1 Stock With Impeccable Pedigree

PetSmart's (Nasdaq: PETM  ) most recent quarterly results secure the company's position as the dominant pet retailer. Wednesday's report, which occurred after market close, has investors wagging their tails. Let's take a look at how PetSmart, yet again, hit it out of the pooch park.

Good PetSmart
Third-quarter earnings per share were up 50% compared to the same period last year. Same-store sales grew 6.5%, attributed to strength across all merchandising categories. Sales for PetSmart services like grooming, training, and boarding increased 8%.  

These recent results continue PetSmart's multiyear sequence of good behavior. Net sales increased 7.7% annually for the past four years, and same-store sales were up 5.4% in 2011. Over the past five years, PetSmart stock returned a wildly impressive 161%. By comparison, the Nasdaq returned 7% during the same period. Year to date, PetSmart stock is up 36%.  

And praise for PetSmart is projected to continue. Company earnings are expected to grow at an 18% annual clip over the next five years.

Big hearts, small wallets
Pets are viewed as members of the family. And we spend on them like they are. According to consumer researcher Packaged Facts, pet industry sales are projected to top $74 billion by 2015. The ASPCA anticipates the first year of ownership of a large dog will run you roughly $1,800. As the "pet parent" of a 90-pound pooch, my checkbook can certainly vouch for that.

This excessive spending on our furry companions is seen not as a trend, but as a long-term societal shift, favoring even greater spending on our pets in the future. For PetSmart, this news is like an extra cup of kibble. 

Best in breed
PetSmart plans to leverage its strong brand through licensing partnerships, differentiation through its services, and probable international expansion.

PetSmart has developed strategic partnerships with popular brands and celebrities. It united with Martha Stewart Living Omnimedia's "Martha Stewart Pets" collection and, more recently, with Bret Michaels' (yes, of '80s metal band Poison fame) "Pets Rock"  line, featuring tough dog apparel and toys. According to PetSmart management, leveraging popular identities with pet parents is paying off nicely. 

Not only can you adopt Mr. Snuggles, buy his food, and procure his medicine at PetSmart, but you can also get him trained, primped, boarded, and enrolled in doggy day care. These services mark PetSmart's biggest strength in differentiating itself from big dog competitors. To further solidify your relationship with PetSmart, store associates are trained in "delivering authentic customer connections,"  evidencing the company's desire for wallet share and mind share.

For now, PetSmart operates roughly 1,300 locations in the U.S., Canada, and Puerto Rico. This limited international reach has helped the company in recent years. It's never felt the effects of a weak Europe like most global retailers have. But PetSmart is tentatively dipping its paws into foreign waters. The company recently signed a product licensing agreement with South Korean retailer E-mart, as it looks to sell proprietary-branded products in South Korean pet stores. The company sees this as a low-risk, low-cost way to gain understanding of how the PetSmart brand is embraced in Asian emerging nations. 

Marking its territory
While pet products are the central focus of PetSmart and privately held Petco, mainstream retailers Costco (Nasdaq: COST  ) and Wal-Mart (NYSE: WMT  ) offer expanding varieties of pet supplies. But while Costco and Wal-Mart sell pet-related products, their respective Investor Relations Departments don't offer specific pet-product-related revenue figures, perhaps evidencing what an insignificant portion of the big-box retailers' businesses this actually represents.

Only 5% of overall pet supplies sales currently take place online, but this is expected to increase. And e-retailers Amazon.com (Nasdaq: AMZN  ) and eBay (Nasdaq: EBAY  ) sit ready to pounce. Amazon's Wag.com, a pet products site launched last year, features more than 10,000 products, free shipping on orders over $49, and a two-day delivery promise. Meanwhile, eBay offers over 700,000 dog supply items alone.

Since 88% of PetSmart's revenues are derived from merchandise (as opposed to services), Amazon and eBay have potential to significantly bite into PetSmart's sales. In response to the online attacks, PetSmart isn't simply rolling over. Beyond what it offers in-store, the company sells 8,000 SKUs online, nearly half of which were added in 2012 alone.

Foolish bottom line
E-tailers simply can't compete with the very heart and soul of PetSmart's appeal: the experience of being among like-minded pet parents. The company is poised for future success due to its dominant brand, differentiation through its services, and international growth prospects. Will PetSmart continue to play nice in coming quarters? Watch to see.


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