Petsmart 2006 Annual Report Download - page 38

• Comparable store sales, or sales in stores open at least a year, increased 5.0% during fiscal 2006 on top of a
4.2% increase during fiscal 2005. We project comparable store sales growth in the mid-single digits for fiscal
2007.
• Services sales increased 25.8% to $376.0 million, or 8.9% of net sales for fiscal 2006. Services sales
increased 24.2% to $298.9 million, or 7.9% of net sales during fiscal 2005.
• Gross margins decreased to 30.9% of net sales in fiscal 2006 compared to 31.2% of net sales in fiscal 2005.
• Operating, general and administrative expenses increased to 23.3% of net sales in fiscal 2006 compared to
22.9% of net sales in fiscal 2005.
• During fiscal 2006, we purchased approximately 6.3 million shares of our common stock for approximately
$161.9 million and we declared cash dividends totaling $0.12 per share.
• Cash capital expenditures for 2006 were $241.1 million, and we anticipate spending between $250.0 million
and $260.0 million for capital expenditures in fiscal 2007.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis,
we evaluate our estimates for inventory valuation reserves, insurance liabilities and reserves, reserve for closed
stores, reserves against deferred tax assets and tax contingencies. 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 different assumptions or conditions, actual results may differ from these estimates. We believe the
following critical accounting policies reflect the more significant judgments and estimates we use in preparing our
consolidated financial statements.
Inventory Valuation Reserves
We have established reserves for estimated inventory shrinkage between physical inventories. Distribution
centers and forward distribution centers perform cycle counts encompassing all inventory items at least once every
quarter or perform an annual physical inventory. Stores perform physical inventories at least once a year, and
between the physical inventories, stores perform counts on certain inventory items. Most of the stores do not
perform physical inventories during the last quarter of the fiscal year due to the holiday season, but continue to
perform counts on certain inventory items. 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. Changes in shrink results or market conditions could cause
actual results to vary from estimates used to establish the inventory reserves.
We also have reserves for estimated obsolescence and to reduce inventory to the lower of cost or market. We
evaluate inventories for excess, obsolescence or other factors that may render inventories unmarketable at their
recorded cost. Obsolescence reserves are recorded so that inventories reflect the approximate net realizable value.
Factors included in determining obsolescence reserves include current and anticipated demand, customer pref-
erences, age of merchandise, seasonal trends and decisions to discontinue certain products. If assumptions about
future demand change or actual market conditions are less favorable than those projected by management, we may
require additional reserves.
As of January 28, 2007 and January 29, 2006, we had inventory valuation reserves of $16.7 million and
$14.3 million, respectively.
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