Petsmart 2009 Annual Report Download - page 35

Overall merchandise margin decreased 150 basis points. Merchandise product margin decreased 115 basis
points, with mix representing 52% and rate representing 48% of the decline. The mix shift is due to an increase in
consumables merchandise sales mix relative to net sales. The rate impact is due to select price reductions, an
increase in promotions for hardgoods merchandise, and broad category promotions to drive additional customer
traffic. Difficult macroeconomic conditions, including reduced discretionary consumer spending, challenged our
merchandise product margins as we have experienced a mix shift from higher margin discretionary hardgoods into
consumables. Consumables merchandise sales, which includes pet food, treats, and litter, typically generate lower
gross margins as compared to hardgoods merchandise. Hardgoods merchandise includes pet supplies such as
collars, leashes, health care supplies, grooming and beauty aids, toys, and apparel, as well as pet beds and carriers.
Merchandise margins related to the flow through of previously capitalized inbound freight, as well as certain
procurement 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 is included in cost of sales; however, services generate higher operating margins than
merchandise sales. As discussed above, the shift in merchandise sales to consumables merchandise has contributed
to the overall decrease in margin.
Store occupancy costs included in margin increased 15 basis points primarily due to the addition of new stores,
and new store growth outpacing the rate of sales growth.
Supply chain costs decreased 50 basis points due to lower fuel costs, transportation efficiencies and improved
productivity in our distribution centers.
Operating, General and Administrative Expenses
Operating, general and administrative expenses were 21.6% and 22.2% of net sales for 2009 and 2008,
respectively, representing an improvement of 60 basis points.
The primary reasons for the decrease in operating, general and administrative expenses as a percentage of net
sales during 2009 were increased efficiencies in our advertising spending due to lower advertising rates, and lower
store preopening expenses due to slower store growth. Store labor expense, travel, and supplies costs were also
lower due to vendor renegotiations and various cost control initiatives.
Interest Expense, net
Interest expense, which is primarily related to capital lease obligations, increased to $60.3 million for 2009,
compared to $59.3 million for 2008. Included in interest expense, net was interest income of $0.6 million for both
2009 and 2008.
Income Tax Expense
In 2009, the $117.6 million income tax expense represents an effective tax rate of 38.0%, compared with 2008
income tax expense of $121.0 million, which represented an effective tax rate of 38.9%. The decrease in the
effective tax rate was primarily due to tax exempt gains from invested assets to fund our deferred compensation
plan. The effective tax rate is calculated by dividing our income tax expense, which includes the income tax expense
related to our equity in income from investee, by income before income tax expense and equity in income from
investee.
Equity in Income from Investee
Our equity in income from our investment in Banfield was $6.5 million and $2.6 million for 2009 and 2008,
respectively, based on our ownership percentage in Banfield’s net income.
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