The Wall Street...'s  Instablog

“The overall top-line trend is PetSmart (PETM) sales-wise has performed well through the economic downturn. Sales widely outperformed most other discretionary chains. I think that reflects to some extent the nondiscretionary piece of PetSmart's business. One way of saying it is that 40% of their business is pet food. Generally speaking, even in tough economies, people don't change their patterns of buying pet food. They don't feed their pets less or even change the food they feed them, generally. So that's what holds PetSmart's earnings up so well.

“The other really big piece of why PetSmart has performed so well, I think, is because the management team was early to adopt the slower growth, higher cash flow model. You have a few years of very high store growth, but now they're opening a much smaller number of stores. They are looking at about a 4% pace on opening new locations. That is obviously a low-single-digit-type percent pace. At the same time, they are controlling costs better, generating more cash and buying back stock. You see a lot of other retailers follow this philosophy as well lately, but PetSmart was early to that model. This new strategy has helped to take a lot of risk out of the PetSmart investment story.”

“IDEXX is a very unique company; it's a hybrid. It has a very strong med-tech focus coming from its instruments and consumables segment, and it's further diversified by the fact that it has a strong international focus, with roughly 40% of its revenue stream derived from non-U.S. sales. Both of these areas of animal health care are growing.

“On the med tech front, veterinarians are increasingly moving towards, as we were just talking about, more testing and more pet-side testing, first and foremost to drive this whole idea of higher-quality clinical care and faster clinical care. And it has the added benefit of a secondary revenue stream.

“So all of a sudden, you are seeing a lot more interest around in-clinic, pet-side care to drive the value proposition not only to the pet owner but to the veterinarian. IDEXX is really leading this charge, which I believe is really a paradigm shift in the delivery of care through its suite of analyzers that essentially create an in-house clinic.

“In many ways, the sustained economic weakness in the U.S. likely accelerated this trend. Instead of a vet giving away 50% of the profit on every test sent out the reference lab, keeping the routine tests in-house provides faster results, direct interaction with the client and a platform for educated decisions to be made on the spot that can drive better clinical care and potentially drive an additional revenue stream. All of the constituencies win.”