No Recession For Fido?

By Greg Sushinsky | November 24, 2009 AAA

PetSmart (Nasdaq:PETM), pet supply retailer, posted rising revenue, profits and same-store sales in its latest earnings report. While the top line showed $1.29 billion, a 3% gain from $1.25 billion, and same store sales increased 0.3%, net income was $38.1 million or 31 cents a share this year's third quarter, versus $35 million or 28 cents a share in last year's same quarter. The company also raised guidance for the full fiscal year. Clearly, consumers love their pets, as they have kept spending on them, despite the recession.

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Growth of the Pet Industry
Though we don't ordinarily think of our furry friends and companions as an industry, the whole business of supplying pets with food, toys, grooming, veterinary and other services has grown to a $43 billion dollar industry. Americans own 171 million dogs and cats, while a total of 62% of U.S. households own some kind of pet.

Expansion of Services, Rough Spots
The expansion of services beyond the basic food and toys finds the grooming and boarding services growing. PetSmart is involved there, too. While the pet biz has been mostly good for PetSmart, all segments of the business aren't humming along, though food, which is 39% of the industry, and services (7% of PetSmart's sales), both remain strong.

Not all pet suppliers and retailers are doing great, however. Pet Meds Express (Nasdaq:PETS) is not gaining new customers as fast as it once did, and its average customer's sales order size fell off by $3. Central Garden & Pet Co. (Nasdaq:CENTA) just announced its fourth-quarter and full-year earnings, and though income was up for the quarter compared to last year, its revenue dropped. The same held true for its fiscal year earnings.

A smaller company in the sector, Pet DRx (Nasdaq:VETS), a veterinary and animal hospital service provider, had a decrease in quarterly revenues and profits, year over year. Other companies in the pet sector that you might not readily think of include general retailers, including wholesale club Costco (Nasdaq:COST) and discounter Big Lots (NYSE:BIG). Simply walking the aisles of these stores and most other big chains gives the sense of the commoditized nature of pet food retailing, in particular, so that is a margin and volume-driven segment.

The Bottom Line: Prospects for PetSmart
Prospects for pets are great. As they continue to thrive, so too should PetSmart as a leader in this sector. The company watches its costs, manages its segments well, and is the clear leader in its field. The other names, however, have struggled some through this recession, so while Fido and PetSmart are living the good life, the other pet businesses have felt pinched. Even with its raised guidance, PetSmart has a modest fourth-quarter projected, so it's clear that while there is expansion and growth in the sector, this is not a high-flying industry. Still, PetSmart stock has potential as a long-term, steady grower, so investors can regard it that way. (To learn more, see The Economics Of Pet Ownership.)

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