petsmart girc final
TRANSCRIPT
Summary
Rating: HoldTarget Price $ 38-$42Current Price $ 40.95
Current & Forecast Metrics
Current P/E 19.71
P/E Range 20-22
Forecast P/E 21
Div Yield 1.4%
Market Cap 4.22B
EPS $1.79
Forecast EPS $3.6
Adjusted Beta .87
• Largest Pet Specialty One-Stop Shop
• High quality differentiation strategy
• Strategy shift from location expansion
to merchandising and service growth
Company Description
Founded in 1986, based in Phoenix, AZ
• Operate 1,172 stores (2010)
• Over 10,000 products
• Business Segments Training
Grooming
Boarding
Veterinary (Banfield)
• Petsmart’s Charity“We want to be a part of the solution not a part of the problem. “
-- Michael Manson
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010$0.0
$10.0 $20.0 $30.0 $40.0 $50.0 $60.0 Industry Spending (bil)
• Sector: Consumer Discretionary• Average annual growth for the industry is 6.5% • Growth Expectations
New store unit growth 2-3% Comparable store sales 2-4%
• Revenue Drivers Consumer spending Pet ownership Humanization of pets
RisksIndustrySpending
Valuation
Industry
CompanyOverview
Financial Analysis
RisksIndustrySpending
Consumer Risk
Changes in Consumer
Preferences
Locations
Competitor Risk
Pet Product Selection
Prices
Business Risk
Product Recalls
Vendor Relationships
Market Risk
Home Ownership
Unemployment Rate
• Recessionary conditions• Increased competition• E-commerce
Valuation
Industry
CompanyOverview
Financial Analysis
• 14% total market share
• Exclusive product contracts
Martha Stewart
GNC
• Competitors
Big box retailers (WalMart)
Grocery stores
Petco
Valuation
Industry
CompanyOverview
Financial Analysis
14%
46%
26%
10%
4%Total Market Share
PetSmartMassGroceryOther Pet SpecialtyIndependent
CustomerCompetitive Positioning
Net Sales and Service Sales
Primary Attributes PetSmart Mass & Grocery
Independent Other Pet Specialty
Broad Assortment X XEngaged In-Store Experience With Your Pet
X
Knowledgeable Associates
X X
Customer Loyalty Program
X X X
Veterinary Services XGrooming Services X X XBoarding and Day Camp Services
X X
Training Services X XTrip Consolidation X
Valuation
Industry
CompanyOverview
Financial Analysis
CustomerCompetitive Positioning
Net Sales and Service Sales
CustomerCompetitive Positioning
Valuation
Industry
CompanyOverview
Financial Analysis
% of PetSmart Customers
% of Total Sales
Average Transactions Per Year
Average Annual Spend per Customer
PetPerks Members
Mart
40%
5%
1.2
$18
36%
Smart
50%
45%
4.1*
$136
57%
Smart with Heart
10%
50%
17.1
$757
79%
1. Cross selling products2. Promoting premium pet food brands3. Promoting & offering services
Net Sales and Service Sales
2009 2010 2011 2012 2013 2014 $-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
Net Sales (Dollar Breakdown)
Services salesMerchandise sales
Valuation
Industry
CompanyOverview
Financial Analysis
CustomerCompetitive Positioning
Net Sales and Service Sales
Valuation
Industry
CompanyOverview
Financial Analysis
2009 2010 2011 2012 2013 20140%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Net Sales (Percent Breakdown)Merchandise sales Services sales
This increment is mainly due to the High Profit Margin of
Service Sales.
CustomerCompetitive Positioning
Net Sales and Service Sales
1%
11%
52%
34%
2%Revenue Breakdown
Services
Pet Food, Treats and Lit -ter
Pet Supplies
Live Pets and Other
Merchandise Sales
Valuation
Industry
CompanyOverview
Financial Analysis
CustomerCompetitive Positioning
Net Sales and Service Sales
`
15%
85%
Grooming & Boarding Services
PetSmartMass
• $3.4 Billion spent in 2009
Valuation
Industry
CompanyOverview
Financial Analysis
CustomerCompetitive Positioning
Net Sales and Service Sales
`
2006 2007 2008 2009 2010 2011 2012 2013 2014 $-
$200
$400
$600
$800
$1,000
$1,200
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
Service SalesTrainingPetsHotelGroomingService Sales Percent
11%
16%Service Sales
Valuation
Industry
CompanyOverview
Financial Analysis
CustomerCompetitive Positioning
Net Sales and Service Sales
`
Valuation
Industry
CompanyOverview
Financial Analysis
CustomerCompetitive Positioning
Net Sales and Service Sales
Merchandise Grooming Training Boarding
1x
2x
7.5x
11.1x
Individual Margin
`
Valuation
Industry
CompanyOverview
Financial Analysis
Dog Product Only Dog Plus Grooming Dog Plus Grooming & Training
Dog Plus Grooming, Training & Boarding
1x
1.5x
3.5x
5.4x
Gross Margin
CustomerCompetitive Positioning
Net Sales and Service Sales
Historically capital expenditures 4.5%-6.5% of sales Approximately $300m 8% - 9% historical store growth
Looking forward capital expenditures 2.1% of sales Approximately $120-$130m 2% - 3% new store growth
Focused on remodeling and expanding current stores
Valuation
Industry
CompanyOverview
Financial Analysis
2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
20406080
100120
New Store Openings
38
100
EarningsCapital Expenditures
Cash Flow
• Steady revenue stream 2010 revenues $5.6b up from $5.3b in 2009
(5.5% increase) Projected to increase 7-8% annually
• Projected earnings Current EPS: $1.59 5 year forecast: $3.36 55% upside
Valuation
Industry
CompanyOverview
Financial Analysis
EarningsCapital Expenditures
Cash Flow
2009 2010 2011 2012 2013 2014 $-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$-
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
Net incomeEarning Per Share
Cash flow expected to increase ~ $500m• Decreased spending on capital expenditures• Increased store efficiencies• Expanding sales growth
Valuation
Industry
CompanyOverview
Financial Analysis
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
100,000
200,000
300,000
400,000
500,000
600,000
700,000
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
Operating Cash Flows
Capital ExpenditureFree cash flow% of Operating CF
EarningsCapital Expenditures
Cash Flow
• Fair Value Current Price: $40.95 (Mar. 31, 2011) Target Price: $38-$42 per share
• Used three valuation models Free cash flow to the firm Enterprise value multiple Three-Stage dividend discount
Valuation
Industry
CompanyOverview
Financial Analysis
FCFM EV/EBITDAInvestmentSummary
DDM
• Investors required equity return: 9.2%• Discounted at WACC: 8.8%• Free cash flows increase 16% Y/Y• Target Price: $40.34
20012002
20032004
20052006
20072008
20092010
20112012
20132014
2015 $-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
Free Cash Flow (thousands)
Valuation
Industry
CompanyOverview
Financial Analysis
FCFM EV/EBITDAInvestmentSummary
DDM
• Current EV/EBITDA multiple: 9.1 Steady historical growth Forecast future multiple: 10.0
• Closest stock return correlation Dicks Sporting Goods (73%) Home Depot (67%)
• Target Price: $38 - $40
Home Depot Dick’s Sporting Goods PetSmart PetSmart (e)9.2 10.4 9.1 10.0Valuation
Industry
CompanyOverview
Financial Analysis
FCFM EV/EBITDAInvestmentSummary
DDM
• Initial dividend $.08 in 2005; rose to $.33 in 2009
• Expected growth: 22% for 5 years 16% until 2019 5.5% long term
• Target Price: $36.34
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $-
$0.50
$1.00
$1.50 Dividends Per Share
FCFM EV/EBITDAInvestmentSummary
DDM
Valuation
Industry
CompanyOverview
Financial Analysis
• Significant change in business model Slower unit growth
Improved cash flows
Expanding products and services Higher profit margins
ExecutiveSummary
Rating: HoldTarget Price $ 38-$42Current Price $ 40.95
Income Statement
Stmt of Cash Flow
Balance Sheet Correlation
CLAYM
WACC
DCFM
FCFF
Unemployment Rate
Consumer Spending
New Opening Stores
Net Sales Trend
Exclusive Product
Total owned Pets
Pet Ownership
Product Margin
Management
Industry Spending
Humanization
Homes with Pets
Qualification
Service marginNet Sales
Competitive Positioning
Revenue BreakdownOperating CFs
Risks
Customers
Sales/Sq.Ft
US Inflation
Financials & Valuations Data & Quantitive Company Related
Net Income Breakdown
Net Sales Breakdown
Earning per share
Service sales forecast
Dividends per share
Net Sales
Net Sales
Net Sales Growth Rate in the past 10 yrs
10.67%
Correlation (Price)
Stock Price 1 year 3 year 5 yearCoach 83.09% 88.70% 80.55%
Foot Locker 82.19% 77.66% 51.24%
Nordstrom, Inc. 34.55% 81.80% 70.22%
The Pep Boys-Manny, More & Jack 65.67% 72.58% 66.42%
Macy's 84.38% 68.55% 55.24%
Target 69.21% 79.89% 74.83%
Brinker International, Inc 52.07% 67.33% 59.50%
RadioShack Corp. 24.22% 83.49% 73.65%
Home Depot, Inc 47.27% 87.09% 67.25%
Big 5 -17.60% 73.84% 60.79%
Dicks Sporting Goods 83.12% 73.75% 61.61%
Correlation (Return)
Stock Return 1 year 3 year 5 yearAbercrombie & Fitch Co. 57.94% 56.79% 48.61%Coach 55.91% 55.65% 49.77%Foot Locker 65.91% 50.24% 46.13%Nordstrom, Inc. 59.30% 58.01% 53.16%O'Reilly Automotive 50.69% 55.92% 50.41%J.C.Penney Company 54.43% 58.28% 52.88%Macy's 55.48% 58.52% 52.91%Target 55.77% 56.93% 52.07%BestBuy 59.01% 60.41% 51.15%Home Depot, Inc 54.24% 60.47% 55.71%Staples 55.10% 60.63% 54.89%Dicks Sporting Goods 60.14% 58.08% 51.55%
CLAYM
Need to maximize Service Sales
Need to Maximize Net sales
Optimize the capital expenditure (it is strongly related to Service Sales)
Optimize new store openings every year
Set up certain constraints
Model Description
Model Solution
WACC Computation
DCFM Three Stage
Discounted Cash Flow Model: Three Stage Growth
Model
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Dividends Per Share 0.33 0.450 0.549 0.670 0.817 0.997 1.156 1.341 1.556 1.805 2.094Present Value of Dividends 0.33 0.414 0.464 0.521 0.584 0.655 0.699 0.746 0.795 0.848 0.905
Terminal Value 29.38 67.97
Growth Rate: 2010 to 2014 0.22
Second Stage Growth 2015 to 2019 0.16
Terminal Growth Rate after 2014 0.055Cost of Equity 0.0875 Intrinsic Value of Equity $ 36.34
FCFF
Free Cash Flow to the Firm Valuation Cash Flows From Operating Activities 2009 2010 2011 2012 2013 2014Net income $ 198,325.00 $ 182,258.82 $216,534.50 $256,241.81 $309,943.90 $ 370,783.44 Depreciation $ 165,454.00 $ 165,170.43 $165,143.83 $164,867.93 $164,895.43 $ 165,325.43 Receivables $ (3,623.00) $ (1,771.94) $ (4,071.35) $ (4,664.02) $ (5,155.12) $ (5,623.92)Inventories $ 20,622.00 $ (31,169.00) $ (17,255.00) $ (15,283.00) $ (15,776.00) $ (17,748.00)Deferred income taxes $ (8,582.00) $ (6,506.33) $ (3,265.24) $ (3,740.56) $ (4,134.42) $ (4,510.40)Prepaid expenses $ 30,025.00 $ (18,802.76) $ (5,763.92) $ (6,602.98) $ (7,298.24) $ (7,961.92)Capital Leases (current) $ 189.19 $ 190.14 $ 191.09 $ 192.05 $ 193.01 $ 193.78 Accounts payable $ 17,491.00 $ 21,181.85 $ 17,588.68 $ 20,149.08 $ 22,270.68 $ 24,295.92 Accrued liabilities $ 24,325.00 $ 61,371.78 $ 17,315.23 $ 19,835.83 $ 21,924.45 $ 23,918.20 Other current liabilities $ 39,650.00 $ (22,885.54) $ 9,354.34 $ 10,716.06 $ 11,844.41 $ 12,921.51 Net cash provided by operating activities $ 483,876.20 $ 349,037.45 $395,772.16 $441,712.20 $498,708.09 $ 561,594.04 Less: Total Capital Expenditures $ 112,920.00 $ 135,361.00 $137,020.00 $135,361.00 $135,361.00 $ 138,561.00 Free Cash Flows to the Firm $ 370,956.20 $ 213,676.45 $258,752.16 $306,351.20 $363,347.09 $ 423,033.04 Free Cash Flow to the Firm Valuation ( 4% Long-term Growth) 2009 2010 2011 2012 2013 2014WACC 8.75% Terminal Growth Rate 4.0% Present Value of Free Cash Flows $ 370,956.20 $196,481.98 $218,784.28 $238,186.84 $259,768.17 $278,102.31 Terminal Value $4,001,913.57 $6,087,477.81 Value of the Firm $5,564,193.36 Less: Value of Debt $ 533,635.00 Value of Equity $5,030,558.36 Shares Outstanding 124,701 Intrinsic Price per Share of Equity $ 40.34
EV/EBITDA
PetSmart Enterprise Multiple Valuation
EBITDA Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Stock 2010 2011 2012 2013 2014
Net Income $ 182,258.82 $ 216,534.50 $ 256,241.81 $ 309,943.90 $ 370,783.44
Interest $ 58,993.35 $ 59,288.32 $ 59,584.76 $ 59,882.68 $ 60,182.09
Taxes $ 115,030.26 $ 136,831.44 $ 162,088.89 $ 196,280.22 $ 235,021.85
Depreciation $ 165,170.43 $ 165,143.83 $ 164,867.93 $ 164,895.43 $ 165,325.43
Amortization $ - $ - $ - $ - $ -
EBITDA $ 521,452.86 $ 577,798.09 $ 642,783.39 $ 731,002.22 $ 831,312.82
EV/EBITDA (Cont.)
Enterprise Value Multiple 9.00 WACC 8.75%
EV Forecast $4,693,075.71 $5,200,182.79 $5,785,050.54 $6,579,020.01 $7,481,815.34 Cash $ 322,456.84 $ 346,766.83 $ 374,615.64 $ 405,396.81 $ 438,977.14
Value of Debt $ (536,303.18) $ (538,984.69) $ (541,679.61) $ (544,388.01) $ (547,109.95) Value of Equity $4,479,229.38 $5,007,964.92 $5,617,986.57 $6,440,028.81 $7,373,682.52
Shares Outstanding 119,712.96 114,924.44 110,327.46 110,327.46 110,327.46
Future Equity Prices $ 37.42 $ 43.58 $ 50.92 $ 58.37 $ 66.83
Intrinsic Price/Share $37.42 $36.85 $39.59 $41.73 $43.94
Enterprise Value Multiple 10.00 WACC 8.75%
EV Forecast $5,214,528.57 $5,777,980.88 $6,427,833.93 $7,310,022.23 $8,313,128.15 Cash $ 322,456.84 $ 346,766.83 $ 374,615.64 $ 405,396.81 $ 438,977.14
Value of Debt $ (536,303.18) $ (538,984.69) $ (541,679.61) $ (544,388.01) $ (547,109.95) Value of Equity $5,000,682.23 $5,585,763.01 $6,260,769.96 $7,171,031.03 $8,204,995.34
Shares Outstanding 119,712.96 114,924.44 110,327.46 110,327.46 110,327.46
Future Equity Prices $ 41.77 $ 48.60 $ 56.75 $ 65.00 $ 74.37
Intrinsic Price/Share $38.41 $41.10 $44.12 $46.47 $48.89
Income Statement
PetSmart, Inc.
Pro Forma Income Statement
USD in thousands except per share data. Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
% of Sales 2009 2010 2011 2012 2013 2014
Column1 Column2 Column3 Column4 Column5 Column6 Column7 Column8
Merchandise sales $ 4,761,039 $ 4,962,874 $ 5,310,275 $ 5,681,995 $ 6,079,734 $ 6,505,316
Services sales 575,353 617,474 690,775 800,999 935,950 1,091,500
Net sales 100.0% $ 5,336,392 $ 5,580,348 $ 6,001,050 $ 6,482,994 $ 7,015,684 $ 7,596,816
Cost of merchandise sales 71.5% 3,402,021 3,546,243 3,770,295 4,011,488 4,255,814 4,514,689
Cost of services sales 72.2% $ 415,154 $ 445,816 $ 493,213 $ 562,301 $ 644,869 $ 738,946
Total cost of sales 69.8% 3,817,175 3,992,059 4,263,508 4,573,790 4,900,683 5,253,635
Gross profit 30.2% $ 1,519,217 $ 1,588,289 $ 1,737,541 $ 1,909,204 $ 2,115,001 $ 2,343,181
Total operating expenses 22.7% 1,150,138 1,264,342 1,359,660 1,468,855 1,589,546 1,721,214
Operating income (EBIT) $ 369,079 $ 323,947 $ 377,881 $ 440,350 $ 525,454 $ 621,967
Interest Expense 59,748 58,993 59,288 59,585 59,883 60,182
Other income (expense) 0.5% $ 29,996 $ 32,257 $ 34,848 $ 37,711 $ 40,835
Income before income taxes (EBT) 7.0% 309,331 294,949 350,850 415,613 503,283 602,620
Provision for income taxes 2.6% $ 117,554 $ 115,030 $ 136,831 $ 162,089 $ 196,280 $ 235,022
Other income 0.0% 6,548 2,340 2,516 2,718 2,942 3,185
Net income $ 198,325 $ 182,259 $ 216,535 $ 256,242 $ 309,944 $ 370,783
Dividends 41,151 53,871 63,094 73,895 90,152 109,986
Retained Earnings $ 157,174 $ 128,388 $ 153,441 $ 182,347 $ 219,792 $ 260,798
Shares Outstanding $ 124,701 $ 119,713 $ 114,924 $ 110,327 $ 110,327 $ 110,327
Earning Per Share 1.59 1.52 1.88 2.32 2.81 3.36
Dividends Per Share $0.33 $0.45 $0.55 $0.67 $0.82 $1.00
Balance Sheet (Asset)
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Assets 2009 2010 2011 2012 2013 2014Current assets
Cash and cash equivalents $ 308,360.00 $ 322,456.84 $ 346,766.83 $ 374,615.64 $ 405,396.81 $ 438,977.14
Restricted cash $ 48,172.00 $ 50,374.21 $ 54,171.91 $ 58,522.46 $ 63,331.09 $ 68,577.01
Receivables $ 52,232.00 $ 54,003.94 $ 58,075.30 $ 62,739.32 $ 67,894.44 $ 73,518.36
Inventories $ 563,389.00 $ 594,558.00 $ 611,813.00 $ 627,096.00 $ 642,872.00 $ 660,620.00
Deferred income taxes $ 36,805.00 $ 43,311.33 $ 46,576.57 $ 50,317.13 $ 54,451.56 $ 58,961.95
Prepaid expenses & other current assets $ 57,652.00 $ 76,454.76 $ 82,218.67 $ 88,821.65 $ 96,119.89 $ 104,081.80
Total current assets $ 1,066,610.00 $ 1,141,159.08 $ 1,199,622.28 $ 1,262,112.20 $ 1,330,065.78 $ 1,404,736.26
Non-current assets:
Property, plant and equipment
Property and equipment, at cost $ 2,342,979.00 $ 2,478,340.00 $ 2,615,360.00 $ 2,750,721.00 $ 2,886,082.00 $ 3,024,643.00
Accumulated Depreciation $ (1,141,122.00)
$ (1,306,292.43)
$ (1,471,436.26)
$ (1,636,304.19)
$ (1,801,199.61)
$ (1,966,525.04)
Equity and other investments $ 32,486.00 $ 32,486.00 $ 32,486.00 $ 32,486.00 $ 32,486.00 $ 32,486.00
Goodwill $ 42,200.00 $ 42,200.00 $ 42,200.00 $ 42,200.00 $ 42,200.00 $ 42,200.00
Deferred income taxes $ 94,901.00 $ 119,365.62 $ 128,364.58 $ 138,673.53 $ 150,067.97 $ 162,498.58
Other long-term assets $ 23,932.00 $ 25,604.69 $ 26,916.46 $ 28,318.57 $ 29,843.27 $ 31,518.69
Total non-current assets $ 1,395,376.00 $ 1,391,703.88 $ 1,373,890.78 $ 1,356,094.91 $ 1,339,479.62 $ 1,326,821.22
Total assets $ 2,461,986.00 $ 2,532,862.97 $ 2,573,513.06 $ 2,618,207.11 $ 2,669,545.41 $ 2,731,557.48
Balance Sheet (Liability & S.E)
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year2009 2010 2011 2012 2013 2014
Liabilities and stockholders' equity
Liabilities Current liabilities Capital leases $ 37,839.00 $ 38,028.20 $ 38,218.34 $ 38,409.43 $ 38,601.47 $ 38,794.48 Accounts payable $ 212,121.00 $ 233,302.85 $ 250,891.52 $ 271,040.60 $ 293,311.28 $ 317,607.20 Accrued liabilities $ 168,304.00 $ 229,675.78 $ 246,991.02 $ 266,826.85 $ 288,751.30 $ 312,669.50 Other current liabilities $ 146,965.00 $ 124,079.46 $ 133,433.80 $ 144,149.86 $ 155,994.27 $ 168,915.78 Total current liabilities $ 565,229.00 $ 625,086.29 $ 669,534.67 $ 720,426.73 $ 776,658.32 $ 837,986.95
Non-current liabilities Capital leases $ 533,635.00 $ 536,303.18 $ 538,984.69 $ 541,679.61 $ 544,388.01 $ 547,109.95 Other long-term liabilities $ 190,407.00 $ 166,905.05 $ 179,488.00 $ 193,902.67 $ 209,835.14 $ 227,216.46 Total non-current liabilities $ 724,042.00 $ 703,208.23 $ 718,472.69 $ 735,582.29 $ 754,223.15 $ 774,326.41 Total liabilities $ 1,289,271.00 $ 1,328,294.51 $ 1,388,007.37 $ 1,456,009.02 $ 1,530,881.47 $ 1,612,313.36 Stockholders' equity
Common stock $ 16.00 $ 16.00 $ 16.00 $ 16.00 $ 16.00 $ 16.00 Additional paid-in capital $ 1,148,228.00 $ 1,205,639.40 $ 1,265,921.37 $ 1,329,217.44 $ 1,395,678.31 $ 1,465,462.23 Retained earnings $ 1,093,708.00 $ 1,222,095.99 $ 1,375,536.97 $ 1,557,883.66 $ 1,777,675.50 $ 2,038,473.42
Treasury stock $(1,071,606.00) $(1,225,188.38) $(1,458,125.28) $(1,727,248.83) $(2,037,227.13) $(2,387,437.64)
Accumulated other comprehensive income $ 2,369.00 $ 2,005.44 $ 2,156.63 $ 2,329.83 $ 2,521.26 $ 2,730.11 Total stockholders' equity $ 1,172,715.00 $ 1,204,568.45 $ 1,185,505.69 $ 1,162,198.09 $ 1,138,663.94 $ 1,119,244.12 Total liabilities and stockholders' equity $ 2,461,986.00 $ 2,532,862.96 $ 2,573,513.06 $ 2,618,207.11 $ 2,669,545.41 $ 2,731,557.48
Statement of Cash Flow
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year2009 2010 2011 2012 2013 2014
Cash Flows From Operating Activities Net income $ 198,325.00 $ 182,258.82 $ 216,534.50 $ 256,241.81 $ 309,943.90 $ 370,783.44 Depreciation $ 165,454.00 $ 165,170.43 $ 165,143.83 $ 164,867.93 $ 164,895.43 $ 165,325.43 Changes in Receivables $ (3,623.00) $ (1,771.94) $ (4,071.35) $ (4,664.02) $ (5,155.12) $ (5,623.92) Changes in Inventories $ 20,622.00 $ (31,169.00) $ (17,255.00) $ (15,283.00) $ (15,776.00) $ (17,748.00) Changes in Deferred income taxes $ (8,582.00) $ (6,506.33) $ (3,265.24) $ (3,740.56) $ (4,134.42) $ (4,510.40) Changes in Prepaid expenses $ 30,025.00 $ (18,802.76) $ (5,763.92) $ (6,602.98) $ (7,298.24) $ (7,961.92) Changes in Capital Leases (current) $ (20,125.00) $ 189.19 $ 190.14 $ 191.09 $ 192.05 $ 193.01 Changes in Accounts payable $ 17,491.00 $ 21,181.85 $ 17,588.68 $ 20,149.08 $ 22,270.68 $ 24,295.92 Changes in Accrued liabilities $ 24,325.00 $ 61,371.78 $ 17,315.23 $ 19,835.83 $ 21,924.45 $ 23,918.20 Changes in Other current liabilities** $ 39,650.00 $ 32,323.65 $ 65,838.60 $ 69,661.59 $ 73,496.65 $ 77,459.51 Net cash provided by operating activities $ 463,562.00 $ 404,245.70 $ 452,255.47 $ 500,656.77 $ 560,359.37 $ 626,131.27
Cash Flows From Investing Activities Purchases of property, plant, and equipment $ (65,066.00) $(135,361.00) $(137,020.00) $(135,361.00) $(135,361.00) $(138,561.00)Changes in Deferred Income Taxes $ (1,773.00) $ (24,464.62) $ (8,998.96) $ (10,308.95) $ (11,394.43) $ (12,430.61)Changes in Other Comprehensive Income $ 5,083.00 $ (363.56) $ 151.19 $ 173.20 $ 191.44 $ 208.84 Purchase (Sale) of Other Long-term Assets $ 24,869.00 $ (1,672.69) $ (1,311.76) $ (1,402.11) $ (1,524.70) $ (1,675.41)Net cash used for investing activities $ (36,887.00) $(161,861.87) $(147,179.54) $(146,898.87) $(148,088.70) $(152,458.18)
Cash Flows From Financing Activities Issuance (Payment) of Capitalized Leases $ (20,125.00) $ 2,668.17 $ 2,681.52 $ 2,694.92 $ 2,708.40 $ 2,721.94 Changes in Other Long-term Liabilities $ 8,807.00 $ (23,501.95) $ 12,582.95 $ 14,414.67 $ 15,932.47 $ 17,381.32 Repurchases of treasury stock $(164,783.00) $(153,582.38) $(232,936.90) $(269,123.55) $(309,978.30) $(350,210.51)Payment of Cash Dividends $ (41,151.33) $ (53,870.83) $ (63,093.52) $ (73,895.13) $ (90,152.06) $(109,985.51)
Net cash provided by (used for) financing activities $(217,252.33) $(228,286.99) $(280,765.95) $(325,909.09) $(381,489.49) $(440,092.76)
Net change in cash $ 209,422.67 $ 14,096.84 $ 24,309.99 $ 27,848.82 $ 30,781.17 $ 33,580.33
Cash at beginning of period $ 126,314.00 $ 308,360.00 $ 322,456.84 $ 346,766.83 $ 374,615.64 $ 405,396.81 Cash at end of period $ 43,827.00 $ 322,456.84 $ 346,766.83 $ 374,615.64 $ 405,396.81 $ 438,977.14 Net Change in Cash $ 82,487.00 $ 14,096.84 $ 24,309.98 $ 27,848.82 $ 30,781.17 $ 33,580.32
Quarterly Unemployment Rate
Source: Bureau of Labor Statistics
New Opening Stores
2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
20
40
60
80
100
120
New Store Openings
38
93
Pet Ownership
Pet ownership is down*Decreased home ownership High Unemployment
Empty Nesters 62% of U.S. households own a pet*
52% of adults age 62 and older own pets *58% own more than two pets10% own six pets or more
People age 65 and overIncreasing Discretionary income **5.8% increase in Real Median Income (2009)**21% estimated growth in Animal Care and Services between 2008-2018.***
*The APPA’s 2009/2010 National Pet Owner Survey** “Income, Poverty, and Health Coverage in the United States”, U.S. Census Bureau’s 2009 ***2010-2011 Occupational Outlook Handbook, Animal Care and Service Workers section
Home with Pets
05
101520253035404550 45.6
38.2
13.3
6 5.3 4.7 3.90.700000000000002
Homes with Pets
Pet Type
Mill
ions
of H
omes
Total Owned Pets
Dog Cat
Fresh
water F
ish Bird
Small
Animals
Reptile
Equine
Saltw
ater F
ish0
40
80
120
160
200
Total Owned Pets
Mill
ions
of P
ets
Industry Spending
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
2010$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
Industry Spending
Reve
nue
in B
illio
ns
Industry Spending
38%
23%
27%
5%
7%
Industry Spending by Category
FoodSuppliesMedical CareAnimal PurchasesServices
Net Sales Trend
Total Revenue
Net Sales Trend
2009 2010 2011 2012 2013 20140
50
100
150
200
250
300
0
2
4
6
8
10
12
Trends per Sq/ft
Net SalesCost of SalesNet Income
Dolla
rs p
er S
q/ft
Product Margin
Classification Available Example Margin (as a multiple)
1 Grocery Brand Anywhere Pedigree 1
2 Bridge Brand Anywhere Iams 1.4
3 PremiumPet Specialty
Stores Science Diet 1.8
4 RxPetSmart Exclusive Royal Canin 1.8
5 Super Premium Pet Specialty Blue Buffalo 2.1
Management Qualifications
Executive Chairman Philip L. Francis CEO PetSmart - 1998 to 2009CEO J. Sainsbury plc. subsidiary, Shaw’s SupermarketsVP of Roundy’s (wholesale grocery distribution company)
CEO Robert F. Moran
PetSmart’s COO President of North American PetSmart store operationsPresident Toys ‘R’ Us, Ltd., CanadaCEO of Sears de MexicoCFO of Galerias Preciados, a Spanish department store chain.
CFO Chip MolloyCFO of Retail Stores Circuit City, Inc Corporate planning at Capital One FinancialPrivate equity with AGL Capital InvestmentsConsulting with Deloitte Consulting.
Management
Interview with Co-Founder Michael Manson
PetSmart empowers employees: Store managers given the responsibility and authority to make changesPetSmart provides training classes for associates
CEO Francis and Mr. Moran entered management during financial distress PetSmart approaching failureStock price had plummetedSignificant changes required for recovery
Management returned PetSmart to profitability
Exclusive Products
Authority BrandRx Pet Food
Only retailer to offer Rx pet food because of veterinary restrictions.
Exclusive Products
Exclusive Relationships
Martha Stewart PETS Collection
GNC – Dietary Pet SupplementsGNC Executive Vice President Tom Dowd, “the new pet vitamins represent a true consumer-driven innovation.”
Fisher-Price Pet Toys
SafetyChild food and toy standards used
Pet Safety Products:Pet harnesses, Portable carriers,Belt systems for vehicle transportation
Holistic pet healthOrganic foodSupplements
Humanization
Humanization is: Treating pets as family members legally, emotionally, financially
88% of pets are considered family.
Legal Rights 25% of pet owners legally provide for pets
(2007)“Pet Protection Agreement” “Pet Trust” Last Will and Testament
Tax Breaks proposed in HAPPY Act (The Humanity and Pets Partnered Through the Years
Act)
Medical Rights AVMA lobbying Congress for:
Pre-Tax Pet BenefitsPets allowed on employer
benefits
Consumer Spending
Spending UpConsumers are not cutting back on pet spendingPet product retailers are top retail industry performers
Growing Market6.5% annual growth from 1994 to 2010
Since 2007,Pet spending growth has slowed about 1% to 2% annuallyIndustry is still growing at 5% year over year
Decreased Spending PowerIncreased pet food costs in 2008
Risks
Consumer Risk
Changes in Consumer Preferences
Locations
Operation CFs
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
100,000
200,000
300,000
400,000
500,000
600,000
700,000
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
Operating Cash Flows
Capital ExpenditureFree cash flow% of Operating CF
Revenue Breakdown
1%
11%
52%
34%
2%Revenue Breakdown
Services
Pet Food, Treats and Lit -ter
Pet Supplies
Live Pets and Other
Merchandise Sales
Customers
% of PetSmart Customers
% of Total Sales
Average Transactions Per Year
Average Annual Spend per Customer
PetPerks Members
Mart
40%
5%
1.2
$18
36%
Smart
50%
45%
4.1*
$136
57%
Smart with Heart
10%
50%
17.1
$757
79%
Gross Margin
Dog Product Only Dog Plus Grooming Dog Plus Grooming & Training
Dog Plus Grooming, Training & Boarding
1x1.5x
3.5x
5.4x
Gross Margin
Margin
Merchandise Grooming Training Boarding
1x
2x
7.5x
11.1x
Individual Margin
Sales per Square Foot
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
2009 2010 2011 2012 2013 2014
Net Sales Per Sq/Ft $ 206.04 $ 208.16 $ 217.71 $ 229.61 $ 242.53 $ 255.74
Net Income per sq/ft $ 7.66 $ 6.80 $ 7.86 $ 9.08 $ 10.71 $ 12.48
Sales per store $ 4,644.38 $ 4,794.11 $ 4,975.99 $ 5,224.01 $ 5,515.47 $ 5,825.78
Competitive Positioning
Primary Attributes PetSmart Mass & Grocery
Independent Other Pet Specialty
Broad Assortment X X
Engaged In-Store Experience With Your Pet
X
Knowledgeable Associates
X X
Customer Loyalty Program
X X X
Veterinary Services X
Grooming Services X X X
Boarding and Day Camp Services
X X
Training Services X X
Trip Consolidation X
US Inflation
Source: Google Trend
Source: ForcastChart.com
1%
US Current Inflation: 1.05%
Net Income Breakdown
2006 2007 2008 2009 2010 2011 2012 2013 2014 $-
$50,000.00
$100,000.00
$150,000.00
$200,000.00
$250,000.00
$300,000.00
$350,000.00
$400,000.00
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Sevice Sales PortionMechandise Sales PortionSevice Sales Persent
39.85%
55.56%
Service Sales Forecast
2006 2007 2008 2009 2010 2011 2012 2013 2014 $-
$200
$400
$600
$800
$1,000
$1,200
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
Service SalesTrainingPetsHotelGroomingService Sales Percent
11%
16%
Earning per share
2009 2010 2011 2012 2013 2014 $-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$-
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$1.59 $1.52
$1.88
$2.32
$2.81
$3.36
Net incomeEarning Per Share
Net sales breakdown
2009 2010 2011 2012 2013 20140%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Net Sales(Percent Breakdown)Merchandise sales Services sales
Net sales breakdown
2009 2010 2011 2012 2013 2014 $-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
Net Sales(Dollar Breakdown)
Services salesMerchandise sales
Dividends Per Share
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $-
$0.20 $0.40 $0.60 $0.80 $1.00 $1.20 $1.40 $1.60
$0.33 $0.45
$0.55 $0.67
$0.82 $1.00 $1.06 $1.12 $1.19 $1.26 $1.33
Dividends Per Share
Earning per share