Investment Analysis by:

Devopama Pant
Chen Liang
Qiao Du

Presentation Date: 11/11/2014

Agenda
Current Holdings
Company Profile
Macroeconomic Review
Industry Review
Strategy Overview
Financial Analysis
Valuation
Recommendation
 Current Position
100 shares bought on May 3, 2012 @ $58.88
Current Price: $72.74 (11/10/2014)
Gain (as on 11/10): 23.54%
Portfolio share(MV): 3.96%

* Yahoo Finance (RCMP Client Portfolio) https://finance.yahoo.com/portfolio/pf_1

Recent stock trends

Trends taken from Bloomberg.com Dated: 11/09/2014

Company Overview

PetSmart was founded in 1986

PetSmart, Inc. is a retail chain operating in the United States,
Canada, and Puerto Rico
Engaged in the sale of specialty pet supplies (around 10,000
pet products) and services such as grooming and dog
training, cat and dog boarding facilities, and daycare
In 1993 went public on the NASDAQ stock exchange listed
under the symbol "PETM"
In 2005, the company announced that it was rebranding its
name from PETsMART to PetSmart
2013, PetSmart operated approximately 1,333 stores (55 new
stores) in around 200 locations with Pets Hotels (3 new pet
hotels) and Doggie Day Camps
Data from http://phx.corporate-ir.net/phoenix.zhtml?c=93506&p=irol-timeline and PetSmart Annual Report 2013 Page # 2-5
PetSmart : Product Line (PETM Owned)

5 self owned brands ranging from

Dogs regular to super-premium

Pet 5 self owned brands ranging from

Products Cats regular to super-premium

Birds / Reptiles /
3 self owned brands ranging from
Fishes / Small regular to premium
Animals

Hotels available at 200 PetSmart

Hotels
Pet locations
Services Hospitals
Hospital services available at 837
PetSmart locations

Proprietary and exclusive products and services currently represent approximately 35% of the Net Sales
Self-owned product brands details on Slide # 23

http://phx.corporate-ir.net/phoenix.zhtml?c=93506&p=irol-homeprofile
www.petsmart.com
 Major Competitors

Category Major Competitors

Specialty Supply Retailers Petco

Stores Walmart, Target, Costco, Others

Merchandise
Online Amazon, EBay, Others

Services Standalone stores, Small retail chains

http://big.assets.huffingtonpost.com/ibis.pdf
 Future growth in Pet Industry
(Macroeconomic view)
Change in Disposable Income
Households owning pets-
68%
(82.5 M Homes and 396M
Pets)
Average growth rate of the
pet store industry 2.2%
(last 5 years)
Unemployment Rate Growth in Pet Population

http://big.assets.huffingtonpost.com/ibis.pdf
http://data.bls.gov/timeseries/LNS14000000
 Market Segments

Total Revenue : $15.7bn

http://big.assets.huffingtonpost.com/ibis.pdf
Porters 5 Forces Model Pet Industry
Barrier to entry:
Medium & Steady
Niche Market
Limited Discretionary
Income
Licensing Cost
Tax rate/Interest Rate
Fluctuation

Threat of Substitutes: Competition:

Low & Steady Medium & Increasing
Demand of premium High Profit Margin for
Products is stable Porters 5 Forces Premium Services
Attitude towards pets Model Protected by
is stable and positive Manufacturers
restrictions

Bargaining Power of
Bargaining Power of
Sellers:
buyers:
Medium & Increasing
Healthcare Cost
Low & Increasing
Bulk Retailers like Costco
Unemployment Level
E-Commerce Retailers
Restrictions on
like Amazon
distribution Channels
Brand Recognition
Available E-Commerce
Distribution
SWOT Analysis PetSmart
Strengths
Well known Brand / Strong
Community Presence
Publically available Financial data
Strong Financial (Current ratio-1.66)
Low Carbon Footprint
Employees have high stakes of
shares
Social Responsibility
Weaknesses
Most products are globally
manufactured so may have
compromised quality
Marginal wages to employees
Distant stores with few distribution
center can be impacted by weather

Opportunity Threats
Petco
Expansion of services Costco/Walmart/Target
Foreign expansion (Mexico/Europe) Amazon/EBay
Homeopathic Products Small Pet retailers
Training services for companion pets Reduced Discretionary Income
Pet insurance Loss of Employees
Food Safety Measures
Market Fluctuation
Customer Preference
Pet Smarts Strategy

Unique role centered around

creating more moments for
people inspired by pets

PetSmart Charities Inc.

PetSmart in-store adoption
centers

PetSmart Gives Back

o PetSmart Paws for Hopes
o PetSmart for Patriots
o PetSmart Pop-up Parks

PetSmart Annual Report 2013, Pg# 3-4

 Management Outlook

Leverage the Humanization of Pets

Stay relevant to the customers
Increase personalized connections
Enhance customer experience through
technology and innovation
Enhance operating excellence
Differentiate with care
Be a part of the community

Focus on Solutions!!

PetSmart Annual Report 2013, Page # 4-5

Merchandise vs. Services
100%
10.8% 10.9% 11.0% 11.0% 11.1%
90%

80%

70%

60%

50% Pet Services

89.2% 88.5% 88.4% 88.5% 88.4% Pet Supplies (Merchandise)
40%

30%

20%

10%

0%
2010-01-31 2011-01-30 2012-01-29 2013-02-03 2014-02-02

PetSmart 2010-10K -Page # F-4 /2012-10K-Page # 42/ 2014-10K -Page # F-4

Risk & Uncertainty

Quarterly results may show fluctuation due to seasonal

changes associated with the pet products and services,
retail industry, new store openings and store closures.

Loss of any of the key vendors may disrupt the quarterly

or annual financial performance as two of the largest
vendors account for a material amount of products sold

Food safety, quality and health are of big concern as a

large selection of products are gathered from all over the
world and it may result in a loss of customer confidence

Presentation 2012-11 / 2012-10 K-2013 10K

 Recent News at Pet Smart

Jana Partners has discussed the possibility of a private

equity buyout after announcing their 9.9%
position.(07/18/2014)
Management surprises investors with news of the Pet360
acquisition and formally announces interest in a potential
sale. (08/27/14)
Private-Equity Firms Prepare Bids for PetSmart
(10/29/2014)
Private-Equity Firms Invited to Final Round of PetSmart
Bidding (11/06/2014)

http://seekingalpha.com/article/2453415-petsmart-the-pet360-piece
http://seekingalpha.com/article/2319995-a-private-takeover-would-be-good-for-petsmart
http://online.wsj.com/articles/private-equity-firms-prepare-bids-for-petsmart-sources-say-1414600644?KEYWORDS=petsmart
http://online.wsj.com/articles/private-equity-firms-invited-to-final-round-of-petsmart-bidding-1415314908?KEYWORDS=petsmart
 Ratio Analysis
Profitability Ratios Liquidity Ratios
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
Gross Profit Margin 28.47% 29.06% 29.52% 30.51% 30.59% Current Ratio 1.89x 1.96x 1.86x 1.74x 1.66x
Operating Profit Margin 6.92% 7.53% 8.23% 9.64% 10.02% Quick Ratio 0.64x 0.62x 0.61x 0.55x 0.45x
Net Margin 3.72% 4.21% 4.75% 5.76% 6.07% Cash Ratio 0.55x 0.51x 0.50x 0.44x 0.36x
ROA 8.05% 9.71% 11.41% 15.36% 16.63%
ROE 16.36% 19.59% 24.03% 32.81% 36.27%
Cash Conversion Cycle
Degree of Operating Leverage -0.04 2.41 2.36 2.79 2.76
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
Greenblatt Ratios
Accounts Receivable Turnover 102.17 107.22 113.35 107.19 95.48
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
EBIT/EV 8.27% 6.98% 6.87% 7.92% 8.81% Days Sales Outstanding 3.57 3.40 3.22 3.41 3.82
EBIT/Tangible Assets 20.62% 24.76% 31.68% 43.93% 47.50% Inventory Turnover 6.78 6.85 6.84 7.09 6.76
Days Inventory Outstanding 53.87 53.28 53.40 51.45 53.96
Capital Structure Ratios Accounts Payables Turnover 17.90 21.48 23.58 23.58 21.26
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 Days Payables Outstanding 20.39 16.99 15.48 15.48 17.17
Debt Ratio 52.37% 52.61% 54.65% 55.73% 56.63%
Time Interest Earned Ratio 6.18 7.29 8.85 11.99 13.39 Cash Convension Cycle 37.05 39.69 41.14 39.37 40.61
Degree of Financial Leverage -14.33 3.13 2.85 3.24 3.28 Inventory to Cash Days 57.44 56.68 56.62 54.86 57.78

PetSmart 2010 10-K, 2012 10-K & 2014 10-K

DuPont Analysis

PetSmart 2010 10-K, 2012 10-K & 2014 10-K

Weighted Average Cost of Capital

Trends taken from Bloomberg.com Dated: 11/09/2014, / PetSmart 2014 10-K

Discounted Cash Flow Evaluation
In Millions of USD except Per ShareFY 2015 Est FY 2016 Est FY 2017 Est FY 2018 Est
12 Months Ending 2015-02-02 2016-02-01 2017-01-31 2018-01-31 Terminal
EBIT 714.1 757.0 825.1 899.3 953.3
Less: Taxes 244.0 258.8 281.2 311.4 330.0
NOPAT 470.1 498.1 543.9 588.0 623.3

Add: Depreciation 249.1 264.0 287.8 313.7 332.5

Capital Expenditures 135.7 136.3 118.9 118.3 114.3

Change in Net Working Capital

Accounts Receivable -2.8 -2.4 -0.3 -1.1 -1.4
Inventories -0.1 -1.0 -0.5 -0.2 -0.9
Accounts Payable 19.9 22.6 44.2 29.7 87.9
Accrued Expenses 20.7 9.2 24.1 12.2 14.2
Total Change in NWC 37.7 28.4 67.5 40.6 99.8

Free Cash Flow 621.2 654.2 780.3 824.0 941.4

Present Value of Free Cash Flow 561.27 534.18 575.68 549.30 7616.35

WACC 9.67%
Business premium 1.00% Implied EV 9,836.77
Discount rate 10.67% Less Debt 2,447
Terminal Growth 3.00% Implied Market Cap 7,390

Shares Outstanding 103.2 Implied Share Price:

Basic $ 71.60

9% sales growth rate for next 4 years and constant 4.5% Optimistic: $85.36
4% sales growth rate for next 4 years and constant 3% Pessimistic $60.66
Technical Analysis

Trends taken from Bloomberg.com Dated: 11/09/2014

Recommendation

Current Price: $72.74 (11/10/2014)

Implied Intrinsic Value: Basic: $71.60
Optimistic: $85.36
Pessimistic: $60.66
Appendix1 : PetSmart - Product Line (PETM Owned)
Dogs Cat
Brand Food/Hard Goods Category Brand Food/Hard Goods Category

Grreat Choice Both Regular Grreat Choice Both Regular

Authority Food Premium Authority * Food Premium

Simply Nourish Food Super Premium Simply Nourish Food Super Premium

Top Paw Hard Goods Private Label Exquisicat Hard Good Cat Litter

Toy Shoppe Hard Good Toys Toy Shoppe Hard Good Toys

Horse Birds/Reptiles/Fishes/Small Animals

Brand Food/Hard Goods Category
Brand Food/Hard Goods Category
Top Fin Hard Good Regular
Proquatics Both Fish Supplement
Sold to Horse.Com
State Line Tack Hard Good Bird-Small Animal
(Pet United) All Living Things Both
Supply

Pet Hotel Pet Hospital(Banfield*)

Orginal idea Place Acquired Orginally Parent Comapany Facility Available

David Mackstellar Arizona 2000 MMI Mars Inc. 837 Stores *

Rodger Ford 200 stores

Previously Sophisticat and before that it was Award

Canada has additional 7 third party hospitals