Petsmart 2009 Annual Report Download - page 60

• Costs associated with operating our distribution network, including payroll and benefit costs, occupancy
costs, utilities costs and depreciation;
• Procurement costs, including merchandising and other costs directly associated with the procurement,
storage and handling of inventory;
• Store occupancy costs, including rent, common area maintenance, real estate taxes, utilities and depreciation
of leasehold improvements and capitalized lease assets; and
• Reductions 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 from several hundred vendors worldwide. Sales of products from our
two largest vendors approximated 22.4%, 21.9% and 20.5% of our net sales for 2009, 2008 and 2007, respectively.
Advertising
We charge advertising costs to expense as incurred. Advertising costs are classified within operating, general
and administrative expenses. Total advertising expenditures, net of cooperative income and vendor funding, and
including direct response advertising, were $67.1 million, $79.5 million and $85.8 million for 2009, 2008 and 2007,
respectively. Vendor cooperative income reduced total advertising expense by $12.7 million, $11.0 million and
$10.3 million for 2009, 2008 and 2007, respectively. Beginning in 2009, we began receiving vendor funding for
advertising, which reduced total advertising expense by $6.8 million. Direct response advertising costs were for
product catalogs, and were capitalized and amortized over the expected period of future benefit, which was the six-
month period to one-year period following the mailing of the respective catalog. In 2007, we exited our equine
product line, including the equine catalog, and had no catalog operations since that time. There were no capitalized
advertising costs remaining at the end of 2007.
Stock-based Compensation
We recognize expense for stock-based compensation based on the fair market value of the awards at the grant
date. We use option pricing methods that require the input of highly subjective assumptions, including the expected
stock price volatility. Compensation cost is recognized ratably over the vesting period of the related stock-based
compensation award.
Foreign Currency
The local currency is used as the functional currency in Canada. We translate assets and liabilities denominated
in foreign currency into United States dollars at the current rate of exchange at year-end, and translate revenues and
expenses at the average exchange rate during the year. Foreign currency translation adjustments were the only
component of other comprehensive income and are reported separately in stockholders’ equity in the Consolidated
Balance Sheets. The income tax expense (benefit) related to the foreign currency translation adjustments was
$3.3 million, $(5.3) million and $2.9 million for 2009, 2008 and 2007, respectively. The transaction (gain)/loss
included in net income was $(1.3) million, $3.4 million and $(1.2) million for 2009, 2008 and 2007, respectively.
F-12
PetSmart, Inc. and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)