PETsMART Inc.

founded: 1987

Contact Information:

headquarters: 19601 n. 27th ave.
phoenix, az 85027 phone: (623)580-6100 fax: (623)580-6502 url: http://www.petsmart.com

OVERVIEW

PETsMART is the largest U.S. provider of supplies and services for animals and household pets. It currently operates more than 500 stores in North America and plans to increase this number annually. The stores offer the customary items such as dog and cat food, grooming supplies, and accessories. In an effort to move beyond traditional retail products the company has become a pioneer in the pet services industry. Customers can take their pets to many locations and schedule a pet grooming session, an obedience class, or an appointment with a licensed veterinarian. PETsMART hopes to carve out an identity as the company that cares about animals and provides services for the entire lifespan of pets.

Merchandise sales account for more than 95 percent of the company's North American revenues. There are three broad categories of products that fuel sales in the pet care industry: pet food, pet supplies and live pets. The pet food sector includes food and treats, and nets about 44 percent of PETsMART's total retail sales. The company stocks only high quality name brands, as well as premium style pet foods not found in discount stores. The pet supplies category offers a large selection of goods for many different types of pets, large and small. Toys, furniture, collars, leashes, and even aquariums are staples of this line that accounts for almost 50 percent of North American retail sales. PETsMART does not sell puppies or kittens, but some smaller creatures may be purchased in most centers. Tropical fish, birds, hamsters and reptiles are available to take home as pets. Sales of live animals account for only three percent of retail sales.

PETsMART Inc. is the leading provider of pet supplies and services in the United States. The company was founded in 1987 and now includes retail stores, catalogues, and an Internet shopping site. PETsMART operates more than 560 stores in North America, which provide pet supplies, pet grooming, training, and veterinary services. PETsMART stores allow pets to stroll the aisles with their human parents. PETsMART stores provide space in retail stores for animal shelters to promote pet adoption.

COMPANY FINANCES

PETsMART claimed $39.6 million in net income on $2,501 million in revenues for the fiscal year ending in January 2002. Although this represents a profit margin of only two percent, it was a marked improvement from the previous year's losses. In 2001 the company posted a net loss of $30.9 million on sales of $2,224 million. Ninety five percent of all revenues were derived from the sale of merchandise. Pet foods and pet supplies each account for 45 percent of the merchandise revenues with the remainder coming from live pets. Pet services account for five percent of total sales and represent the largest growth sector for the company. Revenues from pet training and grooming increased nearly 30 percent in fiscal year 2001.

ANALYSTS' OPINIONS

PETsMART appeared on Investor's Business Daily 52-Week New Highs list in January 2002. Stock prices for the company quadrupled in 2001 from a lowly $2.50 to $11.00 a share. Hans Utsch of the Federated Kauf-mann Fund described the improved financial picture: "You don't cut back on your pet. You spend whatever it takes. It's not like fashion, it's not cyclical. This is a turnaround story. New management, remodeled stores and rising cash flow showed us it was not going out of business." PETsMART also received positive reviews from David Mann, a specialty retailer analyst, reporting for Zack's Investment Research. He recommended the company as a stock to hold in 2002. He cited the potential to increase market share as a factor in his analysis, "a growing part of their business is in the grooming and training areas. The grooming business alone is seeing an increase around 20 to 25 percent per year." Absent any strong competition in the field, PETsMART's future appears promising.

HISTORY

The origins of PETsMART can be traced to Las Vegas in the mid 1980s. A wholesale pet food supplier decided to make business more profitable by selling his wholesale goods in his own retail environment. He hired Jim and Janice Dougherty to open an outpost in Las Vegas, far away from his California customer base. The experiment was a success and two PetFood Warehouse stores were opened in 1987 in Arizona. The Doughertys added a business partner, Ford Smith, and expansion of the pet food stores was underway. The company added stores in Arizona and branched out to Texas and Colorado. The name was officially changed to PETsMART.

By the early 1990s new management had replaced the Doughertys at the reins of PETsMART. The original stores were renovated and some of the warehouse features were eliminated in favor of a more appealing design. PETsMART began offering pet services such as grooming and obedience classes. New stores opened annually and the company operated in states stretching from Georgia to Utah. In order to implement its plan for sustained growth, the company made an initial public offering (IPO) of stock in 1993. PETsMART earned $125 million from its IPO and began trading on the NASDAQ exchange.

PETsMART blossomed into a bona fide money maker operating over 100 stores in 19 states. The company's ambitious growth strategy no longer relied on single store expansion. The company began acquiring other retail chains. In 1994, PETAZZ, a midwestern retailer with stores in five states, became the first major acquisition, with others soon to follow. Petstuff Inc., The Pet Food Giant, Sporting Dog Specialties Inc., and State Line Tack became part of the PETsMART brand. State Line Tack represented a move into a new industry, equine supplies.

In 1999 there were 500 PETsMART stores throughout the country, but the company was poised to enter an even greater market: cyberspace. PETsMART.com was launched and became the most popular online pet store. The company had some difficult financial times in the years 2000 and 2001 due to inventory and distribution inefficiencies. Improved technology and delivery systems remedied these problems and PETsMART prospered again by early 2002.

STRATEGY

PETsMART has developed a strategy that recognizes the important role pets play in the family unit. The strategy targets pet owners who are appropriately labeled "pet parents". These customers treat their pets as loved ones and spare no expense in obtaining the highest quality pet care necessities. In order to attract this type of loyal customer, the company adopted certain best practices. Value and selection are two critical elements in the PETsMART strategy. Stocking the stores with the widest selection of quality goods at a reasonable price is the overall goal. In order to remain competitive PETsMART attempts to undersell grocery stores by a 10 percent margin and to remain within a five percent differential with the discount and warehouse clubs.

Expanding pet services is a crucial point in the growth strategy. Pet grooming and pet training classes are unique to the PETsMART experience. Pet owners cannot find these services at the local discount store and this creates a reason to visit a PETsMART center. The company has invested time and resources to develop a caring, professional staff of pet handlers who will foster the trust of committed pet owners. Providing exceptional customer service in all areas of operation, not just the pet services, is another focal point of the organization. All associates are trained to answer questions and anticipate the needs of customers. Finally, the design and layout of all stores maximizes the shopping experience and invites pet families to spend time browsing.

INFLUENCES

PETsMART was arguably the first bricks and mortar pet "super store." The original management team copied the concept pioneered by successful toy retailer, Toys "R" Us. The business plan translated well and provided a solid foundation upon which the fledgling company built an empire. PETsMART quickly became a "category killer," a term used to describe powerhouse retailers who drive smaller independent stores in their industry out of business. Winning the fight for domination in the shopping mall scene was not the only challenge the company faced.

FAST FACTS: About PETsMART Inc.

Ownership: PETsMART Inc. is a publicly traded company on the NASDAQ Stock Exchange.

Ticker Symbol: PETM

Officers: Philip L. Francis, Chmn. and CEO, 54, salary $619,750, bonus $285,600; Robert F. Moran, Pres. and COO, 50, salary $433,520, bonus $100,000

Employees: 20,450

Principal Subsidiary Companies: PETsMART Inc. is a publicly traded company with several subsidiary units. PETsMART Direct controls the company's catalog businesses. PETsMART.com Inc. is the popular Internet pet supply site.

Chief Competitors: PETsMART is the largest U.S. retailer of pet supplies and services. Its primary competitors include pet store rival Petco Inc. and discount retailers Wal-Mart, Kmart, and Target.

The emergence of e-retailing brought with it a host of online pet supply sites that would garner more attention than any other competitors. In 1999 PETsMART launched its dot-com outlet in partnership with PetJungle.com and touched off a fierce competition with Pets.com for online supremacy in the pet care industry. PETsMART would eventually acquire struggling rival Pets.com despite the popularity of Pets.com's sock puppet spokespooch. The high profile advertising campaign waged by Pets.com, and its subsequent failure, underscored the PETsMART belief that value and customer service were more effective than a gimmicky sales pitch.

CURRENT TRENDS

Moving forward PETsMART's emphasis is on creating a lifestyle for pets. Beginning in 2001 the company rolled out a new slogan in its advertisements that read: "PETsMART: All you need for the life of your pet." Grooming and training services have been identified as an untapped market for the store. PETsMART intends to capitalize on this niche. Stylists and pet handlers are recruited and enrolled in a 15 week training program that teaches them grooming skills ranging from shampooing to nail clipping.

PRODUCTS

PETsMART offers extensive product lines for virtually every creature great and small. Dog and cat food and treats are a top sales item in all stores. The company tries to encourage the use of high quality, nutritious foods for animals. Supplies are an equally important segment. Shampoo, toys, pet carriers, beds, aquariums, and cages are popular buys. Live pets can be purchased at PETs-MART locations, but are limited to small pets. This includes reptiles, gerbils, birds, and fish. At the other end of the spectrum, the company has entered the equine supply market and sells riding gear and apparel.

Pet and veterinary services are also offered at many locations. In 2002, almost 300 locations offered veterinary care for pets. Routine physical examinations, vaccines, and dental care are available in a safe, hospital environment. The in-store hospitals operate under the name of Banfield and are owned by Medical Management International. PETsMART owns 38 percent of Medical Management International.

I WANT TO BE LIKE SPIKE!

Gatorade—for dogs. Rebound, a pet sports drink, is a new product for active dogs. The beverage, designed to counter dehydration in pets, is being distributed by PETsMART Inc. and grocery store, Kroger Inc. The company expected sales to break the $1 million mark in the year 2000. The drink has received national publicity in Rolling Stone and Maxim magazines. PETsMart hopes to expand to more retail outlets in the future.

CHRONOLOGY: Key Dates for PETsMART Inc.

1987:

The first PETsMART store opens in Phoenix, Arizona

1990:

PETsMART expands chain which now has more than 15 stores

1993:

PETsMART becomes a publicly traded company on the NASDAQ Stock Exchange

1994:

PETsMART Charities is formed to help homeless pets

1995:

PETsMART acquires State Line Tack and enters the field of equine care

1999:

PETsMART.com is launched

2001:

The PETsMART adoption program completes its one millionth adoption

GLOBAL PRESENCE

PETsMART is primarily a North American retailer with operations in most major markets of the United States and Canada. Less than 10 percent of total sales were generated from Canada or any other non U.S. region. The company attempted global expansion in 1996 when it acquired Pet City Holdings, a pet supplier in the United Kingdom. The complications associated with international operations affected overall company profitability and in 1999 PETsMART sold Pet City to Pets At Home to refocus on domestic operations.

CORPORATE CITIZENSHIP

PETsMART Charities was formed in 1994 to save the lives of homeless pets and facilitate animal population control. The company offers space in its retail stores for local animal shelters to promote pet adoption to its customers. In 2001, the millionth pet was adopted through in store adoption programs. PETs-MART also participates in local community events to help raise funds for rescued animals. The PETsMART Charities Foundation donates millions of dollars annually to worthy animal training programs and campaigns to spay and neuter pets. In a time of crisis, PETsMART is also willing to lend a hand. Following the terrorist attacks in New York and Washington, D.C. in September 2001, PETsMART donated dog food, supplies, paw protectors, and ear and eye cleaners to police canine units and search and rescue coordinators for use in their efforts.

A TALE OF TWO KITTIES

The eighth annual Spay Day USA was held February 26, 2002. Spay Day is national campaign launched by the Doris Day Animal Foundation. The foundation's goal is to end pet over-population by altering dogs and cats. The theme for 2002's event is "A Tale of Two Kitties—Don't Let Fluffy Breed Like the Dickens." PETsMART Charities sponsored the event for the third consecutive year. For the record, eight of every ten cats that enter a shelter are killed; likewise six of every ten dogs are killed. For more information on this program, visit www.1888pets911.org.

EMPLOYMENT

In 2002, the number of PETsMART employees reached 22,375. Almost 11,000 of these employees were full time staff members. PETsMART provides training for employees interested in the pet services area. The company has initiated incentive programs designed to increase employee retention and pays above minimum wage rates. Employees also receive a generous benefit plan including major medical coverage and tuition assistance programs.

SOURCES OF INFORMATION

Bibliography

"a tale of two kitties, don't let fluffy breed like the dickens." business wire, 24 december 2001.

"doner breaks its first petsmart campaign." adweek, 23 february 2001.

moreau, dan. "retail stocks offering up mixed bag. . . ."investor's business daily, 22 january 2002.

"petsmart sends supplies to canine rescue teams." business wire, 14 september 2001.

reyes, sonia. "dreyer's petsmart on spot." brandweek, 20 november 2000.

waldrop, libby. "sports drinks for pooches leaps over national hurdle." the business journal, 10 december 1999.

williamson, deborah aho. "a dog's life: despite its popular icon. . . ." advertising age, 7 august 2000.

"zacks all star analyst issues recommendations." pr newswire, 2 april 2002.

For an annual report:

on the internet at: http://www.irconnect.com/petm

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. petsmart's primary sic is:

5999 misc. retail stores

also investigate companies by their north american industry classification system codes, also known as naics codes. pets-mart's primary naics code is:

453998 all other misc. store retailers except tobacco