Daily Gains Letter

A “Best in Show” Investment with Sustained Growth

By for Daily Gains Letter | Feb 19, 2013

















DL_Feb_19_2013_JohnBaby boomers have dominated the North American economy over the past quarter-century. As the 77 million baby boomers enter retirement, their spending habits might be changing, but they’re still an economic force to be reckoned with.

Betting on the baby boomers to boost your investment portfolio could be as difficult as trying to time the markets. That said, there is one area that’s often overlooked but has been seriously outstripping the markets.

With children leaving the nest, a growing number of retiring baby boomers are turning to pets for companionship. They also don’t mind giving their pets the best of everything. Over the years, pet pampering has evolved from knocking table scraps onto the kitchen floor to preparing premium food, elegant grooming spas, specialized products, and luxurious overnight day-care centers that show animal-themed movies.

According to the American Pet Products Association (APPA), an estimated 72.9 million households (62%) owned a pet in 2011. In 1988, the first year the survey was conducted, 56% of U.S. households owned a pet. (Source: “2011-2012 APPA National Pet Owners Survey,” American Pet Products Association, last accessed February 15, 2013.)

While the U.S. economy has been sputtering along since 2001, the pet care industry has been on fire, with total expenditures climbing 86% to roughly $53.0 billion in 2012 (from $28.5 billion in 2001). In 2011, Americans spent $51.0 billion on pets, a 5.4% increase over the $48.4 billion spent in 2010.

Seemingly immune to the recession, when America’s retail economy was crumbling from 2008 to 2010, pet spending increased by 11.9%. (Source: Warren, E., “Despite recession, we still indulge our pets,” Chicago Tribune April 29, 2010, last accessed February 15, 2013.)

Just how big is the pet care industry? It’s the seventh-largest retail industry in the U.S., bigger than the jewelry, candy, toy, and hardware industries. After consumer electronics, pet care is the fastest-growing category in retail, expanding at six percent a year. (Source: Mann, P., “How The Rich Pamper Their Pets,” Forbes January 15, 2008, last accessed February 15, 2013.)

Dog may be man’s best friend, but PetSmart, Inc. (NASDAQ/PETM) could be your investment portfolio’s best friend. PetSmart is the #1 U.S. specialty retailer of pet food and supplies, with 1,269 stores and more than 195 in-store PetSmart PetsHotels—boarding facilities for dogs and cats—in the United States, Canada, and Puerto Rico.

The company’s 10,000 products range from scratching posts to iguana harnesses, and they are sold under national brands and PetSmart’s own private labels. Stores provide in-store boarding facilities (PetsHotels), grooming services, and obedience training. Veterinary services are available, as well, in about 800 shops through pet hospital operator Medical Management International, of which PetSmart owns about 20%.

The company has a market cap of $7.1 billion, a forward price-to-earnings (P/E) ratio of 16.8, $317 million in cash, and $536 million in long-term debt; it provides an annual dividend yield of one percent. (Source: “PetSmart Reports Results for the Third Quarter 2012,” PetSmart, Inc. web site, November 14, 2012, last accessed February 15, 2013.)

The company announced that third-quarter revenues were up six percent year-over-year at $1.6 billion; net income for the period was up 50% at $82.0 million, or $0.75 per share.

During the third quarter, the company generated $133 million in operating cash flow, spent $40.0 million in capital expenditures, distributed $18.0 million in dividends, and repurchased $60.0 million of PetSmart stock.

“Our performance in the third quarter was due to strength across all three merchandising categories, as well as across services,” said Bob Moran, Chairman and CEO. (Source: Ibid.)

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Chart courtesy of www.StockCharts.com

PetSmart’s share price has been in an uptrend since 2001, and it has been bullish since late 2008. Since the beginning of 2001, PetSmart’s share price has soared 2,730%. Since 2010, its share price has more than doubled. While the company’s share price has been trading in a tight range since August, it has been testing support near $66.00 on solid volume.

Going forward, the pet care industry shows no signs of slowing down. For fiscal 2012, PetSmart expects comparable store sales growth of six to seven percent and total sales growth in the 10%-11% range. The company also raised its earnings-per-share (EPS) guidance from a previous range of $3.30–$3.40, to current expectations of $3.47–$3.51.

For the fourth quarter of 2012, the company expects comparable store sales growth in the mid-single-digit range, and EPS between $1.16 and $1.20.

Pet ownership in America has been growing steadily and shows no signs of slowing down. According to the APPA 2011–2012 survey, each year Americans spend, on average, more than $1,500 on their dogs and more than $1,200 on their cats.

PetSmart’s best-in-show growth and profitability make it a great opportunity for investors looking to add a proven, recession-proof play to their retirement portfolio.

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