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PetSmart Slumps as Deutsche Bank Slaps With 'Sell'

NEW YORK (TheStreet) - PetSmart (PETM) shares were sinking 2% on Monday after Deutsche Bank analyst Mike Baker slapped a sell rating on the pet goods retailer over concerns that the growing acceptance of online pet supplies and goods purchases at cheaper outlets will eventually cut into sales at the Phoenix-based company's business.

Baker reduced his rating to "sell" from "hold" in a Jan. 6 research note to clients over concerns that this increased competition from places like Amazon's (AMZN) wag.com and others like PetFlow.com is resulting in slowing customer traffic at PetSmart stores.

"We were cautious on PETM heading into 2013 and remain cautious going forward as well," Baker writes. "While we continue to believe that PETM is a very well-run company and is the best in class operator in the space, we continue to see industry headwinds that should create a difficult comp environment in 2014 and beyond. We continue to see ecommerce as a threat. But, we also believe a slowing growth rate on super premium food will impact traffic, and coupled with minimal inflation will weigh against total comps as well."

Baker reduced his earnings estimates for 2014 and 2015 to $3.95 and $4.39, respectively, below consensus levels.

Analysts, according to Thomson Reuters, expect the company to post earnings of $3.97 a share for the full year ending in January. The average analyst expects earnings of $4.49 a share for the January 2015-ending year.

He also cut his 12-month price target by $8 to $65.

PETM ChartPETM data by YCharts

"Comps have decelerated [six] quarters in a row, and we think they will remain in the 2% range going forward, primarily due to slowing traffic trends," the note says.

Baker also believes that the Phoenix-based company is sacrificing gross margins as the company implements more "aggressive online pricing," most notably, with free shipping, to compete with Amazon's wag.com, the note says.

That said, Amazon and its sister Web site seem to have "relatively muted impact" on PetSmart sales, Baker acknowledges, which he attributes to the lack of widespread acceptance of buying pet goods online.

"One of the reasons that e-commerce has not had a bigger impact is that consumers still haven't come to embrace the idea of home delivery of food," Baker writes. "In a recent survey from Pethealth Inc., the number one reason why consumers did not want to shop for dog food online was shipping costs and in fact, when asked if they would use an online dog food option if shipping were free, 89% said yes."

"This suggests to us that as consumers learn that many retailers are now offering free dog food shipping above very makeable minimums, more will decide to use this channel. This will either result in share loss away from PETM and towards online retailers, showing up most notably in negative traffic trends," he adds.

PetSmart shares were down 2.3% to $70.11 at last check.

--Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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