PetSmart Is Getting Targeted by Hedge Funds
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PetSmart (NASDAQ: PETM) -- $53.15
(This write-up is an edited and greatly abbreviated pitch from the SumZero community.)
SumZero Analysts Following PetSmart: 12
SumZero Investment Reports on PetSmart: 3
SumZero Community Sentiment:
66% Short, 33% Long, 0% Hold
SumZero Consensus Price Target:
Mean: $39.50 per share
Median: $39.50 per share
Quick Business Description:
PetSmart is the largest specialty retailer of pet food, supplies and services in North America. The company has over 1,200 stores and 189 PetsHotels throughout the United States, Canada and Puerto Rico. Services include training, grooming, and pet adoption, with pet hotels, doggie day camps and veterinary care in selected locations.
PetSmart has a very successful track record as a public company - the last 10 years (at least) have seen positive same-store sales ("comp") growth and positive EPS growth every year.
SumZero's Differentiated Market Insight:
“PetSmart is undoubtedly a well-managed company positioned within a desirable segment of specialty retail. However, the market currently prices in a scenario where PetSmart meets or beats analyst estimates for the next couple of years. Valuation is at the high end of the multi-year range. Also, after a couple of strong years of execution, analysts have set their estimates at the high end of the targets for the company's financial model. I believe that multiple rising headwinds on the sales and margin lines will lead to mild earnings disappointments and significant multiple contraction.” Hedge Fund. New York, NY.
“A very favorable mix shift to premium pet food, which began in 2008 (that now amounts to 50%+ of total pet food sales), is masking core productivity declines as premium food carries much higher average unit retail and higher gross margins. Were it not for this benefit, sales and gross margins would be under much more significant pressure. While this trend was clearly a positive trend in the recent past, it seems that the incremental benefit should be close to topping out as the category now amounts to over 50% of pet food sales and has seen increased merchandising/SKU’s for 3 years.” Hedge Fund. New York, NY.
“Amazon’s (NASDAQ: AMZN) Wag.com was launched several months ago – analogous to the company’s Diapers.com biz. This unit grew from $80M to $500M in four years (Diapers & Wag are cross-marketed). Fully loaded cost (tax and delivery) reveals that Wag.com is ~10-15% cheaper than PetSmart. An increasing base of Amazon Prime customers increases the likelihood that these customers will order replenishment items on the site rather than make a separate trip to a PetSmart store to lug home a 30-pound bag of food.” Hedge Fund. New York, NY.
“We believe PetSmart faces significant near term risks to both EPS & multiple revisions downward. We believe the stock is worth ~$34 or 14x our 2012 EPS of $2.48 - This represents ~35% downside and we believe both EPS and the multiple we are projecting could be far too generous.” Hedge Fund. New York, NY.
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