Petsmart 2004 Annual Report Download - page 43

Executive Summary
‚ Diluted earnings per common share increased 24% to $1.14, on net income of $171.2 million, for Ñscal
2004 compared to diluted earnings per common share of $0.92 on net income of $135.4 million for
Ñscal 2003. The increase in earnings for 2004 is due to a combination of revenue gains and gross proÑt
rate improvement, partially oÅset by an increase in operating, general and administrative expenses and
income taxes.
‚ Net sales increased 12.4% to $3.4 billion for 2004 compared to $3.0 billion for 2003 due to the addition
of 83 net new stores and a comparable same store sales increase of 6.3% for the year. Services sales also
increased 24.4% over the prior year amounts.
‚ Gross margins increased 78 basis points for Ñscal 2004 compared to Ñscal 2003 as we improved buying
procedures and saw results from our new price optimization software, which is protecting and
enhancing gross margins even as we pursue our loyalty card program. Occupancy and inventory related
costs were also lower as a percentage of revenue in Ñscal 2004 compared to Ñscal 2003.
‚ Operating, general and administrative expenses increased to 22.4% of net sales in 2004 compared to
22.1% of net sales in 2003 due primarily to higher insurance and repair and maintenance costs, which
were partially oÅset by lower advertising, bonus and closed store expenses as a percentage of sales.
‚ During Ñscal 2004, we purchased 2,680,778 shares of our common stock for approximately $80.0 mil-
lion, or an average price of $29.84 per share, and we declared cash dividends totaling $0.12 per share.
‚ We expect to open 100 net new stores and 12 new PETsHOTELs in Ñscal 2005. We also anticipate
same store sales growth of Ñve to six percent for 2005.
‚ Capital expenditures for 2004 were $143 million, and we anticipate spending between $220 million and
$230 million for capital expenditures in Ñscal 2005.
Critical Accounting Policies and Estimates
The discussion and analysis of our Ñnancial condition and results of operations are based on our
consolidated Ñnancial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these Ñnancial statements requires us
to make estimates and judgments that aÅect the reported amounts of assets, liabilities, revenues and expenses.
On an on-going basis, we evaluate our estimates for inventory valuation reserves, reserve for closed stores,
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 reÖect the more signiÑcant judgments and estimates we use in
preparing our consolidated Ñnancial statements.
Inventory Valuation Reserves
We have established reserves for estimated inventory shrinkage between physical inventories. Our stores
perform physical inventories once a year, and in between the physical inventories, the stores perform cycle
counts on certain inventory items. Our distribution centers and forward distribution centers perform cycle
counts encompassing all inventory items every quarter or perform an annual physical inventory. 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 the end of a
reporting period, there will be stores with certain inventory items that have not been counted. For each
reporting period presented, we estimate the inventory shrinkage based on a two-year historical trend analysis.
We also have reserves for estimated obsolescence and to reduce inventory to the lower of cost or market.
Changes in shrink results or market conditions could cause actual results to vary from estimates used to
establish the inventory reserves.
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