In this article, let's take a look at PetSmart Inc. (PETM, Financial), a $7.8 billion market cap company that operates more than 1,300 pet stores in the U.S. and Canada, offering pet food, supplies and services.
Strategic initiative
The company has about 17% of domestic pet merchandise spending, doubling Petco, a traditional rival. The company focuses on expansion. It opened 55 net new stores in fiscal 2014 and operated 1,333 retail stores in North America as of February 2014, including Canada and Puerto Rico.
The firm believes it could reach about 1,800 stores in North America. This expansion strategy includes some important things like increasing market share, improving operating efficiencies and achieving economies of scale in its operations. For next year, it is expected to open 70 new stores.
Good outlook
The company had a three-year compound annual growth rate (CAGR) for sales of 8.2%, and we believe it could continue this trend because consumers will continue spending. Further, new strategic should boost revenues, due to its growth, cost savings and improvements in the omni-channel program.
Revenues, margins and profitability
Looking at profitability, revenues grew by 2.59% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.92 vs $0.88). During the past fiscal year, the company increased its bottom line. It earned $4.03 versus $3.55 in the previous year. This year, Wall Street expects an improvement in earnings ($4.41versus $4.03).
Finally, let's compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| PETM | PetSmart | 36.88 |
| SIG | SignetJewelersLtd | 14.36 |
| CAB | Cabela'sInc | 12.41 |
| DKS | Dick's Sporting Goods Inc | 19.28 |
| TIF | Tiffany & Co | 8.58 |
| Â | Industry Median | 8.93 |
The company has a current ROE of 36.88% which is higher than the industry median and the ones exhibit by Signet Jewelers (SIG, Financial), Cabela´s (CAB, Financial), Dick´s Sporting Goods (DKS, Financial) and Tiffany (TIF, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 18.5x, trading at a discount compared to an average of 25.0x for the industry. To use another metric, its price-to-book ratio of 6.3x indicates a premium versus the industry average of 2.31x while the price-to-sales ratio of 1.2x is above the industry average of 0.87x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $32,487, which represents a 26.6% compound annual growth rate (CAGR).
Final comment
The pet product industry is a growing market. It has increased over 200% since 1994, to a 2013 market at $55.5 billion, according to the American Pet Products Association (APPA) estimates. We expect it will continue to consolidate share in the growing pet retail market.
The PE relative valuation and the return on equity that significantly exceeds the industryaveragemake me feel bullish on this stock.
Hedge fund gurus likeLouis Moore Bacon (Trades, Portfolio), John Paulson (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and John Buckingham (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
