Petsmart 2007 Annual Report Download - page 34

Reserves 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. As of
February 3, 2008, and January 28, 2007, we had closed store reserves of $6.2 million and $7.7 million, respectively.
We can make no assurances that additional charges for these stores will not be required based on the changing real
estate environment.
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 $1.5 billion in buildings
and contents, including furniture and fixtures, leasehold improvements and inventory. Under our casualty and
workers’ compensation insurance policies as of February 3, 2008, we retained an initial risk of loss of $0.5 million
per occurrence for general liability and $0.75 million per occurrence for workers’ compensation. We establish
reserves for losses based on periodic 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 February 3, 2008 and January 28, 2007, we had approximately $86.7 million and
$67.9 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
February 3, 2008, and January 28, 2007, were principally to offset certain deferred income tax assets for net
operating and capital loss carryforwards.
As of January 29, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement No. 109,” or FIN 48. FIN 48 addresses the determination of whether
tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under
FIN 48, the tax benefit from an uncertain tax position may be recognized only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities. The determination is based on the technical
merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing
authority that has full knowledge of all relevant information. Although we believe the estimates are reasonable, no
assurance can be given that the final outcome of these matters will not be different than what is reflected in the
historical income tax provisions and accruals.
We operate in multiple tax jurisdictions and could be subject to audit in any of these jurisdictions. These audits
can involve complex issues that may require an extended period of time to resolve and may cover multiple years.
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