PetSmart Is A Good Purr-chase - Barron's

Even in a recession, pet owners are still willing to splurge on their pets, writes Barron's Jay Palmer. This is good news for PetSmart (PETM), which could see its stock climb nearly 30% in the next year or so.

Over 60% of American households have a pet, and owners are on track to spend $45B this year on their pets, a 5% increase from 2008. With 81% of pet owners planning to maintain or increase their pet-related spending, PetSmart has been posting some of the best sales and earnings growth in the entire retail sector. The nation's largest pet-supplies retailer, PetSmart's earnings jumped 16% last quarter and double-digit growth could continue through 2010. Demographic trends help as well; as baby boomers become empty nesters and younger couples wait to have children, both groups are lavishing attention and money on their pets.

Dry foods are the largest part of the pet business but margins are relatively low, so PetSmart has been focusing on more profitable lines, including everything from orthopedic beds to pet cookbooks to services like pet boarding, grooming and training.

Despite the jump in earnings, PetSmart's stock still trade at just 14 times expected earnings for next year vs. the broad market's multiple of 16. Same-store sales last quarter were up a respectable 4%, and the company expects same-store sales to continue to rise in low single digits for the rest of the year.

More competitors are squeezing into the pet market, including Wal-Mart (WMT), Target (TGT), and Costco (COST), among others. But PetSmart controls a healthy 13% of the market, offers more products and is on strong financial footing. The company has enough money to buy back stock, boost its dividend yield (currently 1.84%) and make acquisitions.

• Christopher Horvers, of JPMorgan Chase, thinks "PetSmart is the best operator in this space, and the stock is a good buy." He thinks shares will rise 29%, to $28, in the next year or so.

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• In June, PetSmart raised its quarterly dividend to $0.10 from $0.03, and authorized a $350M stock buyback.
• PetSmart: Q1 EPS of $0.32 beats by $0.02. Revenue of $1.3B (+9.4%) in-line. (PR)

Comments

[RWCMom:]

Puppies & babies, always good for the soul - and evidently the economy. I hear there is a boom in teen pregnancies - not good for teen mothers & their families but good for Gymboree, Kids R Us, Target, K-Mart, WalMart.

Jul 05 10:05 AM

[Patricia013:]

You betcha. My 14 year old cat, and constant companion, gets the finest food. I even noted at the PetSmart checkout the other day that I could feed her steak cheaper. She's happy and in good health and the extra couple of dollars doesn't matter all that much. I would scrimp in other parts of my budget in order to keep her happy as long as possible - I believe most pet owners think the same.

Jul 05 01:02 PM

[Rhino Realty:]

Good article Rachael...PetSmart certainly could be called a recession proof retailer. Keep up the good work.

Jul 05 08:37 PM

[RE Broker:]

They are one of the few retailers still expanding, Phil Francis has done a great job.

Jul 06 06:36 AM