Petsmart buying controlling interest in e-commerce affiliate

Pet-supply retailer Petsmart Inc. today announced plans to acquire a controlling interest in its unprofitable Petsmart.com e-commerce affiliate, which until now has been operated under a joint venture set up last year with a small online pet-supply company.

Phoenix-based Petsmart also warned that its third-quarter financial results will be below expectations due partly to lingering start-up problems related to an installation of SAP AG's retail applications completed in 1999. The company said "residual effects resulting from last year's difficulty in implementing the SAP system" contributed to higher-than-expected "shrink levels" that affected its product inventories during the quarter.

Petsmart is the second SAP Retail user to disclose in the past few days that its earnings are being affected by issues surrounding an implementation of the software. Last Friday, fabric retailer Jo-Ann Stores Inc. said out-of-stock problems related to its use of the SAP Retail applications played a role in reducing its third-quarter earnings below what the company originally projected (see story).

However, Petsmart said its SAP system "is now providing sound data" on its pet-store inventories. Similarly, Jo-Ann last week said the out-of-stock problems being experience by its retail stores had been isolated to the company's crafts business.

Petsmart said the proposed deal with Petsmart.com will give it 81% ownership of the e-commerce venture. As part of the agreement, Petsmart will invest another $20 million in cash in Petsmart.com and combine its pet-supply catalog business with the Web site to create an integrated direct marketing subsidiary.

The move by Petsmart comes just a week after Pets.com, one of Petsmart.com's chief online retailing rivals, announced that it plans to shut down after "a lengthy and exhaustive effort" to find new financing or a buyer for the San Francisco-based company proved unsuccessful (see story). Pets.com stopped taking orders on its Web site last Thursday and is now trying to sell off its major assets.

Pasadena, Calif.-based Petsmart.com currently is jointly owned by Petsmart and a company that previously was known as PetJungle.com. The joint venture processes most of its orders through a Petsmart distribution center in Rochester, N.Y., which handles the logistics of warehousing products and shipping them to online shoppers (see story). But Petsmart.com's Web site is run by systems that are separate from the SAP Retail applications installed by Petsmart.

Petsmart officials couldn't be reached for comment this morning on the planned ownership change. Phil Francis, the company's chairman, president and CEO, said in a statement that the deal with Petsmart.com "will allow us to fully capitalize on the competitive synergies of our bricks, clicks and catalog model."

With Petsmart's catalog business included, Petsmart.com is expected to reach a run-rate of more than $50 million in annual sales this year, according to today's announcement. Petsmart said it doesn't anticipate having to provide the e-commerce unit with additional funding beyond the new $20 million investment, which is scheduled to be made in two equal installments -- one when the final deal is signed, the other during the first half of next year.

The purchase of the controlling interest in Petsmart.com is due to be completed this month, and Petsmart said more details will be disclosed when the retailer reports its third-quarter results on Nov. 28. Petsmart, which operates 530 retail stores in the U.S. and Canada, said it now expects to show a small profit for the third quarter on revenue of about $540 million.

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