Petsmart 2005 Annual Report Download - page 41

• We added 100 net new stores during fiscal 2005, and at the end of the fiscal year, operated 826 stores. In
addition, we opened 16 new PetsHotels and six Doggie Day Camps. We expect to open approximately 90 net
new stores and 30 new PetsHotels in fiscal 2006.
• Comparable store sales, or sales in stores open at least a year, increased 4.2% during fiscal 2005 on top of a
6.3% increase during fiscal 2004. We project same store sales growth in the mid-single digits for fiscal 2006.
• Services sales increased 24.2% to $298.9 million, or 7.9% of net sales for fiscal 2005. Services sales
increased 24.4% to $240.7 million, or 7.2% of net sales during fiscal 2004.
• Gross margins increased 40 basis points in fiscal 2005 compared to fiscal 2004 as we improved buying
practices and saw results from our ongoing pricing strategies and increased inventory levels resulting in
more of our costs being capitalized in inventory. Improved margins on product sales were partially offset by
increased occupancy and warehousing costs related to new store openings and the opening of our Illinois
distribution facility and increased inventory-related costs.
• Operating, general and administrative expenses decreased to 23.0% of net sales in fiscal 2005 compared to
23.2% of net sales in fiscal 2004 primarily due to a decrease in compensation costs and an increase in legal
settlements recognized, partially offset by increases in advertising and store opening expenses as a
percentage of sales.
• During fiscal 2005, we purchased approximately 9.9 million shares of our common stock for approximately
$265.0 million and we declared cash dividends totaling $0.12 per share.
• Cash capital expenditures for 2005 were $165.7 million, and we anticipate spending between $200 million
and $230 million for capital expenditures in fiscal 2006.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we
evaluate our estimates for inventory valuation reserves, insurance liabilities and reserves, reserve for closed stores,
reserves against deferred tax assets and tax contingencies. We base our estimates on historical experience and on
various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Under different assumptions or conditions, actual results may differ from these estimates. We believe the
following critical accounting policies reflect the more significant judgments and estimates we use in preparing our
consolidated financial statements.
Inventory Valuation Reserves
We have established reserves for estimated inventory shrinkage between physical inventories. Stores perform
physical inventories once a year, and between the physical inventories, the stores perform counts on certain
inventory items. Distribution centers and forward distribution centers perform cycle counts encompassing all
inventory items at least once every quarter or perform an annual physical inventory. Due to the holiday season, the
majority of the stores do not perform physical inventories during the last quarter of the fiscal year, but continue to
perform counts on certain inventory items. Therefore, as of the end of a reporting period, there will be stores with
certain inventory items that have not been counted. For each reporting period presented, we estimate inventory
shrinkage based on a two-year historical trend analysis. Changes in shrink results or market conditions could cause
actual results to vary from estimates used to establish the inventory reserves.
We also have reserves for estimated obsolescence and to reduce inventory to the lower of cost or market. We
evaluate inventories for excess, obsolescence or other factors that may render inventories unmarketable at their
recorded cost. Obsolescence reserves are recorded so inventories reflect the approximate net realizable value.
Factors included in determining obsolescence reserves include current and anticipated demand, customer
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