Petsmart 2008 Annual Report Download

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Our Promise
2008 Annual Report
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Table of contents

  • Page 1
    Our Promise 2008 Annual Report

  • Page 2
    ...PetsHotels® cat and dog boarding facilities, and is a leading online provider of pet supplies and pet care information (www.petsmart.com). PetSmart provides a broad range of competitively priced pet food and pet products; and offers complete pet training, pet grooming, pet boarding, doggie day camp...

  • Page 3
    ... million in 2008. We added 104 net new stores in 2008, ending the year with 1,112 stores in the United States and Canada. As we look forward to 2009, we remain committed to slowing our unit growth and carefully managing our capital, our productivity, and our expenses. Our 2009 capital expenditures...

  • Page 4
    ... "sticky" part of our business, as pet parents remain loyal to us when they are in need of services. Total services sales were $527 million in 2008, up 15.8 percent from 2007. Grooming remains strong, as the Christmas holiday week produced the highest single week of grooming sales in our history. We...

  • Page 5
    ... Employer Identification No.) 19601 N. 27th Avenue Phoenix, Arizona (Address of principal executive offices) 85027 (Zip Code) Registrant's telephone number, including area code: (623) 580-6100 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange...

  • Page 6
    ... About Market Risk...Financial Statements and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...Controls and Procedures ...Other Information ...PART III Directors, Executive Officers and Corporate Governance ...Executive Compensation...

  • Page 7
    ..., or private label, brands across a range of product categories. We complement our strong product assortment with value-added pet services, including grooming, training, boarding and day camp. All our stores offer complete pet training services and virtually all our stores feature pet styling salons...

  • Page 8
    ... economies of scale in distribution, information systems, procurement, marketing and store operations. During 2008, we opened 104 net new stores, and in 2009, we expect to open approximately 40 net new stores. In 2009, we plan to slow our store growth by about 60% as we work to balance investing for...

  • Page 9
    ... the refresh of stores in 2009 and 2010. Expand our pet services business. Based on net sales, we are North America's leading specialty provider of pet services, which include professional grooming, training, boarding and day camp. Pet services are an integral part of our strategy, and we are...

  • Page 10
    ... fish, birds, reptiles and small pets. Pets comprised 3% of our net sales in 2008, 2007 and 2006. We do not sell dogs or cats, but provide space in most stores for adoption and animal welfare organizations to use. Pet Services Pet services, which include grooming, training, boarding and day camp...

  • Page 11
    ... about pets. PetsHotels provide boarding for dogs and cats, which includes 24-hour supervision by caregivers who are PetSmart trained to provide personalized pet care, an on-call veterinarian, temperature controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs...

  • Page 12
    ...an internet website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Management Our executive officers and their ages and positions on March 18, 2009, are as follows: Name Age Position Philip...

  • Page 13
    ...his career with Exxon Company, where he held a variety of operations and financial roles. David K. Lenhardt was appointed Senior Vice President, Store Operations and Human Resources in February 2009. He joined PetSmart as Senior Vice President of Services, Strategic Planning and Business Development...

  • Page 14
    ... 2007 to 2009. Prior to joining PetSmart, Mr. Stacey was employed at American Stores, a national food and drug retailer, where he held several leadership positions including Vice President of Advertising and Market Development, Vice President of Merchandising and Vice President of Business Process...

  • Page 15
    ...or building material costs could also adversely affect our financial performance. Our leases are typically signed approximately 12 months before a store opens. Because of that timing, we may be unable to adjust our store opening schedule to new economic conditions or a change in strategy in a timely...

  • Page 16
    ...our growth plans require the development of new distribution centers to service the increasing number of stores. If we are unable to successfully expand our distribution network in a timely manner, our sales or results of operations could be harmed. Failure to successfully manage our inventory could...

  • Page 17
    ... quality products in a timely or cost-effective manner or risks associated with the suppliers from whom products are sourced, could harm our business. Sales of premium pet food for dogs and cats comprise a significant portion of our net sales. Currently, most major vendors of premium pet food do...

  • Page 18
    ... and other factors relating to foreign trade are beyond our control. These factors affecting our vendors and our access to products could adversely affect our operations and our financial performance. Our expanded offering of proprietary branded products may not improve our financial performance and...

  • Page 19
    ...-level or part-time associates at our stores and distribution centers, increases the risk associates will not have the training and experience needed to provide competitive, high-quality customer service. Our ability to meet our labor needs while controlling our labor costs is subject to numerous...

  • Page 20
    ... methodologies to assess potential business opportunities, the new businesses may not positively affect our financial performance. Changes to estimates related to our property and equipment, or operating results, that are lower than our current estimates at certain store locations, may cause us to...

  • Page 21
    ... and sale of small pets; the generation, handling, storage, transportation and disposal of waste and biohazardous materials; the distribution, import/export and sale of products; providing services to our customers; contracted services with various third-party providers; credit and debit card...

  • Page 22
    ... or death of a pet in our stores or while under our care. We may also be subject to claims resulting from the transfer of diseases to other animals, associates and customers in our stores. From time to time we have been subject to class action lawsuits, governmental action, intellectual property...

  • Page 23
    ...significant fluctuations. The market price of our common stock may continue to be subject to significant fluctuations in response to the impact on our operations, sales and financial results of a variety of factors including, but not limited to: • General economic changes; • Actions taken by our...

  • Page 24
    ... a change in management or control that our stockholders may not believe is in their best interests. These provisions include: • A classified board of directors consisting of three classes; • The ability of our board of directors to issue, without stockholder approval, up to 10,000,000 shares of...

  • Page 25
    ... 1, 2009: Number of Stores United States: Alabama ...Arizona ...Arkansas...California ...Colorado...Connecticut ...Delaware ...Florida ...Georgia ...Idaho ...Illinois ...Indiana ...Iowa...Kansas ...Kentucky ...Louisiana ...Maine...Maryland ...Massachusetts . . Michigan ...Minnesota ...Mississippi...

  • Page 26
    ... as of February 1, 2009, were as follows: Location Square Footage (In thousands) Date Opened Distribution Type Lease Expiration Ennis, Texas ...Phoenix, Arizona ...Columbus, Ohio ...Gahanna, Ohio ...Hagerstown, Maryland ...Ottawa, Illinois ...Newnan, Georgia ...Reno, Nevada ...Total ... 230 620 613...

  • Page 27
    Labor Code, restitution, attorney's fees and costs, and prejudgment interest. On February 17, 2009, we removed the action to the United States District Court for the Central District of California. We are also a party to several lawsuits arising from the pet food recalls announced by several ...

  • Page 28
    ...statement with respect to our Annual Meeting of Stockholders to be held on June 17, 2009 under the caption "Equity Compensation Plans" and is incorporated by reference in this Annual Report on Form 10-K. Stock Purchase Program. In August 2007, the Board of Directors approved a share purchase program...

  • Page 29
    ...the index. The comparison of the total cumulative return on investment includes reinvestment of dividends. Indices are calculated on a month-end basis. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN Among PetSmart, Inc., The S & P 500 Index And The S & P Specialty Stores Index $180 $160 $140 $120 $100...

  • Page 30
    ...footage at end of period ...Net sales per square foot(2) ...Net sales growth ...Increase in comparable store sales(3) ...Selected Balance Sheet Data: Merchandise inventories ...Working capital ...Total assets ...Total debt(4) ...Total stockholders' equity ...Current ratio ...Long-term debt-to-equity...

  • Page 31
    ... stores feature pet styling salons that provide high-quality grooming services. Our PetsHotels provide boarding for dogs and cats, which includes 24-hour supervision, an on-call veterinarian, temperature controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs...

  • Page 32
    ... February 1, 2009, and February 3, 2008, we had inventory valuation reserves of $14.6 million and $13.3 million, respectively. Asset Impairments We review long-lived assets for impairment in accordance with Financial Accounting Standards Board, or "FASB," Statement of Financial Accounting Standards...

  • Page 33
    ...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...

  • Page 34
    ...growth rate was due to inflation and pricing strategies, partially offset by economic conditions and a slow down in consumer spending, primarily in our hardgoods category. Services sales, which are included in our net sales amount discussed above and include grooming, training, boarding and day camp...

  • Page 35
    ... expenses as a percentage of net sales was attributable to various cost savings initiatives, including a new store labor management process, combined with reduced professional fees, renegotiated maintenance and supply contracts, and lower insurance-related costs. These expense decreases were...

  • Page 36
    ... pet food products during the twenty-six weeks ended July 29, 2007, as well as reduced sales of equine products as a result of our decision to exit that product line. Services sales, which are included in our net sales amount discussed above and include grooming, training, boarding and day camp...

  • Page 37
    ... tax positions. The effective tax rate for 2006 includes the settlement of an audit with the Internal Revenue Service and tax benefits primarily due to the expiration of the statute of limitations for certain tax positions and additional federal and state tax credits. Liquidity and Capital Resources...

  • Page 38
    ... associated with opening or acquiring new stores, reformatting existing stores, expenditures associated with equipment and computer software in support of our system initiatives, PetsHotel construction costs, costs to expand our distribution network and other expenditures to support our growth plans...

  • Page 39
    ... certain store assets and continuing our store refresh program. Our ability to fund our operations and make planned capital expenditures depends on our future operating performance and cash flow, which are subject to prevailing economic conditions and to financial, business and other factors, some...

  • Page 40
    ... Management International, Inc., operates full-service veterinary hospitals inside 722 of our stores. Our investment consists of common and convertible preferred stock. During the thirteen weeks ended April 29, 2007, we sold a portion of our non-voting shares in MMIH resulting in a pre-tax gain...

  • Page 41
    ... stores typically draw customers from a large trade area, sales also may be impacted by adverse weather or travel conditions, which are more prevalent during certain seasons of the year. As a result of our expansion plans, the timing of new store and PetsHotel openings and related preopening costs...

  • Page 42
    ... to support seasonal working capital needs. Item 8. Financial Statements and Supplementary Data The information required by this Item is attached as Appendix F. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures We...

  • Page 43
    ... financial statements. Our internal control over financial reporting is supported by a program of internal audits and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel and a written Code of Business Conduct adopted by our Board...

  • Page 44
    ... REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of PetSmart, Inc. Phoenix, Arizona We have audited the internal control over financial reporting of PetSmart, Inc. and subsidiaries (the "Company") as of February 1, 2009, based on criteria established in Internal Control...

  • Page 45
    ...," "Executive Compensation," "Stock Award Grants," "Exercises and Plans," "Employment and Severance Agreements," "Director Compensation," "Compensation Committee Interlocks and Insider Participation," and "Report of the Compensation Committee of the Board of Directors" in our proxy statement. Item...

  • Page 46
    ... caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 26, 2009. PetSmart, Inc. By: PHILIP L. FRANCIS Philip L. Francis Chairman of the Board of Directors, and Chief Executive Officer /s/ POWER OF ATTORNEY KNOWALL PERSONS BY THESE PRESENTS, that...

  • Page 47
    Signature Title Date /s/ AMIN I. KHALIFA Amin I. Khalifa Director March 26, 2009 /s/ RICHARD K. LOCHRIDGE Richard K. Lochridge /s/ BARBARA A. MUNDER Barbara A. Munder /s/ THOMAS G. STEMBERG Thomas G. Stemberg Director March 26, 2009 Director March 26, 2009 Director March 26, 2009 41

  • Page 48
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  • Page 49
    APPENDIX F PetSmart, Inc. and Subsidiaries Index to Consolidated Financial Statements and Financial Statement Schedule Page Report of Independent Registered Public Accounting Firm...Consolidated Balance Sheets as of February 1, 2009, and February 3, 2008 ...Consolidated Statements of Operations and...

  • Page 50
    ... PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of PetSmart, Inc. Phoenix, Arizona We have audited the accompanying consolidated balance sheets of PetSmart, Inc. and subsidiaries (the "Company") as of February 1, 2009 and February 3, 2008, and the related consolidated statements...

  • Page 51
    PetSmart, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except par value) February 1, 2009 February 3, 2008 ASSETS Cash and cash equivalents ...Receivables, net ...Merchandise inventories ...Deferred income taxes ...Prepaid expenses and other current assets ...Total current ...

  • Page 52
    ... 1, February 3, January 28, 2009 2008 2007 (52 weeks) (53 weeks) (52 weeks) (In thousands, except per share data) Merchandise sales...Services sales ...Net sales ...Cost of merchandise sales ...Cost of services sales ...Total cost of sales...Gross profit ...Operating, general and administrative...

  • Page 53
    ... Treasury Common Paid-In Retained Stock Stock Stock Income Stock Capital Earnings (In thousands, except per share data) Total BALANCE AT JANUARY 29, 2006 ...153,024 (14,027) Stock options and employee stock purchase plan compensation cost ...Net tax benefits from tax deductions in excess of the...

  • Page 54
    ... of the acquisition of store locations in Canada: Receivables, net ...1,694 (11,793) 1,832 Merchandise inventories ...(86,151) (9,005) (87,867) Prepaid expenses and other current assets ...(13,758) (22,549) (3,276) Other noncurrent assets...8,057 (4,238) (2,555) Accounts payable ...25,201 (1,515...

  • Page 55
    ...various pet services, including professional grooming, training, boarding and day camp. We also offer pet products through an e-commerce site. As of February 1, 2009, we operated 1,112 retail stores and had full-service veterinary hospitals in 734 of our stores. Medical Management International, Inc...

  • Page 56
    ...estimates. Segment Reporting The Financial Accounting Standards Board, or "FASB," Statement of Financial Accounting Standards, or "SFAS," No. 131, "Disclosures about Segments of an Enterprise and Related Information," requires that a public company report annual and interim financial and descriptive...

  • Page 57
    ...$44.3 million as of February 1, 2009, and February 3, 2008, respectively, represents the excess of the cost of acquired businesses over the fair market value of their net assets. In 2007, we purchased 19 store locations, which added 18 net new stores in Canada and increased goodwill by $27.7 million...

  • Page 58
    ... expenses in the Consolidated Statements of Operations and Comprehensive Income. We calculate the cost 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...

  • Page 59
    ... sales tax liability in other current liabilities on the Consolidated Balance Sheets. Cost of Merchandise Sales Cost of merchandise sales includes the following types of expenses: • Purchase price of inventory sold; • Transportation costs associated with moving inventory; • Inventory shrinkage...

  • Page 60
    ... and benefits costs, and training and professional fees for groomers, trainers and PetsHotel associates. Vendor Concentration Risk We purchase merchandise inventories from several hundred vendors worldwide. Sales of products from our two largest vendors approximated 21.9%, 20.5% and 15.7% of our net...

  • Page 61
    ..., are participating securities and requires such awards be included in the computation of earnings per share pursuant to the two-class method. FSP No. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years...

  • Page 62
    ..., The Pet Hospital." Philip L. Francis, PetSmart's Chairman and Chief Executive Officer, and Robert F. Moran, PetSmart's President and Chief Operating Officer, are members of the board of directors of MMIH. During the thirteen weeks ended April 29, 2007, we sold a portion of our non-voting shares in...

  • Page 63
    ... MMIH totaled $3.3 million and $4.5 million at February 1, 2009, and February 3, 2008, respectively, and were included in receivables in the Consolidated Balance Sheets. The master operating agreement also includes a provision for the sharing of profits on the sales of therapeutic pet foods sold in...

  • Page 64
    ... on the changing real estate environment. The activity related to the reserve for closed stores was as follows (in thousands): February 1, 2009 (52 weeks) Year Ended February 3, 2008 (53 weeks) January 28, 2007 (52 weeks) Opening balance ...Charges, net ...Payments, net ...Ending balance ...F-16...

  • Page 65
    ... the exit of our equine product line. During 2006, we recorded expense of $2.8 million related to the replacement of telecommunications equipment. Note 7 - Income Taxes Income before income tax expense and equity in income from investee was as follows (in thousands): February 1, 2009 (52 weeks) Year...

  • Page 66
    ... tax assets (liabilities) included in the Consolidated Balance Sheets are as follows (in thousands): February 1, 2009 February 3, 2008 Deferred income tax assets: Capital lease obligations ...Employee benefit expense ...Deferred rents ...Net operating loss carryforwards ...Reserve for closed stores...

  • Page 67
    ... - tax positions related to the current year ...Gross increases - tax positions in prior periods ...Gross decreases - tax positions in prior periods ...Gross settlements ...Lapse of statute of limitations ...Gross (decreases) increases - foreign currency translation ...Balance at February 1, 2009...

  • Page 68
    ...stock in 2008, 2007 and 2006, respectively, were not included in the calculation of diluted earnings per common share because the inclusion of the awards would have been antidilutive for the periods presented. Note 9 - Stockholders' Equity Share Purchase Programs In June 2005, the Board of Directors...

  • Page 69
    ... 12 months would be classified as short-term debt in the Consolidated Balance Sheets. We also have a $70.0 million stand-alone letter of credit facility that expires on June 30, 2009. We are subject to fees payable to the lenders each quarter at an annual rate of 0.20% of the average daily face...

  • Page 70
    ...stores, closed stores, stores to be opened in the future, distribution centers and corporate offices. We have recorded accrued rent of $1.4 million and $1.6 million in the Consolidated Balance Sheets as of February 1, 2009, and February 3, 2008, respectively. In addition to the commitments scheduled...

  • Page 71
    ... the California Labor Code, restitution, attorney's fees and costs, and prejudgment interest. On February 17, 2009, we removed the action to the United States District Court for the Central District of California. We are also a party to several lawsuits arising from the pet food recalls announced...

  • Page 72
    ... transferred to the U.S. District Court for the District of New Jersey and consolidated with other pet food class actions under the federal rules for multi-district litigation (In re: Pet Food Product Liability Litigation, Civil No. 07-2867). The Canadian cases were not consolidated. On May 21, 2008...

  • Page 73
    PetSmart, Inc. and Subsidiaries Notes to Consolidated Financial Statements - (Continued) Activity in all of our stock option plans is as follows (in thousands, except per share data): 2006 (52 weeks) Weighted-Average Remaining Weighted-Average Contractual Term Exercise Price Shares Aggregate ...

  • Page 74
    ...or the "Program," provides for the issuance of performance share units under the 2006 Equity Incentive Plan to executive officers and certain other members of our management team based on the established end-of-year net cash threshold for 2009. The actual number of performance share units awarded to...

  • Page 75
    ... Consolidated Statement of Operations and Comprehensive Income were as follows (in thousands): 2008 (52 weeks) 2007 (53 weeks) 2006 (52 weeks) Stock options expense ...Restricted stock expense ...Employee stock purchase plan expense ...Total stock-based compensation cost...Tax benefit ... $ 7,959...

  • Page 76
    ...): 2008 (52 weeks) 2007 (53 weeks) 2006 (52 weeks) Interest paid ...Income taxes paid, net of refunds ...Assets acquired using capital lease obligations...Accruals and accounts payable for capital expenditures ...Dividends declared but unpaid ...Note 17 - Acquisition of Store Locations in Canada...

  • Page 77
    ...related to the exit of the equine product line, remerchandising of the store space previously used for equine inventory and severance costs in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The net effect of the gain on sale of the assets, inventory...

  • Page 78
    ... to Consolidated Financial Statements - (Continued) First Quarter(1, 2) (13 weeks) Second Third Fourth Quarter(1, 2) Quarter(1, 2) Quarter(1, 2, 3) (13 weeks) (13 weeks) (14 weeks) (In thousands, except per share data) Year Ended February 3, 2008 (53 weeks) Net sales ...Gross profit ...Operating...

  • Page 79
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of PetSmart, Inc. Phoenix, Arizona We have audited the consolidated financial statements of PetSmart, Inc. and subsidiaries (the "Company") as of February 1, 2009 and February 3, 2008, and for each of ...

  • Page 80
    ...Qualifying Accounts Description Balance at Beginning of Period Charged to Expense Deductions (In thousands) Balance at End of Period Valuation reserves deducted in the Consolidated Balance Sheets from the asset to which it applies: Merchandise inventories: Lower of cost or market 2006...2007...2008...

  • Page 81
    ... 2002 Employee Stock Purchase Plan, as amended Non-Qualified 2005 Deferred Compensation Plan, as amended Executive Short-Term Incentive Plan, as amended Amended and Restated Employment Agreement, between PetSmart and Philip L. Francis, Chairman of the Board of Directors and Chief Executive Officer...

  • Page 82
    ...Public Accounting Firm Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 10-Q 0-21888 10.16 11/26/2008...

  • Page 83
    ... of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended X X †Compensation plans or arrangements in which directors or...

  • Page 84
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  • Page 85
    ...AZ 85012 Stockholder Inquiries PetSmart Investor Relations 19601 North 27th Avenue Phoenix, AZ 85027 (623) 587-2025 [email protected] PetSmart Common Stock The company's common stock is traded on the NASDAQ Global Select Market under the symbol "PETM." PetSmart Website www.PetSmart...

  • Page 86
    19601 North 27th Avenue Phoenix, AZ 85027 (623) 580-6100 www.PetSmart.com ©2009 PetSmart Store Support Group, Inc. All rights reserved.