Petsmart 2001 Annual Report Download - page 21

stores, including nine replacement stores, and closed six stores in North America for a net increase of 43
stores. The Company had 484 North American stores in operation on January 30, 2000 compared to 441
North American stores open on January 31, 1999.
Gross proÑt, deÑned as net sales less cost of sales, including distribution costs and store occupancy costs,
increased as a percentage of net sales to 27.1% for Ñscal 1999 from 25.0% for Ñscal 1998. On a comparable
basis, excluding the U.K. subsidiary from 1998, gross proÑt in 1998 was 25.7%. This increase principally
reÖected improved product margins and sales mix changes, oÅset partially by increased warehouse and
distribution costs.
Store operating expenses, which include payroll and beneÑts, advertising and other store expenses,
increased as a percentage of net sales to 19.7% for Ñscal 1999 from 19.0% for Ñscal 1998. Excluding the U.K.,
store operating expenses were 18.9% of sales in Ñscal 1998. The change resulted from increased North
American advertising expenditures and increased payroll and beneÑts due to labor requirements for the
conversion to the Company's new information system and point-of-sale register system.
Store preopening expenses as a percentage of net sales decreased to 0.3% for Ñscal 1999, compared to
0.4% in Ñscal 1998. Including nine replacement stores, the Company opened 58 stores during Ñscal 1999,
compared to 74 North American stores opened in Ñscal 1998. For stores that opened during Ñscal 1999, the
average preopening expense incurred was approximately $95,000 per store, which is consistent with the
Company's prior experience.
General and administrative expenses as a percentage of sales increased to 3.0% for Ñscal 1999, as
compared to 2.9% for Ñscal 1998. Excluding the U.K., general and administrative expenses were 3.0% of sales
in Ñscal 1998. General and administrative costs for Ñscal 1998 included $4.7 million of nonrecurring legal and
settlement costs and executive severance costs. Excluding the one-time legal and severance costs and the
U.K., general and administrative costs as a percentage of sales were 2.7% of sales for Ñscal 1998. The increase
in Ñscal 1999 over Ñscal 1998 relates to costs incurred during the implementation of the Company's new
information systems, including one-time costs for payroll and beneÑts, equipment costs and professional fees,
which totaled approximately $5.0 million.
Loss on disposal of subsidiary in Ñscal 1999 was approximately $45.7 million, including approximately
$31.1 million of loss and transaction related expenses on the sale of the Company's U.K. subsidiary, and
approximately $14.6 million of loss from operations in the U.K. during Ñscal 1999.
The Company's operating income decreased to $42.1 million for Ñscal 1999 from $58.3 million for Ñscal
1998, excluding the $1.8 million of merger and restructuring beneÑt recorded in Ñscal 1998. This decrease was
primarily due to the loss on disposal of subsidiary and operational losses of the U.K., oÅset in part by increased
gross proÑt and decreased preopening expenses as described above.
Interest income decreased slightly to $2.9 million for Ñscal 1999 from $3.1 million for Ñscal 1998,
principally due to the decrease in average cash balances available to invest during Ñscal 1999 that came
primarily from stock repurchase, the equity investment in PETsMART.com, and increased capital expendi-
tures for information systems. These factors were oÅset by proceeds from the sale of the U.K. subsidiary.
Interest expense decreased to $22.8 million for Ñscal 1999 from $24.1 million for Ñscal 1998. Excluding the
U.K. segment's interest expense from Ñscal 1998, interest expense on a comparable basis was $22.4 million for
Ñscal 1998.
Equity loss in PETsMART.com, in which the Company had a 49.6% equity investment, represented the
Company's proportionate share of loss from PETsMART.com, which began operations in June 1999. The
Company's portion of PETsMART.com's losses from the date operations began through the end of Ñscal 1999
was approximately $29.1 million.
For Ñscal 1999, the $25.1 million income tax provision resulted in a reported eÅective rate of 368%.
Losses from the Company's equity investment in PETsMART.com are excluded from the Company's
consolidated income tax return. Also, the loss on the sale of the U.K. subsidiary is not deductible for tax
purposes until a capital gain is recognized to oÅset the capital loss. Excluding the tax beneÑt of $4.8 million
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