Petsmart 2005 Annual Report Download - page 68

• Inventory shrinkage costs and valuation adjustments;
• Costs associated with operating our distribution network, including payroll and benefit costs, occupancy
costs, utilities costs and depreciation;
• Costs of services provided, including salaries of groomers and trainers;
• Procurement costs, including merchandising and other costs directly associated with the procurement of
product;
• Store occupancy costs, including rent, common area maintenance, real estate taxes, utilities and depreciation
of leasehold improvements and capitalized lease assets; and
• Reductions for vendor rebates, promotions and discounts.
Inventory Valuation Reserves
The Company has 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, the Company estimates the
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.
The Company also has reserves for estimated obsolescence and to reduce inventory to the lower of cost or
market. The Company evaluates inventories for excess, obsolescence or other factors that may render inventories
unmarketable at their recorded cost. Obsolescence reserves are recorded so that inventories reflect the approximate
net realizable value. Factors included in the determination of obsolescence reserves include current and anticipated
demand, customer 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, additional reserves may be required. During fiscal 2005, the Company increased its obsolescence
reserve to account for certain obsolete inventory by $7,251,000 to $8,534,000, as of January 29, 2006.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation. Depreciation is provided on
buildings, furniture, fixtures and equipment, and computer software using the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements and capital lease assets are amortized using the
straight-line method over the shorter of the lease term or the estimated useful lives of the related assets. Computer
software consists primarily of third party software purchased for internal use. Costs associated with the preliminary
stage of a project are expensed as incurred. Once the project is in the development phase, external consulting costs,
as well as internal labor costs, are capitalized. Training costs, data conversion costs and maintenance costs are
expensed as incurred. Maintenance and repairs to furniture, fixtures and equipment are expensed as incurred.
The Company’s property and equipment is depreciated using the following estimated useful lives:
Buildings ................................................ 39years or term of lease
Furniture, fixtures and equipment .............................. 2-12years
Leasehold improvements ..................................... 3-20years
Computer software ......................................... 3-7years
F-9
PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)