Petsmart 2001 Annual Report Download - page 10

In 1998, the Company entered into an agreement to provide certain product sourcing and consulting
services to a major South African retailer. As these operations grow, they may require greater management
and Ñnancial resources. International operations require the integration of personnel with disparate cultural
and business backgrounds and an understanding of the relevant diÅerences in the legal and regulatory
environments. If the Company's international operations expand, PETsMART's results may be increasingly
aÅected by the risks of such activities, including Öuctuations in currency exchange rates, changes in
international staÇng and employment issues, tariÅ and other trade barriers, the burden of complying with
foreign laws, including tax laws, and political and economic instability and developments.
Government Regulation The Company is subject to laws governing its operation of veterinary clinics in
its retail stores. There are statutes and regulations in certain states and Canadian provinces that aÅect the
ownership of veterinary practices, or the operation of veterinary clinics in retail stores, that may impact the
Company's ability to operate veterinary clinics within certain of its facilities.
A determination that the Company is in violation of any of these applicable restrictions could require the
Company to restructure its operations to comply or render it unable to operate veterinary clinics in a given
local government jurisdiction.
Reliance on Vendors and Product Lines PETsMART has no long-term supply commitments from its
premium food or other product vendors. The Company buys from approximately 593 vendors worldwide, the
two largest of which account for approximately 17% of total purchases. Sales of premium pet food for dogs and
cats make up a signiÑcant 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 2000, IAMS, another premium brand, began mass distribution to supermar-
kets, warehouse clubs and other mass merchandisers. The full impact of this change is still to be determined;
however, some lost traÇc due to customer convenience was experienced during Ñscal 2000. As a result, the
Company could continue to be materially adversely aÅected. Also, if any of the other premium pet food
vendors were to make their products available in supermarkets or through mass merchandisers, or if the
grocery brands currently available to such retailers were to gain market share at the expense of the premium
brands sold only through specialty pet food and supply outlets, the Company could be negatively impacted.
The Company purchases signiÑcant amounts of pet supplies from a number of vendors with limited
supply capabilities. There can be no assurance that PETsMART's current pet supply vendors will be able to
accommodate the Company's anticipated growth. PETsMART is continually seeking to expand its base of pet
supply vendors and to identify new pet supply products. The Company purchases signiÑcant amounts of pet
supplies from vendors outside of the United States. There can be no assurance the Company's overseas
vendors will be able to satisfy PETsMART's requirements, including timeliness of delivery, acceptable
product quality, packaging and labeling requirements, and other requirements of the Company. An inability of
PETsMART's existing vendors to provide products in a timely or cost-eÅective manner could have a material
adverse eÅect on the Company. While the Company believes its vendor relationships are satisfactory, any
vendor could discontinue selling to the Company at any time.
Electronic Commerce Initiatives PETsMART.com competes against other electronic retailers who have
established web sites and product oÅerings. The Company believes that its existing fulÑllment and order
processing capabilities, along with its advertising, merchandising, product procurement, and pet-related
content abilities provide PETsMART.com with a competitive advantage over other electronic commerce
retailers. Direct recently expanded its Brockport, New York distribution facility to better service the
anticipated inventory and fulÑllment needs (See ""Distribution'' section below). There can be no assurance
PETsMART.com, statelinetack.com and rcsteele.com will be successful and proÑtable and that the Company
will realize the anticipated return on their investment in these e-commerce endeavors.
Although electronic commerce is expanding in certain retail categories, there can be no assurance that
the Company's class of goods can be eÅectively and eÇciently marketed, sold and delivered through electronic
commerce. PETsMART may also be required to seek additional capital resources to fund PETsMART.com
and there can be no assurance that the Company would be successful in obtaining such Ñnancing on
acceptable terms. The ""Internet Tax Freedom Act'' currently prohibits the collection by state and local
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