Newest Addition to the Curse?

Spending on pets expected to soar
Revenue is mostly recession-proof since they are considered 'family'
By KATHLEEN GALLAGHERkgallagher@journalsentinel.com
Posted: May 21, 2006
Fluffy, Fido and Spot tug at their owners' hearts - and in many cases, their wallets.
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Petsmart, Inc.
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Investors, even those who don't have a pet, can take advantage of the growing amount of money that owners spend on their dogs, cats, fish and other non-human friends, says a graduate student in the University of Wisconsin-Madison's business school.
"Because people are spending more and more on their pets, there will be a push in services like styling salons and doggie day camps, and in pet health care," said Adam Sweet, who is seeking an MBA in finance and is a participant in the school's Applied Security Analysis Program.
About 63% of all U.S. households, or 69.1 million homes, have at least one pet, according to the American Pet Products Manufacturers Association. Sweet says he expects the growth of two demographic groups - children younger than 18 years of age and empty nesters - to drive that number higher over the next few years.
The pet products manufacturers' association points to research showing that having a pet can provide benefits ranging from helping to lower blood pressure to assisting in fighting depression. That, or just the fact that many pet owners view their pets as members of the family, helps drive them to providing the animals with the best of everything.
From monogrammed sweaters to grooming sessions followed by massages and self-cleaning litter boxes, pet owners are anteing up. Pet industry expenditures were $36.3 billion in 2005 and are projected to grow by 5.8% to $38.4 billion in 2006, according to the association.
Ten years ago, such expenditures were $21 billion, according to the association's data.
Even Sweet, a busy graduate student, was out doing his part recently by purchasing a gift to celebrate the birthday of his dog Tanner.
"We bought him a big toy and a bone," Sweet said.
Healthy pets, healthy profits
Pet owners also are spending more on their animals' health care, particularly for preventive care and services that were previously available only to humans, Sweet said. He predicts services and vet care, now a little more than 30% of all pet industry expenditures, will have close to double-digit growth this year and for several years after that.
There are many companies taking advantage of the pet pampering trend. The biggest risk associated with these stocks is that the companies are dependent on consumers' ability to keep spending. But because many pet owners view their pets as members of the family, Sweet says spending in this area is less likely to fall in the event of an overall consumer spending decline.
"One of the things with pet owners is they're very loyal - once they become a customer, they'll continue to buy things," Sweet said.
PetMed Express Inc. (PETS, $13.48), Pompano Beach, Fla., is a pet pharmacy that sells prescription and over-the-counter pet medications and health and nutritional supplements by phone, fax, mail and the Internet.
Investors who think increased prices at the gas pump and rising interest rates may hinder the amount consumers spend on their pets could find a different dynamic at work with this consumer play.
"If gas is up to $4 or $5 a gallon, I'll drive less - but I'm still going to spend the same amount on my pet," Sweet said.
PetMed's stock price has declined recently because the prices veterinary practices charge for medications have come down to the levels PetMed charges after being at a 10% premium, Sweet said. Despite the price wars, he says PetMed looks attractive under $14 a share because more people are turning to the Internet to make their purchases.
Petsmart Inc. (PETM, $27.20), Phoenix, Ariz., operates 826 stores in the U.S. and Canada. The retailer is focusing on being the all-in-one provider, offering not just pet food and supplies, but grooming and day care services and dog training.
"In the last year they've started adding vet clinics and now close to 75% of their stores have vets on site," Sweet said.
Petsmart also has about 30 in-store "PetsHotels," where animals can stay for the day or overnight, and is planning to expand that offering into another 270 stores, he said.
The retailer plans to add 90 stores this year. It has $206 of sales per square foot, almost $20 more than Petco, one of Petsmart's biggest competitors.
"This top-line revenue growth, coupled with the higher operating margins associated with the growing services portion of their business, will drive increased future cash flows and fuel future expansion," Sweet said.
He would buy Petsmart up to $27 and says