Why JANA Partners discloses activist position in PetSmart (Part 3 of 8)
PetSmart’s same store sales declined
In the previous sections in this series, we reported that JANA Partners disclosed an activist position in PetSmart (PETM). JANA said it intends to discuss a review of strategic alternatives including exploring a sale of the company. In this series, we’ll discuss PetSmart’s latest 1Q14 results and find out why its same store sales declined.
Specialty retailer PetSmart saw its shares fall at the end of May as first quarter sales missed estimates and outlook came below expectations. PetSmart’s first quarter same store sales fell 0.6% while total sales increased only 1.1% to around $1.7 billion. Earnings per share (or EPS) increased 6.1% to $1.04 compared to $0.98 a share the prior year. PetSmart opened seven stores during the quarter, bringing the total number of stores to 1,340. The lackluster results prompted PetSmart to forecast comparable store sales growth in the second quarter to be flat to slightly down and full year 2014 to be relatively flat.
PetSmart said in its 10Q filing that “Foreign currency fluctuations and weather negatively impacted comparable store sales, which declined by 0.6% during the 13 weeks ended May 4, 2014, by approximately 40 basis points each.” Comparable store sales had been up 3.5% in the same quarter a year ago.
Results impacted by macroeconomic factors and rising online competition
The management said on the earnings call that since last year the company has witnessed a “volatile macroeconomic and consumer environment, as well as an intensified competitive landscape.” They noted that “Consumer behavior is shifting and change is happening faster than ever. In a world of increasing choices in the pet specialty market, along with increased online competition, we know we must accelerate key elements of our strategies to drive top line sales growth.”
Analysts noted that PetSmart faces competition not only from traditional retailers such as Walmart (WMT) and Target (TGT), supermarkets and grocery stores, but also online retailers such as Amazon (AMZN), eBay (EBAY), and other unlisted pet supplies websites. According to a recent research by ITG that was cited by news reports, PetSmart was a late entrant to the e-commerce scene. It has been estimated to generate 1% of its sales online as compared to 4% for the pet industry. ITG also noted that Petsmart’s largest customers are moving away to become Amazon Prime members at a higher rate as compared to the other users.