Petsmart 2014 Annual Report Download - page 59

Table of Contents
We also have a $100.0 million stand-alone letter of credit facility agreement, or “Stand-alone Letter of Credit Facility,”
which expires on March 23, 2017. We are subject to fees payable each month at an annual rate of 0.175% of the average daily
face amount of the letters of credit outstanding during the preceding month. In addition, we are required to maintain a cash
deposit with the lender equal to 103% of the amount of outstanding letters of credit.
We had $69.2 million and $69.8 million in outstanding letters of credit, issued for guarantees provided for insurance
programs, under our Stand-alone Letter of Credit Facility as of February 2, 2014, and February 3, 2013, respectively. We had
$71.2 million and $71.9 million in restricted cash on deposit as of February 2, 2014, and February 3, 2013, respectively.
Our Revolving Credit Facility and Stand-alone Letter of Credit Facility permit the payment of dividends if we are not in
default and payment conditions as defined in the agreement are satisfied. As of February 2, 2014, 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 financial assets.
Seasonality and Inflation
Our business is subject to seasonal fluctuation. We typically realize a higher portion of net sales and operating profits
during our fourth quarter, as compared to our other quarters, 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. Because 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. Controllable expenses could fluctuate from quarter-to-quarter in a
year. Finally, because new stores tend to experience higher payroll, advertising, and other store-level expenses as a percentage
of net sales than mature stores, new store openings also contribute to lower store operating margins until these stores become
established.
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 Act." We expect to be in compliance with the
law in 2014 and intend to be in compliance with the employer mandate portion of the Act, which is effective in 2015. We do
not expect the impact on our consolidated financial statements to be material.
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 risks are
principally associated with foreign exchange fluctuations.
Foreign Currency Risk
Our Canadian subsidiary operates 86 stores and uses the Canadian dollar as the functional currency and the United States
dollar as the reporting currency. We have certain exposures to foreign currency risk. Net sales in Canada, denominated in
United States dollars, were $0.4 billion, or 5.4% of our consolidated net sales for 2013. Transaction gains and losses
denominated in the United States dollar are recorded in operating, general, and administrative expenses or cost of sales in the
Consolidated Statements of Income and Comprehensive Income depending on the nature of the underlying transaction.
Transaction losses included in net income were $0.9 million, $0.5 million, and $0.8 million for 2013, 2012, and 2011,
respectively.
We maintain a natural hedge through management of the cash accounts denominated in United States dollars held in
Canada in an effort to reduce the impact of foreign currency exchange rate fluctuations. From time to time, we have entered
into foreign currency exchange forward contracts, or “Foreign Exchange Contracts,” in Canada to manage the impact of
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