QUOTE AND NEWS
Reuters  3 hrs ago  Comment 
PetSmart Inc has hired investment bank JPMorgan Chase & Co to evaluate a range of alternatives, including a leveraged share buyback and a potential deal with private equity,...
Motley Fool  Jul 18  Comment 
The pet supplies retailer is taking seriously the demands of its biggest shareholders.
TheStreet.com  Jul 18  Comment 
NEW YORK (TheStreet) -- Shares of PetSmart are up 0.87% to $69.65 in pre-market trade after it was reported that the pet products and services company is interviewing investment banks, as it faces pressure from an activist investor, sources told...
Wall Street Journal  Jul 17  Comment 
PetSmart Inc. is interviewing investment banks, as the pet-supply retailer deals with pressure from an activist investor, said people familiar with the matter.
SeekingAlpha  Jul 17  Comment 
By David Trainer: PetSmart (NASDAQ:PETM) has been in the news this week after activist hedge fund Jana Partners took a big stake in the company and advocated potential changes, including a possible private equity takeover or a return of capital to...
TheStreet.com  Jul 17  Comment 
NEW YORK (TheStreet) -- Shares of PetSmart  are lower by -1.43% to $69.03 in pre-market trading on Thursday after RBC Capital downgraded the company to "sector perform" from "outperform" on a valuation call. The firm maintained its $66 target...
TheStreet.com  Jul 15  Comment 
Story updated at 9:50 a.m. to reflect market activity. NEW YORK (TheStreet) -- PetSmart was upgraded to "equal-weight" by Morgan Stanley Tuesday. Shares of PetSmart fell -0.7% to $69.98 in morning trading. The firm set a price target of $71...
Motley Fool  Jul 10  Comment 
Jana Partners has essentially put the underperforming PetSmart on the block. Could another one of Jana's holdings be a potential suitor?
New York Times  Jul 9  Comment 
Activist shareholders of PetSmart have pushed the company to put itself up for sale. While there are other options to enhance shareholder returns, a deal with Petco is the most appealing choice, writes Kevin Allison of Reuters Breakingviews.




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PetSmart (PETM) is the largest pet supply store in North America, operating 1,149 retail stores in North America, with the average store size between 18,000 and 27,500 square feet.[1] PetSmart sells pet supplies and offers pet services (such as grooming), in addition to selling small pets. However, this lucrative retail niche has not gone unnoticed by supermarkets and big-box retailers such as Wal-Mart Stores (WMT) and Target (TGT), many of whom offer an increasing variety of pet food and supplies.


PetSmart's merchandising includes a breadth of products (about 10,500 distinct items) ranging from brand names as well as an its own private brands. PetSmart has been expanding its pet service offerings in the current decade, growing service revenues to over 10% of total revenues. These services not only earn a high margin, but also differentiate PetSmart from its competitors. Another method of differentiation is the inclusion of full-service veterinary hospitals in over 69% of PetSmart stores through a partnership with Medical Management International. Finally, despite the U.S. recession in 2009, PetSmart's net sales and same store sales grew during the year, as pet owners continued to spend on their pets in times of economic hardship.

Company Overview

PetSmart owns and operates a chain of over 1,149 pet supply stores throughout the United States and Canada. About 90% of PetSmart's revenue is derived from the sale of merchandise, including premium pet food, medicine, collars, small pets (fish, birds, reptiles, hamsters, etc) and other pet supply products. PetSmart sells products from branded manufacturers as well as its own private label merchandise. The remaining 10% of PetSmart's revenue come from pet services, such as pet grooming and training services provided on-site in PetSmart stores.

Business Financials

In 2009, PETM had total revenues of $5.3 billion, an increase from the previous year's total sales of $5.1 billion. Unsurprisingly, this increase in total revenues has increased PETM's net income. As a result of the increase in total revenues, PETM's net income increased from $192.7 million in 2009 to $198.3 million in 2009.

Business Segments

PetSmart stores carry a variety of pet foods and supplies in addition to pet services. The company divides its sales into the following segments:

Consumables (53% of 2009 total revenues)[2]

Consumables merchandise sales includes pet food, treats, and litter. PETM emphasizes premium dog and cat foods, many of which are not available in supermarkets, warehouse clubs or other mass and general retail merchandisers, as well as our private label foods. The company also offers quality national brands traditionally found in supermarkets and warehouse clubs or other mass merchandisers, and pet stores.

Hardgoods (34% of 2009 total revenues)[2]

Hardgoods merchandise sales includes pet supplies and other goods. PETM offers a broad assortment of pet supplies, including private label products, includes collars, leashes, health care supplies, grooming and beauty aids, toys and apparel, as well as pet beds and carriers. It also offer a complete line of supplies for fish, birds, reptiles and small pets. These products include aquariums and habitats, as well as accessories, décor and filters.

Pets (2% of 2009 total revenues)[2]

Our stores feature fresh-water tropical fish, birds, reptiles and small pets. PETM does not sell dogs or cats, but they do provide space in most stores for adoption and animal welfare organizations to use.

Pet Services (11% of 2009 total revenues)[2]

Pet services includes grooming, training, boarding and day camp. It also includes PetsHotels, which provides boarding for dogs and cats including 24-hour supervision by caregivers who are PetSmart trained to provide personalized pet care, an on-call veterinarian, temperature controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs.

Trends and Forces

Expansion of Pet Services

Since 2005 pet services have grown steadily. Much of this growth has stemmed from the rollout of PetsHotels at select PetSmart stores in 2005, which provide overnight boarding for pets. In addition to the growth of boarding services, PetSmart offers grooming and training services, allowing owners to drop their pets off for a day of classes with PetSmart professional trainers. These services not only earn a higher margin than most physical merchandise sales, but they also differentiate PetSmart from grocery stores and big-box retailers so that more pet owners come to PetSmart (and ideally end up purchasing their pet supplies at PetSmart while their pet is being groomed or trained).

Growth of In-Store Veterinary Hospitals

To complement its own pet services, PetSmart offers full-service veterinary hospitals in most of its stores through a partnership with Medical Management International. These hospitals provide routine examinations, vaccinations, dental care, pharmacies, and surgical capabilities. PetSmart does not receive the profits of these hospitals, but owns a portion of MMI through the partnership in the form of stock and also charges MMI license fees on an annual basis. In addition to financial benefits from its investment in MMI and license fees, these veterinary hospitals differentiate PetSmart from its competitors and draw pet owners to the firm's stores and can lead to add-on sales as owners walk around the stores.

Competition

The pet supply industry is highly fragmented and has attracted supermarkets, warehouse clubs and mass retailers in addition to the myriad specialty pet supply chains, independent pet stores, veterinarians, catalog retailers, and e-commerce players.

PetSmart's most direct competitor is privately held Petco, which operates over 1075 stores in the U.S. and carries over 10,000 distinct pet products.[3] However, as Petco is privately held, sales and financial data is unavailable for comparison. PetSmart also competes with discount retailers and big-box stores like Target (TGT) and Wal-Mart Stores (WMT). These companies can offer basic pet staples at lower prices than PetSmart by leveraging their size and economies of scale, but PetSmart attempts to compete on product breadth (10,500 distinct pet products) and services such as grooming and veterinarian visits.



Footnotes

  1. PETM 10-K 2009 Item 1 Pg. 1
  2. 2.0 2.1 2.2 2.3 PETM 10-K 2009 Item 1 Pg. 4
  3. Petco Corporate Website, About Petco
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