UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

OR

Commission file number: 0-21888

PETsMART, INC.

Delaware (State or other jurisdiction of incorporation or organization)				94-3024325 (I.R.S. Employer Identification No.)

19601 N. 27th Avenue
Phoenix, Arizona 85027
(Address of principal executive offices, including Zip Code)

(623) 580-6100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date:

Common Stock, $.0001 Par Value, 143,553,775 Shares at May 25, 2005

PETsMART, Inc.
INDEX

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
PETsMART, Inc.
Phoenix, Arizona

We have reviewed the accompanying condensed consolidated balance sheet of PETsMART, Inc. and subsidiaries (the “Company”) as of May 1, 2005, and the related condensed consolidated statements of operations and cash flows for the 13-week periods ended May 1, 2005 and May 2, 2004. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

As described in Note 2, the accompanying condensed consolidated financial statements have been restated.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PETsMART, Inc. and subsidiaries as of January 30, 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended prior to restatement for the adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, (not presented herein); and in our report dated April 11, 2005, we expressed an unqualified opinion on those consolidated financial statements. We also audited the adjustments described in Note 3 that were applied to restate the January 30, 2005 consolidated balance sheet of PETsMART, Inc. and subsidiaries (not presented herein). In our opinion, such adjustments are appropriate and have been properly applied and the information set forth in the accompanying condensed consolidated balance sheet as of January 30, 2005 is fairly stated, in all material respects, in relation to the restated consolidated balance sheet from which it has been derived.

DELOITTE & TOUCHE LLP
Phoenix, Arizona
June 8, 2005

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PETsMART, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PETsMART, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PETsMART, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PETsMART, Inc. and Subsidiaries

NOTE 1 — GENERAL:

     PETsMART, Inc., and subsidiaries (the “Company” or “PETsMART”), is North America’s leading provider of food, supplies, accessories and professional services for the lifetime needs of pets. As of May 1, 2005, the Company operated 740 retail stores. The Company offers a broad line of products for all life stages of pets and is the nation’s largest provider of high-quality grooming and pet training services. PETsMART is also a leading mail order catalog and e-commerce retailer of pet and equine products and supplies. Through its strategic relationship with Banfield, The Pet Hospital, operating under the registered trademark of Banfield, full-service veterinary care is available in approximately 440 of the Company’s stores.

     PETsMART’s accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted for annual financial statements. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary for a fair statement of the results of the interim periods presented. Certain reclassifications have been made to prior period financial statements to present them on a basis comparable with the current period’s presentation.

     Because of the seasonal nature of the Company’s business, the results of operations for the thirteen weeks ended May 1, 2005 are not necessarily indicative of the results to be expected for the full year. The Company’s fiscal year ends on the Sunday nearest January 31.

     For further information, refer to the financial statements and related footnotes for the fiscal year ended January 30, 2005, included in the Company’s Form 10-K (File No. 0-21888), filed with the Securities and Exchange Commission on April 12, 2005.

NOTE 2 – RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

Accounting for Leases

     As discussed in the Company’s Form 10-K for the fiscal year ended January 30, 2005, on February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”) issued a letter to the American Institute of Certified Public Accountants clarifying the SEC staff’s interpretation of certain accounting issues and their application under accounting principles generally accepted in the United States of America (“GAAP”) relating to leases. As a result, PETsMART conducted an internal review and determined that certain of its lease accounting methods were not in accordance with GAAP, as described below.

     Rent holiday periods

     The Company had historically recognized rent holiday periods on a straight-line basis over the lease term commencing with the store opening date. The Company has now determined that the lease term should include all periods in which the Company has the right to control the use of the property, including construction and set-up periods prior to the store opening.

     Rent increases

     Many of the Company’s leases have rent escalation provisions based on a factor of the Consumer Price Index (“CPI”) with specified maximum increase amounts. These leases have historically been accounted for under the Financial Accounting Standards Board (“FASB”) Statements of Financial Accounting Standard (“SFAS”) No. 29, Determining Contingent Rentals, which provides that probability-based contingent rentals should be expensed as incurred. However, in connection with the Company’s internal review of its lease accounting practices, the Company determined that in almost all cases, these leases reach their maximum rate increase and the maximum rate increase should be included in the straight-line rental expense.

     The primary effect of the correction of the accounting for rent holiday periods and rent increases is to accelerate the recognition of rent expense and to increase deferred rent liability balances. In situations where the affected lease is a capital lease, the correction may increase the capital lease asset and the related obligation, as well as the amount of interest and depreciation expense recognized in the condensed consolidated statements of operations.

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PETsMART, Inc. and Subsidiaries

     Leasehold improvement amortization

     When accounting for leases with renewal options, the Company had historically depreciated certain assets over a period that, in some instances, extended beyond the initial lease term and into one or more option periods. Amortization for these assets should have been recognized over the initial lease term unless the renewal of an option period had been determined to be “reasonably assured” as that term is contemplated by SFAS No. 13, “Accounting for Leases.” The primary effect of the leasehold improvement correction is to accelerate the recognition of leasehold improvement amortization.

     Tenant improvement allowances

     The Company had historically accounted for tenant improvement allowances as reductions in the related leasehold improvement asset in the condensed consolidated balance sheets and as a reduction in capital expenditures in investing activities in the condensed consolidated statements of cash flows. Management has now determined that FASB Technical Bulletin No. 88-1, “Issues Relating to Accounting for Leases,” requires these allowances to be recorded as deferred rent in the condensed consolidated balance sheets and as a component of operating activities in the condensed consolidated statements of cash flows.

     In addition to the lease corrections outlined above, and as a result of its lease accounting review, the Company corrected the classification of certain items, including the amortization of leasehold improvements and expenses related to capitalized leases, in its condensed consolidated statement of operations to conform with GAAP.

Classification of Auction Rate Securities

     In fiscal 2004, the Company determined that investments in auction rate securities (“ARS”) should be classified as short-term investments. Previously, such investments had been classified as cash and cash equivalents. ARS generally have long-term maturities; however, these investments have characteristics similar to short-term investments because at predetermined intervals, generally every 28 to 49 days, there is a new auction process. The Company recorded investments in ARS as of May 1, 2005 and January 30, 2005 as short-term investments and has recorded the purchase and sale activity of ARS in cash flows from investing activities in the condensed consolidated financial statements.

     Following is a summary of the effects of the corrections discussed above and the adoption of SFAS No. 123(R), “Share-Based Payments,” as discussed in Note 3 (in thousands, except per share data):

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PETsMART, Inc. and Subsidiaries

NOTE 3 – STOCK-BASED COMPENSATION:

     The Company has stock option plans as well as an employee stock purchase plan. Prior to January 31, 2005, the Company accounted for these plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” Effective January 31, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payments,” using the modified retrospective transition method, which allows the restatement of prior periods by recognizing compensation cost in the amounts previously reported in the pro forma footnote disclosure under the provisions of SFAS No. 123.

     Stock-based compensation cost recognized in the thirteen weeks ended May 1, 2005 includes: (a) compensation cost for all share-based payments granted prior to January 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 30, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).

     The Company estimated the fair value of stock awards issued during the thirteen weeks ended May 1, 2005 using a lattice option pricing model. Expected volatilities are based on implied volatilities from traded options on the Company’s stock, historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time the Company expects options granted to be outstanding. The risk-free rates for the periods within the contractual life of the option are based on the U.S. Treasury yield curve in effect at the time of the grant. The fair value of stock awards issued on and before January 30, 2005 was estimated using the Black-Scholes option pricing model. Each option valuation model requires the input of subjective assumptions including the expected volatility and lives. Actual values of grants could vary significantly from the results of the calculations. The weighted average fair value of options granted during the thirteen weeks ended May 1, 2005 and May 2, 2004, was $12.03 and $11.33, respectively. The following assumptions were used to value grants:

^{(1) Prior to the adoption of SFAS No. 123(R), forfeitures were recognized as they occurred.}

     Compensation cost for options granted prior to January 31, 2005 is recognized on an accelerated amortization method over the vesting period of the options. Compensation cost for options granted after January 30, 2005 is recognized on a straight-line

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PETsMART, Inc. and Subsidiaries

basis over the vesting period. The following amounts were recognized for stock-based compensation (in thousands):

     The cumulative effect of adopting SFAS No. 123(R), which includes the impact of changing from the prior method of recognizing forfeitures as they occurred to estimating forfeitures at the grant date, was not material and is included in operating, general and administrative expenses in the condensed consolidated statements of operations.

     As of May 1, 2005, there was $65,783,000 of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted average period of 3.1 years.

     Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows in the condensed consolidated statement of cash flows. SFAS No. 123(R) requires cash flows resulting from excess tax benefits to be classified as financing cash flows. Excess tax benefits result from tax deductions in excess of the compensation cost recognized for those options.

     The condensed consolidated statement of cash flows for the thirteen weeks ended May 2, 2004 has been restated to reflect a decrease in cash flow from operating activities of $3,939,000 with a corresponding increase in cash flow from financing activities related to excess tax benefits.

NOTE 4 – INTANGIBLE ASSETS:

     Intangible assets consisted solely of trademarks that have an estimated useful life of 10 to 15 years. The trademarks have zero residual value. Changes in the carrying amount for the thirteen weeks ended May 1, 2005 were as follows (in thousands):

     Amortization expense for the intangible assets was $90,000 during the thirteen weeks ended May 1, 2005. The Company estimates the amortization expense to be approximately $270,000 for the remainder of the year. For fiscal years 2006 through 2010, the Company estimates the amortization expense to be approximately $360,000 each year.

NOTE 5 – RESERVE FOR CLOSED STORES:

     The Company continuously evaluates the performance of its retail stores and periodically closes those that are under-performing. Reserves for future occupancy payments on closed stores are established in the period the store is closed, in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The costs for future occupancy payments associated with closed stores are calculated by using the net present value method, at a credit-adjusted risk-free interest rate, over the remaining life of the lease, net of expected sublease income. Judgment is used to estimate the underlying real estate market related to the expected sublease income, and the Company can make no assurances that additional charges will not be required based on the changing real estate environment.

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PETsMART, Inc. and Subsidiaries

     The activity related to the closed store reserve was as follows (in thousands):

     The current portion of the closed store reserve is recorded in other current liabilities, and the noncurrent portion of the reserve is recorded in deferred rents and other noncurrent liabilities.

NOTE 6 – COMPREHENSIVE INCOME:

     Foreign currency translation adjustments were the only component of other comprehensive income, and are reported separately in stockholders’ equity (in thousands):

     The income tax benefit related to the foreign currency translation adjustments was approximately $295,000 and $1,920,000 for the thirteen weeks ended May 1, 2005 and May 2, 2004, respectively.

NOTE 7 — EARNINGS PER SHARE:

     Earnings per share is calculated in accordance with SFAS No. 128, “Earnings per Share.” Basic earnings per share is calculated by dividing net income by the weighted average of common shares outstanding during each period. Diluted earnings per share reflects the potential dilution of securities that could share in earnings, such as potentially dilutive common shares that may be issuable upon exercise of outstanding common stock options, and is calculated by dividing net income by the weighted average shares, including dilutive securities, outstanding during each period.

     A reconciliation of the basic and diluted earnings per share calculations for the thirteen weeks ended May 1, 2005 and May 2, 2004 is as follows (in thousands, except per share data):