Petsmart 2009 Annual Report Download - page 57

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 reserves.
We have reserves for estimated obsolescence and to reduce inventory to the lower of cost or market. We
evaluate inventory for excess, obsolescence or other factors that may render inventories unmarketable at their
historical cost. 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 January 31, 2010, and February 1, 2009, our inventory valuation reserves were $16.4 million and
$14.6 million, respectively.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is
provided on buildings, furniture, fixtures and equipment and computer software using the straight-line method over
the estimated useful lives of the related assets. Leasehold improvements and capital lease assets are amortized using
the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets.
Computer software consists primarily of third-party software purchased for internal use. Costs associated with the
preliminary stage of a project are expensed as incurred. Once the project is in the development phase, external
consulting costs, as well as qualifying internal labor costs, are capitalized. Training costs, data conversion costs and
maintenance costs are expensed as incurred. Maintenance and repairs to furniture, fixtures and equipment are
expensed as incurred.
Long-lived assets are reviewed for impairment based on undiscounted cash flows. We conduct this review
quarterly and whenever events or changes in circumstances indicate that the carrying amount of such assets may not
be recoverable. If this review indicates that the carrying amount of the long-lived assets is not recoverable, we will
recognize an impairment loss, measured at fair value by estimated discounted cash flows or market appraisals.
There were no material asset impairments identified during 2009, 2008 or 2007.
Our property and equipment are depreciated using the following estimated useful lives:
Buildings ................................................ 39years or term of lease
Furniture, fixtures and equipment .............................. 2-12years
Leasehold improvements ..................................... 1-20years
Computer software ......................................... 3-7years
Goodwill
The carrying value of goodwill of $42.2 million and $38.6 million as of January 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, goodwill increased (decreased) approximately $3.6 million and
$(5.6) million, respectively, as a result of foreign currency translation. Other than the effects of foreign currency
translation, there have been no other changes to goodwill.
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 a retention of
$1.0 million per occurrence for workers’ compensation. We establish reserves for losses based on periodic
F-9
PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)