HedgeyeRetail Visual: PETM's Latent Commodity Exposure

Takeaway: $PETM's commodity inputs on its food biz (53% of revs) are ripping due to the drought. That's not helping its intermediate-term mgn outlook.

Conclusion: We wonder if the Street is fairly considering the relationship between commodity prices and PETM’s P&L. About 53% of PETM’s business comes from food, which is also the primary traffic driver in the stores. Relevant commodity prices have been ripping, and pricing power is minimal. It might be early to short, but with margins and productivity near peak, risk/reward looks unfavorable in the intermediate term.



History shows that the change in commodity prices (corn, chicken and beef) has a fairly low correlation to comp store sales. In other words, higher input costs don’t evenly through to the consumer.  In fact, look at 2006-2008, which was the last commodity spike. Comps actually went negative. See figures 1 and 3 below.


Comps started to recover in ’08 and into ’09 when commodity prices eased. But still not to a level great enough to exceed PETM’s occupancy hurdle – which we estimate to be about 4%. Note in that same chart that despite a comp recovery, margins were still trending lower.


Commodities are up about 60% since that 2009 trough, and PETM took comps higher by relying on categories other than food (services such as grooming, adoptions, training, vet services).  Note figure 2 below which shows mix going from 57% to 52% over the course of three years. As such, the company is now sitting at a peak comp on a peak margin – at a time when relevant commodities are ripping due to the drought.


The Street has generally not taken a stand on PETM in either direction headed into Wednesday’s print. The consensus is at the high end of management’s $0.61-$0.65 guidance, short interest is around 7-8% of the float, and there’s a fairly even dispersion between Buy and Neutral ratings.


In addition, in the grand scheme of big box retail, this is a decent-enough business – as sales comps are fairly predictable and inventory is easier to manage ( fish, parakeets and hamsters die at a lesser rate than apparel inventory goes out of fashion). Furthermore, compares don’t get tough on the top line for another two quarters. So it may be early to short.


But this is one that feels like risk reward does not favor the upside over the intermediate-term.


Figure 1: There's little evidence that PETM has any pricing power.

HedgeyeRetail Visual: PETM's Latent Commodity Exposure - petm1


Figure 2: Food as a Percent of mix has fluctuated.

HedgeyeRetail Visual: PETM's Latent Commodity Exposure - petm2


Figure 3: Commodity prices have little relationship with comps

HedgeyeRetail Visual: PETM's Latent Commodity Exposure - petm3

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more