In order to experience some modicum of success as a writer, you need to provide compelling content that people want to read.   In our media blitzed society this generally requires one to take a provocative position on some issue.  While I certainly try to challenge my readers to think more broadly on a range of topics related the pet industry, there are only a few storylines where my rabble-rousing has enjoyed a high level of consistency;  the topic of Petco is one of them.

Again, let me state I have nothing against the company per se.  In fact, Petco, and its better looking twin sister Petsmart, provide a necessary and valuable service to both companion animal owners and the industry at large.   That said, they suffer from a fundamental structural challenge, namely their access to cheap high quality labor is limited, which undermines their ability to effectively service customers on a consistent basis.

The other area where I say the “dog has fleas” with respect to Petco is when comparing it to Petsmart.   I wrote about it here.   The basic premise was while the industry had grown nicely since Petco was taken private for a second time, the financial disclosures related to its recent debt refinancing implied that Petsmart had put Petco in its rear view mirror.  I then left it at that.

Unbeknownst to me, San Diego Reader columnist Don Bauder decided to pick up my ball and walk it over to Petco headquarters (also located in San Diego).   He put my musings to Petco Chief Financial Officer Mike Foss here, in an article questioning the benefits of buyouts.

Notably, in Bauder’s article, Foss asserted that “By virtually every single metric — sales, profit, cash — we’re better off than in 2006.”  Given the size of the debt refinancing it is easy to see how profits and cash are up, because interest costs are down and debt is up, albeit not enough to offset the decrease in the effective interest rate as, according to Foss, Petco’s refinancing is saving it $18 million in annual interest expense.   It’s not hard to believe that sales are up either given that the market has grown consistently over the past five years and the pet majors have maintained the lions share of the retail industry’s sales.  What is more notable to me, however, is that Foss said nothing about operating cash flow or same-store-sales, the two most important metrics to measure the health of a retail property.

Net net, while Foss may dispute my assertion, he certainly did little to refute it.   Further, if my analysis was really that wide of the mark, he wouldn’t even have taken the time to put his spin on the situation.

/bryan

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