Despite Disney, Petsmart Forecasts Slower Growth

Petsmart Inc. today reported it expects to grow 2 to 4 percent in 2013, both on a comparable store basis and overall. That figure trails the APPA’s recent forecast of 4.1 percent for the industry overall and fell short of analyst expectations of 5 percent.

Predictably, Petsmart’s stock is being driven down (about 7 percent as of 4:30 EST) in after-hours trading.

This, despite a strong fourth quarter in which Petsmart saw overall sales grow 15 percent to $1.88 billion and net income rose 31 percent to $134 million. Granted, Petsmart’s fourth quarter and 2012 fiscal year included an extra week, so the revenue climb isn’t as robust as it seems –the extra week would account for about half the quarter’s sales growth and less than 2 percent of overall sales for the year. Petsmart reported the extra week added $126 million to sales, so without the extra week its fourth quarter sales would have grown 7 percent.

 For 2013, Petsmart will be back to its 52-week fiscal year—one less week to try to grow sales.

During the year, it plans to open 45 to 50 net new stores in its 12,000- and 18,000-square-foot formats and also test 12 micro stores ranging from 6,000 to 7,500 square feet, according to CFO Chip Molloy. The “micro stores” are slated to open during the first half of the year and are expected to offer a broad assortment of products and grooming, training and pet adoption services.

The company reported strong sales growth in merchandise categories: consumables, hard goods and live goods. It plans to strengthen its growth in the natural/superpremium category by adjusting space allocations to increase available space for Blue Buffalo and Petsmart's proprietary Simply Nourish line, according to David Lenhardt, president and COO (and future CEO in June, when current CEO and chair Bob Moran will relinquish the CEO duties).

Also bolstering sales: the chain’s recent licensing deal with Disney for character-based pet apparel and toys, including Muppet characters such as Kermit the Frog. Also planned, a second quarter reset of its reptile department. Lenhardt says reptiles are the fastest-growing specialty segment for Petsmart.

For its fourth quarter, Petsmart posted comp store sales growth of 4.6 percent. Service sales grew 15 percent to $194 million.

For the year, Petsmart reported overall sales were up 11 percent to $6.8 billion, comp store sales grew 6.3 percent and services grew 10 percent to $740 million. The year’s overall sales more than doubled the APPA’s estimate for overall industry growth of 4.7 percent and services sales slightly outpaced the industry’s 9.7 percent clip.

Phillips Makes Splash With Royal Deal

In the latest move toward pet industry distributor consolidation, Phillips Pet Food and Supplies acquired Royal Pet Supplies, with distribution centers in Brentwood, N.Y., and Pompano Beach, Fla. The move allows Phillips to explore relatively uncharted territories: specifically, the underwater world of aquatics.

“The primary objective of this new venture is to continue to build a best-in-class distribution network that will give our customer’s unprecedented service,” Blaine Phillips wrote in a letter today to Royal’s customers. “Combined, we will offer our customers a full portfolio including full-line aquatics which allows us to address our retailers complete supply needs.”

The move more fully into aquatics comes at a time when the aquatics sector has rebounded: the latest APPA pet population figures estimated 11.7 percent of U.S. households kept freshwater fish and 1.5 percent kept marine fish. The sector had dipped in 2010, but has otherwise hovered about 12 percent since 2000.

 The deal may also give Phillips added heft in advance of a march west toward a national footprint, much as Animal Supply Co.’s acquisition path has led it down the Pacific Coast and across the southern portion of the country to the East Coast. Neither Royal nor Phillips seemed to fit Animal Supply’s needs due to overall size and territorial overlap.

“Both organizations are operating in the same manner as they have,” Phillips wrote. “Gary Nocera, the Royal sales team and drivers will continue to support you. As we work to integrate and consolidate our organizations, we will keep you advised of pending changes. Phillips will be able to offer increased sales support, inventory management, and a variety of other services.”

Phillips did not say whether the company will ultimately consolidate any distribution centers, but the Royal facilities are relatively distant from the Phillips facilities. Phillips operates distribution centers in Pennsylvania, Massachusetts (acquired in its 2010 acquisition of Super-Dog Pet Food), South Carolina, Florida, Ohio and Indianapolis.

The deal will see Phillips add Royal distribution centers in Brentwood, N.Y., (near New York City, about midway between Easton, Pa., and Taunton, Mass.) and Pompano Beach, Fla. (on the Atlantic Coast, 200 miles south of Plant City). 

“The integration of the companies will allow us to learn from each other, focus on the strengths of each and combine the best practices of both organizations to form strategic alliances with the vendor, ourselves, you and your customers,” he wrote.

The Parsley or the Flakes?

Last Wednesday, United Pet Group voluntarily withdrew “limited quantities” of four of its pet bird diets, including Ultra-Blend Gourmet for Parakeets and three Ecotrition Grains and Greens nutritional supplement blends. The withdrawn products could possibly contain salmonella-tainted parsley flakes from its supplier, Specialty Commodities Inc., which had recalled the flakes Feb. 11, or 16 days earlier.

At least two other pet food makers that had received the potentially bad parsley reacted much quicker: rival Kaytee, a unit of Central Garden & Pet Co., which managed to get the word out eight days earlier and before Global Pet Expo, and The Honest Kitchen, which set a new benchmark for recalls two days later during the show. 

At the time, I shuddered to think how many more companies would issue related recalls after the show. So far, just UPG, which announced its action not on the Friday after the show (which would have been my guess, as it is a time-honored way to sneak bad news past the media) but on the following Wednesday. Even with a middle-of-the-week release, it appears that only one (Pet Age) of the three main pet trade media outlets has so far reported on the withdrawal.  

As unsettling as the slow response of both UPG and much of the trade media is, the more troubling recall is Hy-Vee’s recall  (on a Friday, no less) of several Hy-Vee Complete Dog pet foods made by Pro-Pet LLC.

This recall is troubling because it was for excess aflatoxin. 

Aflatoxin, a by-product of the mold Aspergillus, can be deadly to pets if eaten in excess, especially over a long time. Worse, Aspergillus is commonly found in corn, especially during drought conditions. As much of the United States suffered record drought conditions last year, 2013 could shape up to be a bumper year for aflatoxin-related recalls and/or illnesses.

And I am sure many pet owners will be appalled to learn that several states received FDA approval to increase the amount of aflatoxin-containing corn in animal feed due to the drought’s impact on the corn harvest, as Reuters reported. 

U.S. Pet Spending to Hit $100 Billion by 2030?

Pet spending in the U.S. increased 4.7 percent from $50.96 billion in 2011 to $53.33 billion in 2012, according to the American Pet Products Association. The APPA forecast growth of 4.1 percent to $55.5 billion in 2013.

At that rate, U.S. pet spending would surpass $100 billion a year in 2026.

“We are noticing several trends contributing to the growth of the industry,” says Bob Vetere, president and CEO of the APPA. “These trends include the positive impact of pet ownership on human health, which we expect to continue to fuel pet industry sales for years to come. And, as the pet industry proves to be recession resistant, we’re confident that this upward trend in spending will endure.”

What's driving the continued growth? For one thing, the pet population appears to be growing. With its just completed 2013-2014 National Pet Owners Survey, the APPA estimates a record 68 percent of U.S. households now own pets, up significantly from 62 percent in 2010.

While pet population figures reflect gains in the adoption of dogs and cats, it also reflects increased purchases of various hobby pets: fish, birds, reptiles and small animals. The APPA reported live animal sales grew 3.3 percent from $2.14 billion in 2011 to $2.21 billion in 2012 and forecast sales growth would accelerate to 5.9 percent in 2013 to $2.31 billion.

While live animal sales are a relative sliver in the overall pet spending pie, they do spur spending in the supplies and OTC medications category, which was the fastest growing of the three major categories (pet food and veterinary services are the others). Supplies and OTC medications grew 7.4 percent in 2012 to $12.65 billion and is forecast to grow 4.4 percent to $13.21 billion in 2013.

The supplies and OTC medications category also benefited significantly from a rise in the use of OTC medications as an alternative to professional veterinary care, the APPA reported. Indeed, veterinary spending grew a comparatively slow 1.9 percent in 2012 to $13.67 billion. That growth rate is forecast to increase to 3.9 percent in 2013. These figures correlate with comments made by Bob Antin, president and CEO of VCA Antech, the largest operator of veterinary hospitals in the U.S., in a quarterly conference call earlier this month.

“The bigger one [factor affecting growth] over the last few years has been the economy,” Antin said. “Some of it is counter intuitive. Our most intensive hospitals, the larger specialty hospitals, the ones that have the capability that you need when your pet is sick, those have had a higher growth rate and a higher revenue per invoice than general practices. So, you would think it would be the other way around that people would be hesitant to spend the money on sick pets. In turn, what they're really hesitant is they're hesitant to spend the money on well pets.”

Pet food remains the largest single category of pet spending, accounting for nearly 40 percent of the overall market. It grew 3.9 percent in 2012 to $20.64 billion and is forecast to grow 2.9 percent in 2013 to $21.26 billion. The pet food market obviously grows with the overall pet population, but also benefits from continued long-range trends such as the humanization of pets  (and subsequent pampering) and trends toward more natural and premium foods (which are perceived as healthier by consumers and may be seen as an alternative to veterinary care).

Indeed, pampering drove the fastest-growing category of U.S. pet spending in 2012: Pet Services (grooming, boarding, day care, training, and other non-veterinary services). That category grew 9.7 percent in 2012 to $4.16 billion and is forecast to grow another 9.1 percent to $4.54 billion in 2013.

APPA: Pet Population, Spending at All-Time Highs

The percentage of U.S. households owning pets grew a staggering 600 basis points to 68 percent in 2012 from 62 percent in 2010 and a previous peak of 63 percent in 2004 and 2006, according to new data released yesterday by the American Pet Products Association at its Global Pet Expo trade show in Orlando, Fla.

That pet population growth continues to fuel growth in pet spending, which the APPA reported grew 4.7 percent in 2012 to 53.33 billion (from $50.96 billion in 2011). The APPA forecast pet spending would increase 4.1 percent in 2013 to $55.5 billion.

The trade association's 2013-2014 National Pet Owners Survey indicated about 82.5 million U.S. households now owned at least one pet, up nearly 10 million households from the 72.9 million households indicated in the 2011-12 survey.

That suggests a 13 percent increase in the number of pet-owning households over the past two years during a time where consumer spending in general has been tepid. It is considerably more bullish than the American Veterinary Medical Association’s latest statistics, which estimated the overall percentage of U.S. households owning pets at the end of 2011 was 56 percent, down 2.4 percent from 2006. 

Source: American Pet Products Association  2013-2014 National Pet Owners Survey

In addition, the new APPA data showed that the U.S. now has 56.7 million dog-owning households (46.2 percent of overall households) and 45.3 million cat-owning households (37.3 percent overall). The APPA estimates the U.S. pet dog population at 83.3 million dogs and the pet cat population at 95.6 million cats. (Cat owners typically own more cats than dog owners own dogs.)

By comparison, the latest AVMA estimates were 70 million dogs and 74.1 million cats.

While the AVMA and APPA have different survey methodologies and that signs pointed to an increase of pet acquisitions in 2012, the two studies generally track each other fairly closely, with the APPA figures traditionally trending somewhat higher, in large part in that in measures pet ownership over a 12-month period and the AVMA measures pet ownership at a given moment. Thus, the APPA figures would include homes that had recently lost or relinquished their pets and the AVMA figures would not.

Also, the APPA’s estimates of households owning pets have not seen such a dramatic shift from one survey to the next. The previous highest increase was 300 basis points, from 56 percent of households in 1994 to 59 percent in 1996. Much like this year’s strong rebound followed, the sharp increase in 1996 followed a dip from the prior survey. In 1992, the survey estimated 58 percent of U.S. households owned pets.

The APPA attributes the climb in pet-owning households not to anomalies in surveys or a stabilizing economy but word-of-mouth promotions of the joys and benefits of pet ownership.

“As an industry, we have been working very hard to promote the joys and benefits of responsible pet ownership and we are thrilled to see that more people are opening their homes and sharing their families with pets than ever before,” said APPA president and CEO Bob Vetere. “We believe that key initiatives have contributed to the growth and increasing word-of-mouth including the formation of the Human Animal Bond Research Initiative two years ago, a large national social media campaign called Pets Add Life, school program, Pets in the Classroom and public service ad campaign, The Shelter Pet Project.”

What may be particularly promising for the overall pet industry is that the APPA reported recovery in the number of households owning pets other than cats and dogs. All of these species had seen declines in 2010, likely due to lingering recession concerns. And about 40 percent of U.S. households own multiple types of pets, APPA reported.

Its survey will be available to purchase at www.americanpetproducts.org at some point.

  

Total Recall: Pet Foods Pulled for Salmonella, Plastics

What is the hottest trend at this week's Global Pet Expo? It just might be recalled pet food products.

Global, the largest pet trade show in the U.S., is the traditional launching pad of new pet products into all channels of the pet trade: mass, supermarkets, pet specialty, distributors, etc.  Pet product makers time their product development cycles to ensure they can make a promotional splash in Orlando.

The last thing these companies want to deal with is a product recall, yet at least four companies representing at least 10 brands have recalled products due to possible Salmonella contamination this week alone since set-up day for the big trade show.

And Nature’s Variety recalled one batch of its Instinct pet food last Friday due to pieces of clear plastic being found in some bags.

Add to these the recalls and product withdrawals that occurred last month due to illegal antibiotic residues detected in Chinese chicken jerky pet treats marketed by Nestlé Purina and Del Monte, Hartz, and Publix and Cadet and you have a sizable trend.

I shudder to think how many more products may be recalled tomorrow (Friday) due to Salmonella concerns after the show ends and most national media has gone home for the weekend. Many companies opt to release bad news late on Fridays in an effort to go unnoticed, and I certainly understand the desire not to be the talk of the industry’s biggest show for all the wrong reasons. 

So the companies that recalled their pet food products thus far this week due to Salmonella concerns deserve credit for acting responsibly and decisively in withdrawing the potentially problematic products. And it bears remembering that most companies that issue voluntary recalls of their products are acting responsibly and demonstrating that the pet food safety system, while not perfect, works well. And I hope the companies involved in any recall study the failures and take steps to prevent future breakdowns.

The Honest Kitchen of San Diego did just that in what is a textbook example of how to issue a recall. Unlike most salmonella-related pet food recalls, meat was not the contaminated ingredient in this case. Dried parsley was…potentially.

Lucy Postins
(image available at TheHonest Kitchen.com)

“While our quality control tests did not find evidence of Salmonella in any of our finished products, we are accountable for everything we make, and are taking precautionary action to ensure the safety and integrity of our products,” said Lucy Postins, company founder and CEO.

The company issued a press release that clearly illustrated how to identify an affected product, a sincere letter from Postins on its website, and a full FAQ page to address the issue. Each of those resources outlined steps the company planned to take to minimize chances of this happening again. Those steps include steaming all dehydrated leafy greens used in its products as an additional process to eliminate potential pathogens, conducting additional tests on leafy greens when they arrive at the Honest Kitchen’s manufacturing facility, and severing its relationship with the supplier that provided the potentially contaminated parsley.

Parsley also played a role in another of this week’s recalls: Kaytee Products’ recall of 17 SKUs of bird treats and greens. http://www.kaytee.com/assets/021/41844.pdf  Kaytee had received potentially contaminated parsley flakes from Specialty Commodities Inc. None of the affected Kaytee products have yet tested positive for Salmonella, but the company pulled the product due to the potential issue. (The big concern with Salmonella in pet products is the potential of human illness from handling contaminated product.)

This week’s other recalls included Natur-Vet, which recalled NaturPet and Natur-Vet chicken jerky treats http://www.fda.gov/Safety/Recalls/ucm340468.htm because its U.S. supplier (not Chinese) informed the company of possible Salmonella contamination at the processing plant. Again, none of the recalled products had tested positive for Salmonella.

This week’s final recall, and its biggest, was Kasel Associated Industries recall of all dog treats http://www.fda.gov/Safety/Recalls/ucm340337.htm made at its Denver, Colo., facility over a five-month period from April 20, 2012, until September 19, 2012. This recall affected 48 SKUs across six brands: Petco, Boots & Barkley (Target brand),  Bixbi, Nature’s Deli, Colorado Naturals, and Best Bully Stick.

Items recalled include U.S.-sourced chicken jerky treats, pig ears and snouts, beef bully sticks and femur bones, pork jerky products, salmon jerky and lamb jerky. Kasel reports it has had no reports of pet or human illnesses associated with the recalled products.

Unfortunately, too many of these companies’ competitors are no doubt exploiting their misfortune, some even boasting that they’ve never had a product recall.  Certainly some of this week’s recalled brands had made similar claims. But I suspect that a pet food company that has never recalled any of their products for any reason may be very lucky or simply not adequately testing their products—probably both.

Insolvency: As Easy as ABC

Unpaid contributors, employees and other creditors of the former BowTie Inc. have been notified that the company has ceased to exist and that an assignee has been charged with  “closing down all BowTie business,” including unpaid contributor payments and other debts leading to BowTie’s insolvency.

For the new I-5 employees, this provides a nice and legal way to dodge the collection calls that had been dogging them for months: pass the buck, so to speak.

“The Assignee is the only person who can address BowTie accounts payable questions from this point forward,” wrote chief content officer June Kikuchi in a letter to contributors.

What the letter did not explain was that there was no guarantee that contributors would be paid fully.

BowTie opted to retain Insolvency Services Group Inc. of Los Angeles and to execute a general assignment for the benefit of creditors, also known as an ABC. An ABC is an alternative to a bankruptcy filing and its main benefits are speed and simplicity by avoiding bankruptcy court delays and bureaucracy. So the resolution of the case is quicker and less expensive, and creditors should be paid sooner (within the year).

But like a Chapter 7 bankruptcy, it is very much a liquidation of the company. The main assets were already sold to I-5, so the assignee’s role now is to send notices of general assignment to the company’s creditors, followed by formal proof of claim forms to all creditors, as listed by the assignor, within 30 days. Creditors typically have between 150-180 days to submit their claims.

The company’s remaining assets are then sold and proceeds distributed to creditors, with secured creditors paid first, followed by tax and wage claims, and lastly unsecured creditors. Any surplus is returned to the assignor. But it seems unlikely that there would be a surplus, or even sufficient assets to pay off all the debt.

So in the case of BowTie’s contributors, they are toward the back of the line, behind many current I-5 and former BowTie employees that lost accrued vacation pay (wages) when the assets were sold, the government, the banks and the assignee. Also at the back of the line are other service providers of BowTie, which likely include cleaning and landscape services, paper suppliers, other publishers and information providers, sales rep groups, and more.

While the ABC does not discharge the assignor from its debts, the reality is that the assignor has no real assets, so an unhappy creditor may not have many viable options for collection. Creditors that object to the general assignment could also file documents to force an involuntary bankruptcy on the assignor, but because the claims priority is the same, the involuntary bankruptcy usually would not be beneficial.

So, as I wrote in my prior post "New Beginnings: Zoetis, I-5 Emerge from Past Lives," I-5 will face a challenge in restoring much of the goodwill BowTie had lost over the past few years as the company struggled. While the new company could argue that they had saved the publications and therefore a market for the contributors, it would do well also to remember that these faithful contributors were instrumental parts of, in the words of interim CEO Mark Harris, “the talented, passionate teams that have built such a robust content engine.” It would also do well to restore the vacation pay of the former BowTie employees. Such an investment in human capital could pay off for many years to come.

To contact the BowTie assignee, call 949-494-7160 or email claims@managementprotem.com.