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Spending on pet supplies and food has grown as cuddly creatures such as these have gained the status of children in many families.
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PetSmart’s stock fetching increased investor attention after rival’s buyout
Barry Cohen

VALLEY – PetSmart (NASDAQ: PETM) is hoping a three‑pronged marketing strategy will enable the company to take a bigger bite out of the more than $38 billion U.S. pet supply industry.

The Phoenix‑based retailer seeks to gain a leg up in an increasingly competitive environment by focusing on driving traffic, differentiating its brand and increasing in‑store customer spending. Although PetSmart is the largest specialty pet retailer, giant merchandisers Wal‑Mart and Target dominate the market.

PetSmart last week reported net income of $34.6 million for the second quarter of 2006, down slightly from a year earlier.

According to a company news release, second quarter results were affected by acquisition expenses and costs associated with a project in the company’s Phoenix distribution center.

During the quarter, the company also recorded a pre‑tax charge of approximately $3.9 million for a change in accounting treatment.

Sales for the quarter grew nearly 12 percent from the same period a year earlier to $1.0 billion.

PetSmart also said it would accelerate certain investments scheduled for 2007 and 2008 into fiscal 2006. “The investments we’re making are focused on building a strong infrastructure and enhancing the company’s ability to grow and gain market share,” Chairman and CEO Phil Francis said in the news release.

The announcement contained other good news for investors. PetSmart said it would repurchase $250 million of its shares, or about 7 percent of those outstanding, during the next 12 months.

The company’s stock is trading at about $24 a share. It’s 52‑week low is $21.13. PetSmart shares have approached $30 during the past year and were as high as $35 as recently as January 2005.

PetSmart is about a lot more than dog food and kitty litter. The company’s services include grooming, pet training, PetsHotel and Doggie Day Camp. “These services attract new pet parents to our business model and let us create strong, lasting bonds with them,” according to the company’s 2005 annual report. In fact, pet services is the fastest growing part of the company’s business, accounting for sales of nearly $300 million in 2005, up about 25 percent from the previous year.

PetSmart certainly appears to be barking up the right tree. Americans already own 359 million pets, including 164 million cats and dogs, according to the American Pet Products Manufacturers Association; more than six of every 10 U.S. households own a pet. Besides growing ownership, increased spending is being driven by people’s strong emotional attachments to their pets. Over the past several decades, pets have gained nearly the status of children in the modern family, according to the National Science Foundation.

This affinity for pets is a good reason PetSmart doesn’t expect economic factors to hurt its business.

“Despite high fuel prices and a shaky economy, we’ve seen no evidence of any macro‑economic or competitive impact to our business,” said Bruce Richardson, PetSmart director of external communications.

“Our customers treat their pets as one of the family, so they don’t give them up, nor do they give up on things that are important to their pets’ health and well being, such as premium foods, grooming, boarding and training,” added Richardson, emphasizing that these are products and services that big discounters such as Wal‑Mart and Target don’t and can’t offer.

PetSmart’s scent might be attracting more investors now that rival PETCO recently agreed to be acquired for about $29 a share by a private investment group.

In fact, an article in the San Diego Union‑Tribune said that the acquisition expense PetSmart recorded during the second quarter was related to an unsuccessful bid for PETCO. Richardson said that for legal reasons he could not name the candidate.

Morningstar analyst John Owens said in a recent article published on the investor Web site TheStreet.com that his research firm considers PetSmart to be the leader, by far, in the growing pet supplies industry.

PetSmart “has big advantages over PETCO, and the PETCO transaction only signals that there is value in these companies that wasn’t being recognized by the market,” he wrote.

Owens’ optimism was echoed by Nathan Parmelee of The Motley Fool (fool.com), a Web site designed to “educate, amuse, and enrich the individual investor.”

In an Aug. 16 article on the Web site, Parmelee, noting Pet Smart’s cash‑generating capabilities, wrote that he continues to find the shares quite attractive, valuing them at about $29.

“If the company’s investments in efficiency pay off, it’s quite possible that my estimate will prove to be conservative,” he added.

Reach the reporter at barry@thedesertadvocate.com.

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