PETSMART INC. $32 – Nasdaq symbol PETM

PETSMART INC. $32 (Nasdaq symbol PETM; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 123.6 million; Market cap: $4.0 billion; Price-to-sales ratio: 0.7; Dividend yield: 1.3%; WSSF Rating: Above Average) is the biggest pet supply chain in the U.S. It operates 1,149 pet stores in the U.S. and Canada. It also has 162 in-store PetHotels, which look after pets while their owners are away from home.

PetSmart focuses on selling premium pet foods and other products that most supermarkets don’t carry, including its own line of private-label products. It also plans to launch a new line of Martha Stewart pet-care products in the next few months. Exclusive items like these help the company compete with larger retailers — including Wal-Mart.

Long-term trends look positive

The weak economy has prompted the company to slow its expansion. However, it still aims to add more than 650 stores over the next 10 years. Over 71 million U.S. households now own a pet, and this figure should rise as the economy improves. That would help support the additional stores.

Meanwhile, PetSmart’s sales rose 41.9%, from $3.8 billion in 2006 to $5.3 billion in 2010 (the company’s fiscal year ends January 31). Earnings rose from $1.17 a share (or a total of $169.9 million) in 2006 to $1.46 a share (or $194.4 million) in 2008. Earnings fell 0.9%, to $192.7 million, in 2009 . However, earnings per share rose 4.1%, to $1.52, on fewer shares outstanding. In 2010, earnings rose 2.9%, to $198.3 million, while earnings per share rose 4.6%, to $1.59.

Same-store sales rose 1.6% in 2010, while sales of pet services, such as grooming and PetHotel stays, rose 9.2%. Services accounted for 10.8% of revenue, up from 10.4% a year earlier.

PetSmart trades at 18.0 times its likely fiscal 2011 earnings of $1.78 a share. That’s a high p/e ratio for a retail stock, but it’s still reasonable in light of the company’s strong position in a profitable niche market. PetSmart also holds cash of $308.4 million, or $2.50 a share. Its long-term debt of $533.6 million is just 13% of its market cap.

PetSmart is a buy.