Petsmart 2001 Annual Report Download

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
≤ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Ñscal year ended January 28, 2001
OR
nTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission Ñle number 0-21888
PETsMART, Inc.
(Exact name of registrant as speciÑed in its charter)
Delaware 94-3024325
(State or other jurisdiction of (I.R.S. Employer IdentiÑcation No.)
incorporation or organization)
19601 North 27th Avenue, Phoenix, Arizona 85027
(Address of principal executive oÇces) (Zip Code)
Registrant's telephone number, including area code: (623) 580-6100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 par value
Indicate by check mark whether the registrant (1) has Ñled all reports required to be Ñled by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to Ñle such reports), and (2) has been subject to such Ñling requirements for
the past 90 days. Yes ≤No n
Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant's knowledge, in deÑnitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. n
Based on the closing sale price of $3.38 on April 4, 2001, the aggregate market value of the voting stock
held by non-aÇliates of the registrant was $370,761,512.
On April 4, 2001 there were outstanding 111,622,174 shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
(To The Extent Indicated Herein)
Registrant's Proxy Statement (speciÑed portions) with respect to the Annual Meeting of Stockholders to
be held June 21, 2001.

Table of contents

  • Page 1
    ...III of this Form 10-K or any amendment to this Form 10-K. n Based on the closing sale price of $3.38 on April 4, 2001, the aggregate market value of the voting stock held by non-aÇliates of the registrant was $370,761,512. On April 4, 2001 there were outstanding 111,622,174 shares of the Registrant...

  • Page 2
    TABLE OF CONTENTS Item PART I Business Properties Legal Proceedings Submission of Matters to a Vote of Security Holders PART II Market for the Registrant's Common Stock and Related Shareholder Matters Selected Financial Data Management's Discussion and Analysis of Financial Condition and ...

  • Page 3
    ... Item 1. Business General PETsMART is the leading provider of products, services, and solutions for the lifetime needs of pets. On January 28, 2001, the Company operated 533 retail stores in North America, as well as the Internet's most popular pet e-commerce site, and several major branded catalogs...

  • Page 4
    ..., generally falls into three main categories: ‚ Pet Food, Treats and Litter. PETsMART emphasizes premium dog and cat foods, many of which are not available in supermarkets, warehouse clubs or mass merchandisers, as well as quality national brands traditionally found in supermarkets and pet stores...

  • Page 5
    ... PETsMART store typically carries approximately 12,000 pet-related items at everyday low prices. ‚ Grow Pet Services. PETsMART is already the nation's largest provider of professional grooming and pet training, and the Company is focused on driving proÃ'table growth in these service businesses...

  • Page 6
    PETsMART Stores PETsMART's stores are generally located in sites co-anchored by strong destination superstores, and typically are in or near major regional shopping centers. The Company's expansion strategy is to increase its share in existing markets, establish a leading position in each market it ...

  • Page 7
    ... use of store inventory, store labor, reduced transportation costs, improved in-stock position and distribution center productivity and vendor support. The Company also opened a 276,000 square foot facility in Columbus, Ohio, and a 252,000 square foot facility in Hagerstown, Maryland during Ã'scal...

  • Page 8
    ... merchandising and marketing strategies. The Company believes it has all the licenses necessary to conduct its business. Employees As of January 28, 2001, the Company employed 20,450 associates, 9,779 of whom were employed full time. PETsMART's associates receive wages and beneÃ'ts competitive with...

  • Page 9
    ... superior customer service and support its anticipated growth. The Company has made, and continues to make, signiÃ'cant investments in information systems to support point of sale applications, inventory integrity and more eÇcient replenishment, merchandising, inventory control, warehousing and...

  • Page 10
    ... 17% of total purchases. Sales of premium pet food for dogs and cats make up a signiÃ'cant portion of PETsMART's revenues. Currently, most of the major vendors of premium pet foods do not permit these products to be sold in supermarkets, warehouse clubs or through other mass merchandisers. In March...

  • Page 11
    ... this strategy during Ã'scal 1999 with the new distribution center in Ennis, Texas. Two additional forward distribution centers, located in Columbus, Ohio, and Hagerstown, Maryland, opened during Ã'scal 2000. A portion of the Company's warehouse facility in Phoenix, Arizona began operating as...

  • Page 12
    ..., as well as general economic and market conditions, may adversely aÃ...ect the market price of the Common Stock. PETsMART has never paid cash dividends on its Common Stock. The Company currently intends to retain earnings for use in its business and therefore does not anticipate paying cash dividends...

  • Page 13
    ..., Human Resources Senior Vice President, Real Estate, General Counsel and Secretary Senior Vice President, Store Operations Senior Vice President, Chief Information OÇcer Senior Vice President, Services, Strategic Planning and Business Development Interim Senior Vice President and Chief Financial...

  • Page 14
    ... of Marketing and International Supply. She joined PETsMART in 1990 as Vice President and General Merchandise Manager and in March 1997, was promoted to the position of President, PETsMART International Supply Company. From 1985 to 1989, Ms. Meyer held various executive positions with Broadway...

  • Page 15
    ... Nevada New Hampshire New Jersey New Mexico New York North Carolina Ohio Oklahoma Oregon Pennsylvania 3 12 2 3 8 2 15 3 9 18 22 6 6 19 Rhode Island South Carolina Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Total United States stores ÏÏÏ Canada...

  • Page 16
    ... anticipate paying any cash dividends in the foreseeable future. In addition, the Company's revolving credit agreement restricts the payment of dividends. On April 4, 2001, there were 7,473 shareholders of record of the Company's Common Stock. Item 6. Selected Financial Data The information required...

  • Page 17
    ...Gamble Company purchased the Iams Company, whose Iams and Eukanuba product lines of premium dog and cat foods are sold in PETsMART stores. In early March 2000, the Iams product line became available to the consumer in supermarkets, warehouse clubs, and other mass merchandisers for the Ã'rst time. As...

  • Page 18
    ... 30, Jan. 31, 2000 1999 Statement of Operations Data: Net sales Cost of sales Gross proÃ't Store operating expenses Store preopening expenses General and administrative expenses Loss on disposal of subsidiary Restructuring beneÃ'ts Operating income Interest income Interest expense Income...

  • Page 19
    ...planned inventory reduction that included the sell-oÃ... of discontinued and slow-moving items at a discount, higher inventory shrink, higher warehouse and distribution costs from the addition of three new forward distribution centers, and increased store occupancy costs due to higher costs associated...

  • Page 20
    ... to MMI in July 1999. On a comparable basis, excluding the U.K. and veterinary sales from Ã'scal 1999 and Ã'scal 1998, net sales increased 12.6% from approximately $1.9 billion in 1998. Comparable North American store sales increased 4.6% for the period. During Ã'scal 1999, the Company opened 58 new...

  • Page 21
    ... general and administrative costs as a percentage of sales were 2.7% of sales for Ã'scal 1998. The increase in Ã'scal 1999 over Ã'scal 1998 relates to costs incurred during the implementation of the Company's new information systems, including one-time costs for payroll and beneÃ'ts, equipment costs...

  • Page 22
    ..., the Company's Board of Directors approved the purchase of $25 million of its Common Stock or its Notes annually for each of the next three Ã'scal years. The Company's policy on the purchase of Common Stock or Notes is to make market purchases when the price is advantageous and as cash Ã-ow allows...

  • Page 23
    ... Company's information systems, and working capital. All of the Company's stores are leased facilities. The Company expects to open 37 new stores in Ã'scal 2001, consisting of 36 stores representing the Company's 19,000 square-foot prototype, primarily in singlestore markets and as Ã'll-in locations...

  • Page 24
    ...the line item(s) on the income statement that include them. The Company historically has classiÃ'ed both inbound and outbound shipping charges in cost of sales. The Company classiÃ'es fulÃ'llment costs, which are those costs incurred in operating and staÇng distribution and customer service centers...

  • Page 25
    ... dollar denominated transactions are recorded within general and administrative expenses in the consolidated statements of operations, and were not material. Item 8. Financial Statements and Supplementary Data The information required by this Item is attached as Appendix F. Item 9. Changes in and...

  • Page 26
    ... part of this Annual Report on Form 10-K. 1. Financial Statements: The Ã'nancial statements of PETsMART are included as Appendix F of this report. See Index to Financial Statements on page F-1. 2. Financial Statement Schedule: The Ã'nancial statement schedule required under the related instructions...

  • Page 27
    ... of the Board of Directors, President, and Chief Executive OÇcer (Principal Executive OÇcer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated...

  • Page 28
    ...'s Equity Plan, as amended. Employee Stock Purchase Plan, as amended. 1997 Non-OÇcer Equity Incentive Plan, as amended. Form of Restricted Stock Bonuses. Fifth Amended and Restated Credit Agreement among PETsMART, Inc., certain lenders, and Bank of America, N.A. as Administrative Lender, dated as...

  • Page 29
    ... on June 17, 1997. (14) Incorporated by reference to Exhibit 99.1 to PETsMART's Registration Statement on Form S-8, (File No. 333-52417), Ã'led on May 12, 1998. (15) Incorporated by reference to Exhibit 10.19 to PETsMART's Annual Report on Form 10-K, (File No. 0-21888), Ã'led on April 24, 2000. 28

  • Page 30
    PETsMART, Inc. and Subsidiaries INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Page Reports of Independent Auditors Consolidated Balance Sheets as of January 28, 2001 and January 30, 2000 Consolidated Statements of Operations for the Ã'scal years ended January 28, ...

  • Page 31
    ..., the Company acquired a controlling interest in PETsMART.com, Inc. and the Company has consolidated PETsMART.com, Inc. since that date. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform...

  • Page 32
    ... management; our responsibility is to express an opinion on these Ã'nancial statements and Ã'nancial statement schedule based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan...

  • Page 33
    ... Directors and Stockholders of PETsMART.com, Inc.: In our opinion, the accompanying balance sheet and the related statement of operations, of stockholders' equity and of cash Ã-ows present fairly, in all material respects, the Ã'nancial position of PETsMART.com, Inc. (the ""Company'') at December 19...

  • Page 34
    ... and equipment, net Investments Other assets, net Deferred income taxes Total assets Liabilities and Stockholders' Equity Accounts payable and bank overdraft Accrued payroll and employee beneÃ'ts Accrued occupancy expenses Accrued merger, business integration and restructuring costs Current...

  • Page 35
    ... STATEMENTS OF OPERATIONS (In thousands, except per share data) January 28, 2001 Fiscal Year Ended January 30, 2000 January 31, 1999 Net sales 2,224,222 Cost of sales 1,667,371 Gross proÃ't 556,851 Store operating expenses 447,113 Store preopening expenses 4,294 General and administrative...

  • Page 36
    ... tax: Foreign currency translation adjustments, net of reclassiÃ'cation adjustment ÏÏÏÏÏ Purchase of treasury stock, at cost ÏÏ Net loss BALANCE AT JANUARY 30, 2000 Tax beneÃ't from exercise of stock options Issuance of common stock under stock incentive plans Amortization of deferred...

  • Page 37
    ...Merchandise inventories Prepaid expenses and other current assets Other assets Accounts payable Accrued payroll and employee beneÃ'ts Accrued occupancy expenses Accrued merger, business integration and restructuring costs Other accrued expenses Deferred rents and other liabilities Net cash...

  • Page 38
    ... services throughout North America. The Company, through its wholly owned subsidiary, PETsMART Direct (""Direct''), is also a leading mail order catalog retailer of pet and animal products, and equine and riding supplies. On December 20, 2000, the Company acquired a controlling interest in PETsMART...

  • Page 39
    ... Notes to Consolidated Financial Statements Ì (Continued) cooperative advertising is placed. Rebate income is recorded as a reduction of cost of sales and cooperative promotional income is recorded as a reduction of store operating expenses. The uncollected amounts of vendor rebate and promotional...

  • Page 40
    ... point of sale for retail stores and at the time of shipment for catalog and e-commerce sales. Outbound shipping charges are included in net sales when the products are shipped for catalog and e-commerce sales. The Company records an allowance for estimated returns in the period of sale. Advertising...

  • Page 41
    ... by dividing net income or loss by the weighted average number of common shares outstanding during the period after adjusting for dilutive stock options and dilutive common shares assumed to be issued on conversion of the Company's Subordinated Convertible Notes. A reconciliation of the basic and...

  • Page 42
    ... is an accounting policy that should be disclosed. It also determined that if shipping costs or handling costs are signiÃ'cant and are not included in cost of sales (that is, if those costs are accounted for together or separately on other income statement line items), a company should disclose both...

  • Page 43
    ...,135 shares of convertible voting preferred stock in PETsMART.com, a corporate joint venture that began operations as an electronic commerce pet product retailer in June 1999. Additionally, the Company formed a strategic alliance to provide certain marketing, merchandising, procurement, distribution...

  • Page 44
    ... The Company has an investment in MMI Holdings, Inc. (""MMIH''), a provider of veterinary and other pet related services. MMIH, through a wholly-owned subsidiary, Medical Management International, Inc., operates full-service veterinary hospitals and wellness clinics inside certain PETsMART stores...

  • Page 45
    ...Notes to Consolidated Financial Statements ÃŒ (Continued) investment using the cost method, as the Company lacks the ability to exercise signiÃ'cant inÃ-uence over MMIH's operating and Ã'nancial policies. During Ã'scal 1999, the Company transferred assets of PETsMART Veterinary Services, Inc. (""PVS...

  • Page 46
    ... accompanying consolidated statements of operations. Note 7 ÃŒ Merger, Integration and Restructuring Costs During Ã'scal 1996 and 1997, the Company recognized $28,400,000 and $73,514,000, respectively, related to merger, integration, store closure and other business restructuring costs incurred in...

  • Page 47
    PETsMART, Inc. and Subsidiaries Notes to Consolidated Financial Statements ÃŒ (Continued) Note 8 ÃŒ Income Taxes Income (loss) before income tax expense, minority interest, extraordinary item..., 2000 (In thousands) January 31, 1999 Current provision (beneÃ't): Federal State Deferred provision (bene...

  • Page 48
    ... ÃŒ (0.6) 40.5% The Company recorded deferred income tax assets (liabilities) in the following Ã'nancial statement line items in the accompanying consolidated balance sheets: January 28, January 30, 2001 2000 (In thousands) Prepaid expenses and other current assets Deferred income taxes Deferred...

  • Page 49
    ... consolidated balance sheets are as follows: January 28, January 30, 2001 2000 (In thousands) Deferred income tax assets: Deferred rents Reserve for closed stores Employee beneÃ't expense Inventory reserve Net operating loss carryforwards Capital loss carryforwards Income tax credits Other...

  • Page 50
    ... the revolving credit agreement up to $40,000,000. Borrowings under this arrangement were to bear interest, at the Company's option, at the lead bank's prime rate plus 0.25% to 0.75%, or LIBOR plus 1.75% to 2.25%. The agreement was secured by the inventories of the United States store operations, to...

  • Page 51
    ...the Company's retail stores occupied by veterinary services, which is recorded as income from leased departments within cost of sales in the accompanying consolidated statements of operations. Rentals are determined by Ã'xed costs per square foot, adjusted for the number of days the clinics are open...

  • Page 52
    ...,000 relating to future store sites under development and construction. On January 16, 2001, certain former stockholders of Pet City Holdings, a U.K. corporation, including Richard Northcott, who was a PETsMART board member from December 1996 to September 1997, Ã'led two complaints, one in federal...

  • Page 53
    ...29,701,849 shares of common stock to key employees (including oÇcers), consultants or directors of the Company at fair market value at the date of grant. At January 28, 2001, stock options to purchase approximately 13,955,771 shares of common stock were outstanding with exercise prices ranging from...

  • Page 54
    PETsMART, Inc. and Subsidiaries Notes to Consolidated Financial Statements Ì (Continued) Activity in all of the Company's stock option plans is as follows: Shares (In thousands) Weighted Average Exercise Price per Share Outstanding, February 1, 1998 Granted Exercised Canceled Outstanding, ...

  • Page 55
    ... Ã'sh, birds, and small animals and other goods and equine related products through retail stores, catalogs, and e-commerce. Additionally, the Company provides directly, or indirectly through a related party, veterinary, grooming, and obedience training services in many of its retail locations. As...

  • Page 56
    ... direct marketing operations, including its separate corporate and warehousing functions. The PETsMART.com segment represents the Company's e-commerce operations, and information reÃ-ected relates to the period beginning December 20, 2000, when the Company acquired a controlling interest in PETsMART...

  • Page 57
    ... Financial Statements ÃŒ (Continued) Operating results and other Ã'nancial data by business segment for Ã'scal 2000, 1999, and 1998 were as follows (in thousands): 2000 1999 1998 Net sales: PETsMART North America PETsMART U.K PETsMART.com PETsMART Direct ÃŒ External customers PETsMART Direct...

  • Page 58
    ..., except per share data) First Quarter Second Quarter $721,234 40,486 20,427 $782,147 $774,807 60,583 ÃŒ $835,390 Third Quarter Fourth Quarter Net sales Gross proÃ't Operating income (loss Equity loss in PETsMART.com Loss before minority interest, extraordinary item and cumulative effect...

  • Page 59
    ...to Consolidated Financial Statements ÃŒ (Continued) Fiscal Year Ended January 30, 2000 (In thousands, except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter Net sales Gross proÃ't Loss on disposal of subsidiary Operating income (loss Equity loss in PETsMART.com Income...

  • Page 60
    ... Valuation reserve deducted in the balance sheet from the asset to which it applies: Merchandise inventories: Fiscal year 1998, Lower of cost or market allowance Fiscal year 1999, Lower of cost or market allowance Fiscal year 2000, Lower of cost or market allowance $3,654 $1,959 $2,516 $ 346...

  • Page 61
    ... equivalent shares outstanding Ì diluted Selected Operating Data:(8) Stores open at end of period Average square footage(4 Net sales per square foot(5 Net sales growth Increase in North American comparable store sales(6 Selected Balance Sheet Data:(8) Merchandise inventories Working capital...

  • Page 62
    ... of State Line Tack in January 1996 and Pet City Holdings plc in December 1996, both of which were accounted for under the pooling of interests method; and the 2-for-1 stock split eÃ...ected in the form of a stock dividend paid July 19, 1996 to holders of PETsMART Common Stock of record on July...