Petsmart 2002 Annual Report Download - page 57

PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Merchandise Inventories and Cost of Sales
Merchandise inventories are stated at the lower of cost or market. Cost is determined using the Ñrst-in,
Ñrst-out method based on moving average costs and includes certain procurement and distribution costs
relating to the processing of merchandise. The Company maintains reserves for lower of cost or market, as well
as shrinkage reserves.
Total procurement and distribution costs charged to inventory during Ñscal 2002, 2001, and 2000 were
$156,926,000, $126,784,000, and $91,987,000, respectively. Procurement and distribution costs remaining in
inventory as of February 2, 2003 and February 3, 2002 were $25,442,000 and $24,778,000, respectively.
Cost of sales includes the following types of expenses: direct costs associated with the products sold,
including inbound freight; salaries of the groomers and trainers and other costs related to the services line of
business; warehousing costs, including procurement and distribution costs; store occupancy and utilities costs;
and inventory shrinkage costs. Also included in cost of goods sold are reductions for vendor rebates and
discounts.
Inventory Shrinkage Reserves
PETsMART stores perform physical inventories once a year and, in between physical inventories, stores
perform cycle counts on certain inventory items. The forward distribution centers and distribution centers
perform cycle counts encompassing all inventory items every quarter. Therefore, as of the end of each
reporting period, there will be stores with certain inventory items that have not been counted. Due to the
holiday season at the end of the Ñscal year, the stores do not perform physical inventories during the last
quarter of the Ñscal year, but continue to perform counts on certain inventory items. As of the end of each
reporting period, the Company estimates the inventory shrinkage reserve by applying a rolling two-year
historical shrink rate against the volume of merchandise sales since the last inventory. During 2002, the
Company changed the historical shrink rate from a three-year historical trend to a two-year trend because the
Company believes the actual shrink results in 2000 were skewed by the eÅects of the implementation of our
business software, and are not indicative of the current results. As of February 2, 2003 and February 3, 2002,
approximately $10,243,000 and $9,147,000, respectively, were recorded for inventory shrinkage reserves.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation. Depreciation is provided on
buildings, furniture, Ñxtures and equipment, and computer software using the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements and capital lease assets are amortized
using the straight-line method over the shorter of the lease term or the estimated useful lives of the related
assets. Maintenance and repairs are expensed as incurred. New store furniture, Ñxtures and equipment held for
sale and leaseback of $9,629,000 as of February 3, 2002, was recorded in receivables in the accompanying
consolidated balance sheets, and represent assets purchased that will be sold and leased back upon
consummation of lease transactions as new stores open. In Ñscal 2002, the Company did not lease equipment,
and therefore does not have a balance recorded in receivables as of February 2, 2003.
The Company's property and equipment is depreciated using the following estimated useful lives:
Buildings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39 years or term of lease
Furniture, Ñxtures, and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 Ì 7 years
Leasehold improvementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Term of lease
Computer softwareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 Ì 7 years
F-9