Petsmart 2003 Annual Report Download - page 38

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 $11.4 million related to litigation settlement and costs, which represented 0.4% 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 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.
Equity Loss in PETsMART.com and Minority Interest
In January 2002, we acquired all the remaining shares held by PETsMART.com minority stockholders for
approximately $9.5 million.
Income Tax Expense
For 2002, the $65.0 million income tax expense represents an eÅective rate of 42.2%. For 2001, the $8.0 million
income tax expense included a $10.3 million tax beneÑt associated with the June 2001 increase in ownership of
PETsMART.com and a tax expense of $18.3 million for 2001 results, or an eÅective rate of 40.4%.
Liquidity and Capital Resources
Cash Flow and Balance Sheet Data
Cash provided by operations increased $23.6 million to $246.4 million in 2003, compared with $222.8 million in
2002. The increase was driven by higher net income and depreciation and amortization, and was partially oÅset by
decreases in changes in assets and liabilities.
Merchandise accounts payable leveraging (the percentage of merchandise inventory Ñnanced by vendor credit
terms, i.e., accounts payable divided by merchandise inventory), increased to 41.5% as of February 1, 2004,
compared with 39.7% as of February 2, 2003. Inventory balances were $309.1 million as of February 1, 2004, and
$257.1 million as of February 2, 2003. Average retail store inventory, which represents total ending inventory divided
by the open stores at the end of the period, increased to approximately $0.48 million per store as of February 1,
2004, compared with approximately $0.44 million per store as of February 2, 2003. Increases over the prior year
reÖect improved in-stocks at the end of 2003, the increase in the number of store openings in the Ñrst quarter of
2004 and the inventory needed to stock them, and the continued increase in sales in existing stores.
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