Petsmart 2005 Annual Report Download - page 66

PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 — The Company and its Significant Accounting Policies
Business
PetSmart, Inc. and subsidiaries (the “Company” or “PetSmart”), is North America’s leading provider of food,
supplies, accessories and professional services for the lifetime needs of pets. As of January 29, 2006, the Company
operated 826 retail stores. The Company offers a broad line of products for all the life stages of pets and is the
nation’s largest provider of pet services, which include professional grooming, pet training, boarding and day camp.
PetSmart is a leading direct retailer of pet and equine products and supplies. The Company made full-service
veterinary care available in 525 of its stores as of January 29, 2006. As of January 29, 2006, 513 of the veterinary
hospitals were operated by Medical Management International, Inc., or MMI, a third-party operator of veterinary
hospitals, under the registered trade name of Banfield, The Pet Hospital. See Note 3 to the Notes to Consolidated
Financial Statements for a discussion of the Company’s ownership interest in MMI. The remaining 12 hospitals are
located in Canada and operated by other third-parties.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly and majority-owned
subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.
The Company has no investments in which it has the ability to exercise significant influence over the investee.
We account for investments for which the Company does not have the ability to exercise significant influence and
for which there is not a readily determinable market value under the cost method of accounting. The Company
periodically evaluates the carrying value of its investments accounted for under the cost method of accounting, and
as of January 29, 2006 and January 30, 2005, such investments were recorded at the lower of cost or estimated net
realizable value.
Fiscal Year
The Company’s fiscal year ends on the Sunday nearest January 31. Fiscal 2005, 2004 and 2003 each included
52 weeks.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Policies related to inventory valuation
reserves, insurance liabilities and reserves, reserve for closed stores, reserves against deferred tax assets and tax
contingencies require significant estimates. Actual results could differ from those estimates.
Accounting Change
The Company has stock-based compensation plans including stock option plans, employee stock purchase
plans and restricted stock plans. Prior to January 31, 2005, the Company accounted for these plans under the
recognition and measurement provisions of Accounting Principles Board Opinion, or APB, No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations, as permitted by Financial Accounting Standards Board, or
FASB, Statement of Financial Accounting Standards, or SFAS, No. 123, “Accounting for Stock-Based Compen-
sation.” Effective January 31, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R),
“Share-Based Payment,” using the modified retrospective transition method, which allows the Company to adjust
prior periods by recognizing compensation cost in the amounts previously reported in the pro forma footnote
disclosure under the provisions of SFAS No. 123.
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