Petsmart 2004 Annual Report Download - page 70

PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Short-term Investments
The Company's short-term investments consist of Auction Rate Securities, or ARS, which represent
funds available for current operations. In accordance with the Statement of Accounting Standards, or SFAS,
No. 115, ""Accounting for Certain Investments in Debt and Equity Securities,'' these short-term investments
are classiÑed as available-for-sale and are carried at cost, or par value which approximates the fair market
value. These securities have stated maturities beyond three months but are priced and traded as short-term
instruments due to the liquidity provided through the interest rate mechanism of 28 to 49 days.
Vendor Rebates and Promotions
The Company receives income from certain merchandise suppliers in the form of rebates and promotions.
Agreements are made with each individual merchandise supplier and income is earned as buying levels are
met and/or cooperative advertising is placed. Rebate income is recorded as a reduction of cost of sales, and
cooperative promotional income is recorded as a reduction of operating, general and administrative expenses.
The uncollected amounts of vendor rebate and promotional income remaining in receivables in the
accompanying consolidated balance sheets as of January 30, 2005 and February 1, 2004, were approximately
$2,922,000 and $1,293,000, respectively. Unearned vendor rebates recorded as a reduction of inventory in the
accompanying consolidated balance sheets were approximately $455,000 and $386,000 as of January 30, 2005
and February 1, 2004, respectively.
Merchandise Inventories and Cost of Sales
Merchandise inventories are stated at the lower of cost or market. Cost is determined using the Ñrst-in,
Ñrst-out method based on moving average costs and includes certain procurement and distribution costs
related to the processing of merchandise. The Company maintains reserves for lower of cost or market, as well
as shrinkage.
Total procurement and distribution costs charged to cost of sales during Ñscal 2004, Ñscal 2003 and Ñscal
2002 were $183,710,000, $169,579,000 and $156,926,000, respectively. Procurement and distribution costs
remaining in inventory as of January 30, 2005 and February 1, 2004, were $32,383,000 and $30,262,000,
respectively.
Cost of sales includes the following types of expenses: direct costs associated with the products sold,
including inbound freight; salaries of the groomers and trainers and other costs related to the services line of
business; warehousing costs, including procurement and distribution costs; store occupancy, including
depreciation of leasehold improvements and capitalized lease assets, and utilities costs; and inventory
shrinkage costs. Also included in cost of sales are reductions for vendor rebates and discounts.
Inventory Valuation Reserves
The Company has established reserves for estimated inventory shrinkage between physical inventories.
Stores perform physical inventories once a year, and in between the physical inventories, the stores perform
cycle counts on certain inventory items. 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, the Company estimates the inventory shrinkage based on a two-year historical
trend analysis. The Company also has reserves for estimated obsolescence and to reduce inventory to the lower
of cost or market.
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