Petsmart 2011 Annual Report Download - page 39

Comparable store sales growth was driven by an increase in comparable transactions and average sales per
comparable transaction due to the impact of merchandising strategies, pricing strategies and new product offer-
ings. The impact of comparable transactions and average sales per comparable transaction is summarized below.
Year Ended
January 30,
2011
January 31,
2010
Comparable transactions ......................................... 2.1% (0.3)%
Average sales per comparable transaction ........................... 2.7 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 represented 10.9% and 10.8% of
net sales for 2010 and 2009, respectively. The increase in services sales is primarily due to continued strong
demand for our grooming services, and the addition of 38 net new stores and 18 new PetsHotels since 2009.
Gross Profit
Gross profit increased 60 basis points to 29.1% of net sales for 2010, from 28.5% for 2009.
Overall merchandise margin increased 30 basis points due to the sales of a higher margin mix of products
within the product categories. Our hardgoods sales outpaced the sales growth of our consumables category dur-
ing 2010, primarily due to the addition of the flea and tick product line. The flea and tick margin, net of shrink,
was slightly higher than our average consumables margin, but significantly less than our average merchandise
margin. 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 negatively contributed to gross margin by 10 basis points. 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 gross margin pro-
vided 40 basis points of improvement due to leverage associated with the increase in net sales, favorable lease
negotiations and lower utility costs. Warehouse and distribution costs included in gross margin provided a benefit
of 15 basis points due to leverage associated with the increase in net sales.
Recognizing reimbursements from Banfield as other revenue negatively impacted gross margin by 15 basis
points. In accordance with our master operating agreement with Banfield, we charge Banfield license fees for the
space used by the veterinary hospitals and for their portion of utilities costs. We also charge Banfield for its por-
tion of specific operating expenses. Prior to February 1, 2010, license fees were treated as a reduction of occu-
pancy costs, which are included as a component of cost of merchandise sales, and reimbursements for specific
operating expenses were treated as a reduction of operating, general and administrative expense in the Con-
solidated Statement of Operations and Comprehensive Income. Beginning February 1, 2010, license fees and the
reimbursements for specific operating expenses are included in other revenue, and the related costs are included
in cost of other revenue in the Consolidated Statements of Income and Other Comprehensive Income.
Operating, General and Administrative Expenses
Operating, general and administrative expenses decreased to 21.5% of net sales for 2010 from 21.6% of net
sales for 2009. Operating, general and administrative expenses increased on a dollar basis by $75.7 million. The
primary reasons for the year over year increase include increases in costs for incentive compensation associated
with better than expected financial results, increased advertising costs, higher bank fees associated with increases
in debit card rates and higher claims expense for health insurance.
Interest Expense, net
Interest expense, which is primarily related to capital lease obligations, decreased to $59.6 million for 2010,
compared to $60.3 million for 2009. Included in interest expense, net was interest income of $0.8 million and
$0.6 million for 2010 and 2009, respectively.
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