In Retailing Years, PetSmart Shows Its Strength

In Retailing Years, PetSmart Shows Its Strength

SPENCER JAKAB

Nov. 21, 2013 4:40 p.m. ET

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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.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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