Petsmart 2007 Annual Report Download - page 33

ASR. We received 7.0 million shares under the ASR during 2007. In addition to shares purchased under the
ASR, we purchased approximately 2.8 million shares in 2007.
• We recognized a pre-tax gain of $95.4 million, or approximately $0.48 per common share, on the sale of a
portion of our investment in MMI Holdings, Inc. in the first quarter of 2007.
• We exited our equine product line, including the sale of certain assets such as 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 completed the purchase
effective May 31, 2007 for approximately $37.0 million, after adjustments, which included goodwill of
approximately $27.7 million.
• We experienced a series of pet food recalls that had a negative impact on sales.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated
financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated
financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. On an on-going basis, we evaluate our estimates for inventory valuation reserves, insurance
liabilities and reserves, asset impairments, reserves for closed stores, reserves against deferred tax assets and uncertain
tax positions. We base our estimates on historical experience and on various other assumptions we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Under different assumptions or
conditions, actual results may differ from these estimates. We believe the following critical accounting policies reflect
the more significant judgments and estimates we use in preparing our consolidated financial statements.
Inventory Valuation Reserves
We have established reserves for estimated inventory shrinkage between physical inventories. Distribution
centers and forward distribution centers perform cycle counts encompassing all inventory items at least once every
quarter. Stores perform physical inventories at least once a year, and between the physical inventories, stores perform
counts on certain inventory items. Most of the stores do not perform physical inventories during the last quarter of the
year due to the holiday season, but continue to perform counts on certain inventory items. 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, we estimate 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.
We also have reserves for estimated obsolescence and to reduce merchandise inventory to the lower of cost or
market. We evaluate inventories for excess, obsolescence or other factors that may render inventories unmarketable
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 less favorable than those projected by
management, we may require additional reserves.
As of February 3, 2008 and January 28, 2007, we had inventory valuation reserves of $13.3 million and
$16.7 million, respectively.
Asset Impairments
We review long-lived assets for impairment in accordance with Financial Accounting Standards Board, or
FASB, Statement of Financial Accounting Standards, or SFAS, No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” We conduct this review annually and whenever events or changes in circumstances
indicate that the book value of such assets may not be recoverable. There were no material asset impairments
identified during 2007.
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