Petsmart 2011 Annual Report Download - page 36

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. No material asset
impairments were identified during 2011, 2010 or 2009.
Reserve for Closed Stores
We continuously evaluate the performance of our stores and periodically close those that are under-
performing. 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 operat-
ing, general and administrative expenses in the Consolidated Statements of Income and Comprehensive Income.
As of January 29, 2012, and January 30, 2011, our reserve for closed stores was $10.0 million and $9.8 million,
respectively. We do not 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. We do not believe that a 10% change in our reserve for closed stores would be material to our
consolidated financial statements.
Insurance Liabilities and Reserves
We maintain workers’ compensation, general liability, product liability and property and casualty insurance.
We utilize high deductible plans for each of these areas as well as a self-insured health plan for our eligible asso-
ciates. Workers’ compensation deductibles generally carry a $1.0 million per occurrence risk of claim liability.
Our general liability plan specifies a $0.5 million per occurrence risk of claim liability. We establish reserves for
claims under workers’ compensation and general liability plans based on periodic actuarial estimates of the
amount of loss for all pending claims, including estimates for which claims have been incurred but not reported.
Our loss estimates rely on actuarial observations of ultimate loss experience for similar historical events and
changes in such assumptions could result in an adjustment, favorable or adverse, to our reserves. As of Jan-
uary 29, 2012, and January 30, 2011, we had approximately $102.8 million and $99.9 million, respectively, in
reserves related to workers’ compensation, general liability and self-insured health plans.
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 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 $6.4 million in 2011.
Income Tax Reserves
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 29, 2012, and January 30, 2011, were principally to offset certain deferred income tax assets for net
operating 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 of resolution. A favorable tax settlement could result in a reduction in our
effective income tax rate in the period of resolution.
Although we believe that the judgments and estimates discussed herein are reasonable, actual results could
differ, and we may be exposed to losses or gains that could be material.
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