Petsmart 2007 Annual Report Download

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PETSMART, INC. 2007 ANNUAL REPORT
Focused.
PETSMART, INC. 2007 ANNUAL REPORT

Table of contents

  • Page 1
    Focused. P E T S M A R T, I N C . 2 0 0 7 A N N U A L R E P O R T

  • Page 2
    ...information (www.petsmart.com). PetSmart provides a broad range of competitively priced pet food and pet products; and offers complete pet training, pet grooming, pet boarding, doggie day camp and pet adoption services. Since 1994, PetSmart Charities, Inc., an independent 501(c)(3) non-profit animal...

  • Page 3
    ... pet food recall by putting pets and their parents first. On the financial front, we delivered comp store sales growth of 2.4 percent for 2007. We ended the year with $333 million in operating cash flow, bought back 9.8 million shares of our stock, and paid quarterly dividends of 3 cents per share...

  • Page 4
    ... focusing on consistency and execution in our more than 1,000 stores. We'll manage store labor carefully and plan to complete the roll-out of our new labor management system in 2008. And, we'll introduce new processes and policies to drive efficiencies-from how we work with vendors at the front end...

  • Page 5
    ... file number 0-21888 PetSmart, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 94-3024325 (I.R.S. Employer Identification No.) 19601 N. 27th Avenue Phoenix, Arizona (Address of principal executive offices) 85027...

  • Page 6
    ... About Market Risk...Financial Statements and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...Controls and Procedures ...Other Information ...PART III Directors, Executive Officers and Corporate Governance ...Executive Compensation...

  • Page 7
    ..., as well as an extensive selection of proprietary or private label brands across a range of product categories. We complement our strong product assortment with value-added pet services, including grooming, training, boarding and day camp. All our stores offer complete pet training services and...

  • Page 8
    ... factors influencing our business are product selection and quality, convenience of store locations, store environment, customer service, price and availability of other services. Many premium pet food brands, which offer higher levels of nutrition than non-premium brands, are not currently...

  • Page 9
    ... training, boarding and day camp. Pet services are an integral part of our strategy, and we are focused on driving profitable growth in our services business. We believe services differentiate us from our competitors, drive traffic and repeat visits to our stores, provide cross-selling opportunities...

  • Page 10
    ... 826 Store count at end of fiscal year ...1,008 Distribution Our distribution network and information systems are designed to optimize store inventory, drive the efficient use of store labor, facilitate a high in-stock position and promote high distribution center productivity. We currently employ...

  • Page 11
    ... includes collars, leashes, health and beauty aids, shampoos, medication, toys, pet carriers and pet houses. We also offer a complete line of supplies for fish, birds, reptiles and small pets. These products include aquariums and habitats, filters and birdcages. The sale of pet supplies and other...

  • Page 12
    ...our business. Financial Information by Business Segment and Geographic Data Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, or SFAS, No. 131, "Disclosures about Segments of an Enterprise and Related Information" requires that a public company report annual...

  • Page 13
    ...PetSmart as President of North American Stores in July 1999. From 1998 to 1999, he was President of Toys 'R' Us, Ltd., Canada. Prior to 1991, for a total of 20 years, he was with Sears, Roebuck and Company in a variety of financial and merchandising positions, including President and Chief Executive...

  • Page 14
    ... Vice President of Services, Strategic Planning and Business Development in September 2000. From 1996 to 2000, Mr. Lenhardt was a manager with Bain & Company, Inc., where he led consulting teams for retail, technology and e-commerce clients. Prior to that, he worked in the corporate finance and...

  • Page 15
    ... on management and operating systems and may erode sales at existing stores. We currently operate stores in most of the major market areas of the United States and Canada. Our plans for 2008 include opening 104 net new stores, primarily in existing multi-store markets, opening 45 new PetsHotels and...

  • Page 16
    ... with our customers, the demand for our products and services, our market share and our profitability. Our quarterly operating results may fluctuate due to seasonal changes associated with the pet retail industry and the timing of expenses, new store openings and store closures. Our business is...

  • Page 17
    ...growth plans require the development of new distribution centers to service the increasing number of stores. If we are unable to successfully expand our distribution network in a timely manner, our sales or results of operations could be harmed. If our information systems fail to perform as designed...

  • Page 18
    ... located, their ability to meet our standards and applicable legal requirements, the availability of labor and raw materials, merchandise quality issues, currency exchange rates, transport availability and cost, inflation and other factors. In addition, Canada's and the United States' foreign trade...

  • Page 19
    ... management and services personnel could require us to pay higher wages or other compensation to attract a sufficient number of employees. Turnover, which has historically been high among entry-level or part-time associates at our stores and distribution centers, increases the risk associates...

  • Page 20
    ... methodologies to assess potential business opportunities, the new businesses may not positively affect our financial performance. Changes to estimates related to our property and equipment, or operating results that are lower than our current estimates at certain store locations, may cause us to...

  • Page 21
    ... or death of a pet in our stores or while under our care. We may also be subject to claims resulting from the transfer of diseases to other animals, associates and customers in our stores. From time to time we have been subject to class action lawsuits, governmental action, intellectual property...

  • Page 22
    ... or misconduct by our associates or those contracted to perform services for us, and vendors that do not perform in accordance with their contractual agreements. These events can potentially result in financial losses or other damages. We procure insurance to help manage a variety of risks including...

  • Page 23
    ...of companies. These fluctuations, as well as general economic and market conditions, including but not limited to those listed above, may harm the market price of our common stock. Our operating and financial performance in any given period may differ from the guidance we have provided to the public...

  • Page 24
    ... provisions of our restated certificate of incorporation. We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, and the application of Section 203 could delay or prevent an acquisition of PetSmart. Item 1B. None. Unresolved Staff Comments 18

  • Page 25
    ... 3, 2008: United States: Number of Stores Alabama ...Arizona ...Arkansas ...California ...Colorado ...Connecticut ...Delaware ...Florida ...Georgia ...Idaho ...Illinois ...Indiana ...Iowa ...Kansas ...Kentucky ...Louisiana ...Maine...Maryland ...Massachusetts ...Michigan ...Minnesota...Mississippi...

  • Page 26
    ... lease in Reno, Nevada. In February 2007, we decided to exit the State Line Tack equine product line and closed our e-commerce fulfillment, equine catalog fulfillment and equine distribution center in Brockport, New York during 2007. See Note 17 to the Notes to Consolidated Financial Statements for...

  • Page 27
    ...et al., Ontario Superior Court of Justice (filed 3/28/07) By order dated June 28, 2007, the Bruski, Rozman, Ford, Wahl, Demith and Thompkins cases were transferred to the U.S. District Court for the District of New Jersey and consolidated with other pet food class actions under the federal rules for...

  • Page 28
    ...23.89 $23.24 $22.07 $27.80 Common Stock Dividends. We believe our ability to generate cash allows us to invest in the growth of the business and, at the same time, distribute a quarterly dividend. Our credit facility and letter of credit facility permit us to pay dividends, as long as we are not in...

  • Page 29
    ...stock for each period in the quarter ended February 3, 2008: Total Number of Shares Purchased(1) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) Approximate Dollar Value That May Yet be Purchased Under the Plans or Programs(3) Period Average Price Paid per Share...

  • Page 30
    ... Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing. The following graph shows a five-year comparison of the cumulative total stockholders' returns for our common stock, the S&P 500 Index, and the S&P Specialty Stores...

  • Page 31
    ... average shares outstanding: Basic ...Diluted ...Selected Operating Data: Stores open at end of period ...Square footage at end of period ...Net sales per square foot(2) ...Net sales growth ...Increase in comparable store sales(3) ...Selected Balance Sheet Data: Merchandise inventories ...Working...

  • Page 32
    ..., as well as an extensive selection of private brands across a range of product categories. We complement our extensive product assortment with a wide selection of value-added pet services, including grooming, training, boarding and day camp. All our stores offer complete pet training services, and...

  • Page 33
    ... the State Line Tack brand, certain inventory, customer lists and other assets. We recognized expenses of $9.8 million net of tax, or approximately $0.07 per common share, related to the exit of the equine product line. • We acquired 19 store locations, which added 18 net new stores, in Canada. We...

  • Page 34
    ... related to casualty, self-insured health plans, employer's professional liability and workers' compensation insurance policies. Income Taxes We establish deferred income tax assets and liabilities for temporary differences between the financial reporting bases and the income tax bases of our assets...

  • Page 35
    ... recall of certain pet food products during the first two quarters of 2007, as well as reduced sales of equine products as a result of our decision to exit that product line. Services sales, which are included in our net sales amount discussed above and include grooming, training, boarding and day...

  • Page 36
    ... data for our gift card program to make a reasonable estimate of the ultimate redemption patterns and breakage rate. Fiscal 2007 was the first year in which we recognized gift card breakage income. In addition, expenses decreased in our e-commerce business due to the exit of our equine product line...

  • Page 37
    ... rate for 2006 includes the settlement of an audit with the Internal Revenue Service and tax benefits primarily due to the expiration of the statute of limitations for certain tax positions and additional federal and state tax credits. 2006 (52 weeks) compared to 2005 (52 weeks) Net Sales Net sales...

  • Page 38
    ... credit card settlement gain. Fiscal 2005 also included a reduction in expense due to a correction in stock-based compensation. We accelerated into 2006 several initiatives, which include strengthening our distribution processes, improving our information systems and investing in our associates...

  • Page 39
    .... Receipts from our sales come from cash, checks and third-party debit and credit cards, and therefore provide a significant source of liquidity. Cash is used in operating activities primarily to fund procurement of merchandise inventory and other assets, net of accounts payable and other accrued...

  • Page 40
    ... new PetsHotels, to fixture and equip a new distribution center in Reno, Nevada that will open in 2008, to continue our investment in the development of our information systems, to add to our services capacity with the expansion of certain grooming salons, to remodel or replace certain store assets...

  • Page 41
    ... of credit. Related Party Transactions We have an investment in MMI Holdings, Inc. who, through a wholly-owned subsidiary, Medical Management International, Inc., operates full-service veterinary hospitals inside 673 of our stores. Our investment consists of common and convertible preferred stock...

  • Page 42
    ... in the receivables in the accompanying Consolidated Balance Sheets. The master operating agreement also includes a provision for the sharing of profits on the sales of therapeutic pet foods sold in all stores with an operating Banfield hospital. Credit Facility In August 2007, we replaced our...

  • Page 43
    ..., as well as changes in our credit standing. In addition, a market risk exists associated with fuel prices. Energy Costs Increased fuel prices have negatively impacted our results of operations during 2007. Fuel surcharges for transporting product from our vendors to our distribution centers and...

  • Page 44
    ...under the line of credit during 2006. Item 8. Financial Statements and Supplementary Data The information required by this Item is attached as Appendix F. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures We maintain...

  • Page 45
    ... internal control over financial reporting is supported by a program of internal audits and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel and a written Code of Business Conduct adopted by our Board of Directors, applicable...

  • Page 46
    ..., in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended February 3, 2008, of the Company and our report dated March 31, 2008, expressed an unqualified...

  • Page 47
    ...accordance with the policies in PetSmart's Code of Business Ethics and Policies. We require full compliance with this policy and all designated associates including our CEO, CFO, Principal Accounting Officer and other individuals performing similar positions, to sign a certificate acknowledging that...

  • Page 48
    ... Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 28, 2008. PetSmart, Inc. By: PHILIP L. FRANCIS Philip L. Francis Chairman of the Board of Directors, and Chief Executive Officer /s/ POWER...

  • Page 49
    ... Date /s/ GREGORY P. JOSEFOWICZ Gregory P. Josefowicz /s/ AMIN I. KHALIFA Amin I. Khalifa RONALD KIRK Ronald Kirk Director March 28, 2008 Director March 28, 2008 /s/ Director March 28, 2008 /s/ RICHARD K. LOCHRIDGE Richard K. Lochridge /s/ BARBARA A. MUNDER Barbara A. Munder /s/ THOMAS...

  • Page 50
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  • Page 51
    APPENDIX F PetSmart, Inc. and Subsidiaries Index to Consolidated Financial Statements and Financial Statement Schedule Page Report of Independent Registered Public Accounting Firm...Consolidated Balance Sheets as of February 3, 2008 and January 28, 2007...Consolidated Statements of Operations and ...

  • Page 52
    ... of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the...

  • Page 53
    ...Other noncurrent assets ... Total assets...$2,167,257 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and bank overdraft...$ 172,352 Accrued payroll, bonus and employee benefits ...132,768 Accrued occupancy expenses and deferred rents ...46,955 Short-term debt ...30,000 Current maturities of...

  • Page 54
    PetSmart, Inc. and Subsidiaries Consolidated Statements of Operations and Comprehensive Income Year Ended February 3, January 28, January 29, 2008 2007 2006 (53 weeks) (52 weeks) (52 weeks) (In thousands, except per share data) Net sales ...Cost of sales ...Gross profit ...Operating, general and ...

  • Page 55
    ... Common Treasury Common Paid-In Retained Stock Stock Stock (Loss) Stock Capital Earnings (In thousands, except per share data) Total BALANCE AT JANUARY 30, 2005 ...149,517 Stock options and employee stock purchase plan compensation cost ...Net tax benefits from tax deductions in excess of the...

  • Page 56
    ... benefits from tax deductions in excess of the compensation cost recognized . Non-cash interest expense ...Changes in assets and liabilities, excluding the effect of the acquisition of store locations in Canada: Receivables, net ...Merchandise inventories ...Prepaid expenses and other current assets...

  • Page 57
    ...all the life stages of pets and pet services, which include professional grooming, training, boarding and day camp. We also offer pet products through an e-commerce site. As of February 3, 2008, we had full-service veterinary hospitals in 685 of our stores. Medical Management International, Inc., an...

  • Page 58
    ... nature. Cash and Cash Equivalents Under our cash management system, a bank overdraft balance exists for our primary disbursement accounts. This overdraft represents uncleared checks in excess of cash balances in the related bank accounts. Our funds are transferred on an as-needed basis to pay for...

  • Page 59
    ... at their historical cost. Factors included in determining 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...

  • Page 60
    ... that covers products and the sale of pets, self-insured health plans, employer's professional liability and workers' compensation insurance. Property insurance covers approximately $1.5 billion in buildings and contents, including furniture and fixtures, leasehold improvements and inventory. Under...

  • Page 61
    ... years. Other Current Liabilities Other current liabilities consisted of the following (in thousands): February 3, 2008 January 28, 2007 Accrued income and sales tax ...Accounts payable - operating expenses ...Accrued capital purchases ...Accrued general liability insurance reserve ...Gift card...

  • Page 62
    ...." We recognize revenue for store sales when the customer receives and pays for the merchandise at the register. E-commerce sales are recognized at the time we estimate that the customer receives the product. We estimate and defer revenue and the related product costs for shipments that are in...

  • Page 63
    ... Consolidated Financial Statements - (Continued) Foreign Currency Translation and Transactions The local currency has been used as the functional currency in Canada. We translate assets and liabilities denominated in foreign currency into United States dollars at the current rate of exchange at year...

  • Page 64
    ... International, Inc., collectively referred to as MMIH, operates full-service veterinary hospitals inside 673 of our stores, under the registered trademark of Banfield, The Pet Hospital. Philip L. Francis, PetSmart's Chairman and Chief Executive Officer, and Robert F. Moran, PetSmart's President...

  • Page 65
    ... 3, 2008 and January 28, 2007, respectively, and were included in receivables in the Consolidated Balance Sheets. The master operating agreement also includes a provision for the sharing of profits on the sales of therapeutic pet foods sold in all stores with an operating Banfield hospital. F-15

  • Page 66
    ... costs ...Closed store reserve ...The activity related to the closed store reserve was as follows (in thousands): February 3, 2008 (53 weeks) $ 34,376 (27,167) (1,052) $ 6,157 $ 44,234 (35,284) (1,261) $ 7,689 Year Ended January 28, 2007 (52 weeks) January 29, 2006 (52 weeks) Opening balance...

  • Page 67
    ...(52 weeks) United States ...Foreign ... $401,079 1,114 $402,193 $283,545 6,572 $290,117 $285,228 3,981 $289,209 Income tax expense consisted of the following (in thousands): February 3, 2008 (53 weeks) Year Ended January 28, 2007 (52 weeks) January 29, 2006 (52 weeks) Current provision: Federal...

  • Page 68
    ...Deferred income tax assets: Capital lease obligations ...Employee benefit expense ...Deferred rents ...Net operating loss carryforwards ...Capital loss carryforwards ...Reserves for closed stores ...Miscellaneous reserves and accruals...Other ...Total deferred income tax assets...Valuation allowance...

  • Page 69
    ... require an extended period of time to resolve and may cover multiple years. During 2007, we recorded a net benefit of approximately $4.0 million from the settlement of uncertain tax positions with various state tax jurisdictions and the lapse of the statute of limitations for certain tax positions...

  • Page 70
    ... of Directors approved a new share purchase program authorizing the purchase of up to $300.0 million of our common stock through August 2, 2009. On August 19, 2007, we entered into a $225.0 million fixed dollar accelerated share repurchase, or ASR, agreement. The ASR agreement contained provisions...

  • Page 71
    ... on June 30, 2009, and we are subject to fees payable to the lenders each quarter at an annual rate of 0.20% of the average daily face amount of the letters of credit outstanding during the preceding calendar quarter. In addition, we are required to maintain a deposit with the lenders equal to the...

  • Page 72
    ...24,982 $508,765 The rental commitments schedule includes all locations for which we have the right to control the use of the property and includes open stores, closed stores, stores to be opened in the future, distribution centers and corporate offices. We have recorded accrued rent of $1.6 million...

  • Page 73
    ...et al., Ontario Superior Court of Justice (filed 3/28/07) By order dated June 28, 2007, the Bruski, Rozman, Ford, Wahl, Demith and Thompkins cases were transferred to the U.S. District Court for the District of New Jersey and consolidated with other pet food class actions under the federal rules for...

  • Page 74
    ... surplus purchases are credited against the following year's requirement. Note 13 - Stock Incentive Plans We have several stock incentive plans, including plans for stock options, employee stock purchases and restricted stock. Shares issued under our stock incentive plans are issued from new shares...

  • Page 75
    ...623 $42,282 $42,268 $42,250 We have an Employee Stock Purchase Plan, or ESPP, that allows essentially all employees who meet certain service requirements to purchase our common stock on semi-annual offering dates at 85% of the fair market value of the shares on the offering date or, if lower, at 85...

  • Page 76
    ...Comprehensive Income were as follows (in thousands): 2007 (53 weeks) 2006 (52 weeks) 2005 (52 weeks) Stock options expense ...Restricted stock expense ...Employee stock purchase plan expense ...Total stock-based compensation cost...Tax benefit ... $ 3,408 13,196 1,729 $18,333 $ 6,168 $ 8,625 9,384...

  • Page 77
    ... ratably by a charge to income over the four-year term of the restricted stock awards. We estimated the fair value of employee stock plan purchases using the Black-Scholes option pricing model. The valuation model requires the input of subjective assumptions including the expected volatility...

  • Page 78
    ... catalog, and the sale of a warehouse, call center and store facility in Brockport, New York. On April 29, 2007, we entered into an agreement to sell a portion of the equine product line, including the State Line Tack brand, certain inventory, customer lists and certain other assets to a third-party...

  • Page 79
    ... equine inventory to the lower of cost or market value and recorded operating expenses related to the exit of the equine product line, remerchandising of the store space previously used for equine inventory and severance costs. The net effect of the gain on sale of the assets, inventory valuation...

  • Page 80
    PetSmart, Inc. and Subsidiaries Notes to Consolidated Financial Statements - (Continued) First Quarter (13 weeks) Second Third Fourth Quarter Quarter Quarter (13 weeks) (13 weeks) (13 weeks) (In thousands, except per share data) Year Ended January 28, 2007 (52 weeks) Net sales ...Gross profit ......

  • Page 81
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of PetSmart, Inc. Phoenix, Arizona We have audited the consolidated financial statements of PetSmart, Inc. and subsidiaries (the "Company") as of February 3, 2008 and January 28, 2007, and for each of ...

  • Page 82
    ... and Qualifying Accounts Description Balance at Beginning of Period Charged to Expense Deductions (In thousands) Balance at End of Period Valuation reserves deducted in the Consolidated Balance Sheets from the asset to which it applies: Merchandise inventories: Lower of cost or market 2005...2006...

  • Page 83
    ... President, Chief Financial Officer Form of Offer Letter between PetSmart and executive officers Amended and Restated Executive Change in Control and Severance Benefit Plan Forms of Stock Award Grant Agreements for the 2003 Equity Incentive Plan and 1997 Equity Incentive Plan Forms of Revised Stock...

  • Page 84
    ... of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended * Filed herewith. †Compensation plans or arrangements in which directors or executive officers are eligible to participate. (1) Incorporated by reference to Exhibit 3.3(i) to PetSmart...

  • Page 85
    ...reference to Exhibit 10.19 to PetSmart's Current Report on Form 8-K (File No. 0-21888), filed February 7, 2005. (22) The certifications attached as Exhibit 32.1 and Exhibit 32.2 accompany this Annual Report on Form 10-K, are not deemed filed with the Securities and Exchange Commission and are not to...

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  • Page 89
    ...AZ 85012 Stockholder Inquiries PetSmart Investor Relations 19601 North 27th Avenue Phoenix, AZ 85027 (623) 587-2025 [email protected] PetSmart Common Stock The company's common stock is traded on the NASDAQ Global Select Market under the symbol "PETM." PetSmart Website www.PetSmart...

  • Page 90
    19601 North 27th Avenue Phoenix, AZ 85027 (623) 580-6100 www.PetSmart.com ©2008 PetSmart Store Support Group, Inc. All rights reserved.