petsmart girc final

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




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


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



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.



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



`

15%

85%

Grooming & Boarding Services

PetSmartMass

• $3.4 Billion spent in 2009

Valuation

Industry

CompanyOverview

Financial Analysis



`

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



`

Valuation

Industry

CompanyOverview

Financial Analysis



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



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


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


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


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


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


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

petsmart girc final

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