Presented by
Peng Liang
Yongxiang Mao
Richie Hartz
Xiaosi Song
Shengkun Wang
November 29, 2012
1
Agenda
•
•
•
•
•
•
•
•
Introduction
Recent Stock Performance
Company Overview
Industry Overview
Financial Analysis
Projections
Valuation
Recommendation
2
Current Position
• 100 shares bought on May 3, 2012 @ $58.88
• Current Price: $69.91 as of 11/28
• Unrealized Gain: $1,103 with a return on investment
of 18.73%
WAG
12%
WFR ZIXI
1% 4%
ABT
15%
PETM
5%
MOS
8%
MCD
13%
AEO
23%
JKHY
12%
DO
7%
3
Recent Stock Performance
Source: Pet Smart 2011 Annual report P32
4
Recent Company News
• October 1, PetSmart was added to the S&P 500, replacing Sunoco
• October 15, the vice president of investor relations and treasury
post, David Cone, left PetSmart and joined private home builder,
Taylor Morrison, as the CFO
• November 14, PetSmart unveiled its 3rd quarter results: Sales
increased to $1.6B by 9%; EPS up by 50% to $0.75/share; Expected
annual sales for FY 2012 $6.5B
• November 26, CEO Robert Moran told CNBC that PetSmart grabbed
a big share of holiday spending, about 76% of pet owners were
expected to buy their pet a holiday gift. The company was ready to
pounce on a housing recovery, explaining home sales are closely
correlated to pet acquisition.
5
Company Overview
• PetSmart, Inc. is the largest specialty provider of pet products,
services and solutions
• Founded in 1986 and public in 1993 on the NASDAQ
• In 2005, name rebranded from PETsMART to PetSmart
• FY 2011, 50,000 associates & 1,232 pet stores
• Net Sales: $6.1 Billion
• Services Sales: $0.67 Billion
6
Business Segments
• Merchandise
 Consumables
 Hardgoods
 Pets
• Services




Grooming
Training
Hotel/Day Camping
Veterinary Services
7
Consumables
• Consumables merchandise sales include pet food, treats
and litter
• PetSmart emphasizes super-premium, premium and
therapeutic dog and cat foods
• Proprietary labels like Grreat Choice, Authority, and
Simply Nourish
>70%
Source: PetSmart Q2 2012 Presentation, P12
8
Hardgoods
• Hardgoods include pet suppliers and other goods
• Collars, leashes, health care supplies, toys and apparel, as
well as pet beds and carriers
• Higher margin and lower turnover than consumables
• Established strategic cooperation with Martha Stewart,
GNC and Toys R US
Source: PetSmart Q2 2012 Presentation, P13
9
Pets
• No Dogs or Cats, but space in store for adoption
• Only Fish, Reptiles, Birds and Small Pets
10
Services
Largest pet services provider in North America
• Grooming: precision cuts, baths, nail trimming and
grinding, and teeth brushing (900 sq ft / store)
• Training ranges from puppy classes to advanced or
private courses
• PetsHotels: 24-hour supervision, temperature controlled
rooms and suites
• Veterinary hospitals: routine examinations and
vaccinations, dental care, and surgical procedures
• As of Jan. 2012, owns 192 PetsHotels
Source: PetSmart Q2 2012 Presentation, P17
11
Pet Store Industry - Segmentation
Pet food
•A variety of premium pet foods are
available to consumers today
Pet supplies
•Revenue has been declining in the
last five years due to competition,
•Increasingly sold at retail outlets
Services
•Fastest-growing product segment
•Includes full service grooming, haircuts, baths, toenail trimming, and tooth
brushing, but excludes veterinary services
•Other services may include training, boarding and day camp.
Live animal purchases
Relatively small and stable sales as a one-off purchase without repetitive spending
Source: Pet Stores in the US, WWW.IBISWORLD.COM
12
Pet Stores Industry
People between 45 to 54 with steady income streams look for pet
companions to fill the empty space in their households after their children
leave home.
Source: Pet Stores in the US, WWW.IBISWORLD.COM
13
Major Players in This Industry
IBISWorld estimates that by the end
of 2012, the industry will have about
13,853 firms.
Source: Pet Stores in the US, WWW.IBISWORLD.COM
14
Porter’s Five Forces
Source: Pet Stores in the US, WWW.IBISWORLD.COM; Global Specialty Retail, MarketLine; 10-K
15
Demand Determinants
• Pet ownership
• 62% of U.S. households are estimated to own a pet in 2012 compared
with 56% in 1998
• Income
• Pet owning households with high disposable income have been the
main customers for luxury and trendy pet products
• People with higher income tend to travel more and are more likely to
utilize pet boarding industry operators
• Demographics and lifestyle
• Aging population may increase demand for pets for companionship
• Households that are frequently relocating, working longer hours, or
living in apartments are less likely to have pets
Source: Pet Stores in the US, WWW.IBISWORLD.COM
16
Macroeconomic Condition
Recovering consumer confidence and strengthening retail sales since 2009.
Source: http://dailycapitalist.com/2012/01/31/income-and-spending-slowed-to-a- 17
crawl-in-2011/
Industry Outlook
1. Rising pet ownership serves as a strong driver for demand and boosts
sales
2. Slowly improving economic conditions allows customers to spend more on
premium pet products and services
3. Strong competition from grocery stores and mass merchandisers
4. Higher demand for pets over the next five years driven by more common
single-person households and the aging population
5. Profit margins are forecasted to increase from 4.3% in 2012 to 4.5% in
2017 with expected growing profitability, thus also bringing new entrant
into the industry
Source: Pet Stores in the US, WWW.IBISWORLD.COM
18
Financial Performance of Competitors
Gross Profit Margin
Net Income Margin
Merchandise Group
TGT US Equity
29.70%
4.10%
WMT US Equity
24.90%
3.50%
COST US Equity
12.40%
1.70%
Average
22.33%
3.10%
IDXX US Equity
53.80%
13.50%
WOOF US Equity
23.60%
6.10%
HSKA US Equity
43.10%
2.30%
Average
40.17%
7.30%
PETM US Equity
29.90%
5.20%
Service Group
19
Comparative Equity Performance
• Services
• Merchandise
20
PetSmart’s Strategy
• Create meaningful differentiation to drive brand
preference
• Offer superior customer service
• Focus on operating excellence
• Grow pet services business
• Add stores and provide the right format to meet the
needs of customers
Focus is on SOLUTIONS!
Source: PetSmart 10-k and Q2 2012 Presentation, P5
21
Market Differentiation
Customers come to
stores for problems
solving
Increase customer
loyalty
Stimulate
merchandise sales
Store associates with
necessary training
Drive traffic
22
SWOT Analysis
Strengths
Weaknesses
•Strong product assortment
complemented by value added services
•Co-anchor strategy and multiple
channels improving performance of pet
services business
•Supplier concentration
Opportunities
Threats
•Estimated positive growth of pet industry
•Favorable trends of online retail
spending
•Increasing demand for private label
brands
•Sluggish discretionary spending may
impact the revenue growth adversely
•Increasing competition from large
retailers
•Rising labor costs in the U.S.
23
Risk & Uncertainty
• Quarterly operating results may fluctuate due to seasonal
changes associated with the pet products and services retail
industry, and new store openings and store closures.
•
A higher portion of our net sales and operating profit during the fourth fiscal quarter
•
Lower operating margins for new stores that tend to experience higher payroll,
advertising and other store level expenses, as a percentage of net sales, than mature stores
• Disruption of the relationship with or the loss of any of our
key vendors
•
•
Sales of premium pet food for dogs and cats comprise a significant portion of our net
sales. Currently, most major vendors of premium pet food (exclusive relationships) do
not permit their products to be sold in supermarkets, warehouse clubs, or through other
mass and retail merchandisers.
Two of our largest vendors account for a material amount of products sold
• Food safety, quality and health concerns
•
costly recalls and a loss of consumer confidence
Source: 10-K
24
Sales & EPS Growth
Net Sales (Billions)
EPS
$7.00
$3.00
$6.10
$6.00
$5.70
$2.55
$2.50
$5
$5.00
$4.70
$2.01
$1.95
$2.00
$4.00
$1.52
$1.59
$1.50
EPS
Net Sales (Billions)
$5.30
$3.00
$1.00
$2.00
$0.50
$1.00
$0.00
$0.00
2007
2008
2009
2010
2011
Sales growth rate: 7% per year; EPS growth rate: 7% per year
25
Sales Penetration
Merchandise sales
accounts for the largest
portion of PetSmart’s
sales, but keeps
decreasing as % of net
sales due to higher
growth rate in services
segment
100
8.8
9.7
10.4
10.8
10.9
11
90
80
70
60
Pet Services
50
91.2
90.3
89.6
89.2
88.5
88.4
2006
2007
2008
2009
2010
2011
Merchandise
40
30
20
10
0
26
Services Growth
Source: PetSmart Q2 2012 Presentation, P18
27
Dupont Analysis
100.00%
90.00%
90.04%
80.00%
84.22%
84.09%
86.60%
88.94%
61.42%
62.79%
63.08%
63.48% ROE=
70.00%
64.05%
60.00%
50.00%
Tax Burden
40.00%
Interest Burden
30.00%
26.22%
20.00%
10.00%
8.64%
0.00%
2007
18.08%
17.12%
6.19%
5.92%
2008
2009
20.47%
6.68%
2010
24.97%
Profit Margin
7.48%
2011
2.50
2.44
2.40
2.31
2.30
2.20
2.24
2.20
2.16
2.10
Asset Turnover
2.21
2.16
2.12
2.08
Leverage Ratio
2.10
2.00
2007
2008
2009
2010
2011
28
Strategic Transition in 2009
• Pursue existing store profitability instead of blindly
opening new stores
– 37 new stores opened in 2009, less than half of the
number in the previous level
• Promote in-store management and improve pricing,
space and assortment process
• Rely more on the growth in sales of pet services
29
New Stores and Capital Expenditure
Net sales/square feet decreased from $210 in 2007 to $205 in 2009,
but recovered up to $224 in 2011
30
Comparable Store Sales Growth
7
6
5
4
Comparable transactions (%)
3
Average sales/transaction (%)
2
Growth in comparable store sales
(%)
1
0
2007
2008
2009
2010
2011
-1
-2
-3
31
Financial Projection
Sales growth rates
18.0%
16.0%
14.0%
12.0%
10.0%
Merchandise sales
8.0%
Services sales
6.0%
4.0%
2.0%
2007
2009
2011
2013
2015
2017
32
Discount Rate
WACC
CAPM
Risk-free Rate
Market Risk Premium
Five-year Raw Beta
Adjusted Beta
Cost of Equity
No Long-term debt
WACC
ROE
(Past 5-year average annual return)
Discount Rate
1.72%
6.00%
0.72
0.81 (vs. 0.63 from Yahoo Finance)
6.6%
0
6.6%
80%
22.8%
20%
9.8%= 80% x WACC + 20% x ROE
33
DCF Model
Net Income
Changes in
NWC
CAPEX
2007
2008
2009
2010
Actual
Actual
Actual
Actual
2011
58,717
2014
2015
2016
404,928 442,247
294,439 238,188 112,920 125,074 120,720
133,474 145,720
159,101
173,724 189,702
Depreciation
195,980 225,054 236,538 235,926 236,974
229,225 226,096
272,585
326,124 352,478
Free Cash Flow
160,225 118,019 402,201 292,002 390,211
410,664 389,525
451,295
521,502 566,038
5,762,299
Enterprise Value
7,654,130
Capital lease obligations
(505,273)
Cash & Cash Equivalent
342,892
Price Per Share
Current Stock Price
35,826
38,985
1,891,831
Terminal Value
Shares Outstanding
(4,220)
370,734
32,922
Implied Equity Value
16,286
310,694 339,403
30,253
PV(FCF)
61,517 (80,258)
2013
Actual Projected Projected Projected Projected Projected
258,684 192,670 198,325 239,867 290,243
-
2012
7,491,749
113,993
72
69.09Close @ Nov 28,2012
34
Multiples Valuation
M Group vs. S Group
Weight Average
Price
90% vs. 10%
0.99
4.70
4.38
17.25
43.32
80% vs. 20%
1.30
6.06
4.18
18.23
52.43
70% vs. 30%
1.60
7.41
3.98
19.22
61.54
60% vs. 40%
1.90
8.77
3.78
20.21
70.56
35
Recommendation
DCF $72
Multiples $71
Hold
Current Price $69.91
36