Petsmart 2007 Annual Report Download - page 62

Revenue Recognition
We recognize revenue and the related cost of sales (including shipping costs) in accordance with the provisions
of Staff Accounting Bulletin, or SAB, No. 101, “Revenue Recognition in Financial Statements,” as amended by
SAB No. 104, “Revenue Recognition.” 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-transit to
the customer. Customers typically receive goods within a few days of shipment. Such amounts were immaterial as
of February 3, 2008 and January 28, 2007. Amounts related to shipping and handling that are billed to customers are
reflected in net sales, and the related costs are reflected in cost of sales.
We record deferred revenue for the sale of gift cards and recognize this revenue in net sales when cards are
redeemed. Gift card breakage income is recognized based upon historical redemption patterns and represents the
balance of gift cards for which we believe the likelihood of redemption by the customer is remote. During 2007, we
obtained sufficient historical redemption data for our gift card program to make a reasonable estimate of the
ultimate redemption patterns and breakage rate. Accordingly, we recognized $6.0 million of gift card breakage
income in 2007. We began recognizing gift card breakage income in the third quarter of 2007, and therefore, the
amount recognized includes the gift card breakage income related to gift cards sold since the inception of the gift
card program in 2000. Gift card breakage is recorded monthly and is included in the Consolidated Statements of
Operations and Comprehensive Income as a reduction in operating, general and administrative expenses.
We record allowances for estimated returns based on historical return patterns.
Revenue is recognized net of applicable sales tax in the Consolidated Statements of Operations and
Comprehensive Income. We record the sales tax liability in other current liabilities on the Consolidated Balance
Sheets.
Vendor Concentration Risk
We purchase merchandise inventories from several hundred vendors worldwide. Sales of products from our
two largest vendors approximated 20.5%, 15.7% and 15.1% of our net sales for 2007, 2006 and 2005, respectively.
Advertising
We charge advertising costs to expense as incurred, except for direct response advertising, which is capitalized
and amortized over its expected period of future benefit. Advertising costs are classified within operating, general
and administrative expenses. Total advertising expenditures, net of cooperative income, including direct response
advertising, were $85.8 million, $86.3 million and $90.5 million for 2007, 2006 and 2005, respectively. Direct
response advertising consists primarily of product catalogs. The capitalized costs of the direct response advertising
were amortized over the six-month to one-year period following the mailing of the respective catalog and were not
material as of February 3, 2008 and January 28, 2007, respectively. In 2007, we exited our equine product line,
including the equine catalog and had no catalog operations at the end of the year.
Stock-based Compensation
We apply the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment.”
Stock-based compensation costs include: (a) compensation cost for all share-based payments granted on or before
January 30, 2005, based on the grant-date fair value estimated in accordance with the original provisions of
SFAS No. 123, “Accounting for Stock-Based Compensation,” and (b) compensation cost for all share-based
payments granted subsequent to January 30, 2005, based on the grant-date fair value estimated in accordance with
the provisions of SFAS No. 123(R).
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PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)