Analyst upbeat on Petsmart's prospects

Thomas Weisel Partners analyst Matt Nemer, who met recently with PetSmart management and investors, said the company is "one of the safest places to be in specialty retail with approximately half of revenue related to consumables."

Moreover, the company has an expanding pet services business that is unlikely to face any competitive challenges for some time, Nemer said.

However, Nemer warned the average stay at its PetHotels have decreased, while pet daycare and training have also softened. However, Petsmart raised prices for key services, such as grooming, which may offset weak demand.

"The services side of the business has experienced some softness in hotels, daycare, and training, but demand for grooming and veterinary services has remained relatively resilient," Nemer said.

Regarding competition, rival Petco is "relative benign," as the company remains focused on cash flow, while Wal-Mart Stores has ramped up advertising. The world's largest retailer rolled out a new marketing campaign focused on fewer trips for consumers and relocated its pet department to higher-traffic areas within the store, like grocery.

The analyst maintains an "Overweight" rating and $29 price target on Petsmart's stock.

Shares of Petsmart lost 25 cents to $24.48 in morning trading.