Petsmart 2011 Annual Report Download - page 38

Gross Profit
Gross profit increased 40 basis points to 29.5% of net sales for 2011, from 29.1% for 2010.
Overall merchandise margin increased 5 basis points due to a 20 basis point improvement in rate, which was
offset by a 15 basis point decline in mix. The rate improvement is the result of increased sales of higher margin
goods within the product categories and improvement in shrink during 2011, relative to 2010. Mix was neg-
atively impacted as the sales growth in our consumables continued to outpace the sales growth of our higher
margin hardgoods category. 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. Consumables merchandise
sales, which include pet food, treats, and litter, generate lower gross margins on average compared to hardgoods
merchandise.
Services margin increased 5 basis points primarily due to increased sales as 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 included in margin provided 30 basis points due to leverage associated with the
increase in net sales.
Operating, General and Administrative Expenses
Operating, general and administrative expenses decreased 20 basis points to 21.3% of net sales for 2011,
from 21.5% of net sales for 2010. Operating, general and administrative expenses increased on a dollar basis by
$75.5 million. The primary reasons for the year over year increase include store growth, planned incremental
advertising spend focused on our differentiated offerings and higher incentive compensation.
Interest Expense, net
Interest expense, which is primarily related to capital lease obligations, decreased to $58.1 million for 2011,
compared to $59.6 million for 2010 due to a decrease in capital lease obligations. Included in interest expense,
net was interest income of $1.3 million and $0.8 million for 2011 and 2010, respectively.
Income Tax Expense
For 2011, the $167.0 million income tax expense represents an effective tax rate of 37.4% compared with
2010, when we had income tax expense of $140.4 million, which represented an effective tax rate of 38.0%. The
decrease in the effective tax rate was primarily due to a tax deductible dividend received from Banfield, partially
offset by an increase in certain state tax liabilities. 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 Banfield, by income before
income tax expense and equity in income from Banfield.
Equity in Income from Banfield
Our equity in income from our investment in Banfield was $10.9 million and $10.4 million for 2011 and
2010, respectively, based on our ownership percentage in Banfield.
2010 compared to 2009
Net Sales
Net sales increased $0.4 billion, or 6.7%, to $5.7 billion in 2010, compared to net sales of $5.3 billion in
2009. The increase in net sales was partially impacted by $24.6 million in favorable foreign currency fluctuations
during 2010. Approximately 20% of the sales increase is due to the addition of 38 net new stores and 18 new
PetsHotels since January 31, 2010, and 70% of the increase is due to a 4.8% increase in comparable store sales
for 2010, and the remaining 10% of the sales increase is due to other revenue from reimbursements charged to
Banfield.
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