Petsmart 2003 Annual Report Download - page 37

Operating Expenses
Operating expenses decreased slightly as a percentage of net sales to 18.4% for 2003, from 18.5% for 2002. As a
percentage of sales, reductions in equipment rent and operating expenses in the direct marketing channels drove the
decrease for 2003, compared with 2002.
General and Administrative Expenses
General and administrative expenses decreased as a percentage of net sales to 3.8% for 2003, from 4.3% for
2002. In 2002, we recorded $11.4 million related to litigation settlement and costs, which represented 0.4% of sales.
In 2003, we leveraged payroll and beneÑts costs as well as decreased our bonus expenses compared to 2002. This
reduction was partially oÅset by higher expenses associated with closed stores and the payment of a residual value
guarantee on two land parcels. We closed seven stores in Ñscal 2003, compared to four stores in Ñscal 2002. The
higher expense in 2003 was driven by a timing diÅerence due to the application of SFAS 146, ""Accounting for Costs
Associated with Exit or Disposal Activities.'' The plan to close two of the four stores in 2002, and the related expense
recognition, took place at the end of Ñscal 2001. In 2002, we adopted SFAS 146, which requires us to record closed
store expense in the period that the store is actually closed.
Interest Expense
Interest expense decreased to $19.5 million for 2003, from $20.8 million for 2002. The decrease was primarily
due to the retirement and conversion of our 6
3
/ 4 % Subordinated Convertible Notes, or the Notes, in the Ñrst quarter
of 2002. For 2003, interest expense also included lower capital lease interest due to the expiration of certain capital
lease obligations.
Income Tax Expense
For 2003, the $88.3 million income tax expense represents an eÅective rate of 38.8%. For 2002, the
$65.0 million income tax expense represents an eÅective rate of 42.2%. The reduction in the eÅective tax rate from
2002 to 2003 is primarily due to certain non-deductible losses recognized in 2002 associated with the settlement of
litigation.
Fiscal 2002 Compared to Fiscal 2001
Net Sales
Net sales increased $194.2 million, or 7.8%, to $2,695.2 million for 2002, from 2001 sales of $2,501.0 million.
Store sales increased by $240.9 million as a result of 23 additional net stores and a 9.6% increase in comparable store
sales. Fiscal 2001 had 53 weeks compared with 52 weeks in Ñscal 2002. Services sales, which are included in store
sales growth, increased by 29.4%, or $35.1 million. The increases were partially oÅset by a decrease in direct
marketing channel sales of $46.7 million. As of February 2, 2003, we operated 583 stores, compared with 560 stores
as of February 3, 2002. In 2002, we opened 25 new stores, relocated two stores and closed four stores. The increase
in services revenue, which includes grooming, training and our PETsHOTEL operations, was due primarily to
increased traÇc. 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 and increased sales of higher margin products during 2002,
compared with 2001. Although we increased our 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
continued 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.
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