PetSmart (Nasdaq:PETM): Halloween Costumes for Dogs and Martha Stewart

PetSmart (Nasdaq:PETM): Halloween Costumes for Dogs and Martha Stewart

Refresh introduces the health and wellness section within select stores. In conjunction with the rollout of GNC product in stores, a new Health and Wellness section has been added to the front 1/3 of select stores. The space takes up one full and widened aisle within the store, with three to four stand-alone gondolas added to promote supplements, including the new line of GNC product. GNC product is displayed in 20 linear feet of gondola space in three five-height rack faces.

Additional product includes supplements from other brands as well as natural pet care products. Work was completed by third parties in a series of overnight shifts in stores, limiting disruption to operations during regular store hours. This marks the fourth major floor reset in the past year.

New in-store signage and expansion of runways increases visibility, adds space for seasonal product in high-traffic areas. This refresh also introduced new hanging in-store signage throughout select stores, and has led to a widening of runways in some stores (30% of stores visited.) New signage introduces a more upscale presentation (wood-look displays with a consistent wave pattern) with ceiling-hung signage directing customers to individual sections of the store (Dog, Cat, Grooming Supplies, Health and Wellness etc.) Widening of the runways improves visibility throughout the store and allows for the addition of incremental seasonal displays and Martha Stewart product in high-traffic areas of the store, according to our checks.

Increasing private label penetration in hardgoods. We noted a substantial increase of private label product penetration within the hardgoods section of stores. In particular, a significantly larger portion of leash and collar and chew toy floor sets are now allocated to private label product, 40% of toy product, greater than 60% of leash and collar product. With private label margin benefit of 750-1,000bp, we project possible accretion to margins of 50bp, and $0.16 contribution to EPS over the next three to five years.

Commentary on Martha Stewart product largely positive. Store employees indicated that the initial launch of Martha Stewart product has been favorable, with product helping drive ticket as customers add higher-price point Martha Stewart product to baskets. In addition, traffic is seeing a modest benefit as Martha Stewart customers are more frequent shoppers than the average PetSmart customers. Our checks suggest healthy sell-through with broken assortments of several product lines. Price points have been adjusted on some product to help ensure sell-through, particularly of seasonal product (halloween costumes, select collars.)

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