In Retailing Years, PetSmart Shows Its Strength
November 22, 2013 Leave a comment
In Retailing Years, PetSmart Shows Its Strength
SPENCER JAKAB
Nov. 21, 2013 4:40 p.m. ET
Before Americans became obsessed with 140-character bon mots or status updates, cat videos dominated cyberspace. Even today, we spend over 10 times as much on our pets as the combined U.S. revenue of Twitter Inc. TWTR +2.46% and Facebook Inc. Fluffy and Fido aren’t only big business but fairly recession-proof, as shareholders ofPetSmart Inc. PETM +1.44% happily discovered. The retailer went public 20 years ago but spent the first 15 tracking the broad stock market. It fell hard in the early months of the financial crisis as investors figured superpremium pet foods, if not pets themselves, would be a casualty of the downturn.Same-store sales growth merely slowed to a still-respectable 1.6% in fiscal 2009 from 3.8% in 2008; it reaccelerated to 6.3% in 2012. Now, though, with the stock having rallied 385% over the past five years, investors are edgy again.
Back in August, PetSmart beat quarterly earnings expectations, but the stock tumbled 5% that day. The following month, it threw investors a bone with a dividend boost and a share buyback. It is expected on Friday to report earnings per share for the fiscal third quarter of 86 cents, up from 75 cents a year ago. In an earlier bout of nervousness, PetSmart’s stock took a tumble in January. That was after a Nomura analyst downgraded the stock, questioning the sustainability of margins against online behemothAmazon.com Inc., AMZN +1.75% which sells pet food and supplies. It is clear why Amazon is interested.
In the past 18 years, the amount Americans spend on pets has increased at a compound annual rate of 6.5% to over $50 billion. But PetSmart generates revenue from things Amazon can never replicate. In the past six years alone, PetSmart’s sales from services, such as pet grooming, have doubled to nearly 11% of revenue, far outpacing tangible goods.
To boot, PetSmart is doing well by doing good. Last year, a 5-year-old Husky named Dodge became the five-millionth pet adopted through one of its stores. Dodge may generate nearly $5,000 in revenue for PetSmart over his remaining life expectancy based on typical pet expenditures.
At a forward price/earnings ratio of 17.1 times, a bit lower than the stock’s prerecession level, slowing sales momentum doesn’t leave shareholders exposed. As for the threat of pinched margins from online competition, brick-and-mortar PetSmart hardly seems like the underdog.
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