Investment Analysis by:Devopama PantChen LiangQiao Du

Presentation Date: 11/11/2014

Current Holdings Company Profile Macroeconomic Review Industry Review Strategy Overview Financial Analysis Valuation Recommendation

Agenda

Current Position

100 shares bought on May 3, 2012 @ $58.88 Current Price: $72.74 (11/10/2014) Gain (as on 11/10): 23.54% Portfolio share(MV): 3.96%

* Yahoo Finance (RCMP Client Portfolio) https://finance.yahoo.com/portfolio/pf_1

Recent stock trends

Trends taken from Bloomberg.com Dated: 11/09/2014

Company Overview

PetSmart was founded in 1986 PetSmart, Inc. is a retail chain operating in the United States,

Canada, and Puerto Rico Engaged in the sale of specialty pet supplies (around 10,000

pet products) and services such as grooming and dog training, cat and dog boarding facilities, and daycare

In 1993 went public on the NASDAQ stock exchange listed under the symbol "PETM"

In 2005, the company announced that it was rebranding its name from PETsMART to PetSmart

2013, PetSmart operated approximately 1,333 stores (55 new stores) in around 200 locations with Pets Hotels (3 new pet hotels) and Doggie Day Camps

Data from http://phx.corporate-ir.net/phoenix.zhtml?c=93506&p=irol-timeline and PetSmart Annual Report 2013 Page # 2-5

PetSmart : Product Line (PETM Owned)

• Proprietary and exclusive products and services currently represent approximately 35% of the Net Sales• Self-owned product brands details on Slide # 23

Pet Products

Dogs 5 self owned brands ranging from regular to super-premium

Cats 5 self owned brands ranging from regular to super-premium

Birds / Reptiles / Fishes / Small

Animals

3 self owned brands ranging from regular to premium

Pet Services

Hotels Hotels available at 200 PetSmart locations

Hospitals Hospital services available at 837 PetSmart locations

http://phx.corporate-ir.net/phoenix.zhtml?c=93506&p=irol-homeprofilewww.petsmart.com

Major Competitors

Category Major Competitors

Specialty Supply Retailers Petco

MerchandiseStores Walmart, Target, Costco, Others

Online Amazon, EBay, Others

Services Standalone stores, Small retail chains

http://big.assets.huffingtonpost.com/ibis.pdf

Unemployment Rate

Change in Disposable Income

Growth in Pet Population

Future growth in Pet Industry (Macroeconomic view)

http://big.assets.huffingtonpost.com/ibis.pdfhttp://data.bls.gov/timeseries/LNS14000000

Households owning pets- 68%

(82.5 M Homes and 396M Pets)

Average growth rate of the pet –store industry– 2.2% (last 5 years)

Market Segments

Total Revenue : $15.7bn

http://big.assets.huffingtonpost.com/ibis.pdf

Porter’s 5 Forces Model – Pet Industry

Threat of Substitutes:Low & Steady

• Demand of premium Products is stable• Attitude towards pets is stable and positive

Porter’s 5 Forces Model

Barrier to entry: Medium & Steady

• Niche Market• Limited Discretionary

Income• Licensing Cost• Tax rate/Interest Rate Fluctuation

Competition: Medium & Increasing

• High Profit Margin for Premium Services

• Protected by Manufacturer’s restrictions

Bargaining Power of buyers:

Low & Increasing• Bulk Retailers like

Costco• E-Commerce Retailers

like Amazon• Brand Recognition

Bargaining Power of Sellers:

Medium & Increasing• Healthcare Cost• Unemployment Level• Restrictions on

distribution Channels• Available E-Commerce

Distribution

Strengths • Well known Brand / Strong

Community Presence• Publically available Financial data• Strong Financial (Current ratio-1.66)• Low Carbon Footprint• Employees have high stakes of

shares• Social Responsibility

Weaknesses

• Most products are globally manufactured so may have compromised quality

• Marginal wages to employees• Distant stores with few distribution

center can be impacted by weather

Opportunity

• Expansion of services• Foreign expansion (Mexico/Europe)• Homeopathic Products• Training services for companion pets• Pet insurance

Threats• Petco• Costco/Walmart/Target• Amazon/EBay• Small Pet retailers• Reduced Discretionary Income• Loss of Employees• Food Safety Measures• Market Fluctuation• Customer Preference

SWOT Analysis – PetSmart

Pet Smart’s Strategy

Unique role centered around creating more moments for people inspired by pets

PetSmart Charities Inc.

PetSmart in-store adoption centers

PetSmart Gives Backo PetSmart Paws for Hopeso PetSmart for Patriotso PetSmart Pop-up Parks

PetSmart Annual Report 2013, Pg# 3-4

Management Outlook

• Leverage the “Humanization of Pets”• Stay relevant to the customers• Increase personalized connections• Enhance customer experience through

technology and innovation• Enhance operating excellence• Differentiate with “care”• Be a part of the community

Focus on “Solutions”!!

PetSmart Annual Report 2013, Page # 4-5

Merchandise vs. Services

2010-01-31 2011-01-30 2012-01-29 2013-02-03 2014-02-020%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

89.2% 88.5% 88.4% 88.5% 88.4%

10.8% 10.9% 11.0% 11.0% 11.1%

Pet Services

Pet Supplies (Merchandise)

PetSmart 2010-10K -Page # F-4 /2012-10K-Page # 42/ 2014-10K -Page # F-4

Risk & Uncertainty

Quarterly results may show fluctuation due to seasonal changes associated with the pet products and services, retail industry, new store openings and store closures.

Loss of any of the key vendors may disrupt the quarterly or annual financial performance as two of the largest vendors account for a material amount of products sold

Food safety, quality and health are of big concern as a large selection of products are gathered from all over the world and it may result in a loss of customer confidence

Presentation 2012-11 / 2012-10 K-2013 10K

Recent News at Pet Smart

• Jana Partners has discussed the possibility of a private equity buyout after announcing their 9.9% position.(07/18/2014)

• Management surprises investors with news of the Pet360 acquisition and formally announces interest in a potential sale. (08/27/14)

• Private-Equity Firms Prepare Bids for PetSmart (10/29/2014)

• Private-Equity Firms Invited to Final Round of PetSmart Bidding (11/06/2014)

http://seekingalpha.com/article/2453415-petsmart-the-pet360-piecehttp://seekingalpha.com/article/2319995-a-private-takeover-would-be-good-for-petsmarthttp://online.wsj.com/articles/private-equity-firms-prepare-bids-for-petsmart-sources-say-1414600644?KEYWORDS=petsmarthttp://online.wsj.com/articles/private-equity-firms-invited-to-final-round-of-petsmart-bidding-1415314908?KEYWORDS=petsmart

Ratio Analysis

PetSmart 2010 10-K, 2012 10-K & 2014 10-K

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Gross Profit Margin 28.47% 29.06% 29.52% 30.51% 30.59%

Operating Profit Margin 6.92% 7.53% 8.23% 9.64% 10.02%

Net Margin 3.72% 4.21% 4.75% 5.76% 6.07%

ROA 8.05% 9.71% 11.41% 15.36% 16.63%

ROE 16.36% 19.59% 24.03% 32.81% 36.27%

Degree of Operating Leverage -0.04 2.41 2.36 2.79 2.76

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

EBIT/EV 8.27% 6.98% 6.87% 7.92% 8.81%

EBIT/Tangible Assets 20.62% 24.76% 31.68% 43.93% 47.50%

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Debt Ratio 52.37% 52.61% 54.65% 55.73% 56.63%

Time Interest Earned Ratio 6.18 7.29 8.85 11.99 13.39

Degree of Financial Leverage -14.33 3.13 2.85 3.24 3.28

Profitability Ratios

Capital Structure Ratios

Greenblatt Ratios

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Current Ratio 1.89x 1.96x 1.86x 1.74x 1.66x

Quick Ratio 0.64x 0.62x 0.61x 0.55x 0.45x

Cash Ratio 0.55x 0.51x 0.50x 0.44x 0.36x

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Accounts Receivable Turnover 102.17 107.22 113.35 107.19 95.48

Days Sales Outstanding 3.57 3.40 3.22 3.41 3.82

Inventory Turnover 6.78 6.85 6.84 7.09 6.76

Days Inventory Outstanding 53.87 53.28 53.40 51.45 53.96

Accounts Payables Turnover 17.90 21.48 23.58 23.58 21.26

Days Payables Outstanding 20.39 16.99 15.48 15.48 17.17

Cash Convension Cycle 37.05 39.69 41.14 39.37 40.61

Inventory to Cash Days 57.44 56.68 56.62 54.86 57.78

Liquidity Ratios

Cash Conversion Cycle

DuPont Analysis

PetSmart 2010 10-K, 2012 10-K & 2014 10-K

Weighted Average Cost of Capital

Trends taken from Bloomberg.com Dated: 11/09/2014, / PetSmart 2014 10-K

In Millions of USD except Per ShareFY 2015 Est FY 2016 Est FY 2017 Est FY 2018 Est

12 Months Ending 2015-02-02 2016-02-01 2017-01-31 2018-01-31 Terminal

EBIT 714.1 757.0 825.1 899.3 953.3

Less: Taxes 244.0 258.8 281.2 311.4 330.0

NOPAT 470.1 498.1 543.9 588.0 623.3

Add: Depreciation 249.1 264.0 287.8 313.7 332.5

Capital Expenditures 135.7 136.3 118.9 118.3 114.3

Change in Net Working Capital

Accounts Receivable -2.8 -2.4 -0.3 -1.1 -1.4

Inventories -0.1 -1.0 -0.5 -0.2 -0.9

Accounts Payable 19.9 22.6 44.2 29.7 87.9

Accrued Expenses 20.7 9.2 24.1 12.2 14.2

Total Change in NWC 37.7 28.4 67.5 40.6 99.8

Free Cash Flow 621.2 654.2 780.3 824.0 941.4

Present Value of Free Cash Flow 561.27 534.18 575.68 549.30 7616.35

WACC 9.67%

Business premium 1.00% Implied EV 9,836.77

Discount rate 10.67% Less Debt 2,447

Terminal Growth 3.00% Implied Market Cap 7,390

Shares Outstanding 103.2 Implied Share Price:

Basic 71.60$

Optimistic: $85.36

Pessimistic $60.66

Discounted Cash Flow Evaluation

9% sales growth rate for next 4 years and constant 4.5%4% sales growth rate for next 4 years and constant 3%

Technical Analysis

Trends taken from Bloomberg.com Dated: 11/09/2014

Recommendation

Current Price: $72.74 (11/10/2014) Implied Intrinsic Value: Basic: $71.60

Optimistic: $85.36

Pessimistic: $60.66

HOLD!

Appendix1 : PetSmart - Product Line (PETM Owned)

Dogs

Brand Food/Hard Goods Category

Grreat Choice Both Regular

Authority Food Premium

Simply Nourish  Food Super Premium

Top Paw  Hard Goods Private Label

Toy Shoppe Hard Good Toys

Cat

Brand Food/Hard Goods Category

Grreat Choice Both Regular

Authority * Food Premium

Simply Nourish  Food Super Premium

Exquisicat Hard Good Cat Litter

Toy Shoppe Hard Good Toys

Horse

Brand Food/Hard Goods Category

State Line Tack Hard GoodSold to Horse.Com

(Pet United)

Birds/Reptiles/Fishes/Small Animals

Brand Food/Hard Goods Category

Top Fin Hard Good Regular

Proquatics Both Fish Supplement

All Living Things BothBird-Small Animal

Supply

Pet Hotel

Orginal idea Place Acquired

David Mackstellar Arizona 2000

Rodger Ford  200 stores  

Pet Hospital(Banfield*)

Orginally Parent Comapany Facility Available

MMI Mars Inc. 837 Stores *

     

• Previously Sophisticat and before that it was Award• Canada has additional 7 third party hospitals