Petsmart 2014 Annual Report Download - page 51

Table of Contents
latter half of 2012, we began expanding our offerings of exclusive and proprietary brands. Finally, we made more than twenty
website enhancements in 2012 and launched our Canada site on PetSmart.com.
Services sales, which include professional grooming and boarding, as well as training and day camp for dogs, increased
9.7%, or $65.6 million, to $740.5 million for 2012, compared to $674.9 million for 2011. Services sales represented 11.0% of
net sales for 2012 and 2011. The increase in services sales was primarily due to continued strong demand for our grooming
services, the addition of new stores and new PetsHotels since January 29, 2012, and the additional week, which increased
services sales by $12.8 million.
Other revenue included in net sales, which represents license fees and reimbursements for specific operating expenses
charged to Banfield under the master operating agreement, comprised 0.6% of net sales, or $38.2 million in 2012, compared to
0.6% of net sales, or $36.7 million in 2011. There was no impact of the additional 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 included in margin provided 55 and 10 basis points of leverage, respectively. The additional week
increased margin by 15 basis points.
Operating, General, and Administrative Expenses
Operating, general, and administrative expenses decreased 40 basis points to 20.9% of net sales for 2012, from 21.3% of
net sales for 2011. Operating, general, and administrative expenses increased on a dollar basis by $109.6 million. The primary
reasons for the year over year increase include store growth, planned incremental advertising spend focused on our
differentiated offerings, and the additional week, which increased operating, general, and administrative costs by $18.3
million.
Interest Expense, net
Interest expense, which is primarily related to capital lease obligations, decreased to $55.6 million for 2012, compared to
$58.1 million for 2011 due to a decrease in capital lease obligations. Included in interest expense, net was interest income of
$1.3 million for 2012 and for 2011.
Income Tax Expense
Income tax expense for 2012 and 2011 was $223.3 million and $167.0 million, respectively. Both 2012 and 2011 had an
effective tax rate of 37.4%. The effective tax rate is calculated by dividing our income tax expense, which includes the income
tax expense related to our equity income from Banfield, by income before income tax expense and equity income from
Banfield.
Equity Income from Banfield
Our equity income from our investment in Banfield was $16.0 million and $10.9 million for 2012 and 2011, respectively,
based on our 21.0% ownership in Banfield.
Liquidity and Capital Resources
Cash Flow
We believe that our operating cash flow and cash on hand will be adequate to meet our operating, investing, and financing
needs in the foreseeable future. In addition, we have access to our $100.0 million revolving credit facility, which expires on
March 23, 2017. However, there can be no assurance of our ability to access credit markets on commercially acceptable terms
in the future. We continuously assess the economic environment and market conditions to guide our decisions regarding our
uses of cash, including capital expenditures, investments, dividends, and the purchase of treasury stock.
We finance our operations, new store and PetsHotel growth, store remodels, and other expenditures to support our growth
initiatives primarily through cash generated by operating activities. Receipts from our sales come from cash, checks, and
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