Petsmart 2002 Annual Report Download - page 33

February 3, 2002. In 2002, we opened 27 new stores, and closed four stores. The increase in services revenue,
which includes grooming, training and our three PETsMART PETsHOTEL
TM
operations, was due primarily
to higher volume. The decrease in revenue from direct marketing channels was from lower pet catalog sales,
due to a decision to reduce circulation and advertising in the Ñrst half of 2002, and lower e-commerce sales.
Also, in the fourth quarter of 2001, we sold an ancillary equine catalog to a third party and closed Ñve small
neighborhood PetWise retail stores located in upstate New York, which had been part of the direct marketing
channels business in 2001.
Gross ProÑt
Gross proÑt increased as a percentage of net sales to 29.2% for 2002, from 26.9% for 2001. The increase
primarily reÖected lower product cost of goods sold due to increased sales of higher margin products during
2002, compared with 2001, as well as higher services revenue, which carries a higher margin than
merchandise. Although we have increased the direct marketing gross proÑt margins due to lower distribution
costs, the reduction in the direct marketing sales volumes caused a slight reduction in gross proÑt. We also
continue to leverage expenses in 2002 through lower inventory shrinkage and occupancy costs as a percentage
of sales, compared with 2001. The lower distribution costs for our direct marketing channels were primarily a
result of the beneÑts obtained from their integration in the Ñrst half of 2002.
Operating Expenses
Operating expenses decreased as a percentage of net sales to 18.5% for 2002, from 19.3% for 2001. As a
percentage of sales, reductions in equipment rent and advertising expense drove the decrease for 2002,
compared with 2001. In 2002, we shifted our focus to using available cash to purchase new equipment and
equipment expiring under lease agreements rather than entering into new equipment lease contracts. The
result of this shift in focus is higher depreciation expense, which partially oÅset the rent expense reduction. In
addition, reductions of operating expenses in the direct marketing channels contributed to the decrease due
primarily to the beneÑts obtained from their integration in the Ñrst half of 2002. Advertising expenses
decreased due primarily to reductions in store and direct marketing channels advertising in the Ñrst half of the
year, as well as reductions in catalog distribution during 2002, compared with 2001. An increase in store
incentive bonus expenses as a result of our performance in 2002 partially oÅset the improvements for 2002,
compared with 2001.
General and Administrative Expenses
General and administrative expenses decreased as a percentage of net sales to 4.3% for 2002, from 4.8%
for 2001. In 2002, we recorded $13.2 million related to litigation settlement and costs, which represented 0.5%
of sales. In 2001, we recorded $6.9 million for impairment charges, $3.7 million in charges related to the
reorganization of subsidiaries, $13.5 million for store closures, $5.0 million related to litigation costs, and
$0.7 million for other asset write downs. We also recorded cash proceeds of $17.0 million associated with a
vendor resolution, totaling net charges of $12.8 million. These charges represented 0.5% of sales. In 2002, the
reductions in our direct marketing channels, due primarily to the beneÑts obtained from their integration in
the Ñrst half of 2002, as well as credits received through a resolution for vendor services, were partially oÅset
by higher bonus accruals related to our performance for 2002, and higher costs associated with employee
beneÑts and insurance.
Interest Expense
Interest expense decreased to $20.8 million for 2002, from $27.4 million for 2001. The decrease was
primarily due to the retirement and conversion of the 6
3
/ 4 % Subordinated Convertible Notes, or the Notes, in
the Ñrst quarter of 2002. For 2001, interest expense also included higher bank fees due to the expensing of
unamortized fees when we entered into a new credit agreement in April 2001. The decrease was partially oÅset
by higher interest as a result of additional capital leases entered into in 2002 and 2001.
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