Photograph by Victor J. Blue — Bloomberg/Getty Images

A regulatory filing notes the pet supplies chain could change its capital structure.

By Phil Wahba
July 7, 2014

PetSmart PETM said in a terse regulatory filing on Monday that it has been “reviewing” ways of changing its capital structure, with a focus on returning capital to shareholders.

While not committing to taking any specific steps, the statement was clearly in response to activist investor Jana Partners’ disclosure on Thursday that it had taken 9.9% stake in the pet store chain and intended to talk to management about ways extracting a better return from the retailer, even potentially selling the company.

Long an industry leader, PetSmart has run into a cool streak of late, making it an inevitable target of some activist investor. In May, it reported its first quarter of declining comparable sales in seven years. And more embarrassingly, it has finally realized that e-commerce is not going anywhere, allowing Amazon AMZN to use its Prime free delivery program to steal away customers not willing to schlep big bags of dog food or kitty litter.

While PetSmart’s three-sentence filing does not make any reference to Jana, it is clear the retailer is taking Jana seriously, and with reason: Jana almost always wins.

Jana, a hedge fund with $10 billion under management and led by Barry Rosenstein, in the last year alone has gotten its way with companies: movie-rental service Redbox’s parent, Outerwall OUTR (previously known as Coinstar) and grocery-store chain Safeway SWY each took steps advocated by Jana. In the case of Safeway, which it had been pushing to do some M&A deals, include potential selling itself, Jana made a huge killing: it started buying shares last summer, just as the grocer’s merger talks with Cerberus-owned Albertsons got serious, which sent shares soaring. Cerberus ultimately bought Safeway in a $9.4 billion in March.

Even when it isn’t being an activist, meaning not pushing for big changes to strategy and management, Jana typically manages to reap a bonanza: in 2012, Jana got into Barnes & Noble BKS shares soon before Microsoft MSFT announced it was buying a stake in the bookseller’s Nook business and got out before shares fell back to earth.

Jana is widely considered in the investment community to be very methodical and thoughtful in its investments, eschewing wars of words. While Rosenstein has been known to go on CNBC to press his case when targeting a wayward management team, he has always Icahn-style scorched earth techniques. Earlier this winter, Icahn famously accused eBay’s EBAY CEO and its board of incompetence and even of being unethical, and lost that fight. To be sure, Icahn wins far more often than he loses, but as Jana shows, sometimes being understated works better.

As for PetSmart, a Bloomberg analysis shows Jana may have a point: the percentage of profit PetSmart pays out as a dividend is about 18%, roughly half of the 35 percent average ratio for companies in the Standard & Poor’s 500 Index.

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