Petsmart Inc. (PETS), the top U.S. pet supplies chain, Thursday said quarterly earnings rose on improved pet services sales, but its stock sank as much as 12 percent as results lagged analysts' expectations.

Phoenix-based Petsmart said earnings rose to $34.1 million, or 23 cents a share, in the second quarter ended Aug 1, from $28.1 million, or 19 cents, a year earlier.

Earnings in the latest quarter included a tax benefit of about $8 million as well as other items.

"Without that tax benefit, it woulrow 6 percent.

Holdsworth rated the shares as "buy." Wedbush does not have an investment banking relationship with Petsmart.

Harris Nesbitt (search) analyst Sean McGowan agreed that Petsmart's earnings were mainly lifted by the tax benefit.

"In a skittish market, people are looking for excuses to be negative," McGowan said.

McGowan, who does not own the stock, rated Petsmart shares as "outperform." The broker did not receive any fees from Petsmart in the past 12 months.

Petsmart, with more than 675 stores in the United States and Canada, expects third-quarter earnings of 24 cents a share, with same-store sales rising 5 percent to 6 percent.

The earnings forecast matched analysts' estimates, according to Reuters Estimates.

For the full year, Petsmart forecast earnings of $1.17 to $1.18 a share on same-store sales growth of 7 percent. Wall Street expected $1.18 a share.

On Wednesday, smaller rival Petco Animal Supplies Inc. (PETC) posted stronger quarterly earnings on a 6.7 percent increase in same-store sales.

In the past several years, consumers have consistently spent more on their pets regardless of the economy.

At the same time, both Petsmart and Petco have posted improved results, selling more big-ticket items like accessories and pet services rather than lower-priced pet food.

Petsmart shares were down $1.61, or 5.4 percent, at $28.21, in heavy trading on Nasdaq (search). Volume topped 10.5 million shares at midday, more than five times its average daily volume of 1.9 million.

Petco climbed $2.59, or 8.7 percent, at $32.31, also on Nasdaq.