Petsmart 2003 Annual Report Download - page 35

judgments that aÅect the reported amounts of assets, liabilities, revenues, and expenses. On an on-going basis, we
evaluate our estimates for reserves for inventory shrinkage, store closures, insurance liabilities and reserves, and
income taxes. We base our estimates on historical experience and on various other assumptions we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Under diÅerent assumptions or
conditions, actual results may diÅer from these estimates. We believe the following critical accounting policies
aÅect the more signiÑcant judgments and estimates we use in preparing our consolidated Ñnancial statements.
Inventory Shrinkage Reserves
Our stores perform physical inventories once a year, and in between the physical inventories, the stores perform
cycle counts on certain inventory items. Our forward distribution centers and distribution centers perform cycle
counts encompassing all inventory items every quarter. Therefore, as of a reporting period, there will be stores with
certain inventory items that have not been counted. Due to the holiday season, the majority of the stores do not
perform physical inventories during the last quarter of the Ñscal year, but continue to perform cycle counts on
certain inventory items. Therefore, as of each reporting period presented, we estimate the inventory shrinkage
reserve for un-inventoried sales based on a two-year historical trend analysis by store. As of February 1, 2004, and
February 2, 2003, we have reserved approximately $10.1 million and $10.2 million, respectively, for inventory
shrinkage.
Reserve for Closed Stores
We continuously evaluate the performance of our retail stores and periodically close those that are under-
performing. We establish reserves for future rental payments on closed stores and terminated subleases in the period
the store is closed, in accordance with Financial Accounting Standards Board, or FASB, Statement of Financial
Accounting Standards, or SFAS, No. 146, ""Accounting for Costs Associated with Exit or Disposal Activities.'' These
costs are classiÑed in general and administrative expenses. We calculate the costs for future rental payments
associated with closed stores using the net present value method, at a credit-adjusted risk-free interest rate, over the
remaining life of the lease, net of expected sublease income. Judgment is used to estimate the underlying real estate
market related to the expected sublease income and timing of the sublease start date, and we can make no
assurances that additional charges to these stores will not be required based on the changing real estate environment.
As of February 1, 2004, and February 2, 2003, we had, respectively, 19 and 18 stores included in our closed
store reserves, of which 12 and nine were under sublease agreements. We have assumed that as of February 1, 2004,
Ñve additional stores will have sublease income in future periods, which represents a $13.7 million reduction to the
reserve. If these sublease assumptions were extended by a year, the reserve would increase by approximately
$1.3 million. We closed seven stores in Ñscal 2003, of which one store closed as scheduled due to lease expiration,
compared to four stores in Ñscal 2002. As of February 1, 2004, and February 2, 2003, the total remaining discounted
gross rents for such closed stores was $55.7 million and $46.5 million, respectively, which was reduced by expected
sublease income of $41.0 million and $37.2 million, respectively, for a net balance of approximately $14.7 million
and $9.3 million, respectively, for closed store reserves.
Insurance Liabilities and Reserves
We maintain standard property and casualty insurance on all our properties and leasehold interests, product
liability insurance that covers products and the sale of live pets, self-insured health plans, and worker compensation
insurance. Property insurance covers approximately $948.7 million in buildings and contents, including furniture and
Ñxtures, leasehold improvements, and inventory. Under our casualty and workers compensation insurance policies
through January 31, 2004, we retain the initial risk of loss of $0.25 million for each policy per occurrence. EÅective
February 1, 2004, we engaged a new insurance provider. Under our casualty and workers compensation insurance
policies with the new provider, we retain an initial risk of loss of $0.5 million for each policy per occurrence on or
subsequent to February 1, 2004. We establish reserves for losses based on independent actuarial estimates of the
amount of loss inherent in that period's claims, including losses for which claims have been incurred but not
reported. Loss estimates rely on actuarial observations of ultimate loss experience for similar historical events, and
changes in such assumptions could result in an adjustment to the reserves. As of February 1, 2004, and February 2,
2003, we had approximately $27.9 million and $26.5 million, respectively, in reserves related to casualty, self-insured
health plans and workers' compensation insurance policies.
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