PetSmart and Ulta Salon Have a Lot in Common
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Ulta Salon (NASDAQ: ULTA) caught my attention because its specialized model of stores that contain salons and sell beauty products gave it an advantage in the fragmented personal care market. PetSmart (NASDAQ: PETM) offers care to animals, not humans, but the pet products supply store seems very similar in other respects. PetSmart provides pet care services and sells pet food, grooming products, and other supplies, and the pet care market is also extremely fragmented. In its 2011 10-K, PetSmart lists seven types of competitors, which range from independent veterinarians to warehouse clubs.
PetSmart faces competition from discount chains that also sell pet food and supplies. These discount retailers often lack one of PetSmart's main advantages, convenience. Ever been in a hurry to get ready for a vacation and needed to find a kennel for your dog? PetSmart not only sells dog food, it also offers kennel services. Maybe your dog needs flea shampoo. A big box store can sell you the flea shampoo, but PetSmart can also wash your dog for you. If your dog gets sick at the kennel, some PetSmarts have Banfield pet hospitals as well.
Ulta's service based model gives it similar advantages over warehouse retailers. If you're buying shampoo and also need a hair cut, or need help with a special service such as hair coloring, Ulta offers salon services as well. Ulta Salon and PetSmart operate relatively large retail stores, so they can provide services without using up all of their floor space. Independent salons and veterinarians often rent much smaller storefronts that don't offer much space for retail products.
The retail and services model also makes it much easier for Ulta and PetSmart to convince shoppers to spend more. A barber can conveniently provide a sample of a higher end hair product while cutting a customer's hair, and the same concept applies to pet grooming. Ulta and PetSmart sell many cheaper products in volume, so they can still survive without high margin sales. If a dog owner decides to stay at home for the holidays, the dog still needs to eat.
Pharmacies offer an older example of the retail products and services model, and CVS (NYSE: CVS) drug stores share many characteristics with Ulta and PetSmart stores. At a CVS store, a patient can talk to the pharmacist and pick up medicine, and also purchase incidental supplies such as cotton tissues and bandages. Like Ulta and PetSmart, CVS has enough floor space to supply several things that a shopper needs in a single trip, and it offers products and services that a shopper tends to purchase during the same trip.
The synergy between purchases is a major advantage of this business model. General retailers often sell a wide variety of products that a shopper wouldn't necessarily purchase at the same time. For example, a store could sell refrigerators, smartphones, and DVDs. Although a shopper who wants all three items would certainly find it more convenient to buy them all at the same place, a refrigerator buyer wouldn't necessarily want to buy a smartphone during the same trip. Ulta Salon and PetSmart's offerings are more like peanut butter and jelly. Pick up the dog from the kennel, and dog food is right next to you on the shelf. Get a haircut, pick up some hair gel, shampoo and conditioner.
Ulta, Petsmart, and CVS all have growing revenue and earnings. CVS is cheap with a forward P/E of 12 according to Yahoo Finance, and reported 15 percent higher revenue for the quarter. PetSmart has a forward P/E of 16.5, and its 13 percent quarterly income growth stands out. With a forward P/E of 30.5, Ulta boasts a 6.8 percent profit margin, and the company has no debt. All three companies' business models should serve them well in the future, so they all look like buys.
Motley Fool newsletter services recommend PetSmart and Ulta Salon, Cosmetics & Fragrance. The Motley Fool has no positions in the stocks mentioned above. enovinson has no positions in the stocks mentioned above. 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.