Petsmart 2012 Annual Report Download - page 36

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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 income from Banfield, by income before income tax expense and equity income from Banfield.
Equity Income from Banfield
Our equity income from our investment in Banfield was $10.9 million and $10.4 million for 2011 and 2010, respectively,
based on our 21.0% ownership in Banfield.
Liquidity and Capital Resources
Cash Flow
We believe that our operating cash flow and cash on hand will be adequate to meet our operating, investing and financing
needs in the foreseeable future. In addition, we have access to our $100.0 million revolving credit facility, which expires on March
23, 2017. However, there can be no assurance of our ability to access credit markets on commercially acceptable terms in the
future. We expect to continuously assess the economic environment and market conditions to guide our decisions regarding our
uses of cash, including capital expenditures, investments, dividends and the purchase 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 therefore provide a significant source of liquidity. Cash is used in operating activities primarily
to fund procurement of merchandise inventories and other assets, net of accounts payable and other accrued liabilities. Net cash
provided by operating activities was $653.0 million for 2012, $575.4 million for 2011, and $457.6 million for 2010. The primary
differences between 2012 and 2011 include increased net income of $99.3 million and an increase in trade accounts payable
resulting from the extension of vendor payment terms of $51.3 million. This was partially offset by incremental increases in
merchant receivables of $20.2 million and deferred income tax assets of $17.3 million in 2012 as compared to 2011. The primary
differences between 2011 and 2010 include increased net income of $50.4 million, an increase in non-trade accounts payable
resulting from the extension of vendor terms of $29.6 million, a reduction in growth of merchandise inventories of $21.8 million
and the $16.0 million dividend received from Banfield in 2011, as no dividends were received in 2010.
Net cash used in investing activities consisted primarily of expenditures associated with opening new stores, reformatting
existing stores, expenditures associated with equipment and computer software in support of our system initiatives, PetsHotel
construction costs, and other expenditures to support our growth plans and initiatives. Net cash used in investing activities was
$114.6 million for 2012, $155.4 million in 2011 and $147.9 million in 2010. The primary difference between 2012 and 2011 was