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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

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

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      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.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

      The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing sale price of the Registrant’s Common Stock on August 3, 2003, the last business day of the Registrant’s most recently completed second fiscal quarter, as reported on the NASDAQ National Market was approximately $2,701,173,000. This calculation excludes approximately 1,975,000 shares held by directors and executive officers of the Registrant. This calculation does not exclude shares held by such organizations whose ownership exceeds 5% of the Registrant’s outstanding Common Stock as of December 31, 2003 that have represented to the Registrant that they are registered investment advisers or investment companies registered under section 8 of the Investment Company Act of 1940.

      The number of shares of the Registrants Common Stock outstanding as of March 29, 2004 was 144,359,716.

DOCUMENTS INCORPORATED BY REFERENCE

      Proxy Statement for the Annual Meeting of Stockholders to be held on June 10, 2004, to be filed by April 26, 2004.

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PART I

      This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors, including the risks outlined under “Business Risks” contained in Part I of this Annual Report that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements.

      Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Our expectations are as of the date this Annual Report on Form 10-K is filed, and we do not intend to update any of the forward-looking statements after the date this Annual Report on Form 10-K is filed to conform these statements to actual results, unless required by law.

      Our fiscal year consists of the 52 or 53 weeks ending on the Sunday nearest January 31 of the following year. Unless otherwise specified, all references in this Annual Report on Form 10-K to years are to fiscal years. The 2003 and 2002 fiscal years were 52-week years, and the 2001 fiscal year was a 53-week year.

General

      PETsMART was incorporated in Delaware on August 11, 1986, and opened its first two stores in March 1987. In fiscal 2003, we generated sales of $3.0 billion, making PETsMART the leading provider of products, services, and solutions for the lifetime needs of pets in North America. We opened 60 net new stores in fiscal 2003 and, as of February 1, 2004, operated 643 retail stores in North America. Our stores typically range in size from 19,000 to 27,000 square feet. We also reach customers through our direct marketing channels, including PETsMART.com, the internet’s most popular pet e-commerce site, a separate web site dedicated to equine products, and two major branded catalogs. Our stores carry a broad and deep selection of high quality pet supplies at everyday low prices. We offer more than 12,000 distinct items, including nationally recognized brand names, as well as an extensive selection of private brands across a range of product categories.

      We complement our extensive product assortment with a wide selection of value-added pet services, including grooming and pet training. Virtually all our stores offer complete pet training services and feature pet styling salons that provide high quality grooming services. Through our strategic relationship with Banfield, The Pet Hospital, operating under the registered trademark of Banfield, full-service veterinary care is available in approximately 350 of our stores. We also continue to test the PETsMART PETsHOTEL^SM boarding and daycamp concept, and, as of February 1, 2004, we operated nine PETsHOTELs within our retail stores and one stand-alone location.

      We have identified a large group of pet owners we call “pet parents,” who are passionately committed to their pets and consider their pets family members. Our strategy is to attract and keep these customers by becoming the preferred provider of total lifetime care for pets. As part of this strategy, we focus on driving efficiencies in our stores, on our processes and our systems, on growing our pet services business, and on delighting our customers by providing a superior store environment, a superior shopping experience, and superior service. We have improved our distribution capabilities, implemented new management information systems, focused on developing our pet services business, and worked to develop a culture of customer service. In addition, we completed the reformatting of our stores in 2003. Our new store design creates a specialty store environment by organizing store layout by pet species, placing a greater emphasis on pet services, and eliminating most of the high steel shelving, resulting in a brighter and more open store. The new format, combined with our enhanced distribution and information systems capabilities, has reduced inventories, made the store easier to shop, and allowed our associates to spend more time serving customers. We believe these strategic initiatives will continue to drive enhanced comparable store sales growth, profitability, and return on investment.

The Pet Food and Pet Supply Industry

      The pet product industry serves a large and growing market. The American Pet Products Manufacturers Association or APPMA, estimates the 2003 market at approximately $31.0 billion, an increase of approximately

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      The pet product industry can be divided into the following categories: food, supplies/medicines, vet care, pet services (such as grooming or boarding), and live animal purchases. The APPMA estimates dog food, cat food, and treats represent the largest volume categories of pet-related products and in 2003 approximated $13.0 billion or more than 40% of the market. Many premium pet food brands, which offer higher levels of nutrition than non-premium brands, are not currently sold through supermarkets, warehouse clubs, and mass merchandisers due to manufacturers’ restrictions, but are sold primarily through superstores, specialty pet stores, veterinarians, and farm and feed stores.

      Pet supplies and medicine sales account for approximately 25% or $7.6 billion of the market. These sales consist of items such as dog and cat toys, collars and leashes, cages and habitats, books, vitamins and supplements, shampoos, flea and tick control, and aquatic supplies. Vet care, pet services, and animal purchases represent approximately 22%, 8%, and 4%, respectively.

Competition

      Based on total sales, we are the largest specialty retailer of pet food, supplies, and services in North America. The pet food and pet supply retail industry is highly competitive and can be categorized into five different segments:

	•	Supermarkets, warehouse clubs, and other mass merchandisers;
	•	Specialty pet supply chains and pet supply stores;
	•	Independent pet stores;
	•	Catalog retailers; and
	•	Internet retailers.

      We believe the principal competitive factors influencing our business are product selection and quality, convenience of store locations, store environment, customer service, price, and availability of pet services. Many of the products we offer are not currently available in grocery stores, warehouse clubs, or other mass merchandisers due to manufacturers’ restrictions. We believe we compete effectively within our various markets; however, some of our mass merchandiser competitors are larger in terms of overall sales volume and have access to greater capital.

      We are currently the only major specialty pet retailer that markets to customers through stores, catalogs, and the internet, and we believe this gives us a competitive advantage. In addition, we believe our pet services business, which grocery stores and mass merchandisers are not likely to duplicate, is a competitive advantage.

Our Strategy

      Our strategy is to be the preferred provider for the lifetime needs of pets. Our primary initiatives include:

      Add stores in existing multi-store and new single-store markets. Our expansion strategy includes increasing our share in the top 60 existing multi-store markets, penetrating new single-store markets, and achieving operating efficiencies and economies of scale in distribution, procurement, marketing, and store operations. During 2003, we opened 60 net new stores and we expect to open approximately 90 net new stores in 2004, primarily in multi-store markets. Approximately 40% of those store openings are planned in markets in the Northeast and California where we are significantly under-represented. We believe there is a potential for at least 1,200 PETsMART stores in North America.

      Provide the right store format to meet the needs of our customers. As of February 1, 2004, we had completed the conversion of our store base to our new specialty store format. We believe our reformatted stores, combined with our other strategic initiatives, contribute to higher comparable store sales growth, profitability, and return on investment. We continually evaluate our store format to ensure we are meeting the needs and expectations of our customers, while providing a return on investment to our shareholders. We are currently testing additions to this reformat, including updated signage and other changes designed to attract new customers and promote lifetime loyalty.

      Expand our pet services business. Based on sales, we are the leading provider of professional grooming and pet training services. Pet services are an integral part of our strategy, and we are focused on driving profitable growth in

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      Pet services revenue, which includes pet grooming, pet training, and PETsHOTEL, grew by 25% in 2003 and 29% in both 2002 and 2001. We are confident in our ability to continue to expand the pet services portion of our business.

      Offer superior customer service. Our emphasis on the customer is an on-going cultural shift designed to provide our customers with an unparalleled shopping experience every time they visit our stores. Using a detailed curriculum and role playing techniques, we educate store associates to identify customer needs and provide solutions. We measure their success in every store, and a portion of the annual incentive program for managers, from the store level to the executive team, is linked to key customer service metrics. By providing pet parents with expertise and solutions, we believe we are strengthening our relationships with customers, building loyalty, and enhancing our leading market position.

      Differentiate ourselves through effective brand management. We are focused on developing and strengthening our brand identity. We are creating tools to effectively communicate our unique value proposition and vision of providing Total Lifetime Care^TM for pets, and to build enduring relationships with our customers. We have completed the test of a customer loyalty program, using our PetPerks^TM savings card, which will roll out beginning in 2004, and recently installed a centralized customer database that allows us to track and analyze customer shopping patterns. We intend to use this information to customize direct marketing and promotional materials, and to more effectively communicate with customers across all our channels.

Our Stores

      Our stores are generally located in sites co-anchored by strong destination superstores, and typically are in or near major regional shopping centers. In 2003, we opened a total of 60 net new stores. In addition, we expect to open approximately 90 net new stores in 2004. We believe there is a potential for a total of at least 1,200 PETsMART stores in North America.

Distribution

      We currently employ a hybrid distribution system including full truckload shipments to individual stores and the splitting of full truckloads among several closely located stores and distribution centers. Our forward distribution centers handle products that require rapid replenishment. Our improved distribution network, combined with improved integrated information systems, drive reduced store inventory and transportation costs, more efficient use of store labor, improved in-stock positions, and better distribution center productivity. We operate the following distribution centers:

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Information Systems

      In 2003, we completed a three-year project to upgrade and expand telecommunications and wireless features to our stores. These upgrades are designed to make our stores easier to operate, increase associate efficiency, and enhance company communications.

      During 2003, we also finished a two-year project to implement a software application in our grooming salons and PETsHOTELs to automate scheduling, check-in, check-out, labor management, and to maintain a database of customers.

      In addition, we implemented a traffic management software application in 2003. This application manages both the transportation of products coming into PETsMART distribution centers from our suppliers and the transportation of products from our distribution centers to our stores, which has improved supply chain efficiency.

      Finally, we implemented software applications to support various procurement initiatives including demand planning, forecasting, replenishment, and seasonality in 2003. In addition, we implemented customer relationship management, direct marketing, and human resources software. We are in the process of implementing pricing optimization applications, and we anticipate that this software will support continued gross margin growth. We expect to complete final phases of the price optimization software implementation in 2004 and 2005.

Merchandise

      Merchandise, which represented approximately 93.5% percent of our revenues in 2003, 94.3% percent of our revenues in 2002, and 95.0% percent of our revenues in 2001, generally falls into three main categories:

	•	Pet Food, Treats, and Litter. We emphasize premium dog and cat foods, many of which are not available in supermarkets, warehouse clubs, or mass merchandisers. We also offer quality national brands traditionally found in supermarkets and pet stores. The sale of pet food, treats, and litter comprised approximately 39.7%, 42.3%, and 45.0% of our revenues in 2003, 2002, and 2001, respectively.
	•	Pet Supplies and Other Goods. Our broad assortment of pet supplies includes collars, leashes, health and beauty aids, shampoos, medication, toys, pet carriers, doghouses, cat furniture, and equestrian supplies. We also offer a complete line of supplies for fish, birds, and small pets. These products include aquariums, filters, birdcages, and small pet supplies. In certain stores, we have an equine department that serves trade areas with high rates of horse ownership. The sale of pet supplies and other non-pet supply goods comprised approximately 50.7%, 48.7%, and 46.0% of our revenues in 2003, 2002, and 2001, respectively.
	•	Pets. Our stores feature fresh-water tropical fish and domestically bred birds, reptiles, and small pets. Pets comprised approximately 3.1%, 3.3%, and 4.0% of our revenues in 2003, 2002, and 2001, respectively.

Pet Services

      Pet services, which include pet grooming, pet training, and PETsHOTEL, represented approximately 6.5%, 5.7%, and 5.0% of our revenues in 2003, 2002, and 2001, respectively. We offer full-service grooming and pet training services in virtually all our stores. We typically allocate an average of 745 square feet per store for high-quality, full-service grooming, including precision cuts, baths, toenail trimming, and toothbrushing. Our pet stylists are trained through a 15-week program that teaches exceptional grooming skills using safe and gentle techniques. Pet training services range from puppy classes to advanced and private courses. Total revenues from pet grooming, pet training, and boarding services grew approximately 25% from $154.3 million in 2002 to $193.5 million in 2003.

      In 2002, we launched a test of the PETsHOTEL concept and began operating two in-store hotels in addition to the stand-alone location we acquired in 1999. PETsHOTEL provides boarding and daycamp for dogs and cats, 24-hour supervision, an on-call veterinarian, temperature controlled rooms and suites, and daily specialty treats and play time. In 2003, we expanded the test to seven additional locations inside our larger stores. We plan to expand the test by about 14 additional in-store hotels in 2004 and we will continue to evaluate the results.

Veterinary Services

      The availability of comprehensive veterinary care further differentiates us and reflects our overall commitment to pet care. Full-service veterinary hospitals in approximately 350 of our stores offer routine examinations and vaccinations, dental care, a pharmacy, and routine and complex surgical procedures. Substantially all these hospitals are operated by Medical Management International, Inc., or MMI, a third-party operator of veterinary hospitals,

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PETsMART Charities and Adoptions

      Through PETsMART Charities, Inc., an independent 501(c)(3) organization, we support the activities of local humane organizations. Our mission is to improve the quality of life for all companion animals. PETsMART Charities creates and supports programs that save lives of homeless pets and promote healthy relationships between people and pets. Moving toward our vision of a lifelong, loving home for every pet, we:

	•	Raise awareness of companion animal welfare issues;
	•	Fund programs to further individual animal welfare organizations’ missions; and
	•	Facilitate adoptions through in-store programs.

      Since 1994, PETsMART Charities has raised and donated more than $31.0 million to animal welfare programs and, through our in-store adoption programs, has saved the lives of more than 1.7 million pets.

Government Regulation

      We are subject to laws governing our relationship with employees, including minimum wage requirements, overtime, working conditions, and citizenship requirements. There are statutes and regulations in certain states and Canadian provinces that affect the ownership of veterinary practices, or the operation of veterinary hospitals in retail stores, that may impact our ability, or MMI’s ability, to operate veterinary hospitals in certain facilities.

      The transportation, handling, and sale of small pets is governed by various federal, state, provincial, and local regulations. These laws vary from jurisdiction to jurisdiction and are enforced by the courts and by regulatory authorities with broad discretion. While we seek to structure our operations to comply with the laws and regulations of each jurisdiction in which we operate, there can be no assurance that, given varying and uncertain interpretations of these laws, we would be found to be in compliance in all jurisdictions.

      Our facilities and operations are also subject to environmental regulations imposed by federal, state, provincial and local authorities with respect to generation, handling, storage, transportation, and disposal of waste and biohazardous materials, and the sale and distribution of products. We may in the future incur liability under environmental statutes and regulations with respect to sites or other persons. We also could be subject to costs, including fines or sanctions, and third party claims as a result of violations of, or liabilities under environmental, health, or safety laws.

Insurance

      We maintain standard property and casualty insurance on all of our stores, product liability insurance covering products and the sale of live pets, self-insured health plans, and worker compensation insurance. Property insurance covers approximately $948.7 million in buildings and contents, including furniture and fixtures, leasehold improvements, and inventory. Under our casualty and workers compensation insurance policies through January 31, 2004, we retain the initial risk of loss of $0.25 million for each policy per occurrence. Effective February 1, 2004, we engaged a new insurance provider. Under our casualty and workers compensation insurance policies with the new provider, we retain an initial risk of loss of $0.50 million for each policy per occurrence on or subsequent to February 1, 2004.

Intellectual Property

      We have several service marks and trademarks registered with the United States Patent and Trademark Office (or USPTO), including PETsMART, PETsMART.com, PETsHOTEL, Total Lifetime Care, Where Pets Are Family and All You Need For The Life Of Your Pet, as well as many others. We also own several service mark and trademark applications that are pending with the USPTO, such as PetPerks, and anticipate filing additional applications in the future. We also own numerous registered service marks, trademarks, and pending applications in other countries, including Canada, as well as several trade names, domain names and copyrights for use in our

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Employees

      As of February 1, 2004, we employed approximately 26,500 associates, approximately 13,400 of whom were employed full time. We are not subject to any collective bargaining agreements and have not experienced any work stoppages. We consider our relationship with our associates to be good. Increases in the federal minimum wage in recent years have not had a material effect on our business.

Financial Information by Business Segment and Geographic Data

      As of February 1, 2004, we had three operating segments: PETsMART North America, which included all retail stores, PETsMART Direct, which included our equine catalog and equine internet operations; and PETsMART.com, which included our pet catalog and pet internet operations. We have evaluated our segment reporting requirements under Statement of Financial Accounting Standards, or SFAS, No. 131, “Disclosures about Segments of an Enterprise and Related Information,” and have determined that the PETsMART Direct and PETsMART.com operating segments do not meet the quantitative thresholds for disclosure as reportable operating segments. No one region or country other than the United States accounted for 10% or more of revenues in 2003.

      Net sales in the United States were approximately $2,920.3 million, $2,632.5 million, and $2,438.2 million for 2003, 2002, and 2001, respectively. Net sales, denominated in US dollars, in Canada were approximately $75.8 million, $62.7 million, and $62.8 million for 2003, 2002, and 2001, respectively. The information for long-lived assets and deferred tax assets is incorporated by reference to the Notes to Consolidated Financial Statements attached as Exhibit F.

Available Information

      We make available free of charge through our internet web-site (www.petsmart.com) our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file such material, or furnish it to the Securities and Exchange Commission.

Business Risks

      In the normal course of business, our financial position is routinely subjected to a variety of risks, including market risks associated with store expansion, investments in information systems, international expansion, vendor reliability, competitive forces, and government regulatory actions. You should carefully consider the risks and uncertainties described below in connection with those also discussed in Our Stores, Distribution, Information Systems, Competition, and Government Regulation sections of this Annual Report on Form 10-K. Our actual results could differ materially from projected results due to some or all of the factors discussed below.

If we are unable to successfully open new stores or increase sales at our reformatted stores, our results of operations would be harmed.

      Our continued revenue growth depends to a degree on our ability to increase sales at our reformatted stores. We completed this reformatting program in 2003. There can be no assurance that our reformatted stores will meet forecasted levels of sales and profitability.

      In addition, we expect to open approximately 90 net new stores in 2004. Our ability to open additional stores is dependent on various factors including:

	•	Identifying store sites that offer attractive returns on our investment;
	•	Competition for those sites;
	•	Successfully negotiating with landlords;
	•	Timely construction of such stores; and
	•	Our ability to attract and retain qualified store personnel.

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      To the extent we are unable to accomplish any of the above, our ability to open new stores may be harmed. In addition, there can be no assurance that we will be able to operate our new stores profitably.

      We currently operate stores in most of the major market areas of the United States and Canada. Our plans for 2004 include opening 90 net new stores, primarily in existing multi-store markets. Approximately 40% of those store openings are planned in markets in the Northeast and California where we are significantly under-represented. It has been our experience that opening new stores may attract some customers away from other stores already operated by us in those markets and diminish their sales. Our comparable store sales increases were 7.0% and 9.6% for the fiscal years ended February 1, 2004, and February 2, 2003, respectively. As a result of new store openings in existing markets, and because older stores will represent an increasing proportion of our store base over time, our comparable store sales increases may be lower or sales could decrease in future periods.

      Preopening expenses and lower sales volumes associated with newly opened stores can impact operating margins. In certain geographic regions, we have experienced lower comparable store sales increases and lower levels of store contribution compared to results achieved in other regions. In addition, we expect certain operating costs, particularly those related to occupancy, to be higher than in the past in some newly entered geographic regions. As a result of a possible slower overall rate of comparable store sales increases or decreases in comparable store sales, and the impact of these rising costs, our total store contribution and operating margins may be lower in future periods than they have been in the past.

      Our suppliers generally ship our merchandise to one of our distribution centers, which receive and allocate merchandise to our stores. Any interruption or malfunction in our distribution operations could harm our sales and the results of our operations. We have two fish distribution centers that are operated by a third-party vendor, and an interruption or malfunction to their business could harm our sales and results of operations. In such an event, there can be no assurance that we could contract with another third party to operate the fish distribution centers on favorable terms, if at all, or that we could successfully operate the fish distribution centers ourselves.

      The efficient operation of our business is dependent on our information systems. In particular, we rely on our information systems to effectively manage our sales, warehousing, distribution, merchandise planning and replenishment functions, and to maintain our in-stock positions. Our information systems are centrally located at our headquarters in Phoenix, Arizona, and we possess offsite redundancy capabilities. The failure of our information systems to perform as designed could disrupt our business and harm our sales and profitability.

      We continue to invest in our information systems. There can be no assurance that the costs of investments in our information systems will not exceed estimates or that they will be as beneficial as predicted. If we are unable to realize the benefits of improved systems, our results of operations could be harmed.

      Our sales depend on consumer spending, which is influenced by factors beyond our control, including general economic conditions, the availability of discretionary income, weather, consumer confidence, and unemployment levels. We may experience declines in sales during economic downturns. Any material decline in the amount of discretionary spending could reduce our sales and harm our business.

      Our business is subject to seasonal fluctuation. We typically realize a higher portion of our net sales and operating profit during the fourth fiscal quarter. 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

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The pet food and pet supply retailing industry is highly competitive, and continued competitive forces may reduce our sales and profitability.

      The pet food and pet supply retailing industry is highly competitive. We compete with supermarkets, warehouse clubs, and mass merchandisers, many of which are larger and have significantly greater resources than we have. We also compete with a number of pet supply warehouse or specialty stores, smaller pet store chains, catalog retailers, internet retailers, and pet stores. The industry has become increasingly competitive due to the entrance of other specialty retailers into the pet food and pet supply market, some of which have developed store formats similar to ours, and due to the expansion of pet-related product offerings by certain supermarkets, warehouse clubs, and mass merchandisers. There can be no assurance we will not face greater competition from these or other retailers in the future. In particular, if any of our major competitors seek to gain or retain market share by reducing prices, we would likely reduce our prices in order to remain competitive, which may result in a decrease in our sales and profitability and require a change in our operating strategies.

The loss of any of our key vendors, a decision by our vendors to make their products available in supermarkets or through warehouse clubs and mass merchandisers, or the inability of our vendors to provide products in a timely or cost-effective manner, could harm our business.

      We have no long-term supply commitments from our vendors. We buy from several hundred vendors worldwide and, together, our two largest vendors accounted for approximately 16.2% of our total sales for fiscal 2003. Sales of premium pet food for dogs and cats comprise a significant portion of our revenues. Currently, most major vendors of premium pet foods do not permit their products to be sold in supermarkets, warehouse clubs, or through other mass merchandisers. If any premium pet food or pet supply vendors were to make their products available in supermarkets or through warehouse clubs and mass merchandisers, our business could be harmed. In addition, if the grocery brands currently available to such retailers were to gain market share at the expense of the premium brands sold only through specialty pet food and pet supply outlets, our business could be harmed.

      We purchase significant amounts of pet supplies from a number of vendors with limited supply capabilities. There can be no assurance that our current pet supply vendors will be able to accommodate our anticipated needs or comply with existing or any new regulatory requirements. In addition, we purchase significant amounts of pet supplies from vendors outside of the United States. There can be no assurance our overseas vendors will be able to satisfy our requirements including, but not limited to, timeliness of delivery, acceptable product quality, packaging and labeling requirements. Any inability of our existing vendors to provide products in a timely or cost-effective manner could harm our business. While we believe our vendor relationships are satisfactory, any vendor could discontinue selling to us at any time.

We depend on key personnel and may not be able to retain or replace these employees or recruit additional qualified personnel, which could harm our business.

      Our success is largely dependent on the efforts and abilities of our senior executive group. The loss of the services of one or more of our key executives could adversely impact our financial performance and our ability to execute our strategies. In addition, our future success will depend on our ability to attract highly skilled store managers and qualified services personnel such as pet trainers and groomers. There is a high level of competition for these employees and our ability to operate our stores and expand these services depends on our ability to attract and retain these personnel. In addition, historically there has been a shortage of qualified veterinarians. If Banfield cannot attract and retain a sufficient number of veterinarians, Banfield’s ability to provide veterinary services in our stores, and increase the number of stores in which Banfield provides veterinary services, may be impacted.

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      We entered the Canadian market in 1996, and operated 21 stores in Canada as of February 1, 2004. As these operations grow, they may require greater management and financial resources. International operations require the integration of personnel with varying cultural and business backgrounds and an understanding of the relevant differences in the legal and regulatory environments. Our results may be increasingly affected by the risks of our international activities, including:

	•	Fluctuations in currency exchange rates;
	•	Changes in international staffing and employment issues;
	•	Tariff and other trade barriers;
	•	The burden of complying with foreign laws, including tax laws; and
	•	Political and economic instability and developments.

      We and MMI, the third party operator of Banfield, The Pet Hospital, are subject to laws governing the operation of veterinary hospitals. MMI Holdings, Inc., or MMIH, is the parent company of MMI. Statutes and regulations in various states and Canadian provinces regulating the ownership of veterinary practices, or the operation of veterinary hospitals in retail stores, may impact our ability and MMI’s ability to operate veterinary hospitals within our facilities. A determination that we or MMI are in violation of any of these applicable statutes and regulations could require us or MMI to restructure our operations to comply or render us or MMI unable to operate veterinary hospitals in a given location. We recorded $10.5 million and $8.3 million from MMI during 2003 and 2002, respectively, as a reduction of the retail stores’ occupancy costs. We record occupancy costs as a component of cost of sales in our consolidated financial statements. If MMIH or MMI were to experience financial or other operating difficulties that would force it to limit its operations, or if MMIH were to cease operating the veterinary hospitals in our stores, our business may be harmed, both directly and due to a decrease in customer traffic. There can be no assurance that we could contract with another third party to operate the veterinary hospitals on favorable terms, if at all, or that we could successfully operate the veterinary hospitals ourselves. For a further discussion of our relationship with MMI, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Related Party Transactions.”

      We anticipate that our existing capital resources and cash flows from operations will enable us to maintain our currently planned operations for the foreseeable future. If, however, we are unable to generate and maintain positive operating cash flows and operating income in the future, we may need additional funding. We may also choose to raise additional capital due to market conditions or strategic considerations even if we believe that we have sufficient funds for our current or future operating plans. Our current credit facility is secured by substantially all of our personal property assets, our subsidiaries, and certain real property. This could limit our ability to obtain, or obtain on favorable terms, additional financing and may make more costly additional debt financing outside our credit facility. If additional capital were needed, our inability to raise capital on favorable terms would harm our business and financial condition. In addition, to the extent that we raise additional capital through the sale of equity or debt securities convertible into equity, the issuance of these securities could result in dilution to our stockholders.

      Various state and local regulations govern the transportation, handling, and sale of small pets. These laws vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. In addition, the operation of veterinary hospitals are subject to federal, state and local statutes and regulations such as the use, management, transport, and disposal of medical materials and biohazardous materials. While we seek to structure our operations to comply with the laws and regulations of each jurisdiction in which we operate, there can be no assurance that, given varying and uncertain interpretations of these laws, we would be found to be in compliance in all jurisdictions. A determination that we are in violation of applicable laws could require us to restructure our operations to comply with such requirements and/or incur fines or sanctions, which could harm our business.

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A determination by tax regulators that our provision for income and other taxes is not adequate may result in a material impact to our financial position.

      We operate in multiple tax jurisdictions and could be subject to audit in these jurisdictions. These audits can involve complex issues that may require an extended period of time to resolve and may cover multiple years. We believe an adequate provision for income and other taxes has been made for all years subject to audit. A determination by tax regulators in these jurisdictions that our provision for taxes is not adequate may result in a material impact to our financial position.

Our business exposes us to claims that could result in adverse publicity, harm to our brand, and a reduction in our sales.

      We are occasionally subject to claims due to the injury or death of a pet in our stores or while under our care in connection with the pet services we provide. In addition, we sell certain small pets including fish, birds, reptiles, and small rodents in our stores. Given the large number of small pets we sell, deaths or injuries of these small pets sometimes occur while they are within our care. As a result, we may be subject to claims that we do not properly care for these small pets. We may also be subject to claims resulting from the transfer of diseases from pets in our stores to associates and customers. In addition, from time to time, we have been subject to product liability claims for some of the products we sell. Any negative publicity or claims relating to any of the foregoing could harm our reputation and business, as well as expose us to litigation expenses and damages.

Pending legislation, weather, disease, or other factors could disrupt the supply of the small pets and products we sell, which could harm our reputation and decrease sales.

      There is generally a significant amount of legislation pending at the federal, state, provincial and local levels regarding the handling of pets. This legislation may impair our ability to transport the small pets we sell in our stores. The small pets we sell in our stores are susceptible to diseases that can quickly decrease or destroy the supply of these pets. In addition, our supply of products may be negatively impacted by weather, disease, contamination, or trade barriers. Any disruption in the supply of products to our stores, due to legislation, weather, disease, or any other factor, could harm our reputation and decrease our sales.

Fluctuations in the stock market, as well as general economic and market conditions, may harm the market price of our common stock.

      Over the last several years, the market price of our common stock has been subject to significant fluctuation. The market price of our common stock may continue to be subject to significant fluctuations in response to operating results and other factors including, but not limited to:

	•	Announcements by analysts regarding their assessment of PETsMART and our prospects;
	•	Announcements of our financial results, particularly if they differ from investors’ expectations;
	•	General economic changes;
	•	Actions taken by our competitors, including new product introductions and pricing changes;
	•	Changes in the strategy and capability of our competitors;
	•	Our ability to successfully integrate acquisitions and consolidations;
	•	The prospects of our industry; and
	•	Hostilities and acts of terrorism.

      In addition, the stock market in recent years has experienced price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These fluctuations, as well as general economic and market conditions, may harm the market price of our common stock.

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      Our restated certificate of incorporation and bylaws include provisions that may delay, defer, or prevent a change in management or control that our stockholders may not believe is in their best interests. These provisions include:

	•	A classified board of directors consisting of three classes;
	•	The ability of our board of directors to issue without stockholder approval up to 10,000,000 shares of preferred stock in one or more series with rights, obligations, and preferences determined by the board of directors;
	•	No right of stockholders to call special meetings of stockholders;
	•	No right of stockholders to act by written consent;
	•	Certain advance notice procedures for nominating candidates for election to the board of directors; and
	•	No right to cumulative voting.

      In addition, our restated certificate of incorporation requires a 66 2/3% vote of stockholders to:

	•	alter or amend our bylaws;
	•	remove a director without cause; or
	•	alter, amend or repeal certain provisions of our restated certificate of incorporation.

      In August 1997, our board of directors adopted a Stockholder Rights Plan, commonly referred to as a poison pill, under which one preferred share purchase right was distributed on August 29, 1997, for each share of common stock held on that date. We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, and the application of Section 203 could have the effect of delaying or preventing an acquisition of PETsMART.

Management

      Our executive officers and their ages and positions on March 29, 2004, are as follows:

      Philip L. Francis has been a director of PETsMART since 1989, and Chief Executive Officer since March 1998. In September 1999, he was also named Chairman of the Board, and from 1998 to 2001, he was President. From 1991 to 1998, he held various positions with Shaw’s Supermarkets, Inc., a subsidiary of J. Sainsbury plc., including Chief Executive Officer, Chief Operating Officer, and President. Prior to that, he held several senior management positions for Roundy’s Inc., Cardinal Health, and the Jewel Companies.

      Robert F. Moran was appointed President and Chief Operating Officer in December 2001. He joined PETsMART as President of North American Stores in July 1999. From 1998 to 1999, he was President of

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      Scott A. Crozier joined PETsMART as Senior Vice President and General Counsel in June 1999, and was appointed Secretary in June 2000. From 1998 to 1999, Mr. Crozier was Chairman and Chief Executive Officer of Westpac Consulting, L.L.C., a real estate services company. From 1987 to 1998, Mr. Crozier served as Vice President and General Counsel for Phelps Dodge Corporation, a global mining and manufacturing company. Prior to that, he was Counsel for Talley Industries, Inc., and served as an enforcement attorney with the Securities Division of the Arizona Corporation Commission and during that time, was also appointed as Special Assistant Attorney General with the Arizona Attorney General’s Office.

      Barbara A. Fitzgerald joined PETsMART as Senior Vice President of Store Operations in September 2000. Prior to joining PETsMART, during 2000, Ms. Fitzgerald was President of Harmon AutoGlass, a leading provider of auto glass replacement and repair. From 1997 to 2000, Ms. Fitzgerald served in various positions at Toys ‘R’ Us, Inc., including, Vice President, General Manager of New York/ New Jersey and Vice President of People Development. Prior to that, Ms. Fitzgerald spent 24 years with Sears, Roebuck and Company in various capacities, including Vice President and General Manager of Sears Hardware Stores.

      Kenneth T. Hall was appointed Senior Vice President and Chief Marketing Officer in January 2003. He joined PETsMART as Vice President, Strategic Planning and Customer Relationships in October 2000. From 1999 to 2000, Mr. Hall worked as a consultant for Bain & Company, Inc., a global management consulting firm. From 1998 to 1999, he attended Harvard University Graduate School of Business Administration. From 1992 to 1997, Mr. Hall held various operational and financial positions at EXXON Company, U.S.A.

      David L. King joined PETsMART as Senior Vice President and Chief Information Officer in March 2000. From 1998 to 2000, Mr. King held various positions at JDA Software, Inc., a software and consulting provider for the retail industry, including Director of Consulting and Director of Sales. From 1994 to 1997, Mr. King served as Director of Systems and Logistics at Salinas y Rocha, in Mexico City. Prior to that, Mr. King held positions at Datamerica Corporation, Tymshare, Inc., and Boeing Computer Services, Inc. He was also the President and owner of two software and information system consulting firms, KingTec International, Inc., and D.L. King & Associates, Inc.

      Timothy E. Kullman joined PETsMART as Senior Vice President and Chief Financial Officer in July 2002. From 2001 to 2002, Mr. Kullman was the Executive Vice President and Chief Financial Officer for Hagemeyer North America Holdings, Inc., part of a global distribution company based in the Netherlands. From 1997 to 2001, Mr. Kullman served as Senior Vice President and Chief Financial Officer of Genuardi’s Family Markets, Inc., a regional grocery retailer. From 1994 to 1997, Mr. Kullman served as Senior Vice President, Chief Financial Officer, Treasurer and Secretary for Delchamps, Inc., a grocery retailer in the southeastern United States. Prior to that, he held various positions with Farm Fresh, Inc., Blue Cross Blue Shield of Michigan, and Deloitte Haskins & Sells, the predecessor to Deloitte & Touche LLP.

      David K. Lenhardt joined PETsMART as Senior Vice President of Services, Strategic Planning and Business Development in October 2000. From 1996 to 2000, Mr. Lenhardt was a manager with Bain & Company, Inc., where he led consulting teams for retail, technology, and e-commerce clients. Prior to that, he worked in the corporate finance and Latin American groups of Merrill Lynch & Co.’s investment banking division.

      Mark D. Mumford was appointed Vice President, Controller and Chief Accounting Officer in March 2003. He joined PETsMART in August 2001 as Vice President of Finance. From 2000 to 2001, he was a Director in the Financial Advisory Services group at PriceWaterhouse LLP, the predecessor of PricewaterhouseCoopers LLP. From 1990 to 2000, Mr. Mumford held various positions at MicroAge, Inc., including Senior Vice President of Operations, Vice President of Finance, Controller, and Chief Financial Officer and Chief Information Officer of Pinacor, Inc., a wholly owned subsidiary of MicroAge, Inc. In April 2000, MicroAge, Inc. filed for protection under Chapter 11 of the United States Bankruptcy Code. He started his career in public accounting where he worked for Deloitte & Touche LLP.

      David A. Quinn was appointed Senior Vice President of Distribution in January 2002. Mr. Quinn joined PETsMART as Vice President of Distribution in September 1999. From 1990 to 1999, he was Director of Distribution and Traffic for the Waccamaw Corporation/ Home Place. Prior to that, Mr. Quinn was Divisional Director of Distribution for Lazarus Department Stores.

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      Francesca M. Spinelli, joined PETsMART as Senior Vice President, People, in September 2003. From 1998 to 2003, she was with Radio Shack Corporation, where she served as Senior Vice President of People. Previously, Ms. Spinelli was with Wal-Mart Stores, Inc., from 1993 to 1998, where she held the positions of Corporate Vice President, Organizational Development and Vice President, Human Resources — McLane Company, Inc., a former division of Wal-Mart. Prior to 1993, Ms. Spinelli has held human resources positions with Dillaashwa, Hawthorn and Company, P.C., and APS, Inc. In addition, Ms. Spinelli serves on the board of directors of Advance Auto Parts, Inc.

      Anthony N. Truesdale was appointed Senior Vice President of Merchandising in June 2000. Mr. Truesdale joined PETsMART as Vice President of Hardgoods Merchandising in January 1999. He took on the import business for PETsMART in August 1999, and in October 1999, he was promoted to Senior Vice President of Merchandising for Hardgoods and Specialty. In April 2000, he was promoted to Senior Vice President Merchandising and Logistics. From 1997 to 1999, he served as Senior Manager in Produce for J. Sainsbury, plc., in the United Kingdom. Prior to that, Mr. Truesdale spent 18 years in various operating and merchandising functions at Shaws Supermarkets, Inc., a subsidiary of J. Sainsbury plc., in New England before taking the United Kingdom assignment.

      Our stores are generally located in sites co-anchored by strong destination superstores and typically are in or near major regional shopping centers. The following table summarizes the locations of the stores by country and state at February 1, 2004:

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