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Pet S mart Corp.

Pet S mart Corp. Real Client Managed Portfolio PetSmart (PETM) November 14, 2013 Alex Johansson, Charlie Penicook & Zi Jian Gu. Agenda. Introduction Holding Information Macroeconomic Overview Industry Overview Company Overview Financial Analysis Valuation Recommendation.

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Pet S mart Corp.

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  1. PetSmart Corp. Real Client Managed Portfolio PetSmart (PETM) November 14, 2013 Alex Johansson, Charlie Penicook & Zi Jian Gu

  2. Agenda • Introduction • Holding Information • Macroeconomic Overview • Industry Overview • Company Overview • Financial Analysis • Valuation • Recommendation

  3. Current Holding Information • May 3rd, 2012: • Acquired 100 shares @ $58.88 • Cost Basis = $5,888 • November 29th, 2013: • Hold Recommendation • November 14th, 2013: • Current holding 100 shares @ $73.02 • HPR = 24%

  4. Macroeconomic Overview • October jobs report better than expected • 204,00 jobs added - 2x expectations • Unemployment rose to 7.3% from 7.2% • Possible reduction in quantitative easing due to stronger jobs report • May consider reduction at December’sFed Meeting • Income & job gap widens in uneven recovery Source: LATimes, Forbes, WSJ (URLs in notes)

  5. Industry Analysis - Catalysts Number of Pets - Demand for industry goods increases as households adopt more pets - Owners spend $250/year on pet food - Continual growth of number of pets creates growth catalyst. - Predicted 4% growth in industry revenue through 2018 Per Capita Disposable Income - Per capita disposable income is expected to increase slowly in 2013 - Consumers perceive pets as family members - pet products are considered non-discretionary - A decrease in disposable income has little affect on demand because pet goods are non-discretionary - Purchase of greater quantity of goods and premium items when disposable income increases - Growth of “pet parents” Source: IBISWorld Industry Report - Pet Stores in the US (Pg. 4 & 5)

  6. Industry Overlook - New product introductions and rising number of enterprises - Industry growing at 3.5%, economy is growing at 2.1% - Variety of premium pet foods allows high price with large markups - Services has been the fast growing segment - Supply Segment faces huge competition from large merchandises Source : IBISWorld Industry Report - Pet Stores in the US (URLs in notes)

  7. Industry Overlook Customer Demographics - Age 35 to 54 accounts for more than 50% of the pet ownership - Steady Income and consider pets as family members Changing Competition - Supermarkets attracted many budget-conscious consumers by offering low quality goods - Expected to remain strong for basic pet supplies - Niche products become keys to succeed Source: IBISWorld Industry Report - Pet Stores in the US (URLs in notes)

  8. Industry Performance - Growing industry and phenomenal growth the past 10 years - Continuous growth due to increase in number of pets and pet owners’ attitudes towards them - 68.0% of US households own a pet - growth rates have translated into rising demand for pet products - Continual growth from 2008 - 2012, even during the recession - The emerging trend of pet parents has also commanded high demand for premium pet products and services - Net profit margins have increased to 3.5% from 3.0% in 2008 Source: IBISWorld Industry Report - Pet Stores in the US (URL in notes)

  9. Industry Analysis - Porter’s Five Forces Source: IBISWorld Industry Report - Pet Stores in the US

  10. Company Overview • Specialty Retailer • Products, services, and solutions for pets • 1,278 stores • Offers a variety of pets for sale (no cats or dogs) • PetSmart Pet Hotel • Animal Hospital (operate by Banfield) • Banfield is a partially owned subsidiary • Services include grooming & training services Source: PETM 2012 10-K; (Pg. 4, 5). IBISWorld Industry Report - Pet Stores in the US (Pg. 2)

  11. Company Overview • Company Strategy • Innovative product and services development • Engaging with customers • Financial Outlook • Net sales increased 10.5% to $6.8 billion in 2012 from $6.1 billion in 2011 • Comparable store sales increased 6.3% in 2012 from a 5.4% increase in 2011 Source: PETM 2012 10-K; (Pg. 23-25)

  12. Risk Factors • A decline in consumer spending or detrimental change in consumer behavior. • Mis-management of inventory • Increasing competition among specialty retailers • A disruption or increased costs of supply chain • Operation of Banfield pet hospitals diminishes • Comparable store sales growth decreases Source: PETM 2012 10-K; (Pg. 7-14)

  13. Company Overview • Recent News • October 17, 2013: • Continues to expect the Earnings per share (EPS) in the range of $0.83 to $0.87, • Comparable store sales growth to be in the range of 2.2-2.5%, compared to 3-4%. • total sales growth in the range of 3-4% • Earnings per share in the range of $3.88 to $3.98. • September 26, 2013: • Increase its quarterly dividend by 18% to $0.195 from $0.165 per share beginning in the third quarter of fiscal 2013. • The dividend of $0.195 will be paid on November 15, 2013 Source: PETM 2012 10-K; (Pg. 23-25); OneSource (URL in notes)

  14. Management Outlook • Challenges include: • Operation in a highly competitive market • Volatility of macro-economy • Cash flow from operations adequate to meet operating, investing and financing needs in the short-term • Assess economic conditions to guide decisions on use of cash • Continual evaluation of store performance • 46 net new stores opened in 2012 Source: PETM 2012 10-K (Pg. 23-25)

  15. Company Overview - SWOT Source: OneSource Information Service: PetSmart,Inc.

  16. Recent PETM Performance Source: Yahoo! Finance

  17. PetSmart Financials

  18. PetSmart Financials – Sales Growth Source: OneSource Information Service: PetSmart,Inc.

  19. PetSmart Financials - Profitability Source: OneSource Information Service: PetSmart,Inc.

  20. PetSmart Financials – Efficiency Source: OneSource Information Service: PetSmart,Inc.

  21. PetSmart Financials - Solvency Source: OneSource Information Service: PetSmart,Inc.

  22. PetSmart Financials - DuPont Source: OneSource Information Service: PetSmart,Inc.

  23. No Comparables Analysis PetSmart is the only publicly traded retailer devoted to pet products and services Petco. is a private company—No Financials Big-Box Competitors aren’t related enough Specialty Retail

  24. Technical Analysis

  25. Decision Drivers • Continued growth during economic downturn • Diversified product offering • Market saturation concerns • Demographic slowdown • New store expansion • Increased competition from big box retailers, e-commerce • Consistent dividend growth

  26. Equity Valuation

  27. Recommendation DCF Valuation: $71.65 Current Price: $ 73.02 Recommendation: HOLD

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