Petsmart 2001 Annual Report Download - page 17

Overview
PETsMART is the leading provider of products, services, and solutions for the lifetime needs of pets. At
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 and aÇliated web sites that market supplies
for pets and horses. The Company oÅers a broad line of products for all the life stages of pets and is the
nation's largest provider of high-quality grooming and pet training services. Through its strategic partnership
with BanÑeld, The Pet HospitalTM, PETsMART provides full-service veterinary care in approximately half its
stores.
During Ñscal 2000, the Company opened 55 new retail stores, including four replacement stores, and
closed two stores in North America.
The Company expects that any future increases in net sales and net income will be dependent on the
opening of additional stores and the improved performance of existing stores. In view of the increasing
maturity of its store base (an average age of 4.7 years as of January 28, 2001), as well as the planned opening
of additional stores in existing markets, the Company anticipates that comparable store sales increases may be
lower in future periods. As a result of its expansion plans, the Company anticipates the timing of new store
openings, related preopening expenses, and the amount of revenue contributed by new and existing stores may
cause the Company's quarterly results to Öuctuate. In addition, because new stores have higher payroll,
advertising and other store level expenses as a percentage of sales than mature stores, the impact of new store
openings will also contribute to lower store operating margins until they become established. The Company
charges preopening costs associated with each new location to earnings as the costs are incurred. Therefore,
the Company expects that the opening of large numbers of new stores in a given quarter will adversely impact
its quarterly results of operations for that period.
Acquisition of Controlling Interest in PETsMART.com
On December 20, 2000, the Company acquired a controlling interest in PETsMART.com, Inc.
(""PETsMART.com'') (the ""Transaction''). PETsMART.com is a leading e-commerce pet food and supply
business which began operations in the second quarter of Ñscal 1999. The Company held a voting ownership of
approximately 46% prior to closing of the Transaction and historically accounted for its investment under the
equity method of accounting, recognizing the Company's share of PETsMART.com's operating results. Under
the terms of the Transaction, the Company received newly issued PETsMART.com Series F Preferred Stock
in exchange for $10 million in cash, a promissory note for $10 million, as well as the Company's pet catalog
business assets which are valued at book value of approximately $9.2 million (consisting of approximately $6.2
million of merchandise inventories and approximately $3.0 million of other current assets) and purchased
outstanding shares of capital stock directly from certain employees and other shareholders of PET-
sMART.com for approximately $3.8 million in aggregate consideration. The cash paid to other shareholders in
the Transaction came from the Company's general business funds. As a result of the Transaction, the
Company now holds more than an 81% voting ownership in PETsMART.com, and has assumed control. The
Company has accounted for the results of operations of PETsMART.com from December 20, 2000 to
January 28, 2001 under the consolidation method of accounting.
Iams Brand Shift to Mass Channel Retailing
In August 1999, The Proctor and 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 Ñrst time. As a result, PETsMART experienced a decrease in sales of Iams products,
compared to the same period in Ñscal 1999. The long-term impact of this development is yet to be determined,
and the Company could continue to be adversely aÅected by it.
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