PetSmart, Inc.
NEUTRAL
Company Update
Equity | United States | Retailing-Hardlines
21 March 2014
Adoption headwinds make new
initiatives critical, Reit Neutral
adoptions at PETM, Petco a headwind
 Declining
Recent data from Pethealth Inc., a leading provider of management software to
animal shelters in North America, suggests that while total pet adoptions have
generally been growing in the past year, adoptions in both PETM and Petco have
declined (Chart 8 and Chart 9). In February, due to national adoption weekends,
adoptions at PETM and Petco grew 2.1%/ 5.6% respectively, vs. a 70bp decline in
total adoptions. However, in the 13 months prior, total monthly adoptions grew on
average 2.9%, while PETM and Petco declined by on average (4.5%) and (5.3%),
respectively. We believe the declining adoption trends at PETM could be a
headwind as adoptions are an important driver of traffic, hardgoods sales and new
customer acquisition for PETM. Decelerating comps and traffic in recent quarters
appear to reflect these challenges (Chart 3 and Chart 4). In our view, this situation
makes the success of PETM’s new customer initiatives in driving comps and traffic
even more critical.
Success and execution of new customer initiatives is key
Unauthorized redistribution of this report is prohibited. This report is intended for [email protected].
Management has highlighted 3 major customer initiatives to reaccelerate comps. All
the strategies sound sensible to us, but execution will be key to truly driving traffic
and comps. Initiatives include 1) Connecting with pet parents through improved
personalization and omnichannel experience; 2) growing proprietary and exclusive
products/ services; and 3) attracting and retaining the most valuable customers. The
company is also introducing many new omnichannel capabilities, including
expanding in-store availability check to all products in 1Q, new mobile website in
2H14, and rolling out order online pick up in store capability during the year.
Denise Chai, CFA
+1 646 855 3988
Curtis Nagle, CFA
+1 646 855 2939
Katherine Lin
+1 646 855 5825
Research Analyst
MLPF&S
[email protected]
Research Analyst
MLPF&S
[email protected]
Research Analyst
MLPF&S
[email protected]
 Stock Data
Price
Price Objective
Date Established
Investment Opinion
Volatility Risk
52-Week Range
Mrkt Val / Shares Out (mn)
BofAML Ticker / Exchange
Bloomberg / Reuters
ROE (2015E)
Total Dbt to Cap (Jan-2014A)
Est. 5-Yr EPS / DPS Growth
US$66.47
US$77.00
8-Jan-2014
B-2-7
MEDIUM
US$61.37-77.32
US$6,629 / 99.7
PETM / NAS
PETM US / PETM.O
55.9%
0%
12.1% / 23.1%
Staying Neutral; waiting on comp reacceleration
We remain Neutral on PETM. We are positive on management’s customer
initiatives, and valuations look reasonable, with shares trading at 14.8x 2014E EPS
vs. hardline retail universe average of 19.4x. In 2015-16, PETM is trading on ~1x
PEG, which is not demanding given the solid FCF yield. However, we believe PETM
will remain a "show me" stock until comps reaccelerate, which could take time.
Estimates (Jan)
 (US$)
EPS
GAAP EPS
EPS Change (YoY)
Consensus EPS (Bloomberg)
DPS
2013A
2014A
0.64
2013A
3.55
3.55
39.2%
2015E
2016E
2017E
0.72
4.48
4.48
11.4%
4.47
0.96
2014A
2015E
2016E
2017E
4.02
4.02
13.2%
5.07
5.07
13.2%
5.06
1.15
5.67
5.67
11.8%
NA
1.34
Valuation (Jan)
P/E
GAAP P/E
Dividend Yield
EV / EBITDA*
Free Cash Flow Yield*
18.7x
18.7x
1.0%
8.2x
7.8%
16.5x
16.5x
1.1%
7.8x
7.5%
14.8x
14.8x
1.4%
7.4x
7.4%
13.1x
13.1x
1.7%
7.0x
8.9%
11.7x
11.7x
2.0%
6.6x
8.9%
* For full definitions of iQmethod SM measures, see page 11.
BofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Refer to important disclosures on page 12 to 14. Analyst Certification on Page 10. Price Objective Basis/Risk on page 10. Link to Definitions on page 10.11370845
P e tSmart, Inc .
2 1 Ma rc h 20 14
iQprofile PetSmart, Inc.
SM
– Bus Performance*
 iQmethod
(US$ Millions)
2013A
2014A
2015E
2016E
2017E
– Quality of Earnings*
 iQmethod
(US$ Millions)
PetSmart is the largest retailer of pet food and pet
supplies in the US, with 2012 revenues of $6.8
billion. The company operates nearly 1,300 stores in
the US and Canada, growing square footage at
approximately 3%. Higher margin services currently
account for about 11% of revenues, which should
increase going forward.
2013A
2014A
2015E
2016E
2017E
Investment Thesis
Income Statement Data (Jan)
(US$ Millions)
2013A
2014A
2015E
2016E
2017E
Company Description
SM
Return on Capital Employed
Return on Equity
Operating Margin
Free Cash Flow
22.7%
34.7%
9.6%
515
25.1%
38.0%
10.0%
496
27.7%
55.9%
10.2%
492
31.8%
73.0%
10.5%
588
36.1%
95.0%
10.8%
589
SM
Cash Realization Ratio
Asset Replacement Ratio
Tax Rate
Net Debt-to-Equity Ratio
Interest Cover
Sales
% Change
Gross Profit
% Change
EBITDA
% Change
Net Interest & Other Income
Net Income (Adjusted)
% Change
1.7x
0.6x
36.4%
11.5%
12.0x
6,758
10.5%
2,062
14.3%
890
20.2%
(54)
390
34.2%
1.5x
0.6x
36.3%
15.0%
13.4x
6,917
2.3%
2,116
2.6%
929
4.4%
(52)
420
7.7%
1.5x
0.7x
37.5%
55.9%
14.4x
7,295
5.5%
2,232
5.5%
981
5.6%
(52)
446
6.4%
1.5x
0.7x
37.5%
73.1%
15.5x
7,658
5.0%
2,346
5.1%
1,039
5.9%
(52)
485
8.6%
1.4x
0.7x
37.5%
97.4%
16.8x
8,038
5.0%
2,467
5.1%
1,103
6.2%
(52)
526
8.5%
Free Cash Flow Data (Jan)
(US$ Millions)
2013A
2014A
2015E
2016E
2017E
Balance Sheet Data (Jan)
(US$ Millions)
2013A
2014A
2015E
2016E
2017E
Short-Term Debt
Other Current Liabilities
Long-Term Debt
Other Non-Current Liabilities
Total Liabilities
0
755
465
194
1,413
0
794
452
182
1,428
0
709
638
197
1,545
0
737
670
207
1,614
0
766
703
217
1,686
Total Equity
Total Equity & Liabilities
1,124
2,537
1,105
2,533
799
2,344
664
2,278
554
2,240
Net Income from Cont Operations (GAAP)
Depreciation & Amortization
Change in Working Capital
Deferred Taxation Charge
Other Adjustments, Net
Capital Expenditure
Free Cash Flow
% Change
Cash & Equivalents
Trade Receivables
Other Current Assets
Property, Plant & Equipment
Other Non-Current Assets
Total Assets
* For full definitions of iQmethod SM measures, see page 11.
2
405
238
55
(21)
(25)
(138)
515
13.2%
335
72
910
986
234
2,537
437
236
1
(17)
(14)
(147)
496
-3.6%
286
73
960
953
262
2,533
465
234
(49)
(4)
1
(155)
492
-0.7%
192
77
972
874
229
2,344
505
232
6
10
(6)
(160)
588
19.4%
185
80
971
802
240
2,278
548
232
(21)
(9)
(2)
(160)
589
0.2%
164
84
1,017
730
246
2,240
PetSmart is the market leader in the $37bn pet
industry, with an estimated 16-17% market share.
However, we see multiple headwinds to comps and
valuation, including market share losses, slowing instore adoptions, sentiment overhang from online
competition and limited benefit to hardgood
categories from new household formation.
Stock Data
Average Daily Volume
1,871,294
Quarterly Earnings Estimates
2014
Q1
Q2
Q3
Q4
0.98A
0.89A
0.88A
1.28A
2015
1.01E
1.00E
1.00E
1.47E
P e tSmart, Inc .
2 1 Ma rc h 20 14
Adoption headwinds at PETM/Petco
Recent data from Pethealth Inc., a leading provider of management software to
animal shelters in North America, suggests that while total pet adoptions have
generally been growing in the past year, adoptions in both PETM and Petco have
declined (Chart 8 and Chart 9). In February, due to national adoption weekends,
adoptions at PETM and Petco grew 2.1%/ 5.6% respectively, vs. a 70bp decline
in total adoptions. However, in the 13 months prior, total monthly adoptions grew
on average 2.9%, while PETM and Petco declined by on average (4.5%) and
(5.3%), respectively. For background on why third party pet adoptions are soft,
please see our note on shifting dynamics in animal welfare. We believe the
declining adoption trends at PETM could be a headwind as adoptions are an
important driver of traffic, hardgoods sales and new customer acquisition for
PETM. Decelerating comps and traffic in recent quarters appear to reflect these
challenges (Chart 3 and Chart 4). In our view, this situation makes the success of
PETM’s new customer initiatives in driving comps and traffic even more critical.
PetCo
Feb-14
Jan-14
Dec-13
Oct-13
Nov-13
Sep-13
Jul-13
Y/Y Change in Adoptions
PETM
Aug-13
(10.0%)
Jun-13
(5.0%)
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
0.0%
Apr-13
5.0%
May-13
10.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
(2.0%)
(4.0%)
Mar-13
15.0%
Feb-13
Chart 2: Y/Y Adoption Growth vs. BAC card Pet Specialty spending
Jan-13
Chart 1: Y/Y change in market share of 3rd party adoptions
Pet Specialty spending
Other 3rd party
Sources:Y/Y Change in Adoptions, Pethealth Inc, Pet Specialty Spending: BAC internal data.
Source: Pethealth Inc, BofA Merrill Lynch Global Research
Chart 3: PETM adoptions vs. comps and traffic
Chart 4: PETM adoptions growth vs. comps and traffic
8.0%
18,000
6.0%
4.0%
16,000
6.0%
14,000
12,000
4.0%
2.0%
0.0%
(2.0%)
10,000
2.0%
8,000
1Q13
2Q13
3Q13
4Q13
(4.0%)
(6.0%)
6,000
0.0%
4,000
(2.0%)
2,000
(8.0%)
(10.0%)
(12.0%)
0
(4.0%)
(14.0%)
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
Y/Y PETM Adoptions
PETM Adoptions (LHS)
PETM Comps
PETM Comps
PETM Traffic
PETM Traffic
Source: Pethealth Inc, BofA Merrill Lynch Global Research
Source: Pethealth Inc, BofA Merrill Lynch Global Research
3
P e tSmart, Inc .
2 1 Ma rc h 20 14
Adoptions slightly recover in February for PETM and Petco
Over the past year, adoptions at PETM and Petco have been declining while
other third party organizations have seen growth (see Chart 7 to Chart 9).
However, both PETM and Petco showed slight recovery in growth rates in
February, which we attribute to national pet adoption weekends. PETM adoptions
in February ticked up 2.1% after (7.2%) and (10.4%) decline in
January/December and vs. (3.8%) decline in February 2013. Cat adoptions were
stronger in February, up 5.4% vs. (1.9%) decline in dog adoptions. Data also
suggests that PETM's market share in total cat adoptions (including total in
shelter adoptions) has been growing strongly in recent months after a sharp drop
in May 2013 (Chart 12). PETM's total market share of dog adoptions has been
steadily in the 4-6% range in the last 6 months (Chart 14).
Petco adoptions were much higher in February, up 5.6%, though on a much
easier compare as adoptions were down (11.5%) last year. Petco adoptions were
down (11.1%)/(1.6%) in January and December. Petco dog adoptions showed a
strong rebound in February, up 19.5% after (29.5%) decline in January and (27%)
decline last year. Cat adoptions were slightly down, dropping (0.7%) in February.
After a surge in adoption market share in October/November, Petco's market
share in adoptions has declined in recent months to about 2% (Chart 16), in line
with the average in past two years.
3 major customer initiatives to reaccelerate comps
Management at PETM has highlighted 3 major customer initiatives to
reaccelerate comps. All the strategies sound sensible to us, but execution will be
key to truly driving traffic and comps. In our view, reaccelerating comps will be
particularly important as soft in-store adoptions represent a headwind to traffic,
hardgood sales, and new customer acquisition. In addition, the online threat albeit small - continues to grow, with the company now estimating that 4% of the
industry is online, compared to 3% about 6M ago. Below we highlight the three
customer strategies:
1) Connecting with pet parents
PETM has been investing in enhancing the customer experience through
technology and personalization. The company can attribute 90% of sales to
individual customers and wants to continue to leverage its strong database to
drive growth. The company will utilize a new enhanced promotional system where
customers can enroll in its PetPerks loyalty program through pin pads at the
register. This new system increases PETM’s ability to capture e-mails and
accelerates delivery, personalization, and variety of offers.
The company will also introduce new omnichannel initiatives including
4

Improvements to its PetSmart.com shopping experience with a new
website platform in 1Q: this includes capabilities such as product imagezoom, enhanced natural search performance, improved item comparison
tools, and better presentation of item level content.

Expanding in-store availability feature online to all product categories
in 1Q: this was the most requested feature by customers

Redesigned Mobile website launching in 2H14: today 1/3 of
PetSmart.com visits come via smartphone.
P e tSmart, Inc .
2 1 Ma rc h 20 14

Accelerating use of mobile devices by store associates: this will include
features such as pet food selector, in-aisle ordering when a product is out of
stock in the store or when a product is available online only. The company
plans to have iPad minis in all stores by end of the year.

Order online, pick up in store: This is the second most requested feature
by customers, and the company will roll it out to all stores in 2014.
Chart 5: Total Unique Traffic
Chart 6: Y/Y growth in total unique traffic
120.0%
3,500
100.0%
3,000
80.0%
2,500
60.0%
2,000
40.0%
1,500
20.0%
0.0%
1,000
(20.0%)
500
PETM
Source: Comscore
Petco
PETM
Wag
Petco
Feb-2014
Nov-2013
Aug-2013
May-2013
Feb-2013
Nov-2012
Aug-2012
Feb-2012
May-2012
Nov-2011
Aug-2011
Feb-2011
May-2011
Nov-2010
Jan-2014
Oct-2013
Jul-2013
Apr-2013
Jan-2013
Oct-2012
Jul-2012
Apr-2012
Jan-2012
Oct-2011
Jul-2011
Apr-2011
Jan-2011
-
(40.0%)
Wag
Source: Comscore
2) Growing proprietary and exclusive products and services
Today, proprietary and exclusive products and services represent about 37% of
PETM sales, of which 11% are services. The company intends to drive double
digit sales growth in this area over the next three to five years. In 2014, most of
this growth should come from merchandising categories, consumables,
hardgoods, and specialty. The largest growth opportunity is in consumables,
where the company plans to continue to build on its own proprietary brands. With
that said, exclusives now represent over 75% of PETM’s food mix, and we do not
think that gains to comps will be nearly as substantial as they were in the past,
particularly as competition has increased. Additionally, PETM is working with
national brand vendors to bring in new exclusive formulations and sub-brands.
5
P e tSmart, Inc .
2 1 Ma rc h 20 14
Exhibit 1: We expect a more muted lift to comps from the latest reset
Source: Company reports, BofA Merrill Lynch Global Research
3) Attracting and retaining most valuable customers
To PETM, the most valuable customers are those who use buy channel-exclusive
foods, use grooming services, and are new pet parents. These customers shop
the store more frequently and spend more money.
6

For channel-exclusive customers, the company is investing in significant
differentiation opportunities in the natural foods categories. The company will
introduce over 900 new items as part of the consumables reset in the 1Q.
This includes expanding the assortment of fresh foods to all stores across
the chain and raw/frozen foods to ~40% of stores. Blue Buffalo will expand
from half an aisle to an aisle as new formulations catering to pets of different
breeds, ages and health concerns are introduced.

For grooming customers, the company is launching Pet Expressions
creative grooming services in all salons across the chain in 1Q. These addon services include chalking, stenciling, and feathering.

For new pet parent customers, the company will continue to market
products such as its Puppy Starter Kits.
P e tSmart, Inc .
2 1 Ma rc h 20 14
Chart 7: Number of Organizations Reporting Adoptions
Chart 8: PETM Y/Y % Change in Adoptions
800
1,200
1,180
1,160
1,140
1,120
1,100
1,080
1,060
1,040
1,020
1,000
700
600
500
400
300
200
100
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
Jan-14
Feb-14
Jan-14
Feb-14
Total
Source: Pethealth Inc, BofA Merrill Lynch Global Research
Source: Pethealth Inc, BofA Merrill Lynch Global Research
Chart 9: Petco Y/Y % Change in Adoptions
Chart 10: Other Third Party Y/Y % Change in Adoptions
50.0%
Dec-13
Nov-13
Oct-13
Sep-13
Jul-13
Dog
Dec-13
Cat
Total Adoptions (RHS)
Aug-13
Jun-13
Apr-13
May-13
In Shelter Adoptions
Mar-13
3rd Party / Offsite Adoptions
Feb-13
-25.0%
Jan-13
Jan-14
Feb-14
Dec-13
Nov-13
Oct-13
Sep-13
Jul-13
Aug-13
Jun-13
Apr-13
May-13
Mar-13
Jan-13
Feb-13
0
10.0%
100.0%
40.0%
80.0%
30.0%
20.0%
60.0%
10.0%
40.0%
0.0%
-10.0%
20.0%
-20.0%
0.0%
-30.0%
Cat
Source: Pethealth Inc, BofA Merrill Lynch Global Research
Total
Dog
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
Apr-13
Cat
May-13
Mar-13
Feb-13
Jan-13
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Jul-13
Dog
Aug-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
-20.0%
Jan-13
-40.0%
Total
Source: Pethealth Inc, BofA Merrill Lynch Global Research
7
P e tSmart, Inc .
2 1 Ma rc h 20 14
Chart 11: Total cat adoptions by channel
Chart 12: Cat adoption market share by channel
4,000
40,000
14.0%
90.0%
3,500
35,000
12.0%
88.0%
3,000
30,000
10.0%
86.0%
2,500
25,000
2,000
20,000
1,500
15,000
Petco (LHS)
PETM (LHS)
Petco (LHS)
Other 3rd Party (LHS)
Total in Shelter (RHS)
Other 3rd Party (LHS)
Total in Shelter (RHS)
Source: Pethealth Inc, BofA Merrill Lynch Global Research
Chart 13: Total dog adoptions by channel
Chart 14: Dog adoption market share by channel
89.0%
10,000
2.0%
500
88.0%
5,000
1.0%
87.0%
0
0.0%
86.0%
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Jan-13
Mar-13
Nov-12
Jul-12
Sep-12
May-12
Mar-12
0
Jan-14
3.0%
15,000
1,000
Nov-13
90.0%
Jul-13
4.0%
20,000
Sep-13
1,500
May-13
91.0%
Mar-13
5.0%
25,000
Jan-13
92.0%
30,000
Nov-12
93.0%
6.0%
Sep-12
7.0%
35,000
Jul-12
94.0%
May-12
2,000
8.0%
40,000
Jan-12
2,500
45,000
Mar-12
3,000
Jan-12
Jan-14
Mar-13
Jul-12
Jan-12
PETM (LHS)
Source: Pethealth Inc, BofA Merrill Lynch Global Research
PETM (LHS)
Petco (LHS)
PETM (LHS)
Petco (LHS)
Other 3rd Party (LHS)
Total in Shelter (RHS)
Other 3rd Party (LHS)
Total in Shelter (RHS)
Source: Pethealth Inc, BofA Merrill Lynch Global Research
8
Nov-13
74.0%
Jul-13
0.0%
Sep-13
0
May-13
76.0%
Jan-13
2.0%
Nov-12
78.0%
5,000
Sep-12
10,000
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Jan-13
Mar-13
Nov-12
Jul-12
Sep-12
May-12
Jan-12
Mar-12
0
80.0%
4.0%
May-12
500
82.0%
6.0%
Mar-12
1,000
84.0%
8.0%
Source: Pethealth Inc, BofA Merrill Lynch Global Research
P e tSmart, Inc .
2 1 Ma rc h 20 14
Chart 15: Total dog/cat adoptions by channel
Chart 16: Total dog/cat adoption market share by channel
7,000
90,000
91.0%
12.0%
80,000
6,000
90.0%
10.0%
70,000
5,000
60,000
4,000
50,000
3,000
40,000
89.0%
8.0%
88.0%
6.0%
30,000
2,000
87.0%
86.0%
4.0%
85.0%
20,000
2.0%
1,000
84.0%
10,000
Jan-14
Nov-13
Jul-13
Sep-13
Mar-13
May-13
Jan-13
Nov-12
Jul-12
Sep-12
May-12
83.0%
Jan-12
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Jan-13
Mar-13
Nov-12
Jul-12
Sep-12
May-12
Jan-12
Mar-12
0.0%
Mar-12
0
0
PETM (LHS)
Petco (LHS)
PETM (LHS)
Petco (LHS)
Other 3rd Party (LHS)
Total in Shelter (RHS)
Other 3rd Party (LHS)
Total in Shelter (RHS)
Source: Pethealth Inc, BofA Merrill Lynch Global Research
Source: Pethealth Inc, BofA Merrill Lynch Global Research
Chart 17: Total cat adoption y/y growth
Chart 18: Total dog adoption y/y growth
70.0%
10.0%
60.0%
5.0%
100.0%
50.0%
40.0%
80.0%
30.0%
50.0%
20.0%
0.0%
40.0%
10.0%
(5.0%)
30.0%
0.0%
20.0%
60.0%
40.0%
(10.0%)
20.0%
(20.0%)
(10.0%)
10.0%
0.0%
(40.0%)
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
(20.0%)
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
(15.0%)
0.0%
(30.0%)
PETM (LHS)
Petco (LHS)
PETM (LHS)
Petco (LHS)
Total in Shelter (LHS)
Other 3rd Party (RHS)
Total in Shelter (LHS)
Other 3rd Party (RHS)
Source: Pethealth Inc, BofA Merrill Lynch Global Research
Source: Pethealth Inc, BofA Merrill Lynch Global Research
9
P e tSmart, Inc .
2 1 Ma rc h 20 14
Price objective basis & risk
PetSmart, Inc. (PETM)
Our PO of $77 is based on 16x the midpoint of our 2014-15 EPS estimates and is
approximately in line with its historical range. We believe an inline valuation is
warranted as slowing comps and negative sentiment surrounding online
competition offset PETM's market leading position and history of consistent
execution, in our view.
The downside risks are: 1) an increased focus on pet consumables from
discounters, warehouse clubs, grocery and dollar stores, 2) persistently high gas
prices could hinder human travel, which would impact the slower-than-expected
turnaround in Pet Smart's pet boarding business, as well as weigh on demand for
hardgoods and premium pet food, 3) persistently high commodity prices (soy and
corn) could impact the gross margin, 4) changes in consumer spending behavior,
and 5) reputational risk from food/product recalls, due to consumers' emotional
attachment to pets. The upside risks are: 1) a stronger-than-expected
acceleration in services, 2) a stronger-than-expected recovery in hardgoods, and
3) a better-than-expected pick-up in adoptions and pet ownership.
Link to Definitions
Consumer & Retail
Click here for definitions of commonly used terms.
Analyst Certification
I, Denise Chai, CFA, hereby certify that the views expressed in this research report
accurately reflect my personal views about the subject securities and issuers. I also
certify that no part of my compensation was, is, or will be, directly or indirectly,
related to the specific recommendations or view expressed in this research report.
US - Retail Hardline Coverage Cluster
Investment rating
BUY
NEUTRAL
UNDERPERFORM
10
Company
BofA Merrill Lynch
ticker
Bloomberg symbol
Analyst
Advance Auto Parts, Inc.
Bed Bath & Beyond Inc.
Best Buy Co., Inc.
Dollar General Corporation
Dollar Tree, Inc.
Lowe's Companies, Inc.
Office Depot, Inc.
O'Reilly Automotive, Inc.
Tempur Sealy International Inc.
The Home Depot, Inc.
Tractor Supply Company
Whirlpool
AAP
BBBY
BBY
DG
DLTR
LOW
ODP
ORLY
TPX
HD
TSCO
WHR
AAP US
BBBY US
BBY US
DG US
DLTR US
LOW US
ODP US
ORLY US
TPX US
HD US
TSCO US
WHR US
Denise Chai, CFA
Denise Chai, CFA
Denise Chai, CFA
Denise Chai, CFA
Denise Chai, CFA
Denise Chai, CFA
Denise Chai, CFA
Denise Chai, CFA
Denise Chai, CFA
Denise Chai, CFA
Denise Chai, CFA
Denise Chai, CFA
AutoZone Inc.
GameStop
PetSmart, Inc.
Williams-Sonoma, Inc.
AZO
GME
PETM
WSM
AZO US
GME US
PETM US
WSM US
Denise Chai, CFA
Curtis Nagle, CFA
Denise Chai, CFA
Denise Chai, CFA
Family Dollar Stores, Inc.
Pier 1 Imports Inc.
Staples, Inc.
The Container Store Group, Inc.
Vitamin Shoppe, Inc.
FDO
PIR
SPLS
TCS
VSI
FDO US
PIR US
SPLS US
TCS US
VSI US
Denise Chai, CFA
Denise Chai, CFA
Denise Chai, CFA
Denise Chai, CFA
Denise Chai, CFA
P e tSmart, Inc .
2 1 Ma rc h 20 14
iQmethod SM Measures Definitions
Business Performance
Numerator
Return On Capital Employed
Return On Equity
Operating Margin
Earnings Growth
Free Cash Flow
Quality of Earnings
Cash Realization Ratio
Asset Replacement Ratio
Tax Rate
Net Debt-To-Equity Ratio
Interest Cover
Valuation Toolkit
Price / Earnings Ratio
Price / Book Value
Dividend Yield
Free Cash Flow Yield
Enterprise Value / Sales
EV / EBITDA
NOPAT = (EBIT + Interest Income) * (1 - Tax Rate) + Goodwill
Amortization
Net Income
Operating Profit
Expected 5-Year CAGR From Latest Actual
Cash Flow From Operations – Total Capex
Denominator
Total Assets – Current Liabilities + ST Debt + Accumulated Goodwill
Amortization
Shareholders’ Equity
Sales
N/A
N/A
Cash Flow From Operations
Capex
Tax Charge
Net Debt = Total Debt, Less Cash & Equivalents
EBIT
Net Income
Depreciation
Pre-Tax Income
Total Equity
Interest Expense
Current Share Price
Current Share Price
Annualised Declared Cash Dividend
Cash Flow From Operations – Total Capex
EV = Current Share Price * Current Shares + Minority Equity + Net Debt
+ Other LT Liabilities
Enterprise Value
Diluted Earnings Per Share (Basis As Specified)
Shareholders’ Equity / Current Basic Shares
Current Share Price
Market Cap. = Current Share Price * Current Basic Shares
Sales
Basic EBIT + Depreciation + Amortization
iQmethod SMis the set of BofA Merrill Lynch standard measures that serve to maintain global consistency under three broad headings: Business Performance, Quality of Earnings, and validations. The key features of iQmethod are: A consistently
structured, detailed, and transparent methodology. Guidelines to maximize the effectiveness of the comparative valuation process, and to identify some common pitfalls.
iQdatabase ® is our real-time global research database that is sourced directly from our equity analysts’ earnings models and includes forecasted as well as historical data for income statements, balance sheets, and cash flow statements for
companies covered by BofA Merrill Lynch.
iQprofile SM, iQmethod SM are service marks of Merrill Lynch & Co., Inc.iQdatabase ®is a registered service mark of Merrill Lynch & Co., Inc.
11
P e tSmart, Inc .
2 1 Ma rc h 20 14
Important Disclosures
PETM Price Chart
1-Mar:B
Rifkin
PO:US$46
100
14-Dec
Chai
PO:US$56
18-Jun
PO:US$72
13-Feb
PO:US$60
90
6-Mar
PO:US$80
15-Aug
PO:US$85
1-Nov:N
PO:US$80
17-May
PO:US$90
8-Jan
PO:US$77
3-May
PO:US$65
80
70
22-May
PO:US$68
60
50
40
30
20
10
0
PETM
1-Jan-13
1-Jan-12
Review
Restricted
1-Jan-14
No Coverage
B : Buy, N : Neutral, U : Underperform, PO : Price objective, NA : No longer valid, NR: No Rating
The Investment Opinion System is contained at the end of the report under the heading "Fundamental Equity Opinion Key". Dark grey shading indicates the security is restricted with the opinion suspended. Medium grey shading indicates the
security is under review with the opinion withdrawn. Light grey shading indicates the security is not covered. Chart is current as of February 28, 2014 or such later date as indicated.
Investment Rating Distribution: Retailing Group (as of 31 Dec 2013)
Coverage Universe
Count
Percent
Buy
Neutral
Sell
98
52
51
48.76%
25.87%
25.37%
Investment Rating Distribution: Global Group (as of 31 Dec 2013)
Coverage Universe
Count
Percent
Inv. Banking Relationships*
Buy
Neutral
Sell
Inv. Banking Relationships*
Count
61
30
22
Count
Percent
62.24%
57.69%
43.14%
Percent
Buy
1713
49.48%
Buy
1270
74.14%
Neutral
890
25.71%
Neutral
674
75.73%
Sell
859
24.81%
Sell
539
62.75%
* Companies that were investment banking clients of BofA Merrill Lynch or one of its affiliates within the past 12 months. For purposes of this distribution, a stock rated Underperform is
included as a Sell.
FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK
RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a
stock’s: (i) absolute total return potential and (ii) attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There
are three investment ratings: 1 - Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster;
2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least
attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a
stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better
understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation).
Investment rating
Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster*
Buy
≥ 10%
≤ 70%
Neutral
≥ 0%
≤ 30%
Underperform
N/A
≥ 20%
* Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.
INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered
to be secure) and 9 - pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common
industry, sector, region or other classification(s). A stock’s coverage cluster is included in the most recent BofA Merrill Lynch Comment referencing the stock.
Price charts for the securities referenced in this research report are available at http://pricecharts.ml.com, or call 1-800-MERRILL to have them mailed.
MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: PetSmart, Inc.
MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months: PetSmart, Inc.
The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: PetSmart, Inc.
MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: PetSmart, Inc.
The company is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates:
PetSmart, Inc.
BofA Merrill Lynch Research personnel (including the analyst(s) responsible for this report) receive compensation based upon, among other factors, the overall
profitability of Bank of America Corporation, including profits derived from investment banking revenues.
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P e tSmart, Inc .
2 1 Ma rc h 20 14
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P e tSmart, Inc .
2 1 Ma rc h 20 14
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14