Petsmart 2011 Annual Report Download - page 64

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PetSmart, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements — (Continued)
• 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 deprecia-
tion of leasehold improvements and capitalized lease assets; and
• Reductions for 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 to license fees, utilities and specific operating expenses
charged to Banfield.
Vendor Concentration Risk
We purchase merchandise inventories from several hundred vendors worldwide. Sales of products from our
two largest vendors approximated 20.7%, 17.8% and 22.4% of our net sales for 2011, 2010 and 2009,
respectively.
Advertising
We charge advertising costs to expense as incurred, which are classified within operating, general and
administrative expenses in the Consolidated Statements of Income and Comprehensive Income. Total advertising
expenditures, net of vendor allowances for cooperative advertising incentives, and including direct response
advertising, were $95.9 million, $83.5 million and $67.1 million for 2011, 2010 and 2009, respectively. Vendor
allowances for cooperative advertising incentives reduced total advertising expense by $33.0 million, $24.5 mil-
lion and $19.5 million for 2011, 2010 and 2009, respectively.
Stock-based Compensation
We recognize stock-based compensation expense based on the fair value of the awards at the grant date for
all awards except management equity units which are evaluated quarterly based upon the current market value of
our common stock. We use option pricing methods that require the input of highly subjective assumptions,
including the expected stock price volatility. Compensation cost is recognized on a straight-line basis 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 denomi-
nated 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 are
included in other comprehensive income and are reported separately in stockholders’ equity in the Consolidated
Balance Sheets.
F-12