UPDATE 2-PetSmart Q4 beats Street; sees strong 2010

* Q4 EPS $0.61 vs est. $0.56

* Q4 sales $1.41 bln vs est. $1.4 bln

* Sees Q1 EPS $0.41-$0.44 vs est. $0.38

* Sees FY10 EPS $1.73-$1.83 vs est. $1.68

* Shares up 11 pct (Recasts; adds details from conference call, analyst comment, updates share movement)

BANGALORE, March 3 (Reuters) - Pet products retailer PetSmart Inc's (PETM.O) quarterly profit beat market estimates as pet lovers spent more money during the holiday season, and the company forecast a strong 2010, sending its shares up as much as 11 percent.

For the full year, the company expects to earn $1.73-$1.83 a share on revenue on total sales growth in the low-to mid-single digit range.

Analysts were expecting earnings of $1.68 on revenue of $5.53 billion, according to Thomson Reuters I/B/E/S.

Wedbush Morgan Securities analyst Joan Storms said she thinks the consensus forecast underestimated the company's potential.

"So the Street was just not believing them or not giving them credit for the initiatives they've been working on," she told Reuters before the company's conference call, adding that she still thinks PetSmart's outlook could be conservative from a same-store sales and gross margin perspective.

On the conference call, the company said it expects operating margins in 2010 to expand 10-30 basis points in 2010, driven primarily by gross margin expansion of 10-20 basis points.

The company also said it will henceforth report reimbursements from the Banfield pet hospitals, operated in PetSmart stores, as part of revenues as mandated by the Securities and Exchange Commission, impacting margins to the tune of 10-20 basis points.

The company currently reports these reimbursements, expected to total about 35 million in 2010, as an offset to rent and occupancy costs.

For the first quarter, the company said it expects to earn 40 cents to 44 cents a share and sees same-store sales growth in the low-single digits.

Analysts on average were expecting the company to earn 38 cents in the first quarter.

For the fourth quarter ended Jan. 31, the company posted a net profit of $75 million, or 61 cents a share, compared with $78.4 million, or 62 cents, last year.

Net sales rose 3.4 percent to $1.41 billion. Same store sales grew 1.5 percent.

"Improvements in traffic, as well as a strong holiday performance led to better results than expected for the quarter," Chief Executive Bob Moran said on the conference call.

The company sold through all of its holiday season inventory and Chief Financial Officer Chip Molloy believes the health of the company's inventory is well positioned for 2010.

The impact on the company's merchandise margins also continues to decline as it laps shifts in consumer preferences away from the higher margin hardgoods category and moves beyond disruptions from the company's reset of the category.

PetSmart reset the hardgoods category, which includes products like collars, leads and toys, to get rid of certain "low productivity" items. The company completed the major reset of the category in September 2009.

Analysts were expecting the company, which also offers boarding, grooming and training services, to earn 56 cents, before items on revenue of $1.40 billion.

Shares of the Phoenix, Arizona-based company were up 11 percent at $30.71 in extended trading. They closed at $27.71 Wednesday on Nasdaq. (Reporting by Abhishek Takle in Bangalore; Editing by Maju Samuel)