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

For the Thirteen Weeks Ended October 31, 2010

o		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: 0-21888

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 þ 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, 117,604,890 Shares at November 12, 2010

 

 

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 October 31, 2010, January 31, 2010, and November 1, 2009			4
Condensed Consolidated Statements of Income and Comprehensive Income for the thirteen and thirty-nine weeks ended October 31, 2010, and November 1, 2009			5
Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 31, 2010, and November 1, 2009			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			22
Item 4. Controls and Procedures			22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			23
Item 1A. Risk Factors			23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			24
Item 6. Exhibits			24
Signatures			25
EX-15.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

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 October 31, 2010 and November 1, 2009, and the related condensed consolidated statements of income and comprehensive income for the thirteen week and thirty-nine week periods ended October 31, 2010 and November 1, 2009, and of cash flows for the thirty-nine week periods ended October 31, 2010 and November 1, 2009. 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 January 31, 2010, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 25, 2010, 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 January 31, 2010, 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 24, 2010

PetSmart, Inc. and Subsidiaries

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

		October 31,				January 31,				November 1,
		2010				2010				2009
ASSETS
Cash and cash equivalents		$	235,407			$	308,360			$	185,215
Restricted cash			46,515				48,172				55,250
Receivables, net			43,108				52,232				52,144
Merchandise inventories			687,825				563,389				608,274
Deferred income taxes			36,805				36,805				29,333
Prepaid expenses and other current assets			91,822				57,652				88,126
Total current assets			1,141,482				1,066,610				1,018,342
Property and equipment, net			1,150,286				1,201,857				1,225,116
Equity investment in investee			38,691				32,486				30,865
Deferred income taxes			86,199				94,901				83,631
Goodwill			43,555				42,200				41,882
Other noncurrent assets			29,140				23,932				24,192
Total assets		$	2,489,353			$	2,461,986			$	2,424,028
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and bank overdraft		$	201,564			$	212,121			$	179,709
Accrued payroll, bonus and employee benefits			125,563				105,162				103,526
Accrued occupancy expenses and deferred rents			67,606				63,142				65,495
Current maturities of capital lease obligations			43,503				37,839				36,151
Other current liabilities			155,655				146,965				126,745
Total current liabilities			593,891				565,229				511,626
Capital lease obligations			528,270				533,635				545,226
Deferred rents			87,479				91,030				91,695
Other noncurrent liabilities			107,078				99,377				97,225
Total liabilities			1,316,718				1,289,271				1,245,772
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, 162,042, 160,311 and 160,048 shares issued			16				16				16
Additional paid-in capital			1,201,158				1,148,228				1,137,132
Retained earnings			1,201,957				1,093,708				1,030,753
Accumulated other comprehensive income			4,478				2,369				2,053
Less: Treasury stock, at cost, 44,543, 39,517 and 36,471 shares			(1,234,974	)			(1,071,606	)			(991,698	)
Total stockholders’ equity			1,172,635				1,172,715				1,178,256
Total liabilities and stockholders’ equity		$	2,489,353			$	2,461,986			$	2,424,028

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

PetSmart, Inc. and Subsidiaries

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

		For the Thirteen Weeks Ended								For the Thirty-Nine Weeks Ended
		October 31, 2010				November 1, 2009				October 31, 2010				November 1, 2009
Merchandise sales		$	1,230,911			$	1,157,647			$	3,681,188			$	3,496,995
Services sales			148,282				136,703				466,874				433,714
Other revenue			8,877				—				25,701				—
Net sales			1,388,070				1,294,350				4,173,763				3,930,709
Cost of merchandise sales			880,556				837,875				2,619,624				2,516,378
Cost of services sales			109,652				100,299				338,866				311,491
Cost of other revenue			8,877				—				25,701				—
Total cost of sales			999,085				938,174				2,984,191				2,827,869
Gross profit			388,985				356,176				1,189,572				1,102,840
Operating, general and administrative expenses			305,345				284,896				910,664				867,902
Operating income			83,640				71,280				278,908				234,938
Interest expense, net			(14,289	)			(15,031	)			(44,222	)			(44,975	)
Income before income tax expense and equity in income from investee			69,351				56,249				234,686				189,963
Income tax expense			(26,386	)			(20,453	)			(91,300	)			(71,594	)
Equity in income from investee			2,648				2,274				6,205				4,927
Net income			45,613				38,070				149,591				123,296
Other comprehensive income (loss), net of income tax:
Foreign currency translation adjustments			387				(125	)			2,109				4,767
Comprehensive income		$	46,000			$	37,945			$	151,700			$	128,063
Earnings per common share:
Basic		$	0.39			$	0.31			$	1.27			$	1.00
Diluted		$	0.38			$	0.31			$	1.25			$	0.98
Weighted average shares outstanding:
Basic			116,943				121,661				117,333				123,163
Diluted			119,360				123,781				119,771				125,396

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

PetSmart, Inc. and Subsidiaries

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

		For the Thirty-Nine Weeks Ended
		October 31, 2010				November 1, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	149,591			$	123,296
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			176,221				177,001
Loss on disposal of property and equipment			6,104				3,937
Stock-based compensation expense			21,316				18,485
Deferred income taxes			7,456				8,388
Equity in income from investee			(6,205	)			(4,927	)
Tax benefits from tax deductions in excess of the compensation cost recognized			(7,063	)			(1,939	)
Non-cash interest expense			234				853
Changes in other operating assets and liabilities:
Merchandise inventories			(123,503	)			(21,889	)
Other assets			(29,936	)			(9,494	)
Accounts payable			(16,929	)			3,330
Accrued payroll, bonus and employee benefits			20,233				14,794
Other liabilities			15,542				31,538
Net cash provided by operating activities			213,061				343,373
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted cash and short-term investments			1,657				(55,250	)
Cash paid for property and equipment			(88,811	)			(86,957	)
Proceeds from sales of property and equipment			164				3,867
Net cash used in investing activities			(86,990	)			(138,340	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock traded under stock incentive plans			33,810				7,252
Minimum statutory withholding requirements			(5,410	)			(3,373	)
Cash paid for treasury stock			(163,368	)			(84,875	)
Payments of capital lease obligations			(39,663	)			(28,660	)
Increase (decrease) in bank overdraft			6,081				(19,682	)
Tax benefits from tax deductions in excess of the compensation cost recognized			7,063				1,939
Cash dividends paid to stockholders			(38,716	)			(20,101	)
Net cash used in financing activities			(200,203	)			(147,500	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			1,179				1,368
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(72,953	)			58,901
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			308,360				126,314
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	235,407			$	185,215

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 the leading specialty provider of products, services and solutions for the lifetime needs of pets in North America. We offer a broad line of products for all the life stages of pets, as well as various pet services including professional grooming, training, boarding and day camp. We also offer pet products through an e-commerce site. As of October 31, 2010, we operated 1,172 retail stores and had full-service veterinary hospitals in 765 of our stores. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 754 of the veterinary hospitals under the registered trade name of “Banfield, The Pet Hospital.” The remaining 11 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 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 for 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 January 31, 2010. Differing from our presentation in our previously filed Form 10-K, we have combined the receivables, net, other noncurrent assets, and prepaid expenses and other current assets line items in the Condensed Consolidated Statements of Cash Flows into a single line item called other assets. Further, we have combined the accrued occupancy expenses and current deferred rents, other current liabilities, deferred rents and other noncurrent liabilities line items in the Condensed Consolidated Statements of Cash Flows into a single line item called other liabilities. Prior year amounts have been combined to conform to this condensed presentation. Finally, for the thirteen and thirty-nine weeks ended October 31, 2010, Banfield license fees and operating expense reimbursements, and the related costs, have been separately presented on a gross basis as detailed in Note 4.

     Due to the seasonal nature of our business, the results of operations for the thirteen and thirty-nine weeks ended October 31, 2010, 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 2010 ends on January 30, 2011, while fiscal 2009 ended on January 31, 2010, 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 — DERIVATIVE FINANCIAL INSTRUMENTS

     We use foreign currency exchange forward contracts, or “Foreign Exchange Contracts,” to manage the impact of foreign currency exchange rate fluctuations related to certain balance sheet accounts. We enter into the Foreign Exchange Contracts in Canada primarily to mitigate risk related to non-functional currency exposures. These Foreign Exchange Contracts are not designated as hedges and are recorded at fair value using quoted prices for similar assets or liabilities in active markets. The changes in the fair value are recognized in operating, general and administrative expenses in the Condensed Consolidated Statements of Income and Comprehensive Income.

     At October 31, 2010, we had Foreign Exchange Contracts outstanding with a notional amount of $5.0 million, which represents the amount of foreign currencies to be purchased or sold at maturity and does not represent our exposure on these contracts. The fair value of the liability related to these Foreign Exchange Contracts included in other current liabilities was immaterial at October 31, 2010. During the thirteen and thirty-nine weeks ended October 31, 2010, we recorded $0.1 million and $0.3 million in losses on the Foreign Exchange Contracts, respectively. We did not enter into Foreign Exchange Contracts during 2009.

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 Income and Comprehensive Income. We believe it is reasonably possible that approximately

$0.4 million of our current remaining unrecognized tax positions may be recognized by October 31, 2011, as a result of settlements or a lapse of the statute of limitations.

     As of October 31, 2010, our gross tax liabilities associated with uncertain tax positions, excluding interest and penalties, were $7.8 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 October 31, 2010, 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 or prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets, as appropriate. The provision is calculated based on our estimated annual effective income tax rate applied to pretax income. As a result, a reclassification between other current liabilities and deferred income tax assets and liabilities is likely to occur during the fourth quarter of 2010.

     At October 31, 2010, accrued taxes of $32.0 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 Banfield which is accounted for using the equity method of accounting. Our ownership interest in the stock of Banfield was as follows (in thousands):

		October 31, 2010								January 31, 2010								November 1, 2009
		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			—				17,016				—				10,811				—				9,190
Total equity investment in affiliate			4,693			$	38,691				4,693			$	32,486				4,693			$	30,865

     Our investment consisted of voting common stock, comprising 21.4% of all voting stock as of October 31, 2010, January 31, 2010, and November 1, 2009. Our ownership percentage as of October 31, 2010, January 31, 2010, and November 1, 2009, considering all classes of stock, voting and non-voting, was 21.0%.

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

		October 31, 2010				January 31, 2010				November 1, 2009
Current assets		$	349,507			$	269,381			$	265,973
Noncurrent assets			121,975				122,934				126,798
Current liabilities			301,705				247,138				256,274
Noncurrent liabilities			14,172				16,216				15,603

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		October 31, 2010				November 1, 2009				October 31, 2010				November 1, 2009
Net sales		$	162,011			$	149,924			$	472,665			$	422,073
Income from operations			21,696				18,036				50,342				39,675
Net income			12,609				10,821				29,549				23,445

     In accordance with our master operating agreement with Banfield, we charge Banfield license fees for the space used by the veterinary hospitals and for their portion of utilities costs. We also charge Banfield for its portion of specific operating expenses. Prior to February 1, 2010, license fees were treated as a reduction of occupancy costs, which are included as a component of cost of merchandise sales, and reimbursements for specific operating expenses were treated as a reduction of operating, general and administrative expenses in the Condensed Consolidated Statement of Income and Comprehensive Income. Beginning February 1, 2010, license fees and the reimbursements for specific operating expenses are included in other revenue, and the related costs are included in cost of other revenue in the Condensed Consolidated Statements of Income and Other Comprehensive Income.

     We recognized license fees and reimbursements for specific operating expenses from Banfield of $8.9 million and $8.5 million during the thirteen weeks ended October 31, 2010, and November 1, 2009, respectively, and $25.7 million and $25.2 million during the thirty-nine weeks ended October 31, 2010, and November 1, 2009, respectively. Receivables from Banfield totaled $2.9 million, $2.4

million, and $3.4 million at October 31, 2010, January 31, 2010, and November 1, 2009, respectively, and were included in receivables, net 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 are not material to our condensed consolidated financial statements.

NOTE 5 — RESERVE FOR CLOSED STORES

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

		October 31, 2010				January 31, 2010				November 1, 2009
Total remaining gross occupancy costs		$	35,740			$	33,577			$	35,049
Less:
Expected sublease income			(23,916	)			(24,018	)			(25,530	)
Interest costs			(1,708	)			(1,343	)			(1,457	)
Reserve for closed stores		$	10,116			$	8,216			$	8,062
Current portion, included in other current liabilities		$	3,200			$	2,395			$	1,922
Noncurrent portion, included in other noncurrent liabilities			6,916				5,821				6,140
Reserve for closed stores		$	10,116			$	8,216			$	8,062

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

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		October 31, 2010				November 1, 2009				October 31, 2010				November 1, 2009
Opening balance		$	10,969			$	7,633			$	8,216			$	6,382
Reserve for new store closures			155				1,025				3,706				1,025
Changes in sublease assumptions			—				1,145				992				3,743
Lease terminations			—				(565	)			—				(565	)
Other			190				203				521				611
Charges, net			345				1,808				5,219				4,814
Payments			(1,198	)			(1,379	)			(3,319	)			(3,134	)
Ending balance		$	10,116			$	8,062			$	10,116			$	8,062

NOTE 6 — 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
		October 31, 2010				November 1, 2009				October 31, 2010				November 1, 2009
Basic			116,943				121,661				117,333				123,163
Effect of dilutive securities:
Stock options, restricted stock and performance share units			2,417				2,120				2,438				2,233
Diluted			119,360				123,781				119,771				125,396

     Certain stock-based compensation awards representing 2.5 million and 3.7 million shares of common stock in the thirteen weeks ended October 31, 2010, and November 1, 2009, respectively, and 2.2 million and 6.0 million shares of common stock in the thirty-nine weeks ended October 31, 2010, and November 1, 2009, 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 7 — STOCKHOLDERS’ EQUITY

     Share Purchase Program

     In June 2009, the Board of Directors approved a 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 May 2, 2010, we purchased 3.4 million shares of common stock for $107.1 million under the June 2009 share purchase program.

     In June 2010, the Board of Directors approved a new share purchase program authorizing the purchase of up to $400.0 million of our common stock through January 29, 2012, replacing the $350.0 million program. During the thirteen weeks ended October 31, 2010, we purchased 1.6 million shares of common stock for $56.3 million under the June 2010 share purchase program. As of October 31, 2010, $343.7 million remained available under the $400.0 million program.

     Dividends

     During the thirty-nine weeks ended October 31, 2010, the Board of Directors declared the following dividends:

Date

Dividend Amount

Stockholders of

Date

Declared

Per Share

Record Date

Paid

March 23, 2010

$

0.100

April 30, 2010

May 14, 2010

June 16, 2010

$

0.125

July 30, 2010

August 13, 2010

September 29, 2010

$

0.125

October 29, 2010

November 12, 2010

NOTE 8 — STOCK-BASED COMPENSATION

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

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		October 31, 2010				November 1, 2009				October 31, 2010				November 1, 2009
Stock options expense		$	2,533			$	2,051			$	6,965			$	6,225
Management equity unit expense			1,912				418				3,884				1,009
Performance share unit expense			2,061				955				5,576				2,321
Restricted stock expense			1,837				2,937				4,891				8,930
Total stock-based compensation expense, net of forfeitures		$	8,343			$	6,361			$	21,316			$	18,485
Tax benefit		$	2,954			$	2,165			$	7,430			$	6,596

     At October 31, 2010, the total unrecognized stock-based compensation expense, net of estimated forfeitures, was $46.0 million and is expected to be recognized over a weighted average period of 1.3 years. During the thirteen weeks ended October 31, 2010, there were no grants issued under our equity incentive plans.

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. The ESPP allows 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 October 31, 2010, and November 1, 2009, no shares were purchased through the ESPP. During the thirty-nine weeks ended October 31, 2010, and November 1, 2009, 0.1 million shares were purchased through the ESPP.

NOTE 9 — FOREIGN CURRENCY

     Foreign currency translation adjustments were the only component of accumulated other comprehensive income and are reported separately in stockholders’ equity in the Condensed Consolidated Balance Sheets. The income tax expense (benefit) related to the foreign currency translation adjustments was $248 thousand and $(80) thousand for the thirteen weeks ended October 31, 2010, and November 1, 2009, respectively, and $1.2 million and $3.0 million for the thirty-nine weeks ended October 31, 2010, and November 1, 2009, respectively. The transaction (loss) gain included in net income was $(9) thousand and $262 thousand for the thirteen weeks ended October 31, 2010, and November 1, 2009, respectively, and $(0.7) million and $(1.2) million for the thirty-nine weeks ended October 31, 2010, and November 1, 2009, respectively.

     The impact of foreign currency translation adjustments to the carrying value of goodwill was $0.2 million and $(0.1) million for the thirteen weeks ended October 31, 2010, and November 1, 2009, respectively, and $1.4 million and $3.2 million for the thirty-nine weeks ended October 31, 2010, and November 1, 2009, respectively.

NOTE 10 — SUPPLEMENTAL SCHEDULE OF CASH FLOWS

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

		Thirty-nine Weeks Ended
		October 31, 2010				November 1, 2009
Interest paid		$	44,177			$	44,539
Income taxes paid, net of refunds			121,814				60,128
Assets acquired using capital lease obligations			37,331				18,274
Accruals and accounts payable for capital expenditures			28,359				14,081
Dividends declared but unpaid			14,695				12,358

NOTE 11 — 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 the 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 stand-by letters of credit or 0.438% to 0.625% for commercial letters of credit.

     We had no borrowings and $31.6 million in stand-by letter of credit issuances outstanding under our $350.0 million Revolving Credit Facility as of October 31, 2010. As of January 31, 2010, we had no borrowings and $35.7 million in stand-by letter of credit issuances outstanding, and as of November 1, 2009, we had no borrowings and $32.4 million in stand-by letter of credit issuances outstanding.

     We also have a $100.0 million stand-alone letter of credit facility, or “Stand-alone Letter of Credit Facility,” that 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 October 31, 2010, we had $46.5 million in outstanding letters of credit under the Stand-alone Letter of Credit Facility and $46.5 million in restricted cash on deposit with the lender. As of January 31, 2010, we had $48.2 million in outstanding letters of credit under the Stand-alone Letter of Credit Facility and $48.2 million in restricted cash on deposit with the lender. 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.

     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 October 31, 2010, 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.

NOTE 12 — COMMITMENTS AND CONTINGENCIES

     Advertising Purchase Commitments

     As of October 31, 2010, we had obligations to purchase $8.7 million of advertising through the remainder of 2010, and $14.2 million in 2011.

     Product Purchase Commitments

     As of October 31, 2010, we had various commitments to purchase product from certain vendors that are not material to our total inventory purchases.

     Litigation and Settlements

     Beginning in March 2007, we were named as a party in the following lawsuits arising from pet food recalls announced by several manufacturers. The 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.

     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 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.
	•		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, 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.
	•		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.
	•		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 impact our financial results.
	•		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.
	•		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 January 31, 2010, filed with the Securities and Exchange Commission on March 25, 2010, which is incorporated herein by reference.

Overview

     Based on our 2009 net sales of $5.3 billion, we are North America’s leading specialty provider of products, services and solutions for the lifetime needs of pets. As of October 31, 2010, we operated 1,172 stores, and we anticipate opening 13 to 16 net new stores during the remainder of 2010. Our stores carry a broad assortment 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 October 31, 2010, we operated 172 PetsHotels, and we anticipate opening 8 additional PetsHotels during the remainder of 2010.

     We make full-service veterinary care available through our strategic relationship with certain third-party operators. As of October 31, 2010, 765 of our stores included full service veterinary hospitals. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 754 of the veterinary hospitals under the registered trade name of “Banfield, The Pet Hospital.” The remaining 11 hospitals are operated by other third parties in Canada.

     The principal challenges we face as a business are the highly competitive market in which we operate and the continued uncertainty in the macro-economy. However, we believe we have a competitive advantage in our solutions for the Total Lifetime Care^SM of pets, including pet services and proprietary brands, which we believe cannot easily be duplicated. Additionally, 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 and we continue to have access to our Revolving Credit Facility. 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 22.6% to $0.38, on net income of $45.6 million, for the thirteen weeks ended October 31, 2010, compared to diluted earnings per common share of $0.31 on net income of $38.1 million for the thirteen weeks ended November 1, 2009. Diluted earnings per common share were $1.25 and $0.98 for the thirty-nine weeks ended October 31, 2010, and November 1, 2009, respectively.
	•		Net sales increased 7.2% to $1.4 billion for the thirteen weeks ended October 31, 2010, compared to $1.3 billion for the thirteen weeks ended November 1, 2009. This increase included $8.9 million of other revenue from license fees, utilities and specific operating expenses charged to Banfield during the thirteen weeks ended October 31, 2010. Net sales increased 6.2% to $4.2 billion for the thirty-nine weeks ended October 31, 2010, compared to $3.9 billion for the thirty-nine weeks ended November 1, 2009. This increase included $25.7 million of other revenue from license fees, utilities and specific operating expenses charged to Banfield during the thirty-nine weeks ended October 31, 2010.
	•		Comparable store sales, or sales in stores open at least one year, increased 5.6% and 4.3% for the thirteen and thirty-nine weeks ended October 31, 2010, respectively.
	•		Services sales increased 8.5% to $148.3 million for the thirteen weeks ended October 31, 2010, compared to $136.7 million for the thirteen weeks ended November 1, 2009. Services sales increased 7.6% to $466.9 million for the thirty-nine weeks ended October 31, 2010, compared to $433.7 million for the thirty-nine weeks ended November 1, 2009.
	•		As of October 31, 2010, we had $281.9 million in cash, cash equivalents and restricted cash. We had no short-term debt, and did not borrow against the Revolving Credit Facility during the thirty-nine weeks ended October 31, 2010.
	•		We purchased 1.6 million and 5.0 million shares of our common stock for $56.3 million and $163.4 million during the thirteen and thirty-nine weeks ended October 31, 2010, respectively.
	•		During the thirteen and thirty-nine weeks ended October 31, 2010, we added 8 and 23 net new stores, 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 January 31, 2010. We have made no significant changes to our critical accounting policies since January 31, 2010.

Results of Operations

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

		Thirteen Weeks Ended								Thirty-nine Weeks Ended
		October 31, 2010				November 1, 2009				October 31, 2010				November 1, 2009
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Total cost of sales			72.0				72.5				71.5				71.9
Gross profit			28.0				27.5				28.5				28.1
Operating, general and administrative expenses			22.0				22.0				21.8				22.1
Operating income			6.0				5.5				6.7				6.0
Interest expense, net			(1.0	)			(1.2	)			(1.1	)			(1.1	)
Income before income tax expense and equity in income from investee			5.0				4.3				5.6				4.8
Income tax expense			(1.9	)			(1.6	)			(2.2	)			(1.8	)
Equity in income from investee			0.2				0.2				0.1				0.1
Net income			3.3	%			2.9	%			3.6	%			3.1	%

Thirteen Weeks Ended October 31, 2010, Compared to the Thirteen Weeks Ended November 1, 2009

     Net Sales

     Net sales increased $0.1 billion, or 7.2%, to $1.4 billion for the thirteen weeks ended October 31, 2010, compared to $1.3 billion for the thirteen weeks ended November 1, 2009. The increase in net sales was partially impacted by $3.1 million in favorable foreign currency fluctuations. Approximately 15% of the sales increase is due to the addition of 23 net new stores and 11 new PetsHotels since November 1, 2009, 75% of the sales increase is due to a 5.6% increase in comparable store sales for the thirteen weeks ended October 31, 2010, and the remaining 10% of the sales increase is due to other revenue from reimbursements charged to Banfield. The increase in comparable store sales was due to the impact of merchandising and pricing strategies, as well as new product offerings. Comparable store transactions, which we use as a proxy for traffic, represented 3.6% of the comparable store sales growth in the thirteen weeks ended October 31, 2010, compared to (0.9)% in the thirteen weeks ended November 1, 2009. An increase in the average sales per transaction represented 2.0% of the comparable store sales growth in the thirteen weeks ended October 31, 2010, compared to 1.2% in the thirteen weeks ended November 1, 2009.

     Services sales increased 8.5%, or $11.6 million, to $148.3 million for the thirteen weeks ended October 31, 2010, compared to $136.7 million for the thirteen weeks ended November 1, 2009. The increase in services sales is primarily due to continued strong demand for our grooming services, and the addition of 23 net new stores and 11 new PetsHotels since November 1, 2009.

     Other revenue included in net sales during the thirteen weeks ended October 31, 2010, represents license fees and reimbursements for specific operating expenses charged to Banfield under the master operating agreement, which comprised 0.6% of net sales, or $8.9 million. See the Related Party Transactions discussion for further information.

     Gross Profit

     Gross profit increased 50 basis points to 28.0% of net sales for the thirteen weeks ended October 31, 2010, from 27.5% for the thirteen weeks ended November 1, 2009.

     Overall merchandise margin increased 25 basis points. We experienced rate improvement within the merchandise categories that was partially offset by the continuation of high volume flea and tick sales. The flea and tick margin, net of shrink, was slightly higher than our average consumables margin, but significantly less than our average merchandise margin. 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.

     The services contribution to gross margin was flat. Store occupancy and warehouse and distribution costs included in gross margin provided benefits of 30 basis points and 15 basis points, respectively, due to leveraging associated with the increase in net sales for the thirteen weeks ended October 31, 2010.

     Recognizing reimbursements from Banfield as other revenue negatively impacted gross margin by approximately 20 basis points.

     Operating, General and Administrative Expenses

     Operating, general and administrative expenses remained flat as a percentage of net sales for the thirteen weeks ended October 31, 2010, compared to the thirteen weeks ended November 1, 2009.

     For the thirteen weeks ended October 31, 2010, operating, general and administrative expenses were $305.3 million compared to $284.9 million for the thirteen weeks ended November 1, 2009. The primary reasons for the year over year increase include increases in costs for incentive compensation associated with better than expected financial results, higher bank fees associated with increases in debit card rates and higher claims expense for health insurance.

     Interest Expense, net

     Interest expense, which is primarily related to capital lease obligations, was $14.5 million during the thirteen weeks ended October 31, 2010, compared to $15.1 million for the thirteen weeks ended November 1, 2009. Included in interest expense, net was interest income of $0.2 million for the thirteen weeks ended October 31, 2010, compared to $0.1 million for the thirteen weeks ended November 1, 2009.

     Income Tax Expense

     For the thirteen weeks ended October 31, 2010, income tax expense was $26.4 million, an effective tax rate of 38.0%, compared with $20.5 million for the thirteen weeks ended November 1, 2009, an effective tax rate of 36.4%. The increase in the effective tax rate was primarily due to fluctuations in liabilities accrued for uncertain tax positions. 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 Banfield was $2.6 million and $2.3 million for the thirteen weeks ended October 31, 2010, and November 1, 2009, respectively, based on our ownership percentage in Banfield.

Thirty-nine Weeks Ended October 31, 2010, Compared to the Thirty-nine Weeks Ended November 1, 2009

     Net Sales

     Net sales increased $0.24 billion, or 6.2%, to $4.17 billion for the thirty-nine weeks ended October 31, 2010, compared to $3.93 billion for the thirty-nine weeks ended November 1, 2009. The increase in net sales was partially impacted by $20.6 million in favorable foreign currency fluctuations. Approximately 20% of the sales increase is due to the addition of 23 net new stores and 11 new PetsHotels since November 1, 2009, 70% of the sales increase is due to a 4.3% increase in comparable store sales for the thirty-nine weeks ended October 31, 2010 and the remaining 10% of the sales increase is due to other revenue from reimbursements charged to Banfield. The increase in comparable store sales was due to the impact of merchandising strategies, pricing strategies and new product offerings. Comparable store transactions, which we use as a proxy for traffic, represented 1.3% of the comparable store sales growth in the thirty-nine weeks ended October 31, 2010, compared to (0.5)% in the thirty-nine weeks ended November 1, 2009. An increase in the average sales per transaction represented 3.0% of the comparable store sales growth in the thirty-nine weeks ended October 31, 2010, compared to 2.1% in the thirty-nine weeks ended November 1, 2009.

     Services sales increased 7.6%, or $33.2 million, to $466.9 million for the thirty-nine weeks ended October 31, 2010, compared to $433.7 million for the thirty-nine weeks ended November 1, 2009. The increase in services sales is primarily due to continued strong demand for our grooming services and the addition of 23 net new stores and 11 new PetsHotels since November 1, 2009.

     Other revenue included in net sales during the thirty-nine weeks ended October 31, 2010, represents license fees and reimbursements for specific operating expenses charged to Banfield under the master operating agreement, which comprised 0.6% of net sales, or $25.7 million. See the Related Party Transactions discussion for further information.

     Gross Profit

     Gross profit increased 40 basis points to 28.5% of net sales for the thirty-nine weeks ended October 31, 2010, from 28.1% for the thirty-nine weeks ended November 1, 2009.

     Merchandise margin increased 10 basis points as we anniversary various price reductions, hardgoods promotions and broad category promotions to drive additional customer traffic during the thirty-nine weeks ended October 31, 2010. Our hardgoods sales outpaced the sales growth of our consumables category during the thirty-nine weeks ended October 31, 2010, primarily due to the addition of the flea and tick product line The flea and tick margin, net of shrink, was slightly higher than our average consumables margin, but significantly less than our average merchandise margin. The planned resets of the rawhide and live goods areas of the stores further pressured the merchandise margin.

     Services negatively contributed to gross margin by 10 basis points. Store occupancy costs included in gross margin provided 40 basis points of improvement due to leveraging associated with the increase in net sales, favorable lease negotiations and lower utility costs. Warehouse and distribution costs included in gross margin provided a benefit of 20 basis points due to leveraging associated with the increase in net sales for the thirty-nine weeks ended October 31, 2010.

     Recognizing reimbursements from Banfield as other revenue negatively impacted gross margin by approximately 20 basis points.

     Operating, General and Administrative Expenses

     Operating, general and administrative expenses decreased to 21.8% of net sales for the thirty-nine weeks ended October 31, 2010, from 22.1% for the thirty-nine weeks ended November 1, 2009.

     During the thirty-nine weeks ended October 31, 2010, lower store related expenses as a percentage of net sales provided 25 basis points of benefit. Operating, general and administrative expenses increased on a dollar basis by $42.8 million. The primary reasons for the year over year increase include increases in costs for incentive compensation associated with better than expected financial results, higher bank fees associated with increases in debit card rates and higher claims expense for health insurance.

     Interest Expense, net

     Interest expense, which is primarily related to capital lease obligations, was $44.7 million during the thirty-nine weeks ended October 31, 2010, compared to $45.5 million for the thirty-nine weeks ended November 1, 2009. Included in interest expense, net was interest income of $0.5 million for both the thirty-nine weeks ended October 31, 2010, and November 1, 2009.

     Income Tax Expense

     For the thirty-nine weeks ended October 31, 2010, income tax expense was $91.3 million, an effective tax rate of 38.9%, compared with $71.6 million the thirty-nine weeks ended November 1, 2009, an effective tax rate of 37.7%. The increase in the effective tax rate was primarily due to fluctuations in liabilities accrued for uncertain tax positions and increases to certain state tax liabilities. 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 Banfield was $6.2 million and $4.9 million for the thirty-nine weeks ended October 31, 2010, and November 1, 2009, respectively, based on our ownership percentage in Banfield.

Liquidity and Capital Resources

     Cash Flow

     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. In addition, we also have access to our $350.0 million revolving credit facility, although there can be no assurance of our ability to access these markets on commercially acceptable terms in the future. 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 the purchase of treasury stock.

     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. 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. Net cash provided by operating activities was $213.1 million for the thirty-nine weeks ended October 31, 2010, compared to $343.4 million for the thirty-nine weeks ended November 1, 2009. The primary differences between the thirty-nine weeks ended October 31, 2010, and November 1, 2009, were increased purchases of merchandise inventories and income tax payments.

     Cash used in investing activities consisted primarily of expenditures associated with opening 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. Net cash used in investing activities was $87.0 million for the thirty-nine weeks ended October 31, 2010, compared to $138.3 million for the thirty-nine weeks ended November 1, 2009. The primary differences between the thirty-nine weeks ended October 31, 2010, and November 1, 2009, resulted from an increase in restricted cash during the thirty-nine weeks ended November 1, 2009.

     Net cash used in financing activities was $200.2 million for the thirty-nine weeks ended October 31, 2010, and consisted primarily of the cash paid for treasury stock, payments on capital lease obligations, and payments of cash dividends, offset by net proceeds from common stock issued under equity incentive plans, and an increase in our bank overdraft 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 1, 2009, was $147.5 million. The primary differences between the thirty-nine weeks ended October 31, 2010, and November 1, 2009, were an increase in cash paid for treasury stock offset by an increase in our bank overdraft.

Operating Capital and Capital Expenditure Requirements

     Substantially all our stores are leased facilities. We opened 29 new stores and closed 6 stores in the thirty-nine weeks ended October 31, 2010. Generally, each new store requires capital expenditures of approximately $0.9 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 $125 million to $135 million for 2010, based on our plan to open 36 to 39 new stores and 18 new PetsHotels, to invest in the development of our information systems, to add to our services capacity with the expansion of certain grooming salons, to remodel or replace certain store assets and to continue 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
		October 31, 2010				November 1, 2009
Capital Expenditures:
New stores		$	27,112			$	22,345
Store-related projects(1)			38,369				38,201
PetsHotel(2)			6,876				4,982
Information technology			12,808				12,471
Supply chain			3,423				8,403
Other			223				555
Total capital expenditures		$	88,811			$	86,957

Commitments and Contingencies

     As of October 31, 2010, we had obligations to purchase $8.7 million of advertising through the remainder of 2010, and $14.2 million in 2011.

     As of October 31, 2010, we had various commitments to purchase product from certain vendors that are not material to our total inventory purchases.

     Other than in connection with executing operating leases, we do not have any off-balance sheet financing that has, or is reasonably likely to have, a material, current or future effect on our financial condition, cash flows, results of operations, liquidity, capital expenditures or capital resources.

     We have not had any other material changes in our contractual obligations since January 31, 2010. 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 January 31, 2010.

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 the 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 stand-by letters of credit or 0.438% to 0.625% for commercial letters of credit.

     We had no borrowings and $31.6 million in stand-by letter of credit issuances outstanding under our $350.0 million Revolving Credit Facility as of October 31, 2010. As of January 31, 2010, we had no borrowings and $35.7 million in stand-by letter of credit issuances outstanding, and as of November 1, 2009, we had no borrowings and $32.4 million in stand-by letter of credit issuances outstanding.

     We also have a $100.0 million stand-alone letter of credit facility, or “Stand-alone Letter of Credit Facility,” that 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 October 31, 2010, we had $46.5 million in outstanding letters of credit under the Stand-alone Letter of Credit Facility and $46.5 million in restricted cash on deposit with the lender. As of January 31, 2010, we had $48.2 million in outstanding letters of credit under the Stand-alone Letter of Credit Facility and $48.2 million in restricted cash on deposit with the lender. 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.

     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 October 31, 2010, 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.

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 October 31, 2010, the Board of Directors declared the following dividends:

Date

Dividend Amount

Stockholders of

Date

Declared

per Share

Record Date

Paid

March 23, 2010

$

0.100

April 30, 2010

May 14, 2010

June 16, 2010

$

0.125

July 30, 2010

August 13, 2010

September 29, 2010

$

0.125

October 29, 2010

November 12, 2010

Share Purchase Program

     In June 2009, the Board of Directors approved a 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 May 2, 2010, we purchased 3.4 million shares of common stock for $107.1 million under the June 2009 share purchase program.

     In June 2010, the Board of Directors approved a new share purchase program authorizing the purchase of up to $400.0 million of our common stock through January 29, 2012, which replaced the $350.0 million program. During the thirteen weeks ended October 31, 2010, we purchased 1.6 shares of common stock for $56.3 million under the June 2010 share purchase program. As of October 31, 2010, $343.7 million remained available under the $400.0 million program.

Related Party Transactions

     We have an investment in Banfield, who through a wholly owned subsidiary, Medical Management International, Inc., operates full-service veterinary hospitals in 754 of our stores. We use the equity method of accounting for our investment in Banfield. Our investment consists of common and preferred stock. As of October 31, 2010, we owned 21.4% of the voting stock and 21.0% of the combined voting and non-voting stock of Banfield.

     Our equity in income from our investment in Banfield, which is recorded one month in arrears under the equity method of accounting, was $2.6 million and $2.3 million for the thirteen weeks ended October 31, 2010, and November 1, 2009, respectively, and $6.2 million and $4.9 million for the thirty-nine weeks ended October 31, 2010, and November 1, 2009, respectively.

     In accordance with our master operating agreement with Banfield, we charge Banfield license fees for the space used by the veterinary hospitals and for their portion of utilities costs. We also charge Banfield for its portion of specific operating expenses. Prior to February 1, 2010, license fees were treated as a reduction of occupancy costs, which are included as a component of cost of merchandise sales, and reimbursements for specific operating expenses were treated as a reduction of operating, general and administrative expense in the Condensed Consolidated Statement of Operations and Comprehensive Income. Beginning February 1, 2010, license fees and the reimbursements for specific operating expenses are included in other revenue, and the related costs are included in cost of other revenue in the Condensed Consolidated Statements of Income and Other Comprehensive Income.

     We recognized license fees and reimbursements for specific operating expenses from Banfield of $8.9 million and $8.5 million during the thirteen weeks ended October 31, 2010, and November 1, 2009, respectively, and $25.7 million and $25.2 million during the thirty-nine weeks ended October 31, 2010, and November 1, 2009, respectively. Receivables from Banfield totaled $2.9 million, $2.4 million, and $3.4 million at October 31, 2010, January 31, 2010, and November 1, 2009, respectively, and were included in receivables, net 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 are 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 due to increased holiday traffic. As a result of this seasonality, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. 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 have experienced inflationary pressure in recent years, we have been able to largely mitigate the effect by increasing retail prices accordingly. Although neither inflation nor deflation has had a material impact on net operating results, we can make no assurance that our business will not be affected by inflation or deflation in the future.

Impact of Federal Health Care Reform Legislation

     In March 2010, the President of the United States signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or “the Acts.” The provisions of the Acts are not expected to have a significant impact to our condensed consolidated financial statements in the short term. The longer term potential impacts of the Acts to our business and the condensed consolidated financial statements are currently uncertain. We will continue to assess how the Acts apply to us and how to best have our healthcare plans meet the stated requirements.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

     As of October 31, 2010, 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 January 31, 2010. 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 January 31, 2010.

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 October 31, 2010. 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 October 31, 2010, 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 October 31, 2010, 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

     Beginning in March 2007, we were named as a party in the following lawsuits arising from pet food recalls announced by several manufacturers. The 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.

     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 January 31, 2010, which could materially affect our business, financial condition or future 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 October 31, 2010:

										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 2, 2010, to August 29, 2010			437,932			$	32.74				437,932			$	385,663,000
August 30, 2010, to October 3, 2010			—				—				—			$	385,663,000
October 3, 2010, to October 31, 2010			1,175,889			$	35.69				1,175,889			$	343,701,000
Thirteen Weeks Ended October 31, 2010			1,613,821			$	34.89				1,613,821			$	343,701,000

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.
Exhibit 101.INS **		XBRL Instance
Exhibit 101.SCH **		XBRL Taxonomy Extension Schema
Exhibit 101.CAL **		XBRL Taxonomy Extension Calculation
Exhibit 101.LAB **		XBRL Taxonomy Extension Labels
Exhibit 101.PRE **		XBRL Taxonomy Extension Presentation
Exhibit 101.DEF **		XBRL Taxonomy Extension Definition

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 24, 2010