It was inevitable that an activist hedge fund would be sniffing around PetSmart Inc.'s doggie door. The growing band of shakeup artists are constantly on the prowl for underachievers with strong brand names but lacklustre performance and languishing stock prices. And the largest U.S. retail pet products peddler certainly fits the bill after its latest difficult quarter and subdued guidance for the rest of the year.
So along comes Jana Partners LLC to reveal that it has acquired the usual 9.9-per-cent stake, which it will be using to press the management and board for changes designed to boost shareholder returns, including a possible sale of the company.
Jana's investment turned profitable in a hurry as investors drove up PetSmart's stock by more than 12 per cent – and as much as 15 per cent at one point, its biggest intraday jump in more than five years. At a time of soaring stock prices, PetSmart has been a bit of a dog for a while. Before the latest news, its share price had fallen more than 12 per cent in the past year.
Pet-related stocks have long been regarded as a decent harbour to ride out economic storms, because no one is going to skimp on the care and feeding of their cuddly family animals. That has generally turned out to be the case for the better-run players with plenty of pricing power, as pet lovers fork out ever higher sums to feed, groom and look after the health of their beloved animals.
Naturally, Amazon was not going to ignore such a fertile retail field. Its Wag.com unit (Does anyone do cute better than Amazon?) and other online players have been altering the competitive landscape in the pet biz. And while PetSmart has established its own profitable digital channel, it faces the same problems as major big-box retailers of electronics, office supplies, books and other staples targeted by Amazon: What to do with all those oversized bricks-and-mortar stores, more than 1,300 of them in PetSmart's case?
PetSmart has exploited one key advantage over online rivals by expanding services like in-store pet grooming into an important revenue source. But its core business remains under pressure. Which is where Jana has stepped into the dog park.
Jana is eager for a friendly chat about the retailer's future, which would preferably include a hard look at its capital structure and strategic alternatives to boost performance. These would include hanging up the for-sale sign or merging with its biggest competitor, Petco, which is owned by private equity firms.
Ever mindful of the interests of long-suffering shareholders, Jana would also like to see a lot better disclosure policy and a shakeup of both management and the board.
PetSmart replied with the usual pablum about welcoming "open communications with its shareholders" and valuing "constructive input toward the goal of enhancing shareholder value." Yadda yadda yadda.
Whether its top dogs intend to play nicely with this particular aggressive shareholder remains to be seen. Jana prefers working for change quietly off camera. But Canadians know what could happen if PetSmart politely tells Jana's founder Barry Rosenstein to take a hike.
When Mr. Rosenstein couldn't get what he wanted from Agrium Inc., the Calgary fertilizer heavyweight found itself in a very public and nasty 10-month battle for the hearts and votes of its shareholders. Agrium managed to defeat the hedge fund's campaign to install its own board members and break up the company.
After the contentious proxy vote, Mr. Rosenstein accused the board of violating "all precepts of good corporate governance, fair play, ethical behaviour and democracy."
It's too early to gauge how heated the Jana-PetSmart relationship will become. But PetSmart definitely needs to learn some new tricks if it wants to keep the hounds at bay.