Petsmart 2009 Annual Report Download

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2009
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Table of contents

  • Page 1
    2009 annual l report

  • Page 2
    ...in-store PetSmart PetsHotel® cat and dog boarding facilities, and is a leading online provider of pet supplies and pet care 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...

  • Page 3
    ... ƃow We added 37 net new stores in 2009, ending the year with 1,149 stores and 162 PetsHotels in the United States and Canada, with plans to open 40 to 42 net new stores and 18 PetsHotels in 2010. Our pet services business-grooming, pet training, PetSmart PetsHotel and Doggie Day Camp -continues to...

  • Page 4
    ... in 2010. We've bolstered our merchandising capabilities with strong and experienced leadership, effective strategies and sturdy vendor partnerships. Our emphasis on proprietary brands and adding strong new national and exclusive brands such as the Martha Stewart Pets line-to reach stores this...

  • 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

  • Page 7
    ... 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 ...Security...

  • Page 8
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  • Page 9
    ... our PetSmart PetsHotels», or "PetsHotels." As of January 31, 2010, there were full-service veterinary hospitals in 752 of our stores. Medical Management International, Inc., an operator of veterinary hospitals, operated 740 of the hospitals under the registered trade name of "Banfield, The Pet...

  • Page 10
    ... care, pet services (such as grooming and boarding) and purchases of pets. The APPA estimates that food and treats for dogs and cats are the largest volume categories of pet-related products and in calendar year 2009, accounted for approximately $17.4 billion in sales, or 38.3% of the market. Pet...

  • Page 11
    ... day camp. Full-service veterinary hospitals are available in 752 of our stores, through our partnership with Medical Management International, Inc. and other third parties in Canada. Pet services are an integral part of our strategy, and we are focused on driving profitable growth in our services...

  • Page 12
    ... fish, birds, reptiles and small pets. Pets comprised 2% of our net sales in 2009, 2008 and 2007. We do not sell dogs or cats, but provide space in most stores for adoption and animal welfare organizations to use. Pet Services Pet services, which includes grooming, training, boarding and day camp...

  • Page 13
    ... in our business. Employees As of January 31, 2010, we employed approximately 45,000 associates, approximately 22,000 of whom were employed full-time. We continue to invest in education for our full and part-time associates as part of our emphasis on customer service and providing pet care solutions...

  • Page 14
    ...Officer. He joined 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 and from 1993 to 1998, for a total of 20 years, he was with Sears, Roebuck and Company in a variety of financial and merchandising positions...

  • Page 15
    ... Vice President of Merchandising in February 2006. From September 2008 until December 2009, he completed an executive rotational assignment in the field in Store Operations. Prior to PetSmart, he worked with Bain & Company, where he developed business and customer loyalty strategies and programs for...

  • Page 16
    ... 2007 to 2009. Prior to joining PetSmart, he was employed at American Stores, a national food and drug retailer, where he held several leadership positions including Vice President of Advertising and Market Development, Vice President of Merchandising and Vice President of Business Process Redesign...

  • Page 17
    ... on existing systems and procedures, and on management by our store development plans, also could result in operational inefficiencies and less effective management of our business and associates, which could in turn adversely affect our financial performance. Opening new stores in a market will...

  • Page 18
    ... could successfully operate the fish distribution centers ourselves. In addition, our 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...

  • Page 19
    ... to gain market share at the expense of the premium brands sold only through specialty pet food and pet supply outlets, our business could be harmed. We purchase a substantial amount of pet supplies from a number of vendors with limited supply capabilities, and two of our largest vendors account for...

  • Page 20
    ...-time associates at our stores and distribution centers, increases the risk associates will not have the training and experience needed to provide competitive, high-quality customer service. Our ability to meet our labor needs while controlling our labor costs is subject to numerous external factors...

  • Page 21
    ... increased costs associated with operating inefficiencies which could have an adverse effect on our financial results. Also, while we employ several different methodologies to assess potential business opportunities, the new businesses may not positively affect our financial performance. 13

  • Page 22
    ... in our internal controls over financial reporting, our results of operations or financial condition may be adversely affected and the price of our common stock may decline. Changes in laws, accounting standards and subjective assumptions, estimates, and judgments by management related to complex...

  • Page 23
    ... price of our common stock may continue to be subject to significant fluctuations in response to the impact on our operations, sales and financial results of a variety of factors including, but not limited to: • General economic changes; • Actions taken by our competitors, including new product...

  • Page 24
    ... services and technical systems encounter similar difficulties with credit or liquidity in their own businesses, our business may also be adversely affected. Our operating and financial performance in any given period may differ from the guidance we have provided to the public. We provide public...

  • Page 25
    ... locations of the stores by country and state as of January 31, 2010: United States: Number of Stores Alabama ...Arizona ...Arkansas...California ...Colorado...Connecticut ...Delaware ...Florida ...Georgia ...Idaho ...Illinois ...Indiana ...Iowa...Kansas ...Kentucky ...Louisiana ...Maine...Maryland...

  • Page 26
    ... a total corporate facility square footage of approximately 365,000. Our distribution centers and respective lease expirations as of January 31, 2010, were as follows: Location Square Footage (In thousands) Date Opened Distribution Type Lease Expiration Ennis, Texas ...Phoenix, Arizona ...Columbus...

  • Page 27
    ... are material to our consolidated financial statements. PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Price Range of Common Stock. Our common stock is traded on the NASDAQ Global Select Market under the symbol PETM...

  • Page 28
    ...10 per share payable on May 14, 2010 to stockholders of record on April 30, 2010. Holders. On March 12, 2010, there were 3,337 holders of record of our common stock. Equity Compensation Plan Information. Information regarding our equity compensation plans will be included in our proxy statement with...

  • Page 29
    Stock Performance Graph. The following performance graph and related information shall not be deemed "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934...

  • Page 30
    ... ...Net sales per square foot(2) ...Net sales growth ...Increase in comparable store sales(3) ...Selected Balance Sheet Data: Merchandise inventories ...Average inventory per store(4) ...Working capital ...Total assets ...Total debt(5) ...Total stockholders' equity ...Current ratio ...Long-term...

  • Page 31
    ... stores feature pet styling salons that provide high-quality grooming services. Our PetsHotels provide boarding for dogs and cats, which includes 24-hour supervision, an on-call veterinarian, temperature controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs...

  • Page 32
    ... 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 33
    ...closed stores would not be material to our consolidated financial statements. Insurance Liabilities and Reserves We maintain property and casualty insurance on all our properties and leasehold interests, product liability insurance that covers products and the sale of pets, self-insured health plans...

  • Page 34
    ...An increase in the average sales per transaction represented 1.9% of the comparable store sales growth in 2009, compared to 5.8% in 2008. Services sales, which are included in the net sales amount discussed above and include grooming, training, boarding and day camp, increased 9.2%, or $48.7 million...

  • Page 35
    ... and distribution costs, decreased 35 basis points. Services margin increased 10 basis points primarily due to the demand for our grooming services, and the addition of 20 new PetsHotels since 2008. Services sales typically generate lower gross margins than merchandise sales as service-related labor...

  • Page 36
    ... taxes and lower reimbursements from Banfield for vet clinic expenses. Supply chain costs were flat as a percentage of net sales. We realized cost savings from increased productivity and efficiency across the distribution network due to our new replacement distribution centers in Newnan, Georgia...

  • Page 37
    ... acquiring new stores, reformatting existing stores, new equipment and computer software in support of our system initiatives, PetsHotel construction, expansion of our distribution network and other costs to support our growth plans and initiatives. The primary differences between 2009 and 2008 were...

  • Page 38
    ... lower purchases of treasury stock in 2008, lower proceeds from common stock issued under stock incentive plans, and lower tax deductions in excess of the compensation cost recognized. Free Cash Flow Free cash flow is considered a non-GAAP financial measure under the SEC's rules. Management believes...

  • Page 39
    ... total capital spending to be approximately $125.0 to $135.0 million for 2010, based on our plan to open 40 to 42 net new stores and 18 new PetsHotels, continuing our investment in the development of our information systems, adding to our services capacity with the expansion of certain grooming...

  • Page 40
    ... wholly-owned subsidiary, Medical Management International, Inc., operates full-service veterinary hospitals inside 740 of our stores. Our investment consists of common and convertible preferred stock. In 2007, we sold a portion of our non-voting shares in Banfield resulting in a pre-tax gain of $95...

  • Page 41
    ...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 a hospital operated by Banfield. The net sales and gross profits on the sale of therapeutic pet foods is not material. Credit...

  • Page 42
    ...million for 2009, 2008 and 2007, respectively. 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...

  • Page 43
    ... guidelines, careful selection and training of qualified personnel and a written Code of Business Conduct adopted by our Board of Directors, applicable to all our Directors, officers, employees and subsidiaries. Because of its inherent limitations, internal control over financial reporting may not...

  • Page 44
    ... REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of PetSmart, Inc. Phoenix, Arizona We have audited the internal control over financial reporting of PetSmart, Inc. and subsidiaries (the "Company") as of January 31, 2010, based on criteria established in Internal Control...

  • Page 45
    ... by reference from the information under caption "Fees to Independent Registered Public Accounting Firm for Fiscal Years 2010 and 2009" in our proxy statement. PART IV Item 15. Exhibits, Financial Statement Schedule (a) The following documents are filed as part of this Annual Report on Form 10...

  • Page 46
    ...or 15(d) of the Securities 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 25, 2010. PetSmart, Inc. By: ROBERT F. MORAN Robert F. Moran President and Chief Executive Officer /s/ POWER OF ATTORNEY...

  • Page 47
    ... /s/ AMIN I. KHALIFA Amin I. Khalifa Director March 25, 2010 Director March 25, 2010 /s/ RICHARD K. LOCHRIDGE Richard K. Lochridge /s/ BARBARA A. MUNDER Barbara A. Munder /s/ THOMAS G. STEMBERG Thomas G. Stemberg Director March 25, 2010 Director March 25, 2010 Director March 25, 2010 39

  • Page 48
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  • Page 49
    ... January 31, 2010, February 1, 2009, and February 3, 2008 ...Consolidated Statements of Cash Flows for the years ended January 31, 2010, February 1, 2009, and February 3, 2008 ...Notes to Consolidated Financial Statements ...Report of Independent Registered Public Accounting Firm on Supplemental...

  • Page 50
    ... PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of PetSmart, Inc. Phoenix, Arizona We have audited the accompanying consolidated balance sheets of PetSmart, Inc. and subsidiaries (the "Company") as of January 31, 2010 and February 1, 2009, and the related consolidated statements...

  • Page 51
    ... Consolidated Balance Sheets (In thousands, except par value) January 31, 2010 February 1, 2009 ASSETS Cash and cash equivalents ...$ Restricted cash ...Receivables, net ...Merchandise inventories ...Deferred income taxes...Prepaid expenses and other current assets...Total current assets...

  • Page 52
    ... thousands, except per share data) Year Ended February 1, 2009 (52 Weeks) January 31, 2010 (52 Weeks) February 3, 2008 (53 Weeks) Merchandise sales...Services sales ...Net sales ...Cost of merchandise sales ...Cost of services sales ...Total cost of sales...Gross profit ...Operating, general and...

  • Page 53
    ... Stock Total BALANCE AT JANUARY 28, 2007 ...155,782 (20,313) Cumulative effect of FIN No. 48 adoption ...Stock options and employee stock purchase plan compensation cost ...Net tax benefits from tax deductions in excess of the compensation cost recognized ...Issuance of common stock under stock...

  • Page 54
    ... ...Equity in income from investee ...Tax 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...

  • Page 55
    ...various pet services, including professional grooming, training, boarding and day camp. We also offer pet products through an e-commerce site. As of January 31, 2010, we operated 1,149 retail stores and had full-service veterinary hospitals in 752 of our stores. Medical Management International, Inc...

  • Page 56
    ... are credit and debit card receivables from banks, which typically settle within five business days, of $44.1 million and $43.0 million as of January 31, 2010, and February 1, 2009, respectively. Under our cash management system, a bank overdraft balance exists for our primary disbursement accounts...

  • Page 57
    ... 31, 2010, and February 1, 2009, respectively, represents the excess of the cost of acquired businesses over the fair market value of their net assets. In 2007, we purchased 19 store locations, which added 18 net new stores in Canada and increased goodwill by $27.7 million. During 2009 and 2008...

  • Page 58
    ..., in reserves related to casualty, self-insured health plans, employer's professional liability, and workers' compensation insurance policies, of which $66.5 million and $63.2 million were classified as other noncurrent liabilities in the Consolidated Balance Sheets. Reserve for Closed Stores We...

  • Page 59
    ... of the following (in thousands): January 31, 2010 February 1, 2009 Accrued income and sales tax ...Accounts payable - operating expenses ...Accrued capital purchases ...Accrued general liability insurance reserve (current portion)...Gift card liability ...Deferred revenue ...Other ... $ 43,428 19...

  • Page 60
    ... for vendor rebates, promotions and discounts. Cost of Services Sales Costs of services sales includes payroll and benefit costs, as well as professional fees for the training of groomers, training instructors and PetsHotel associates. Vendor Concentration Risk We purchase merchandise inventories...

  • Page 61
    ... full-service veterinary hospitals in 740 of our stores under the registered trade name "Banfield, The Pet Hospital." Philip L. Francis, our Executive Chairman, and Robert F. Moran, our President and Chief Executive Officer are members of the Banfield Board of Directors. In 2007, we sold a portion...

  • Page 62
    ... Banfield totaled $2.4 million and $3.3 million at January 31, 2010, and February 1, 2009, 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...

  • Page 63
    ... Balance Sheets. Note 5 - Reserve for Closed Stores The components of the reserve for closed stores were as follows (in thousands): January 31, 2010 February 1, 2009 Total remaining gross occupancy costs ...Less: Expected sublease income ...Interest costs ...Reserve for closed stores...Current...

  • Page 64
    ... to Consolidated Financial Statements - (Continued) The activity related to the reserve for closed stores was as follows (in thousands): January 31, 2010 (52 weeks) Year Ended February 1, 2009 (52 weeks) February 3, 2008 (53 weeks) Opening balance ...Reserve for new store closures ...Changes in...

  • Page 65
    ... Financial Statements - (Continued) A reconciliation of the federal statutory income tax rate to our effective tax rate is as follows (dollars in thousands): January 31, 2010 (52 weeks) Year Ended February 1, 2009 (52 weeks) February 3, 2008 (53 weeks) Provision at federal statutory tax rate...

  • Page 66
    ... February 1, 2009 (52 weeks) February 3, 2008 (53 weeks) Unrecognized tax benefits, beginning balance ...Gross increases - tax positions related to the current year...Gross increases - tax positions in prior periods ...Gross decreases - tax positions in prior periods ...Gross settlements ...Lapse...

  • Page 67
    ... of the weighted average shares outstanding used to calculate earnings per common share (in thousands): January 31, 2010 (52 weeks) Year Ended February 1, 2009 (52 weeks) February 3, 2008 (53 weeks) Basic ...Effect of dilutive securities: Stock options, restricted stock and performance share units...

  • Page 68
    ..., 13, 2009 2009 2009 2010 2008 2008 2008 2009 We have several long-term incentive plans, including plans for stock options, restricted stock, performance share units, management equity units and employee stock purchases. Shares issued under our long-term incentive plans are issued from new shares...

  • Page 69
    ...by the Board of Directors. The employee may be required to pay par value for the shares depending on their length of service. The shares of common stock awarded under the plan are subject to a reacquisition right held by us. In the event that the award recipient's employment by, or service to, us is...

  • Page 70
    ...Inc. and Subsidiaries Notes to Consolidated Financial Statements - (Continued) Restricted stock activity in our restricted stock plan is as follows (in thousands): Year Ended 2009 (52 weeks) Weighted-Average Grant Date Fair Value Year Ended 2008 (52 weeks) Weighted-Average Grant Date Fair Value Year...

  • Page 71
    ... thousands): January 31, 2010 (52 weeks) Year Ended February 1, 2009 (52 weeks) February 3, 2008 (53 weeks) Stock options expense ...Restricted stock expense ...PSU expense ...MEU expense...Employee stock purchase plan expense ...Total stock-based compensation cost ...Tax benefit ... $ 8,263 11,626...

  • Page 72
    ... performance goal. Share-based compensation expense, net of forfeitures, for MEUs is recognized over the requisite service period, or three years, and is evaluated quarterly based upon the current market value of our common stock. Note 10 - Employee Benefit Plans We have a defined contribution plan...

  • Page 73
    ... stand-alone letter of credit facility, or "Stand-alone Letter of Credit Facility," that expires August 15, 2012. We are subject to fees payable to the lender each quarter at an annual rate of 0.45% of the average daily face amount of the letters of credit outstanding during the preceding calendar...

  • Page 74
    ... 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 $1.7 million and $1.4 million in the Consolidated Balance Sheets as of January 31, 2010, and February 1, 2009...

  • Page 75
    ... 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 multi-district litigation (In re: Pet Food Product Liability Litigation, Civil No. 07-2867). The Canadian cases were not consolidated. On May 21, 2008...

  • Page 76
    ... plans to exit our equine product line, including the sale or discontinuation of StateLineTack.com and our equine 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...

  • Page 77
    ... and 2008 is as follows: Year Ended January 31, 2010 (52 weeks) First Quarter (13 weeks) Second Third Fourth Quarter Quarter Quarter (13 weeks) (13 weeks) (13 weeks) (In thousands, except per share data) Merchandise sales ...$1,184,755 Services sales ...142,819 Net sales ...1,327,574 Gross profit...

  • Page 78
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  • Page 79
    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 January 31, 2010 and February 1, 2009, and for each of ...

  • Page 80
    ...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 2007...2008...2009...

  • Page 81
    ... Non-Employee Directors' Equity Plan, as amended 1997 Equity Incentive Plan, as amended 2002 Employee Stock Purchase Plan, as amended Non-Qualified 2005 Deferred Compensation Plan, as amended Executive Short-Term Incentive Plan, as amended Amended and Restated Employment Agreement, between PetSmart...

  • Page 82
    ...By Reference Exhibit Number Exhibit Description Form File No. Exhibit Filing Date Filed Herewith 10.11†Form of Offer Letter between PetSmart and executive officers 10.12†Amended and Restated Executive Change in Control and Severance Benefit Plan 10.13†Forms of Stock Award Grant Agreements...

  • Page 83
    ... 13a-14(b) of the Securities Exchange Act of 1934, as amended Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended X X †Compensation plans or arrangements in which directors or executive officers are eligible to participate...

  • Page 84
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  • Page 85
    ... 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.com Executive Officers Directors...

  • Page 86
    PetSmart | 19601 N 27 Ave • Phoenix, AZ 85027 | 623.580.6100 | PetSmart.com ©2010 PetSmart Store Support Group, Inc. All rights reserved.