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This Pet Food Supplier Is Still In the Hunt for Growth

It's been the dog days for pet supplies industry. Data: American
Pet Products Association

It's been the dog days for pet supplies industry. Data: American Pet Products Association

The wave of consolidation washing over the pet supplies industry may claim yet another company in PetSmart, and Petco's acquisition of Drs. Foster & Smith for an undisclosed sum shows its ability and willingness to participate in the M&A game.

As much bite as bark these days

Although a lot of the stocks gains PetSmart has made over the year can probably be attributed to the strategic moves it has been forced to undertake, its most recent quarterly performance was a reason for investors to purr with delight. Net sales continued improving, rising at low single digit rates, and comparable stores were flat, which for a company experiencing falling comps for much of the year, it was a welcome change.

It still needs to get control over comparable transactions, which continued to fall, but it maintains a trajectory that's beating analyst expectations while producing profit margins that are decent considering the promotional economic environment it's operating in.

With planned cost reductions totaling $200 million for 2015, comps in the low single digits, and a mid-teen increase in EPS, PetSmart may be strong enough to withstand the challenge hedge fund operator Jana Partners promises will result if it doesn't approve of the strategic alternative analysis that emerges. The P/E firm says it has five candidates it will nominate for the pet supplier's board.

Chomping at the bit

A PetSmart acquisition could make its acquirer the top dog in the industry. However, there seems to be more risk than reward in its stock at the moment. An offer has been largely priced in, and if a buyout deal doesn't materialize, its stock could deflate.

With the industry being shaped by the ebb and flow of mergers and acquisitions, and as e-commerce and online shopping continue to alter the landscape further, the major industry retailers will need to devise new strategies to come up with a competitive edge other than simply buying out their rivals if they want to unleash growth.

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The article This Pet Food Supplier Is Still In the Hunt for Growth originally appeared on Fool.com.

FollowRich Duprey 's coverage of all theretailing industry'smost important news and developments. He owns shares of Pfizer. The Motley Fool recommends Amazon.com and PetSmart. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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