PetSmart Corp. Real Client Managed Portfolio PetSmart (PETM) November 14, 2013 Alex Johansson, Charlie Penicook & Zi Jian Gu Agenda Introduction Holding Information Macroeconomic Overview Industry Overview Company Overview Financial Analysis Valuation Recommendation Current Holding Information May 3rd, 2012: Acquired 100 $58.88 Cost Basis = $5,888 November 29th, 2013: Hold Recommendation November 14th, 2013: Current holding 100 $73.02 HPR = 24% Macroeconomic Overview October jobs report better than expected o 204,00 jobs added - 2x expectations Unemployment rose to 7.3% from 7.2% Possible reduction in quantitative easing due to stronger jobs report o May consider reduction at Decembers Fed Meeting Income & job gap widens in uneven recovery Source: LATimes, Forbes, WSJ (URLs in notes) Industry Analysis - Catalysts Number of Pets - Demand for industry goods increases as households adopt more pets - Owners spend $250/year on pet food - Continual growth of number of pets creates growth catalyst. - Predicted 4% growth in industry revenue through 2018 Per Capita Disposable Income - Per capita disposable income is expected to increase slowly in Consumers perceive pets as family members - pet products are considered non-discretionary - A decrease in disposable income has little affect on demand because pet goods are non-discretionary - Purchase of greater quantity of goods and premium items when disposable income increases - Growth of pet parents Source: IBISWorld Industry Report - Pet Stores in the US (Pg. 4 & 5) Source : IBISWorld Industry Report - Pet Stores in the US (URLs in notes) Industry Overlook - New product introductions and rising number of enterprises - Industry growing at 3.5%, economy is growing at 2.1% - Variety of premium pet foods allows high price with large markups - Services has been the fast growing segment - Supply Segment faces huge competition from large merchandises Source: IBISWorld Industry Report - Pet Stores in the US (URLs in notes) Industry Overlook Customer Demographics - Age 35 to 54 accounts for more than 50% of the pet ownership - Steady Income and consider pets as family members Changing Competition - Supermarkets attracted many budget-conscious consumers by offering low quality goods - Expected to remain strong for basic pet supplies - Niche products become keys to succeed Industry Performance - Growing industry and phenomenal growth the past 10 years - Continuous growth due to increase in number of pets and pet owners attitudes towards them % of US households own a pet - growth rates have translated into rising demand for pet products - Continual growth from , even during the recession - The emerging trend of pet parents has also commanded high demand for premium pet products and services - Net profit margins have increased to 3.5% from 3.0% in 2008 Source: IBISWorld Industry Report - Pet Stores in the US (URL in notes) Industry Analysis - Porters Five Forces Source: IBISWorld Industry Report - Pet Stores in the US Company Overview Specialty Retailer Products, services, and solutions for pets 1,278 stores Offers a variety of pets for sale (no cats or dogs) PetSmart Pet Hotel Animal Hospital (operate by Banfield) Banfield is a partially owned subsidiary Services include grooming & training services Source: PETM K; (Pg. 4, 5). IBISWorld Industry Report - Pet Stores in the US (Pg. 2) Company Overview Company Strategy Innovative product and services development Engaging with customers Financial Outlook Net sales increased 10.5% to $6.8 billion in 2012 from $6.1 billion in 2011 Comparable store sales increased 6.3% in 2012 from a 5.4% increase in 2011 Source: PETM K; (Pg ) Risk Factors A decline in consumer spending or detrimental change in consumer behavior. Mis-management of inventory Increasing competition among specialty retailers A disruption or increased costs of supply chain Operation of Banfield pet hospitals diminishes Comparable store sales growth decreases Source: PETM K; (Pg. 7-14) Company Overview Recent News October 17, 2013: Continues to expect the Earnings per share (EPS) in the range of $0.83 to $0.87, Comparable store sales growth to be in the range of %, compared to 3-4%. total sales growth in the range of 3-4% Earnings per share in the range of $3.88 to $3.98. September 26, 2013: Increase its quarterly dividend by 18% to $0.195 from $0.165 per share beginning in the third quarter of fiscal The dividend of $0.195 will be paid on November 15, 2013 Source: PETM K; (Pg ); OneSource (URL in notes) Management Outlook Challenges include: Operation in a highly competitive market Volatility of macro-economy Cash flow from operations adequate to meet operating, investing and financing needs in the short-term Assess economic conditions to guide decisions on use of cash Continual evaluation of store performance 46 net new stores opened in 2012 Source: PETM K (Pg ) Company Overview - SWOT Source: OneSource Information Service: PetSmart,Inc. Recent PETM Performance Source: Yahoo! Finance PetSmart Financials PetSmart Financials Sales Growth Source: OneSource Information Service: PetSmart,Inc. PetSmart Financials - Profitability Source: OneSource Information Service: PetSmart,Inc. PetSmart Financials Efficiency Source: OneSource Information Service: PetSmart,Inc. PetSmart Financials - Solvency Source: OneSource Information Service: PetSmart,Inc. PetSmart Financials - DuPont Source: OneSource Information Service: PetSmart,Inc. No Comparables Analysis PetSmart is the only publicly traded retailer devoted to pet products and services Petco. is a private companyNo Financials Big-Box Competitors arent related enough Specialty Retail Technical Analysis Decision Drivers Continued growth during economic downturn Diversified product offering Market saturation concerns o Demographic slowdown o New store expansion Increased competition from big box retailers, e-commerce Consistent dividend growth Equity Valuation Recommendation DCF Valuation: $71.65 Current Price: $ Recommendation: HOLD