[Please refer to Appendix. PetSmart, Inc. (PETM) 3Q Preview: Expect In-Line Results - Survey Work Supportive of MSD Comps RESEARCH UPDATE

Transcription

1 November 12, 2012 Baird Equity Research Hardline & Broadline Retail PetSmart, Inc. (PETM) 3Q Preview: Expect In-Line Results - Survey Work Supportive of MSD Comps Thoughts on 3Q. Maintaining comp and EPS estimates of +5.7% and $0.63 (+26% Y/Y) as our channel checks and proprietary survey of industry players suggest another quarter of solid growth, albeit at a modestly softer pace than the particularly robust 1H12 levels. With Street models already incorporating a deceleration vs. 2Q's 7. comp as well, modest slowdown unlikely to come as a surprise. Expect in-line 3Q. Results out Wednesday (11/14) post-close. Our checks/survey work suggest some modest slowing across the pet industry from particularly robust growth in 1H12. As such, we feel comfortable with the deceleration implied by our 5.7% comp estimate (vs. 2Q's 7%; +MSD guidance). Our/Street's $0.63E EPS sits at the high end of management's $0.59-$0.63 plan. Survey work supportive of MSD comps. Our PSS index (a decent directional indicator of PETM comps last 5+ years) tracked to 2.12 in 3Q from 2.29 in 2Q. Accordingly, we view results to be supportive of +L-MSD demand (vs. 1H12's +M-HSD level) across the pet industry in 3Q. At PETM, new/exclusive merchandise and continued strength in pet adoptions point to another quarter of solid traffic gains (2%-3%) despite a tough compare. Inflation expected to moderate (~50bps in 3Q), though trade-up to higher-end goods should again help boost average ticket. EBIT margin expansion on tap. Though mix remains a headwind, rate improvement within categories plus cycling some more aggressive promotions last year should drive merchandise margin expansion in 3Q (modeling ~30bps). When combined with fixed cost leverage, we forecast overall GM to rise 80bps. With SG&A growth targeted at 9%, our model assumes modest expense deleverage. As such, EBIT margin expansion (~70bps) is expected to be driven entirely by GM improvement in 3Q. Thoughts on the stock. PETM's attractive/defensive industry, consistent execution, and shareholder-friendly capital allocation strategies form the foundation for one of the better stories in Hardlines retail today. That said, PETM's premium valuation embeds an expectation for continued earnings upside, and our survey work is indicating some modest near-term deceleration in industry growth. While incorporated in Street models, we prefer to look for better entry points into PETM shares. Our Neutral rating/$72 price target remain unchanged. RESEARCH UPDATE 1-Year Price Chart D-11 J-12 Stock Data F-12 M-12 A-12 M-12 Rating: Neutral Suitability: Average Risk Price Target: $72 Price (11/9/12): $65.99 Market Cap (mil): $7,252 Shares Out (mil): Average Daily Vol (mil): 1.28 Dividend Yield: 0.8% EV/EBITDA (FY13E) 7.7x FCF Yield (FY13E) 6.9% Estimates FY Jan 2011A 2012E 2013E Q A 0.85 A Q A 0.71 A Q A 0.63 E Q A 1.22 E Fiscal EPS 2.55 A 3.40 E 3.80 E Fiscal P/E 25.9x 19.4x 17.4x Chart/Table Sources: Bloomberg and Baird Data J-12 EPS (Net): 2012 is a 53-week period J-12 A S-12 O-12 N-12 PetSmart, Inc. is a specialty provider of products, services and solutions for the lifetime needs of pets, operating ~1,240 stores in the U.S. and Canada. [Please refer to Appendix - Important Disclosures and Analyst Certification] Peter S. Benedict pbenedict@rwbaird.com Justin E. Kleber, CFA jkleber@rwbaird.com Matthew J. Larson mlarson@rwbaird.com

2 Details Checks Confirm Solid +L-MSD Pet Industry Demand in 3Q Proprietary survey results (feedback from nearly 70 pet supply retailers and vendors) point to sequentially slowing, though still healthy, +L-MSD industry sales trends across food/hardgoods/services in 3Q. Given these results and other industry checks we conducted during the quarter, we anticipate in-line results from PETM and feel comfortable with our current 5.7%E comp (embedding some deceleration vs. 2Q's robust 7. consistent with management's +MSD guidance). Sales trends slow modestly in 3Q. 49%/38% of our vendor/retailer contacts experienced better-than-expected sales in 3Q (compared to 68%/7 in 2Q) suggesting sales trends slowed some from historically robust levels across 1H12. Traffic trends at retail also moderated, as 78% of respondents reported stable to accelerating traffic flow in 3Q (below 1H12 s ~9 level). Healthy trends across categories in 3Q. Our retail contacts witnessed +MSD trends across food/hardgoods, as 67%/73% of retailers posted positive y/y sales growth (vs. 69%/79% in 2Q). Services trends remained modestly positive in 3Q (similar to 2Q). Comparing trends sequentially, many retail contacts pointed to mostly similar trends across food/hardgoods/services in 3Q vs. 2Q. Input cost/retail price increases continue - additional round of inflation on the horizon? With retailer input costs remaining elevated, 82%/56% of our retail contacts noted raising prices on food/hardgoods in 3Q (compared to 2Q's 92/39% level). Less than 2 of vendors raised prices (mostly consistent with our 2Q12 survey results). That said, price increases appear poised to (at least modestly) accelerate in late 2012/early 2013 as nearly half of producers expect more increases ahead, a notable step up from our initial 3Q12 sentiment. Interestingly, during our ongoing price checks across the wholesale retail channel, we noted the first price increase since 2011 (and second time during the history of our checks) across Costco's Kirkland brand super premium dry dog food prices (see chart below). With very fast inventory turns and the ability to steadfastly control price (especially across its private label brands), does this step up in super premium dog food prices at COST suggest an early indication of another round of pet food inflation in early 2013? Stay tuned... Pet Food Inflation At Retail Re-emerging? Costco Kirkland's Brand Super Premium Dry Dog Food Pricing 14% 12% 1 8% 6% 4% 2% -2% 3/31/10 4/30/10 5/31/10 6/30/10 7/31/10 8/31/10 9/30/10 10/31/10 11/30/10 12/31/10 1/31/11 2/28/11 3/31/11 4/30/11 5/31/11 6/30/11 7/31/11 8/31/11 9/30/11 10/31/11 11/30/11 12/31/11 1/31/12 2/29/12 3/31/12 4/30/12 5/31/12 6/30/12 7/31/12 8/31/12 9/30/12 10/31/12 COST Kirkland's Super Premium Chicken/Rice/Veg Dog Food ($/lb. y/y change) COST Kirkland's Super Premium Lamb/Rice/Veg Dog Food ($/lb. y/y change) Source: Analysis 2

3 Competition remains rational. Our recent retail checks again suggest a fairly rational promotional environment/competitive landscape currently. We again surveyed online pet retail sales trends in 3Q and continue to believe many online pet retailers are growing sales at +DD rates at minimal (or negative) levels of profitability. With many of these online retailers continuing their category/assortment expansion online, the competitive threat to PETM bears watching over the long term. Baird Pet Survey Sales Index Slows in 3Q 3.0 Baird Pet Survey Sales Index vs. PETM Comps (Reported & Core) 1 8% Sales vs. Expectations Index Baird PSS Index (vendor/retailer avg) PETM Reported Comps PETM Comps Ex-Inflation 6% 4% 2% -2% -4% -6% -8% -1 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 PETM Comp Store Sales 3Q12 Source: Company Reports, Estimates and Proprietary Research Adoption Trends Update and Pet Vendor Commentary Adoption trends remain healthy. 3Q-to-date adoptions data [released as part of Pethealth, Inc. s (PTZ.TO, $0.95, not covered) PetPoint Report] point to continued healthy trends as dog and cat adoptions were both up at a HSD pace y/y across August/September. Recall, pet acquisitions are important as they serve as key sales drivers for higher-margin hardgoods at PETM. Solid Adoption Trends Continue 15% Pet Adoption Trends (YoY % Change) 14% 1 5% 6% 5% 3% 2% 1% 3% 2% 1% 1% 11% 9% 9% 8% 5% 5% 3% 3% 2% 2% 2% 1% 1% 1 7% 5% 1% 1 8% 8% 8% 8% 8% 7% 5% 5% 1% -5% -1% -2% -3% -3% -1% -2% -1% -3% -6% -6% Dog Adoptions (YoY % change) -1 Cat Adoptions (YoY % Change) Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Source: The PetPoint Report, created by Pethealth, Inc. (PTZ.TO, $0.95, not covered), a leading provider of management software to animal shelters in North America 3

4 Public company pet vendor sentiment somewhat mixed in 3Q vs. 2Q. Aligning with our recent checks across food/consumables vendors, public company commentary pointed to continued challenges for more mature, non-natural brands, while trends for faster growing natural/super premium food/treats remain robust. Hill s Pet Nutrition (modestly decelerating trends vs. 2Q) Hill's total 3Q12 sales declined 1.5%, as recent pricing actions (+4. in 3Q) were more than offset by still-challenging volume declines and f/x headwinds. U.S. organic sales were down again (sixth consecutive quarter), though Hill's expects volume trends to improve in 4Q12, as December's relaunch of Science Diet and consumer adoption of Ideal Balance are expected to aid lagging volume trends. Procter & Gamble Pet Care (consistent two-year stacked trends 3Q vs. 2Q) PG's 3Q North America Pet Care volume improved to +MSD vs. 2Q's double-digit decline, though acceleration was largely a result of an easier comparison (year-ago period excluded volume pulled forward from prior price increases) that helped results. Nestle (mostly consistent trends vs. 2Q) Nestle's PetCare unit extended its 1H12 +HSD% momentum into 3Q, reporting nine-month organic growth of +7.8% y/y (near 1H12's ~8%). Management noted continued outperformance within North America, aided by good results across both cat (Friskies, Fancy Feast, Tidy Cats) and dog (Beneful). Public Company Pet Vendor Commentary Mixed in 3Q Company Selected Pet Brands Sales Growth 3Q11 4Q11 1Q12 2Q12 3Q12 Commentary Colgate-Palmolive (CL) Hill's Science Diet Hill's Prescription Diet Unit Volume % -1.5% % Pricing % FX % -0.5% Total Sales % % U.S. Volume Down Down Down Down Down Relaunching Science Diet line at the beginning of December (natural ingredients as opposed to by-products; new packaging). Ideal Balance momentum continues to build with 3Q volume 19% higher than 2Q Procter & Gamble (PG) Eukanuba Iams Natura Pet Care Volume (ex Natura acquisition) -MSD -LSD -DD -DD +MSD PG's Pet Care volume similar sequentially, though +MSD y/y due to easier comparison (low volume base period due to pricedriven volume pull forward into prior quarter) Nestle Alpo Beneful Dog Chow Friskies Fancy Feast Purina Tidy Cats PetCare Sales (cumulative y/y organic growth) 9-mo 12-mo 3-mo 6-mo 9-mo 3.9% 4.3% 7.7% 8.2% 7.8% PetCare extended positive momentum from earlier this year, noting good performances in cat (Friskies, Fancy Feast, Tidy Cats) and dog (Beneful) Source: Company Reports 4

5 Investment Thesis Merchandising efforts should continue driving incremental demand. Tailwinds from recent merchandising efforts - including the introduction of new SKUs across both hardgoods (Martha Stewart, GNC, Kong, Marvel Comics, Bret Michaels) and consumables (Blue Buffalo) - should remain in place and help drive incremental demand. Further, we expect PETM to continue refining and evolving its merchandising capabilities in order to differentiate itself and drive customer loyalty in the face of abundant competition. Stabilization in hardgoods helps margin profile. PETM's hardgoods business continues to improve as merchandising efforts gain traction and PETM leverages new/exclusive product introductions. While food/consumables growth will likely continue to outpace hardgoods, structural mix headwind on margins should moderate as hardgoods (which carry margins 2x those of consumables) share has stabilized. Expense/capex disciplines support strong free cash flow. Expense disciplines remain in place and capex is expected to hold around 2.25% of sales ($130-$150M) indefinitely, which should enable PETM to drive impressive free cash flow generation (targeting $450M+ in FY12). Primary uses of strong free cash flow remain dividends (targeting yield) and buybacks (targeting 4%-5% repurchase yield). Great story, but valuation keeps us Neutral. We continue to like PETM s expense/capex discipline, impressive FCF generation (supporting dividends and increased buybacks), and leverage (both in terms of sales/margins) to a recovery in hardgood sales. While traction from merchandising efforts should continue to build, valuation keeps us Neutral-rated for now. Price target rationale. Our $72 price target assumes shares trade at ~19x our FY13E EPS estimate, a premium to the stock's historical five-year average forward P/E multiple of ~15.5x given PETM's strong comp and EPS growth trends. Risks & Caveats Inflationary pressures. While we believe inflation will ultimately prove additive to comps, inability to pass through cost increases on to consumers in the form of higher prices could squeeze margins. Increased competition. While PETM differentiates itself through its extensive product selection and services offering, efforts by discounters, supermarkets, or specialty pet retailers to gain market share through aggressive pricing could impact sales and profits. Consumer trade-down. A large portion of PETM's sales are generated from premium pet food. If lower price point grocery brands (available at supermarkets, discounter, and warehouse clubs) begin to gain share at the expense of premium brands, PETM's sales could suffer. Reduced travel. If consumers cut back on travel plans, the financial performance of PETM's PetsHotels could be adversely impacted. Economic conditions. A contraction in consumer spending resulting from macroeconomic factors such as higher interest rates, rising fuel and energy costs, prolonged weakness in the housing market, and increased unemployment levels could negatively impact sales. Company Description PetSmart, Inc. is a specialty provider of products, services and solutions for the lifetime needs of pets in North America. The company's strategy is to attract and keep "pet parents" by becoming the preferred provider of "Total Lifetime Care" for pets. PetSmart stores carry a broad and deep selection 5

6 of high-quality pet supplies at everyday low prices ("EDLP"), including nationally recognized brand names, as well as an extensive selection of private brands. The company complements its product assortment with a selection of pet services, including grooming, pet training, boarding, and day camp. 6

7 PetSmart, Inc. Income Statement Q11 2Q11 3Q11 4Q Q12 2Q12 3Q12E 4Q12E 2012E 2013E ($ millions except per share data) Weeks in Period Comp Store Sales Growth 4.8% % 5.5% 5.4% 7.4% % % 4. Total Sales Growth 6.7% 6.8% % 7.7% 7.4% 9.4% 8.9% 8.1% 15.8% 10.7% 4. Merchandise Sales $5,041 $1,314 $1,300 $1,327 $1,460 $5,402 $1,440 $1,419 $1,435 $1,691 $5,985 $6,212 Service Sales Other revenue Net Sales $5,694 $1,490 $1,488 $1,498 $1,638 $6,113 $1,630 $1,620 $1,620 $1,896 $6,765 $7,039 Cost of Goods Sold 4,039 1,049 1,051 1,069 1,140 4,309 1,133 1,131 1,144 1,299 4,706 4,883 Gross Profit $1,655 $441 $437 $428 $498 $1,804 $497 $489 $476 $597 $2,059 $2,156 Operating, General & Administrative Expenses 1, , ,426 1,472 Operating Income $429 $122 $110 $101 $170 $503 $154 $136 $120 $223 $634 $684 Interest, Net (59) (14) (14) (14) (14) (57) (14) (14) (13) (13) (54) (51) Earnings before income taxes $370 $107 $96 $87 $156 $446 $140 $123 $107 $210 $580 $634 Income Taxes Net Income before equity interest Equity Interest Net Income $240 $71 $61 $56 $102 $290 $94 $79 $68 $132 $373 $406 Weighted Average Diluted Shares Diluted EPS $2.01 $0.61 $0.54 $0.50 $0.91 $2.55 $0.85 $0.71 $0.63 $1.22 $3.40 $3.80 % change 26% 33% 32% 3 19% 27% 38% 33% 26% 34% 34% 12% Extra Week Impact $0.16 $0.16 $0.00 Adjusted EPS $1.05 $3.24 $3.80 % change 16% 27% 17% Prior First Call Consensus EPS Estimate $0.55 $0.51 $0.48 $0.90 $0.73 $0.66 Actual EPS $0.61 $0.54 $0.50 $0.91 $0.85 $0.71 EPS Surprise $0.06 $0.03 $0.02 $0.01 $0.12 $0.05 Valuation Summary Q11 2Q11 3Q11 4Q Q12 2Q12 3Q12E 4Q12E 2012E 2013E P/E 32.9x 25.9x 19.4x 17.4x S&P 500 P/E 16.2x 14.1x 13.5x 12.6x Relative P/E FCF Yield 4.6% 6.3% 6.7% 6.9% Enterprise Value $7,497 $7,497 $7,497 $7,497 EBITDA $694 $780 $919 $973 EV/EBITDA 10.8x 9.6x 8.2x 7.7x Select Model Data Q11 2Q11 3Q11 4Q Q12 2Q12 3Q12E 4Q12E 2012E 2013E Units 1,187 1,192 1,197 1,210 1,232 1,232 1,241 1,249 1,279 1,278 1,278 1,324 Growth Rates (Y-O-Y) Units 3.3% 2.8% 2.8% 3.2% 3.8% 3.8% 4.1% 4.3% 5.7% 3.7% 3.7% 3.6% Sq Ft 2.9% 2.4% 2.4% 2.1% 2.4% 2.4% 2.5% 2.5% 3.7% 2.3% 2.3% 2.5% SSS 4.8% % 5.5% 5.4% 7.4% % % 4. Net Sales 6.7% 6.8% % 7.7% 7.4% 9.4% 8.9% 8.1% 15.8% 10.7% 4. Gross Profit 8.9% 9.2% 10.3% 10.1% 7.1% 9.1% 12.7% 11.9% 11.2% % 4.7% Operating Income 16.2% 17.8% 19.9% % 17.4% 26.8% 23.4% % Pretax Income 19.6% % 15.3% 20.7% 30.8% 27.6% % 29.9% 9.3% Net Income 20.9% 27.5% 26.4% 23.1% % 28.3% 21.8% 29.4% 28.5% 8.8% % of Net Sales Gross Profit 29.1% 29.6% 29.4% 28.6% 30.4% 29.5% 30.5% 30.2% 29.4% 31.5% 30.4% 30.6% SG&A 21.5% 21.5% % % % % 21.1% 20.9% Depreciation 4.1% % 3.6% 3.9% 3.7% 3.7% 3.7% 3.2% 3.5% 3.4% Operating Income 7.5% 8.2% 7.4% 6.8% 10.4% 8.2% 9.5% 8.4% 7.4% 11.8% 9.4% 9.7% Pretax Income 6.5% 7.2% 6.5% 5.8% 9.5% 7.3% 8.6% 7.6% 6.6% 11.1% 8.6% 9. Net Income 4.2% 4.8% 4.1% 3.7% 6.2% 4.7% 5.8% 4.8% 4.2% % 5.8% BPS Change Gross Profit (19) SG&A (2) (12) 8 (16) (71) (24) (41) (18) 12 (28) (21) (16) Depreciation (29) (26) (21) (29) (31) (27) (36) (30) (17) (45) (33) (16) Operating Income Pretax Income Net Income Free Cash Flow CFFO Capex (125) (31) (20) (28) (41) (121) (36) (35) (36) (28) (135) (148) FCF Capital Returns ROE 20.6% % 25.1% 25.1% 27.5% 29.1% 30.4% 33.1% 33.1% 36.5% ROA 9.8% 10.4% 10.9% 11.3% 11.7% 11.7% 12.6% 13.2% 13.6% 14.8% 14.8% 16.2% NOPAT Margin (ttm) 7.9% % 8.2% 8.3% 8.3% 8.5% 8.6% 8.6% 8.7% 8.7% 8.9% x Capital Turnover (ttm) 1.45x 1.46x 1.48x 1.50x 1.52x 1.52x 1.56x 1.59x 1.61x 1.67x 1.67x 1.74x ROIC (Lease-Adjusted, ttm) 11.38% 11.68% 11.98% 12.25% 12.59% 12.59% 13.22% 13.63% % 14.61% 15.47% Balance Sheet Items Cash & Equivalents $292 $228 $259 $271 $343 $343 $269 $282 $241 $357 $357 $370 Total Debt $567 $562 $564 $564 $559 $559 $552 $540 $537 $527 $527 $515 Net Cash ($275) ($334) ($305) ($293) ($217) ($217) ($283) ($258) ($296) ($170) ($170) ($145) Inventory % growth 9.3% 6.5% 2.5% 2.9% 4.7% 4.7% 7.5% 8.4% 7.3% 6.1% 6.1% 4.2% Inventory Turns (ttm) 6.54x 6.64x 6.49x 6.43x 6.64x 6.64x 6.77x 6.64x 6.52x 6.79x 6.79x 6.73x Source: Company Data, estimates. Peter Benedict (203) Justin Kleber, CFA (314) Matthew Larson (414) Please refer to Appendix - Important Disclosures and Analyst Certification 7

8 Appendix - Important Disclosures and Analyst Certification Covered Companies Mentioned All stock prices below are the November 11, 2012 closing price. Costco Wholesale Corp. (COST - $ Outperform) (See recent research reports for more information) Rating and Price Target History for: PetSmart, Inc. (PETM) as of /04/10 N:$30 05/18/10 N:$36 11/11/10 N:$41 03/03/11 N:$45 05/19/11 N:$47 08/18/11 N:$45 10/14/11 N:$46 02/15/12 N:$57 05/23/12 N:$62 08/16/12 N:$ Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q Created by BlueMatrix Rating and Price Target History for: Costco Wholesale Corp. (COST) as of /01/10 O:$70 10/04/10 O:$75 12/09/10 O:$80 02/07/11 O:$85 05/05/11 O:$91 10/06/11 O:$95 02/15/12 O:$97 05/25/12 O:$100 07/05/12 O:$105 10/09/12 O:$ Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q Created by BlueMatrix 1 Incorporated makes a market in the securities of PETM and COST. Incorporated and/or its affiliates expect to receive or intend to seek investment banking related compensation from the company or companies mentioned in this report within the next three months. Incorporated may not be licensed to execute transactions in all foreign listed securities directly. Transactions in foreign listed securities may be prohibited for residents of the United States. Please contact a Baird representative for more information. Investment Ratings: Outperform (O) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity market over the next 12 months. Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis on 8

9 safety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue and earnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Company characteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H - Higher Risk - Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Company characteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and price volatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high degree of volatility and risk. Company characteristics may include: unpredictable earnings, small capitalization, aggressive growth strategies, rapidly changing market dynamics, high leverage, extreme price volatility and unknown competitive challenges. Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of 12 months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by a subjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may be used to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons, and sum of the parts. Overall market risk, interest rate risk, and general economic risks impact all securities. Specific information regarding the price target and recommendation is provided in the text of our most recent research report. Distribution of Investment Ratings. As of October 31, 2012, Baird U.S. Equity Research covered 682 companies, with 5 rated Outperform/Buy, 49% rated Neutral/Hold and 1% rated Underperform/Sell. Within these rating categories, 14% of Outperform/Buy-rated, 7% of Neutral/Hold-rated and 13% of Underperform/Sell rated companies have compensated Baird for investment banking services in the past 12 months and/or Baird managed or co-managed a public offering of securities for these companies in the past 12 months. Analyst Compensation. Analyst compensation is based on: 1) The correlation between the analyst's recommendations and stock price performance; 2) Ratings and direct feedback from our investing clients, our institutional and retail sales force (as applicable) and from independent rating services; 3) The analyst's productivity, including the quality of the analyst's research and the analyst's contribution to the growth and development of our overall research effort and 4) Compliance with all of Robert W. Baird s internal policies and procedures. This compensation criteria and actual compensation is reviewed and approved on an annual basis by Baird's Research Oversight Committee. Analyst compensation is derived from all revenue sources of the firm, including revenues from investment banking. Baird does not compensate research analysts based on specific investment banking transactions. A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can be accessed at You can also call or write:, Equity Research, 24th Floor, 777 E. Wisconsin Avenue, Milwaukee, WI Analyst Certification. The senior research analyst(s) certifies that the views expressed in this research report and/or financial model accurately reflect such senior analyst's personal views about the subject securities or issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report. Disclaimers Baird prohibits analysts from owning stock in companies they cover. This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure and report performance of various sectors of the stock market; direct investment in indices is not available. Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the United States Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ from Australian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers and not Australian laws. Copyright 2012 Incorporated Other Disclosures The information and rating included in this report represent the Analyst s long-term (12 month) view as described above. The research analyst(s) named in this report may at times, discuss, at the request of our clients, including salespersons and traders, or may have discussed in this report, certain trading strategies based on catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report. These trading strategies may differ from the analysts published price target or rating for such securities. Any such trading strategies are distinct from and do not affect the analysts fundamental long-term (12 month) rating for such securities, as described above. In addition, Incorporated and/or its affiliates (Baird) may provide to certain clients additional or research supplemental products or services, such as outlooks, commentaries and other detailed analyses, which focus on covered stocks, companies, industries or sectors. Not all clients who receive our standard company-specific research reports are eligible to receive these additional or supplemental products or services. Baird determines in its sole discretion the clients who will receive additional or supplemental products or services, in light of various factors including the size and scope of the client relationships. These additional or supplemental products or services may feature different analytical or research techniques and information than are contained in Baird s standard research reports. Any ratings and recommendations contained in such additional or research supplemental products are consistent with the Analyst s long-term ratings and recommendations contained in more broadly disseminated standard research reports. UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W. Baird Limited holds an ISD passport. 9

10 This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed to private clients. Issued in the United Kingdom by Robert W. Baird Limited, which has offices at Mint House 77 Mansell Street, London, E1 8AF, and is a company authorized and regulated by the Financial Services Authority. For the purposes of the Financial Services Authority requirements, this investment research report is classified as objective. Robert W. Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the Financial Services Authority ("FSA") under UK laws and those laws may differ from Australian laws. This document has been prepared in accordance with FSA requirements and not Australian laws. Ask the analyst a question Click here to unsubscribe 10