A Smart Stock for Pet and Profit Lovers

09/01/2011 8:30 am EST

Focus: STOCKS

Patrick McKeough

Editor, Successful Investor

For most stores today, it’s tough to keep consumers walking through the doors…but this company is continuing to grow sales and expand its business in North America, writes Pat McKeough of the TSI Network.

Lower consumer confidence and higher gas prices are cutting US store traffic. So, successful retailers will need to have a well-established niche and quality name-brand merchandise to attract customers.

We also think it’s important, when investing in stocks in the retail industry, to focus on chains that can adapt quickly and prosper in the ever-changing economic landscape.

PetSmart Inc. (PETM) is the biggest pet-supply chain in the US. In all, it operates 1,197 pet stores in the US and Canada. It also has 185 in-store PetsHotels, which look after pets while their owners are away.

PetSmart focuses on selling premium pet foods and other products that most supermarkets don’t carry, including its own line of private-label products. Even with the slow economy, premium pet-food sales remain strong. That should make it easier for the company to pass along higher ingredient costs to its customers.

As well, PetSmart separates itself from other retailers with exclusive brands. Recently, the company announced that it has a new deal to sell dog toys under the Toys ’R’ Us brand starting next year. It already carries Martha Stewart pet-care products.

The company continues to benefit from rising pet ownership: 39% of US households now own at least one dog, while 33% own a cat.

In the second quarter of fiscal 2012, which ended July 31, PetSmart’s earnings rose 26.4% from a year earlier. The company also spent $63 million buying back its shares during the quarter. Due to fewer shares outstanding, earnings per share rose 31.7%.

Sales rose 7%, with same-store sales increasing by 5%. Sales of pet services, such as grooming and PetsHotels, rose 7.6%.

PetSmart has slowed its expansion plans in response to the uncertain economy. Even so, it will still probably open 40 to 50 more stores in the second half of fiscal 2012.

It also plans to spend more on advertising, as it aims to sell more services—such as grooming—that earn higher profit margins than merchandise sales.

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