Petsmart 2011 Annual Report Download

Download and view the complete annual report

Please find the complete 2011 Petsmart annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 88

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88

2 0 11
Annual Report

Table of contents

  • Page 1
    201 1 Annual Report

  • Page 2
    ... of differentiation. We are the only pet retailer to provide professional grooming, training, boarding, day camp, and veterinary care, all under one roof. In 2011, services sales increased 9% to $675 million, or 11% of sales. In the services business, we understand that it is about...

  • Page 3
    ...to build on the solid performance of 2011. By focusing on the proven strategies that have made PetSmart successful, and continuing to challenge ourselves to evolve, we will be well positioned to deliver superior shareholder returns in 2012 and beyond. As the...

  • Page 4
    ... knew he was sick and made sure every day was a fun day for Harley." into the PetSmart as usual only all the employees had gotten together and threw a surprise party for Harley's second birthday!! They bought him treats, gave him dog ice cream, he got to open gifts, we took tons of photos. They even...

  • Page 5
    More Than Training I was in my favorite PetSmart store one day in Downers Grove, Illinois, looking for new toys for my 5 month old Golden Retriever puppy named Logan. While I was searching for the perfect new toy, I was approached by Wendy, a dog trainer at PetSmart, to see if I wanted to enroll him...

  • Page 6
    ...-store PetSmart® PetsHotels® dog and cat boarding facilities and is a leading online provider of pet supplies and pet care information (http://www.petsmart.com). PetSmart provides a broad range of competitively priced pet food and pet products; and offers dog training, pet grooming, pet boarding...

  • Page 7
    ...by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ' No È The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing sale price of the registrant's common stock on July 31, 2011, the last business day...

  • Page 8

  • Page 9
    ...Disagreements with Accountants on Accounting and Financial Disclosure ...Controls and Procedures ...Other Information ...PART III Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder...

  • Page 10
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 11
    .... The 2011 fiscal year ended on January 29, 2012, and was a 52-week year. The 2010 and 2009 fiscal years were also 52-week years. Unless otherwise specified, all references in this Annual Report on Form 10-K to years are to fiscal years. Item 1. Business General We opened our first stores in 1987...

  • Page 12
    ... care, pet services (such as grooming and boarding) and live animal purchases. The APPA estimates that food and treats for dogs and cats are the largest volume categories of pet-related products and in calendar year 2011, accounted for an estimated $19.5 billion in sales, or 38.4% of the market. Pet...

  • Page 13
    ...grooming, training, boarding and day camp. Full-service veterinary hospitals are available in 799 of our stores, through our partnership with Banfield 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 14
    ...-water fish, small birds, reptiles and small pets. Pets comprised 1.7%, 1.6% and 1.8% of our net sales in 2011, 2010, and 2009, respectively. We do not sell dogs or cats, but provide space in all stores for adoption and animal welfare organizations. Pet Services Pet services, which include grooming...

  • Page 15
    ...our business. Employees As of January 29, 2012, we employed approximately 50,000 associates, of which approximately 23,000 were employed full-time. We continue to invest in education and training for our full and part-time associates as part of our emphasis on customer service and providing pet care...

  • Page 16
    ...for 2011, 2010 and 2009, respectively. Substantially all our long-lived assets are located in the United States. Available Information We make available, free of charge through our investor relations internet website (www.petm.com), our Annual Report on Form 10-K and our Quarterly Reports on Form 10...

  • Page 17
    ...and Services in February 2007 and in February 2009 was appointed Senior Vice President, Store Operations and Human Resources. In January 2011, he was appointed Executive Vice President, Store Operations, Human Resources and Information Systems. From 1996 to 2000, he was a manager with Bain & Company...

  • Page 18
    ... 2007 to 2009. Prior to joining PetSmart, he was employed at American Stores Company, 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...

  • Page 19
    ...effective management of our business and associates, which could in turn adversely affect our financial performance. Opening new stores in a market will attract some customers away from other stores already operated by us in that market and diminish their sales. An increase in construction costs and...

  • Page 20
    ... could successfully operate all of 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...

  • Page 21
    ... merchandisers. If any premium pet food or pet supply vendor were to make its products available in supermarkets, warehouse clubs and other mass or retail merchandisers, our business could be harmed. In addition, if the grocery brands currently available to such retailers were to gain market share...

  • Page 22
    ... action or private litigation, or lead to costly recalls and a loss of consumer confidence, any of which could have an adverse effect on our sales and operations and financial performance. We depend on key executives, store managers and other personnel and may not be able to retain or replace...

  • Page 23
    ..., prevailing wage rates, changing demographics and changes in employment legislation. If we are unable to retain qualified associates or our labor costs increase significantly, our business operations and our financial performance could be adversely impacted. Our international operations may result...

  • Page 24
    ...; the distribution, import/export and sale of products; providing services to our customers; contracted services with various thirdparty providers; environmental regulation; credit and debit card processing; the handling, security, protection and use of customer and associate information; and...

  • Page 25
    ... we, or our independent registered public accounting firm, determine in future periods that we have a material weakness 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...

  • Page 26
    ... or trade barriers. Any disruption in our operations or the supply of products to our stores could harm our reputation and decrease our sales. Fluctuations in the stock market, as well as general economic and market conditions, may impact our operations, sales, financial results and market price of...

  • Page 27
    ..., defer or prevent a change in management or control that our shareholders may not believe is in their best interests. These provisions include: • The ability of our board of directors to issue, without stockholder approval, up to 10,000,000 shares of preferred stock in one or more series with...

  • Page 28
    ... regional shopping centers. The following table summarizes the locations of the stores by country and state or territory as of January 29, 2012: Number of Stores Alabama ...Alaska ...Arizona ...Arkansas ...California ...Colorado ...Connecticut ...Delaware ...Florida ...Georgia ...Idaho ...Illinois...

  • Page 29
    ... in Acosta v. PetSmart, Inc., et. al., a lawsuit originally filed in California Superior Court for the County of Los Angeles. The Acosta complaint raises substantially similar allegations to those raised in the Pedroza case, but the allegations in Acosta are limited to store Operations Managers only...

  • Page 30
    ... "Equity Compensation Plans" and is incorporated by reference in this Annual Report on Form 10-K. Share Purchase Program. In June 2009, the Board of Directors approved a share purchase program authorizing the purchase of up to $350.0 million of our common stock through January 29, 2012. During 2009...

  • Page 31
    ... stock under this program for each period in the thirteen weeks ended January 29, 2012: Total Number of Shares Purchased Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Value That May Yet be Purchased Under the Plans or Programs Period Average Price Paid per Share...

  • Page 32
    ..., except to the extent that we specifically incorporate it by reference into such filing. The following graph shows a five-year comparison of the cumulative total return for our common stock, the S&P 500 Index, and the S&P Specialty Stores Index based on a $100 investment on January 28, 2007 in...

  • Page 33
    ...Selected Operating Data: Stores open at end of period ...Square footage at end of period ...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...

  • Page 34
    ... who are PetSmart trained to provide personalized pet care, an on-call veterinarian, temperature controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs. As of January 29, 2012, we operated 192 PetsHotels, and we plan to open 5 net new PetsHotels in 2012. We...

  • Page 35
    ... of our common stock during each of 2011 and 2010 for $336.8 million and $263.3 million, respectively. • We added 45 net new stores during 2011 and operated 1,232 stores as of the end of the year. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and...

  • Page 36
    ... 2011, 2010 or 2009. Reserve for Closed Stores We continuously evaluate the performance of our stores and periodically close those that are underperforming. Closed stores are generally replaced by a new store in a nearby location. We establish reserves for future occupancy payments on closed stores...

  • Page 37
    ... grooming services, and the addition of 45 net new stores and 12 new PetsHotels since January 30, 2011. Other revenue included in net sales during 2011, represents license fees and reimbursements for utilities and specific operating expenses charged to Banfield under the master operating agreement...

  • Page 38
    ... well as a shift to higher margin offerings in our grooming services. 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. Store occupancy costs...

  • Page 39
    ... 31, 2011 2010 Comparable transactions ...Average sales per comparable transaction ... 2.1% 2.7 (0.3)% 1.9 Services sales, which include grooming, training, boarding and day camp, increased 7.5%, or $43.4 million, to $618.8 million for 2010, compared to $575.4 million for 2009. Services sales...

  • Page 40
    ... of treasury stock. We finance our operations, new store and PetsHotel growth, store remodels and other expenditures to support our growth initiatives primarily through cash generated by operating activities. Receipts from our sales come from cash, checks and third-party debit and credit cards, and...

  • Page 41
    ...in merchandise inventory balances, income tax payments, capital spending and capital lease payments during 2010. Share Purchase Program In June 2009, the Board of Directors approved a share purchase program authorizing the purchase of up to $350.0 million of our common stock through January 29, 2012...

  • Page 42
    ...million for 2012, based on our plan to open approximately 45 to 50 net new stores and 5 new PetsHotels, continuing our investment in the development of our information systems, adding to our services capacity with the expansion of certain grooming salons, remodeling or replacing certain store assets...

  • Page 43
    ..., 2012, and January 30, 2011, respectively, and were included in receivables, net 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 in all stores with a hospital operated by Banfield. The...

  • Page 44
    ... stores typically draw customers from a large trade area, sales also may be impacted by adverse weather or travel conditions, which are more prevalent during certain seasons of the year. As a result of our expansion plans, the timing of new store and PetsHotel openings and related preopening costs...

  • Page 45
    ... $(1.3) million for 2011, 2010 and 2009, respectively. From time to time, we have entered into foreign currency exchange forward contracts, or "Foreign Exchange Contracts," in Canada to manage the impact of foreign currency exchange rate fluctuations related to certain balance sheet accounts. We do...

  • Page 46
    ... internal control over financial reporting is supported by a program of internal audits and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel and a written Code of Business Conduct adopted by our Board of Directors, applicable...

  • Page 47
    ... 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 29, 2012, based on criteria established in Internal Control...

  • Page 48
    ...caption "Fees to Independent Registered Public Accounting Firm for Fiscal Years 2012 and 2011" 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-K. 1. Consolidated Financial Statements: Our...

  • Page 49
    ...: The financial statement schedule required under the related instructions is included within Appendix F of this Annual Report. See Index to Consolidated Financial Statements and Financial Statement Schedule on page F-1. 3. Exhibits: The exhibits which are filed with this Annual Report or which...

  • Page 50
    ... and Chief Executive Officer (Principal Executive Officer) Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Director March 23, 2012 /s/ LAWRENCE P. MOLLOY Lawrence P. Molloy March 23, 2012 /s/ ANGEL CABRERA Angel Cabrera RITA...

  • Page 51
    ... S. Hardin, Jr. GREGORY P. JOSEFOWICZ Gregory P. Josefowicz /s/ AMIN I. KHALIFA Amin I. Khalifa Director March 23, 2012 /s/ Director March 23, 2012 Director March 23, 2012 /s/ RICHARD K. LOCHRIDGE Richard K. Lochridge BARBARA A. MUNDER Barbara A. Munder THOMAS G. STEMBERG Thomas G. Stemberg...

  • Page 52
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 53
    APPENDIX F PetSmart, Inc. and Subsidiaries Index to the Consolidated Financial Statements and Financial Statement Schedule Page Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of January 29, 2012, and January 30, 2011 ...Consolidated Statements of Income ...

  • Page 54
    REPORT OF INDEPENDENT REGISTERED 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 29, 2012 and January 30, 2011, and the ...

  • Page 55
    ... Balance Sheets (In thousands, except par value) January 29, 2012 January 30, 2011 ASSETS Cash and cash equivalents ...Short-term investments ...Restricted cash ...Receivables, net ...Merchandise inventories ...Deferred income taxes ...Prepaid expenses and other current assets ...Total current...

  • Page 56
    ..., except per share data) January 29, 2012 Year Ended January 30, 2011 January 31, 2010 Merchandise sales ...Services sales ...Other revenue ...Net sales ...Cost of merchandise sales ...Cost of services sales ...Cost of other revenue ...Total cost of sales ...Gross profit ...Operating, general and...

  • Page 57
    ...Earnings Treasury Stock Total BALANCE AT FEBRUARY 1, 2009 ...159,770 (32,408) Net Income ...Issuance of common stock under stock incentive plans ...541 Stock-based compensation expense ...Excess tax benefits (shortages) from stockbased compensation ...Dividends declared ($0.33 per share) ...Other...

  • Page 58
    ... in income from Banfield ...Dividend received from Banfield ...Excess tax benefits from stock-based compensation ...Non-cash interest expense ...Changes in assets and liabilities: Merchandise inventories ...Other assets ...Accounts payable ...Accrued payroll, bonus and employee benefits ...Other...

  • Page 59
    ..., training, boarding and day camp. We also offer pet products through an e-commerce site. As of January 29, 2012, we operated 1,232 retail stores and had full-service veterinary hospitals in 799 of our stores. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International...

  • Page 60
    ..., 2011. Merchandise Inventories and Valuation Reserves Merchandise inventories represent finished goods and are recorded at the lower of cost or market. Cost is determined by the moving average cost method and includes inbound freight, as well as certain procurement and distribution costs related to...

  • Page 61
    ... excess of the cost of acquired businesses over the fair market value of their net assets. Other than the effects of foreign currency translation, no other changes were made to goodwill during 2011, 2010 or 2009. Insurance Liabilities and Reserves We maintain workers' compensation, general liability...

  • Page 62
    ... the cost for future occupancy payments, net of expected sublease income, associated with closed stores using the net present value method at a credit-adjusted risk-free interest rate over the remaining life of the lease. Judgment is used to estimate the underlying real estate market related to...

  • Page 63
    ... net of applicable sales tax in the Consolidated Statements of Income and Comprehensive Income. We record the sales tax liability in other current liabilities on the Consolidated Balance Sheets. In accordance with our master operating agreement with Banfield, we charge Banfield license fees for the...

  • Page 64
    ...vendor rebates, promotions and discounts. Cost of Services Sales Cost of services sales includes payroll and benefit costs, as well as professional fees for the training of groomers, training instructors and PetsHotel associates. Cost of Other Revenue Cost of other revenue includes the costs related...

  • Page 65
    ... impact on our consolidated financial statements. In May 2011, the FASB issued new guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure...

  • Page 66
    ...to manage the impact of foreign currency exchange rate fluctuations related to certain balance sheet accounts. We do not designate these Foreign Exchange Contracts as hedges and, accordingly, they are recorded at fair value using quoted prices for similar assets or liabilities in active markets. The...

  • Page 67
    ...) included in the Consolidated Balance Sheets are as follows (in thousands): January 29, 2012 January 30, 2011 Deferred income tax assets: Capital lease obligations ...Employee benefit expense ...Deferred rents ...Net operating loss carryforwards ...Other ...Total deferred income tax assets...

  • Page 68
    ... (in thousands): January 29, 2012 Year Ended January 30, 2011 January 31, 2010 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...

  • Page 69
    ...2.9 million shares of voting preferred stock that may be converted into voting common stock at any time at our option; and (b) 1.8 million shares of voting common stock. Banfield's financial data is summarized as follows (in thousands): January 29, 2012 January 30, 2011 Current assets ...Noncurrent...

  • Page 70
    PetSmart, Inc. and Subsidiaries Notes to the Consolidated Financial Statements - (Continued) 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 an operating Banfield hospital. The net sales and gross ...

  • Page 71
    PetSmart, Inc. and Subsidiaries Notes to the Consolidated Financial Statements - (Continued) The activity related to the reserve for closed stores was as follows (in thousands): January 29, 2012 Year Ended January 30, 2011 January 31, 2010 Opening balance ...Provision for new store closures ......

  • Page 72
    ... 2011 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. Stock Options At January 29, 2012, stock...

  • Page 73
    ... stock under the 2011 Equity Incentive Plan. Under the terms of the plan, employees may be awarded shares of our common stock, subject to approval 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...

  • Page 74
    ... our closing stock price on the vest date and will be paid out in cash. As of January 29, 2011, the total liability for the 2009, 2010, and 2011 MEU grants was $18.4 million and was included in other current liabilities and other non-current liabilities in the Consolidated Balance Sheet. The 2009...

  • Page 75
    ... 29, January 30, January 31, 2012 2011 2010 Stock options expense ...Restricted stock expense ...Performance share unit expense ...Stock-based compensation expense - equity awards ...Management equity unit expense ...Total stock-based compensation expense ...Tax benefit ... $11,435 4,624 11,930...

  • Page 76
    ... upon the current market value of our common stock. Changes to our Stock-Based Compensation in 2012 In March 2012, the Board of Directors approved a plan which would replace MEUs with Restricted Stock Units, or "RSUs." The shares for RSUs granted in 2012 are not issued until cliff vesting on the...

  • Page 77
    ...Stand-alone Letter of Credit Facility with similar facilities and terms before they expire on August 15, 2012. Operating and Capital Leases We lease substantially all our stores, distribution centers and corporate offices under noncancelable leases. The terms of the store leases generally range from...

  • Page 78
    ... 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 $1.0 million and $0.9 million in the Consolidated Balance Sheets as of January 29, 2012, and January 30, 2011, respectively. In addition...

  • Page 79
    ... in Acosta v. PetSmart, Inc., et. al., a lawsuit originally filed in California Superior Court for the County of Los Angeles. The Acosta complaint raises substantially similar allegations to those raised in the Pedroza case, but the allegations in Acosta are limited to store Operations Managers only...

  • Page 80
    ... financial information for 2011 and 2010 is as follows: Year Ended January 29, 2012 First Second Third Fourth Quarter Quarter Quarter Quarter (13 weeks) (13 weeks) (13 weeks) (13 weeks) (In thousands, except per share data) Merchandise sales ...$1,314,349 $1,300,473 $1,326,819 $1,460,090 Services...

  • Page 81
    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 29, 2012 and January 30, 2011, and for each of ...

  • Page 82
    ... Accounts Description Balance at Beginning of Period Charged to Expense Deductions(1) (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 2009 ...2010 ...2011...

  • Page 83
    ...and Chief Executive Officer Amended and Restated Employment Agreement, between PetSmart and Robert F. Moran, President and Chief Operating Officer Form of Performance Share Unit Grant Notice and Performance Share Unit Agreement Form of Offer Letter between PetSmart and executive officers E-1 S-1 10...

  • Page 84
    .... 2011 Performance Share Unit Program 2011 Equity Incentive Plan Form of Nonstatutory Stock Option Agreement for 2011 Plan Form of Stock Option Agreement for 2011 Plan Form of Performance Share Unit Grant Notice and Performance Share Unit Agreement for 2011 Plan Form of Revised Performance Share...

  • Page 85
    ... Grant Notice for the 2011 Equity Incentive Plan Form of Revised Restricted Stock Unit Grant Notice for 2011 Equity Incentive Plan Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities...

  • Page 86
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 87
    ..., Real Estate and Development Neil H. Stacey Senior Vice President, Human Resources Bruce K. Thorn Senior Vice President, Store Operations and Services Melvin G. Tucker Senior Vice President, Finance STOCKHOLDER INFORMATION Corporate Offices 19601 North 27th Avenue Phoenix, AZ 85027 (623) 580-6100...

  • Page 88
    PetSmart® 19601 North 27th Avenue Phoenix, AZ 85027 (623) 580-6100 petsmart.com ©2012 PetSmart Store Support Group, Inc. All rights reserved.