Presented by 1 Peng Liang Yongxiang Mao Richie Hartz Xiaosi Song Shengkun Wang November 29, 2012.

Presented by

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Peng LiangYongxiang MaoRichie HartzXiaosi SongShengkun WangNovember 29, 2012

Agenda• Introduction• Recent Stock Performance • Company Overview• Industry Overview• Financial Analysis• Projections• Valuation• Recommendation

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Current Position• 100 shares bought on May 3, 2012 @ $58.88• Current Price: $69.91 as of 11/28• Unrealized Gain: $1,103 with a return on investment

of 18.73%

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Recent Stock Performance

4Source: Pet Smart 2011 Annual report P32

Recent Company News• October 1, PetSmart was added to the S&P 500, replacing Sunoco• October 15, the vice president of investor relations and treasury

post, David Cone, left PetSmart and joined private home builder, Taylor Morrison, as the CFO

• November 14, PetSmart unveiled its 3rd quarter results: Sales increased to $1.6B by 9%; EPS up by 50% to $0.75/share; Expected annual sales for FY 2012 $6.5B

• November 26, CEO Robert Moran told CNBC that PetSmart grabbed a big share of holiday spending, about 76% of pet owners were expected to buy their pet a holiday gift. The company was ready to pounce on a housing recovery, explaining home sales are closely correlated to pet acquisition.

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Company Overview• PetSmart, Inc. is the largest specialty provider of pet

products, services and solutions

• Founded in 1986 and public in 1993 on the NASDAQ

• In 2005, name rebranded from PETsMART to PetSmart

• FY 2011, 50,000 associates & 1,232 pet stores• Net Sales: $6.1 Billion

• Services Sales: $0.67 Billion

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Business Segments• Merchandise

Consumables Hardgoods Pets

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• Services Grooming Training Hotel/Day Camping Veterinary Services

• Consumables merchandise sales include pet food, treats and litter

• PetSmart emphasizes super-premium, premium and therapeutic dog and cat foods

• Proprietary labels like Grreat Choice, Authority, and Simply Nourish

Source: PetSmart Q2 2012 Presentation, P128

Consumables

>70%

Hardgoods• Hardgoods include pet suppliers and other goods • Collars, leashes, health care supplies, toys and apparel,

as well as pet beds and carriers• Higher margin and lower turnover than consumables• Established strategic cooperation with Martha Stewart,

GNC and Toys R US

9Source: PetSmart Q2 2012 Presentation, P13

Pets• No Dogs or Cats, but space in store for adoption• Only Fish, Reptiles, Birds and Small Pets

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Services

Source: PetSmart Q2 2012 Presentation, P17

Largest pet services provider in North America

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• Grooming: precision cuts, baths, nail trimming and grinding, and teeth brushing (900 sq ft / store)

• Training ranges from puppy classes to advanced or private courses

• PetsHotels: 24-hour supervision, temperature controlled rooms and suites

• Veterinary hospitals: routine examinations and vaccinations, dental care, and surgical procedures

• As of Jan. 2012, owns 192 PetsHotels

Pet Store Industry - Segmentation

Services•Fastest-growing product segment•Includes full service grooming, haircuts, baths, toenail trimming, and tooth brushing, but excludes veterinary services•Other services may include training, boarding and day camp.

Live animal purchasesRelatively small and stable sales as a one-off purchase without repetitive spending

Pet food•A variety of premium pet foods are available to consumers today

Pet supplies•Revenue has been declining in the last five years due to competition, •Increasingly sold at retail outlets

Source: Pet Stores in the US, WWW.IBISWORLD.COM12

Pet Stores Industry

People between 45 to 54 with steady income streams look for pet companions to fill the empty space in their households after their children leave home.

13Source: Pet Stores in the US, WWW.IBISWORLD.COM

Major Players in This Industry

IBISWorld estimates that by the end of 2012, the industry will have about 13,853 firms.

14Source: Pet Stores in the US, WWW.IBISWORLD.COM

Porter’s Five Forces

15Source: Pet Stores in the US, WWW.IBISWORLD.COM; Global Specialty Retail, MarketLine; 10-K

Demand Determinants• Pet ownership

• 62% of U.S. households are estimated to own a pet in 2012 compared with 56% in 1998

• Income• Pet owning households with high disposable income have been the

main customers for luxury and trendy pet products• People with higher income tend to travel more and are more likely to

utilize pet boarding industry operators

• Demographics and lifestyle• Aging population may increase demand for pets for companionship• Households that are frequently relocating, working longer hours, or

living in apartments are less likely to have pets

16Source: Pet Stores in the US, WWW.IBISWORLD.COM

Macroeconomic Condition

17Source: http://dailycapitalist.com/2012/01/31/income-and-spending-slowed-to-a-crawl-in-2011/

Recovering consumer confidence and strengthening retail sales since 2009.

Industry Outlook

1. Rising pet ownership serves as a strong driver for demand and boosts sales

2. Slowly improving economic conditions allows customers to spend more on premium pet products and services

3. Strong competition from grocery stores and mass merchandisers4. Higher demand for pets over the next five years driven by more common

single-person households and the aging population5. Profit margins are forecasted to increase from 4.3% in 2012 to 4.5% in

2017 with expected growing profitability, thus also bringing new entrant into the industry

18Source: Pet Stores in the US, WWW.IBISWORLD.COM

Financial Performance of Competitors

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　 Gross Profit Margin Net Income Margin

Merchandise Group 　 　

TGT US Equity 29.70% 4.10%

WMT US Equity 24.90% 3.50%

COST US Equity 12.40% 1.70%

Average 22.33% 3.10%

Service Group 　 　

IDXX US Equity 53.80% 13.50%

WOOF US Equity 23.60% 6.10%

HSKA US Equity 43.10% 2.30%

Average 40.17% 7.30%

PETM US Equity 29.90% 5.20%

Comparative Equity Performance• Services

• Merchandise

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PetSmart’s Strategy• Create meaningful differentiation to drive brand

preference• Offer superior customer service• Focus on operating excellence• Grow pet services business• Add stores and provide the right format to meet the

needs of customers

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Focus is on SOLUTIONS!

Source: PetSmart 10-k and Q2 2012 Presentation, P5

Market Differentiation

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SWOT AnalysisStrengths Weaknesses

•Strong product assortment complemented by value added services•Co-anchor strategy and multiple channels improving performance of pet services business

•Supplier concentration

Opportunities Threats

•Estimated positive growth of pet industry•Favorable trends of online retail spending•Increasing demand for private label brands

•Sluggish discretionary spending may impact the revenue growth adversely•Increasing competition from large retailers•Rising labor costs in the U.S.

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Risk & Uncertainty• Quarterly operating results may fluctuate due to seasonal

changes associated with the pet products and services retail industry, and new store openings and store closures.

• A higher portion of our net sales and operating profit during the fourth fiscal quarter• Lower operating margins for new stores that tend to experience higher payroll,

advertising and other store level expenses, as a percentage of net sales, than mature stores

• Disruption of the relationship with or the loss of any of our key vendors

• Sales of premium pet food for dogs and cats comprise a significant portion of our net sales. Currently, most major vendors of premium pet food (exclusive relationships) do not permit their products to be sold in supermarkets, warehouse clubs, or through other mass and retail merchandisers.

• Two of our largest vendors account for a material amount of products sold

• Food safety, quality and health concerns• costly recalls and a loss of consumer confidence

24Source: 10-K

Sales & EPS Growth

25Sales growth rate: 7% per year; EPS growth rate: 7% per year

Sales Penetration

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Merchandise sales accounts for the largest portion of PetSmart’s sales, but keeps decreasing as % of net sales due to higher growth rate in services segment

Services Growth

Source: PetSmart Q2 2012 Presentation, P18 27

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Dupont Analysis

Strategic Transition in 2009• Pursue existing store profitability instead of blindly

opening new stores– 37 new stores opened in 2009, less than half of the

number in the previous level• Promote in-store management and improve pricing,

space and assortment process • Rely more on the growth in sales of pet services

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New Stores and Capital Expenditure

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Net sales/square feet decreased from $210 in 2007 to $205 in 2009, but recovered up to $224 in 2011

Comparable Store Sales Growth

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Financial Projection

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Sales growth rates

Discount RateWACC

CAPMRisk-free Rate 1.72%Market Risk Premium 6.00%Five-year Raw Beta 0.72Adjusted Beta 0.81 (vs. 0.63 from Yahoo Finance)

Cost of Equity 6.6%

No Long-term debt 0

WACC 6.6% 80%

ROE(Past 5-year average annual return) 22.8% 20%

Discount Rate 9.8%= 80% x WACC + 20% x ROE

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DCF Model

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Actual Actual Actual Actual Actual Projected Projected Projected Projected Projected

Net Income 258,684 192,670 198,325 239,867 290,243 310,694 339,403 370,734 404,928 442,247

Changes in NWC - 61,517 (80,258) 58,717 16,286 (4,220) 30,253 32,922 35,826 38,985

CAPEX 294,439 238,188 112,920 125,074 120,720 133,474 145,720 159,101 173,724 189,702

Depreciation 195,980 225,054 236,538 235,926 236,974 229,225 226,096 272,585 326,124 352,478

Free Cash Flow 160,225 118,019 402,201 292,002 390,211 410,664 389,525 451,295 521,502 566,038

PV(FCF) 1,891,831

Terminal Value 5,762,299

Enterprise Value 7,654,130

Capital lease obligations (505,273)

Cash & Cash Equivalent 342,892

Implied Equity Value 7,491,749

Shares Outstanding 113,993

Price Per Share 72

Current Stock Price 69.09Close @ Nov 28,2012

Multiples Valuation

M Group vs. S Group Weight Average Price

90% vs. 10% 0.99 4.70 4.38 17.25 43.32

80% vs. 20% 1.30 6.06 4.18 18.23 52.43

70% vs. 30% 1.60 7.41 3.98 19.22 61.54

60% vs. 40% 1.90 8.77 3.78 20.21 70.56

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Recommendation

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