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A sMART Move in the Pet Space

Pet products retailer PETsMART Inc., which operates more than 530 pet superstores in the United States and Canada, said it will pay $30 million in cash and assets for a controlling interest in online pet operation PETsMART.com.

The company also said the move will help to produce lower-than-expected financial results for the third quarter, with earnings per share in the range of two to three cents, including the effect of tax benefits associated with previous PETsMART.com losses, and the early retirement of debt at favorable rates.

PETsMART stock was down 37 cents on the news in early trading at $3.62.

Under the terms of the proposed agreement with PETsMART.com, PETsMART Inc. will contribute $20 million in cash, as well as its pet catalog business (valued at approximately $10 million) to form an integrated direct marketing subsidiary.

The cash investment will be made in two $10 million installments. PETsMART will make the first payment when the agreement is signed, with an equal payment during the first half of fiscal 2001. PETsMART will hold an 81 percent interest in PETsMART.com at the conclusion of the deal.

Founded in May 1999 as a privately held company based in Pasadena, CA, PETsMART.com is expected to achieve a run rate in excess of $50 million in sales for this year and "is the only major pet player in the e-commerce space poised for stable growth in the future," PETsMART Inc. said. The Web site has been funded by PETsMART and other investors, including idealab!, idealab Capital Partners and Global Retail Partners, as well as Big Dog Holdings Inc.

No doubt the execs think they are right; still it would appear a gutsy move in the face of the recent demise of pets.com But management said it does not anticipate the need for additional future funding for PETsMART.com.

"This transaction will allow us to fully capitalize on the competitive synergies of our bricks, clicks and catalog model," said Phil Francis, chairman, president and chief executive officer of PETsMART Inc.

The company said it expects to report revenues of approximately $540 million for the third quarter, affected by several factors, including lower-than-expected comparable store sales of approximately 1 percent associated with a difficult retail environment and higher-than-expected shrink levels, which negatively impacted margins.

The company currently projects fiscal 2000 year-end revenues of approximately $2.23 billion and net income before PETsMART.com losses of between $26 million and $28 million.

Third quarter results are due Nov. 28.