Petsmart 2005 Annual Report Download - page 45

legal settlements; partially offset by increases in advertising and store opening expenses. Compensation costs
decreased as a result of a reduction in stock-based compensation recognized, charges incurred in fiscal 2004 related
to workers’ compensation reserves which were not incurred at the same levels in fiscal 2005 and lower bonus
expense recognized in fiscal 2005. Legal settlements recorded as a reduction of OG&A expenses were larger in
fiscal 2005 as compared to fiscal 2004 primarily due to a one-time legal settlement recorded in the first quarter of
fiscal 2005 and a Visa/Mastercard settlement recorded in the fourth quarter of fiscal 2005. Advertising expenses
increased as a result of our “Mart” to “Smart” advertising initiative. Store opening expenses increased as a result of
an increase in new store openings and the timing of openings.
Interest Income
Interest income increased to $9.0 million during fiscal 2005 compared to $4.8 million during fiscal 2004
primarily due to an increase in interest rates.
Interest Expense
Interest expense increased to $31.2 million for fiscal 2005, from $21.3 million for fiscal 2004. The increase
was primarily due to an increase in capital lease obligations in fiscal 2005.
Income Tax Expense
For fiscal 2005, income tax expense was $106.7 million representing an effective rate of 36.9%. For fiscal
2004, income tax expense of $83.4 million represented an effective rate of 34.6%. The increase in the effective tax
rate from fiscal 2004 to fiscal 2005 was primarily due to a tax benefit of $7.7 million recorded in the second quarter
of fiscal 2004 related to the expected utilization of $22.1 million of net operating losses previously considered
unavailable. We also recorded additional tax expense of $2.0 million in the fourth quarter of fiscal 2005 and
$2.3 million in the third quarter of fiscal 2005 resulting primarily from adjustments to deferred tax assets and
liabilities. Offsetting these increases to the effective rate, during the third quarter of fiscal 2005, we recorded a
reduction to income tax expense of $6.1 million related to reductions in certain tax reserves that we determined
would no longer be needed.
Fiscal 2004 Compared to Fiscal 2003
Net Sales
Net sales increased $370.3 million, or 12.4%, to $3.4 billion for fiscal 2004, compared to net sales of
$3.0 billion for fiscal 2003. The sales increase was due to 83 net new stores and a 6.3% increase in comparable store
sales for fiscal 2004. Services sales, which are included in our net sales and include grooming, pet training, pet
boarding and day camp operations, increased by 24.4%, or $47.2 million, to $240.7 million.
Gross Profit
Gross profit increased as a percentage of net sales to 30.9% for fiscal 2004, from 30.1% for fiscal 2003. The
increase primarily reflected higher margins on product sales during fiscal 2004 compared with fiscal 2003 due to
improved buying practices and our ongoing pricing strategies. We also experienced lower inventory shrinkage and
other inventory related expenses as a percentage of sales in fiscal 2004 compared to fiscal 2003. In addition,
occupancy costs recorded in cost of sales decreased as a percentage of sales in fiscal 2004 compared to fiscal 2003.
These items were partially offset by higher freight costs as a result of increased fuel prices.
Operating, General and Administrative Expenses
Operating, general and administrative expenses increased as a percentage of net sales to 23.2% for 2004, from
22.8% for 2003. The increase was primarily due to increases in workers’ compensation, general liability and
medical insurance costs as well as higher repairs and maintenance costs in our stores. The higher insurance costs
were primarily due to increases in actuarial estimates for workers’ compensation and general liability claims. In
addition, we recognized a $4.1 million expense in the second quarter of fiscal 2004 primarily for the retirement of
25