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A Purdue university study revealed that 97% of pet owners speak to their pets. The non-speaking balance consisted of mutes and liars. More than ever, Americans view their pets as integral members of the family and are increasingly lavishing them with formerly human-only creature comforts: organic foods, day care, designer clothing, fully climate-controlled hotels. The list goes on.

The raw numbers tell us pet ownership is on the rise. But these animal companions have been at our sides for thousands of years and one would reasonably expect these figures to rise with broader population growth. But how much money we devote to our pets, and more specifically what we spend the money on, reveals the changing ways we've come to view them.

Our team takes a deeper look at the numbers, pinpoints trends, and as always identifies opportunities for you to capitalize on this trend.

Doggies at the Dinner Table: Pet Humanization in America

We'll jump straight into it. Look at the figure below. The number of households with pets rises steadily, but the big take away? Nothing to see here. Modest growth rates are in line with broader population growth.

(click to enlarge)Total Households that Own 1 or More Pets

But take a look at spending. Increasing at a rate well above pet ownership growth. And the data don't suggest that existing pet-owning households are simply buying more pets now.

(click to enlarge)Growth in Pet Owning Households vs Growth in Spending As can be deduced from the figure above, spending is significantly outpacing the CPI. And to make it visual:

(click to enlarge)Pet Spending vs CPI

What's driving this? To be sure, there are many factors at play. But a major contributor is the changing makeup of our population. Median age is increasing. And retiring baby boomers are looking to fill empty nests. But the grandchildren that they may have otherwise filled them with are put off longer and longer as the average marriage age increases every year. Those couples, those of the deferred marriage, are having less children than before and in many cases opt for the doggy door over the baby crib (with more households now owning dogs than having children according to the 2010 census). The result: pets as family members as never before. Spending habits show this too: the APPA Pet Owner's Survey reveals more than 15% of dog owners buy an urn for deceased pet ashes, nearly a half of dog and cat owners will buy their pets Christmas and birthday gifts, and pets travel with us over the road and through the air. Take a look at the spending figures:

(click to enlarge)Pet Spending Breakdown

Up and to the right, even during the recession. Here's how the spending categories breakdown when indexed:

(click to enlarge)Pet Spending Breakdown Indexed

Services - doggy hotels, kitty spas, designer groomers - and vet care the two highest growth categories. And these two really indicate our evolving views of our pets. We pamper them when they're happy and we cry for them when they're sick. Mom, Dad, brother, and sister…and Fido. All members of the same family.

Action

Many household names are in the pet space, but markedly fewer pure play opportunities exist. Here are a few pure plays that we see poised to continue capitalizing on this trend. We should note however, that we view the industry as ripe for disruption - we expect the humanization trend to continue which will create new business models and in general view the public marketplace as uncrowded (for a multi billion dollar market) - so keep your eyes peeled for new entrants. We do feel, though, that these are good plays for the near and intermediate-term:

  1. PetSmart, Inc. (NASDAQ:PETM) - the overwhelming market leader in the pet supply and services space. PetSmart has done an excellent job at transforming a shopping trip into a full-fledged pet experience and has stayed out in front of pet trends - they've been early adopters of on-site services and also capitalized on changing food, toy, and clothing tastes. When other retailers were hard hit, PetSmart remained strong and we don't see the trend stopping anytime soon. PetSmart is a touch expensive at a P/E ratio of 23x but we see the pet space as significantly more attractive from a growth perspective than the retail space where Wal-Mart and Target are trading at 15.7x and 15.0x, respectively.
  2. VCA Antech, Inc. (NASDAQ:WOOF) - VCA provides diagnostic testing and other services to veterinarians and also serves as a distributor of veterinary medical technology equipment. As the data show, people are spending more and more money at the vet, and we see this accelerating as the economy continues its prolonged recovery. Of note, the pet insurance industry grew at 6.0% per year over the last 5 years. With pets increasingly covered for vet care, a significant hurdle of vet care - the all-at-once high cost - is being lowered.
  3. Petmed Express Inc. dba 1-800-PetMeds (NASDAQ:PETS) - if not for its attractive dividend yield (6.1% at the time of publication) and track record of raising its dividend, PETS may not be on our radar. The company distributes prescription and non-prescription pet medications and serves its customers through online, telephone, and catalogue channels. We see other online retailers such as Amazon as a threat (at least on the non-prescription side of the business), but so far PETS has held serve. Importantly, PETS has no debt, which affords the company maximum flexibility. It's worth a look, but do your homework. We think PETS is the riskiest of the bunch, but is at the very least an attractive near-term yield play (the company has increased its dividend by 50% since 2009).

Conclusion

As we've already mentioned, we at The Wall Street Flaneur think the industry outlook is favorable but also ripe for disruption - the market is enormous, is constantly changing, but has relatively few public players. New, valuable investment opportunities will present themselves. We think the humanization trend will continue to reflect general movements within our society. To name a few: many pets face the same obesity issues as Americans - how about doggie trainers?, we think tech will play an increasingly large role in pet ownership - RFID pinpoints a runaway Fido, and we think the green living movement now so prominent will continue to spill over into the pet marketplace - were those cows-turned-dog-food ethically and sustainably raised? Beyond these, look for emerging economies to follow lead on many of these as disposable incomes rise.

Source: Doggies At The Dinner Table: Pet Humanization In America