PetSmart (PETM) has been a glorious investment in recent years, as seen in a stock chart, more than tripling in value while the most pampering pet owners discovered new trinkets and accessories in its revamped warehouse stores. But there are worries about the shares’ ability to climb much from here, even if spoiling Fido continues as a social norm.
That steep drop in January was triggered by a Nomura analyst who abruptly switched a recommendation on the shares from buy to sell. The usual reasons for such a startling reversal – scandal, a horrible earnings report – were nowhere in evidence, and there are still numerous buy recommendations from other houses. But Nomura’s concerns over potential competition from Amazon.com (AMZN), a high PE ratio on the shares, and the exit (for mundane reasons) of both the chief executive and the chief financial officer this year, apparently struck a chord. A quick check of datarama also shows that Steve Romnick and Robert Olstein, two value fund managers that hold PetSmart stock, have been reducing their holdings in recent quarters.
Although Amazon is the boogeyman for any retailer, PetSmart has been considered more immune from online competition than others. PetSmart has several attractions that Amazon can’t offer, like training classes, vet services and a place one can go with one’s dog. Yes, Amazon can sell and ship 30 pounds of dog food to you cheaper, but it cannot let your dog sniff out his own birthday present before purchase. And selling more such presents (as opposed to basic supplies) has helped PetSmart steadily build both same store sales and profit margins in recent years.
Those profit margins, as the chart below shows, are not particularly remarkable when compared to other retailers, such as TJX (TJX), Bed Bath and Beyond (BBBY) and Target (TGT). The share price climbed on the gains, rather than the actual number. The fear is that the changes that widened those margins are done, leaving the share price with an outsized valuation as improvements slow.
More clarity should come on Wednesday, when PetSmart reports fourth quarter and full-year earnings after market hours. The company expects a 10% to 11% rise in revenues for the year (6% to 7% gains in comparable store sales), and earnings per share between $3.47 and $3.51. A lot of investors have a lot of profits they could take in these shares. Anything remotely disappointing might give them a good excuse to do so.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org.
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