PetSmart Stock, Tripled in Less Than Three Years: On a Leash Now?
A lot of companies survived the Great Recession by going a bit down market, understanding that they needed to offer more practical items to make up for a certain slump in more whimsical goods. PetSmart (PETM), of all places, never accepted this trade-off. And with this singular rejection, PetSmart nearly tripled its shareholders’ money in less than three years, as seen in a stock chart.
PetSmart bet that people would pamper their pets even while they cut spending elsewhere. Rather than trying to sell more discount dog foods and cheap litter boxes, the company in 2009 made room for all sorts of products and services former generations of pet owners would have scorned – like pet teeth cleaning, organic rabbit food and orthopedic dog beds. Recently, it teamed up wit Martha Stewart Living Omnimedia (MSO) for a line of food bowls, pet furniture (Fido’s toy box, for example) and the like. It was counterintuitive thinking that’s paid off big for its investors.
The higher end products dramatically boosted profits. Profit margins have steadily widened since then and continue to defy analyst forecasts with their gains. Consistently selling more at each of its 1,250 stores has fed revenue growth as much as opening new outlets. The company has reported double-digit profit growth every quarter for two and a half years now, and it just raised guidance for full-year earnings because it expects profit margins to widen further.
PetSmart boosted its dividend 18% in June and authorized $525 million in share repurchases. The dividend yield now is about 1%.
For investors, the problem with PetSmart now is that pictures of yorkies in designer boots or installed in Coach handbags are no longer surprising or amusing. Everyone knows that baby boomers pamper their pets, and that PetSmart has grown cash heavy from this, so there’s little hope of grabbing some untapped value in its shares now. PetSmart shares, which used to lean toward Target-level (TGT) valuations, now trend closer to fast-growing companies like Chinese Internet provider Baidu (BIDU), based in PE ratio.
That’s quite the turnoff for investment analysts, despite the respect they have for the business. The vast majority like holding PetSmart shares but not buying them at these levels. YCharts Pro feels the same way, giving the company strong marks for fundamentals but marking its shares as considerably overvalued. That could be a problem for shareholders when same-store sales and margin gains slow down, as they inevitably will.
If valuations do decline modestly on PetSmart, perhaps long-term investors will want to take interest. PetSmart’s recent growth is awfully good evidence that the company can sell superfluous doggie items even when much of the country is scrimping on groceries. Imagine what it might achieve in a real recovery.
Dee Gill is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.
Filed under: Company Analysis