Shares of PetSmart, Inc. (PETM) surged 12.48% to $67.27 on July 3 after the activist hedge fund Jana Partners disclosed a 9.90% stake in the retailer. Due to the move, Jana Partners will become the company’s largest shareholder.
More than 16.17 million shares were traded on the day, comparing with the average volume of 2.34 million. PetSmart currently has a market cap of $6.67 billion.
The company’s stock has been up and down in the past six months. In late May, the stock’s price shed 10.59% from $64.58 to $57.98 per share. The stock has a 52-week high of $77.32, and a 52-week low of $55.00 per share.
Jana Partners Reveals Major Stake
Jana Partners revealed plans to hold discussions with PetSmart’s management and board about ways to increase the value of its stock. According to the filing, Jana Partner would like PetSmart take a series of actions, including exploring various options to improve operating performance, the company’s capital structure, and management and board composition.
Jana Partners also revealed that it intended to ask PetSmart to explore a sale of the company, the fact that most likely sparked much of the day’s gains.
PetSmart, a Phoenix, Ariz.-based company, is the largest specialty pet retailer of services and solutions for the lifetime needs of pets in the United States, Puerto Rico, and Canada. The company also offers pet food and pet products through an e-commerce site, PetSmart.com.
One Retail Stock with Reason for Optimism
PetSmart’s stock has several strengths, which has greater impacts than its weaknesses. The strengths include revenue growth, growth in earnings per share, and solid financial position. The company has a quarter-revenue growth rate of 1.10%, though is slightly lower than the industry average of 1.50%, which still appears to have trickled down to the company’s bottom line, and to improve the earnings per share as well.
The current debt-to-equity ratio of 0.48 is much lower than the industry average of 36.80, implying that PetSmart has successfully managed its debt levels. But its weak quick ratio of 0.70 demonstrates a lack of ability to pay short-term obligations.
Q1 2014 Saw Improving Income
PetSmart released its financial results for Q1 of fiscal 2014 on May 21. According to the report, the company’s net income has increased 1.30% to $104 million, from $102 million in Q1 of fiscal 2013. Comparable store sales, or sales in stores open at least one year, including online sales, fell 0.60%, with comparable transactions decreasing 2.20%. Services sales grew 4.50% to $200 million.
“We are pleased with the company’s ability to achieve earrings per share growth of 6.10% while continuing to drive earnings before tax margin expansion during the first quarter,” said CEO David Lenhardt. “However, we did not achieve our sales goals, which were impacted by a challenging and volatile consumer environment and a competitive market.”
Fierce Competition Could Eat Into Profits
Indeed, challenges from rivals and the market itself should be noted by investors. Despite the large market of pets’ products and services in the U.S., competitors surround PetSmart. Large supermarkets like Walmart (WMT) also offers pet supplies, and small grocery stores sell limited but much cheaper products. In addition, e-commerce’s expansion has blocked the development of physical stores. Amazon (AMZN) offers free delivery on thousands of pet supplies, offering more convenience at a competitive price.
In order to win over consumers, PetSmart has taken several actions, including building its own online shopping system and improving user experience. The company began to offer daily free shipping on orders over $49. It has also refined its online pet pharmacy services via well-designed selection items.