Petsmart 2013 Annual Report Download

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2013 Annual Report

Table of contents

  • Page 1
    2013 Annual Report

  • Page 2

  • Page 3
    ...This was a very exciting year in our company history as we celebrated our 20th listing anniversary on the NASDAQ Stock Exchange. We are pleased that 2013 marked the fourth consecutive year of double-digit earnings per share growth and a record high year for earnings before tax margin. Our ability to...

  • Page 4
    ...building national partnerships and supporting the local communities where our associates live and work. Since launching PetSmart Gives Back, we have seen the power of giving back in the tremendous response from our customers, associates, and communities. I am very proud that last year our associates...

  • Page 5
    ... and exclusive product sales growth over the next 3 to 5 years. Growing our most valuable customers includes increasing the penetration of customers who buy channel-exclusive foods, use grooming services, and are new pet parents of dogs, cats, and fish. We know that these customers shop us...

  • Page 6
    Financial Highlights Net Sales (In Billions) $6.9 $740 $675 1,232 Services Sales (In Millions) $766 Stores Open at End of Period 1,333 1,278 Sales Growth $6.8 $6.1 2011 2012 2013 2011 2012 2013 2011 2012 2013 Earnings Growth Gross Profit 30.5% 29.5% 30.6% 7.3% EBT Margin 9.3% 8.8%...

  • Page 7
    ... SECTION 13 OR 15(d) SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended February 2, 2014 or OF THE Â... TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-21888 _____ PetSmart, Inc. (Exact name...

  • Page 8
    ... 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 Security Ownership...

  • Page 9
    ... will develop moment-making products, services, and experiences that will attract and retain these pet parents as PetSmart customers. We opened 55 net new stores in 2013, which includes twelve microstores, and at the end of the year operated 1,333 stores in the United States, Puerto Rico, and Canada...

  • Page 10
    ... Pet supplies and medicine sales account for 23.8%, or $13.2 billion, of the market. These sales include dog and cat toys, collars and leashes, cages and habitats, books, vitamins and supplements, shampoos, flea and tick control, and aquatic supplies. Veterinary care, other services, and live animal...

  • Page 11
    ... be inspired by pets. Beginning in 2014, we refreshed our strategic priorities, which are centered around caring for our customers, caring for our associates, and caring for our communities. Our new customer strategy is to develop moment-making products, services, and experiences for pet parents. We...

  • Page 12
    ... to generate sales growth, and allow us to focus on managing capital and leveraging costs, to produce returns for our stockholders. Our Stores Typically, our stores are located at sites co-anchored by strong destination mass merchandisers and are in or near major regional shopping centers. We are...

  • Page 13
    ... supervision by caregivers who are PetSmart trained to provide personalized pet care, temperature controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs. Our Services Reservation Center creates operational efficiencies in our hotels and allows us to better...

  • Page 14
    ...work stoppages. Financial Information by Business Segment and Geographic Data We have identified two operating segments, Merchandise and Services. These operating segments have similar long-term economic characteristics, include sales to the same types of customers, have the same distribution method...

  • Page 15
    ... President title, working in Supply Chain and Merchandising groups through December 2010. In January 2011, he was appointed Executive Vice President, Merchandising, Marketing, Supply Chain, and Strategic Planning. Prior to joining PetSmart, he was Chief Operating Officer for Interactive Health LLC...

  • Page 16
    ..., the last being the Chief Information Officer for the after-market support division. In January 2014, Mr. Beaver announced that he will retire from his position in April 2014. Gene Eddie Burt II was appointed Senior Vice President, Supply Chain in January 2012. He joined PetSmart in April 2007 and...

  • Page 17
    ... serve as Executive Vice President, Store Operations, Services, and Supply Chain. David K. Lenhardt, currently our Chief Executive Officer, will assume the title of President and Chief Executive Officer. Additionally, Chris McCurdy, previously Vice President, Replenishment and Vendor Management has...

  • Page 18
    ... into the pet food and pet supply market, some of which have developed store formats similar to ours. We may face greater competition from these or other retailers in the future, and changes in their merchandising and operational strategies could impact our sales and profitability. In particular...

  • Page 19
    ... periods. In addition, opening new stores in a market will attract some customers away from other stores already operated by us in that market and diminish their sales. Our store development plans place increased demands on existing systems, procedures, and management and could result in operational...

  • Page 20
    ..., 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. If our information systems fail to perform...

  • Page 21
    ... merchandisers, the inability of our vendors to provide quality products in a timely or cost-effective manner, the availability of generic products, or risks associated with the suppliers from whom products are sourced, could harm our business. Sales of natural pet food for dogs and cats comprise...

  • Page 22
    ... associates at our stores and distribution centers, increases the risk that 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 external factors...

  • Page 23
    ...-party processor's, security procedures and operational controls; failure or inadequacy in our, or any third-party processor's, systems or ability to process customer orders; government regulation and legal uncertainties with respect to e-commerce; and collection of sales or other taxes by one or...

  • Page 24
    ... protection, advertising, employment, intellectual property, tort and other matters. We may also be subject to lawsuits relating to the design, manufacture or distribution of our proprietary brand products. We may incur losses relating to claims filed against us, including costs associated with...

  • Page 25
    ... upon future claim costs and currently recorded liabilities and could have a material impact on our consolidated financial statements. Fluctuations in the stock market, as well as general economic and market conditions, may impact our operations, sales, financial results, and market price of our...

  • Page 26
    ...by written consent; Certain advance notice procedures for nominating candidates for election to the Board of Directors; and No right to cumulative voting... of the Delaware General Corporation Law, and the application of Section 203 could delay or prevent an acquisition of PetSmart. Item 1B. Unresolved...

  • Page 27
    ... sites co-anchored by strong destination mass merchandisers and are in or near major regional shopping centers. The following table summarizes the locations of our stores by country and state or territory as of February 2, 2014: Number of Stores Alabama...Alaska ...Arizona ...Arkansas ...California...

  • Page 28
    ...square feet for our corporate offices. The lease expires in 2023. Our distribution centers and respective lease expirations as of February 2, 2014, were as follows: Location Square Footage (In thousands) Date Opened Distribution Type Lease Expiration Ennis, Texas...Phoenix, Arizona...Columbus, Ohio...

  • Page 29
    ... action consisting of all current and former operations managers employed by PetSmart at any time in the preceding three-year period. Notices were sent to potential class members in February 2014, and the Court has established a 60-day period within which recipients may consent to join the lawsuit...

  • Page 30
    Item 4. Mine Safety Disclosures Not applicable. 22

  • Page 31
    ...Related Stockholder Matters, and Issuer Purchases of Equity Securities Price Range of Common Stock Our common stock is traded on the NASDAQ Global Select Market under the symbol PETM. The following table indicates the intra-day quarterly high and low price per share of our common stock. These prices...

  • Page 32
    ... statement with respect to our Annual Meeting of Stockholders to be held on June 18, 2014, under the caption "Equity Compensation Plan Information" and is incorporated by reference in this Annual Report on Form 10-K. Share Purchase Programs In September 2013, the Board of Directors approved a share...

  • Page 33
    ... or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing. The following graph shows a five-year comparison of the cumulative total return for our common stock, the S&P 500 Index, and the S&P Specialty Stores Index...

  • Page 34
    ... average shares outstanding: Basic...Diluted...Selected Operating Data: Stores open at end of period...Square footage at end of period ...Net sales growth...Increase in comparable store sales(3) ...Selected Balance Sheet Data: Merchandise inventories ...$ Average inventory per store(4) ...$ Working...

  • Page 35
    ... the 53 weeks ended February 5, 2012. Without the additional week in 2012, comparable store sales growth would have been 6.5%, as compared to 6.3%, calculated on a 53-week basis. (4) Represents merchandise inventories divided by stores open at end of period. (5) Represents capital lease obligations...

  • Page 36
    ... by caregivers who are PetSmart trained to provide personalized pet care, temperature-controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs. As of February 2, 2014, we operated 199 PetsHotels. We make full-service veterinary care available through our...

  • Page 37
    ... during 2013, and 7.2 million shares of our common stock for $456.6 million during 2012. We added 55 net new stores during 2013, and operated 1,333 stores at the end of the year. • • • • Critical Accounting Policies and Estimates The discussion and analysis of our financial condition...

  • Page 38
    ...2013, 2012, or 2011. Reserve for Closed Stores We continuously evaluate the performance of our 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...

  • Page 39
    ... Statements of Income and Comprehensive Income: Year Ended February 2, 2014 (52 weeks) Net sales ...Total cost of sales...Gross profit ...Operating, general, and administrative expenses...Operating income...Interest expense, net...Income before income tax expense and equity income from Banfield...

  • Page 40
    ... grooming salon in 2013, such as new puppy bath packages and application of flea and tick solution. We also continued to develop our pipeline of innovative services and exclusive offerings that are integrated with our merchandise brands and supported by marketing. Other revenue included in net sales...

  • Page 41
    ... weeks ended April 29, 2012, adding innovative new formulations and expanded grain-free and limited ingredient assortments in dog and cat. In hardgoods, we refreshed and rebranded the dog toy aisle with the PetSmart Toy Chest reset. We also reset the aquatics and small animal categories to support...

  • Page 42
    ... week on other revenue. Gross Profit Gross profit increased 100 basis points to 30.5% of net sales for 2012, from 29.5% for 2011. Overall merchandise margin increased 15 basis points primarily due to rate improvement. Services margin increased 5 basis points. Store occupancy and supply chain costs...

  • Page 43
    ... and deferred income tax assets of $17.3 million in 2012 as compared to 2011. Net cash used in investing activities consisted primarily of expenditures associated with opening new stores, reformatting existing stores, expenditures associated with equipment and computer software in support of our...

  • Page 44
    ...in trade accounts payable resulting from the extension of vendor payment terms. This was partially offset by incremental increases in merchant receivables, deferred income tax assets, and capital spending as compared to 2011. Share Purchase Programs In September 2013, the Board of Directors approved...

  • Page 45
    ... provided for insurance programs. As of February 2, 2014, we had $83.5 million outstanding under our letters of credit. Off-Balance Sheet Arrangements Other than executed operating leases, we do not have any off-balance sheet financing that has, or is reasonably likely to have, a material current or...

  • Page 46
    ... 2, 2014, and February 3, 2013, respectively, and were included in receivables, net in the Consolidated Balance Sheets. Our master operating agreement with Banfield also includes a provision for the sharing of profits on the sale of therapeutic pet foods sold in all stores with an operating Banfield...

  • Page 47
    .... From time to time, we have entered into foreign currency exchange forward contracts, or "Foreign Exchange Contracts," in Canada to manage the impact of foreign currency exchange rate fluctuations related to certain balance sheet accounts. We did not designate these Foreign Exchange Contracts as...

  • Page 48
    ... 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 of Directors, applicable...

  • Page 49
    ... OF INDEPENDENT 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 2, 2014, based on criteria established in...

  • Page 50
    ...," "Executive Compensation," "Stock Award Grants, Exercises, and Plans," "Employment and Severance Arrangements," "Director Compensation," "Compensation Committee Interlocks and Insider Participation," and " Compensation Committee Report" in our 2014 Proxy Statement. Item 12. Security Ownership...

  • Page 51
    ... Statement Schedule: The financial statement schedule required under the related instructions is included within Appendix F of this Annual Report. See Index to Consolidated Financial Statements and Financial Statement Schedule on page F-1. 3. Exhibits: The exhibits which are filed with this Annual...

  • Page 52
    ... of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 27, 2014. PetSmart, Inc. By: /s/ David K. Lenhardt David K. Lenhardt Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY...

  • Page 53
    APPENDIX F PetSmart, Inc. and Subsidiaries Index to the Consolidated Financial Statements and Financial Statement Schedule Page Number Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of February 2, 2014, and February 3, 2013 Consolidated Statements of Income ...

  • Page 54
    REPORT OF INDEPENDENT REGISTERED 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 2, 2014 and February 3, 2013, and the ...

  • Page 55
    ... Balance Sheets (In thousands, except par value) February 2, 2014 February 3, 2013 ASSETS Cash and cash equivalents ...$ Short-term investments ...Restricted cash ...Receivables, net ...Merchandise inventories ...Deferred income taxes ...Prepaid expenses and other current assets ...Total current...

  • Page 56
    PetSmart, Inc. and Subsidiaries Consolidated Statements of Income and Comprehensive Income (In thousands, except per share data) Year Ended February 2, 2014 (52 weeks) February 3, 2013 (53 weeks) January 29, 2012 (52 weeks) Merchandise sales ...$ Services sales...Other revenue ...Net sales ...Cost ...

  • Page 57
    ... stock under stock incentive plans ...Stock-based compensation expense .. Excess tax benefits from stock-based compensation ...Dividends declared ($0.72 per share) ...Other comprehensive income (loss), net of income tax...Purchase of treasury stock, at cost...BALANCE AT FEBRUARY 2, 2014...1,969...

  • Page 58
    ...Cash paid for treasury stock...Payments of capital lease obligations ...Change in bank overdraft and other financing activities ...Excess tax benefits from stock-based compensation...Cash dividends paid to stockholders...Net cash used in financing activities...EFFECT OF EXCHANGE RATE CHANGES ON CASH...

  • Page 59
    ... grooming and boarding, as well as training and day camp for dogs. We also offer pet products through PetSmart.com. As of February 2, 2014, we operated 1,333 stores and had full-service veterinary hospitals in 844 of our stores. We have a 21.0% investment in MMI Holdings, Inc., which is accounted...

  • Page 60
    ... markets. The changes in the fair value were recognized in operating, general, and administrative expenses in the Consolidated Statements of Income and Comprehensive Income. We did not enter into Foreign Exchange Contracts during 2013 or 2012. The recorded gains and losses were immaterial for 2011...

  • Page 61
    ...2013, 2012, or 2011. Insurance Liabilities and Reserves We maintain workers' compensation, general liability, product liability, and property insurance on all our operations, properties, and leasehold interests. We utilize high deductible plans for each of these areas including a self-insured health...

  • Page 62
    ... 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 of the lease. Judgment is used to estimate the underlying real estate market related to...

  • Page 63
    ...sales tax liability in other current liabilities in the Consolidated Balance Sheets. We recognize revenue for store merchandise sales when the customer receives and pays for the merchandise at the register. We recognize revenue from professional grooming, boarding, and dog training when the services...

  • Page 64
    ... for all awards except management equity units which are evaluated quarterly based upon the current market value of our common stock. We use option pricing methods that require the input of highly subjective assumptions, including the expected stock price volatility. Compensation cost is recognized...

  • Page 65
    ... Balance Sheet as of February 3, 2013. The adoption of the new guidance did not have a material impact on our consolidated financial statements. Note 3 - Income Taxes Income before income tax expense and equity income from Banfield was as follows (in thousands): Year Ended February 2, 2014 (52 weeks...

  • Page 66
    ... assets (liabilities) included in the Consolidated Balance Sheets are as follows (in thousands): February 2, 2014 February 3, 2013 Deferred income tax assets: Capital lease obligations...$ Employee benefit expense...Deferred rents ...Net operating loss carryforwards...Other ...Total deferred income...

  • Page 67
    ... tax benefits is as follows (in thousands): Year Ended February 2, 2014 (52 weeks) February 3, 2013 (53 weeks) January 29, 2012 (52 weeks) Unrecognized tax benefits, beginning balance ...$ Gross increases - tax positions related to the current year. Gross increases - tax positions in prior periods...

  • Page 68
    ... on observable market data (Level 2). The inputs of the pricing models are issuer spreads and reported trades. Unrecognized gains for 2013, 2012, and 2011 were immaterial. Equity Investment in Banfield We have an investment in Banfield which is accounted for using the equity method of accounting. We...

  • Page 69
    PetSmart, Inc. and Subsidiaries Notes to the Consolidated Financial Statements - (Continued) Our master operating agreement with Banfield also includes a provision for the sharing of profits on the sale of therapeutic pet foods sold in all stores with an operating Banfield hospital. The net sales ...

  • Page 70
    ...common stock under the respective share purchase programs (in thousands): Year Ended Share Purchase Program Date Approved by Board June 2010 June 2011 June 2012 September 2013 Program Termination Date July 31, 2011 January 31, 2013 January 31, 2014 January 31, 2015 February 2, 2014 (52 weeks) Shares...

  • Page 71
    ..., 2012 On March 19, 2014, the Board of Directors declared a quarterly cash dividend of $0.195 per share payable on May 16, 2014, to stockholders of record on May 2, 2014. Note 9 - Stock-based Compensation We have several long-term incentive plans, including plans for stock options, restricted stock...

  • Page 72
    ...the recipient. Restricted stock awards cliff vest after the requisite service period, which is four years for restricted stock awards and one year for restricted stock awarded to Directors. The shares for restricted stock units are not issued until cliff vesting on the third anniversary of the grant...

  • Page 73
    ... on the third anniversary of the initial grant date, and settle in shares at that time. For units granted in 2013 and 2012, the performance goal was defined as a specified cumulative three-year annualized, compound growth of income before income tax expense and equity income from Banfield for the...

  • Page 74
    ...in cash in April 2013. The 2011 management equity unit grant vests on March 28, 2014. No additional MEUs were granted in 2012 or thereafter. Employee Stock Purchase Plan We have an Employee Stock Purchase Plan, or "ESPP," that allows essentially all employees who meet certain service requirements to...

  • Page 75
    ...2014 (52 weeks) February 3, 2013 (53 weeks) January 29, 2012 (52 weeks) Stock options expense ...$ Restricted stock expense ...Performance share unit expense...Stock-based compensation expense - equity awards...Management equity unit expense...Total stock-based compensation expense ...$ Tax benefit...

  • Page 76
    ... upon the current market value of our common stock. Note 10 - Employee Benefit Plans We have a defined contribution plan, or the "Plan," pursuant to Section 401(k) of the Internal Revenue Code. The Plan covers all employees that meet certain service requirements. We match employee contributions, up...

  • Page 77
    PetSmart, Inc. and Subsidiaries Notes to the Consolidated Financial Statements - (Continued) Operating and Capital Leases We lease all our stores, distribution centers, and corporate offices under noncancelable leases. The terms of the store leases generally range from 10 to 15 years and typically ...

  • Page 78
    ... action consisting of all current and former operations managers employed by PetSmart at any time in the preceding three-year period. Notices were sent to potential class members in February 2014, and the Court has established a 60-day period within which recipients may consent to join the lawsuit...

  • Page 79
    ...been stayed until the case management conference currently scheduled for April 2014. On December 22, 2012, a customer filed a lawsuit against us captioned Matin, et al. v. Nestle Purina PetCare Company, et al. in the United States District Court for the Northern District of California. The plaintiff...

  • Page 80
    ... quarterly financial information for 2013 and 2012 is as follows: First Quarter (13 weeks) Second Quarter Third Quarter Fourth Quarter (13 weeks) Year Ended February 2, 2014 (13 weeks) (13 weeks) (In thousands, except per share data) Merchandise sales...Services sales...Other revenue ...Net sales...

  • Page 81
    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 2, 2014 and February 3, 2013, and for each of ...

  • Page 82
    ... of Period Charged to Expense Balance at End of Period Description Deductions(1) (In thousands) Valuation reserves deducted in the Consolidated Balance Sheets from the assets to which they apply: Merchandise inventories: Lower of cost or market 2011...2012...2013...Shrink 2011...2012...2013...

  • Page 83
    ... Agreement between PetSmart and its Directors 2003 Equity Incentive Plan S-1 33-63912 10.1 6/4/1993 10.2†Proxy Statement S-8 0-21888 Exhibit B 5/12/2003 10.3†1996 Non-Employee Directors' Equity Plan, as amended 1997 Equity Incentive Plan, as amended 2012 Employee Stock Purchase Plan...

  • Page 84
    ... Filed Herewith 10.8†Amended and Restated Employment Agreement, between PetSmart and Form of Performance Share Unit Grant Notice and Performance Share Form of Offer Letter between PetSmart and executive officers Amended and Restated Executive Change in Control and Severance Forms of Stock Award...

  • Page 85
    ... Stock Grant Notice under 2011 Equity Incentive Significant Subsidiaries of PetSmart, Inc., as required by Item 601(b)(21) Consent of Deloitte & Touche LLP, Independent Registered Public Certification of Chief Executive Officer as required by Rule 13a-14(a) Certification of Chief Financial Officer...

  • Page 86
    ... X _____ †* Compensation plans or arrangements in which directors or executive officers are eligible to participate. The certifications attached as Exhibit 32.1 and Exhibit 32.2 accompanying this Annual Report on Form 10-K are not deemed filed with the Securities and Exchange Commission and are...

  • Page 87
    ...Erick M. Goldberg Senior Vice President, Human Resources Corporate Offices 19601 North 27th Avenue Phoenix, AZ 85027 (623) 580-6100 Transfer Agent, Registrar for Common Shares and Dividend Disbursing Agent Wells Fargo Shareowner Services 1110 Center Pointe Curve, Suite 101 Mendota Heights, MN 55120...

  • Page 88
    PetSmart Corporate Offices 19601 North 27th Avenue Phoenix, AZ 85027 (623) 580-6100 ©2014 PetSmart Store Support Group, Inc. All rights reserved.