UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 0-21888

PetSmart, Inc.

(Exact name of registrant as specified in its charter)

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

19601 N. 27th Avenue
Phoenix, Arizona		85027
(Address of principal executive offices)		(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. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     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, 123,568,873 Shares at November 13, 2009

 

 

PetSmart, Inc. and Subsidiaries
INDEX

		Page
		Number
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Report of Independent Registered Public Accounting Firm			3
Condensed Consolidated Balance Sheets as of November 1, 2009, February 1, 2009, and November 2, 2008			4
Condensed Consolidated Statements of Operations and Comprehensive Income for the thirteen and thirty-nine weeks ended November 1, 2009, and November 2, 2008			5
Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended November 1, 2009, and November 2, 2008			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. Quantitative and Qualitative Disclosures About Market Risk			23
Item 4. Controls and Procedures			23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			25
Item 1A. Risk Factors			26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 6. Exhibits			27
Signatures			28
EX-15.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
PetSmart, Inc.
Phoenix, Arizona

We have reviewed the accompanying condensed consolidated balance sheets of PetSmart, Inc. and subsidiaries (the “Company”) as of November 1, 2009 and November 2, 2008, and the related condensed consolidated statements of operations and comprehensive income for the thirteen week and thirty-nine week periods ended November 1, 2009 and November 2, 2008, and of cash flows for the thirty-nine week periods ended November 1, 2009 and November 2, 2008. 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.

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 February 1, 2009, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 26, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 1, 2009, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Phoenix, Arizona
November 25, 2009

Condensed Consolidated Balance Sheets
(In thousands, except par value)
(Unaudited)

		November 1,				February 1,				November 2,
		2009				2009				2008
ASSETS
Cash and cash equivalents		$	185,215			$	126,314			$	54,317
Restricted cash			55,250				—				—
Receivables, net			52,144				48,609				39,352
Merchandise inventories			608,274				584,011				612,246
Deferred income taxes			29,333				28,223				28,826
Prepaid expenses and other current assets			88,126				87,677				77,787
Total current assets			1,018,342				874,834				812,528
Property and equipment, net			1,225,116				1,302,245				1,328,554
Equity investment in affiliate			30,865				25,938				26,242
Deferred income taxes			83,631				93,128				129,958
Goodwill			41,882				38,645				39,057
Other noncurrent assets			24,192				22,863				24,091
Total assets		$	2,424,028			$	2,357,653			$	2,360,430
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and bank overdraft		$	179,709			$	194,630			$	196,903
Accrued payroll, bonus and employee benefits			103,526				88,337				93,484
Accrued occupancy expenses and deferred rents			65,495				55,642				58,718
Short-term debt			—				—				50,000
Current maturities of capital lease obligations			36,151				32,233				30,873
Other current liabilities			126,745				107,315				126,120
Total current liabilities			511,626				478,157				556,098
Capital lease obligations, net of current maturities			545,226				553,760				558,518
Deferred rents			91,695				92,155				92,071
Other noncurrent liabilities			97,225				89,445				92,980
Total liabilities			1,245,772				1,213,517				1,299,667
Commitments and contingencies
Stockholders’ equity:
Preferred stock; $.0001 par value; 10,000 shares authorized, none issued and outstanding			—				—				—
Common stock; $.0001 par value; 625,000 shares authorized, 160,048, 159,770 and 159,556 shares issued			16				16				16
Additional paid-in capital			1,137,132				1,117,557				1,108,260
Retained earnings			1,030,753				936,100				861,527
Accumulated other comprehensive income (loss)			2,053				(2,714	)			(2,217	)
Less: Treasury stock, at cost, 36,471, 32,408 and 32,408 shares			(991,698	)			(906,823	)			(906,823	)
Total stockholders’ equity			1,178,256				1,144,136				1,060,763
Total liabilities and stockholders’ equity		$	2,424,028			$	2,357,653			$	2,360,430

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

Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share data)
(Unaudited)

		For the Thirteen Weeks Ended								For the Thirty-Nine Weeks Ended
		November 1,				November 2,				November 1,				November 2,
		2009				2008				2009				2008
Merchandise sales		$	1,157,647			$	1,124,587			$	3,496,995			$	3,310,021
Services sales			136,703				126,557				433,714				396,002
Net sales			1,294,350				1,251,144				3,930,709				3,706,023
Cost of merchandise sales			837,875				798,513				2,516,378				2,335,780
Cost of services sales			100,299				94,935				311,491				289,773
Total cost of sales			938,174				893,448				2,827,869				2,625,553
Gross profit			356,176				357,696				1,102,840				1,080,470
Operating, general and administrative expenses			284,896				285,571				867,902				852,678
Operating income			71,280				72,125				234,938				227,792
Interest expense, net			(15,031	)			(14,769	)			(44,975	)			(43,722	)
Income before income tax expense and equity in income from investee			56,249				57,356				189,963				184,070
Income tax expense			(20,453	)			(22,492	)			(71,594	)			(72,684	)
Equity in income from investee			2,274				959				4,927				2,896
Net income			38,070				35,823				123,296				114,282
Other comprehensive (loss) income, net of income tax:
Foreign currency translation adjustments			(125	)			(6,436	)			4,767				(7,802	)
Comprehensive income		$	37,945			$	29,387			$	128,063			$	106,480
Earnings per common share:
Basic		$	0.31			$	0.29			$	1.00			$	0.92
Diluted		$	0.31			$	0.28			$	0.98			$	0.90
Weighted average shares outstanding:
Basic			121,661				124,122				123,163				124,308
Diluted			123,781				126,795				125,396				126,761

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

Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

		For the Thirty-Nine Weeks Ended
		November 1,				November 2,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	123,296			$	114,282
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			177,001				166,402
Loss on disposal of property and equipment			3,937				4,357
Stock-based compensation expense			18,485				18,562
Deferred income taxes			8,388				(3,475	)
Equity in income from investee			(4,927	)			(2,896	)
Tax benefits from tax deductions in excess of the compensation cost recognized			(1,939	)			(2,912	)
Non-cash interest expense			853				4,075
Changes in assets and liabilities:
Receivables, net			(3,801	)			10,942
Merchandise inventories			(21,889	)			(109,684	)
Prepaid expenses and other current assets			(4,166	)			(5,272	)
Other noncurrent assets			(1,527	)			6,906
Accounts payable			3,330				34,372
Accrued payroll, bonus and employee benefits			14,794				10,639
Accrued occupancy expenses and current deferred rents			9,855				12,315
Other current liabilities			13,942				(14,610	)
Deferred rents			(848	)			4,138
Other noncurrent liabilities			8,589				8,458
Net cash provided by operating activities			343,373				256,599
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash and short-term investments			(55,250	)			—
Cash paid for property and equipment			(86,957	)			(194,562	)
Proceeds from sales of property and equipment			3,867				2,980
Net cash used in investing activities			(138,340	)			(191,582	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock traded under stock incentive plans			7,252				10,601
Minimum statutory withholding requirements			(3,373	)			(1,959	)
Cash paid for treasury stock			(84,875	)			(49,955	)
Payments of capital lease obligations			(28,660	)			(26,665	)
Proceeds from short-term debt			—				464,000
Payments on short-term debt			—				(444,000	)
Decrease in bank overdraft			(19,682	)			(7,871	)
Tax benefits from tax deductions in excess of the compensation cost recognized			1,939				2,912
Cash dividends paid to stockholders			(20,101	)			(11,451	)
Net cash used in financing activities			(147,500	)			(64,388	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			1,368				(4,634	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			58,901				(4,005	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			126,314				58,322
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	185,215			$	54,317

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

PetSmart, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 — GENERAL

     PetSmart, Inc., including its wholly owned subsidiaries (the “Company,” “PetSmart” or “we”), is a leading specialty provider of products, services and solutions for the lifetime needs of pets. We offer a broad line of products for all the life stages of pets and offer various pet services, including professional grooming, training, boarding and day camp. We also offer pet products through an e-commerce site. As of November 1, 2009, we operated 1,149 retail stores and had full-service veterinary hospitals in 752 of our stores. Medical Management International, Inc. operated 740 of the veterinary hospitals under the registered trade name of “Banfield, The Pet Hospital.” See Note 4 for a discussion of our ownership interest in MMI Holdings, Inc., the parent company of Medical Management International, Inc. The remaining 12 hospitals are operated by other third parties in Canada.

     The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or “GAAP,” for interim financial information. Accordingly, they do not include all the information and footnotes required by GAAP 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 the fair statement of results of the interim periods presented. These condensed consolidated financial statements, which are unaudited, should be read in conjunction with the audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended February 1, 2009. As detailed in Note 1 to the audited consolidated financial statements of said Annual Report, certain prior period amounts have been reclassified to conform to the current year presentation. We evaluated subsequent events through the time that we filed these condensed consolidated financial statements in our Form 10-Q with the Securities and Exchange Commission on November 25, 2009.

     Due to the seasonal nature of our business, the results of operations for the thirteen and thirty-nine weeks ended November 1, 2009, are not necessarily indicative of the results expected for the full year. Our fiscal year consists of 52 or 53 weeks and ends on the Sunday nearest January 31. Fiscal 2009 ends on January 31, 2010, while fiscal 2008 ended on February 1, 2009, both of which are 52 week years. Unless otherwise specified, all references to years in these condensed consolidated financial statements are to fiscal years.

NOTE 2 — FAIR VALUE MEASUREMENTS

     The following table provides the fair value hierarchy for financial assets measured at fair value on a recurring basis (in thousands):

Fair Value Measurements at November 1, 2009, using:

Significant

Significant

Quoted Prices in

Observable

Unobservable

Total Carrying

Active Markets

Other Inputs

Other Inputs

Value at November 1, 2009

(Level 1)

(Level 2)

(Level 3)

Money market funds

$

183,793

$

183,793

—

—

NOTE 3 — INCOME TAXES

     We establish deferred income tax assets and liabilities for temporary differences between the financial reporting bases and the income tax bases of our assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled. We record a valuation allowance on the deferred income tax assets to reduce the total to an amount we believe is more likely than not to be realized.

     We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense in the Condensed Consolidated Statements of Operations and Comprehensive Income. We believe it is reasonably possible that approximately $0.2 million of our current remaining unrecognized tax positions may be recognized by October 31, 2010, as a result of settlements or a lapse of the statute of limitations.

     As of November 1, 2009, our gross tax liabilities associated with uncertain tax positions, excluding interest and penalties, were $6.7 million. Based on the uncertainties associated with the settlement of these types of items, we are unable to make reasonably reliable estimates of potential cash settlements, if any, with taxing authorities.

     We generally do not materially adjust deferred tax assets as part of our interim income tax provision. During the thirty-nine weeks ended November 1, 2009, changes in deferred tax assets were due to tax benefits related to stock-based compensation, and changes in accumulated other comprehensive income. During the interim periods, we recognize the provision for income taxes in other current liabilities in the Condensed Consolidated Balance Sheets. A reclassification between other current liabilities and deferred income tax assets and liabilities is likely to occur during the fourth quarter of 2009.

     At November 1, 2009, accrued taxes of $25.8 million related to sales taxes and income taxes were included in other current liabilities in the Condensed Consolidated Balance Sheets.

NOTE 4 — INVESTMENTS

     We have an investment in MMI Holdings, Inc., a provider of veterinary services. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “MMIH,” operates full-service veterinary hospitals in 740 of our stores under the registered trade name “Banfield, The Pet Hospital.”

     We use the equity method of accounting for our investment in MMIH. Our ownership interest in the stock of MMIH was as follows (in thousands):

		November 1, 2009								February 1, 2009								November 2, 2008
		Shares				Amount				Shares				Amount				Shares				Amount
Voting common stock and preferred stock			4,693			$	21,675				4,693			$	21,675				4,693			$	21,675
Equity in income from investee			—				9,190				—				4,263				—				4,567
Total equity investment in affiliate			4,693			$	30,865				4,693			$	25,938				4,693			$	26,242

     Our investment consisted of voting common stock, comprising 21.4% of all voting stock as of November 1, 2009, and 21.5% as of February 1, 2009, and November 2, 2008. Our ownership percentage as of November 1, 2009, February 1, 2009, and November 2, 2008, considering all classes of stock (voting and non-voting), was 21.0%.

     MMIH’s financial data is summarized as follows (in thousands):

		November 1, 2009				February 1, 2009				November 2, 2008
Current assets		$	265,973			$	187,066			$	184,493
Noncurrent assets			126,798				121,932				126,474
Current liabilities			256,274				196,070				197,195
Noncurrent liabilities			15,603				14,070				14,226

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		November 1, 2009				November 2, 2008				November 1, 2009				November 2, 2008
Net sales		$	149,924			$	127,147			$	422,073			$	374,318
Gross profit			23,553				17,419				56,478				56,960
Net income before minority interest			10,821				2,521				23,445				13,349

     We have a master operating agreement with MMIH which covers license fees, utilities and other cost reimbursements. We charge MMIH license fees for the space used by the veterinary hospitals and for their portion of utilities costs. These amounts are classified as a reduction of the retail stores’ occupancy costs, which are included as a component of cost of merchandise sales in the Condensed Consolidated Statements of Operations and Comprehensive Income. We also charge MMIH for its portion of specific operating expenses and classify the reimbursement as a reduction of the retail stores’ operating expense.

     We recognized license fees, utilities and other cost reimbursements of $8.5 million and $7.6 million during the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively, and $25.2 million and $22.6 million during the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively. Receivables from MMIH totaled $3.4 million, $3.3 million, and $3.2 million at

November 1, 2009, February 1, 2009, and November 2, 2008, respectively, and were included in receivables in the Condensed Consolidated Balance Sheets.

     The master operating agreement also includes a provision for the sharing of profits on the sale of therapeutic pet foods sold in all stores with an operating Banfield hospital. The net sales and gross profit on the sale of therapeutic pet food sales is not material to our condensed consolidated financial statements.

NOTE 5 — STOCK-BASED COMPENSATION

     The stock-based compensation expense and the total income tax benefit recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income were as follows (in thousands):

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		November 1, 2009				November 2, 2008				November 1, 2009				November 2, 2008
Stock options expense		$	2,051			$	1,963			$	6,225			$	6,048
Management equity unit expense			418				—				1,009				—
Performance share unit expense			955				—				2,321				—
Restricted stock expense			2,937				3,854				8,930				11,070
Employee stock purchase plan expense			—				494				—				1,444
Total stock-based compensation expense		$	6,361			$	6,311			$	18,485			$	18,562
Tax benefit		$	2,165			$	2,239			$	6,596			$	6,458

     Stock-based compensation expense has been adjusted to reflect both actual and estimated forfeitures as follows (in thousands):

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		November 1, 2009				November 2, 2008				November 1, 2009				November 2, 2008
Stock options forfeiture (benefit) expense		$	(22	)		$	106			$	(127	)		$	290
Management equity unit forfeiture benefit			(74	)			—				(117	)			—
Performance share unit forfeiture benefit			(40	)			—				(88	)			—
Restricted stock forfeiture benefit			(135	)			(787	)			(799	)			(2,914	)
Total forfeiture benefit		$	(271	)		$	(681	)		$	(1,131	)		$	(2,624	)

     At November 1, 2009, the total unrecognized stock-based compensation expense, net of estimated forfeitures, was $43.8 million and is expected to be recognized over a weighted average period of 1.9 years.

     In accordance with our equity incentive plans, we granted the following (in thousands, except per stock option, per unit or per share information):

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		November 1, 2009				November 2, 2008				November 1, 2009				November 2, 2008
Stock options awarded			6				17				1,690				1,807
Weighted average fair value per stock option		$	7.18			$	8.59			$	6.67			$	6.43
Weighted average exercise price per stock option		$	24.30			$	23.71			$	16.93			$	19.11
Management equity units awarded			—				—				284				—
Fair value per management equity unit		$	—			$	—			$	23.53			$	—
Performance share units awarded			2				—				590				—
Weighted average fair value per performance share unit		$	24.30			$	—			$	16.93			$	—
Restricted stock awarded			—				31				82				966
Weighted average fair value per share of restricted stock		$	—			$	23.85			$	18.05			$	19.37

     We estimated the fair value of stock option grants using a lattice option pricing model. The following assumptions were used to value stock option grants:

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		November 1, 2009				November 2, 2008				November 1, 2009				November 2, 2008
Dividend yield			1.96	%			0.42	%			0.61	%			0.42	%
Expected volatility			37.1	%			38.7	%			46.0	%			36.2	%
Risk-free interest rate			1.32	%			2.28	%			1.16	%			1.96	%
Expected life		5.3 years				5.2 years				5.3 years				5.2 years
Vesting period		4.0 years				4.0 years				4.0 years				4.0 years
Term		7.0 years				7.0 years				7.0 years				7.0 years

Employee Stock Purchase Plan

     We have an Employee Stock Purchase Plan, or “ESPP,” that allows employees who meet certain service requirements to purchase our common stock on semi-annual offering dates at a discount. Prior to February 1, 2009, the ESPP allowed employees to purchase shares at 85% of the fair market value of the shares on the offering date or, if lower, at 85% of the fair market value of the shares on the purchase date. Effective February 1, 2009, the discount was reduced to 5%, allowing participants to purchase our common stock on semi-annual offering dates at 95% of the fair market value of the shares on the purchase date. During the thirteen weeks ended November 1, 2009, and November 2, 2008, no shares were purchased through the ESPP. During the thirty-nine weeks ended November 1, 2009, and November 2, 2008, 0.1 million and 0.2 million shares were purchased through the ESPP, respectively.

NOTE 6 — RESERVE FOR CLOSED STORES

     The components of the reserve for closed stores were as follows (in thousands):

		November 1, 2009				February 1, 2009				November 2, 2008
Total remaining gross occupancy costs		$	35,049			$	34,107			$	35,452
Less:
Expected sublease income			(25,530	)			(26,604	)			(27,950	)
Interest costs			(1,457	)			(1,121	)			(1,191	)
Reserve for closed stores		$	8,062			$	6,382			$	6,311

     Included in other current liabilities in the Condensed Consolidated Balance Sheets is $1.9 million, $2.3 million, and $2.0 million for the current portion of the reserve for closed stores at November 1, 2009, February 1, 2009, and November 2, 2008, respectively. We can make no assurances that additional charges related to closed stores will not be required based on the changing real estate and macroeconomic environment.

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

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		November 1, 2009				November 2, 2008				November 1, 2009				November 2, 2008
Opening balance		$	7,633			$	5,919			$	6,382			$	6,157
Reserve for new store closures			1,025				—				1,025				2,585
Changes in sublease assumptions			1,145				1,265				3,743				1,265
Lease terminations			(565	)			—				(565	)			(821	)
Other			203				114				611				237
Charges, net			1,808				1,379				4,814				3,266
Payments			(1,379	)			(987	)			(3,134	)			(3,112	)
Ending balance		$	8,062			$	6,311			$	8,062			$	6,311

NOTE 7 — FOREIGN CURRENCY

     Foreign currency translation adjustments were the only component of other comprehensive income and are reported separately in stockholders’ equity in the Condensed Consolidated Balance Sheets. The income tax (benefit) expense related to the foreign currency translation adjustments was $(0.1) million and $(4.1) million for the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively, and $3.0 million and $(5.0) million for the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively.

     The transaction loss (gain) included in net income was $0.3 million and $2.8 million for the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively, and $(1.2) million and $3.2 million for the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively.

     The impact of foreign currency translation adjustments to the carrying value of goodwill was $(0.1) million and $(4.3) million for the thirteen weeks ended November 1, 2009, and November 3, 2008, respectively, and $3.2 million and $(5.3) million for the thirty-nine weeks ended November 1, 2009, and November 3, 2008, respectively.

NOTE 8 — STOCKHOLDERS’ EQUITY

     Share Purchase Program

     In August 2007, the Board of Directors approved a share purchase program authorizing the purchase of up to $300.0 million of our common stock through August 2, 2009. During the thirteen weeks ended May 3, 2009, we purchased 1.2 million shares of common stock for $25.0 million, completing the $300.0 million program.

     In June 2009, the Board of Directors approved a new share purchase program authorizing the purchase of up to $350.0 million of our common stock through January 29, 2012. During the thirteen weeks ended November 1, 2009, we purchased 1.7 million shares of common stock for $35.0 million. Since the inception of the new share purchase authorization in June 2009, we have purchased 2.9 million shares of common stock for $60.0 million. As of November 1, 2009, $290.0 million remained available under the $350.0 million program.

     Dividends

     The Board of Directors declared the following dividends:

Date

Dividend Amount

Stockholders of

Date

Declared

per Share

Record Date

Paid

March 24, 2009

$

0.03

May 1, 2009

May 15, 2009

June 22, 2009

$

0.10

July 31, 2009

August 14, 2009

September 30, 2009

$

0.10

October 30, 2009

November 13, 2009

NOTE 9 — EARNINGS PER COMMON SHARE

     The following table presents a reconciliation of the weighted average shares outstanding used in the earnings per common share calculations (in thousands):

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		November 1, 2009				November 2, 2008				November 1, 2009				November 2, 2008
Basic			121,661				124,122				123,163				124,308
Effect of dilutive securities:
Stock options, restricted stock and performance share units			2,120				2,673				2,233				2,453
Diluted			123,781				126,795				125,396				126,761

     Certain stock-based compensation awards representing 3.7 million and 4.1 million shares of common stock in the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively, and 6.0 million and 4.8 million shares of common stock in the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively, were not included in the calculation of diluted earnings per common share because the inclusion of such awards would have been antidilutive for the periods presented.

NOTE 10 — SUPPLEMENTAL SCHEDULE OF CASH FLOWS

     Supplemental cash flow information was as follows (in thousands):

		Thirty-Nine Weeks Ended
		November 1, 2009				November 2, 2008
Interest paid		$	44,539			$	41,276
Income taxes paid, net of refunds			60,128				81,097
Assets acquired using capital lease obligations			18,274				81,235
Accruals and accounts payable for capital expenditures			14,081				34,035
Dividends declared but unpaid			12,358				3,815

NOTE 11 — LITIGATION AND SETTLEMENTS

     On January 12, 2009, a former groomer filed suit on behalf of herself and a putative class of current and former groomers in California State Court entitled Langton v. PetSmart. The plaintiff alleged that she and other non-exempt groomers did not receive payment for all hours worked, did not receive meal and rest breaks, did not receive all wages due upon termination, did not receive accurate wage statements as required by law, and were not provided with necessary tools and equipment. On February 17, 2009, we removed the action to the United States District Court for the Central District of California, and have since resolved this matter for an amount that is not material to our condensed consolidated financial statements.

     We are also a party to several lawsuits arising from the pet food recalls announced by several manufacturers beginning in March 2007. The named plaintiffs sued the major pet food manufacturers and retailers claiming that their pets suffered injury and/or death as a result of consuming allegedly contaminated pet food and pet snack products.

Bruski v. Nutro Products, et al., USDC, N.D. IL (filed 3/23/07)

Rozman v. Menu Foods, et al., USDC, MN (filed 4/9/07)

Ford v. Menu Foods, et al., USDC, S.D. CA (filed 4/23/07)

Wahl, et al. v. Wal-Mart Stores Inc., et al., USDC, C.D. CA (filed 4/10/07)

Demith v. Nestle, et al., USDC, N.D. IL (filed 4/23/07)

Thompkins v. Menu Foods, et al., USDC, CO (filed 4/11/07)

McBain v. Menu Foods, et al., Judicial Centre of Regina, Canada (filed 7/11/07)

Dayman v. Hills Pet Nutrition Inc., et al., Ontario Superior Court of Justice (filed 8/8/07)

Esau v. Menu Foods, et al., Supreme Court of Newfoundland and Labrador (filed 9/5/07)

Ewasew v. Menu Foods, et al., Supreme Court of British Columbia (filed 3/23/07)

Silva v. Menu Foods, et al., Canada Province of Manitoba (filed 3/30/07)

Powell v. Menu Foods, et al., Ontario Superior Court of Justice (filed 3/28/07)

     By order dated June 28, 2007, the Bruski, Rozman, Ford, Wahl, Demith and Thompkins cases were transferred to the U.S. District Court for the District of New Jersey and consolidated with other pet food class actions under the federal rules for multi-district litigation (In re: Pet Food Product Liability Litigation, Civil No. 07-2867). The Canadian cases were not consolidated.

     On May 21, 2008, the parties to the U.S. lawsuits comprising the In re: Pet Food Product Liability Litigation and the Canadian cases jointly submitted a comprehensive settlement arrangement for court approval. Preliminary court approval was received from the U.S. District Court on May 3, 2008, and from all of the Canadian courts as of July 8, 2008. On October 14, 2008, the U.S. District Court approved the settlement, and the Canadian courts gave final approval on November 3, 2008.

     Two different groups of objectors filed notices of appeal with respect to the U.S. District Court’s approval of the U.S. settlement. Upon expiration of the prescribed appeal process, these cases should be resolved, and we continue to believe they will not have a material adverse impact on our condensed consolidated financial statements. Accordingly, we have not accrued any contingent liability amount for these cases.

     There have been no appeals filed in Canada.

     We are involved in the defense of various other legal proceedings that we do not believe are material to our condensed consolidated financial statements.

NOTE 12 — COMMITMENTS AND CONTINGENCIES

     Letters of Credit

     As of November 1, 2009, a total of $87.7 million was outstanding under letters of credit to guarantee insurance policies, capital lease agreements and utilities.

     Advertising Purchase Commitments

     As of November 1, 2009, we had obligations to purchase $9.3 million of advertising through the remainder of 2009, and $14.5 million in 2010.

NOTE 13 — SHORT-TERM DEBT AND LETTERS OF CREDIT

     We have a $350.0 million revolving credit facility, or “Revolving Credit Facility,” that expires on August 15, 2012. Borrowings under the Revolving Credit Facility are subject to a borrowing base and bear interest, at our option, at a bank’s prime rate plus 0% to 0.25% or LIBOR plus 0.875% to 1.25%. We are subject to fees payable to lenders each quarter at an annual rate of 0.20% of the unused amount of the Revolving Credit Facility. The Revolving Credit Facility also gives us the ability to issue letters of credit up to $100.0 million, which reduce the amount available under the Revolving Credit Facility. Letter of credit issuances under the Revolving Credit Facility are subject to interest payable to the lenders and bear interest of 0.875% to 1.25% for standby letters of credit or 0.438% to 0.625% for commercial letters of credit.

     Any borrowings under the Revolving Credit Facility that we intend to repay within 12 months are classified as short-term debt in the Condensed Consolidated Balance Sheets. As of November 1, 2009, we had no short-term debt and $32.4 million in letter of credit issuances outstanding under our Revolving Credit Facility. We had no short-term debt and $91.3 million in letter of credit issuances outstanding as of February 1, 2009, while $50.0 million in short-term debt and $70.4 million in letter of credit issuances was outstanding as of November 2, 2008.

     On May 13, 2009, we amended our $70.0 million stand-alone letter of credit facility to increase the availability to $100.0 million. The $100.0 million stand-alone letter of credit facility, or “Stand-alone Letter of Credit Facility,” expires August 15, 2012. We are subject to fees payable to the lender each quarter at an annual rate of 0.45% of the average daily face amount of the letters of credit outstanding during the preceding calendar quarter. In addition, we are required to maintain a cash deposit with the lender equal to the amount of outstanding letters of credit or we may use other approved investments as collateral. If we use other approved investments as collateral, we must have an amount on deposit which, when multiplied by the advance rate of 85%, is equal to the amount of the outstanding letters of credit under the Stand-alone Letter of Credit Facility. As of November 1, 2009, we had $55.3 million in outstanding letters of credit under the Stand-alone Letter of Credit Facility and $55.3 million in restricted cash on deposit with the lender. As of February 1, 2009, and November 2, 2008, we had no outstanding letters of credit under the Stand-alone Letter of Credit Facility, no restricted cash or short-term investments on deposit with the lender, and no other investments related to the Stand-alone Letter of Credit Facility.

     As of November 1, 2009, 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 personal property assets, our subsidiaries and certain real property.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Except for historical information, the following discussion contains forward-looking statements that involve risks and uncertainties. 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. Our actual results could differ materially from projected results due to some or all of the factors discussed below. You should carefully consider the risks and uncertainties described below:

•

A decline in consumer spending or a change in consumer preferences could reduce our sales or profitability and harm our business.

•

The pet products and services retail industry is very competitive and continued competitive forces may adversely impact our business and financial results.

•

Comparable store sales growth may decrease as stores grow older. If we are unable to increase sales at our existing stores, our results of operations could be harmed.

•

We may be unable to continue to open new stores and enter new markets successfully. If we are unable to successfully reformat existing stores and open new stores, our results of operations could be harmed. Also, store development may place increasing demands on management and operating systems and may erode sales at existing stores.

•

Our quarterly operating results may fluctuate due to seasonal changes associated with the pet products and services retail industry and the timing of expenses, new store openings and store closures.

•

Failure to successfully manage and execute our marketing initiatives could have a negative impact on our business.

•

Our operating margins at new stores may be lower than those of existing stores.

•

A disruption, malfunction or increased costs in the operation, expansion or replenishment of our distribution centers or our supply chain would impact our ability to deliver to our stores or increase our expenses, which could harm our sales and results of operations.

•

Failure to successfully manage our inventory could harm our business.

•

If our information systems fail to perform as designed or are interrupted for a significant period of time, our business could be harmed.

•

If we fail to protect the integrity and security of customer and associate information, we could be exposed to litigation and our business could be adversely impacted.

•

The disruption of the relationship with or 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 other mass and retail merchandisers, or the inability of our vendors to provide quality products in a timely or cost-effective manner or risks associated with the suppliers from whom products are sourced, could harm our business.

•

Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to product liability claims.

•

Food safety, quality and health concerns could affect our business.

•

Failure to successfully anticipate merchandise returns could have a negative impact on our business.

•

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

•

Our international operations may result in additional market risks, which may harm our business.

•

Our business may be harmed if the operation of veterinary hospitals at our stores is limited or fails to continue.

•

We face various risks as an e-commerce retailer.

•

Our business could be harmed if we were unable to effectively manage our cash flow and raise any needed additional capital on acceptable terms.

•

Failure to successfully integrate any business we acquire could have an adverse impact on our financial results.

•

Changes to estimates related to our property and equipment, or operating results that are lower than our current estimates at certain store locations, may cause us to incur impairment charges.

•

Failure to protect our intellectual property could have a negative impact on our operating results.

•

A determination that we are in violation of any contractual obligations or government regulations could result in a disruption to our operations and could harm our business.

•

Failure of our internal controls over financial reporting could harm our business and financial results.

•

Changes in laws, accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.

•

An unfavorable determination by tax regulators may cause our provision for income and other taxes to be inadequate and may result in a material impact to our financial results.

•

Our business exposes us to claims, litigation and risk of loss that could result in adverse publicity, harm to our brand and impact our financial results.

•

Failure to obtain commercial insurance at acceptable prices or failure to adequately reserve for self-insured exposures might have a negative impact on our business.

•

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

•

Fluctuations in the stock market, as well as general economic and market conditions may impact our operations, sales, financial results and market price of our common stock.

•

Continued volatility and disruption to the global capital and credit markets may adversely affect our ability to access credit and the financial soundness of our suppliers.

•

Our operating and financial performance in any given period may differ from the guidance we have provided to the public.

•

We have implemented some anti-takeover provisions that may prevent or delay an acquisition of us that may not be beneficial to our stockholders.

     For more information about these risks, see the discussion under the heading “Risk Factors” in our Form 10-K for the year ended February 1, 2009, filed with the Securities and Exchange Commission on March 26, 2009, which is incorporated herein by reference.

Overview

     Based on our 2008 net sales of $5.1 billion, we are North America’s leading specialty provider of products, services and solutions for the lifetime needs of pets. As of November 1, 2009, we operated 1,149 stores, and we anticipate opening 2 to 5 new stores during the remainder of 2009. Our stores carry a broad and deep selection of high-quality pet supplies at everyday low prices. We offer approximately 10,000 distinct items, including nationally recognized brand names, as well as an extensive selection of proprietary brands across a range of product categories.

     We complement our extensive product assortment with a wide selection of pet services, including grooming, training, boarding and day camp. All our stores offer complete pet training services, and virtually all our stores feature pet styling salons that provide high-quality grooming services. Our PetsHotels provide boarding for dogs and cats, which includes 24-hour supervision, an on-call veterinarian, temperature controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs. As of November 1, 2009, we operated 161 PetsHotels, and we anticipate opening one additional PetsHotel during the remainder of 2009.

     We make full-service veterinary care available through our strategic relationship with certain third-party operators. As of November 1, 2009, full-service veterinary hospitals were in 752 of our stores. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “MMIH,” operated 740 of the veterinary hospitals under the registered trade name of “Banfield, The Pet Hospital.” We have a 21.0% stock ownership interest in MMIH. The remaining 12 hospitals are operated by other third parties in Canada.

     The principal obstacles we face as a business are the highly competitive market in which we operate and the recent macroeconomic challenges. However, we feel we have a competitive advantage in our offering of pet services, which is a growing industry, that we believe cannot easily be duplicated. Additionally, we have been able to generate cash flow from operations sufficient to meet our financing needs and continue to have access to our $350.0 million revolving credit facility, or “Revolving Credit Facility.” As our cash flow from operations increases, we expect to continuously assess the economic environment and market conditions to guide our decisions regarding our uses of cash, including capital expenditures, investments, dividends and share repurchases.

Executive Summary

•

Diluted earnings per common share increased 10.7% to $0.31, on net income of $38.1 million, for the thirteen weeks ended November 1, 2009, compared to diluted earnings per common share of $0.28 on net income of $35.8 million for the thirteen weeks ended November 2, 2008. Diluted earnings per common share were $0.98 and $0.90 for the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively.

•

Net sales increased 3.5% to $1.29 billion for the thirteen weeks ended November 1, 2009, compared to $1.25 billion for the thirteen weeks ended November 2, 2008. Net sales increased 6.1% to $3.9 billion for the thirty-nine weeks ended November 1, 2009, compared to $3.7 billion for the thirty-nine weeks ended November 2, 2008.

•

Cash, cash equivalents, and restricted cash increased $114.2 million, or 90.4%, to $240.5 million during the thirty-nine weeks ended November 1, 2009.

•

We had no short-term debt as of November 1, 2009, and did not borrow against the Revolving Credit Facility during the thirty-nine weeks ended November 1, 2009.

•

We added 4 and 37 net new stores during the thirteen and thirty-nine weeks ended November 1, 2009, respectively.

•

Comparable store sales, or sales in stores open at least one year, increased 0.3% and 1.6% for the thirteen and thirty-nine weeks ended November 1, 2009, respectively. The increase in net sales was partially impacted by $0.7 million in favorable foreign currency fluctuations and $18.4 million in unfavorable foreign currency fluctuations for the thirteen and thirty-nine weeks ended November 1, 2009, respectively.

•

Services sales increased 8.0% to $136.7 million for the thirteen weeks ended November 1, 2009, compared to $126.6 million for the thirteen weeks ended November 2, 2008. Services sales represented 10.6% and 10.1% of net sales for the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively. Services sales increased 9.5% to $433.7 million for the thirty-nine weeks ended November 1, 2009, compared to $396.0 million for the

thirty-nine weeks ended November 2, 2008. Services sales represented 11.0% and 10.7% of net sales for the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively.

•

We purchased 1.7 million and 4.1 million shares of our common stock for $35.0 million and $85.0 million during the thirteen and thirty-nine weeks ended November 1, 2009, respectively.

Critical Accounting Policies and Estimates

     We discuss our critical accounting policies and estimates in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended February 1, 2009. We have made no significant change in our critical accounting policies since February 1, 2009.

Results of Operations

     The following table presents the percent of net sales of certain items included in our Condensed Consolidated Statements of Operations and Comprehensive Income:

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		November 1, 2009				November 2, 2008				November 1, 2009				November 2, 2008
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Total cost of sales			72.5				71.4				71.9				70.8
Gross profit			27.5				28.6				28.1				29.2
Operating, general and administrative expenses			22.0				22.8				22.1				23.0
Operating income			5.5				5.8				6.0				6.1
Interest expense, net			(1.2	)			(1.2	)			(1.1	)			(1.2	)
Income before income tax expense and equity in income from investee			4.3				4.6				4.8				5.0
Income tax expense			(1.6	)			(1.8	)			(1.8	)			(2.0	)
Equity in income from investee			0.2				0.1				0.1				0.1
Net income			2.9	%			2.9	%			3.1	%			3.1	%

Thirteen Weeks Ended November 1, 2009, Compared to the Thirteen Weeks Ended November 2, 2008

     Net Sales

     Net sales increased $43.2 million, or 3.5%, to $1.29 billion for the thirteen weeks ended November 1, 2009, compared to $1.25 billion for the thirteen weeks ended November 2, 2008. The increase in net sales was partially impacted by $0.7 million in favorable foreign currency fluctuations. Approximately 92% of the sales increase is due to the addition of 42 net new stores and 29 new PetsHotels since November 2, 2008, and 8% of the sales increase is due to a 0.3% increase in comparable store sales for the thirteen weeks ended November 1, 2009. The increase in comparable store sales was due to the impact of key merchandising and pricing strategies, partially offset by economic conditions and the slowdown in consumer spending, primarily in our hardgoods category. A decrease in the number of transactions represented (0.9)% of the comparable store sales growth in the thirteen weeks ended November 1, 2009, compared to (0.9)% in the thirteen weeks ended November 2, 2008. An increase in the average sales per transaction represented 1.2% of the comparable store sales growth in the thirteen weeks ended November 1, 2009, compared to 6.3% in the thirteen weeks ended November 2, 2008.

     Services sales, which are included in the net sales amount discussed above and include grooming, training, boarding and day camp, increased 8.0%, or $10.1 million, to $136.7 million for the thirteen weeks ended November 1, 2009, compared to $126.6 million for the thirteen weeks ended November 2, 2008. Services sales represented 10.6% and 10.1% of net sales for the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively. The increase in services sales is primarily due to continued strong demand for our grooming services, and the addition of 42 net new stores and 29 new PetsHotels since November 2, 2008.

     Gross Profit

     Gross profit decreased to 27.5% of net sales for the thirteen weeks ended November 1, 2009, from 28.6% for the thirteen weeks ended November 2, 2008, representing a decrease of 110 basis points.

     Overall merchandise margin decreased 160 basis points. Merchandise product margin decreased 130 basis points, with mix representing 45% and rate representing 55% of the decline. The mix shift is due to an increase in consumables merchandise sales mix relative to net sales. The rate impact is a result of markdowns related to major hardgoods category resets and strategic pricing changes for hardgoods merchandise to drive additional customer traffic. Difficult macroeconomic conditions, including reduced discretionary consumer spending, challenged our merchandise product margins as we have experienced a mix shift from higher margin discretionary hardgoods into consumables. Consumables merchandise sales, which includes pet food, treats, and litter, typically generate a lower gross product margin as compared to hardgoods merchandise. Hardgoods merchandise includes pet supplies such as collars, leashes, health care supplies, grooming and beauty aids, toys, and apparel, as well as pet beds and carriers. Merchandise margin related to the amortization of previously capitalized inbound freight, as well as certain procurement and distribution costs, decreased 30 basis points.

     Services margin increased 15 basis points primarily due to continued strong demand for our grooming services, and the addition of 29 new PetsHotels since November 2, 2008. Services sales typically generate lower gross margins than merchandise sales as service-related labor is included in cost of sales; however, services generate higher operating margins than merchandise sales. As discussed above, the shift in merchandise sales to consumables merchandise has contributed to the overall decrease in margin.

     Store occupancy costs included in margin increased 10 basis points primarily due to the addition of new stores, and new store growth outpacing the rate of sales growth.

     Supply chain costs decreased 45 basis points due to lower fuel costs, transportation efficiencies and improved productivity in our distribution centers.

     Operating, General and Administrative Expenses

     Operating, general and administrative expenses were 22.0% and 22.8% of net sales for the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively, representing an improvement of 80 basis points.

     The primary reasons for the decrease in operating, general and administrative expenses as a percentage of net sales during the thirteen weeks ended November 1, 2009, were increased efficiencies in our advertising spending due to lower advertising rates, and lower store preopening expenses due to slower store growth. Store labor expense and travel costs were also lower due to various cost control initiatives.

     Interest Expense, net

     Interest expense, which is primarily related to capital lease obligations, was $15.1 million during the thirteen weeks ended November 1, 2009, compared to $14.9 million for the thirteen weeks ended November 2, 2008. Included with interest expense, net was interest income of $0.1 million for the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively.

     Income Tax Expense

     In the thirteen weeks ended November 1, 2009, the $20.5 million income tax expense represents an effective tax rate of 36.4%, compared with the thirteen weeks ended November 2, 2008, when we had income tax expense of $22.5 million, which represents an effective tax rate of 39.2%. The decrease in the effective tax rate was primarily due to tax exempt gains from our deferred compensation plan. The effective tax rate is calculated by dividing our income tax expense, which includes the income tax expense related to our equity in income from investee, by income before income tax expense and equity in income from investee.

     Equity in Income from Investee

     Our equity in income from our investment in MMIH was $2.3 million and $1.0 million for the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively, based on our ownership percentage in MMIH’s net income.

Thirty-Nine Weeks Ended November 1, 2009, Compared to the Thirty-Nine Weeks Ended November 2, 2008

     Net Sales

     Net sales increased $224.7 million, or 6.1%, to $3.9 billion for the thirty-nine weeks ended November 1, 2009, compared to $3.7 billion for the thirty-nine weeks ended November 2, 2008. The increase in net sales was partially impacted by $18.4 million in unfavorable foreign currency fluctuations during the thirty-nine weeks ended November 1, 2009. Approximately 73% of the sales increase is due to the addition of 42 net new stores and 29 new PetsHotels since November 2, 2008, and 27% of the increase is due to a 1.6% increase in comparable store sales for the thirty-nine weeks ended November 1, 2009. The increase in comparable store sales was due to the impact of key merchandising and pricing strategies, primarily in our hardgoods categories, partially offset by economic conditions and the slowdown in consumer spending. A decrease in the number of transactions represented (0.5)% of the comparable store sales growth in the thirty-nine weeks ended November 1, 2009, compared to (1.6)% in the thirty-nine weeks ended November 2, 2008. An increase in the average sales per transaction represented 2.1% of the comparable store sales growth in the thirty-nine weeks ended November 1, 2009, compared to 5.7% in the thirty-nine weeks ended November 2, 2008.

     Services sales, which are included in the net sales amount discussed above and include grooming, training, boarding and day camp, increased 9.5%, or $37.7 million, to $433.7 million for the thirty-nine weeks ended November 1, 2009, compared to $396.0 million for the thirty-nine weeks ended November 2, 2008. Services sales represented 11.0% and 10.7% of net sales for the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively. The increase in services sales is primarily due to continued strong demand for our grooming services, and the addition of 42 net new stores and 29 new PetsHotels since November 2, 2008.

     Gross Profit

     Gross profit decreased to 28.1% of net sales for the thirty-nine weeks ended November 1, 2009, from 29.2% for the thirty-nine weeks ended November 2, 2008, representing a decrease of 110 basis points.

     Overall merchandise margin decreased 170 basis points. Merchandise product margin decreased 170 basis points, with mix representing 48% and rate representing 52% of the decline. The mix shift is due to an increase in consumables merchandise sales mix relative to net sales. The rate impact is due to select price reductions, an increase in promotions for hardgoods merchandise, and broad category promotions to drive additional customer traffic. Difficult macroeconomic conditions, including reduced discretionary consumer spending, challenged our merchandise product margins as we have experienced a mix shift from higher margin discretionary hardgoods into consumables. Consumables merchandise sales, which includes pet food, treats, and litter, typically generate a lower gross margin as compared to hardgoods merchandise. Hardgoods merchandise includes pet supplies such as collars, leashes, health care supplies, grooming and beauty aids, toys, and apparel, as well as pet beds and carriers.

     Services margin increased 15 basis points primarily due to continued strong demand for our grooming services, and the addition of 29 new PetsHotels since November 2, 2008. Services sales typically generate lower gross margins than merchandise sales as service-related labor is included in cost of sales; however, services generate higher operating margins than merchandise sales. As discussed above, the shift in merchandise sales to consumables merchandise has contributed to the overall decrease in margin.

     Store occupancy costs included in margin increased 20 basis points primarily due to the addition of new stores, and new store growth outpacing the rate of sales growth.

     Supply chain costs decreased 65 basis points due to lower fuel costs, transportation efficiencies and improved productivity in our distribution centers.

     Operating, General and Administrative Expenses

     Operating, general and administrative expenses were 22.1% and 23.0% of net sales for the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively, representing an improvement of 90 basis points.

     The primary reasons for the decrease in operating, general and administrative expenses as a percentage of net sales during the thirty-nine weeks ended November 1, 2009, were increased efficiencies in our advertising spending due to lower advertising rates, and lower store preopening expenses due to slower store growth. Store maintenance expense, travel, and supplies costs were also lower due to vendor renegotiations and various cost control initiatives.

     Interest Expense, net

     Interest expense, which is primarily related to capital lease obligations, increased to $45.5 million during the thirty-nine weeks ended November 1, 2009, compared to $44.1 million for the thirty-nine weeks ended November 2, 2008. Included with interest expense, net was interest income of $0.5 million and $0.4 million during the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively.

     Income Tax Expense

     In the thirty-nine weeks ended November 1, 2009, the $71.6 million income tax expense represents an effective tax rate of 37.7%, compared with the thirty-nine weeks ended November 2, 2008, when we had income tax expense of $72.7 million, which represents an effective tax rate of 39.5%. The decrease in the effective tax rate was primarily due to tax exempt gains from our deferred compensation plan. The effective tax rate is calculated by dividing our income tax expense, which includes the income tax expense related to our equity in income from investee, by income before income tax expense and equity in income from investee.

     Equity in Income from Investee

     Our equity in income from our investment in MMIH was $4.9 million and $2.9 million for the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively, based on our ownership percentage in MMIH’s net income.

Liquidity and Capital Resources

     Cash Flow

     We continue to generate operating cash flow sufficient to meet our needs. 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. Global capital and credit markets have recently experienced increased volatility and disruption. Despite this volatility and disruption, we continue to have access to our $350.0 million revolving credit facility. However, there can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not impair our ability to access these markets on commercially acceptable terms. As we generate cash flow from operations, we expect to continuously assess the economic environment and market conditions to guide our decisions regarding our uses of cash, including capital expenditures, investments, dividends and share repurchases.

     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. Net cash provided by operating activities was $343.4 million for the thirty-nine weeks ended November 1, 2009, compared to $256.6 million for the thirty-nine weeks ended November 2, 2008. Receipts from our sales come from cash, checks and third-party debit and credit cards, and therefore provide a significant source of liquidity. Cash is used in operating activities primarily to fund procurement of merchandise inventories and other assets, net of accounts payable and other accrued liabilities. The primary differences between the thirty-nine weeks ended November 1, 2009, and November 2, 2008, were decreased purchases of merchandise inventories and an increase in current liabilities primarily as a result of increases in tax accruals, offset by an increase in receivables and a decrease in accounts payable.

     Net cash used in investing activities was $138.3 million for the thirty-nine weeks ended November 1, 2009, compared to $191.6 million for the thirty-nine weeks ended November 2, 2008. Cash used in investing activities consisted primarily of expenditures associated with opening or acquiring new stores, reformatting existing stores, expenditures associated with equipment and computer software in support of our system initiatives, PetsHotel construction costs, and other expenditures to support our growth plans and initiatives. The primary differences between the thirty-nine weeks ended November 1, 2009, and November 2, 2008, were a decrease in cash paid for property and equipment as a result of the slow-down in store openings, and an increase in restricted cash.

     Net cash used in financing activities was $147.5 million for the thirty-nine weeks ended November 1, 2009, and consisted primarily of the cash paid for treasury stock, a decrease in our bank overdraft, payments on capital lease obligations, payments of cash dividends, offset by net proceeds from common stock issued under equity incentive plans, and proceeds from tax deductions in excess of the compensation cost recognized. Net cash used in financing activities for the thirty-nine weeks ended November 2, 2008, was $64.4

million. The primary difference between the thirty-nine weeks ended November 1, 2009, and the thirty-nine weeks ended November 2, 2008, was an increase in cash paid for treasury stock and no short-term debt borrowings.

Operating Capital and Capital Expenditure Requirements

     Substantially all our stores are leased facilities. We opened 43 new stores and closed 6 stores in the thirty-nine weeks ended November 1, 2009. Generally, each new store requires capital expenditures of approximately $0.7 million for fixtures, equipment and leasehold improvements, approximately $0.3 million for inventory and approximately $0.1 million for preopening costs. We expect total capital spending to be $115 million to $125 million for 2009 for opening new stores and PetsHotels, continuing our investment in the development of our information systems, adding to our services capacity with the expansion of certain grooming salons, remodeling or replacing certain store assets and continuing our store refresh program.

     Our ability to fund our operations and make planned capital expenditures depends on our future operating performance and cash flow, which are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.

     The following table presents our capital expenditures (in thousands):

		Thirty-Nine Weeks Ended
		November 1, 2009				November 2, 2008
Capital Expenditures:
New stores		$	22,345			$	68,623
Store-related projects(1)			38,201				46,288
PetsHotel(2)			4,982				34,459
Information technology			12,471				16,253
Supply chain			8,403				18,482
Other(3)			555				10,457
Total capital expenditures		$	86,957			$	194,562

Commitments and Contingencies

     As of November 1, 2009, we had obligations to purchase $9.3 million of advertising through the remainder of 2009, and $14.5 million in 2010.

     There have been no other material changes in our contractual obligations since February 1, 2009. Information regarding our contractual obligations is provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended February 1, 2009.

Credit Facilities

     We have a $350.0 million revolving credit facility, or “Revolving Credit Facility,” that expires on August 15, 2012. Borrowings under the Revolving Credit Facility are subject to a borrowing base and bear interest, at our option, at a bank’s prime rate plus 0% to 0.25% or LIBOR plus 0.875% to 1.25%. We are subject to fees payable to lenders each quarter at an annual rate of 0.20% of the unused amount of the Revolving Credit Facility. The Revolving Credit Facility also gives us the ability to issue letters of credit, which reduce the amount available under the Revolving Credit Facility. Letter of credit issuances under the Revolving Credit Facility are subject to interest payable to the lenders and bear interest of 0.875% to 1.25% for standby letters of credit or 0.438% to 0.625% for commercial letters of credit. As of November 1, 2009, we had no borrowings and $32.4 million in stand-by letter of credit issuances under our Revolving Credit Facility.

     We also have a $100.0 million stand-alone letter of credit facility, or “Stand-alone Letter of Credit Facility,” that expires on August 15, 2012. We are subject to fees payable to the lender each quarter at an annual rate of 0.45% of the average daily face amount of the letters of credit outstanding during the preceding calendar quarter. In addition, we are required to maintain a cash deposit with the lender equal to the amount of outstanding letters of credit or we may use other approved investments as collateral. If we use other approved investments as collateral, we must have an amount on deposit which, when multiplied by the advance rate of 85%, is equal to the amount of the outstanding letters of credit under the Stand-alone Letter of Credit Facility. As of November 1, 2009, we had $55.3 million in outstanding letters of credit under the Stand-alone Letter of Credit Facility and $55.3 million in restricted cash on deposit with the lender. As of February 1, 2009, and November 2, 2008, we had no outstanding letters of credit under the Stand-alone Letter of Credit Facility, no restricted cash or short-term investments on deposit with the lender, and no other investments related to the Stand-alone Letter of Credit Facility.

     We issue letters of credit for guarantees provided for insurance programs, capital lease agreements and utilities.

     The Revolving Credit Facility and Stand-alone Letter of Credit Facility permit the payment of dividends, if we are not in default and the payment of dividends would not result in default of the Revolving Credit Facility and Stand-alone Letter of Credit Facility. As of November 1, 2009, 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 personal property assets, our wholly owned subsidiaries and certain real property.

Common Stock Dividends

     We believe our ability to generate cash allows us to invest in the growth of our business and, at the same time, distribute a quarterly dividend.

     During the thirty-nine weeks ended November 1, 2009, the Board of Directors declared the following dividends:

Date

Dividend Amount

Stockholders of

Date

Declared

per Share

Record Date

Paid

March 24, 2009

$

0.03

May 1, 2009

May 15, 2009

June 22, 2009

$

0.10

July 31, 2009

August 14, 2009

September 30, 2009

$

0.10

October 30, 2009

November 13, 2009

Common Stock Purchase Program

     In August 2007, the Board of Directors approved a program authorizing the purchase of up to $300.0 million of our common stock through November 1, 2009. We purchased 1.2 million shares of our common stock for $25.0 million during the thirteen weeks ended May 3, 2009, completing the $300.0 million program.

     In June 2009, the Board of Directors approved a new share purchase program authorizing the purchase of up to $350.0 million of our common stock through January 29, 2012. During the thirteen weeks ended November 1, 2009, we purchased 1.7 million shares of common stock for $35.0 million. Since the inception of the new share purchase authorization in June 2009, we have purchased 2.9 million shares of common stock for $60.0 million. As of November 1, 2009, $290.0 million remained available under the $350.0 million program.

Related Party Transactions

     We have an investment in MMIH, who through a wholly owned subsidiary, Medical Management International, Inc., operates full-service veterinary hospitals in 740 of our stores. Our investment consists of common and preferred stock.

     We use the equity method of accounting for our investment in MMIH. As of November 1, 2009, we owned approximately 21.4% of the voting stock and approximately 21.0% of the combined voting and non-voting stock of MMIH.

     Our equity in income from our investment in MMIH, which is recorded one month in arrears, was $2.3 million and $1.0 million for the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively, and $4.9 million and $2.9 million for the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively.

     We have a master operating agreement with MMIH which covers license fees, utilities and other cost reimbursements. We charge MMIH license fees for the space used by the veterinary hospitals and for their portion of utilities costs. These amounts are classified as a reduction of the retail stores’ occupancy costs, which are included as a component of cost of merchandise sales in the Condensed Consolidated Statements of Operations and Comprehensive Income. We also charge MMIH for its portion of specific operating expenses and classify the reimbursement as a reduction of the stores’ operating expense.

     We recognized license fees, utilities and other cost reimbursements of $8.5 million and $7.6 million during the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively, and $25.2 million and $22.6 million during the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively. Receivables from MMIH totaled $3.4 million, $3.3 million, and $3.2 million at November 1, 2009, February 1, 2009, and November 2, 2008, respectively, and were included in receivables in the Condensed Consolidated Balance Sheets.

     The master operating agreement also includes a provision for the sharing of profits on the sale of therapeutic pet foods sold in all stores with an operating Banfield hospital. The net sales and gross profit on the sale of therapeutic pet food sales is not material to our condensed consolidated financial statements.

Seasonality and Inflation

     Our business is subject to seasonal fluctuations. We typically realize a higher portion of our net sales and operating profits during the fourth 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 upon as indicators of future performance. Controllable expenses could fluctuate from quarter-to-quarter in a year. Since 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. Finally, because new stores tend to experience higher payroll, advertising and other store level expenses as a percentage of sales than mature stores, new store openings will also contribute to lower store operating margins until these stores become established. We expense preopening costs associated with each new location as the costs are incurred.

     While we continue to experience inflationary pressure, 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

     As of November 1, 2009, there have been no material changes in any of the market risk information disclosed by us in our Annual Report on Form 10-K for the year ended February 1, 2009. More detailed information concerning market risk can be found in Part II, Item 7A., “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended February 1, 2009.

Item 4. Controls and Procedures

     Management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of November 1, 2009. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

     No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the thirteen weeks ended November 1, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on the evaluation of our disclosure controls and procedures as of November 1, 2009, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level and designed to meet the objective at the reasonable assurance level.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     On January 12, 2009, a former groomer filed suit on behalf of herself and a putative class of current and former groomers in California State Court entitled Langton v. PetSmart. The plaintiff alleged that she and other non-exempt groomers did not receive payment for all hours worked, did not receive meal and rest breaks, did not receive all wages due upon termination, did not receive accurate wage statements as required by law, and were not provided with necessary tools and equipment. On February 17, 2009, we removed the action to the United States District Court for the Central District of California, and have since resolved this matter for an amount that is not material to our condensed consolidated financial statements.

     We are also a party to several lawsuits arising from the pet food recalls announced by several manufacturers beginning in March 2007. The named plaintiffs sued the major pet food manufacturers and retailers claiming that their pets suffered injury and/or death as a result of consuming allegedly contaminated pet food and pet snack products.

Bruski v. Nutro Products, et al., USDC, N.D. IL (filed 3/23/07)
Rozman v. Menu Foods, et al., USDC, MN (filed 4/9/07)
Ford v. Menu Foods, et al., USDC, S.D. CA (filed 4/23/07)
Wahl, et al. v. Wal-Mart Stores Inc., et al., USDC, C.D. CA (filed 4/10/07)
Demith v. Nestle, et al., USDC, N.D. IL (filed 4/23/07)
Thompkins v. Menu Foods, et al., USDC, CO (filed 4/11/07)
McBain v. Menu Foods, et al., Judicial Centre of Regina, Canada (filed 7/11/07)
Dayman v. Hills Pet Nutrition Inc., et al., Ontario Superior Court of Justice (filed 8/8/07)
Esau v. Menu Foods, et al., Supreme Court of Newfoundland and Labrador (filed 9/5/07)
Ewasew v. Menu Foods, et al., Supreme Court of British Columbia (filed 3/23/07)
Silva v. Menu Foods, et al., Canada Province of Manitoba (filed 3/30/07)
Powell v. Menu Foods, et al., Ontario Superior Court of Justice (filed 3/28/07)

     By order dated June 28, 2007, the Bruski, Rozman, Ford, Wahl, Demith and Thompkins cases were transferred to the U.S. District Court for the District of New Jersey and consolidated with other pet food class actions under the federal rules for multi-district litigation (In re: Pet Food Product Liability Litigation, Civil No. 07-2867). The Canadian cases were not consolidated.

     On May 21, 2008, the parties to the U.S. lawsuits comprising the In re: Pet Food Product Liability Litigation and the Canadian cases jointly submitted a comprehensive settlement arrangement for court approval. Preliminary court approval was received from the U.S. District Court on May 3, 2008, and from all of the Canadian courts as of July 8, 2008. On October 14, 2008, the U.S. District Court approved the settlement, and the Canadian courts gave final approval on November 3, 2008.

     Two different groups of objectors filed notices of appeal with respect to the U.S. District Court’s approval of the U.S. settlement. Upon expiration of the prescribed appeal process, these cases should be resolved, and we continue to believe they will not have a material adverse impact on our condensed consolidated financial statements. Accordingly, we have not accrued any contingent liability amount for these cases.

     There have been no appeals filed in Canada.

     We are involved in the defense of various other legal proceedings that we do not believe are material to our condensed consolidated financial statements.

Item 1A. Risk Factors

     In addition to the other information in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended February 1, 2009, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     The following table shows purchases of our common stock and the available funds to purchase additional common stock for each period in the thirteen weeks ended November 1, 2009:

										Total Number of
		Total								Shares				Value That May
		Number								Purchased as Part of				Yet be Purchased
		of Shares				Average Price				Publicly Announced				Under the Plans or
Period		Purchased				Paid per Share				Plans or Programs				Programs(1)
August 3, 2009, to August 30, 2009			1,717,900				20.34				1,717,900			$	290,000,000
August 31, 2009, to October 4, 2009			—				—				—			$	290,000,000
October 5, 2009, to November 1, 2009			—				—				—			$	290,000,000
Thirteen Weeks Ended November 1, 2009			1,717,900			$	20.34				1,717,900			$	290,000,000

Item 6. Exhibits

(a) Exhibits

Exhibit 15.1		Awareness Letter from Deloitte & Touche LLP regarding unaudited interim financial statements.
Exhibit 31.1		Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
Exhibit 31.2		Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
Exhibit 32.1*		Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.
Exhibit 32.2*		Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 25, 2009