PetSmart Hasn’t Gone to the Dogs

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

Following PetSmart’s (NASDAQ: PETM) 8% drop after reporting robust quarterly results, but forward guidance below estimates, potential investors might want to let this sleeping dog lie. However, a dip in the stock simply makes PetSmart more fetching.

Fourth quarter 2012 earnings per share came in at $1.24, up 36% from the 91 cents earned in the same quarter a year ago. The EPS was also better than expected at $1.21 a share.

Sales across all sectors were strong, contributing to a 15% increase in PetSmart's top line to $1.88 billion. That was a tad light of the projected $1.9 billion. But smart investors should let the slight miss roll off like water on a duck's back.

Looking ahead, the Phoenix, AZ based company forecasts EPS between $3.76 and $3.92, again a bit shy of analysts’ expectations of $3.97. It was that modest full year outlook that ruffled feathers at Nomura Securities and Piper Jaffray, prompting analysts at the firms to look meaner than a junk yard dog when they slashed their opinions and downgraded the stock. But RBC Capital Markets see a buying opportunity.

PetSmart, like others in the industry, may be overly cautious in its outlook. Retailers overall are taking a guarded position in forecasting company sales. The payroll tax, higher tax rate on the affluent, and rising gas prices have left consumers with left disposable income. In addition, the political wrangling on Capitol Hill over budget cuts has many worried about their jobs and certain entitlements. Plus, a push for a high minimum wage has some wary of retailers in general.

But spending on pet care continues to defy the odds. PetSmart is at the head of the pack when it comes to sales. During the Great Recession, which slowed demand through most of the retail sector, pet store sales continued to yield growth.

The American Pet Products Association (APPA) reports 62% of U.S. households own a pet. The average dog or cat owner spends about $250 annually just on food. The APPA expects this pet industry driver to increase through 2013 and beyond.

Consumers have increasingly grown to perceive pets as members of the family, so products for pets can considered non-discretionary. Waning disposable income has scant effect on demand in this sector because consumers are apt to cut out leisure products or other splurges before skimping on pet food and toys. As disposable income rises, as it expected (even if tepidly) during 2013, the result is for increased purchases of pet goods and more premium purchases, like those found exclusively at PetSmart.

Competitors include big box stores like Target (NYSE: TGT) and Wal-Mart (NYSE: WMT). Some pet owners prefer not to claw through a PetSmart store and instead get their paws on food and supplies for their pets while shopping for other household items. But you won’t find the same kind of specialty products and select services that PetSmart offers at these large discount retailers.

Target does look tempting though. The retailer reported mixed Q4 results, a result of expansion efforts in Canada. But the company is optimistic for 2013. Target expects adjusted EPS of $4.85 to $5.05, ahead of analysts’ expectation of $4.40 for fiscal 2013. Deutsche Bank says the stock is undervalued and raised the stock to a buy after the March earnings report. Shares trade at modest P/E of 14.66 and yield a decent $2.17. The stock remains a favorite among mutual funds and other market institutions.

Wal-Mart also appears attractive. The company recently reported EPS that were up 10.6% from the same year ago period, and increased its dividend. Sales are growing both here and abroad. Of particular note was that the Bentonville, AK based company gained market share for food, consumables, health, wellness and over-the-counter items, as well as entertainment items and toys.

No denying these two mass retailers look like good bets, but investors who look at PetSmart are not barking up the wrong tree.

With some 1,200 stores in the United States and Canada, PetSmart is the top dog in its industry. The company offers more than 10,000 products in stores and on its website. Stores have boarding facilities, provide grooming services and offer obedience training. Through pet hospital operator Medical Management International, which PetSmart owns 20%, veterinary services are available in roughly 800 shops.

Revenue for the pet industry is projected to remain strong through at least 2017, according to the APPA. Also expected to grow is the number of pet owing households, their wallets and their willingness to spend money on a pet. That is simply dog gone dandy, the cat’s meow, and good news for PetSmart.


Diane Alter has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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