PETCO ANIMAL SUPPLIES INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 30, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-23574

PETCO ANIMAL SUPPLIES, INC.

(Exact name of registrant as specified in its charter)


Delaware		33-0479906
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

9125 Rehco Road, San Diego, California		92121
(Address of principal executive offices)		(Zip Code)

(858) 453-7845

(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. Yes x No ¨

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


Title	Date	Outstanding
Common Stock, $0.001 Par Value	December 3, 2004	57,619,000

PETCO ANIMAL SUPPLIES, INC.

FORM 10-Q

For the Quarter Ended October 30, 2004

INDEX


			Page
Part I	Financial Information

	Item 1.	Unaudited Consolidated Financial Statements
		Consolidated Balance Sheets at January 31, 2004 and October 30, 2004	3
		Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks ended November 1, 2003 and October 30, 2004	4
		Consolidated Statements of Cash Flows for the Thirty-Nine Weeks ended November 1, 2003 and October 30, 2004	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
	Item 4.	Controls and Procedures	21

Part II	Other Information

	Item 1.	Legal Proceedings	21
	Item 5.	Other Information	23
	Item 6.	Exhibits	24

Signatures			25

Part I. Financial Information

Item 1. Unaudited Consolidated Financial Statements

PETCO ANIMAL SUPPLIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)


	January 31, 2004			October 30, 2004
				(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	62,201		$	90,108
Receivables		12,514			16,891
Inventories		139,513			162,872
Deferred tax assets		12,047			16,539
Other		12,907			10,971

Total current assets		239,182			297,381
Fixed assets, at cost		520,503			583,218
Less accumulated depreciation		(264,156	)		(294,781	)

Fixed assets, net		256,347			288,437
Debt issuance costs		4,251			3,343
Goodwill		40,289			40,179
Other assets		11,793			16,399

Total assets	$	551,862		$	645,739

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	63,773		$	77,389
Accrued salaries and employee benefits		57,223			67,446
Accrued expenses and other liabilities		67,260			69,523
Current portion of long-term debt		1,920			1,870

Total current liabilities		190,176			216,228
Long-term debt, excluding current portion		139,370			138,305
Senior subordinated notes payable		120,000			120,000
Deferred tax liability		26,919			33,871
Deferred rent and other liabilities		22,264			26,989

Total liabilities		498,729			535,393

Stockholders’ equity:
Preferred stock, $.01 par value, 5,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $.001 par value, 250,000 shares authorized, 57,458 and 57,586 shares issued and outstanding at January 31, 2004 and October 30, 2004, respectively		57			58
Additional paid-in capital		66,105			67,835
Retained earnings (accumulated deficit)		(13,029	)		42,453

Total stockholders’ equity		53,133			110,346

Total liabilities and stockholders’ equity	$	551,862		$	645,739

See accompanying notes to consolidated financial statements.

PETCO ANIMAL SUPPLIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)


	Thirteen weeks ended						Thirty-nine weeks ended
	November 1, 2003			October 30, 2004			November 1, 2003			October 30, 2004
Net sales	$	403,595		$	455,469		$	1,166,468		$	1,319,832
Cost of sales and occupancy costs		266,474			294,269			780,517			860,885

Gross profit		137,121			161,200			385,951			458,947
Selling, general and administrative expenses		104,785			121,658			298,694			351,656

Operating income		32,336			39,542			87,257			107,291
Interest income		(186	)		(351	)		(1,270	)		(682	)
Interest expense		6,561			5,242			21,312			15,430
Debt retirement costs		—			—			1,572			—

Earnings before income taxes		25,961			34,651			65,643			92,543
Income taxes		6,752			13,649			21,877			36,477

Net earnings	$	19,209		$	21,002		$	43,766		$	56,066

Net earnings per share:
Basic	$	0.33		$	0.36		$	0.76		$	0.97

Diluted	$	0.33		$	0.36		$	0.75		$	0.96

Shares used for computing net earnings per share:
Basic		57,448			57,554			57,411			57,512

Diluted		58,465			58,510			58,223			58,474

See accompanying notes to consolidated financial statements.

PETCO ANIMAL SUPPLIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	Thirty-nine weeks ended
	November 1, 2003			October 30, 2004
Cash flows from operating activities:
Net earnings	$	43,766		$	56,066
Depreciation and amortization		42,625			47,247
Amortization of debt issuance costs		1,130			914
Provision for deferred and other taxes		14,553			3,845
Non-cash write-off of debt issuance costs		1,572			—
Changes in assets and liabilities:
Receivables		(1,040	)		(4,377	)
Inventories		(16,038	)		(23,359	)
Other assets		(3,367	)		1,368
Accounts payable		5,144			13,616
Accrued salaries and employee benefits		8,666			10,223
Accrued expenses and other liabilities		576			2,460
Deferred rent		1,060			4,013

Net cash provided by operating activities		98,647			112,016

Cash flows from investing activities:
Additions to fixed assets		(81,740	)		(78,666	)
Acquisitions of intangible assets		(3,037	)		(3,767	)
Repayments of employee loans		245			263

Net cash used in investing activities		(84,532	)		(82,170	)

Cash flows from financing activities:
Repayments of long-term debt		(51,665	)		(1,438	)
Debt issuance costs		(1,488	)		—
Costs of common stock sold by stockholders		(1,423	)		(584	)
Net proceeds from issuance of common stock		86			83

Net cash used in financing activities		(54,490	)		(1,939	)

Net increase (decrease) in cash and cash equivalents		(40,375	)		27,907
Cash and cash equivalents at beginning of year		108,937			62,201

Cash and cash equivalents at end of period	$	68,562		$	90,108

See accompanying notes to consolidated financial statements.

PETCO ANIMAL SUPPLIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, in thousands, except per share data)

Note 1—General

PETCO Animal Supplies, Inc. (the “Company” or “PETCO”), a Delaware corporation, is a national specialty retailer of premium pet food, supplies and services with 705 stores in 47 states and the District of Columbia as of October 30, 2004. The Company’s products include pet food, supplies, grooming products, toys, novelty items, vitamins, small pets such as fish, birds and other small animals (excluding cats and dogs), and veterinary supplies.

In the opinion of management of PETCO, the unaudited consolidated financial statements presented herein contain all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position, results of operations and cash flows of the Company as of October 30, 2004 and for the thirteen and thirty-nine week periods ended November 1, 2003 and October 30, 2004. The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain prior period amounts have been reclassified to conform to the current period presentation. Because of the seasonal nature of the Company’s business, the results of operations for the thirteen and thirty-nine weeks ended November 1, 2003 and October 30, 2004 are not necessarily indicative of the results to be expected for the full year. The Company’s fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. All references to a fiscal year refer to the fiscal year ending on the Saturday closest to January 31 of the following year. For example, references to fiscal 2004 refer to the fiscal year beginning on February 1, 2004 and ending on January 29, 2005. All of the Company’s stores are aggregated into one reportable segment given the similarities in economic characteristics among the operations represented by the stores and the common nature of the products, customers and methods of distribution. For further information, refer to the consolidated financial statements and related footnotes for fiscal 2003 included in the Company’s Annual Report on Form 10-K (File No. 000-23574) filed with the Securities and Exchange Commission on April 5, 2004.

Note 2—New Accounting Standards

The Company adopted Emerging Issues Task Force, or EITF, 02-16, Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor, during the first quarter of fiscal 2003. EITF 02-16 addresses how a customer should account for cash consideration received from a vendor and requires all amounts received from vendors to be accounted for as a reduction of the cost of the products purchased unless certain criteria are met to allow presentation as a reduction of selling, general and administrative expenses. The transition provisions applied prospectively to arrangements with vendors entered into or modified subsequent to December 31, 2002 and did not allow for prior period reclassification. Pursuant to the adoption of EITF 02-16, substantially all vendor support is initially deferred as a reduction of the cost of inventory purchased and then recognized as a reduction of cost of sales and occupancy costs as the related inventory is sold. Prior to the adoption of EITF 02-16, certain vendor support was recorded as a reduction of selling, general and administrative expenses when earned. Certain cooperative advertising reimbursements continue to be classified as a reduction of advertising expenses within selling, general and administrative expenses, because they represent a reimbursement of specific, incremental and identifiable advertising costs incurred by the Company in selling certain vendors’ products. The total amount of such reimbursements is immaterial to the Company’s consolidated financial position and results of operations.

The Company adopted EITF 03-10, Application of EITF Issue No. 02-16, “Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor,” by Resellers to Sales Incentives Offered

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