Petsmart 2006 Annual Report Download - page 39

Reserve for Closed Stores
We continuously evaluate the performance of our retail stores and periodically close those that are under-
performing. Closed stores are generally replaced by a new store in a nearby location. We establish reserves for
future occupancy payments on closed stores in the period the store is closed, in accordance with SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities.” These costs are classified in operating, general
and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income. We
calculate the costs for future occupancy payments, net of expected sublease income, associated with closed stores
using the net present value method, at a credit-adjusted risk-free interest rate, over the remaining life of the lease.
We can make no assurances that additional charges for these stores will not be required based on the changing
real estate environment.
As of January 28, 2007 and January 29, 2006, we had 19 stores included in our closed store reserve, of which 12
were under sublease agreements. In addition to the stores under sublease agreements as of January 28, 2007, we
have assumed that five stores will have sublease income in future periods, which represents a $4.5 million reduction
to the reserve. If these sublease assumptions were extended by a year from the anticipated commencement date of
the assumed sublease term, the reserve would increase by approximately $1.0 million. We closed 10 stores in fiscal
2006 of which one closed as scheduled due to lease expiration and three stores closed under lease termination
agreements. We closed seven stores in fiscal 2005, of which two stores closed as scheduled due to lease expiration
and two stores were closed under lease termination agreements. The closed store reserves were as follows (in
thousands):
January 28,
2007
January 29,
2006
Total remaining gross occupancy costs ........................... $44,234 $ 47,485
Less:
Expected sublease income ................................... (35,284) (36,002)
Interest costs ............................................. (1,261) (1,879)
Closed store reserve ......................................... $ 7,689 $ 9,604
Insurance Liabilities and Reserves
We maintain standard property and casualty insurance on all our properties and leasehold interests, product
liability insurance that covers products and the sale of pets, self-insured health plans, employer’s professional
liability and workers’ compensation insurance. Property insurance covers approximately $1.4 billion in buildings
and contents, including furniture and fixtures, leasehold improvements and inventory. Under our casualty and
workers’ compensation insurance policies as of January 28, 2007, we retained an initial risk of loss of $0.5 million
for each policy per occurrence. We establish reserves for losses based on periodic independent actuarial estimates of
the amount of loss inherent in that period’s claims, including losses for which claims have been incurred but not
reported. Loss estimates rely on actuarial observations of ultimate loss experience for similar historical events, and
changes in such assumptions could result in an adjustment to the reserves. As of January 28, 2007 and January 29,
2006, we had approximately $67.9 million and $54.2 million, respectively, in reserves related to casualty, self-
insured health plans, employer’s professional liability and workers’ compensation insurance policies.
Income Taxes
We establish deferred income tax assets and liabilities for temporary differences between the financial
reporting bases and the income tax bases of our assets and liabilities at enacted tax rates expected to be in effect
when such assets or liabilities are realized or settled. We record a valuation allowance on the deferred income tax
assets to reduce the total to an amount we believe is more likely than not to be realized. Valuation allowances at
January 28, 2007 and January 29, 2006 were principally to offset certain deferred income tax assets for operating
and capital loss carryforwards.
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