1 Stock With Both Bark and Bite
Millions of consumers, including myself, shell out piles of money on our four-legged friends -- and this trend isn't changing. Surveys of pet owners show that we spend more and more money on our canine companions each year. One pet product retailer has established itself as the top dog, but an entirely different breed is breathing down its neck.
Pampering pets is big business
Today's $50 billion pet industry has doubled since 1994, and sales are expected to top $74 billion by 2015. Consumer researcher Packaged Facts sees "pet parenting and the ensconcement of pets as members of the family not just as a trend, but as a long-term societal shift favoring even greater spending on the pet market in the years to come." That's enough to make Benji salivate, and pet product retailers are drooling, too.
Pet owners fork over cash at specialty chain stores like PetSmart (NYS: PETM) and privately held Petco, big-box merchandisers, and various e-tailers. While pet products encompass the central focus of PetSmart and Petco's businesses, mainstream retailers Target (NYS: TGT) , Wal-Mart (NYS: WMT) , and Costco (NAS: COST) offer ever-widening varieties of Fifi's favorite squeak toys, food, and treats.
Target lumps pet supply sales into its "Food and Pet Supplies" segment. While this segment composed 19% of Target's sales in 2011, according to the company's investor relations department, pet supplies make up a "pretty small percentage of total sales." And while Wal-Mart and Costco sell an array of pet-related products, their respective investor relations departments do not offer specific pet-product-related numbers -- perhaps a testament to what an insignificant portion of the mega-retailers' business this actually is.
While these big-box stores hold a certain share of the market, I don't see them as PetSmart's biggest competition. Later in this article I'll explain which retailer I think presents a real threat.
But let's first take a closer look at why PetSmart melts investors' hearts.
Not only can you adopt Fido, get him vaccinated, buy his food and medicine, train him, and get him primped all at PetSmart, but you can enroll him in doggy day care and board him there, too. As of late January 2012, the company operated 192 "PetsHotels " at its stores, and it plans to open more this year. PetSmart's moat is wide enough that Fido would have a tough time paddling across.
Net sales increased 7.2% annually for the past four years, and same-store sales were up 5.4% in 2011. The company is expected to grow at a 16% annual clip over the next five years.
Efficient cash generator
PetSmart's cash conversion cycle -- how swiftly it turns cash into goods and services, and then back into cash -- is shortening. The less time it takes to convert cash, the more quickly it can deploy current cash to create even more.
Successful share buyback program
PetSmart purchased more than $700 million of its shares in the past three years, and shareholders have been rewarded: The stock price has increased an impressive 170% during this time.
A dog pile of competition
A survey conducted by Packaged Facts shows that 47% of pet product buyers shop at a variety of stores. And while PetSmart is likely a beneficiary, it faces severe competition as consumers buy more of their furry friends' goodies online.
Currently, only a sliver of overall pet supplies sales are made online, but this is expected to increase. And online retailer Amazon.com (NAS: AMN) sits on its haunches, ready to pounce. Last year it launched Wag.com, a pet-related products site featuring more than 10,000 products, free shipping on orders greater than $49, and a two-day delivery promise.
Because 88% of PetSmart's sales are derived from merchandise, as opposed to pet services, I think Amazon.com has potential to make a real dent in PetSmart's sales. But the e-tailing format can't compete in one major way that defines PetSmart's allure: the nose-to-tail experience of being among like-minded pet owners.
King of the dog park
PetSmart's wide moat, strong same-store sales growth, and cash conversion efficiency position the company for future success. And the stock appears undervalued compared to its peers, given its PEG ratio of 1.19, versus 1.44 for the industry average for specialty retailers. Watch to see whether PetSmart continues to improve these metrics.
Even though I think PetSmart is the smartest play in the pet products market, Amazon.com and Costco are two retailers strongly worth considering for other enticing reasons. Read more about the exciting prospects for these two retailers in a free report here.
At the time this article was published Fool contributorNicole Seghettiowns shares of Costco, Wal-Mart, and Target. She spends a chunk of her paycheck on her beloved pooch. The Motley Fool owns shares of Costco Wholesale and Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of PetSmart, Costco Wholesale, and Amazon.com and have recommended creating a diagonal call position in Wal-Mart Stores. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.