Petsmart 2005 Annual Report Download - page 42

preferences, age of merchandise, seasonal trends and decisions to discontinue certain products. If assumptions
about future demand change or actual market conditions are less favorable than those projected by management, we
may require additional reserves. During fiscal 2005, we increased our obsolescence reserve to account for certain
obsolete inventory by $7.3 million to $8.5 million, as of January 29, 2006.
Reserve for Closed Stores
We continuously evaluate the performance of our retail stores and periodically close those that are under-
performing. Closed stores are generally replaced by a new store in a nearby location. We establish reserves for
future occupancy payments on closed stores in the period the store is closed, in accordance with SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities.” These costs are classified in operating, general
and administrative expenses in the Consolidated Statements of Operations. We calculate the costs for future
occupancy payments, net of expected sublease income, associated with closed stores using the net present value
method, at a credit-adjusted risk-free interest rate, over the remaining life of the lease. We use judgment to estimate
the underlying real estate market related to the expected sublease income and timing of the sublease start date, and
we can make no assurances that additional charges for these stores will not be required based on the changing real
estate environment.
As of January 29, 2006 and January 30, 2005, we had 19 and 17 stores included in our closed store reserve, of
which 12 and 12 were under sublease agreements, respectively. In addition to the stores with sublease agreements as
of January 29, 2006, we have assumed that three stores will have sublease income in future periods, which
represents a $1.5 million reduction to the reserve. If these sublease assumptions were extended by a year from the
anticipated commencement date of the assumed sublease term, the reserve would increase by approximately
$0.5 million. We closed seven stores in fiscal 2005 and nine stores in fiscal 2004, of which two stores in fiscal 2005
closed as scheduled due to lease expiration and two stores were closed under lease termination agreements. The
closed store reserves are as follows (in thousands):
January 29,
2006
January 30,
2005
Total remaining gross occupancy costs ........................... $47,485 $ 46,772
Less:
Expected sublease income ................................... (36,002) (35,215)
Interest costs ............................................. (1,879) (2,416)
Closed store reserve ......................................... $ 9,604 $ 9,141
Insurance Liabilities and Reserves
We maintain standard property and casualty insurance on all our properties and leasehold interests, product
liability insurance that covers products and the sale of pets, self-insured health plans, employer’s professional
liability and workers’ compensation insurance. Property insurance covers approximately $1.2 billion in buildings
and contents, including furniture and fixtures, leasehold improvements and inventory. Under our casualty and
workers’ compensation insurance policies through January 31, 2004, we retained the initial risk of loss of
$0.25 million for each policy per occurrence. Effective February 1, 2004, we engaged a new insurance provider.
Under our casualty and workers’ compensation insurance policies with the new provider, we retain an initial risk of
loss of $0.5 million for each policy per occurrence on or subsequent to February 1, 2004. We establish reserves for
losses based on semi-annual independent actuarial estimates of the amount of loss inherent in that period’s claims,
including losses for which claims have been incurred but not reported. Loss estimates rely on actuarial observations
of ultimate loss experience for similar historical events, and changes in such assumptions could result in an
adjustment to the reserves. As of January 29, 2006 and January 30, 2005, we had approximately $54.2 million and
$41.6 million, respectively, in reserves related to casualty, self-insured health plans, employer’s professional
liability and workers’ compensation insurance policies.
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