Passion for pets makes PetSmart a success

PetSmart's four-footed clients can lounge on hypoallergenic lambskin blankets, watch television and snack on lactose-free, fat-free ice cream while staying at a PetsHotel when their owners are away on holiday.

"I've been inside stores that have hotels," said Walter Todd, a money manager with Greenwood Capital, a PetSmart investor in Greenwood, S.C. "They are pretty impressive. You wouldn't mind staying in one yourself."

PetSmart, the largest U.S. pet-store chain, with 909 stores, has set a goal of eventually opening 435 PetsHotels, a seven-fold increase from its current 62 locations. Sales at stores with lodging are 29 percent higher than those without it after the fifth year, PetSmart says, as owners pay for grooming or food when picking up or dropping off pets.

PetSmart's revenue from services, such as grooming, training and lodging, has increased an average of 27 percent annually during the past six years, and services are twice as profitable as selling pet toys and food, said David Lenhardt, head of services for PetSmart. Same-store sales for all of PetSmart rose 4.2 percent in 2005.

"Services have been PetSmart's saving grace," said Todd, whose firm owned 159,900 PetSmart shares as of Sept. 30. "They've been pleasantly surprised by the success of the concept."

Shares have doubled

PetSmart shares have more than doubled in the past five years, while the Standard & Poor's 500 Index has risen 23 percent. PetSmart had sales of $3.76 billion last year, when it groomed 6.5 million pets and 324,000 dogs took training classes. Annual profit growth has averaged 7 percent in the past five years.

PetsHotels notched sales of $16.7 million in 2005, double the $8.7 million a year earlier. PetsHotels will add to overall profit in 2008 as more are built and existing hotels attract more customers, said Joan Storms, a Los Angeles-based analyst at Wedbush Morgan Securities, which rates PetSmart 'buy" and doesn't own the shares.

A survey last year by the Pew Research Center found that 85 percent of pet owners call their dogs members of the family, as do 78 percent of those with cats. Eighty percent of owners buy holiday and birthday gifts for pets, it said.

"We are benefiting from the trend toward the humanization of pets," Lenhardt said. "It's that passion for pets that makes the pet hotel work."

PetSmart customer Jean Rask, 76, takes her two dogs — 13-year-old Trixie, a border Collie/German shepherd mix, and 12-year-old Pebbles, a Chihuahua — to a PetsHotel because she likes the care. They are also groomed during their stay.

The retired accountant's assistant made reservations for her dogs to stay for two nights starting Christmas Eve at the PetsHotel in Whittier, Calif., about 20 miles from Los Angeles.

"They take good care of them," Rask said. "They have these sheepskins in their little suites and they get clean ones every day." The hotel costs her $46 a night for both dogs.

Pet accommodations

Dog owners pay about $31 a night for a suite, a room with a window that measures 4 feet by 7 feet. The suites have raised dog beds with lambskin blankets and a television. The television plays videos such as Walt Disney Co.'s "Lady and the Tramp" and "101 Dalmatians."

Standard accommodations include cages with blankets and padded beds and cost $21 a night.

Prices include "Bone Booth" phone calls from a spot where pets can sit on an elevated cushion and chat with their vacationing owners with the help of the staff. About 40 percent of customers use the Bone Booth service, PetSmart said.

Dogs receive exercise by joining their canine pals in a supervised indoor playroom with earth-tone concrete flooring and tile. Inside are chew toys and a minislide.

Pet-item sales and services have the second-fastest growth for U.S. retailers after consumer electronics, says the American Pet Products Manufacturers Association. The U.S. pet industry has expanded 36 percent to $45 billion in 2006 from 2000.

Wal-Mart takes note

That growth hasn't gone unnoticed. Wal-Mart, the world's largest retailer, this year opened its first of an expected 12 pet-grooming centers.

"Anytime Wal-Mart gets in your space, it's not good news," said Todd. "When Wal-Mart enters a new market, it typically drives down prices and profits."

So far, though, PetSmart is staying ahead of the services curve.

"The employees know the pet's name and the company even sends birthday cards to the pets," said Todd. "These are the things pet owners appreciate."