PetSmart, Inc. (NASDAQ:PETM) shares are up 2.3 percent on the day after Longview Asset Management revealed a stake in the firm. Longview’s investment comes on the heals of Barry Rosenstein’s Jana Partners establishing a stake in PetSmart and sharks may be smelling blood in the water.
Board of directors’ quick reaction to Jana Partners stake in PetSmart
After Jana Partners acquired a 10% stake in PetSmart, Inc. (NASDAQ:PETM), the board of directors quickly reacted, reviewing potential changes to the company’s capital structure that could return cash to shareholders, regulatory filings reveal. When Jana Partner’s intentions in PetSmart were made public last week, the hedge fund made it known its goal was “significant return of capital to shareholders.” PetSmart appears to be reacting to that desire. Jana Partner’s Rosenstein has a reputation as an aggressive activist investor.
Last Wednesday shares of PetSmart jumped more than 12 percent when Jana declared ownership of 9.82 million shares of the company (including options to purchase 4.73 million shares of Common Stock), which account for 9.9% of its outstanding stock. Jana paid $341 million for the 9.82 million shares last week.
After saying PetSmart board was focused on returning capital, they made the quick decision to return cash to shareholders seem nonchalant. “The evaluation is ongoing and is consistent with the company’s commitment to driving shareholder value,” PetSmart was quoted as saying in a report.
PetSmart’s fight with online competition
PetSmart, Inc. (NASDAQ:PETM) has been in the cross hairs lately, as the brick and mortar retailer has been struggling to fight with online competition. Both sales and revenue have suffered. In the latest quarter, PetSmart’s revenue grew 1.1% but still missed Wall Street expectations. Same-store sales fell 0.6%.
The brick and mortar retailing space is no stranger to Jana. As previously reported in ValueWalk, Jana was instrumental in creating one of the larger retail grocery store mergers when Safeway was ultimately acquired by Cerberus Capital Management LP. The Safeway acquisition has similarities to PetSmart.
At the time the Pleasanton, Calif.-based grocery store operator, which has over 1,300 locations, had seen revenue falling and its business units running into trouble. In the fourth quarter of 2013, for instance, Safeway Inc. (NYSE:SWY) earned 35 cents per share, or $100 million, from continuing operations and excluding onetime charges it earned 53 cents per share. While the earnings were above Wall Street consensus estimates of 47 cents per share, compare this to 2012 earnings of 71 cents per share, or $170.7 million to see the revenue drop.
The issue to watch will be if Jana plans to drive for more than cash being returned to shareholders and instead looks for a more aggressive merger solution similar to what happened with Safeway.