Petsmart 2002 Annual Report Download - page 60

PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
assets will not be realized. In 2001, the Company reversed valuation allowances on deferred tax assets of
$18,885,000 associated with the increase in ownership of PETsMART.com (see Note 2). The impact of the
reversed valuation allowances was included in income tax expense net of the reduction of goodwill discussed
above under Goodwill.
Revenue Recognition
The Company records revenue at the point of sale for retail stores. The shipping terms for catalog and
Internet orders is FOB shipping point, therefore revenue is recognized at the time of shipment for catalog and
electronic commerce sales. Outbound shipping charges are included in net sales when the products are
shipped for catalog and electronic commerce sales. The Company records an allowance for estimated returns
in the period of sale. Revenue for pet grooming and training is recognized when services are performed.
Advertising
The Company charges advertising costs to expense as incurred, except for direct response advertising,
which is capitalized and amortized over its expected period of future beneÑt, and classiÑes advertising costs
within operating expenses. Total advertising expenditures, net of cooperative income, including direct response
advertising, were $66,180,000, $80,247,000, and $64,675,000 for Ñscal 2002, 2001, and 2000, respectively.
Direct response advertising consists primarily of product catalogs developed by the Company's direct
marketing subsidiaries. The capitalized costs of the direct response advertising are amortized over the six-
month to one-year period following the mailing of the respective catalog. As of February 2, 2003, and
February 3, 2002, $2,020,000 and $2,648,000, respectively, of direct response advertising was included in
prepaid expenses and other current assets in the accompanying consolidated balance sheets.
Reserve for Closed Stores
The Company continuously evaluates the performance of its retail stores and periodically closes those
which are underperforming. The Company establishes reserves for future rental payments on closed stores and
terminated subleases, and classiÑes these costs in general and administrative expenses (see Note 6). The costs
for future rental payments associated with closed stores are calculated using the net present value method, at a
risk-free interest rate, over the remaining life of the lease, net of expected sublease income. The Company
records such reserves as of the date it ceases use of the property. Judgment is used to estimate the underlying
real estate market related to the expected sublease income, and the Company can make no assurances that
additional charges will not be required based on the changing real estate environment. As of February 2, 2003
and February 3, 2002, approximately $9,261,000 and $12,319,000, respectively, were recorded for closed store
reserves.
Foreign Currency Translation and Transactions
The local currency has been used as the functional currency in Canada. The assets and liabilities
denominated in foreign currency are translated into United States dollars at the current rate of exchange at
year-end and revenues and expenses are translated at the average exchange rate for the year. The translation
gains and losses are included as a separate component of other comprehensive income (loss), and transaction
gains and losses are included in net income (loss).
Comprehensive Income
The income tax expense (beneÑt) related to the foreign currency translation adjustment, which was the
only component of other comprehensive income, was approximately $592,000, $(210,000), and $(763,000)
for Ñscal 2002, 2001, and 2000, respectively.
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