A [Socially-Based] Short Thesis For Petsmart, Inc.

A total put-down to pets everywhere

Petsmart, Inc. (ticker "PETM") has seen its shares appreciate over 350% since early 2009.  Recent time series action is setting off some warning signals, and it's time to take a good, hard look at this company.  What will drive sales for Petsmart?  Increased pet ownership and increased per-pet spending.  What if we're beginning to see a structural shift in ownership rates (a negative shift)?  The above graphic depicts Google search trends for "put my dog to sleep," and "put my cat to sleep."  The grim reality of the situation is that more people are searching for this option.  So what?  Could be coincidental.  These searches are likely slightly-tainted by people who have insomniacs for pets, but we can live with this assumed noise.

The delta for pet euthanasia is positive.  Let's look at the delta for the puppy/kitten refresh rate:

Search terms "buy a puppy," (blue) and "buy a kitten" (red)

 I must say that trend for puppy/kitten love isn't as strong as the anti-puppy/anti-kitten trend.

PETM's last three quarters have seen decelerating sales, gross profit, and net income for PETM.  There's a your fundamental chink if you were looking for one.  When we combo this with the recent time series weakness and the Google provided [negative] social factors - we begin to see a story emerge of a dog...an equity dog. 

How would one play [hypothetically of course] a potential breakdown in the stock?  Hypothetically, one could buy an April '13 55/60 put spread for about $1.78 (or $2.00 if you have zero patience) if you're an options lover.  If one doesn't have the dexterity to write options, one can purchase the April '13 60 put for 2.25.  If one prefers short sales (as I often do), then sell PETM on a break below $64.80 (stop at $67.80) .  If 11/14 earnings come in weak, you're almost guaranteed a quick 12% drop (with realistic expectations of 21% downside over the next few months).  The bubble-ish nature of this stock means the downside move could be very brisk, very dramatic, and quite profitable for those who are positioned for the fall.