* Jana reports 9.9 pct stake in co
* PetSmart shares rise as much as 15 pct (Adds statement from PetSmart)
By Sruthi Ramakrishnan
July 3 (Reuters) - Activist hedge fund Jana Partners LLC said it planned to ask PetSmart Inc to explore a sale, underlining troubles at the pet products retailer.
PetSmart shares rose as much as 15 percent on Thursday.
Jana Partners reported a 9.9 percent stake in PetSmart, making it the company's largest shareholder. (1.usa.gov/1orkOfN)
"PetSmart's customer traffic has been declining due to the impact of its aging store base and growing e-commerce competition, which management was late to address," Raymond James analyst Dan Wewer wrote in a note.
The company lowered its sales outlook in May for the year ending January, citing a "challenging and volatile consumer environment and competitive market".
It also reported a 0.6 percent drop in same-store sales for the quarter ended May 4 - the first drop in seven years.
PetSmart could attract private equity interest - given its stable business generating solid free cash flow - an analyst, who did not wish to be named, said. The company could fetch 7 billion-$8 billion, he added.
The company was valued at $5.93 billion at Wednesday's close.
"PetSmart welcomes open communications with its shareholders and values constructive input toward the goal of enhancing shareholder value," the company said, without elaborating further.
Central Garden & Pet Co received a $750 million offer last month from Philip Falcone's Harbinger Group Inc for its pet products business. Harbinger also offered $10 per share for the whole company, valuing it at more than $1 billion including debt.
Jana Partners said on Thursday it expects to hold discussions with PetSmart's management and board, shareholders and other interested parties.
The investor also plans to discuss the company's capital structure - including returns to shareholders - improving disclosures as well as management and board composition.
Jana, run by Barry Rosenstein, often pressures companies it invests in to change strategies or sell themselves. It disclosed a stake in grocery chain Safeway Inc in September and asked it to explore strategic alternatives.
Safeway agreed to be acquired by private equity firm Cerberus Capital Management in a deal valued at about $9.4 billion in March.
Jana also took a large stake in Redbox video rental operator Outerwall Inc last year and asked for a sale. It lost a battle to break up fertilizer company Agrium Inc when all its nominees failed to get elected to its board.
PetSmart shares, among the top percentage gainers on the Nasdaq, were up nearly 13 percent at $67.46 after touching a high of $69.
More than 13.4 million shares had changed hands by 12.10 p.m. on Thursday - about 4 times the stock's 10-day average volume. (Reporting by Sruthi Ramakrishnan in Bangalore; Editing by Joyjeet Das)