PetSmart’s new initiatives
Last week, Barry Rosenstein’s activist hedge fund JANA Partners disclosed a stake in PetSmart (PETM). JANA expects to discuss strategic alternatives, including a sale of the specialty retailer to unlock shareholder value.
PetSmart forecast comparable store sales growth in the second quarter to be flat to slightly down and full year 2014 to be relatively flat. Its net sales for the 1Q14 were up 1.1%, while comparable store sales, or sales in stores open at least one year, including online sales, fell 0.6%, with comparable transactions decreasing 2.2%. Despite the setback, the management stressed on the first quarter earnings call that the company has several initiatives lined up to “to drive traffic and generate positive comp store sales growth.” These initiatives would support the company’s long-term strategies which are “Expanding our proprietary and exclusive products and services, growing our most valuable customers, and connecting with pet parents in an authentic and personalized way.” PetSmart said one of the initiatives is to grow its online presence, which has been discussed in detail in a previous part of this series.
PetSmart believes its key competitive advantage lies in the fact that it’s an exclusive provider of the “widest assortment of proprietary and exclusive products and services.” The company expects to increase sales of its proprietary products and has introduced innovative National Geographic pet products for freshwater fish, reptiles, and small pets in its stores. It also recently expanded its “key traffic driver” consumables by adding natural pet food products from Nature’s Variety. The company plans to launch an “inspirational and engaging brand differentiation campaign” which will ” include a vital social marketing element, as well as TV advertisements, pet parent participation, enhancements to the store environment, and a more robust digital experience.”
Increasing humanizaton of pets is a demand driver for pet products and services
An industry report by IBISWorld on pet stores in the U.S. noted that “The emerging trend of pet parents has also commanded high demand for premium pet products and services. Since pets are often considered family members, pet owners frequently lavish them with all-natural and organic pet foods and treats, in addition to high-end services.” Due to the positive trends in demand, IBISWorld estimated that profit margins for the companies in the space increased from about 3.1% of revenue in 2009 to about 3.6% in 2014. The research noted that due to the increasing humanization of pets, spending on products and services for pets is no longer discretionary.
According to IBISWorld, PetSmart has a 40.2% share of the market while San Diego-based, privately-held PETCO Animal Supplies has a 19.5% share. The research said the pet store industry is highly fragmented but sees “intense price competition from mass merchandisers, online operators, and catalog retailers.” IBISWorld estimates that per capita disposable income is set to increase in 2014 and this will help drive demand for premium products and services sold by PetSmart and its peers that include online retailers such as Amazon’s (AMZN) Wag.com and traditional retailers Target (TGT) and Walmart (WMT). Specialty retailer PetSmart is a part of the Consumer Discretionary Select Sector SPDR ETF (XLY).