Petsmart 2012 Annual Report Download - page 57

F-11
• 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 depreciation of leasehold
improvements and capitalized lease assets; and
• Reductions for promotions and discounts, as well as vendor funding for temporary price reductions.
Cost of Services Sales
Cost of services sales includes payroll and benefit costs, supplies, 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 20.5%, 20.7% and 17.8% of our net sales for 2012, 2011 and 2010, 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 advertising agreements, and including direct response advertising, were $117.6 million, $95.9 million and $83.5 million for
2012, 2011 and 2010, respectively. Vendor allowances for advertising agreements reduced total advertising expense by $35.8
million, $33.0 million and $24.5 million for 2012, 2011 and 2010, 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 denominated 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 in stockholders' equity in the Consolidated Balance Sheets. Transaction gains and losses are included in net income in
the Consolidated Statements of Income and Comprehensive Income.
Activities related to foreign currency adjustments were as follows (in thousands):
Year Ended
February 3, 2013 January 29, 2012 January 30, 2011
(53 weeks) (52 weeks) (52 weeks)
Deferred tax expense on translation adjustments........................................ $ 23 $ 50 $ 1,817
Transaction loss (gain)................................................................................. 454 817 (705)
Earnings Per Common Share
Basic earnings per common share is calculated by dividing net income by the weighted average of shares outstanding during
each period. Diluted earnings per common share reflects the potential dilution of securities that could share in earnings, such as
potentially dilutive common shares that may be issuable under our stock incentive plans, and is calculated by dividing net income
by the weighted average shares, including dilutive securities, outstanding during the period.
PetSmart, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements — (Continued)