By Jason Simpkins
During a recession, investors typically look to consumer staples, such as food, medical care and utilities. But one of the most overlooked, recession-resistant industries is the pet care industry, where sales of food and medication have helped a handful of companies turn a sizeable profit.
About 63% of U.S. households own a pet, according to the American Pet Products Manufacturers Association (APPA). That equates to more than 69 million households, up from 64 million in 2002 and 51 million in 1988 when APPA began tracking data.
About 75% of dog owners and more than 50% of cat owners consider their pet a member of family, and about 80% of dog owners and 63% of cat owners buy gifts for their pet.
"It's a substantial market," says Eugene Fram, a globally known market expert and a retired Rochester Institute of Technology College of Business marketing professor. "The numbers bear that out with more than 60% of households having a pet. It's a good business and a great target market" to pursue.
Americans will spend $45.4 billion on pets in 2009, according to the APPA. That's a 5.1% increase from 2008, and nearly double pet spending a decade ago.
Sales of pet products at supermarkets, drug chains and mass-market retailers, were up 11% percent for the 52 weeks ended April 18, according to Nielsen Co. data. But the big winners continue to be specialty shops.
PetSmart Inc. (Nasdaq: PETM), PetMed Express Inc. (Nasdaq: PETS) and VCA Antech Inc. (Nasdaq: WOOF) have been among the pet care companies to watch as a stream of profits flowed into their corporate coffers.
A number of upstart startups are experiencing success, as well.
, an online pet luxury store, made its debut in March, and has already experienced an expansion in its business.
"We've been inundated," Pets Palace Marketing Director Diana Costa told Reuters. "People are looking for ways to make themselves feel good that don't cost very much and our items don't cost a lot."
Items marketed by the Australia-based Pets Palace include personalized food bowls for about $22, jewelry – known as "doggy bling" – for less than $10,and $5 dog socks. The product line also extends to $54 plush dog beds, as well as seasonal pet attire that includes $27 goggles, $60 life jackets and $15 sunglasses.
Costa says that when the Pets Palace retail site was first launched, the company was only receiving one order every two days.
Now, however, the company is filling 15 orders a day, according to Reuters.
"We'll get an order for a pair of socks and then we'll get an order for a Paris Hilton carry-me Chihuahua bag," Costa said. "We actually thought the biggest market would be people without children and the baby boomers because they're empty nesters but that's not the case. We have received inquiries from 8-year-olds too."
Pet Shop Profit
Aside from Pets Palace, there are a number of companies that have managed to successfully navigate the recession.
One such company is PetSmart, the largest U.S. pet-products retailer. PetSmart announced net profit of $46.3 million, or 37 cents a share, for the quarter ended May 3, topping analysts' expectations and easily trumping last year's results of $41.2 million, or 32 cents a share over the same period.
Revenue for the quarter was up 9% to $1.33 billion on a year-over-year basis, while same-store sales rose by 3.9%. The company said it now expects its full-year profit to reach a range of $1.42 to $1.52 a share, compared to its earlier forecast of $1.40 to $1.50 per share.
"Pet parents continue to spend," Jessica Case, manager of investor relations at PetSmart, told RTT News. "Sometimes spending more time at home means spending more money on pets."
PetSmart had $210 million in cash at the end of the quarter. The company also has been buying back shares, including $25 million of its own stock in the first quarter.
The company has also further burnished its brand via its PetSmart Charities unit, through which it has tapped into the strong emotions pet-owners have about homeless pets – a steeply escalating problem as a result of the ongoing financial crisis. With its "Just-a-Buck" campaign, PetSmart says it has raised enough at the checkout counter to save nearly 3.8 million displaced pets – very likely scoring some points with its customers at the same time.
PetSmart's successes on multiple fronts have rewarded the company's shareholders – especially compared to the broader market. Year-to-date, PetSmart stock is up more than 6.5%, whereas the Standard & Poor's 500 Index is virtually flat. The stock is up about 20% since the current rally in U.S. stocks began in March.
Online pet medication distributor PetMed Express Inc. also topped analysts' estimates in the first quarter of 2009. Revenue in the quarter rose 19% on a year-over-year basis to reach $48.1 million, well above the consensus estimate of $46.4 million. Re-order sales increased 20% in the quarter.
New orders have been also been strong, advancing 16% in fiscal 2009 versus 5% in fiscal 2008.
The company, which retails prescription and non-prescription pet medications over the Web or via a toll-free number, acquired about 142,000 new customers during the first quarter, compared to 126,000 a year ago.
"We are very proud of our financial performance for the year, which was highlighted by a strong fourth quarter," PetMed Chief Executive Officer and President Menderes Akdag said in a statement. "The results can be attributed to reorder and new order growth and our success in leveraging operating expenses … our continued focus in fiscal 2010 will be on capturing additional market share, and improving reorders and our customer service levels."
Analyst Edward Woo of Wedbush Morgan Securities Inc. believes PetMed benefited from aggressive advertising initiatives and earlier warmer weather.
"Warmer weather increases people's desire to go outside as well as increases flea and tick population, so it causes more consumers to buy the medication earlier," Woo told Reuters.
PetMed's advertising spending rose 12%, reaching $5.1 million in the quarter.
Another company profiting from the business of keeping pets healthy is VCA Antech Inc. The Los Angeles-based company owns, operates and manages the largest network of freestanding veterinary hospitals and diagnostic labs in the country.
MorningStar Inc. (Nasdaq: MORN) analyst Debbie Wang referred to the diagnostic labs as VCA Antech's "crown jewel, a super high-margin business" that has proved extremely profitable. Analysts expect the firm to bolster its growth by acquiring 40 to 50 hospitals this year.
VCA Antech also sells diagnostic-imaging equipment and other medical-technology products to the veterinary market.
The business has "tremendous cash flow," says Ryan Daniels, an analyst with William Blair & Co. LLC, who thinks the stock has room to grow.
First-quarter revenue increased 2.6% to $315.8 million and net income increased 2.5% to $32 million.
"Animal hospital revenue in the first quarter increased 5.4% to $238.4 million, driven by acquisitions made in the past 12 months," VCA Chairman and CEO Robert L. Antin said. "Our animal hospital gross margin and operating margin remained essentially unchanged at 18.1% and 16.0%, respectively. Although our day-adjusted same-store revenue declined 2.7% during the quarter, our same-store gross profit margin increased to 18.8% from 18.5%."
The company made nine acquisitions during the quarter, with combined additional annual revenue of $20.9 million. Laboratory revenue in the first quarter increased 1% to $77.5 million.
VCA Antech stock is up more than 22% so far this year.
News and Related Story Links:
American Pet Products Association:
Industry Statistics & Trends
- Pets Palace: