Barking all the Way to the Bank

01/19/2007 12:00 am EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Although the economy has had its ups and downs, consumer spending remains strong. And growth stock adviser Vahan Janjigian has zeroed in on one area ripe for collecting our discretionary dollars--the spoiling of our pets...

"PetSmart (PETM NASDAQ GS) is the largest retailer of pet products and services in North America, operating nearly 900 stores across the US and Canada. The merchandise segment, with nearly 14,000 distinct items, generated 91% of Q3 sales. About 50% of fiscal 2005 sales came from supplies and goods such as collars, leashes, toys, medications, carriers, houses, and hygiene products. Pet foods, treats, and litter accounted for 39% of sales. The company also sells a full line of small pets such as fish, birds, and reptiles, and related supplies. Stores in select regions feature equine departments.

"The Pet Services segment includes grooming and training services, offered in almost all locations. Pet training ranges from beginner to advanced levels and includes the operation of 57 PetsHotels, which provide day camps, as well as 24-hour supervision and boarding for dogs and cats, an on-call veterinarian, daily treats, and playtime. PETM provides space for veterinary care at almost 600 stores through arrangements with third-party veterinarians and reaps licensing fees.

"Soon after rival Petco was taken private in July, PETM said it would accelerate initiatives scheduled for fiscal 2007 and 2008. It expanded its PetPerks program to reward loyal customers and is remodeling older stores and opening new ones under Eagle II, a format which highlights certain products and improves in-store training facilities. During the first three quarters of fiscal 2006, PETM remodeled 213 stores and opened 61 net new stores.

"Fiscal Q3 net sales jumped 14% year-over-year to $1.04 billion. Comparable store sales were up 6.8%. Merchandise and pet services grew 13% and 26%, respectively. Despite increased costs and expenses from the accelerated investments, the pro forma gross and operating profit margins expanded to 30.09% and 5.64%, respectively. Pro forma net income jumped 15.9% to $31.69 million or 23 cents per share. GAAP net income was $31.73 million or 23 cents per share.

"Although a slowing economy could possibly pressure consumer spending on discretionary items, PETM's Wal-Mart like negotiations with vendors should allow it to maintain fat margins. Furthermore, management sees room for expansion and expects to open 22 net new stores in fiscal Q4 and approximately 90-100 in fiscal 2007. It believes total store count can be increased to 1,400 in North America. Management also expects to open five more PetsHotels in the current fiscal quarter and 35 in fiscal 2007, a business that can eventually grow to 435."

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