One Retailer on the Rise

10/16/2012 11:00 am EST




While many retailers continue the quarter-to-quarter earnings slog, this one has been off to the races for a while, and will continue this run for quite some time, reports Chad Fraser of Investing Daily.

Back in March 2009, when the market was plumbing its depths following the financial crisis, we took a look at the battered retail sector.

We didn’t share the view of the many doom-and-gloomers who were predicting the sector’s demise. While lower housing prices and stock values, as well as tighter credit markets, would put a crimp in consumer spending, there was a behavioral shift going on—and retailers that could compete aggressively on price or offer unique products or services that encouraged repeat visits would be the ones left standing.

One stock that nicely fit the bill was PetSmart (PETM), which operates 1,200 pet-supply stores in the US, Puerto Rico, and Canada.

The company’s services are what sets it apart from other pet stores. For example, its PetsHotel service, which it offers at 194 PetSmart stores, boards pets while owners are away. PetSmart also offers Doggie DayCamps, which keep dogs entertained for the day, as well as grooming services and dog-training classes. In addition, 770 PetSmart stores contain veterinary hospitals.

PetSmart’s new services and its strong performance through the market crash prompted us to recommend the stock. It turned out to be a prescient call: on the day the article came out, PetSmart closed at $18.06. Today, it’s trading around $68.89, for a 281% gain.

And the rise has been as steady as they come: PetSmart’s volatility is remarkably low. Its beta rating is just 0.78 (with a rating of 1 being equal to the market as a whole).

Joining the S&P 500 Now
Now the stock is about to achieve another milestone. After the markets close tonight, PetSmart will be added to the S&P 500 index, taking the place of oil and gas company Sunoco (SUN), which has been taken over.

That’s a plus for PetSmart, because its addition to the S&P 500—which is widely considered to be a key bellwether for the US economy—will attract more attention to the stock, including that of large institutional investors. PetSmart shares could also gain it a near-term lift because exchange traded funds and other investments that track the S&P 500 will add them to their holdings.

But even more important, PetSmart is in a great position to profit from another key trend: ballooning spending on pet supplies.

PetSmart Best in Show
The amount of money Americans are spending on their furry and feathered friends continues to surge, despite the weak economy.

In 2011, it added up to $50.96 billion, according to a recent Huffington Post article. That marks a new all-time high, and the first time the figure has crossed the $50 billion threshold. And there’s no sign of a slowdown, with $53 billion in pet-related purchases expected this year.

Spending on services saw the biggest increase in 2011, soaring to $3.79 billion from $3.51 billion in 2010, for a 7.9% jump.

Pet spending is rising in lockstep with rising rates of pet ownership. According to pet-supply firm VetDepot, the number of US households whose inhabitants include animals rose to 72.9 million in 2011—again, an all-time high.

Of that total, 38.9 million households owned at least one cat, and 46.3 million had at least one dog. Smaller critters figured prominently, too, with 12.6 million households owning fish and 5 million providing homes for birds, reptiles, and small mammals like guinea pigs and rabbits.

For a hint of what’s driving our pet-spending binge, you need only look at how our attitudes toward our animal housemates are changing: VetDepot’s study also found that 70% of dog owners and 60% of cat owners viewed their pet as a child or as a member of the family.

There’s Plenty of Growth Ahead
In its 2012 second quarter, which ended July 29, PetSmart’s sales rose 9% from a year ago to $1.6 billion. Same-store sales, or sales at outlets that have been open for at least a year, rose 7%. The company also continues to benefit from its focus on expanding its pet services and launching new ones: sales of services, such as grooming and dog-training classes, jumped 7%, to $191 million.

Earnings jumped 31%, to 71 cents from 54. That was well ahead of the consensus estimate of 66 cents. It was also the 16th time out of the last 17 that the company’s profits topped expectations.

PetSmart also boosted its outlook for its full fiscal year: it now expects to earn $3.30 to $3.40 a share, up from its previous forecast of $3.19 to $3.31.

The company remains well-positioned to cash in on surging pet spending, particularly due to its expanding array of services, which supplied 12% of its revenue in the latest quarter. Its addition to the S&P 500 will only help highlight that strength.

Read more from Investing Daily here...

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