A report done for one of my MBA finance classes, analyzing PetSmart's financial statements.

1. Teresa Rothaar
MHR 7830 – Final Project

2. 
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Pretend that PetSmart has hired me as a financial
consultant.
Based on an analysis of PetSmart’s financial statements,
and any relevant supplementary information about the
company and its operating environment, identify areas in
which PetSmart is performing well and advise management
on any problem areas.
PetSmart’s annual report comes out in April, and includes
data from the previous fiscal year ending January 30/31.
Thus, the 2011 report was not out at the time I completed
the project; I used the 2010 report.
Note: as an alumni of Temple University, I was able to
access the Mergent Online database through their library.

3. 
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PetSmart is profitable, creditworthy and investmentworthy. It serves a specialty niche—pet products and
services—that has continued to grow rapidly even as other
retail sectors have fallen victim to the poor economy.
PetSmart has strong financial statements and ratios. Its
Net Sales, Gross Profits and EPS grew year-over-year. It
does need to work on Times Interest Earned and P/E.
While PetSmart needs to keep an eye on up-and-coming
competitor Wag.com (owned by Amazon), PetSmart has
established a competitive edge that would be difficult for
a competitor to duplicate. Since Wag.com operates solely
online, it cannot compete with PetSmart in the areas of
veterinary services, grooming, boarding and other
services.

4. 
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
Founded in 1986,
headquartered in
Phoenix, AZ, and
incorporated in
Delaware.
Stock ticker: PETM.
Largest specialty
retailer of products,
services and
solutions for pets in
North America – has
14% - 15% share of
pet industry dollars.

5. 
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
Sells consumables (i.e., pet
food and treats), hardgoods
(i.e., cat litter, dog collars,
pet accessories), and
freshwater tropical fish, birds
and small animals (mice,
hamsters, etc.).
Does not sell dogs or cats,
but most locations set aside
an area for local animal
rescues to hold adoption
events.
Some locations offer
grooming services, boarding
(PetSmart PetsHotels), and
veterinary hospitals (under
the trade names Banfield and
The Pet Hospital).

6. 


As of January 30, 2011,
PetSmart operated 1,187
retail stores, 180
PetsHotels, and 768
veterinary clinics
(including 11 operated by
3rd parties in Canada), and
had 47,000 employees.
Facilitated 403,000 instore pet adoptions in
2010.
In addition to brick-andmortar stores, PetSmart
also sells goods through its
website, petsmart.com.

7. 
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According to a 2011-2012 survey by
the American Pet Products
Association (APPA), 62% of
American households own a pet,
equating to 72.9 million homes.
Contrast this to the 56% figure in
1988, the first year the survey was
conducted, and 62% in 2008.
Despite the worsening of the
economy, pet ownership and
spending continues to grow. The
APPA estimates Americans spent
approximately $50.84 billion on
their pets in 2011, up from $48.35
in 2010, and only $17 billion in
1994.
Unlike other retail sectors, which
have been hammered by the poor
economy, the outlook for PetSmart
and other pet-related businesses is
bright.

8. Pet retail industry is highly
competitive; can be
organized into 8 categories:
1.Warehouse
clubs/mass
merchandisers.
2.Grocery stores.
3.Specialty pet supply stores.
4.Independent pet stores.
5.Veterinarians.
6.General retail
merchandisers.
7.Catalog retailers.
8.Ecommerce retailers.

9. 
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
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Private corporations
(most notably
Petco), small,
independent
retailers, and
regional chains
(i.e., PetKraze and
Concord Pet Supply)
Target
Wal-Mart
Central Garden &
Pet Company

10. 
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Many premium pet food
manufacturers do not allow
their brands to be sold in
grocery stores, warehouse
clubs or other general mass
merchandising stores; they
wholesale exclusively to
specialty pet supply stores,
veterinarians and farm and
feed stores.
Only 10% of PetSmart’s
products are available in the
mass channel.
Further, PetSmart’s unique
relationship with Banfield
allows them to sell medical pet
foods—available only through
veterinarians--in locations with
Banfield Hospitals.

11. 
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The semi-exclusivity PetSmart has
with premium brand
manufacturers, along with its
ability to sell medical pet foods at
locations with Banfield hospitals,
gives it a competitive advantage
that would be difficult to
duplicate.
The availability of veterinary care,
grooming and other pet services in
many locations further
differentiates PetSmart and helps
drive sales of hard goods;
customers like one-stop shopping,
and this is what PetSmart offers
pet parents.
However, competitors such as
Target and Wal-Mart are much
larger in terms of overall sales
volume, and thus have access to
greater capital.

12. 
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A consumer shift to premium pet foods, which
began in 2008, amounts to over 50% of total pet
food sales. This could mask declines in other
areas. Further, the incremental benefit could be
topping out.
Amazon launched Wag.com in July 2011. Prices
on Wag.com are cheaper than PetSmart,
especially for Amazon Prime customers (who get
discounted shipping), plus consumers have the
convenience of shipping heavy items to their
door. However, shipping costs of heavy,
inexpensive items is what fueled the infamous
Pets.com implosion.

13. 

A growing number of food
poisoning recalls in recent
years involved tainted pet
foods. PetSmart was
named as a co-defendant
in a number of lawsuits
related to pet food
recalls.
While these suits are close
to resolution, and
PetSmart does not feel
they will have a material
impact on its finances, the
threat of future recalls—
and further litigation—
remains.

14. 
So far, PetSmart has not been
significantly negatively impacted
by minimum wage laws or major
labor issues, especially compared
with competitor Wal-Mart.

PetSmart was named as a codefendant in a labor-related
lawsuit in California. PetSmart
believes the suit is without merit
and continues to defend it; the
eventual outcome is uncertain.

Like all other businesses,
PetSmart is at risk from the
uncertainty surrounding the
Patient Protection and
Affordable Care Act, as well as
the volatility of global capital
and credit markets.

18. Ratio
1/30/2011
1/31/2010
Industry Avg.
Quick Ratio
0.62
0.62
0.55
Current Ratio
1.96
1.89
1.84
Inventory
Turnover
6.85
6.65
7.22
Total Asset
Turnover
2.32
2.22
1.9
The quick and current ratios are good for the retail industry, averaging higher than the
industry as a whole. Inventory turnover is a bit low for the industry, but is still
acceptable, and has improved since 2010. Total asset turnover is very good for retail,
especially considering that most of PetSmart’s products are non-perishable.
As PetSmart is a retailer that collects payment at the time of sale, not on credit terms,
Average Collection Period is not applicable. Average Payment Period cannot be
analyzed because the average credit terms PetSmart receives from its creditors is not
available.

19. Note: all ratios are from most recent annual reports; competitor data courtesy of
Mergent Online. Industry benchmark ratios courtesy of BizStats.com.
PetSmart stacks up well against its competitors, especially considering that a direct
comparison is impossible because its competitors don’t exclusively focus on pet
products. Wal-Mart is a big player in the grocery industry (explaining its ultra-low quick
ratio and extraordinarily high inventory turnover ratio). Similarly, Central Garden & Pet
Co. sells lawn, garden and outdoor supplies in addition to pet products. PetSmart’s
Total Asset Turnover is superior to that of Target and Central Garden & Pet Co., and is
close to Wal-Mart’s.

20. Ratio
1/30/2011
1/31/2010
Debt Ratio
0.53
0.52
Times Interest Earned
3.05
3.14
Fixed-Payment Coverage
1.56
1.45
Gross Profit Margin
29.06%
28.47%
Operating Profit Margin
7.53%
6.92%
Net Profit Margin
4.21%
3.72%
EPS
$2.01
$1.59
ROA
9.73%
8.23%
ROE
20.47%
17.12%
P/E
21.2
21.4
M/B
$5.59
$3.52

21. Examining 4 Areas:
1. Liquidity
&
Activity
2. Debt
3. Profitability
4. Market

22. 
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The liquidity & activity ratios for the firm look
good when compared to its direct competitors
and the industry as a whole.
Current & quick ratios have remained stable for
the past 2 years. PetSmart does not appear to be
in danger of not satisfying its short-term
obligations.
Inventory Turnover & Total Asset Turnover have
slightly improved year-over-year, and Total Asset
Turnover is higher than the industry average.
PetSmart is making good use of its assets to
generate sales.

23. 
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PetSmart’s Debt Ratio increased slightly yearover-year. It has financed >50% of its assets with
debt, but this is not unusual for a large retailer
of off-the-shelf merchandise; stores must be
well-stocked.
Times Interest Earned has gone down year-overyear, and at 3.05 is on the low side. PetSmart
needs to increase its EBIT to get this number
closer to 5.0.
Fixed-Payment Coverage went up in 2010.
PetSmart has enough money to meet all fixedpayment obligations.

24. 
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Gross, Net and Operating Profit Margins all
went up in 2010.
EPS, ROA and ROE all went up considerably.
PetSmart is increasing profits each year, and
increasing its returns to its stockholders.
There are no red flags when looking at the
profitability ratios.

25. 
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Price/Earnings went down a bit from 2009 to
2010, indicating that investors lost some
confidence in the firm. However, the ratio
did not plunge; it went down by only 0.2.
Market/Book Value went up considerably in
2010—by over $2.00—indicating that
investors feel that PetSmart will earn high
returns relative to its risks.

26. 
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Strengths – PetSmart’s liquidity & activity
measurements are good both for the industry and
when benchmarked against its major
competitors. Its Debt Ratio is expected in retail,
and its Fixed-Payment Coverage is good. Its
profit is increasing and its Market/Book value is
good.
Weaknesses – PetSmart needs to get its Times
Interest Earned Ratio up; it is currently hovering
just above 3.0, the acceptable minimum. P/E
went down in 2010, and PetSmart needs to keep
an eye on this and make sure it doesn’t keep
decreasing.

27. 
PetSmart has strong financials, with no major red flags. Its Net Sales,
Gross Profits and EPS continue to grow. PetSmart operates in a niche—pet
products and services—that has continued to expand despite the poor
overall economy.

Other than Times Interest Earned, and possibly P/E, all of its financial
ratios look good. The firm is profitable, creditworthy and investmentworthy.

Because of its partnership with Banfield, its expansion into pet-related
services like boarding and grooming, the semi-exclusivity of many of its
hard goods, and its catering to the high-end pet market (while not
ignoring the budget-minded customer), PetSmart has carved a unique
niche in a highly competitive industry.

It would be very difficult for a competitor to emerge and duplicate what
PetSmart has done. While Amazon’s Wag.com is an up-and-comer in the
industry, since it is an e-tailer, it cannot compete with PetSmart in the
areas of pet services (veterinary, grooming, boarding, etc.).

28. 
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Further, it is unlikely that premium pet food brands will agree to
sell to Wag.com; they want their products to remain semiexclusive so as not to devalue their brands/labels.
While the incremental benefit from premium pet food brands
may be topping out, PetSmart continues to grow its pet services,
which is still an area ripe for expansion, particularly the
PetsHotels boarding service.
While it cannot ignore its competitors, the biggest risks to
PetSmart are in areas it cannot control, such as manufacturer
recalls, the uncertainty of U.S. healthcare legislation, and the
volatility of global credit markets.
So far, PetSmart has not only survived, but thrived during the
economic storm. Jim Cramer of CNBC’s “Mad Money” recently
recommended PETM stock, citing the same strengths (the focus
on luxe brands, expansion into pet services, etc.) discussed in
this report.

29. 
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PetSmart 2010 Annual Report (Published April 2011) http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9OTE5MDB8Q2hpbGRJR
APPA – Industry Statistics & Trends http://www.americanpetproducts.org/press_industrytrends.asp
PetSmart on Yahoo! Finance http://finance.yahoo.com/q?s=petm&ql=1
PetSmart is Getting Targeted by Hedge Funds – The Motley Fool,
January 31, 2012.
http://beta.fool.com/sumzeroresearch/2012/01/31/petsmartgetting-targeted-hedge-funds/1509/
From Diapers to Pets, Amazon’s Quidsi Introduces Wag.com –
TechCrunch, July 6, 2011.
http://techcrunch.com/2011/07/06/amazon-quidsi-wag-com-pets/
Miscellaneous Store Retailers Industry Benchmarks, BizStats.com http://www.bizstats.com/corporation-industry-financials/retailtrade-44/miscellaneous-store-retailers-453/show

30. 
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Salmonella Lurks in Pet Foods, Too, The New York Times, August
11, 2011.
http://well.blogs.nytimes.com/2011/08/11/salmonella-lurks-inpet-foods-too/
Cramer: Put PetSmart Stock On Your Radar, CNBC, February 13,
2012. http://www.cnbc.com/id/46373423
Mergent Online – accessed through the Temple University
Library’s proxy. http://libproxy.temple.edu/login?
url=http://www.mergentonline.com
Financial Ratios – FindOutInfo http://www.findoutinfo.com/direct/CD001?
stylesheet=USE315.xsl
PetSmart on Morningstar Financials http://quote.morningstar.com/stock/s.aspx?
t=PETM&region=USA&culture=en-us