Pet Products Woof Off Recession, So PetSmart Gains

(MoneyWatch)  Like dollar stores and Wal-Mart, pet retail has been loping through the recession with its tail wagging.

The consumer determination to bunker in for the recession's duration clearly encompasses man's best friend and other assorted members of the domestic menagerie. Not only are pets getting treated the same as people, they may be getting treated better. While consumers trade down to private labels and forego restaurant visits, they seem to be spending more on pet edibles. According to Nielsen Co. data for supermarkets, drug chains and mass-market retailers, unit sales of pet food were actually down 3.2 percent for the 52 weeks ended April 18, 2009, but dollar sales were up 11 percent.

Specialty stores are among the beneficiaries of the trend. In the first quarter, PetSmart's 37 cents per share earnings beat per share profits in last year's quarter, which came in at 32 cents, its own guidance of 27 to 31 cents and the consensus analyst estimate of 30 cents.

An emphasis on consumables helped, said Wedbush Morgan analyst Joan Storms, but management also has been diligent in ensuring costs remain in line with circumstances. In fact, Storms said, the company's latest quarterly report demonstrated that it had reduced costs at least incrementally on a line-by-line basis and had improved efficiencies in buying and sourcing.

At the same time, PetSmart introduced a series of marketing and merchandising efforts. A company-wide pet birthday campaign boosted sales even during a period when Wal-Mart was running a pet supplies television commercial, Storms noted. Also, PetSmart conducted promotions that included vendor participation, something it hadn't really done in the past. The result was a significant sales boost at reduced cost, as the vendors involved could be counted on to pick up a lot of the tab. New merchandising and marketing efforts have the potential to continue driving the top line even as efficiency initiatives are kicking in, which could result in more cash falling to the bottom line.

Storms noted that the lower grades of wet food at PetSmart, while stable in terms of sales, hadn't done as well as dried, as some consumers did trade down, but also hadn't done as well as the premium categories, which suggests what may be going on with the Nielsen numbers. More big sacks of dried food and additional expensive cans of the premium would account for the trends.