Why This 1 Retailer Begs Notice

PetSmart’s (NYSE: PETM  ) most recent quarterly results further secure the pet retailer’s position as the dominant top dog. Wednesday’s results, which were announced after market close, have investors licking their chops. Let’s take a look at how PetSmart hit it out of the dog park.

Praise for PetSmart
Second-quarter earnings per share were up 31%, compared to the same period last year. Same store sales grew 7%, attributed to strength across all merchandising categories.  Sales for PetSmart services, like grooming, training, and boarding, increased 7%. 

This recent news continues PetSmart’s string of good behavior. Net sales increased 7.6% annually for the past five years, and same store sales were up 5.4% in 2011. The company is expected to grow at a 17% annual clip over the next five years.

Pampering our pets is big business
Pet industry sales are projected to top $74 billion by 2015. Consumer researcher Packaged Facts sees "the ensconcement of pets as members of the family not just as a trend, but as a long-term societal shift favoring even greater spending on the pet market in the years to come."  This news is like a scratch behind PetSmart ears.

Not only can you adopt Benji, get him vaccinated, buy his food and meds, train him, and get him primped at PetSmart, but you can enroll him in their doggy day care, and board him there, too. And it won’t stop there. PetSmart’s broader goal is to grow its brand through "innovation and differentiation."

As far as innovation, the company is developing strategic partnerships with popular brands, like GNC and Toys "R" Us, and captivating personalities. The company united with Martha Stewart Living Omnimedia’s (NYSE: MSO  ) "Martha Stewart Pets" line and, more recently, with Bret Michaels' (yes, of 1980’s rock band Poison fame) "Pets Rock" collection of tough dog toys, pet beds, and apparel.  PetSmart looks to leverage these popular identities with pet parents and, according to management’s most recent earnings conference call, this strategy is paying off nicely.

As far as differentiating itself from big dog competitors, PetSmart is focusing on "delivering authentic customer connections."  The company recently completed training for North American store associates, teaching them to engage with pet parents in more personalized ways. The company continually looks to differentiate from competitors through its service offerings like grooming, boarding, and its Banfield veterinary clinics.

Banfield, through its 800 veterinary hospitals in the U.S., has had a long relationship with MWI Veterinary Supply (Nasdaq: MWIV  ) , which provides animal health products to veterinary practices in the U.S. and the U.K. As PetSmart service sales increase, look for companies like MWI Veterinary Supply to potentially benefit.  Take a glance at how both companies have performed.

PETM Total Return Price Chart

PETM Total Return Price data by YCharts

Source: YCharts

Over the past five years, PetSmart and MWI Veterinary Supply stocks moved in tandem, returning roughly 148% and 167%, respectively. By comparison, the Nasdaq returned nearly 23% during the same period.

Big dogs circling the park
Pet owners shell out money at specialty chain stores like PetSmart, and privately held Petco, big-box merchandisers, and online. While pet products encompass the central focus of PetSmart and Petco, more mainstream retailers, like Costco (Nasdaq: COST  ) and Wal-Mart, offer ever-widening varieties of toys, pet food, and treats. And while Wal-Mart and Costco sell an array of pet-related products, their Investor Relations Departments don’t offer specific pet product related numbers; maybe evidence to what an insignificant portion of the mega-retailers businesses this actually is.

Currently, only 5% of overall pet supplies sales are online, but this is expected to increase.  And e-retailer Amazon.com (Nasdaq: AMZN  ) sits ready to pounce with its Wag.com, a pet-related products site launched last year, featuring more than 10,000 products, free shipping on orders over $49, and a two-day delivery promise. Because nearly 90% of PetSmart’s sales are derived from merchandise, as opposed to services, Amazon.com has the potential to bite into PetSmart’s sales. But PetSmart won’t take these online attacks lying down -- the company now offers 8,000 SKUs online beyond what it offers in-store.  Of these, 3,500 were added this year alone.

A fierce breed
The e-retailing format can’t compete with what defines PetSmart’s allure -- the nose-to-tail experience of being among like-minded pet owners. PetSmart’s strong brand, differentiation, and innovation position the company for continued success. Watch to see whether PetSmart continues to play nicely in coming quarters.

Even though I think PetSmart is the smartest play in the pet retailing market, Amazon.com and Costco are two retailers strongly worth considering for other compelling reasons. Read more about the exciting prospects for these two retailers in a free report here.

Fool contributor Nicole Seghetti owns shares of Costco. She’s been known to spoil her beloved pooch. The Motley Fool owns shares of Costco Wholesale and Amazon.com. Motley Fool newsletter services have recommended buying shares of Costco Wholesale, Amazon.com, and PetSmart. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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