Stock of the Day: Petsmart: Still In The Dog House?
Yahoo! The Online Investor
Oct 05, 1998
Once a upon a time Petsmart (Nasdaq:PETM - news) could do no wrong. That was about two years ago. Since then, Petsmart's business has stumbled and its stock price has collapsed. It's still considered a category killer, though. And that means Petsmart is a company that still has to be reckoned with. The company, in fact, believes that its past woes and transgressions -- which helped drag its stock price from $29 to its current price of $6.88 -- are now behind it, clearing the way for a turnaround.
One thing that Phoenix-based Petsmart has put behind it is an ill-advised and untested advertising campaign. When Petsmart tanked last year, company officials were quick to point to aggressive
inventory reductions and more competition as the main culprits. But according to Philip Francis, the company's new president and chief executive officer, it was simpler than that. He said the company's
decision to go from print advertising to direct mail was a major faux pas.
"It was a mistake," Francis told the Arizona Republic newspaper. "It is fair to say it wasn't tested anywhere. It just was done (without doing any due diligence)."
And while Francis didn't want to blame inventory problems on Petsmart's tumble, they certainly played a part. In an attempt to reduce costs, the company aggressively cut inventory levels, leaving
some items in short supply. Unfortunately, one thing left in short supply was dog food, a staple for any pet-supply store. The empty shelves irritated customers, which probably led to Petsmart losing
some valuable customers in the process. The company says it now has tight controls on merchandise flow and that problems from last year are over. In other words, dog food may be flying off the shelves, but it'll be replaced just as quickly.
Something that won't be moving quite as quickly, however, is the pace of expansion. In an effort to be anywhere and everywhere, Petsmart experienced some serious growing pains in 1996. In hindsight, the company was simply unable to handle the frenetic course that it was set upon. At one point, Petsmart was expanding into the United Kingdom, Canada, and into several large U.S. markets simultaneously.
"There were a lot of things undertaken at once, which individually or in a smaller number probably all had merit, but coming at once probably overcame the ability of the business to handle them all well," Francis told the Bloomberg Forum.
Store growth has been curtailed and Petsmart is now intent on a more controlled level of store expansion.
One guy who's betting that Petsmart is turning it around is Art Samberg, a hedge-fund manager who recently told Fortune magazine that the company has the opportunity to kill its competitors if it gets
itself together. Said Samberg: "We think they've got $1 a share of earning power and an opportunity to do creative things. If they were to wrap a Web strategy around their basic operations, they could
cut costs and run rings around their competitors."
Petsmart recently embarked on just such a Web strategy, which the company expects to post "a significant profit" from during the upcoming year.
As to its ability to earn $1 a share, it won't happen anytime soon, but management seems open to the idea of doing it sometime in the next couple of years. "Our management feels that the company has the potential to get in the 75 cents to $1 range over the next several years," said Chief Financial Officer Neil T. Watanabe, speaking to a meeting of the Phoenix Society of Financial Analysts.
Looking at Petsmart's stock price, it's obvious that investors don't believe that a turnaround has arrived just yet. Indeed, investors may acknowledge that the big dog is barking again, but there's no proof that it has any bite.
If it doesn't, look for Petsmart shares to continue playing dead.
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