Take Advantage of the Booming Pet Economy: PetSmart, Inc. (PETM)

Despite all of Bob Barker’s pleading at the end of the Price is Right, the pet population is exploding! As the number of pet owners rises, spending is rising even faster. The market size has doubled on a real basis in the last 20 years. In 2012, Americans spent over $52 billion on animals. That number is expected to rise to $74 billion by 2015.

(Source: The Atlantic)

There are several ways you can invest in the booming pet economy, but one company stands out to me: PetSmart, Inc. (NASDAQ:PETM)

The last bastion of brick-and-mortar retail

Retail stores have been suffering at the hands of e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN) for some time now. The growth of the online retailer is a key driver to the expansion of the greater than $1 trillion e-commerce industry. However, the pet industry has proven a tougher customer for Amazon.

That’s not to say Amazon isn’t a significant threat in the pet supply business. Its Wag.com website launched a couple years ago and features a huge selection of products, and offers the usual Amazon perks – great prices and free and fast shipping.

However, pet owners seem to buck the trend of increasing online sales. Even Petmed Express Inc (NASDAQ:PETS) is starting to see sales plateau after growing revenue by an average of 15.8% per year over the last decade. Earnings growth slowed to just 5% for the company in 2012, and is expected to rise just 1% in 2013.

The limitations of online retail are quite evident in the pet supplies category. Not much can beat the personalized (animalized?) recommendations from knowledgeable in store staff at specialty retailers like PetSmart. PetSmart has grown into a one-stop shop for pet owners providing food, toys, and other supplies as well as grooming, boarding, training, and veterinary services. Not to mention you can get your next pet there too.

But really, pet owners love going to PetSmart, Inc. (NASDAQ:PETM) because their pets love it! While barking at the mailman as he delivers a package full of food, toys, and medicine is fun, it’s a far cry from going for a trip, meeting other animals, and getting a special treat at the end of it all.

The real competition

A much bigger threat to PetSmart is big-box retailer Wal-Mart Stores, Inc. (NYSE:WMT). As it’s just started expanding into the pet supplies business with food and toys, there’s still a lot of potential for Wal-Mart to capitalize on the booming pet industry by adding more pet-friendly store sections.

Currently, Wal-Mart doesn’t control the mind space of pet owners. However, it’s just a successful marketing campaign away from seeing packs of four legged creatures coming through its doors. Wal-Mart definitely has the pricing power to undercut PetSmart, which makes it a serious threat. I think it’s just a matter of time until we see a bigger push on Wal-Mart’s part.