Petsmart 2010 Annual Report Download - page 42

credit issuances under our Revolving Credit Facility. As of January 31, 2010, we had no borrowings and
$35.7 million in stand-by letter of credit issuances under our Revolving Credit Facility.
We also have a $100.0 million stand-alone letter of credit facility, or “Stand-alone Letter of Credit Facility,”
that expires August 15, 2012. We are subject to fees payable to the lender each quarter at an annual rate of 0.45% of
the average daily face amount of the letters of credit outstanding during the preceding calendar quarter. In addition,
we are required to maintain a cash deposit with the lender equal to the amount of outstanding letters of credit or we
may use other approved investments as collateral. If we use other approved investments as collateral, we must have
an amount on deposit which, when multiplied by the advance rate of 85%, is equal to the amount of the outstanding
letters of credit under the Stand-alone Letter of Credit Facility. As of January 30, 2011, we had $61.4 million in
outstanding letters of credit under the Stand-alone Letter of Credit Facility and $61.4 million in restricted cash on
deposit with the lender. As of January 31, 2010, we had $48.2 million in outstanding letters of credit under the
Stand-alone Letter of Credit Facility and $48.2 million in restricted cash on deposit with the lender.
We issue letters of credit for guarantees provided for insurance programs.
The Revolving Credit Facility and Stand-alone Letter of Credit Facility permit the payment of dividends, if we
are not in default and the payment of dividends would not result in default of the Revolving Credit Facility or Stand-
alone Letter of Credit Facility. As of January 30, 2011, we were in compliance with the terms and covenants of our
Revolving Credit Facility and Stand-alone Letter of Credit Facility. The Revolving Credit Facility and Stand-alone
Letter of Credit Facility are secured by substantially all our personal property assets, our wholly owned subsidiaries
and certain real property.
Seasonality and Inflation
Our business is subject to seasonal fluctuations. We typically realize a higher portion of our net sales and
operating profits during the fourth quarter due to increased holiday traffic. As a result of this seasonality, we believe
that quarter-to-quarter comparisons of our operating results are not necessarily meaningful, and that these
comparisons cannot be relied upon as indicators of future performance. Controllable expenses could fluctuate
from quarter-to-quarter in a year. Since our 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, the
amount of revenue contributed by new and existing stores and PetsHotels and the timing and estimated obligations
of store closures, our quarterly results of operations may fluctuate. Finally, because new stores tend to experience
higher payroll, advertising and other store level expenses as a percentage of sales than mature stores, new store
openings will also contribute to lower store operating margins until these stores become established. We expense
preopening costs associated with each new location as the costs are incurred.
While we have experienced inflationary pressure in recent years, we have been able to largely mitigate the
effect by increasing retail prices accordingly. Although neither inflation nor deflation has had a material impact on
net operating results, we can make no assurance that our business will not be affected by inflation or deflation in the
future.
Impact of Federal Health Care Reform Legislation
In March 2010, the President of the United States signed into law the Patient Protection and Affordable Care
Act, as amended by the Health Care and Education Reconciliation Act of 2010, or “the Acts.” The provisions of the
Acts are not expected to have a significant impact to our consolidated financial statements in the short term. The
longer term potential impacts of the Acts to our business and the consolidated financial statements are currently
uncertain. We will continue to assess the impact of the Acts on our health care plans.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to certain market risks arising from transactions in the normal course of our business. Such risk
is principally associated with foreign exchange fluctuations.
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