PETM - PetSmart

[thefatbaboon]

Ross,

 

This thing you mention - of waiting to see food has run low and then making an impromptu visit to the shop was one of the consumer habits that Petsmart management mentioned in their last Investor presentation.  (They also said that with pet food - as with human food - consumers seem to not like the delivery model because they don't want a package of food sitting outside while they are at work). 

 

You mentioned some interesting relative pricing on a few products.  Also, the pet stores can stock quite a few products "channel-exclusive" that the food manufacturers have agreed not to put through the grocery stores.  The whole chain - services, retail, food producer - seems to take advantage of (and protect) "premiumization".

 

Overall,  I think Petsmart has some decent advantages vis-a-vis the online retailer and the grocer. 

[augustabound]

This is true.

Groceries every Sunday morning then sometime during dinner remembering the dog or cats need food.  Always last minute for us.  ;D

[beerbaron]

Did anybody notice that good cat or good food costs about 50$ per kilo, while whole grain chicken costs about 20$, beef 10$, pork 5$. What can they put in there that is better for my cat than clean proteins? And why would I feed my animal food that is more expensive than what I eat myself?

 

I personally like the economic lesson from it. By segmenting the market (human food VS animal food) some manufacturers can extract ridiculously better margins than others.

 

I'm not in the right business!

 

BeerBaron

 

 

 

 

[crastogi]

Augusta (and any other pet owners),

 

If you're a pet owner and frequenter of Pet stores, have a couple questions:

 

1.  Do you buy pet food online?  Would you consider buying pet food online?  If not, why not? 

 

2.  Do you take your pet with you to the store?  Is that an important option?

 

3.  Have you made use of a) In store veterinary services, b) In store grooming services, c) PetsHotel boarding services.

 

Thanks!!!

 

1. I have bought pet food online, but it is now actually cheaper from petsmart both online and in the store. Wag.com is owned by Amazon:

 

http://www.petsmart.com/product/index.jsp?productId=20325346&lmdn=Brand&f=PAD%2FpsNotAvailInUS%2FNo

 

http://www.petsmart.com/product/index.jsp?productId=20325346&lmdn=Brand&f=PAD%2FpsNotAvailInUS%2FNo

 

Science Diet Grain Free $38 at Petsmart vs $47 at wag.com.

 

http://www.wag.com/dog/p/iams-proactive-health-adult-large-breed-premium-dog-nutrition-819951

 

http://www.petsmart.com/product/index.jsp?productId=17059616&f=PAD%2FpsNotAvailInUS%2FNo

 

Iams ProActive Health 30lb - $30 at Petsmart vs $40 at wag.com.

 

Amazon does come out ahead on some products but it is pretty close. Blue Buffalo Dog Food 24 lb bag:

 

Petsmart $59 (though they run a lot of specials 10-30% off for large orders and they have Petsmart Perks) vs Amazon $58

 

 

This is the food we used to buy for our cats of Amazon:

 

 

We buy it locally for $28. More than price, my wife and I seem to notice the food has run low at the last minute and it's easier to pick it up on our weekend grocery trip than order it online. I ordered online until I forgot to order and discovered the food was cheaper at the pet store. I could see online being a good deal if you lived out and going to a pet store was an inconvenience.

 

2.  Taking my pet to the store is not important to me. Before I bought PETM the first time, I went to a few stores to see what they were like. I would say about 25% of the people in the stores had their pets with them. Petsmart puts all the dog bones and toys on the bottom shelf in wide bins so your dog can pick their own treat (or grabs something and obliges you to buy it while you are walking around  ;) ).

 

3. I have never used any of their services. I did observe people bringing their dogs in to the store, dropping them off to be groomed and leaving to finish some other shopping. I see the locations many petsmarts in the same shopping centers as Target, Lowes, HD, a mall, and Best Buy as an advantage.

 

Off topic here, but how did you create that price watch?

[jouni1]

this is one specialty retail segment i expect to do well. people's love for their pets makes it possible to run a specialized shop for this stuff.

 

i have looked at petsmart but for some reason i really like zooplus in germany. been meaning to look into it more. it's number 3 in europe (IIRC), and the top 2 players are brick & mortar, zooplus being purely online. they plan on being number one in a few years.

 

the site is kind of tacky, but the content is great. pet supplies and food for competitive prices, quick & cheap delivery to remote parts of EU and user pictures&reviews of the products. (compared to sears website it's just heaven)

 

i feel like this might be one of the few online retail segments that amazon can't force itself to be #1 in. while thinking about this, i realized that even though i love shopping at amazon, i had only once looked for pet products there. but a zooplus package comes in every 2-3 months.

 

here's a link if someone's interested: http://investors.zooplus.com/en/home.html

 

would love to hear more if someone here is familiar with the business (ze germans?)

[radioheadok3]

Not sure if this point has been made, but PetSmart does not run the vet portion of the business. It's operated by Banfield, which IIRC they own 20% of. We recently switched to Banfield and couldn't be happier. Super friendly staff and knowledgeable Docs. Also, channel exclusivity is a big part of the PETM story, and what likely prevents it from being a slow melting ice cube, if at all.

 

If PETM is able to underprice AMZN, does anyone know what the margin profile differential is? Also, IIRC PETM outsources its e-Commerce, which struck me as slightly bizarre. Anyone have insight into how meaningful e-Commerce is for the Company?

[thefatbaboon]

Radio,

 

Yes, had seen that regarding Banfield.  To the best of my knowledge the rest of Banfield is owned by a company controlled by the Mars family.  (In a funny way I took this as a good sign, a sign of commitment to "premiumization" - for one of the biggest Pet food manufacturers to be involved in providing physical, in-store services).

 

Regarding those numbers Ross put up…I think it is difficult to extract conclusions without seeing a full spread of data because as we all know with retail they have a lot of flexibility to loss-lead in some areas and make up for that in margin in other areas.  In general, I find it promising that they can be competitive on many important products while getting good margins.  So, it does look like they are not sitting there with a big bullseye on their back.  Now exactly what they are making on each product compared to competition - no idea.  Haven't a clue how one could get that out of amazon or the grocers.

 

They've outsourced their commerce to eBay.  Also, the BoD has made eCommerce a particular point of focus for management - and starting last year  it has explicitly got its own line in mgmt compensation.  So, they clearly see it as important.  Why have they outsourced?  I don't know for sure - but my guess would be they don't have the internal expertise.  Might be interesting to ask that on a conference call.

[Ross812]

Ross,

 

This thing you mention - of waiting to see food has run low and then making an impromptu visit to the shop was one of the consumer habits that Petsmart management mentioned in their last Investor presentation.  (They also said that with pet food - as with human food - consumers seem to not like the delivery model because they don't want a package of food sitting outside while they are at work). 

 

You mentioned some interesting relative pricing on a few products.  Also, the pet stores can stock quite a few products "channel-exclusive" that the food manufacturers have agreed not to put through the grocery stores.  The whole chain - services, retail, food producer - seems to take advantage of (and protect) "premiumization".

 

Overall,  I think Petsmart has some daecent advantages vis-a-vis the online retailer and the grocer. 

 

Augustabound and I have both experienced the impromptu visit to the pet store phenomena and this happens in a household where my wife and I feed our pets. What happens if your children are responsible for feeding the family pet? I can imagine many instances where your child goes to feed the dog in the morning and discovers the food is gone. You run to Petsmart to get the dog some food and while you’re there, pick up a pig ear because your dog had to wait for breakfast… 

 

The other moat expanding factor that I think analysts routinely fail to note when citing online competition are all the accessories you need when caring for an animal. For instance, we use about 40 pounds of cat litter a month. Wag.com may be able to compete when they are shipping $2/lb premium pet food, but what about 35c/lb cat litter? I pick up my cat litter at the pet store because its +/- $1 for a 40lb box compared to Target, always several dollars cheaper than the grocery store, and my wife loves looking at the pets available for adoption!

 

This leads to the subject about services. I would say comparing the Petsmart Grooming Services (and other services i.e. training, doggy day care, ect) to a Professional Local Groomer (or other) is like comparing Fantastic Sams or Great Clips to a local hair salon. Sure you are going to get a better cut from the salon, but you will get a decent cut for half the price at Great Clips; Great Clips is always full of people waiting for a cheap hair cut which in Petsmart’s case is foot traffic. I’m not sure the services are strictly about competing with local groomers and providing elite service. I think they are more about providing a cost effective solution to their consumers and a decent margin that gets people into their stores and has them walking around shopping while they are waiting to pick up their dog from its appointment. This may be why the vet clinic at Petsmart is outsourced. It may have been easier to do a partnership with an established practice and get them in the stores to drive traffic than to build a clinic from the ground up.

 

The only competitor that I would worry about is premium grocery stores. If Petsmart loses their exclusive distribution channels and Whole Foods picks up the premium pet food, what will happen? Petsmart and Whole Foods consumers overlap. I can see many of the customers, like Augustabound who runs in to grab his pet food instead of taking advantage of the pet services, opting to pick up the food while they are picking up groceries during their weekly visit to Whole Foods. 

 

 

Castogi,

 

The price watch to is a browser plugin. Check out:

 

www.camelcamelcamel.com

 

 

 

[thefatbaboon]

Ross,

 

This thing you mention - of waiting to see food has run low and then making an impromptu visit to the shop was one of the consumer habits that Petsmart management mentioned in their last Investor presentation.  (They also said that with pet food - as with human food - consumers seem to not like the delivery model because they don't want a package of food sitting outside while they are at work). 

 

You mentioned some interesting relative pricing on a few products.  Also, the pet stores can stock quite a few products "channel-exclusive" that the food manufacturers have agreed not to put through the grocery stores.  The whole chain - services, retail, food producer - seems to take advantage of (and protect) "premiumization".

 

Overall,  I think Petsmart has some daecent advantages vis-a-vis the online retailer and the grocer. 

 

Augustabound and I have both experienced the impromptu visit to the pet store phenomena and this happens in a household where my wife and I feed our pets. What happens if your children are responsible for feeding the family pet? I can imagine many instances where your child goes to feed the dog in the morning and discovers the food is gone. You run to Petsmart to get the dog some food and while you’re there, pick up a pig ear because your dog had to wait for breakfast… 

 

The other moat expanding factor that I think analysts routinely fail to note when citing online competition are all the accessories you need when caring for an animal. For instance, we use about 40 pounds of cat litter a month. Wag.com may be able to compete when they are shipping $2/lb premium pet food, but what about 35c/lb cat litter? I pick up my cat litter at the pet store because its +/- $1 for a 40lb box compared to Target, always several dollars cheaper than the grocery store, and my wife loves looking at the pets available for adoption!

 

This leads to the subject about services. I would say comparing the Petsmart Grooming Services (and other services i.e. training, doggy day care, ect) to a Professional Local Groomer (or other) is like comparing Fantastic Sams or Great Clips to a local hair salon. Sure you are going to get a better cut from the salon, but you will get a decent cut for half the price at Great Clips; Great Clips is always full of people waiting for a cheap hair cut which in Petsmart’s case is foot traffic. I’m not sure the services are strictly about competing with local groomers and providing elite service. I think they are more about providing a cost effective solution to their consumers and a decent margin that gets people into their stores and has them walking around shopping while they are waiting to pick up their dog from its appointment. This may be why the vet clinic at Petsmart is outsourced. It may have been easier to do a partnership with an established practice and get them in the stores to drive traffic than to build a clinic from the ground up.

 

The only competitor that I would worry about is premium grocery stores. If Petsmart loses their exclusive distribution channels and Whole Foods picks up the premium pet food, what will happen? Petsmart and Whole Foods consumers overlap. I can see many of the customers, like Augustabound who runs in to grab his pet food instead of taking advantage of the pet services, opting to pick up the food while they are picking up groceries during their weekly visit to Whole Foods. 

 

 

Castogi,

 

The price watch to is a browser plugin. Check out:

 

www.camelcamelcamel.com

 

That's very interesting about the weight/size of some products.  Thanks.

 

On services, I think I see it the way you see it.  Burger King is big business.

 

Regarding a Whole Foods type.  I think one would need to look at yield per square foot etc…to see if it would be enhancing for them to carve out space for pets.  If 10,000 sq ft & associated cap ex dedicated to food has better yields than 10,000 sq ft dedicated to pets it seems highly unlikely they would make a push.  The other point would be that a lot of the WF clientel would be using local vets, stores, groomers, because thats quite likely for people who spend $100 to get some organic chickens and vegetables.  Have you seen any high end grocers going into pets?

[mikazo]

I've actually noticed over the past year that many of the Petsmarts (I've been to 4 or 5) have reorganized their store layout entirely. I'm not sure exactly what their plan was, but it looks like they moved commonly-bought essentials like cat litter closer to the front of the store. Maybe this is talked about in their annual report somewhere; I haven't had a chance to look yet.

[mikazo]

Just found from the PETM 2013 proxy that they changed CEOs in the past year:

 

The positions of Chairman and Chief Executive Officer are currently both held by Robert F. Moran. In January 2013, PetSmart announced that, as part of

its executive succession plan, immediately following the 2013 Annual Meeting of Stockholders Mr. Moran will resign from his position as Chief Executive

Officer and that position will be assumed by David K. Lenhardt, our current President and Chief Operating Officer. In connection with these management

changes, Mr. Lenhardt will be appointed to the Board of Directors. Mr. Moran will continue in his role as Chairman of the Board in an executive capacity.

[Ross812]

From Morningstar on the subject:

 

However, PetSmart has experienced fairly significant management turnover over the past year. David Lenhardt, the prior president and chief operating officer (among other roles he has taken on since joining the company in 2000), assumed the CEO role from Robert Moran, who stepped down from both his chairman and CEO role earlier this year. Additionally, Carrie Teffner, the former CFO of Weber-Stephen Products (a manufacturer of barbecue grills and accessories), replaced Chip Molloy as acting CFO, though Molloy will continue in an advisory role through March 2014. In our view, both Moran and Molloy helped sculpt PetSmart’s current premium focus and prudent capital allocation strategy, so their departure is an incremental negative and creates some uncertainty during the transition period. However, we believe the executive team has established a sensible strategy going forward, and Lenhardt is well equipped to execute it.

[thefatbaboon]

Just found from the PETM 2013 proxy that they changed CEOs in the past year:

 

The positions of Chairman and Chief Executive Officer are currently both held by Robert F. Moran. In January 2013, PetSmart announced that, as part of

its executive succession plan, immediately following the 2013 Annual Meeting of Stockholders Mr. Moran will resign from his position as Chief Executive

Officer and that position will be assumed by David K. Lenhardt, our current President and Chief Operating Officer. In connection with these management

changes, Mr. Lenhardt will be appointed to the Board of Directors. Mr. Moran will continue in his role as Chairman of the Board in an executive capacity.

 

Yep, you'll have seen also that the COO retired/quit/fired a couple weeks ago.

 

Haven't seen anything suspicious in the mgmt turnover.  Moran and Molloy had been there for quite a long time - and Lenhardt was serving there for quite a few years before being promoted to CEO. 

[mikazo]

PETM down 11% over the past two days. Haven't had a chance to look at earnings yet.

[thefatbaboon]

Still haven't pulled the trigger, but it's interesting.  There are a couple things that are giving me pause.  One,  all the mgmt turnover - I really don't feel I "know" the new managers: ceo (new), cfo (new), coo(gone), cio (new).  Two, when something starts going wrong with a retailer it doesn't usually change in a quarter. Whatever causes the traffic and sss weakness usually takes time to identify and correct - particularly with a new management team.  Three, haven't completely accepted the long term competitive advantages/moat of things like services, feed etc.  I sort of accept them - but for some reason I still feel a bit uncomfortable.

[Ross812]

Still haven't pulled the trigger, but it's interesting.  There are a couple things that are giving me pause.  One,  all the mgmt turnover - I really don't feel I "know" the new managers: ceo (new), cfo (new), coo(gone), cio (new).  Two, when something starts going wrong with a retailer it doesn't usually change in a quarter. Whatever causes the traffic and sss weakness usually takes time to identify and correct - particularly with a new management team.  Three, haven't completely accepted the long term competitive advantages/moat of things like services, feed etc.  I sort of accept them - but for some reason I still feel a bit uncomfortable.

 

A little light on the management changes:

 

CEO Robert Moran retired and replaced by the former president and COO David Lenhardt in June of '13. Lendhardt was named president president (April '14) and eliminated the COO position after the SVP of supply chain stepped down from a promotion to the COO and president position. Lendhardt has been with petsmart since 2000.

 

The SVP of supply chainwas replaced by the VP  Gene Burt  in 2012; Burt previously worked as a distribution executive at both Target and Home Depot. He has been with Petsmart since 2007. 

 

CFO Chip Malloy retired and was replaced by Carrie Teffner who was the former CFO of Sarah Lee (Hillshire Brands) and was with the company from 1988-2009. She recently worked as the CFO for Timberland (Apparel, acquired in 2011) and Weber-Stephen (Grills, 2011 to 2013).  Shares were consistently bought back under Teffner while she was at Sarah Lee.

 

 

[thefatbaboon]

Ross,

 

To avoid confusion it's probably worth being clear that Teffner was a divisional CFO at SLE and not herself responsible for capital decisions of the parent.  She seems a straight talker on the calls - and it's quite cool if she actually does own a great dane.

 

I don't me to be negative on any of these people.  The new CEO and CFO have been very clear that they intend to stick to the shareholder return model.  And Lenhardt himself has been at the company for more than a decade and was obviously a pivotal figure in Petsmart's successes.

 

I find the pick from Hallmark as CIO to be interesting (in a good way).  That's a 2000+ store business which has had to navigate the ecommerce threat/opportunity for a long time, so Goodwin probably has a decade of useful experience in that regard.

[Ross812]

Have you seen this UBS report?

 

http://www.petpoint.com/reportspage/analystreports/March%203%20-%20UBS.pdf

[thefatbaboon]

No.  Will give it a read.  Thanks!

 

 

[thefatbaboon]

Longview Asset Management - the Crown family/General Dynamics guys - added 1m shares and now hold 8.4m shares.

[Phaceliacapital]

Ross,

 

you're a big fan of Petsmart, any summary on why it hit 52w low recently?

 

TiA

[KCLarkin]

Yeah, I'd like to hear the bear case. If I'm a Greenblatt investor, PETM looks incredibly attractive.

[PatientCheetah]

What do everyone think of the upper limit on store counts? Retail concepts usually don't translate well internationally. I know for apparel retailers, the upper limit in the US is about 1,000 stores.

[randomep]

Yeah, I'd like to hear the bear case. If I'm a Greenblatt investor, PETM looks incredibly attractive.

 

I am a 7yr PETM holder during which time I have seen it go up 3x and now it is back down, but why is it "incredibly" attractive?

[Ross812]

Ross,

 

you're a big fan of Petsmart, any summary on why it hit 52w low recently?

 

TiA

 

Same store sales decreased by 0.6% for the first time in 14 years and are expected to be flat for the next year.

 

Metric Previous Outlook Current Outlook

Earnings Per Share $4.42-$4.54 $4.29-$4.39

Revenue Growth 4%-6% low single digits

Comp-Store Sales Growth 2%-4% relatively flat

 

I think it was a knee jerk reaction from the market and caused all sorts of renewed fears about why it was happening. I don't believe pet stores are on par with grocers when it comes to online competition. I think last year was a great year and put up some really high comps. I would expect 2-4% same store growth next year before I would reconsider my thesis in the least.

 

What do everyone think of the upper limit on store counts? Retail concepts usually don't translate well internationally. I know for apparel retailers, the upper limit in the US is about 1,000 stores.

 

See the attached IBISWorld report on the pet store industry. It seems that pet ownership is growing at 2% and pet spending at 8-10%. Even if super pet stores reach saturation at 1/10th the number of supermarkets (35k supermarkets with over $2M sales) this 3500 number of petstores should grow at 2%. Smaller foot print stores have even more potential. I don't compare petsmart to a apparel retailer but to a specialty grocer like Whole Foods.

45391_Pet_Stores_in_the_US_Industry_Report.pdf