Last summer, Wal-Mart Stores, Inc. (NYSE:WMT) unleashed its first ultra-premium, private-label dog food. Its Pure Balance brand touts either lamb or poultry as its primary ingredient and contains no soy, wheat, corn, chicken by-products, artificial colors or preservatives. Wal-Mart Stores, Inc. (NYSE:WMT)’s focus on ingredient quality and the scale of this retailing giant will allow it to bite into the $21 billion pet food industry. According to Wal-Mart Stores, Inc. (NYSE:WMT), it sells enough dog food “to match the weight of an African elephant more than 27 times each hour.” That’s a lot of kibble.
PetSmart, Inc. (NASDAQ:PETM) also faces serious online pressures from both Wal-Mart and Amazon.com, Inc. (NASDAQ:AMZN) . In fact, according to the recently published Placed: Aisle to Amazon Study, PetSmart faces strong threats from the e-commerce heavyweight. Amazon’s Wag.com pet-centric website boasts more than 25,000 products, 5% back on pet food, and free two-day shipping for orders over $49.
The real differentiator
But what sets PetSmart apart from the competition is its in-store experience, mostly through its services. As the largest provider of pet services on the continent, PetSmart’s sales from services have almost doubled during the past six years. Grooming and training are available in all PetSmart stores, with an increasing number of them offering veterinary services, boarding, and pet day care. In Q4 2012, PetSmart’s services sales increased nearly 15%.
PetSmart services increase the frequency of customer visits, the amount of money dropped on our pets per visit, and profitability. Services drive PetSmart’s margins substantially. For example, margins double when a dog is groomed and the “pet parent” buys a dog product versus when a pet parent buys only a dog product. Add boarding to the scenario, and the margin increases four-and-a-half times.
Foolish bottom line
During the past five years, PetSmart stock has returned nearly 48% annually, roughly four times that of the Nasdaq. I still think PetSmart possesses ample growth potential, mostly because of its differentiation through its store experience and services. And there’s plenty of industry growth potential to support future growth for PetSmart. But the market is looking for perfection these days. As a result, I think investors should temper expectations.
The article 1 Big Reason PetSmart Stock Took a Pause originally appeared on Fool.com and is written by Nicole Seghetti.
Fool contributor Nicole Seghetti owns shares of Wal-Mart Stores. Follow her on Twitter @NicoleSeghetti. The Motley Fool recommends Amazon.com, Chipotle Mexican Grill, Lululemon Athletica, and PetSmart. The Motley Fool owns shares of Amazon.com and Chipotle Mexican Grill.
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