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WIKI ANALYSIS
PetSmart (PETM) is the largest pet supply store in North America, operating 1,112 retail stores at the end of fiscal 2008.[1] PetSmart has nearly doubled its store base and annual revenues since 2003, as it has been able to capture a large segment of the specialty pet supply and services market. 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), 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),[2] 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 in 2008.[1] 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 2008, 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 1,112 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, which accounted for approximately 17% of sales in 2008.[3] The remaining 10% of PetSmart's revenue come from pet services, such as pet grooming and training services provided on-site in PetSmart stores. PetSmart's total revenues topped $5.0 billion in 2008, an 8.4% increase from 2007.[1]
- PetSmart's total revenue has grown at a CAGR of 11.1% from 2003 to 2008.[1][4]
- Since 2003 PetSmart has opened 469 stores on net, operating 1,112 stores in the U.S. and Canada as of March 2009.[1][4]
- PetSmart's net income slid to $193 million in 2008, down 25% from $259 in 2007; however net income in 2007 included a $95 million gain on the sale of part of PetSmart's stock holdings in Medical Management International, so after excluding this one-time gain from the comparison 2007 net income would have been $164 million, resulting in an 18% increase in net income in 2008.[1][4]
- 142 of PetSmart's stores include a PetSmart PetsHotel, which offer overnight and short-term stay services for pets.[1]
| PetSmart | 2006 | 2007 | 2008 |
| Revenue ($M) | $4,234 | $4,673 | $5,065 |
| Gross Margin | 30.9% | 30.7% | 29.5% |
| Operating Margin | 7.6% | 7.5% | 7.3% |
| Same Store Sales Growth | 5.0% | 2.4% | 3.8% |
| Stores | 908 | 1,008 | 1,112 |
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:
- Pet Food, Treats, Litter (41% of 2007 sales)[5]: This segment includes premium dog and cat foods, snacks, treats and litter products. National brands and PetSmart's own private label products are sold in this segment. This segment has grown its share of net sales from 40% in 2006 to 41% in 2007 (2008 data for merchandise categories is not yet released).[5]
- Pet Supplies (47%)[5]: The pet supplies category includes collars, leashes, health and beauty aids, shampoo, medicines, toys, pet carriers, pet houses, habitats, aquariums and birdcages.
- Pets (2%)[5]: PetSmart sells fresh-water tropical fish, birds, reptiles, hamsters and other small pets. The company does not sell cats or dogs, but it does offer space for adoption shelters in most of its stores.
- Pet Services (10%)[5]: PetSmart provides numerous pet services including grooming, training, boarding and day camps. PetsHotel operations are included in this segment, through which the company provides 24-hour supervision by pet caregivers and climate-controlled rooms for its pet-guests.[5]
Trends and Forces
Expansion of Pet Services
Since 2005 pet services revenues have grown from less than $300 million to over $525 million in 2008.[5][1] Much of this growth has stemmed from the rollout of PetsHotels at select PetSmart stores in 2005, which provide overnight boarding for pets. At the end of 2008 there were 142 in-store PetsHotels, up from 97 locations in 2007.[1] 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. At the end of 2008, over 69% of PetSmart stores housed a veterinary hospital. 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 (these fees totaled $32.9 million in 2007).[6] 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.
Low Recessionary Impact on Pet Spending
The U.S. fell into a recession in late 2007,[7] which continued through 2008 crippling many domestic retailers as consumers cut back on spending. However, PetSmart was able to grow net sales 8.4% and same store sales 3.8% in 2008, despite the economic hardship throughout the United States.[1] Net sales were augmented partially by the addition of 104 stores during the year, but PetSmart's positive same store sales growth (sales growth at stores open at least one year) is markedly different than many retailers. This could be a signal that pet owners are slow to cut back spending on their pets (your dog Fido still needs to eat, whether or not the DOW is up this week). If this trend holds true, PetSmart could be in a prime position to continue adding sales while most of the retail industry struggles.
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 900 stores in the U.S. and carries over 10,000 distinct pet products.[8] 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
- ↑ 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 PetSmart (PETM) Press Release, Fourth Quarter and Year-End 2008 Results
- ↑ PetSmart (PETM) Annual Report 2007, General, pg. 7
- ↑ Seeking Alpha, PetSmart, Inc. F4Q08 Earnings Call Transcript, pg. 4
- ↑ 4.0 4.1 4.2 4.3 4.4 PetSmart (PETM) Annual Report 2007, Selected Financial Data, pg. 31
- ↑ 5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 PetSmart (PETM) Annual Report 2007, Merchandise, pg. 11
- ↑ PetSmart (PETM) Annual Report 2007, Note 2 - Investments, pg. 64
- ↑ WSJ.com, "NBER Makes It Official: Recession Started in December 2007", December 1, 2008
- ↑ Petco Corporate Website, About Petco
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