Petsmart 2009 Annual Report Download - page 33

We have not made any significant changes in our impairment loss assessment methodology during the past
three fiscal years. We do not presently believe there is a reasonable likelihood that there will be a material change in
the estimates or assumptions we use to calculate long-lived asset impairment losses. There were no material asset
impairments identified during 2009, 2008 or 2007.
Reserve for Closed Stores
We continuously evaluate the performance of our stores and periodically close those that are under-perform-
ing. Closed stores are generally replaced by a new store in a nearby location. We establish reserves for future
occupancy payments on closed stores in the period the store is closed. These costs are classified in operating,
general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income. As
of January 31, 2010, and February 1, 2009, our reserve for closed stores was $8.2 million and $6.4 million,
respectively. We can make no assurances that additional charges for these stores will not be required based on the
changing real estate environment.
We do not presently believe there is a reasonable likelihood of a material change in the future estimates or
assumptions that we use to determine our reserve for closed stores, including cash flow projections and sublease
assumptions. In any event, a 10% change in our reserve for 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 and workers compensation and
employers liability insurance. Under our general liability and workers’ compensation insurance policies as of
January 31, 2010, we maintain a self insured retention of $0.5 million per occurrence for general liability and a
combination of self insurance and a high deductible workers compensation plan that specifies retention of
$1.0 million per occurrence for workers’ compensation. We establish reserves for losses based on periodic
actuarial estimates of the amount of loss inherent in that period’s claims, including losses for which claims have
been incurred but not reported. Loss estimates rely on actuarial observations of ultimate loss experience for similar
historical events and changes in such assumptions could result in an adjustment to the reserves. As of January 31,
2010, and February 1, 2009, we had approximately $95.4 million and $92.5 million, respectively, in reserves related
to casualty, self-insured health plans, employer’s professional liability, and workers’ compensation insurance
policies.
We have not made any material changes in the accounting methodology we use to establish our insurance
reserves during the past three years. We do not presently believe there is a reasonable likelihood of a material change
in the estimates or assumptions that we use to calculate our insurance reserves, including factors such as historical
claims experience, demographic factors, severity factors and other valuations. However, if actual results are not
consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10%
change in our insurance reserves would have affected net income by approximately $5.9 million in 2009.
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 and liabilities at enacted tax rates expected to be in effect
when such assets or liabilities are realized or settled. We record a valuation allowance on the deferred income tax
assets to reduce the total to an amount we believe is more likely than not to be realized. Valuation allowances at
January 31, 2010, and February 1, 2009, were principally to offset certain deferred income tax assets for net
operating and capital loss carryforwards.
We operate in multiple tax jurisdictions and could be subject to audit in any of these jurisdictions. These audits
can involve complex issues that may require an extended period of time to resolve and may cover multiple years. To
the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of
our reserves, our effective income tax rate in a given fiscal period could be materially affected. An unfavorable tax
settlement would require use of our cash and could result in an increase in our effective income tax rate in the period
25