Here at the Fool, we know you have a life. Between working while the sun shines, and catching Z's when it doesn't, you may find it hard to keep up to speed on Wall Street events -- corporate "investor conferences," for instance.
These meetings ostensibly benefit investors, but the companies behind them rarely transcribe their proceedings and file them with the SEC. As a result, unless you can attend in person, you're often left out in the cold. That's where our "Fool on the Street" series comes in. We listen to the conferences so you don't have to.
Without further ado ...
Today, we'll recap the news from PetSmart's (NASDAQ:PETM) Sept. 5 presentation at the Goldman Sachs 14th Annual Global Retailing Conference, where CEO Phil Francis spoke with Wall Street. As presentations go, this one wasn't quite long enough to make an investor want to roll over and play dead. But to be safe I'll skip the play-by-play, and fetch only the three most interesting points for you to peruse.
My pun supply is now exhausted, so on to the main event.
Big boxes but room for more
About a year ago, I had the chance to ask Phil Francis about the company's growth plans. At the time, there were upwards of 850 PetSmart stores in operation. By year's end, that number increased to 908. And by the close of last quarter, PetSmart was up to 966 stores. With the firm closing rapidly on its estimated "room for at least 1,400 PetSmart stores, in addition to whatever our competitors have or may add," a Fool wonders just how much longer this growth story has to run.
Not coincidentally, Francis addressed this very question last week: "We have grown share of market nicely. Today our share is about 12%, and there's plenty of room for growth. Services are even more fragmented. We estimate the addressable market is about $4.3 billion. Our share of that is about 8.6%. And we're the only major national player in grooming, training, and hoteling. There's real opportunity for us to continue to grow and gain share."
Breaking that down into its constituent parts, PetSmart's development has two elements. First is growth. According to Francis, we should expect to see the firm expand by about "100 stores [per year] for several years in a row." (With nearly 1,000 stores today, that gives the firm four years to grow into the lower rung of its estimate that North America can handle 1,400 PetSmarts.)
The second element is share. Francis said, "Pet is one of the fastest growing sectors in all of retail ... the market for pet services and supplies continues to grow at a 5% to 6% clip." Those are telling numbers because, you see, PetSmart itself has grown at an annualized 16% per year over the last five years, and analysts predict it will continue to grow at 17% per year over the next five. In other words, the company has in the past, and may well in the future, outgrow its industry by a factor of three.
There's only one way to do that, folks -- and that's by taking market share from the other guy.
Speaking of which ...
Who is the other guy? That was another question Francis was tossed last week. Asked how historical worries that discount big boxers Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) would eat his dog food have played out, he had this to say: "Wal-Mart ... [is] directly competitive on 20% of SKU's. They've announced they're getting out of the fish business in some superstores, and I don't know if there's more of that, or not." So yes, Wal-Mart is a rival, but in at least one category of goods, it's a beaten rival in retreat.
Target may be more of a problem. Francis said, "On fashion, and the styles and colors [of 'hard goods,' or non-food items] ... they are so good, and so to be admired." After recently visiting a newly built Target and checking out its pets section, Francis came away with the impression that Target may be slimming down its consumables (that's corporate-speak for "food") offerings, while selling "slightly more hard goods." So it seems this rival in particular is playing to its strengths as an affordable and fashionable seller.
As for archrival PETCO, Francis lamented that the company's return to private ownership, and its consequent release from the obligation to produce regulated filings, was keeping information on its operations hush-hush. That said, Francis characterized his strategy toward PETCO as "respectful and watchful, and so far there isn't much to report."
No more horse-and-buggy thinking
PetSmart, unlike its nemesis, still has to report quarterly earnings. And the analysts were understandably interested in what its numbers will look like going forward. (As indeed are we; we did recommend PetSmart to members of our Motley Fool Stock Advisor investing newsletter.)
In this regard, Francis mentioned that the firm's exit from its equine business cost PetSmart one point's worth of same-store sales last quarter, and will hurt Q3 as well. That said, he characterized the equine business as a "way outlier" from PetSmart's core focus on indoor and domestic pets. Exiting that business aimed to "simplify the business model, focus on what fits." Moreover, it took up "$35 million worth of inventory train ... at a not great margin rate, and not great space productivity." Little wonder then that Francis concluded with the pithy explanation: "Horse doesn't fit."
We're to expect some short-term impact on margins from the exit, compounded by implementing new labor and warehouse management systems that will make "leverage and supply chain, which shows up in margin tough next year." The good news is that "in operating margin sense these systems will both be paid off in '09."
Short-term pain for long-term gain? That is good horse sense.
