A Smart Buy for Pet Owners

John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Just so everyone knows, it was really hard for me to not lead off with a headline that referred to the S&P 500 going to the dogs. I wanted to, I needed to, but it's been overdone so I refrained. Anyway, with that out of the way, let's talk about PetSmart (NASDAQ: PETM) With Sunoco having been bought out recently, its absence leaves room in the S&P 500 for PetSmart to move up in its place (and allows Cabela’s and Acorda Therapeutics to make their own moves into the MidCap 400 and SmallCap 600, respectively). PetSmart is obviously doing well, but is it something that you should be buying?

PetSmart is trading upwards of $65 a share, up nearly 40% from its $41 price tag this time a year ago, and up approximately 26% from $50 at the beginning of 2012. Just over a week ago the company announced that it'd be paying a quarterly dividend of 16.5 cents per share, the same as the previous quarter's dividend and 2.5 cents higher than the dividend paid from the same quarter last year. With 1,249 stores in the US, Canada and Puerto Rico, and nearly 200 PetSmart-branded boarding facilities, PetSmart is the largest retailer dedicated to pet foods and pet products. Its closest competition is Petco which went private in 2006.

Numbers only tell a part of the story, of course; just because a particular stock has done well in the past doesn't mean that it will continue to do so. Countless companies have been at the top of their game until suddenly they weren't anymore, so let's dig a little deeper and see whether PetSmart is likely to continue growing in the future or if it's just another company suffering from little dog syndrome and thinking that it's bigger than it really is.

Big Dog in the Yard

One big thing that PetSmart has going for it is a lack of direct competition. Aside from Petco, most of the competition that PetSmart faces comes from local pet supply stores which aren't likely to have the sheer amount of stock and resources as the local PetSmart store. This isn't to say that there isn't indirect competition for the chain, of course; Wal-Mart Stores (NYSE: WMT) competes with just about everyone, and offers pet foods, pet toys, health and beauty products, bedding and various other pet supplies.

The pet department for Wal-Mart only takes up a small portion of a typical store's floor space; however, Wal-Mart tends to offer lower prices on the items that it does stock, but the fact that it isn’t a dedicated pet-focused retailer limits the amount of damage that it can do to PetSmart's bottom line. The same goes for other retail outlets—they just don't offer much in the way of direct competition.

More than Just Pet Food

PetSmart offers a full range of pet services, including veterinary services that are available in over 800 stores, grooming by professional groomers, pet boarding services and obedience training by certified dog trainers. Adoption services are offered in conjunction with local shelters and branches of the Humane Society, and animal sales of more exotic pets such as fancy rats, snakes, birds and fish are also available. Animal furniture and accessories, fish tanks of all sizes, pet clothing, food and water dispensers and even water purification systems can also be purchased in the stores.

The company also offers an opportunity for charitable donations in the form of PetSmart Charities., an independent non-profit organization that helps to secure adoption services and provides for animal welfare. The company is currently running a fairly popular "Put Pawlitics Aside" campaign on Facebook that mirrors the US Presidential election, inviting visitors to vote in the long-standing battle of dogs vs. cats while encouraging people on both sides of the line to unite and help find homes for pets in need. It's estimated that since its inception in 1994 the charity has helped save the lives of over 5 million pets.

Facing the Future

If there is anything that threatens PetSmart's dominance when it comes to pet supplies, it's the Internet. Online retailers don't have the same space restrictions that physical stores like Wal-Mart do, meaning that you can find almost anything that you'd find in a PetSmart store at websites like Amazon.com (NASDAQ: AMZN), and may even be able to find it cheaper; you can even head over to Amazon and pick up a PetSmart gift card. This isn't to say that PetSmart doesn't have its own web presence, but Amazon has a larger distribution network and greater name recognition, so it has a better chance of drawing in online customers than PetSmart's website does. That doesn't mean that PetSmart is in danger of being overwhelmed by online adversaries, however.

PetSmart continues to refine its online shopping experience, and has recently made tweaks to its mobile store to decrease page load times on smartphones. The company has also placed an additional emphasis on the services that it offers, which can't be matched by online retailers; if you head into a PetSmart store you'll have a hard time getting very far without seeing information about obedience training classes, grooming services and other services that you simply can't get at Amazon.

Factor in the "PetSmart Experience" of being able to bring your dog, cat or ferret into the store with you and you've got something that sets the company squarely apart from most other businesses. Good customer experiences create loyal customers—just ask Apple fans. PetSmart makes a gross margin per customer that's approximately 4.6 times greater than its competitors because it offers a wide range of services and an enjoyable shopping experience that can't be matched elsewhere.

In Conclusion

I started off by asking if PetSmart was something you should be buying, and I'll finish here by saying yes, you probably should. PetSmart has been outperforming the S&P 500 even before it joined its ranks, and though its stock price has dropped slightly since shifting to the new index there is good reason to believe that the company will continue to grow. The company's dividends are getting larger as time goes by and if past trends hold up you can expect another dividend increase within the next two quarters.

You also have to consider that people love to pamper their pets, and even when the economy is rocky there will likely be a need for the various services and products that PetSmart offers. It's a solid stock from a well-managed company, and if it's not in your portfolio yet then you should consider adding it as a long-term buy.

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Croaxleigh has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com and PetSmart. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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