PetSmart Shares Surge on Jana Stake

NEW YORK (The Deal) -- Jana Partners on Thursday disclosed a 9.9% stake in PetSmart (PETM) saying in a regulatory filing it intends to hold discussions with the retailer's board about options including a potential sale of the company.

New York-based Jana said in a filing that it has acquired 9.8 million shares, including 4.7 million options, because it believes the shares are undervalued.

Jana in its filing said it intends to talk to PetSmart's board about "exploring a sale, improving operating performance, the company's capital structure" and management and board composition.

Phoenix-based PetSmart operates more than 1,300 pet stores and about 200 dog and cat boarding facilities in the U.S., Puerto Rico and Canada. The company as of May 4 had $236.9 million in cash on its balance sheet and total debt of $519.4 million.

Pet stores are generally considered a safe haven during a recession, as spending on pets tends to hold up even as other economic indicators falter. But PetSmart shares have been under pressure of late on fears that growth at the company is playing dead.

The company reported that comparable-store sales declined by 0.6% during its fiscal first quarter, versus 3.5% comparable-store sales growth in the same three months of 2013 and a 7% uptick two years ago. Analysts have voiced concern that PetSmart's sales are being hurt by online retailers including Amazon.com (AMZN), which has made a major push into the pet retail market.

PetSmart shares had fallen by more than 10% in the first half of 2014 before getting a pop Thursday after Jana's disclosure. The stock traded up more than 14%, or $8.53 apiece, to $68.34 on Thursday morning.

Pet stores have been popular among investors of late. Philip Falcone's Harbinger Partners last month launched a $505 million offer to acquire Central Garden & Pet (CENT), sending shares of the pet and lawn products company up nearly 10%.

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