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PetSmart's lodging puts animals in lap of luxury

The retailer's PetsHotel business, where four- footed clients watch TV and snack on ice cream, unleashes fresh profit.

December 28, 2006|From Bloomberg News

As Christmas approached, pet owner Jean Rask wanted to give her dogs -- a 13-year-old collie/shepherd mix named Trixie and 12-year-old Pebbles, a Chihuahua -- a special holiday gift.

So she booked them two nights at a PetsHotel in Whittier operated by Phoenix-based pet-store chain PetSmart Inc.

"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 $46 a night for both dogs.

Since 2000, the U.S. pet industry has expanded 36% to a $45-billion-a-year business, with much of the growth coming from pet services such as grooming, training and lodging.

PetSmart, the largest U.S. pet store chain with 909 stores, is finding the trend lucrative. The company's revenue has increased an average of 27% annually the last six years, and services are twice as profitable as selling pet toys and food, said David Lenhardt, head of services for PetSmart. Sales at all PetSmart stores open at least a year rose 4.2% in 2005.

Now, the retailer has set a goal of eventually opening 435 PetsHotels, a sevenfold increase from its current 62 locations.

At its PetsHotels, four-footed clients can lounge on hypoallergenic lambskin blankets, watch television and snack on lactose-free, fat-free ice cream while their owners are away for the holidays.

"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."

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 and a television. The TV 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% of customers use the Bone Booth service, PetSmart said. Grooming and training services are extra, and ice cream snacks cost $3 each.

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 mini-slide.

Sales at PetSmart stores with lodging are 29% higher than those without it after the fifth year, PetSmart says, as owners pay for grooming, food or "Bad Hair Day" T-shirts when picking up or dropping off pets.

"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."

PetSmart shares have more than doubled in the last five years, while the Standard & Poor's 500 index has risen 23%. 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% in the last five years.

PetsHotels notched sales of $16.7 million in 2005, nearly 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 shares a "buy" and doesn't own the shares.

A survey last year by the Washington-based Pew Research Center found that 85% of pet owners call their dogs members of the family, as do 78% of those with cats. About 80% 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."

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

That growth hasn't gone unnoticed. Wal-Mart Stores Inc., 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," Todd said. "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," Todd said. "These are the things pet owners appreciate."

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