Tuesday, June 10, 2008

Time to Buy Petsmart

Petsmart is the “top dog” in its industry – outdoing its competitors in every phase of the pet game. Naturally, the primary business operates pet stores (1,008 stores per Yahoo! Finance) in North America. What separates Petsmart form its competitors: Veterinary services, grooming, doggie day camps and boarding. Instead of going to a discount store to buy food and supplies, many consumers still splurge on their pets – perhaps taking advantage of the loyalty the company shows to both animals and their owners. The diversity of the stores are unrivaled- down to the simplest form: Petsmart offers both specialty and national chain brand pet food!

With a plurality of sales coming from essentials like food, Petsmart seems to be in a decent position to handle the penny pinching becoming prominent in the face of $135 oil. Business week points out that food sales account for 40% of total revenue and the newly implemented PetHotel grooming rose 22% last quarter. April same-store sales also rose 2.9% despite headwinds blowing in the direction of most retailers.

In the most recent conference call, PETM also reaffirmed full year guidance of $1.51-$1.59/share. Only time will tell if a dismal macroeconomic picture factors into pet spending.

Additionally, I found the following quotes interesting [from the article]:

a) “Based on the 2007-08 APPMA National Pet Owners Survey, more than 71 million U.S. households, or 63%, own a pet.”

b) “Increasingly, pets are being treated like family members, according to the APPMA. While discretionary spending by consumers is likely to slow in 2008, precipitated by rising gasoline prices, a decline in home equity loans and refinancing, and burgeoning debt levels, we believe that pet retailers are somewhat insulated from these pressures. If pets are considered part of the family—and are treated as such—we think this subindustry should be able to weather the negative economic issues that are currently hurting most retailers.”

©businessweek: See the full article here.

And I personally don’t disagree. People will certainly give up some luxury items to keep their best friends happy. I know I will. Sure, we all know Walmart wants to penetrate the pet food and supplies market. But, remember, Walmart sells clothes and that does not stop people from shopping at Nordstrom and Abercrombie & Fitch. This same theory, in my opinion, will hold true for this specialty retailer.

Finally, from a trading/technical standpoint, take a look at the 6 month chart with 50 day SMA:

It has bounced off the 50 day SMA twice since breaking through in late April. After just breaking under the 50 day this week, a bounce back off it will further affirm my conviction from a technical standpoint as a great time to enter a position.

Disclosure: I have no position in PETM as of 6/11/08.

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