Petsmart 2014 Annual Report Download - page 45

Table of Contents
We also have reserves for estimated obsolescence and to reduce merchandise inventory to the lower of cost or market. We
evaluate inventory for excess, obsolescence, or other factors that may render inventories unmarketable at historical cost.
Factors used in determining obsolescence reserves, which are recorded to reflect approximate net realizable value of our
inventories, include current and anticipated demand, customer preferences, age of merchandise, seasonal trends, and decisions
to discontinue certain products. If assumptions about future demand change, or actual market conditions are less favorable
than those projected by management, we may require additional reserves.
As of February 2, 2014, and February 3, 2013, our inventory valuation reserves were $12.7 million and $11.8 million,
respectively.
Asset Impairments
We review long-lived assets for impairment based on undiscounted cash flows on a quarterly basis, and whenever events
or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. No material asset
impairments were identified during 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 in the period the store closes, based on the fair value of the remaining contractual obligations, net of expected
subtenant income, using a credit-adjusted risk-free interest rate over the remaining life of the lease. Key estimates that we use
in calculating the required reserve include cash flow projections and sublease assumptions. The costs for future occupancy
payments are reported in operating, general, and administrative expenses in the Consolidated Statements of Income and
Comprehensive Income. As of February 2, 2014, and February 3, 2013, our reserve for closed stores was $3.9 million and
$8.7 million, respectively.
Insurance Liabilities and Reserves
We maintain workers' compensation, general liability, product liability, and property and casualty insurance. We utilize
high deductible plans for each of these areas, as well as a self-insured health plan for our eligible associates. Workers'
compensation deductibles generally carry a $1.0 million per occurrence risk of claim liability. Our general liability plan
specifies a $0.5 million per occurrence risk of claim liability. We establish reserves for claims under workers' compensation
and general liability plans based on periodic actuarial estimates of the amount of loss for all pending claims, including
estimates for claims that have been incurred but not reported. The loss estimates rely on actuarial observations of ultimate loss
experience for similar historical events. Our insurance reserves may be sensitive to changes in historical claims experience,
demographic factors, severity factors, and other valuations, which could result in a material adjustment to our reserves if
actual results are inconsistent with our expectations.
As of February 2, 2014, and February 3, 2013, we had approximately $102.1 million and $107.2 million, respectively, in
reserves related to workers' compensation, general liability, and self-insured health plans. A 10% change in our insurance
reserves would have affected net income by approximately $6.4 million in 2013.
Income Tax Reserves
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 generally do not materially adjust deferred income taxes at interim periods. 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 2, 2014, and February 3, 2013, were principally to offset certain deferred income tax assets
for net operating loss carryforwards.
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. To the extent we
prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our
effective income tax rate in a given fiscal period could be materially affected. An unfavorable tax settlement would require
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