PetSmart, Inc. (PETM), Petmed Express Inc (PETS), Zoetis Inc (ZTS): How to Profit From the Popularity of Pets

What if you could find an industry that kept growing through the recession? And what if this industry had such loyal customers that when faced with tighter household budgets, they reduced expenditures so they could keep buying this industry’s products? Wouldn’t you consider adding its companies to your portfolio?

So let’s look at the top retailer of pet products and services, a supplier of pet medications, and a developer of animal health medications that aid both household pets and livestock. It seems all these companies are profiting from the increased humanization of pets.

Key drivers

We only need to consider one key driver: Americans love their pets. In the last ten years a new term has been coined to recognize how valued pets are, particularly dogs and cats, as members of the family — Pet Parents. These consumers of pet products and services are vitally concerned about the health, welfare, and happiness of their pets.

They are buying premium dog and cat food with better nutritional elements than the pet food sold in the grocery stores. They take their pets for regular health checkups and are willing to foot the bill for whatever treatments the vet recommends.

In the depths of the Great Recession I skipped my own annual physical so my Irish Setter “Rose” could have hers. I thought of it as my Fido-ciary Duty. The American Pet Products Association reports that industry sales grew from $43 billion in 2008 to $53 billion in 2012.

The retail leader

The sales and market share champion of the specialty pet products retail industry is PetSmart, Inc. (NASDAQ:PETM), based in Phoenix, Arizona. Currently the company has more than 43% of the pet store market, according to IBISWorld. The next highest share is owned by privately held Petco, with around 20%. In 2008 PetSmart, Inc. (NASDAQ:PETM)’s share was 39% — so during tough times it was able to pull customers away from its competitors.

Beyond these top dogs, the remainder of the 13,000 pet stores in the U.S. are mostly little pups. Less than 8% of them have in excess of 20 employees. PetSmart, Inc. (NASDAQ:PETM)’s scale advantage allows it to purchase larger wholesale quantities of popular brands and premium foods at lower prices than smaller stores.

Its most formidable competition are the grocery store chains and mass merchandisers. The CEO of one retail giant told a group of analysts back in 2008 that the company was making the sales of pet products a key part of its strategy to get through the recession. The huge retailers have one major disadvantage to PetSmart, Inc. (NASDAQ:PETM): they generally do not carry premium pet food brands. PetSmart also offers services that these retailers can’t match, including pet boarding, day care, grooming, and in-store veterinary services.

In late May, PetSmart, Inc. (NASDAQ:PETM) released its first quarter results. Total sales were up 5% and EPS rose an impressive 15%. The company invested $35 million in capital expenditures and repurchased $180 million of its stock, and still had $324 million in cash at quarter’s end.

A medication retailer that found the cure for a slump

Its phone number is embedded in our consciousness: 1-800-PetMeds. Petmed Express Inc (NASDAQ:PETS) markets prescription and non-prescription drugs for dog and cats. It offers customers convenience by giving them the ability to order online or on the phone. It also provides good prices and delivers products promptly.

In the company’s annual report, management points out that supplies and medicines were the second fastest growing category in the pet products sector in 2012, rising 6.8%. Only boarding and grooming grew faster, over 10%.

This company unfortunately experienced a decline in revenue from $238 million in 2012 to $228 million in 2013. But results improved for the company substantially in its first quarter of its new year. It reported a 7.6% increase in revenue and a 20% jump in net income. It also added 207,00 new customers compared to 197,000 the year before.

The not-so-secret sauce of its business model is re-orders. It becomes so easy to get more medication, that their customers aren’t tempted to shop elsewhere.

New kid on the block

Zoetis Inc (NYSE:ZTS) is new but not to the animal care industry.  This company was formerly the animal health segment of Pfizer and just became an independent entity on June 24. Zoetis Inc (NYSE:ZTS) isn’t a small company by any means: revenue was over $1 billion in the first quarter, an increase of 4% over the same quarter last year. Net income spiked 26% to $140 million.

The company markets its products — which include veterinary vaccines, medicines and diagnostic products — in 120 countries. One of their its companion animal products is Convenia, which fights bacterial skin infections in dogs and cats. This is a $15 billion company, that pays out a dividend of around 1%, and trades with a P/E around 33.

What we learned

These stocks have a lot to offer investors now and over the long term. As the economy continues to improve, pet parents will be even more liberal in their spending on their beloved companions. PetSmart, Inc. (NASDAQ:PETM)‘s industry leading position should be maintained because big box retailers aren’t able to offer the same variety, information, and atmosphere.

IBISWorld projects 4% annual revenue growth for pet stores between 2013 and 2018. Petmed Express Inc (NASDAQ:PETS) is experiencing a clear rebound in its business after having a slowdown in customer growth last year. Zoetis Inc (NYSE:ZTS) global reach allows it to take advantage of increasing demand for animal medicines in all parts of the world. Each of these companies will benefit from the continued strength of the pet products market and should be fine investments going forward.

The article How to Profit From the Popularity of Pets originally appeared on Fool.com and is written by Brian Hill.

Brian Hill has no position in any stocks mentioned. The Motley Fool recommends PetSmart. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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