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.