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HolidayBuyer's Guide
Tech Industry

PETsMART absorbs its online namesake

PETsMART Inc. (Nasdaq: PETM) said Wednesday it would absorb PETsMART.com and its losses.

Under the terms of the deal, PETsMART will contribute $20 million in cash and its catalog business valued at $10 million to form an integrated direct marketing subsidiary.

Once the deal is completed PETsMART will own about 81 percent of PETsMART.com. PETsMART, however, will also take a hit to the bottom line. The company said it will report a third quarter profit of 2 cents a share to 3 cents a share. Analysts were looking for a profit of 7 cents a share, according to earnings tracking firm First Call. Part of PETsMART's problems this quarter were attributed to trouble implementing a system from SAP (NYSE: SAP), the company said.

A growing trend

PETsMART.com was perceived to be a winner in the online pet store race because of its ties to its brick-and-mortar partner. PETsMART owned about half of the online venture and had hoped to take it public. PETsMART.com was formed in 1999 after PetJungle.com, a creation of Internet incubator idealab!, sold a big stake PETsMART and changed its name.

The deal is likely to one of many where dot-com entities are folded into brick-and-mortar partners. Barnes & Noble (NYSE: BKS) recently announced tighter integration with Barnesandnoble.com (Nasdaq: BNBN). Other offline businesses are yanking plans for a dot-com IPO. Playboy (NYSE: PLA) said Tuesday it pulled IPO plans for Playboy.com.

The reason behind the consolidation of offline and online properties is simple: Without a big IPO, there's no reason to keep dot-com units separate. PETsMART.com filed for an IPO in February, just before the dot-com plunge. Once PETsMART.com is folded into PETsMART, the company will have a revenue run rate of $50 million and be funded until profitability.

What a difference a year makes

Online pet stores have imploded this year. Just a year ago, PETsMART.com competed with well funded Pets.com, Petopia.com and Petstore.com. Pets.com's sock puppet was in the Macy's Thanksgiving Parade in New York.

The consolidation happened quickly. Pets.com bought Petstore.com, but still closed shop earlier this month after blowing its funding on sock puppet commercials. Petopia.com still operates a Web site.

PETsMART.com was lucky. It'll live on as a unit of its brick-and-mortar partner. Roughly a year ago, PETsMART.com CEO Tom McGovern told ZDII there would be two players left standing in the pet category. He was right.


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