Today, I will be reviewing our first quarter performance, as well as providing guidance for the second quarter and full year. As Bob mentioned, earnings for the quarter were $0.98, which represents 15% growth when compared to $0.85 for the same period last year. Comparable store sales growth was 3.5% and comp transactions were positive for the 12th consecutive quarter at 0.8%.

Total sales for the quarter were $1.7 billion, up 5%. The increase in total sales included an unfavorable impact from foreign currency fluctuations of $2 million. Services sales, which are included in total sales, increased 6% to $192 million. Other revenue, which is also included in total sales, was $10 million, representing reimbursements from Banfield for the space they utilize in our stores.

The sales mix for the quarter included consumables at 54.0%, hardgoods at 32.5%, services at 11.2%, live pets at 1.8%, and other revenue at 0.6%. Gross margins for the quarter were up 45 basis points to 31.0%. Within the gross margin line merchandize margins were down 15 basis points. While services margins added 15 basis points to the overall rate. Store occupancy and warehouse and distribution were favorable 30 and 15 basis points, respectively.

Operating, general and administrative expenses were 21.2%, representing 15 basis points of deleverage when compared to the same period last year. Year-over-year increases in OG&A expenses were primarily due to planned incremental advertising spend focused on our differentiated offerings and professional fees associated with various IT projects. Net interest expense for the quarter totaled $13.2 million. Overall earnings before tax increased to $154 million, or 9% of sales. This represents 10% growth and a 40 basis point improvement. The tax rate for the quarter was 36%.

During the quarter, we opened 13 new stores and closed 2, bringing our totals to 1,289 stores and 196 hotels. We ended the quarter with average inventory per store of $573,000, up 4% compared to the first quarter last year. During the quarter, we generated $147 million in cash flows from operating activities, including our third annual dividend from our investment in Banfield of $15 million. During the quarter, we spent $35 million on capital expenditures, and repurchased $180 million of PetSmart stock. Depreciation and amortization expense for the quarter was $59 million.

We ended the quarter with $324 million in cash, cash equivalents and restricted cash and zero borrowings on our credit facility. Although the macro economy remains challenging, we are confident in our ability to influence those things within our control, to continue to deliver on our commitment of driving strong operating results, while maintaining a healthy balance sheet.

As a reminder, the annual guidance for 2013 is on a GAAP basis. Therefore, all comparisons will be 52 weeks for 2013 versus 53 weeks for 2012.

For the fiscal year 2013 we are expecting comp store sales growth of 3% to 4% and total sales growth of 3% to 4%. We are raising our earnings per share guidance from our previous range of $3.76 to $3.92 to our current expectations of $3.82 to $3.94. We expect gross margins to be flat to slightly up, OG&A to grow in dollars approximately 4%, interest expense to be flat from a dollar perspective and EBT margin to expand slightly. We anticipate the tax rate to be around 38%.

For the second quarter of 2013, we are expecting comparable store sales growth of 3% to 4% and earnings per share of $0.82 to $0.86. EBT margin is expected to improve 40 to 50 basis points when compared to the second quarter of last year. The improvement should come primarily from gross margin expansion while OG&A costs grow 5% to 5.5% when compared to the second quarter of last year. The tax rate is expected to be between 38% and 39%. We remain committed to our long-term guidance of 11% to 17% EPS growth and believe we have a 2013 operating plan that can deliver on those goals.

With that I'd like to turn it over to David Lenhardt, who will highlight our first quarter activities and provide insights into the remainder of 2013.

David K. Lenhardt - President and COO: Thanks, Chip and good afternoon, everyone. As Bob mentioned our innovative merchandize assortments, suite of differentiated services offerings and uniquely engaged in-store experience demonstrates the strength of our brand and really resonates with our pet parent customers. In the first quarter, we supported the growth in super premium natural foods by expanding the space dedicated to Blue Buffalo as well as our own super premium proprietary brand Simply Nourish and introduced new formulations in both dog and cat across top channel exclusive brands. The addition of novel new proteins like bison and venison and new meatloaf and casserole inspired wet formulas have further expanded the grain-free and high-protein offerings in both wet and dry food across breeds and life stages. PetSmart has always been a best destination for food with an unmatched selection at great value, and by providing the right breadth and depth of solutions for all of the pets' health and nutritional needs we are listing to our pet parents, when they express their desire to give their pets the best quality nutrition.

In our specialty business, we are resetting the Reptile space this month with improved adjacencies and layout, newness in our proprietary brands and improved educational signage with clear good, better, best brand positioning. With a focus on solutions, driven by our extensive customer research to drive an easier customer shopping experience, we will continue to support the growth in Reptile, our fastest-growing species in the specialty category.

In hardgoods, we continue to innovate and differentiate our assortment with exclusive new partnerships and expanded fresh new assortments. In March, we added a new line of Disney pet apparel and toys to our portfolio of exclusive partnerships. Last month, we launched an exclusive clothing and toy line with Tommy Bahama Pets available exclusively at PetSmart through August. We're also refreshing the assortments in existing brands like Bret Michaels Pets Rock with the 1980s retro neon themed line of apparel, toys and accessories, and in Martha Stewart Pats with seasonal new assortments like out at sea, featuring tropical inspiration sea life creatures and Camp Martha with outdoor campaign inspiration and travel solutions.

This summer, we will be executing a dog hardgoods reset across the chain, which will be the largest merchandizing reset in the Company's history, with almost a 1,000 new items. We will be adding newness to our core brands bringing in new category relevant brands, as well as in and out buzz-worthy brands. With the focus on space and adjacencies and new fixtures across categories, this reset will support better brand positioning, simplifying the customer shopping experience and improving the stores' operational execution. Leveraging our key customer insights and strong vendor partnerships, we will continue to maximize the potential of our key brands through fully integrated and compelling marketing campaigns.

Moving onto services, our highly differentiated services businesses continue to show strength. In grooming, our quality of care continues to drive sales with the grooming Look Great Guarantee. We rolled out several new services offerings at the grooming salon during the first quarter, including new puppy bath packages, and K9 Advantix II Spot-On Solution and application. We're continuing to develop a pipeline of innovative services and exclusive offerings that are integrated with our core merchandise brands and supported by marketing, including the newest offering our exclusive Tommy Bahama, Top Dog Spaw package and that's with a W, featuring a signature orange bandanna and coconut mango spritz.

In boarding, the PetsHotel business achieved profitability for the first time in 2012. We continue to drive profitability by leveraging our PetsHotel call center driving more awareness through increased marketing integration and improving our overall operational efficiencies.

We've shown our customers how we're different from the competition and how we offer the best choice but we're not done. Delivering authentic customer connections is at the core of our customer experience and we will continue to evolve this experience in our stores through investments in our associates with training and development so that they can continue to engage with our pet parents in an authentic and genuine way.

Our customer centric focus is also the foundation of our three pillar approach to omnichannel, which includes e-commerce, e-influence and building new capabilities. We remain focused on this important area of our business with a number of initiatives that are grounded in these three pillars, centered around the core goal of simplifying the shopping experience for our customers, whenever and wherever they choose to engage with us. We continue to invest in improving and enhancing our website experience with richer content and better navigation and new tools like our online food selector. In just a few simple steps, the food selector helps pet parents narrow a wide assortment down to the choices that offer the best nutrition for their pets' unique health needs and preferences. This is just another example of the investments that we are making to provide a better and richer website experience on PetSmart.com.

All of the innovation and initiatives that we've talked about today would not be possible without the integration and alignment across merchandizing, marketing, supply chain and store operations. While we expect the macro economy will continue to hold challenges in 2013, we believe that the strength of our differentiation and pipeline of innovation will allow us to continue to execute on our strategic priorities at every level of the business to deliver strong shareholder returns through 2013 and beyond.

Before we open it up for Q&A, I would like to take the opportunity to thank Bob for his tremendous leadership to PetSmart over the past nearly 14 years. We are fortunate that he will remain active as Executive Chairman. I would also like to thank Chip for his leadership and contributions and for bringing the financial discipline to the Company that will remain a key pillar of our strategy well into the future. We wish him all the best.

I'm excited to have Carrie join the leadership team next month as Senior Vice President and Chief Financial Officer and I look forward to her contributions in the role. She will be a valuable addition to the team in support of our strategy of financial focus and discipline to drive shareholder value.

With that we would like to take your questions. Thank you.

Transcript Call Date 05/22/2013

Operator: Matt Fassler, Goldman Sachs.

Matthew Fassler - Goldman Sachs & Co.: My question really relates to sales off in two quick parts. First of all, if you think about the traffic ticket combination implied in your sales guidance for the rest of the year, how would you see those mixing? Then secondly, you took up the low-end of your sales guidance, I'm interested and given that we had a very volatile quarter across retail, how the trends over the past eight or nine, 10 weeks since we last spoke to you influenced your thought process on the annual outlook?

Chip Molloy - EVP and CFO: Matt, it's Chip. I would say that if you just take this quarter on the way that the composition of the sales, you have a little bit of traffic. You have units per ticket down a bit and overall comp units down a bit and you are picking it up in AUR. The primary drivers of that is a teeny bit of inflation call it 100 basis points and the rest is really the quality of goods continuing to go into the basket, driven a lot by the high-end foods that are continuing to perform extremely well. As I think about the rest of the year, I would suggest that the ticket – we like that higher traffic in point A and we are driving to try to do that, but as we sit today our expectations are that this is the world we are kind of living in for right now and our expectations are that the makeup will probably look fairly similar for the remainder of the year. We did pick up the bottom end. Just you got a quarter in the bank. So, it's closer for the year, and also I would say that it was extremely volatile in the beginning of the quarter and started to stabilize somewhat and it's a bit more stable and feels a bit more predictable today, than it did at the beginning of the quarter.

Operator: Gary Balter, Credit Suisse.

Gary Balter - Credit Suisse: The question is, I'm surprised you guys are even on this call, because the clients who call me tell me you're about to go bankrupt because of the internet, could you talk about what you're seeing in terms of more availability, pricing et cetera and any reactions you've done, because the quarter looked pretty good for a Company that's going under.

David K. Lenhardt - President and COO: Yeah Gary, it's David. We've talked in the past about this, as we think about what we call omnichannel online and e-commerce. Sales are a piece of that. We've seen that, that portion of our business in terms of the industry from our perspective remains relatively stable. We think it's today growing at about 12% to 14% a year in terms of the industry, we think it's about a 2% to 3% online penetration of the pet industry. We've continued to from our own e-commerce business outpace those growth rates, but we've seen a relatively – in terms of the customer response to the competitive environment out there from an online perspective, we've seen that, that 12%, 14% growth as best we can tell has remained pretty stable. Having said that, we continue to focus on improving our website experience. We continue to focus on building new omnichannel capabilities, because we do think it's important to be relevant to our customers as they interact with us both online and in our stores.

Gary Balter - Credit Suisse: Just on a different topic, you had one of your big suppliers and I know you are not going to want to discuss specific suppliers but one of your bigger suppliers changed their format in their advertising approach and their pricing and I think the formulation of their products. Did that help or is that something that you view as a potential driver of your business for the next few quarters?

Robert F. Moran - Chairman and CEO: Yes. I mean again we work with all of our vendors and innovation is really important for us and I think each of our vendors adjusts and reacts and we partner with them very closely, our merchant team to deliver what we feel the customer needs. So I think as particular vendors work with the mix of everything you just said whether it be price, whether it be marketing, they are driving different results and I think – I wouldn't point to any one vendor or anyone product. I think we are seeing momentum particularly on the consumables side across the board.

Gary Balter - Credit Suisse: Then finally and then I will get off. Is there any special feed for cicadas that you sell?

Robert F. Moran - Chairman and CEO: Gary, not that I can off the top of my head think. But I am glad you are thinking of us for that. We are going to ready 17 years from now.

Operator: Michael Lasser, UBS.

Michael Lasser - UBS: At the risk of sounding like a broken record very best of luck to both Bob and Chip. You have done wonderful things for the business. So the question I have is on the merchant margin decline in the quarter. Can you expand on what drove that? Are you at the point right now where your merchant margin is tapped out or do you think that as you get through the bulk of the dog resets that you will still have more opportunity in the horizon?

Chip Molloy - EVP and CFO: Michael, it's Chip. The merchant margin rate is down a little bit. It's really mix driven hardgoods versus consumables. Hardgoods was not – it was a solid quarter, but it wasn't as good it's been in the past. Consumables continue to make up the bulk of the growth in the Company. But we feel very good about our hardgoods business as you heard David speak too. We are going to continue to innovate. We have to continue to drive demand in that space. We have to continue to innovate. We have to continue to introduce new products and with our hardgoods reset this year we're bringing in new SKUs and we're going to continue to drive what we believe is demand in that space. As it relates to the margin, it was just down a little bit from the merch side. I think as we go through the rest of the year, working hard to keep that flat to slightly up. The good news for us especially in this quarter and I think you will see it for a couple quarters to go is the services is kind of making up for that. So, what you saw in services pick up that's – we have some new people running our services division. They are doing a very nice job. They are working at it in the hotels. They have – we did a price increase on the hotels, while at the same time they are continuing to bring out some cost efficiencies. They're leveraging the call center. They are getting add-ons through the call center and it's less expensive to operate from that perspective. So, that's going to help from a go forward perspective to sort of net it out.

Michael Lasser - UBS: Chip, when you talked about some variability in the comp trends over the quarter now stabilized. What piece of it was more volatile, the ticket piece or the traffic piece and what's kind of stabilized?

Chip Molloy - EVP and CFO: Traffic. So, it really was a – I don't think we were any different, not to make excuses. I don't think we were really any different than most of the retailers out there. You see the ebbs and flows of the tide and we love to be always be sort of exclusive of where the tide goes, but we like other retailers – when there is more traffic in the parking lot, we're going to benefit from it, when there's less, it's also going to impact us slightly as well.

Michael Lasser - UBS: Then my last question is on the segmentation of your customer base, you've done a fantastic job in the past of breaking down your customer group in three different buckets. Can you talk about how – it's been a little bit since you've updated Smart with Heart, what are you seeing from each different customer base? Do you see any risk that – maybe the least attached customer could gravitate online or maybe even more ominously that your most committed customer will start to be better served by some other competitor?

David K. Lenhardt - President and COO: Michael, it's David. As we look at all three of those segments as well as new customers, coming into our store, we're actually seeing pretty consistent growth rates across all of those segments. So, we feel good about that. We'll give you a more detailed breakout of that in our Investor Day coming up, but like I said, we've seen very consistent growth across all of the categories which we're happy to see.

Operator: Alan Rifkin, Barclays.

Alan Rifkin - Barclays Capital: With last year being still warm, coupled with this year being so cool, could you, Chip, describe the effect on flea and tick in particular?

Chip Molloy - EVP and CFO: Yeah it was material for that category on flea and tick and then it did drive our overall hardgoods performance down. We were essentially flattish to slightly up in hardgoods overall, but the expected performance of hardgoods was down than what we thought and it was driven primarily because of flea and tick.

Alan Rifkin - Barclays Capital: Did flea and tick, in and of itself have any negative impact on the comp or it's just not enough weight?

Robert F. Moran - Chairman and CEO: Well it's a pretty big category for us now and yes it did. We wouldn't break it out. But it would have some impact on the overall comp and because now it's a product that – we got shrink under control a couple of years ago, it's actually at a margin rate that's above the corporate average. It's not in line with a lot of the hard goods but it's above the corporate average. So when you're selling less of it then you expect they will lessen year-over-year though still a little bit of a drag on the rate as well.

Alan Rifkin - Barclays Capital: Just a little bit more information on the dog resets, since it's so material. How long will it go for, how disruptive will it be? Will this be a significant cost in and of itself on the P&L in the quarters in which you're doing the reset? If you can just give any more color that you can on that program in particular?

David K. Lenhardt - President and COO: We are going to start it in June. It's going to go through August. In terms of disruption I would say we are going to see minimal. I think we've gotten very good over the years at planning resets both the actual execution of them in the store, the markdowns prior and in terms of the cost that's all baked into our guidance for the year. In terms of kind of the details of it and I think this is going to be continued evolution of our innovation and I think this is a big piece of it, a couple of things. First of all, this is the biggest reset we've done actually in the Company's history. It's about a third of the total space in the store and as we said earlier, we are introducing a 1,000 new items. Now I do want to point out when I say new items, on a net basis, it's going to be flat. So we are bringing in those new items but as part of this we are optimizing and taking out the slower movers. A couple of things you'll see us introduce as part of this, one is, we are going to continue with exclusivity and really leveraging the humanization of pets' friend that brings human brands into the pet space. So, you're going to see Burt's Bees in health and beauty. You're going to see (Off) in Flea and Tick, you're going to see Shout in Stain and Odor. We were very excited last year, with what we did with marbles, so you're going to see its coming out again with limited edition marble sets that are going to be related to the summer movies, some of which are out now, and then there's going to be some more fundamental space and adjacency changes. So, we are going to be expanding the space in the more profitable categories and from an adjacency perspective if I can give you a couple of examples. We've got a number of our stores today, and I'll use the toy aisle as an example, where we half the toy aisle is on side of an aisle and then the other one you have to go all the way around to the other. We're going to combine those into a valley in all of our stores, and we tested that we liked the answer there. Things like puppy pads in Stain & Odor. Today, in many of our stores, the puppy pads are in one aisle and you've got to walk 50 feet to get to the Stain & Odor. Now, they're going to be right next to each other. So, this is again really the first time we've been able to holistically look at our entire dog hardgoods section, and we're excited about both the innovation and the productivity it's going to drive and you'll also see some new fixtures in our stores, for example, around things like beds. Today, if you go into our bed wall as we call it, it's very hard to maintain, very messy from a customer perspective. We have some new fixtures that are much more organized that we know our customer likes. So, again, we'll start in June, and go through August with that.

Alan Rifkin - Barclays Capital: Will these resets be done in off hours and with the majority of the reset in Q2, I mean, is there an earnings impact that you've already factored into your guidance – what are we talking about in terms of cost, Dave?

David K. Lenhardt - President and COO: Yeah, it is absolutely in our guidance book, the cost and the revenue side of it. It is all going to happen overnight.

Operator: Peter Benedict, Robert W. Baird.

Peter Benedict - Robert W. Baird: My first question is, when you get back to the online stuff and obviously your business is doing well there. What are you selling online though? There's been a lot of talk about food, but then we hear from some of our contacts that kind of some of the higher bigger ticket hardlines are what sell. Can you give us a sense of maybe what's been performing particularly well online and do you make any adjustments in your in-store merchandising mix to account for that?

David K. Lenhardt - President and COO: Yeah, I mean, to answer your last question, this is such a small portion of our business. It's not influencing kind of assortments in the store. Having said that, what we have been doing is adding SKUs online that you can't find in our store and we've been happy with the results there. As we've looked at the online pet space and as we look at our own business, the categories that do better are the other categories that are higher ticket, higher-margin and lower weight, and when you think about our store things like flea and tick are a natural category and I think you see that today in the online space. So, those are the types of categories that do better.

Peter Benedict - Robert W. Baird: Then when you're thinking about the food category, can you talk about maybe how the gap in performance between your grocery brands and your premium food brands – I mean, obviously it's been big for a while, has that gap – did that expand during the first quarter, so is that getting wider or pretty much the same, what's going on there?

David K. Lenhardt - President and COO: Yeah, I would say Peter, it's pretty much the same. It's been pretty consistent and as you said, we've seen that trend be pretty consistent over many quarters now.

Peter Benedict - Robert W. Baird: Then last question, just on the small store tests, any initial commentary? I know you have been testing some smaller stores, just what's the latest thought there?

Robert F. Moran - Chairman and CEO: Yes. No new commentary yet. I mean we are working our way through opening all 12 of them through this quarter. Again the intent is to really learn once they are up and running, both customer demand, how to operate them and then we will evaluate from that point forward. So nothing, it's too early to tell right now.

Operator: Christopher Horvers, JPMorgan.

Christopher Horvers - JPMorgan: A question for on the OG&A side, you guys took up the growth here to 4% from 3%. Can you talk about what's driving that and what's changing versus your original forecast?

Chip Molloy - EVP and CFO: It's a subtle nuance so it's advertising. It is just some of the IT projects, (indiscernible) drawn a little bit more than they were. But at the end of the day the ones that are rounding them, or three ones are rounding them or a four, it's materially different.

Christopher Horvers - JPMorgan: I guess is it the omni-channel effort is stepping up here and that's just causing around the round up versus what you previously thought?

Chip Molloy - EVP and CFO: No. Some of it is discretionary choice on the advertising side. I would say its predominately on that side and IT projects in the omni-channel efforts. Those are well planned before the beginning of the fiscal year. So we have a good understanding as to how that's going to go through.

Christopher Horvers - JPMorgan: Then in terms of the new Wag program, I don’t know if you saw, they are just going to test out a prime like membership, resigning for free shipping and then at some point they are going to charge, and you can order from Wag and Soap.com and Diapers.com, and I was just – and also at the same time this year, they took the free ship level down from 50 to 35 granted, I would guess if you have a $40 something average ticket, 40% actual food, it's maybe high-teens, average food ticket within there. So, I guess is that right and how do you think about those two changes, is it incrementally worse is it something where you still feel like the moat's wide enough?

David K. Lenhardt - President and COO: Chris, it's David. We're not seeing any discernible impact at all from that and I think when you look at Wag. I think you can't look at the pet side in isolation as you look at the economics and I think that's what different in particular about Wag because given that they're a part of Quidsi which has Diapers and Casa and Yoyo. They're very much adopting kind of the vertical strategy going after moms and going after convenience and so those changes in terms of the potential prime membership and the lowering of the shipping fees apply to anything you buy on any of their vertical. So, I think when you look at them it's a totally different model that is attaching across multiple verticals.

Christopher Horvers - JPMorgan: Then just on a final one. I mean is it just in your comment about the trend in the business throughout the quarter, because it sounds like most retailers February, there was a tough start with the tax refunds and then March, obviously weather was awful. So, there's ending at 3.5 and seeing more stability suggests that, you ended at the high-end of the range, just especially in light of you've narrowed down sort of a 3% to 4% comp growth were it previously, you had a bit of a wider range in your guidance?

David K. Lenhardt - President and COO: Chris, I would say that is embedded in our guidance for the quarter and for the rest of the year and so, yes, we have narrowed down. Typically we would give sort of a 200 to 400 basis points range, we have sort of narrowed that down for the next quarter. This quarter that that we're in today, and that's just the predictability of it, but we feel pretty confident that we're going to land somewhere in that range.

David K. Lenhardt - President and COO: Maybe just to add a little bit more color to that Chris I would say that, as we said, the first couple of weeks of the year were very, very choppy and I think we saw a stabilization after that period that continued for the rest of the quarter.

Operator: Scot Ciccarelli, RBC Capital Markets.

Scot Ciccarelli - RBC Capital Markets: First of all, I would say that our survey data would agree with your comments regarding data would agree with your comments regarding low penetration rates for the Internet channel, but I guess, my question is, do you think that there's a point down the road, where you need to accelerate the investments you're making on the e-Com side simply because it is starting to gain traction within the pet space?

David K. Lenhardt - President and COO: Yeah, Scott, it's David, I mean, again, I think – we very much think omnichannel is important and we are making investments in it. I think the key is we feel it's really important to be relevant to our consumer. However, they want to interact with us and as the data would show in our best estimate in the market, we're not seeing that consumer in any very big way move online, and I think we're going to let the consumer lead us to where we need to be and we think right now, the consumer wants to interact with us in whatever form they want and as we think about omnichannel, we're spending a lot of investment and focus on improving our website experience, improving navigation, the pet food selector and making it feel more like our store experience online and we think that that's important for us to do and we're continuing to focus on that.

Scot Ciccarelli - RBC Capital Markets: Then secondly, Chip, you made the comment regarding the adverse impact on flea and tick, should we see some catch up in the second quarter or do you simply lose some of those sales at some point?

Chip Molloy - EVP and CFO: Technically you are going to lose some because if you think about it, it's an application that lasts 30 days and it's in the moment. I mean if there are no ticks out there for like 30 days you are not going to sell it.

Scot Ciccarelli - RBC Capital Markets: So that's not something that you are expecting some sort of catch-up in the second quarter?

Chip Molloy - EVP and CFO: I wouldn’t expect a catch up, no.

Operator: David Gober, Morgan Stanley.

David Gober - Morgan Stanley: So I just wanted to touch on the hardgoods business for a second kind of excluding the resets that are coming up. Obviously there is some impact from flea and tick, but the last couple of quarters seemed like you have had a little bit of lag on the hardgoods business where we would probably expect to start to see that kind of catch up here as household formation starts to improve and I think you guys talked about pet acquisition improving a bit as well. Is there any – are you seeing any trend in terms of pet acquisition that are additive, is there something offsetting that or is it just that you are not seeing pet acquisition pick up meaningfully yet?

Robert F. Moran - Chairman and CEO: The way we look at pet acquisition is, we use the adoptions in our stores as a proxy. We do approximately about 1,100 adoptions per day in our stores and what we saw was the last quarter of '11 and then a sequential improvement through '12. What has happened in Q1 '13 is that sequential improvement has continues. So it's encouraging. Obviously we are seeing some of the same trends in housing that will support us down the road, but we think there is a little bit of a lag effect on the housing side before pet acquisition gets a little bit (fee per book). We are encouraged, there is no question about it, and we are complementing that in the stores with our adoption kits and our puppy kits to really help our pet parent customers. So, it continues.

David Gober - Morgan Stanley: Is there anything else that you are seeing, I mean I'm assuming that maybe pet acquisition hasn't picked up, it hasn't really been there for a while. But is there anything else you're seeing in the hardgoods business that's driving that business to lag versus consumables given that you do have the traffic coming into the stores?

Robert F. Moran - Chairman and CEO: No. I don't think so. I think the hardgoods business – first of all you think about the hardgoods business, that's probably the most competitive business that we are in, because everybody out there in the world from Bed Bath & Beyond to the Targets, they have all got hardgoods everywhere. So you got to continue to stay relevant to continue to drive comps there. I think those are the efforts you see. We had some win behind our back when we introduced, just starting a few years ago and really started to make ourselves relevant in that space, and I think you are hearing more and more about the efforts that we are putting behind, as David spoke to like Tommy Bahama and the reset, et cetera. Those are things you just have to do in that space to continue to drive positive comps, and I think we are doing the right things and we are still driving comps that are even slightly positive. But we are in the positive range, and we are hopeful that at some point, the housing market, you are going to start to see acquisitions move meaningful that you will start to see that reverse. We are just not yet seeing that kind of activity take place within really on the pet acquisition front as well as all the way down to the store level in the hardgoods space.

David Gober - Morgan Stanley: Just switching gears for a second. Could you call out the contribution from inflation this quarter?

Chip Molloy - EVP and CFO: It was – not to be terribly specific, but it was just a hair above 100 basis points.

David Gober - Morgan Stanley: I guess just finally, I know you guys have been talking a lot about what you are doing online and there's a couple of different places that's going to show up obviously in terms of IT versus on a CapEx side versus OpEx, but is there any way to quantify kind of the overall investment that you're making between the integration of GSI and some of the other stuff that you're doing there?

Chip Molloy - EVP and CFO: No, I would say that we're not going to break it out and quantify it. I would tell you that we are making what we would believe appropriate investment level, I would tell you, if you just listen to the activates that David speaks to, it's not a meaningless number, it's a pretty meaningful number, both on a CapEx perspective, as well as in a headcount perspective as well as things that we're doing to the site, operating expense perspective, but I would tell you that you're not going to – we're not underinvesting, because we're not building DCs and so, if you go out there and you want to look into those companies that are spending huge amounts of money in omnichannel, a lot of that is huge investments in the DC networks and that's not where we're going and I don't suspect that, that will be a space – in this business, we would ever need to go.

Operator: Daniel Hofkin, William Blair & Company.

Daniel Hofkin - William Blair & Company: Just I guess, to follow on a little bit from the last couple of recent questions as it relates to margins within the categories. Can you say specifically whether margins were up within both food and hardgoods, just on a – within the categories themselves?

Chip Molloy - EVP and CFO: They are and we are still seeing accretion there driven primarily once again by the quality of goods going into the basket, but then it's been offset a little bit by the over performance of consumables versus hardgoods.

Daniel Hofkin - William Blair & Company: So but within hardgoods itself the merchandize margin was up?

Chip Molloy - EVP and CFO: Yes.

Daniel Hofkin - William Blair & Company: If you – I mean I was sort of reading between the lines between a couple of the comments, it sounds like even if you take out the flea and tick the negative impact on the comp it sounds like maybe the hardgoods comp, is not quite what it has been the last couple of years or what you might have expected. Is that fair to say?

Chip Molloy - EVP and CFO: Yes. I would say that the hardgoods comp is less than it's been the last several quarters. However, I would say that there is a meaningful piece of that associated with flea and tick.

Daniel Hofkin - William Blair & Company: As it relates to the initiatives going forward and the impact on the gross margin, looking out over the next couple of years in terms of the Fishbone framework, any comment regarding how much of the pretax margin beyond this year is likely to be gross versus OG&A?

Chip Molloy - EVP and CFO: Well I will come back to the idea that if you look at the Fishbone, the two hardest boxes to drive each and every year and each and every quarter, one, would be the comp of course. Then the second, and I would say, it's even more challenging, each and every quarter would be the merchant services margin, the combination of that to have that continue to be flat to increasing. It is the most volatile box, the hardest box, (and it's the) only one we work on the most. So you hear about the innovative products, you hear about our desire to drive innovation through our hardgoods business. You hear about – you just go in our stores after our consumables reset and you will see how much more space we are going to get, the velocity SKUs that are happening on both on our super premium and RX businesses. Those things are to drive top line but to also keep that merch margin stable through expanding and I am pretty confident listening to all of the things that we have in the hopper for this year and thinking about the run way of things that we are working on for next year and thereafter. That we are going to continue to be a little bit – maybe squared a little bit out on there. But to say it's ever going to be meaningful, we have never said that and I don’t know that we will know but that will happen. But we are very focused on trying to keep it stable to slightly expanding.

Daniel Hofkin - William Blair & Company: As it relates just back to the flea and tick for a second. Can you isolate if that's just weather in the first quarter or you did call it out as a category within so-called hardgoods, but is potentially more susceptible to migration online either on your side or elsewhere. Just curious whether you're able to isolate it, is it just weather, whether there might have been…?

Robert F. Moran - Chairman and CEO: I would say we don’t (indiscernible) it. We try to be the retailer that doesn’t use the weather. So I think we do a pretty good job of that. Yes. It is a business that – it's clearly – if year-over-year if it's warmer in any given period year-over-year than it was the previous year that business is going to react positively and if its colder year-over-year in that space it's going to react negatively. It's just the nature of the products, such a pretty meaningful product. But that said we still have a large mix of other goods. It isn't anything to do with online and yes, we do sell it online but we've never – we keep the same prices in stores, online, so I would argue that we're not as competitively priced online for that product. So, we haven't driven volume that way. So, it is clearly something driven by the temperature.

Robert F. Moran - Chairman and CEO: Dan, I would just add into that, that we definitely wouldn't think that it's online and I think there are online competitors out there, who, a large portion of their business is flea and tick, that if you look at their results, would suggest that it's not online.

Daniel Hofkin - William Blair & Company: Good quarter guys, best of luck to everyone.

Robert F. Moran - Chairman and CEO: Thank you. Well, I think we've come to an end. I want to thank everyone for joining us today and we look forward to speaking to you again in August. Thank you, very much.

Operator: Thank you, ladies and gentlemen. That does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.