Times may still be tough. But that's no reason to skimp on the
adorable family pooch.
Why not give your loyal pal the best? Premium organic food, an
irresistible hunk of rawhide, a softer cushion to lay his furry
head. Even day camp to while away those lonely afternoons while
you're mysteriously busy at work.
It's warm and cuddly thinking of this sort that is filling the
coffers atPetSmart (
), a food products retailer that has built a chain of more than
In the second quarter, reported in mid-August, PetSmart topped
analyst estimates in continuing steady sales growth and even
better earnings growth. Sales grew by just under 9%. Earnings, at
71 cents, were up by 33.5%.
In an unsteady retail environment, PetSmart has been a very
steady performer. Sales at stores open a year or more were up
7.4%. That followed a rise of 7% in the first quarter. Same-store
sales have been up 5% or better each of the last six
And why not? A recent visit to a Boston-area PetSmart revealed
a friendly, laid--back atmosphere where shoppers strolled through
the aisles with their curious leashed pets. One handsome,
well-behaved hound stopped to peer intently at a chatty parrot
perched safely behind glass.
His owner then got to explore four long aisles packed with a
staggering display of canine cuisine. Everything from familiar
Alpo to "antioxidant rich" kibble with prebiotics to aid
digestion. Some of the 30-pound bags boast a "grain-free
formula." Others tout low glycemic index.
Displays cater to every pet need, real and imagined. There is
the wide array of squeaker toys in every mammalian shape. And
shouldn't you check out the anti-microbial water filtration
systems? Catering to the style-conscious pooch (well, owner,
actually) are the Martha Stewart branded fabric collars.
And walled off from the sales floor are rooms for training and
grooming as well as special day care and overnight kennel
Pet care clearly has gone upscale. And the shift to premium
product has helped pad sales and margins at PetSmart.
Consumables, chiefly food, represent more than half of
PetSmart sales. And of that 53%, roughly 70% are
channel-exclusive, meaning that pet food manufacturers sell them
only to specialty retailers. These are typically what's known as
"super premium" foods with higher or specialized nutritional
"Super premium channel-exclusive foods continue to be our
fastest growing category," Chief Operating Officer David Lenhardt
told analysts Aug. 15.
Also growing nicely is revenue from such services as grooming,
training and boarding. A decade ago, services represented just 5%
of PetSmart revenue, noted KeyBanc analyst Bradley Thomas. Last
year, they accounted for 11%, and in the latest quarter 11.8%.
Hard goods, which notably include toys, accounted for about
one-third of all revenue.
It's a potent mix that has allowed PetSmart to prosper. But it
may also contain the seeds of trouble down the road. Successful
businesses always attract competition. And this is much the case
with pet supplies.
Competition is expected from two sources. On the one hand,
mass marketers likeWal-Mart (
) have long eyed pet supplies as a growing category.
And despite the much-lampooned collapse a decade ago of online
pet supply hopeful Pets.com, online omnivoreAmazon (
) has been gearing up for a major push. One problem with Pets.com
was that it simply cost too much to store and ship 30-pound sacks
of low-cost kibble. The economics never made sense.
But the shift to premium food may have altered the equation.
The price points and high gross margins on such fare may now
justify shipping, noted William Blair analyst Daniel Hofkin. "On
high-ticket food brands, there's enough dollar value to absorb
shipping costs," he said.
KeyBanc analyst Thomas believes Amazon may have the
distribution efficiency to make online pet retailing work.
"Amazon.com today has 26 million square feet of distribution
space. This is not Pets.com that PetSmart is competing against,"
But Joan Storms, an analyst with Wedbush Securities, contends
that even with premium products, pet food doesn't make all that
much sense for online providers. "It still leaves the online
provider with very low profit margins.
And Amazon cannot offer the in-store browsing experience --
the bird cages and fish tanks, for example -- that entertain pet
Says analyst Storms of PetSmart: "It's an enticing shopping
To date, online retailers still have, by most estimates, only
mid-single-digit market share. PetSmart also has its own online
If anything, online is a threat still making its way over the
horizon. Thomas sees a very low risk to PetSmart over the next
couple of quarters. But he does see risk growing over time.
"As you look out five or 10 years, we see very high risk," he
Thomas is less concerned over the threat from mass-market
retailers like Wal-Mart. Though Wal-Mart is already a large
seller of pet food, Thomas believes it will struggle to challenge
the PetSmart stronghold in super-premium brands. Mass-market
merchants, he says, may have trouble procuring product. "If
you're a premium pet food manufacturer, you can get better
margins selling to PetSmart than to Wal-Mart," he explained.
With over 1,200 stores in the U.S. and Canada, PetSmart is not
in super-expansionary mode. Analysts expect square footage growth
of just 2% to 3% a year.
To some degree, this reflects the chain's move toward somewhat
smaller new stores. Thomas sees it as a sign of fiscal
discipline. "They are not ones to open stores simply for the sake
of top-line growth," he said.
Analysts believe PetSmart can sustain mid-single-digit revenue
growth and better earnings growth. Hofkin, for example, thinks
PetSmart can achieve 11% annual operating earnings growth, with
an added kicker from share repurchases.
PetSmart does have one secret weapon. To judge by the tugging
and straining on all those shopper leashes, canine store visitors
are very pleased with the merchandise.