Investment Analysis by:
Devopama Pant
Chen Liang
Qiao Du
Presentation Date: 11/11/2014
Agenda
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Current Holdings
Company Profile
Macroeconomic Review
Industry Review
Strategy Overview
Financial Analysis
Valuation
Recommendation
Current Position
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100 shares bought on May 3, 2012 @ $58.88
Current Price: $72.74 (11/10/2014)
Gain (as on 11/10): 23.54%
Portfolio share(MV): 3.96%
* Yahoo Finance (RCMP Client Portfolio) https://finance.yahoo.com/portfolio/pf_1
Recent stock trends
Trends taken from Bloomberg.com Dated: 11/09/2014
Company Overview
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PetSmart was founded in 1986
PetSmart, Inc. is a retail chain operating in the United States,
Canada, and Puerto Rico
Engaged in the sale of specialty pet supplies (around 10,000
pet products) and services such as grooming and dog
training, cat and dog boarding facilities, and daycare
In 1993 went public on the NASDAQ stock exchange listed
under the symbol "PETM"
In 2005, the company announced that it was rebranding its
name from PETsMART to PetSmart
2013, PetSmart operated approximately 1,333 stores (55 new
stores) in around 200 locations with Pets Hotels (3 new pet
hotels) and Doggie Day Camps
Data from http://phx.corporate-ir.net/phoenix.zhtml?c=93506&p=irol-timeline and PetSmart Annual Report 2013 Page # 2-5
PetSmart : Product Line (PETM Owned)
Pet
Products
Pet
Services
Dogs
5 self owned brands ranging from
regular to super-premium
Cats
5 self owned brands ranging from
regular to super-premium
Birds / Reptiles /
Fishes / Small
Animals
3 self owned brands ranging from
regular to premium
Hotels
Hotels available at 200 PetSmart
locations
Hospitals
Hospital services available at 837
PetSmart locations
• Proprietary and exclusive products and services currently represent approximately 35% of the Net Sales
• Self-owned product brands details on Slide # 23
http://phx.corporate-ir.net/phoenix.zhtml?c=93506&p=irol-homeprofile
www.petsmart.com
Major Competitors
Category
Major Competitors
Specialty Supply Retailers
Petco
Stores
Walmart, Target, Costco, Others
Online
Amazon, EBay, Others
Merchandise
Services
http://big.assets.huffingtonpost.com/ibis.pdf
Standalone stores, Small retail chains
Future growth in Pet Industry
(Macroeconomic view)
 Households owning pets68%
(82.5 M Homes and 396M
Pets)
 Average growth rate of the
pet –store industry– 2.2%
(last 5 years)
Unemployment Rate
Change in Disposable Income
Growth in Pet Population
http://big.assets.huffingtonpost.com/ibis.pdf
http://data.bls.gov/timeseries/LNS14000000
Market Segments
Total Revenue : $15.7bn
http://big.assets.huffingtonpost.com/ibis.pdf
Porter’s 5 Forces Model – Pet Industry
Barrier to entry:
Medium & Steady
• Niche Market
• Limited Discretionary
Income
• Licensing Cost
• Tax rate/Interest Rate
Fluctuation
Competition:
Medium & Increasing
Threat of Substitutes:
Low & Steady
• Demand of premium
Products is stable
• Attitude towards pets
is stable and positive
Bargaining Power of
Sellers:
Medium & Increasing
• Healthcare Cost
• Unemployment Level
• Restrictions on
distribution Channels
• Available E-Commerce
Distribution
Porter’s 5 Forces
Model
• High Profit Margin for
Premium Services
• Protected by
Manufacturer’s
restrictions
Bargaining Power of
buyers:
Low & Increasing
• Bulk Retailers like Costco
• E-Commerce Retailers
like Amazon
• Brand Recognition
SWOT Analysis – PetSmart
Strengths
• Well known Brand / Strong
Community Presence
• Publically available Financial data
• Strong Financial (Current ratio-1.66)
• Low Carbon Footprint
• Employees have high stakes of
shares
• Social Responsibility
Opportunity
• Expansion of services
• Foreign expansion (Mexico/Europe)
• Homeopathic Products
• Training services for companion pets
• Pet insurance
Weaknesses
• Most products are globally
manufactured so may have
compromised quality
• Marginal wages to employees
• Distant stores with few distribution
center can be impacted by weather
Threats
• Petco
• Costco/Walmart/Target
• Amazon/EBay
• Small Pet retailers
• Reduced Discretionary Income
• Loss of Employees
• Food Safety Measures
• Market Fluctuation
• Customer Preference
Pet Smart’s Strategy
Unique role centered around
creating more moments for
people inspired by pets
PetSmart Charities Inc.
PetSmart in-store adoption
centers
o
o
o
PetSmart Annual Report 2013, Pg# 3-4
PetSmart Gives Back
PetSmart Paws for Hopes
PetSmart for Patriots
PetSmart Pop-up Parks
Management Outlook
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Leverage the “Humanization of Pets”
Stay relevant to the customers
Increase personalized connections
Enhance customer experience through
technology and innovation
• Enhance operating excellence
• Differentiate with “care”
• Be a part of the community
Focus on “Solutions”!!
PetSmart Annual Report 2013, Page # 4-5
Merchandise vs. Services
100%
10.8%
10.9%
11.0%
11.0%
11.1%
90%
80%
70%
60%
Pet Services
50%
89.2%
88.5%
88.4%
88.5%
88.4%
2010-01-31
2011-01-30
2012-01-29
2013-02-03
2014-02-02
40%
30%
20%
10%
0%
PetSmart 2010-10K -Page # F-4 /2012-10K-Page # 42/ 2014-10K -Page # F-4
Pet Supplies (Merchandise)
Risk & Uncertainty
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Quarterly results may show fluctuation due to seasonal
changes associated with the pet products and services,
retail industry, new store openings and store closures.
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Loss of any of the key vendors may disrupt the quarterly
or annual financial performance as two of the largest
vendors account for a material amount of products sold
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Food safety, quality and health are of big concern as a
large selection of products are gathered from all over the
world and it may result in a loss of customer confidence
Presentation 2012-11 / 2012-10 K-2013 10K
Recent News at Pet Smart
• Jana Partners has discussed the possibility of a private
equity buyout after announcing their 9.9%
position.(07/18/2014)
• Management surprises investors with news of the Pet360
acquisition and formally announces interest in a potential
sale. (08/27/14)
• Private-Equity Firms Prepare Bids for PetSmart
(10/29/2014)
• Private-Equity Firms Invited to Final Round of PetSmart
Bidding (11/06/2014)
http://seekingalpha.com/article/2453415-petsmart-the-pet360-piece
http://seekingalpha.com/article/2319995-a-private-takeover-would-be-good-for-petsmart
http://online.wsj.com/articles/private-equity-firms-prepare-bids-for-petsmart-sources-say-1414600644?KEYWORDS=petsmart
http://online.wsj.com/articles/private-equity-firms-invited-to-final-round-of-petsmart-bidding-1415314908?KEYWORDS=petsmart
Ratio Analysis
Profitability Ratios
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
Gross Profit Margin
Operating Profit Margin
Net Margin
ROA
ROE
Degree of Operating Leverage
28.47%
6.92%
3.72%
8.05%
16.36%
-0.04
29.06%
7.53%
4.21%
9.71%
19.59%
2.41
29.52%
8.23%
4.75%
11.41%
24.03%
2.36
30.51%
9.64%
5.76%
15.36%
32.81%
2.79
30.59% Current Ratio
10.02% Quick Ratio
6.07% Cash Ratio
16.63%
36.27%
2.76
EBIT/EV
EBIT/Tangible Assets
Greenblatt Ratios
Accounts Receivable Turnover
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
8.27% 6.98% 6.87% 7.92% 8.81% Days Sales Outstanding
20.62% 24.76% 31.68% 43.93% 47.50% Inventory Turnover
Days Inventory Outstanding
Accounts Payables Turnover
Capital Structure Ratios
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 Days Payables Outstanding
Debt Ratio
Time Interest Earned Ratio
Degree of Financial Leverage
52.37%
6.18
-14.33
PetSmart 2010 10-K, 2012 10-K & 2014 10-K
52.61%
7.29
3.13
54.65%
8.85
2.85
55.73%
11.99
3.24
56.63%
13.39 Cash Convension Cycle
3.28 Inventory to Cash Days
Liquidity Ratios
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
1.89x
0.64x
0.55x
1.96x
0.62x
0.51x
1.86x
0.61x
0.50x
1.74x
0.55x
0.44x
1.66x
0.45x
0.36x
Cash Conversion Cycle
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
102.17
3.57
6.78
53.87
17.90
20.39
107.22
3.40
6.85
53.28
21.48
16.99
113.35
3.22
6.84
53.40
23.58
15.48
107.19
3.41
7.09
51.45
23.58
15.48
95.48
3.82
6.76
53.96
21.26
17.17
37.05
57.44
39.69
56.68
41.14
56.62
39.37
54.86
40.61
57.78
DuPont Analysis
PetSmart 2010 10-K, 2012 10-K & 2014 10-K
Weighted Average Cost of Capital
Trends taken from Bloomberg.com Dated: 11/09/2014, / PetSmart 2014 10-K
Discounted Cash Flow Evaluation
In Millions of USD except Per ShareFY 2015 Est FY 2016 Est FY 2017 Est FY 2018 Est
12 Months Ending
2015-02-02 2016-02-01 2017-01-31 2018-01-31
EBIT
Less: Taxes
NOPAT
Add: Depreciation
Capital Expenditures
Change in Net Working Capital
Accounts Receivable
Inventories
Accounts Payable
Accrued Expenses
Total Change in NWC
Free Cash Flow
Present Value of Free Cash Flow
WACC
Business premium
Discount rate
Terminal Growth
Shares Outstanding
Terminal
714.1
757.0
825.1
899.3
953.3
244.0
470.1
258.8
498.1
281.2
543.9
311.4
588.0
330.0
623.3
249.1
135.7
264.0
136.3
287.8
118.9
313.7
118.3
332.5
114.3
-2.8
-0.1
19.9
20.7
37.7
-2.4
-1.0
22.6
9.2
28.4
-0.3
-0.5
44.2
24.1
67.5
-1.1
-0.2
29.7
12.2
40.6
-1.4
-0.9
87.9
14.2
99.8
621.2
561.27
654.2
534.18
780.3
575.68
824.0
549.30
941.4
7616.35
9.67%
1.00%
10.67%
3.00%
103.2
Implied EV
Less Debt
Implied Market Cap
Implied Share Price:
Basic
9% sales growth rate for next 4 years and constant 4.5%
4% sales growth rate for next 4 years and constant 3%
9,836.77
2,447
7,390
Optimistic:
Pessimistic
$
71.60
$85.36
$60.66
Technical Analysis
Trends taken from Bloomberg.com Dated: 11/09/2014
Recommendation
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Current Price: $72.74 (11/10/2014)
Implied Intrinsic Value: Basic: $71.60
Optimistic: $85.36
Pessimistic: $60.66
Appendix1 : PetSmart - Product Line (PETM Owned)
Cat
Dogs
Brand
Food/Hard Goods
Category
Brand
Food/Hard Goods
Category
Grreat Choice
Both
Regular
Grreat Choice
Both
Regular
Authority
Food
Premium
Authority *
Food
Premium
Simply Nourish
Food
Super Premium
Simply Nourish
Food
Super Premium
Top Paw
Hard Goods
Private Label
Exquisicat
Hard Good
Cat Litter
Toy Shoppe
Hard Good
Toys
Toy Shoppe
Hard Good
Toys
Birds/Reptiles/Fishes/Small Animals
Horse
Brand
State Line Tack
Food/Hard Goods
Category
Hard Good
Sold to Horse.Com
(Pet United)
Brand
Food/Hard Goods
Category
Top Fin
Hard Good
Regular
Proquatics
Both
Fish Supplement
All Living Things
Both
Bird-Small Animal
Supply
Pet Hotel
Pet Hospital(Banfield*)
Orginal idea
Place
Acquired
Orginally
Parent Comapany
Facility Available
David Mackstellar
Arizona
2000
MMI
Mars Inc.
837 Stores *
Rodger Ford
200 stores
•Previously Sophisticat and before that it was Award
•Canada has additional 7 third party hospitals