PetSmart Inc.PETM

Morningstar Rating

Stock Research and Analysis

by R. J. Hottovy, CFA

PetSmart appears well positioned for market share gains in coming years, even with a leading 13% of the $43 billion U.S. pet supply market. With unrivaled product diversity and unique service offerings, the firm holds several advantages over its rivals. Read more

Bulls Say

With just 13% of pet supply sales and 12% of pet-related services, PetSmart has ample opportunities to gain additional market share. The company has a number of scale advantages over the competition.

The industry has intriguing growth prospects, thanks to increasing pet ownership and the amount spent on pets. PetSmart expects mid-single-digit market growth (7% services, 5% products) the next few years.

It is doubtful that mass merchants will be willing to provide the same level of product diversity or devote sufficient square footage to compete with PetSmart's service offerings.

Consumable products, such as pet food, are somewhat resilient to difficult economic conditions. Pets could also face digestive tract issues when changing pet food brands, implying higher switching costs.

Management continues to use cash to augment shareholder value. It recently increased the quarterly dividend to $0.10 per share from $0.03 and authorized a $350 million share buyback program during the next two and a half years. Read more

Bears Say

About 20% of PetSmart's products are sold at mass merchants, with price points being 3%-5% lower. Premium private-label pet food brands from mass merchants are an increasing threat.

Challenging macroeconomic conditions could weigh on the demand for premium hard goods and services. Pet adoption rates are also secondarily tied to housing market conditions.

Plans to expand to 1,800 North American locations could lead to increased cannibalization and industry rivalry. Rapid store growth during difficult economies can have a negative impact on margins.

Pet food recalls, like the one announced by several manufacturers in March 2007, can have a adverse impact on top-line results and disrupt customer buying patterns.

Many nontraditional competitors, such as Bed Bath & Beyond BBBY, Home Depot HD, and Old Navy GPS, are looking to cash in on this growing industry. Read more

Strategy

PetSmart will employ a multifaceted approach to gain market share, including new stores in underrepresented markets, expansion of higher-margin pet services, and a focus on customer service. The firm Read more

Management

Former president and COO Robert Moran replaced Philip Francis as CEO in June 2009. Francis remains the chairman of the board. We believe the transition will be seamless for PetSmart because Moran has been with the firm for 10 years and COO since 2001. Read more

Profile

PetSmart is a leading retailer of pet food, supplies, and services in the United States. The company operates 1,137 stores with an average size of 23,000 square feet. PetSmart Read more

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