PetSmart (NASDAQ:PETM) is now my 6th largest holding out of 21 stocks. I went "crazy" and bought heavily after it was crushed. What's interesting to me is that Q1 2014 didn't go badly at all...
Earnings of $1.04 per share were up 6.1% compared to $0.98 per share in the first quarter of 2013. Net income increased 1.3% to $104 million, compared to $102 million in the first quarter of 2013. Net sales for the first quarter of 2014 increased 1.1% to $1.7 billion.
Comparable store sales, or sales in stores open at least one year, including online sales, fell 0.6%, with comparable transactions decreasing 2.2%. Services sales, which are included in net sales, grew 4.5% to $200 million.
Furthermore, PETM is shareholder friendly and there's fiscal responsibility as evidenced here:
The company generated $137 million in cash flows from operating activities, spent $32 million in capital expenditures, distributed $20 million in dividends, and repurchased $130 million of PetSmart stock. The company ended the quarter with $301 million in cash, cash equivalents and restricted cash and zero borrowings on its credit facility.
So, PETM didn't miss big but they did guide lower for 2014.
Looking forward, PetSmart trimmed its outlook for the full year. PetSmart had previously estimated a full-year profit of between $4.42 and $4.54 per share. It now anticipates full-year earnings to fall between $4.29 and $4.39 per PETM share.
But, analysts also downgraded the stock:
- Deutsche Bank Reiterates "Sell" Rating for PetSmart (reference)
- Wolfe Research Downgrades PetSmart to Underperform (reference)
- PetSmart Price Target Lowered to $55.00 at Jefferies Group (reference)
What's the summary? Well, PetSmart had a reasonable quarter. Nothing was horrific and there were no train wrecks. They landed right around consensus but guidance forward was weak.
So, short-term growth is slower than expected. But, what about long-term growth? Is there a catalyst?
PetSmart's Omni-Channel Marketing
It's pretty clear to me that PETM isn't sitting around hoping for growth. In fact, they're working through their plan to simultaneously drive traffic in all environments. This is the crux of omni-channel marketing:
Omni-Channel Retailing is the evolution of multi-channel retailing, but is concentrated more on a seamless approach to the consumer experience through all available shopping channels, i.e. mobile internet devices, computers, brick-and-mortar, television, radio, direct mail, catalog and so on. Retailers are meeting the new customer demands by deploying specialized supply chain strategy software..
Although this is absolutely, totally a buzzword, it captures the idea that shopping is done all over the place, with multiple devices, through all kinds of channels, at different points in time, for different reasons (e.g., QR codes, web site, smartphone).
For a brick-and-mortar company, like PETM, it's the next evolution. It's an awareness that "just adding water" (i.e., e-commerce or mobile) isn't enough. It needs to be a multi-headed attack.
The omni-channel consumer expects everything to be readily available at his or her fingertips and expects the overall brand experience to be similarly accessible. According to MIT's report, 80% of store shoppers check prices online, with one-third accessing the information on their mobile device while inside the actual store. This percentage proves that consumers are also approaching their experience from multiple angles.
And, if we look at other retailers for omni-channel innovation:
Best Buy's omni-channel strategy centers on adding value to brick and mortar retail stores that were for a time threatened by e-commerce competitors. Adding a "Store Pickup" option within its online shopping process turned out to be a major win for the brand. Although many shoppers compare products and buy online, some still prefer to pick up the goods in person from an actual store.
I've seen this in other environments, like restaurants (e.g., Panera Bread). The blending and merging of the internet, mobile, and physical stores is at the heart of multi-channel.
PetSmart's David Lenhardt said this on the Q1 2014 earnings call:
First, we are focused on driving our consumables sales and are pursuing a more powerful and effective marketing plan and in-store execution that emphasizes the value and breadth of our consumables offerings. Second, we are intensifying our omnichannel efforts to better capture the valuable online customer. Third, we are launching an inspirational and engaging brand campaign to differentiate PetSmart and elevate how the consumer relates to the PetSmart brand.
But, is this puffery? Is PETM just jabbering or are they actually taking action? Are they putting human resources against this drive for growth, and the future?
Enter: Phil Bowman
So, we've seen that growth is maybe slowing and the stock is punished as a result. We've heard that "omni-channel" is the next evolution of retail and that PetSmart is committed. Is there any meat and potatoes here or are we talking rice cakes and carrot salad?
Well, look who was hired on 28-May-2014: PetSmart Appoints Phil Bowman Executive Vice President of Customer Experience.
This is a pretty big deal. In case you're not familiar with "customer experience" it's not just fluffy and puffy stuff. It's the application of usability, user experience, customer service (and more) to a business, especially its technology and customer-facing environments like mobile and the web. It's what make people enjoy shopping along with great products and services.
Who's this Phil Bowman guy? Here's a great list of his skills and experience over on LinkedIn. Looks like he's got some talent.
He was the TD Ameritrade Chief Marketing Officer. Here's what I found from back in 2011.
Bowman comes with nearly 30 years' experience marketing some of North America's most recognized brands, including leadership roles covering everything from branding to direct marketing and client analytics. He most recently served as the senior vice president of corporate marketing for TD Bank Group in Toronto, ON, where he was responsible for the corporate brand, marketing communications and advertising, research and analytics, and integrated customer data and marketing technology, as well as marketing support for the bank's Wealth Management platform.
Prior to joining TD Bank Group, Bowman held marketing leadership roles with several other notable organizations, including H&R Block, Sprint, Circle K Stores and Pizza Hut Group, which at the time was a division of PepsiCo, Inc. He holds a Bachelor of Arts Degree in Communication from Brigham Young University, as well as a Masters of Business Administration, with an emphasis in Marketing, from the University of Virginia, Darden Graduate School of Business Administration.
...and he's now got the TD Ameritrade experience under his belt as well. So, there's even more depth now.
I also found this YouTube video where Bowman is talking about marketing and branding and customer stuff. About 9 minutes into that video he's talking about social media, digital markets, and more.
In that same video I thought it was awesome when he explained that by doing smart education you build confidence in buyers and therefore you don't need to compensate or sink to the bottom by offering discounts to win in the marketplace. That's part of the power of omni-channel marketing, and it also gives me hope that PetSmart can continue to leverage its brand and physical stores.
In any event, the point here isn't just that Phil Bowman seems highly competent. It's that PETM senior management understands they need to get smarter and drive growth using every channel possible. And, that they are putting investments into their online store and mobile, but also senior management.
PetSmart isn't just talking the talk, they are walking the walk. They are not standing still. They are not just bumbling along, or waiting for the tide to turn. I'm seeing a fiscally conservative company being aggressive about growth, and about the future, and giving customers what they want, need and expect.
Although I previously explained several reasons for investing in PETM (PetSmart Has A 35% Upside Right Now), I'm thrilled with how Phil Bowman, and what he represents, fits into the larger puzzle. My confidence in PETM's future is secure.
Disclosure: I am long PETM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.