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Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
     
(Mark One)    
 
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Fiscal Year Ended January 30, 2011
or
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.)
 
(PETSMART LOGO)
 
     
19601 N. 27th Avenue
  85027
Phoenix, Arizona   (Zip Code)
(Address of principal executive offices)    
 
Registrant’s telephone number, including area code:
(623) 580-6100
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, $.0001 par value   The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act from their obligations under those sections.
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether 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 Act).  Yes o     No þ
 
The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing sale price of the registrant’s common stock on August 1, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, as reported on the NASDAQ Global Select Market was approximately $3,644,575,000. This calculation excludes approximately 1,180,000 shares held by directors and executive officers of the registrant. This calculation does not exclude shares held by such organizations whose ownership exceeds 5% of the registrant’s outstanding common stock as of December 31, 2010, that have represented to the registrant that they are registered investment advisers or investment companies registered under Section 8 of the Investment Company Act of 1940.
 
The number of shares of the registrant’s common stock outstanding as of March 11, 2011, was 114,886,181.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Proxy Statement for the 2011 Annual Meeting of Stockholders to be held on June 15, 2011, to be filed on or about May 2, 2011, have been incorporated by reference into Part III of this Annual Report on Form 10-K.
 


 

 
TABLE OF CONTENTS
 
                 
Item       Page
 
 
1.
    Business     1  
 
1A.
    Risk Factors     8  
 
1B.
    Unresolved Staff Comments     17  
 
2.
    Properties     18  
 
3.
    Legal Proceedings     19  
 
PART II
 
5.
    Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     20  
 
6.
    Selected Financial Data     23  
 
7.
    Management’s Discussion and Analysis of Financial Condition and Results of Operations     24  
 
7A.
    Quantitative and Qualitative Disclosures About Market Risk     34  
 
8.
    Financial Statements and Supplementary Data     35  
 
9.
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     35  
 
9A.
    Controls and Procedures     35  
 
9B.
    Other Information     38  
 
PART III
 
10.
    Directors, Executive Officers and Corporate Governance     38  
 
11.
    Executive Compensation     38  
 
12.
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     38  
 
13.
    Certain Relationships and Related Transactions, and Director Independence     38  
 
14.
    Principal Accounting Fees and Services     38  
 
PART IV
 
15.
    Exhibits, Financial Statement Schedules     38  
 EX-23.1
 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
 EX-101 DEFINITION LINKBASE DOCUMENT


Table of Contents

 
PART I
 
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on management’s current expectations and beliefs about future events or future financial performance. We have attempted to identify forward-looking statements by words such as: “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” or other comparable terminology. These statements are not guarantees of future performance or results and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Item 1A. Risk Factors” contained in Part I of this Annual Report, that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
 
Although we believe the expectations and beliefs reflected in the forward-looking statements are reasonable, such statements speak only as of the date this Annual Report on Form 10-K is filed, and we disclaim any intent or obligation to update any of the forward-looking statements after such date, whether as a result of new information, actual results, future events or otherwise, unless required by law.
 
Our fiscal year consists of the 52 or 53 weeks ending on the Sunday nearest January 31 of the following year. The 2010 fiscal year ended on January 30, 2011, and was a 52-week year. The 2009 and 2008 fiscal years were also 52-week years. Unless otherwise specified, all references in this Annual Report on Form 10-K to years are to fiscal years.
 
Item 1.   Business
 
General
 
We opened our first stores in 1987 and have become the leading specialty provider of products, services and solutions for the lifetime needs of pets. We have identified a large group of pet owners we call “pet parents,” who are passionately committed to their pets and consider their pets members of the family. Our strategy is to attract and keep these customers by becoming the preferred provider for the Total Lifetime CareSM of pets.
 
We opened 38 net new stores in 2010 and at the end of the year operated 1,187 retail stores in North America. Square footage in 2010 increased 0.7 million to 26.6 million compared to 25.9 million in 2009. Our stores typically range in size from 12,000 to 27,500 square feet and carry a broad selection of high-quality pet products 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, including both exclusive and private label products, across a range of product categories.
 
We complement our strong product assortment with a differentiated 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. As of January 30, 2011, we offered pet boarding at 180 of our stores through our PetSmart PetsHotels®, or “PetsHotels.”
 
As of January 30, 2011, there were full-service veterinary hospitals in 768 of our stores. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 757 of the hospitals under the registered trade name of “Banfield, The Pet Hospital.” The remaining 11 hospitals are operated by other third parties in Canada.
 
Our PetPerks® program enables us to understand the needs of our customers and target offers directly to them. We also reach customers through PetSmart.com®, our pet e-commerce site, as well as mypetsmart.com, our pet community site and selected social networking sites.
 
The Pet Industry
 
The pet industry serves a large and growing market. The American Pet Products Association, or “APPA,” estimated the calendar year 2010 market at approximately $47.7 billion, an increase of more than 180% since calendar year 1994. Based on the 2009/2010 APPA National Pet Owners Survey, approximately 62% of households


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in the United States own a pet, which equates to more than 71 million homes. In total, there are approximately 94 million cats and 78 million dogs owned as pets in the United States.
 
The APPA divides the pet industry into the following categories: food and treats, supplies and medicines, veterinary care, pet services (such as grooming and boarding) and live animal purchases. The APPA estimates that food and treats for dogs and cats are the largest volume categories of pet-related products and in calendar year 2010, accounted for an estimated $18.3 billion in sales, or 38.3% of the market.
 
Pet supplies and medicine sales account for 23.1%, or $11.0 billion, of the market. These sales include dog and cat toys, collars and leashes, cages and habitats, books, vitamins and supplements, shampoos, flea and tick control and aquatic supplies. Veterinary care, pet services, and live animal purchases represent 26.8%, 7.2% and 4.6%, respectively, of the market.
 
Competition
 
Based on total net sales, we are North America’s leading specialty retailer of products, services and solutions for the lifetime needs of pets. The pet products retail industry is highly competitive and can be organized into eight different categories:
 
  •  Warehouse clubs and other mass merchandisers;
 
  •  Grocery stores;
 
  •  Specialty pet supply stores;
 
  •  Independent pet stores;
 
  •  Veterinarians;
 
  •  General retail merchandisers;
 
  •  Catalog retailers; and
 
  •  E-commerce retailers.
 
We believe the principal competitive factors influencing our business are product selection and quality, customer service, convenience of store locations, store environment, price and availability of other services. Many premium pet food brands, which offer higher levels of nutrition than non-premium brands, are not currently sold through grocery stores, warehouse clubs and other mass and general retail merchandisers due to manufacturers’ restrictions, but are sold primarily through specialty pet supply stores, veterinarians and farm and feed stores. In addition, our unique relationship with Banfield allows us to sell therapeutic pet foods at our stores with Banfield hospitals. We believe our pet services business provides a competitive advantage that cannot be easily duplicated. We compete effectively in our various markets; however, some of our grocery store, warehouse club and other mass and general retail merchandise competitors are much larger in terms of overall sales volume and may have access to greater capital.
 
Our Strategy
 
Our strategy is to be the preferred provider for the lifetime needs of pets. Our primary initiatives include:
 
Create meaningful differentiation that drives brand preference.  We are focused on developing and strengthening our brand identity and enhancing the emotional connection pet parents make with their pets and with PetSmart. We remain committed to our promise of providing Total Lifetime CareSM for every pet, every parent, every time. We provide pet parents with information, knowledge, trust and product solutions, including both exclusive and private label offerings, that help their pets live long, healthy and happy lives. Our marketing and advertising efforts focus on emphasizing our unique offerings for customers and promoting our strong value proposition. Through extensive and on-going customer research, we are gaining valuable insights into the wants and needs of our customers and developing solutions and communication strategies to address them. Our PetPerks® program, which is available in all PetSmart stores, plays a central role in this effort. We are also able to reach customers through various online communities and social networking sites. With increasingly greater capacity to


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customize offers relevant to our customers, we are helping them build a stronger, more meaningful bond with their pet and a greater loyalty to PetSmart.
 
Offer superior customer service.  Our emphasis on the customer is designed to provide an unparalleled shopping experience every time a customer visits our stores. Using a detailed associate learning curriculum and role-playing techniques, we educate store associates to identify customer needs and provide appropriate solutions. We measure our success in every store, and a portion of the annual incentive program for the store management team is linked to customer satisfaction. By providing pet parents with expertise and solutions, we believe we are strengthening our relationships with customers, building loyalty and enhancing our leading market position, thus differentiating ourselves from grocery and other mass retailers.
 
Focus on operating excellence.  Our commitment to operating excellence emphasizes retail basics like store cleanliness, short check-out lines, a strong in-stock position, an effective supply chain and outstanding care of the pets in our stores, which allows us to provide a consistently superior shopping experience. This focus on operating excellence simplifies processes, makes our stores more efficient and easier to operate and allows associates to be more productive. We continually seek opportunities to strengthen our merchandising capabilities allowing us to provide a differentiated product assortment, including pet specialty channel exclusive products and our proprietary brand offerings, to drive innovative solutions and value to our customers.
 
Grow our pet services business.  Based on net services sales, we are North America’s leading specialty provider of pet services, which includes professional grooming, training, boarding and day camp. Full-service veterinary hospitals are available in 768 of our stores, through our partnership with Banfield and other third parties in Canada. Pet services are an integral part of our strategy, and we are focused on driving profitable growth in our services business. We believe services further differentiate us from our competitors, drive traffic and repeat visits to our stores, provide cross-selling opportunities, allow us to forge a strong relationship with our customers, increase transaction size and enhance operating margins.
 
Add stores and provide the right store format to meet the needs of our customers.  Our expansion strategy includes increasing our share in existing multi-store markets, penetrating new multi-store and single-store markets and achieving operating efficiencies and economies of scale in merchandising, distribution, information systems, procurement, marketing and store operations. We continually evaluate our store format to ensure we are meeting the needs and expectations of our customers, while providing a return on investment to our stockholders. A store format that emphasizes our highly differentiated products and pet services offerings, when combined with our other strategic initiatives, will generally contribute higher comparable store sales growth (or sales in stores open at least one year), profitability and return on investment.
 
We believe these strategic initiatives will continue to drive comparable store sales and overall sales growth, allow us to focus on managing capital and leveraging costs and drive product margins to produce profitability and return on investment for our shareholders.
 
Our Stores
 
Our stores are generally located at sites co-anchored by strong destination mass merchandisers and typically are in or near major regional shopping centers. We are engaged in an ongoing expansion program, opening new stores in both new and existing markets and relocating existing stores. Store activity was as follows:
 
                         
    2010     2009     2008  
 
Store count at beginning of year
    1,149       1,112       1,008  
New, or relocated stores opened
    46       45       112  
Stores closed
    (8 )     (8 )     (8 )
                         
Store count at end of year
    1,187       1,149       1,112  
                         
 
Distribution
 
Our distribution network and information systems are designed to optimize store inventory, drive the efficient use of store labor, facilitate a high in-stock position and promote high distribution center productivity. We currently


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ship product to our stores in full truckloads, some of which contain multiple store deliveries. We operate two kinds of distribution centers: forward distribution centers and combination centers. Our forward distribution centers handle consumable products that require rapid replenishment, while our combination distribution centers handle both consumable and non-consumable products. We believe the combination distribution centers drive efficiencies in transportation costs and store labor. Our suppliers generally ship merchandise to one of our distribution centers, which receive and allocate merchandise to our stores. We contract the transportation of merchandise from our distribution centers to stores through third-party vendors.
 
Merchandise
 
Merchandise sales, which have been decreasing as a percentage of net sales due to the higher growth rate in services, represented approximately 88.5%, 89.2% and 89.6% of our net sales in 2010, 2009 and 2008, respectively. Merchandise generally falls into three main categories:
 
  •  Consumables.  Consumables merchandise sales includes pet food, treats and litter. We emphasize premium and therapeutic dog and cat foods, many of which are not available in grocery stores, warehouse clubs or other mass and general retail merchandisers, as well as our private label foods. We also offer quality national brands traditionally found in grocery stores, warehouse clubs or other mass merchandisers, and pet stores. Consumables merchandise sales comprised 52.5%, 53.4% and 51.6% of our net sales in 2010, 2009 and 2008, respectively.
 
  •  Hardgoods.  Hardgoods merchandise sales includes pet supplies and other goods. Our broad assortment of pet supplies, including exclusive and private label products, includes collars, leashes, health care supplies, grooming and beauty aids, toys and apparel, as well as pet beds and carriers. We also offer a complete line of supplies for fish, birds, reptiles and small pets. These products include aquariums and habitats, as well as accessories, décor and filters. Hardgoods merchandise sales comprised 34.4%, 34.0% and 36.1% of our net sales in 2010, 2009 and 2008, respectively.
 
  •  Pets.  Our stores feature fresh-water tropical fish, birds, reptiles and small pets. Pets comprised 1.6%, 1.8% and 1.9% of our net sales in 2010, 2009 and 2008, respectively. We do not sell dogs or cats, but provide space in most stores for adoption and animal welfare organizations.
 
Pet Services
 
Pet services, which include grooming, training, boarding and day camp, represented 10.9%, 10.8% and 10.4% of our net sales in 2010, 2009 and 2008, respectively. Net sales from pet services increased 7.5% from $575.4 million in 2009 to $618.8 million in 2010.
 
We offer full-service grooming and training services in virtually all our stores. We typically allocate approximately 900 square feet per store for high-quality, full-service grooming, including precision cuts, baths, nail trimming and grinding, and teeth brushing. Depending upon experience, our pet stylists are educated as part of a comprehensive program that teaches exceptional grooming skills using safe and gentle techniques. Pet training services range from puppy classes to advanced or private courses, led by our accredited pet training instructors who are passionate about pets.
 
PetsHotels provide boarding for dogs and cats, which includes 24-hour supervision by caregivers who are PetSmart trained to provide personalized pet care, an on-call veterinarian, temperature controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs. As of January 30, 2011, we operated 180 PetsHotels, and we plan to open 8 to 10 new PetsHotels in 2011.
 
Veterinary Services
 
The availability of comprehensive veterinary care in our stores further differentiates us, drives sales in our stores and reflects our overall commitment to pet care. Full-service veterinary hospitals in 768 of our stores offer routine examinations and vaccinations, dental care, a pharmacy and surgical procedures. As of January 30, 2011, Banfield operated 757 of the hospitals under the registered trade name of “Banfield, The Pet Hospital.” The


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remaining 11 hospitals are located in Canada and are operated by other third parties. See Note 3 in the Notes to Consolidated Financial Statements for a discussion of our ownership interest in Banfield.
 
PetSmart Charities and Adoptions
 
Through PetSmart Charities, Inc., an independent 501(c)(3) organization, we support the activities of animal welfare organizations in North America. PetSmart Charities creates and supports programs to help find a lifelong loving home for every pet by:
 
  •  Raising awareness of companion animal welfare issues;
 
  •  Funding programs to further individual animal welfare organizations’ missions; and
 
  •  Facilitating adoptions through in-store programs, community events and pet transport programs.
 
Since 1994, PetSmart Charities has funded more than $134 million in grants and programs benefiting animal welfare organizations and, through its adoption programs, has helped save the lives of more than 4.4 million pets.
 
Government Regulation
 
We are subject to various federal, state, provincial and local laws and regulations governing, among other things: our relationships with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements; veterinary practices or the operation of veterinary hospitals in retail stores that may impact our ability to operate veterinary hospitals in certain facilities; the transportation, handling and sale of small pets; the generation, handling, storage, transportation and disposal of waste and biohazardous materials; the distribution, import/export and sale of products; the handling, security, protection and use of customer and associate information; and the licensing and certification of services.
 
We seek to structure our operations to comply with all federal, state, provincial and local laws and regulations of each jurisdiction in which we operate. Given varying and uncertain interpretations of these laws and regulations, and the fact the laws and regulations are enforced by the courts and regulatory authorities with broad discretion, we can make no assurances we would be found to be in compliance in all jurisdictions at all times. We also could be subject to costs, including fines, penalties or sanctions and third-party claims as a result of violations of, or liabilities under, these laws and regulations.
 
Intellectual Property
 
We believe our intellectual property has significant value and is an important component in our merchandising and marketing strategies. Some of our intellectual property includes numerous servicemarks and trademarks registered with the United States Patent and Trademark Office, or “USPTO,” including: PetSmart®, PetSmart.com®, PetSmart PetsHotel®, PetPerks®, and Where Pets Are Family®, as well as many others. We also have several servicemark and trademark applications that are pending with the USPTO and anticipate filing additional applications in the future. We also own numerous registered servicemarks, trademarks and pending applications in other countries, including Canada, as well as several trade names, domain names and copyrights for use in our business.
 
Employees
 
As of January 30, 2011, we employed approximately 47,000 associates, approximately 22,000 of whom were employed full-time. We continue to invest in education for our full and part-time associates as part of our emphasis on customer service and providing pet care solutions. We are not subject to collective bargaining agreements and have not experienced work stoppages. We consider our relationship with our associates to be a positive one. Increases in the federal and state minimum wage in recent years have not had a material effect on our business.
 
Financial Information by Business Segment and Geographic Data
 
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in


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assessing performance. Utilizing these criteria, we manage our business on the basis of one reportable operating segment.
 
Net sales in the United States were $5.4 billion, $5.1 billion and $4.9 billion for 2010, 2009 and 2008, respectively. Net sales in Canada, denominated in United States dollars, were $296.7 million, $245.5 million and $217.6 million for 2010, 2009 and 2008, respectively. Substantially all our long-lived assets are located in the United States.
 
Available Information
 
We make available, free of charge through our investor relations internet website (www.petm.com), our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, including our XBRL instance documents, our current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file such material, or furnish it to the Securities and Exchange Commission, or “SEC.”
 
The public may read and copy materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
 
Management
 
Our executive officers and their ages and positions on March 1, 2011, are as follows:
 
             
Name   Age   Position
 
Philip L. Francis
    64     Executive Chairman
Robert F. Moran
    60     President and Chief Executive Officer
Lawrence P. Molloy
    49     Senior Vice President, Chief Financial Officer
Emily D. Dickinson
    51     Senior Vice President, General Counsel and Secretary
David K. Lenhardt
    41     Executive Vice President, Store Operations, Human Resources and Information Systems
Joseph D. O’Leary
    52     Executive Vice President, Merchandising, Marketing and Supply Chain
John W. Alpaugh
    45     Senior Vice President, Chief Marketing Officer
Donald E. Beaver
    52     Senior Vice President, Chief Information Officer
Jaye D. Perricone
    52     Senior Vice President, Real Estate and Development
Neil H. Stacey
    57     Senior Vice President, Human Resources
Bruce K. Thorn
    43     Senior Vice President, Supply Chain
Kenneth T. Hall
    42     Senior Vice President, Strategic Planning and Business Development
 
Philip L. Francis has been a Director of PetSmart since 1989 and was named Executive Chairman in June 2009. From January 2002 until June 2009, he was Chairman and Chief Executive Officer. He joined PetSmart as President and Chief Executive Officer in March 1998, was named Chairman of the Board in 1999, and held all three positions until December 2001. From 1991 to 1998, he held various positions with Shaw’s Supermarkets, Inc., a subsidiary of J. Sainsbury plc., including Chief Executive Officer, Chief Operating Officer and President. Prior to that, he held several senior management positions for Roundy’s Supermarket, Inc., Cardinal Health, Inc. and the Jewel Companies, Inc.
 
Robert F. Moran was named President and Chief Executive Officer in June 2009. He has been a Director of PetSmart since June 2009. He joined PetSmart as President of North American Stores in July 1999 and in December 2001, he was appointed President and Chief Operating Officer. From 1998 to 1999, he was President of Toys ‘R’ Us, Ltd., Canada. Prior to 1991 and from 1993 to 1998, for a total of 20 years, he was with Sears, Roebuck and Company


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in a variety of financial and merchandising positions, including President and Chief Executive Officer of Sears de Mexico. He was also Chief Financial Officer and Executive Vice President of Galerias Preciados of Madrid, Spain from 1991 through 1993.
 
Lawrence P. Molloy joined PetSmart as Senior Vice President and Chief Financial Officer in September 2007. Prior to joining PetSmart, he was employed by Circuit City Stores, Inc, a national consumer electronics retailer, from 2003 to 2007. While at Circuit City, he served as the Director of Financial Planning and Analysis from 2003 to 2004, the Vice President, Financial Planning and Analysis from 2004 to 2006 and from 2006 to 2007 was Chief Financial Officer of retail. Prior to Circuit City, he served in various leadership, planning and strategy roles for Capital One Financial Corporation; AGL Capital Investments, LLC; Deloitte & Touche Consulting Group; and the United States Navy. He served ten years in the Navy as a fighter pilot, later retiring from the Navy Reserve with a rank of Commander.
 
Emily D. Dickinson joined PetSmart in September 2009 as Senior Vice President, General Counsel and Secretary. Prior to joining PetSmart, she spent 18 years with Hannaford Bros. Co., eight of which were also with Delhaize Group, a Belgian-based food retailer. While there, she had dual responsibility as Vice President, Legal on a global basis for Delhaize and Senior Vice President, General Counsel and Secretary for Hannaford Bros. from 2000 to 2009. Before serving at Hannaford Bros. Co., she was an attorney in Boston and with two Portland, Maine law firms.
 
David K. Lenhardt was appointed Executive Vice President, Store Operations, Human Resources and Information Systems effective January 31, 2011. He joined PetSmart as Senior Vice President of Services, Strategic Planning and Business Development in October 2000. He was appointed Senior Vice President, Store Operations and Services in February 2007 and in February 2009 was appointed Senior Vice President, Store Operations and Human Resources. From 1996 to 2000, he was a manager with Bain & Company, Inc., where he led consulting teams for retail, technology and e-commerce clients. Prior to that, he worked in the corporate finance and Latin American groups of Merrill Lynch & Co., Inc.’s investment banking division.
 
Joseph D. O’Leary was appointed Executive Vice President, Merchandising, Marketing and Supply Chain effective January 31, 2011. He joined PetSmart as Senior Vice President of Supply Chain in September 2006. From October 2008 to March 2010, he held the title of Senior Vice President, Merchandising and Supply Chain. From March 2010 to January 2011, he held the title of Senior Vice President, Merchandising. Prior to joining PetSmart, he was Chief Operating Officer for Interactive Health, a manufacturer of robotic massage chairs. Prior to that, he served as Senior Vice President of Supply Chain Strategy and Global Logistics for the Gap, Inc. from 2003 to 2005, and Senior Vice President of Global Logistics from 2000 to 2003. Prior to 1999, he held positions at Mothercare plc, Coopers & Lybrand LLP and BP International.
 
John W. Alpaugh was appointed Senior Vice President, Chief Marketing Officer in February 2010. He joined PetSmart in 1999 and has served in a number of leadership roles including Vice President, Marketing from February 2006 to April 2007, Vice President, Specialty Merchandising from April 2007 to March 2008, and from April 2008 to February 2010, Vice President of Strategic Planning and Business Development. Prior to joining PetSmart, he worked in Brand Management for Procter & Gamble Europe and in Financial Planning and Analysis for IBM.
 
Donald E. Beaver joined PetSmart as Senior Vice President and Chief Information Officer in May 2005. Prior to joining PetSmart, he was employed by H.E. Butt Grocery Company where he held the position of Senior Vice President and Chief Information Officer starting in 1999. Prior to that, he served 14 years at Allied Signal Aerospace, Inc. in various information systems leadership roles, the last being the CIO for the aftermarket support division.
 
Jaye D. Perricone was appointed Senior Vice President, Real Estate and Development in December 2007, serving as Vice President, Real Estate during the year prior. She joined PetSmart in 1995, and served in a number of leadership roles including Regional Vice President from 1997 to 2000, Vice President of Services Operations from 2000 to 2001, Vice President of Customer Service and Store Operations from 2001 to 2004 and Vice President of Property Management and Store Design from 2004 to 2006. Prior to joining PetSmart, she held various positions with Target Corporation, Pace Membership Warehouse, Inc. and Bizmart, Inc.


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Neil H. Stacey was appointed Senior Vice President of Human Resources in February 2009. He joined PetSmart in 1995 and served in a number of leadership roles including Vice President General Merchandise Manager from 1995 to 1999, Senior Vice President of Merchandising Consumables from 1999 to 2000, Regional Vice President from 2000 to 2007, and Divisional Vice President of Operations from 2007 to 2009. Prior to joining PetSmart, he was employed at American Stores, a national food and drug retailer, where he held several leadership positions including Vice President of Advertising and Market Development, Vice President of Merchandising and Vice President of Business Process Redesign.
 
Bruce K. Thorn was appointed Senior Vice President, Supply Chain in December 2009. He joined PetSmart in 2007 as Vice President, Supply Chain Solutions, and served as Vice President, Supply Chain from 2008 to 2009. Prior to joining PetSmart, he served as Chief Operating Officer for LESCO, Inc. from 2002 through 2007. LESCO, Inc. is a public company and leader in the professional turf care industry. He previously held leadership roles with Gap, Inc., Cintas Corporation and the United States Army.
 
Kenneth T. Hall was appointed Senior Vice President of Strategic Planning and Business Development in January 2010. He joined PetSmart in October 2000 as Vice President, Strategic Planning and Customer Relationships. In January 2003, he was appointed Senior Vice President and Chief Marketing Officer, after serving in the role from October 2002 on an interim basis. He was appointed Senior Vice President of Merchandising in February 2006. From September 2008 until December 2009, he completed an executive rotational assignment in the field in Store Operations. Prior to PetSmart, he worked with Bain & Company, where he developed business and customer loyalty strategies and programs for major retail, automotive and financial services companies. He began his career with Exxon Company, where he held a variety of operations and financial roles. In January 2011, Mr. Hall announced that he would retire from his position in March 2011.
 
Item 1A.   Risk Factors
 
In the normal course of business, our operations, financial condition and results of operations are routinely subjected to a variety of risks. Our actual financial 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, as well as those discussed in the “Competition,” “Our Stores,” “Distribution” and “Government Regulation” sections of this Annual Report on Form 10-K. In addition, the current global economic conditions amplify many of these risks.
 
A decline in consumer spending or a change in consumer preferences could reduce our sales or profitability and harm our business.
 
Our sales depend on consumer spending, which is influenced by factors beyond our control, including general economic conditions, the availability of discretionary income and credit, tax or interest rate fluctuations, fuel and other energy costs, healthcare costs, weather and unemployment levels. Global or national political unrest or uncertainty may also impact the price paid by consumers for goods, services and commodities and reduce consumer spending and confidence, and reduce our sales or profitability. We may experience declines in sales or changes in the types of products sold during economic downturns. Any material decline in the amount of consumer spending could reduce our sales, and a decrease in the sales of higher-margin products could reduce profitability and, in each case, harm our business. The success of our business depends in part on our ability to identify and respond to evolving trends in demographics and consumer preferences. Failure to timely identify or effectively respond to changing consumer tastes, preferences, spending patterns and pet care needs could adversely affect our relationship with our customers, our market share, the demand for our products and services, our sales and gross margins, and our profitability.
 
The pet products and services retail industry is very competitive and continued competitive forces may adversely impact our business and financial results.
 
The pet products and services retail industry is very competitive. We compete with supermarkets, warehouse clubs and other mass and general retail merchandisers, many of which are larger and have significantly greater resources than we have. We also compete with a number of specialty pet supply stores and independent pet stores,


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veterinarians, catalog retailers and e-commerce retailers. The pet products and services retail industry has become increasingly competitive due to the expansion of pet-related product offerings by certain supermarkets, warehouse clubs and other mass and retail merchandisers and the entrance of other specialty retailers into the pet food and pet supply market, some of which have developed store formats similar to ours. We can make no assurances we will not face greater competition from these or other retailers in the future. In particular, if supermarket, warehouse club or other mass and retail merchandiser competitors seek to gain or retain market share by reducing prices, we would likely reduce our prices on similar product offerings in order to remain competitive, which may result in a decrease in our market share, sales, operating results and profitability and require a change in our operating strategies.
 
We also have been able to compete successfully by differentiating ourselves from our competitors through providing a careful combination of product assortment, competitive pricing, service offerings and unique customer experience. If changes in consumer preferences decrease the competitive advantage attributable to these factors, or if we fail to otherwise positively differentiate our customer experience from our competitors, our business and results of operations could be adversely affected.
 
Comparable store sales growth may decrease. If we are unable to increase sales at our existing stores, our results of operations could be harmed.
 
We can make no assurances that our stores will meet forecasted levels of sales and profitability. As a result of new store openings in existing markets, and because older stores will represent an increasing proportion of our store base over time, our comparable store sales performance may be materially impacted in future periods. In addition, a portion of a typical new store’s sales comes from customers who previously shopped at other PetSmart stores in the existing market.
 
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.
 
We currently operate stores in most of the major market areas of the United States and Canada. Our ability to be successful with our store development efforts is dependent on various factors, some of which are outside our control, including:
 
  •  Identifying store sites that offer attractive returns on our investment including the impact of cannibalization of our existing stores;
 
  •  Competition for those sites;
 
  •  Successfully negotiating with landlords and obtaining any necessary governmental, regulatory or private approvals;
 
  •  Timely construction of stores; and
 
  •  Our ability to attract and retain qualified store personnel.
 
To the extent we are unable to accomplish any of the above, our ability to open new stores and hotels may be harmed and our future sales and profits may be adversely affected. In addition, we can make no assurances that we will be able to meet the forecasted level of sales or operate our new stores or hotels profitably.
 
The increased demands placed on existing systems and procedures, and on management by our store development plans, also could result in operational inefficiencies and less effective management of our business and associates, which could in turn adversely affect our financial performance. Opening new stores in a market will attract some customers away from other stores already operated by us in that market and diminish their sales. An increase in construction costs and/or building material costs could also adversely affect our financial performance.
 
Our leases are typically signed approximately 9 months before a store opens. As a result of that timing, we may be unable to adjust our store opening schedule to new economic conditions or a change in strategy in a timely manner.


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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.
 
Our business is subject to seasonal fluctuation. We typically realize a higher portion of our net sales and operating profit during the fourth fiscal quarter. Sales of certain products and services are seasonal and because our stores typically draw customers from a large area, sales may also be impacted by adverse weather or travel conditions, which are more prevalent during certain seasons of the year. 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. Also, controllable expenses, such as advertising, may fluctuate from quarter to quarter within a year. As a result of our expansion plans, the timing of new store openings and related preopening expenses, the amount of revenue contributed by new and existing stores, 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 net sales, than mature stores, new store openings will also contribute to lower store operating margins until these stores become established.
 
Failure to successfully manage and execute our marketing initiatives could have a negative impact on our business.
 
Our continued success and growth depend on cultivating a growing, loyal customer base, improving customer traffic and increasing the average transaction amount to gain sales momentum in our stores and on our e-commerce web site. Historically, we have utilized various media to reach the consumer, and we have experienced varying responses to our marketing efforts. Often, media placement decisions are made months in advance, and our inability to accurately predict our consumers’ preferred method of communication may impair our ability to attract new customers, result in fewer customers shopping at our stores, or fail to drive additional sales and thereby negatively impact our business and financial performance.
 
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.
 
Our vendors generally ship merchandise to one of our distribution centers, which receive and allocate merchandise to our stores. Any interruption or malfunction in our distribution operations, including, but not limited to, the loss of a key vendor that provides transportation of merchandise to or from our distribution centers, or a material increase in our transportation and distribution costs, including, but not limited to, costs resulting from increases in the price of fuel and other energy costs or other commodities, could harm our sales and the results of our operations. We seek to optimize inventory levels to operate our business successfully. An interruption in the supply chain could result in out-of-stock or excess merchandise inventory levels that could harm our sales and the results of operations. We operate two fish distribution centers and have two fish distribution centers that are operated by a third-party vendor. An interruption or malfunction in these operations or in the fulfillment of fish orders could harm our sales and results of operations. Operating the fish distribution centers is a very complex process, and if we lose the third-party operator, we can make no assurances that we could contract with another third-party to operate the fish distribution centers on favorable terms, if at all, or that we could successfully operate all of the fish distribution centers ourselves. In addition, our growth plans require the development of new distribution centers to service the increasing number of stores. If we are unable to successfully expand our distribution network in a timely manner, our sales or results of operations could be harmed.
 
Failure to successfully manage our inventory could harm our business.
 
In addition to the risks described elsewhere in this Item 1A relating to our distribution centers and inventory optimization by us and third parties, we are exposed to inventory risks that may adversely affect our operating results as a result of seasonality, new product launches, changes in customer demand and consumer spending patterns, changes in consumer tastes with respect to our products and other factors. We endeavor to accurately predict these trends and avoid overstocking or under stocking products that we sell. Demand for products, however, can change between the time inventory is ordered and the date of sale. In addition, when we begin selling a new


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product, it may be difficult to establish vendor relationships, determine appropriate product selection, and accurately forecast demand. We carry a broad selection of certain products and we may be unable to sell products in sufficient quantities or during the relevant selling seasons. Any one of the inventory risk factors set forth above may adversely affect our operating results.
 
If our information systems fail to perform as designed or are interrupted for a significant period of time, our business could be harmed.
 
The efficient operation of our business is dependent on our information systems. In particular, we rely on our information systems to effectively manage our financial and operational data, process payroll and to maintain our in-stock positions. We possess disaster recovery capabilities for our key information systems and take measures to prevent security breaches and computer viruses. The failure of our information systems to perform as designed, loss of data or any interruption of our information systems for a significant period of time could disrupt our business.
 
We continue to invest in our information systems. Enhancement to or replacement of our major financial or operational information systems could have a significant impact on our ability to conduct our core business operations and increase our risk of loss resulting from disruptions of normal operating processes and procedures that may occur during the implementation of new information systems. We can make no assurances that the costs of investments in our information systems will not exceed estimates, that the systems will be implemented without material disruption, or that the systems will be as beneficial as predicted. If any of these events occur, our results of operations 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 increasing costs associated with information security, such as increased investment in technology, the costs of compliance with consumer protection laws, and costs resulting from consumer fraud, could adversely impact our business. We also routinely possess sensitive customer and associate information and, while we have taken reasonable and appropriate steps to protect that information, if our security procedures and controls were compromised, it could harm our business, reputation, operating results and financial condition and may increase the costs we incur to protect against such information security breaches.
 
The disruption of the relationship with or the loss of any of our key vendors, including our vendors with whom we have exclusive relationships, 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, the availability of generic products, or risks associated with the suppliers from whom products are sourced, all could harm our business.
 
Sales of premium pet food for dogs and cats comprise a significant portion of our net sales. Currently, most major vendors of premium pet food do not permit their products to be sold in supermarkets, warehouse clubs, or through other mass and retail merchandisers. If any premium pet food or pet supply vendor were to make its products available in supermarkets, warehouse clubs and other mass or retail merchandisers, our business could be harmed. In addition, if the grocery brands currently available to such retailers were to gain market share at the expense of the premium brands sold only through specialty pet food and pet supply outlets, our business could be harmed.
 
We purchase a substantial amount of pet supplies from a number of vendors with limited supply capabilities, and two of our largest vendors account for a material amount of products sold. We can make no assurances that we will be able to find new qualified vendors who meet our standards, or that our current pet supply vendors will be able to accommodate our anticipated needs or comply with existing or any new regulatory requirements. In addition, we purchase a substantial amount of pet supplies from vendors outside of the United States. Effective global sourcing of many of the products we sell is an important factor in our financial performance. We can make no assurances that our international vendors will be able to satisfy our requirements including, but not limited to, timeliness of delivery, acceptable product quality, and accurate packaging and labeling. Any inability of our existing vendors to provide products meeting such requirements in a timely or cost-effective manner could harm our business. While


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we believe our vendor relationships are good, we have no material long-term supply commitments from our vendors and any vendor could discontinue selling to us at any time.
 
Many factors relating to our vendors and the countries in which they are located are beyond our control, including the stability of the political, economic and financial environments where they are located, their ability to operate in challenging economic environments or meet our standards and applicable U.S. and local legal requirements, the availability of labor and raw materials, labor unrest, merchandise quality issues, currency exchange rates, trade restrictions, transport availability and cost, inflation and other factors. In addition, Canada’s and the United States’ foreign trade policies, tariffs and other impositions on imported goods, trade sanctions imposed on certain countries, the limitation on the import of certain types of goods or of goods containing certain materials from other countries and other factors relating to foreign trade are beyond our control. These factors affecting our vendors and our access to products could adversely affect our operations and our financial performance.
 
Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to product liability claims.
 
We offer various proprietary branded products, for which we rely on third-party manufacturers. Such third-party manufacturers may prove to be unreliable, or the quality of the products may not meet our expectations. In addition, our proprietary branded products compete with other manufacturers’ branded items that we offer. As we continue to evaluate the number and types of proprietary branded products that we sell, we may adversely affect our relationships with our vendors, who may decide to reduce their product offerings through us and increase their product offerings through our competitors. Finally, if any of our customers are harmed by our proprietary branded products, they may bring product liability and other claims against us. Any of these circumstances could have an adverse effect on our business and financial performance.
 
Food safety, quality and health concerns could affect our business.
 
We could be adversely affected if consumers lose confidence in the safety and quality of vendor-supplied food products and hard-good products. Adverse publicity about these types of concerns, whether valid or not, may discourage consumers from buying the products in our stores or cause vendor production and delivery disruptions. The real or perceived sale of contaminated food products by us could result in product liability claims against our vendors or us, expose us or our vendors to governmental enforcement action or private litigation, or lead to costly recalls and a loss of consumer confidence, any of which could have an adverse effect on our sales and operations and financial performance.
 
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 success is largely dependent on the efforts and abilities of our senior executive group and other key personnel. The loss of the services of one or more of our key executives or personnel, or the increased demands placed on our key executives and personnel by our continued growth, could adversely impact our financial performance and our ability to execute our strategies. In addition, our future success depends on our ability to attract, train, manage and retain highly skilled store managers and qualified services personnel such as pet trainers and groomers. There is a high level of competition for these employees and our ability to operate our stores and expand our services depends on our ability to attract and retain these personnel. Competition for qualified management and services personnel could require us to pay higher wages or other compensation to attract a sufficient number of employees. Turnover, which has historically been high among entry-level or part-time associates at our stores and distribution centers, increases the risk associates will not have the training and experience needed to provide competitive, high-quality customer service. Our ability to meet our labor needs while controlling our labor costs is subject to numerous external factors, including unemployment levels, prevailing wage rates, changing demographics and changes in employment legislation. If we are unable to retain qualified associates or our labor costs increase significantly, our business operations and our financial performance could be adversely impacted. In addition, there historically has been a shortage of qualified veterinarians. If third party veterinary services providers cannot attract and retain a sufficient number of qualified veterinarians, their ability to provide


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veterinary services in our stores and our ability to increase the number of stores in which veterinary services are provided, may be impacted.
 
Our international operations may result in additional market risks, which may harm our business.
 
We entered the Canadian market in 1996 and operate 69 stores in Canada as of January 30, 2011. As these operations grow, they may require greater management and financial resources. International operations require the integration of personnel with varying cultural and business backgrounds and an understanding of the relevant differences in the cultural, legal and regulatory environments. Our results may be increasingly affected by the risks of our international activities, including:
 
  •  Fluctuations in currency exchange rates;
 
  •  Changes in international staffing and employment issues;
 
  •  Tariff and other trade barriers;
 
  •  Greater difficulty in utilizing and enforcing our intellectual property rights;
 
  •  Failure to understand the local culture and market;
 
  •  The burden of complying with foreign laws, including tax laws and financial accounting standards; and
 
  •  Political and economic instability and developments.
 
Our business may be harmed if the operation of veterinary hospitals at our stores is limited or fails to continue.
 
We and Banfield, the third-party operator of Banfield, The Pet Hospital, and our other third-party operators are subject to statutes and regulations in various states and Canadian provinces regulating the ownership of veterinary practices, or the operation of veterinary hospitals in retail stores, that may impact our ability to host and Banfield’s ability to operate veterinary hospitals within our facilities. A determination that we, or Banfield, are in violation of any of these applicable statutes and regulations could require us, or Banfield, to restructure our operations to comply, or render us, or Banfield, unable to operate veterinary hospitals in a given location. If Banfield were to experience financial or other operating difficulties that would force it to limit its operations, or if Banfield were to cease operating the veterinary hospitals in our stores, our business may be harmed. We can make no assurances that we could contract with another third-party to operate the veterinary hospitals on favorable terms, if at all, or that we could successfully operate the veterinary hospitals ourselves. Any significant decrease in Banfield’s financial results may negatively impact our financial performance.
 
We face various risks as an e-commerce retailer.
 
We may require additional capital in the future to sustain or grow our e-commerce business. We have engaged a third-party to maintain our e-commerce website and process all customer orders placed through that site. Business risks related to our e-commerce business include our ability to keep pace with rapid technological change; failure in our, or any third-party processor’s, security procedures and operational controls; failure or inadequacy in our, or any third-party processor’s, systems or ability to process customer orders; government regulation and legal uncertainties with respect to e-commerce; and collection of sales or other taxes by one or more states or foreign jurisdictions. If any of these risks materialize, it could have an adverse effect on our business.
 
Our business could be harmed if we were unable to effectively manage our cash flow and raise any needed additional capital on acceptable terms.
 
We expect to fund our currently planned operations with existing capital resources, including cash flows from operations and the borrowing capacity under our credit facility. If, however, we are unable to effectively manage our cash flows or generate and maintain positive operating cash flows and operating income in the future, we may need additional funding. We may also choose to raise additional capital due to market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. Our credit facility


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and letter of credit facility are secured by substantially all our personal property assets, our subsidiaries and certain real property. This could limit our ability to obtain, or obtain on favorable terms, additional financing and may make additional debt financing outside our credit facility and letter of credit facility more costly. If additional capital were needed, an inability to raise capital on favorable terms could harm our business and financial condition. In addition, to the extent that we raise additional capital through the sale of equity or debt securities convertible into equity, the issuance of these securities could result in dilution or accretion to our stockholders.
 
Failure to successfully integrate any business we acquire could have an adverse impact on our financial results.
 
We may, from time to time, acquire businesses we believe to be complementary to our business. Acquisitions may result in difficulties in assimilating acquired companies and may result in the diversion of our capital and our management’s attention from other business issues and opportunities. We may not be able to successfully integrate operations that we acquire, including their personnel, financial systems, distribution, operations and general operating procedures. If we fail to successfully integrate acquisitions, we could experience increased costs associated with operating inefficiencies which could have an adverse effect on our financial results. Also, while we employ several different methodologies to assess potential business opportunities, the new businesses may not meet or exceed our expectations and, therefore, affect our financial performance.
 
Failure to protect our intellectual property could have a negative impact on our operating results.
 
Our trademarks, servicemarks, copyrights, patents, trade secrets, domain names and other intellectual property are valuable assets that are critical to our success. The unauthorized reproduction or other misappropriation of our intellectual property could diminish the value of our brands or goodwill and cause a decline in our revenue or operating results. Protecting our intellectual property outside the United States could be time-consuming and costly, and the local laws and regulations outside the United States may not fully protect our rights in such intellectual property. Any infringement or other intellectual property claim made against us, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to enter into royalty or licensing agreements. As a result, any such claim could have an adverse effect 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.
 
We are subject to various contractual obligations with third-party providers and federal, state, provincial and local laws and regulations governing, among other things: our relationships with employees, including minimum wage requirements, overtime, terms and conditions of employment, working conditions and citizenship requirements; veterinary practices, or the operation of veterinary hospitals in retail stores, that may impact our ability to operate veterinary hospitals in certain facilities; the transportation, handling and sale of small pets; the generation, handling, storage, transportation and disposal of waste and biohazardous materials; the distribution, import/export and sale of products; providing services to our customers; contracted services with various third-party providers; credit and debit card processing; the handling, security, protection and use of customer and associate information; and the licensing and certification of services.
 
We seek to structure our operations to comply with all applicable federal, state, provincial and local laws and regulations of each jurisdiction in which we operate. Given varying and uncertain interpretations of these laws and regulations and the fact that the laws and regulations are enforced by the courts and by regulatory authorities with broad discretion, we can make no assurances that we would be found to be in compliance in all jurisdictions. We also could be subject to costs, including fines, penalties or sanctions and third-party claims as a result of violations of, or liabilities under, the above referenced contracts, laws and regulations.
 
Failure of our internal controls over financial reporting could harm our business and financial results.
 
We have documented and tested our internal controls over financial reporting to assess their design and operating effectiveness. Internal controls over financial reporting have inherent limitations and are not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. We may


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encounter problems or delays in completing the review and evaluation, or implementing improvements. Additionally, we may identify deficiencies that need to be addressed in our internal controls over financial reporting, or other matters that may raise concerns for investors. Should we, or our independent registered public accounting firm, determine in future periods that we have a material weakness in our internal controls over financial reporting, our results of operations or financial condition may be adversely affected and the price of our common stock may decline.
 
Changes in laws, accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.
 
Accounting principles generally accepted in the United States of America, or “GAAP,” and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters relevant to our business are highly complex, continually evolving and involve many subjective assumptions, estimates and judgments by us. Changes in these rules or their interpretation, or changes in facts, underlying assumptions, estimates or judgments by us could significantly impact our reported or expected financial performance.
 
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.
 
We operate in multiple tax jurisdictions and believe we have made adequate provisions for income and other taxes. If, however, tax regulators in these jurisdictions determine a position we have taken on an issue is inappropriate, our financial results may be adversely affected.
 
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.
 
We procure insurance to help us manage a variety of risks. A failure of insurance to provide coverage for these risks may expose us to expensive defense costs and the costs of the ultimate outcome of the matter. Insurance costs continue to be volatile, affected by natural catastrophes, fear of terrorism, financial irregularities and fraud at other publicly traded companies and fiscal viability of insurers. We believe that commercial insurance coverage is prudent for risk management, and insurance costs may increase substantially in the future. In addition, for certain types or levels of risk, such as risks associated with earthquakes, hurricanes or terrorist attacks, we may determine that we cannot obtain commercial insurance at acceptable prices. Therefore, we may choose to forego or limit our purchase of relevant commercial insurance, choosing instead to self-insure one or more types or levels of risks. Provisions for losses related to self-insured risks are based upon independent actuarially determined estimates. We maintain stop-loss coverage to limit the exposure related to certain risks. The assumptions underlying the ultimate costs of existing claim losses are subject to a high degree of unpredictability, which can affect the liability recorded for such claims. For example, variability in inflation rates of health care costs inherent in these claims can affect the amounts realized. Similarly, changes in legal trends and interpretations, as well as a change in the nature and method of how claims are settled can impact ultimate costs. Although our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, any changes could have a considerable effect upon future claim costs and currently recorded liabilities and could have a material impact on our consolidated financial statements.
 
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.
 
There is generally a significant amount of legislation pending at the federal, state, provincial and local levels regarding the handling of pets. This legislation may impair our ability to transport the small pets we sell in our stores. The small pets we sell in our stores are susceptible to health risks and diseases that can quickly decrease or destroy the supply of these pets. In addition, our supply of products may be negatively impacted by weather, catastrophic events, disease, supply chain malfunctions, contamination or trade barriers. Any disruption in our operations or the supply of products to our stores could harm our reputation and decrease our sales.


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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.
 
Over the last several years, the market price of our common stock has been subject to significant fluctuations. The market price of our common stock may continue to be subject to significant fluctuations in response to the impact on our operations, sales and financial results of a variety of factors including, but not limited to:
 
  •  General economic changes;
 
  •  Actions taken by our competitors, including new product introductions and pricing changes;
 
  •  Changes in the strategy and capability of our competitors;
 
  •  Our ability to successfully integrate acquisitions;
 
  •  The prospects of our industry;
 
  •  Natural disasters, hostilities and acts of terrorism; and
 
  •  National or regional catastrophes or circumstances, such as a pandemic or other public health or welfare scare.
 
In addition, the stock market in recent years has experienced price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These fluctuations, as well as general economic and market conditions, including but not limited to those listed above, may harm the market price of our common stock. Further, a change in an analyst’s published opinion or rating of our business could impact the 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.
 
Financial turmoil affecting the banking system and financial markets and the risk that additional financial institutions may consolidate or become insolvent has resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and volatility in credit, currency and equity markets. In such an environment, there is a risk that lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to: extending credit up to the maximum permitted by credit facility, allowing access to additional credit features and otherwise accessing capital and/or honoring loan commitments. If our lender fails to honor its legal commitments under our credit facility, it could be difficult in this environment to replace our credit facility on similar terms. And if our suppliers or key third party vendors of necessary services and technical systems encounter similar difficulties with credit or liquidity in their own businesses, our business may also be adversely affected.
 
Our operating and financial performance in any given period may differ from the guidance we have provided to the public.
 
We provide public guidance on our expected operating and financial results for future periods. Although we believe that this guidance provides investors and analysts with a better understanding of management’s expectations for the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. If our operating or financial results for a particular period differ from our guidance or the expectations of investment analysts, or if we change our guidance for future periods, the market price of our common stock could decline.


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We have implemented some anti-takeover provisions that may prevent or delay an acquisition of us that may not be beneficial to our shareholders.
 
Our restated certificate of incorporation and bylaws include provisions that may delay, defer or prevent a change in management or control that our shareholders may not believe is in their best interests. These provisions include:
 
  •  Until 2012, a classified board of directors consisting of two classes;
 
  •  The ability of our board of directors to issue, without stockholder approval, up to 10,000,000 shares of preferred stock in one or more series with rights, obligations and preferences determined by the board of directors;
 
  •  No right of stockholders to call special meetings of stockholders;
 
  •  No right of stockholders to act by written consent;
 
  •  Certain advance notice procedures for nominating candidates for election to the board of directors; and
 
  •  No right to cumulative voting.
 
In addition, our restated certificate of incorporation requires a 662/3% vote of stockholders to:
 
  •  alter or amend our bylaws;
 
  •  remove a director without cause; or
 
  •  alter, amend or repeal certain provisions of our restated certificate of incorporation.
 
We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, and the application of Section 203 could delay or prevent an acquisition of PetSmart.
 
Item 1B.   Unresolved Staff Comments
 
None.


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Item 2.   Properties
 
Our stores are generally located at sites co-anchored by strong destination superstores and typically are in or near major regional shopping centers. The following table summarizes the locations of the stores by country and state as of January 30, 2011:
 
         
    Number of
 
United States:   Stores  
 
Alabama
    13  
Alaska
    2  
Arizona
    48  
Arkansas
    7  
California
    122  
Colorado
    32  
Connecticut
    9  
Delaware
    3  
Florida
    71  
Georgia
    40  
Idaho
    4  
Illinois
    51  
Indiana
    22  
Iowa
    9  
Kansas
    7  
Kentucky
    9  
Louisiana
    15  
Maine
    2  
Maryland
    29  
Massachusetts
    17  
Michigan
    32  
Minnesota
    16  
Mississippi
    7  
Missouri
    20  
Montana
    3  
Nebraska
    7  
Nevada
    17  
New Hampshire
    5  
New Jersey
    39  
New Mexico
    6  
New York
    41  
North Carolina
    41  
North Dakota
    2  
Ohio
    39  
Oklahoma
    15  
Oregon
    14  
Pennsylvania
    46  
Rhode Island
    2  
South Carolina
    17  
South Dakota
    2  
Tennessee
    21  
Texas
    116  
Utah
    11  
Vermont
    1  
Virginia
    44  
Washington
    25  
West Virginia
    3  
Wisconsin
    14  
         
Total U.S. stores
    1,118  
Canada
    69  
         
Total stores
    1,187  
         


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We lease substantially all of our stores, distribution centers, and corporate offices under non-cancelable leases. The terms of the store leases generally range from 10 to 15 years and typically allow us to renew for 2 to 4 additional 5 year terms. Store leases, excluding renewal options, expire at various dates through 2026. Certain leases require payment of property taxes, utilities, common area maintenance, and insurance and, if annual sales at certain stores exceed specified amounts, provide for additional rent. We have paid minimal additional rent under these provisions during 2010, 2009 and 2008.
 
We lease approximately 365,000 square feet for our corporate offices. The lease expires in 2023.
 
Our distribution centers and respective lease expirations as of January 30, 2011, were as follows:
 
                             
    Square
                 
Location   Footage     Date Opened     Distribution Type   Lease Expiration  
    (In thousands)                  
 
Ennis, Texas
    230       May 1996     Forward distribution center     2013  
Phoenix, Arizona
    620       November 1999     Combination distribution center     2021  
Columbus, Ohio
    613       September 2000     Combination distribution center     2015  
Gahanna, Ohio
    276       October 2000     Forward distribution center     2015  
Hagerstown, Maryland
    252       October 2000     Forward distribution center     2015  
Ottawa, Illinois
    1,000       August 2005     Combination distribution center     2015  
Newnan, Georgia
    878       July 2007     Combination distribution center     2022  
Reno, Nevada
    873       April 2008     Combination distribution center     2023  
                             
Total
    4,742                      
                             
 
Item 3.   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.


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Two different groups of objectors filed notices of appeal with respect to the U.S. District Court’s approval of the U.S. settlement, and the Court of Appeals remanded one point of fact to the motions judge for additional clarification. Once the point remanded by the appeals court is addressed, these cases should be resolved, and we continue to believe they will not have a material adverse impact on our consolidated financial statements.
 
There have been no appeals filed in Canada.
 
In January 2011, we were named as a defendant in Pedroza v. PetSmart, Inc., et al., a lawsuit originally filed in California Superior Court for the County of San Bernardino. The case has been removed to the U.S. District Court for the Central District of California. The complaint alleges, purportedly on behalf of current and former exempt store management in California, that we improperly classified our store management as exempt pursuant to the California Labor Code, and as a result failed to: (i) pay or provide to such managers proper wages, overtime compensation, or rest or meal periods, (ii) maintain and provide accurate wage-related statements and records, and (iii) reimburse certain business expenses, in each case as is required by the California Labor Code.
 
The lawsuit seeks compensatory damages, statutory penalties and other relief, including liquidated damages, attorneys’ fees, costs and injunctive relief. At this time, we are not able to predict the outcome of this lawsuit, or any possible monetary exposure associated with the lawsuit. We believe, however, that the lawsuit is without merit and that the case should not be certified as a class or collective action, and we are vigorously defending these claims.
 
We are involved in the defense of various other legal proceedings that we do not believe are material to our consolidated financial statements.
 
PART II
 
Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Price Range of Common Stock.  Our common stock is traded on the NASDAQ Global Select Market under the symbol PETM. The following table indicates the intra-day quarterly high and low price per share of our common stock. These prices represent quotations among dealers without adjustments for retail mark-ups, markdowns or commissions, and may not represent actual transactions.
 
                 
    High   Low
 
Year Ended January 30, 2011
               
First Quarter ended May 2, 2010
  $ 34.89     $ 25.01  
Second Quarter ended August 1, 2010
  $ 34.93     $ 29.55  
Third Quarter ended October 31, 2010
  $ 37.74     $ 28.88  
Fourth Quarter ended January 30, 2011
  $ 41.20     $ 36.55  
Year Ended January 31, 2010
               
First Quarter ended May 3, 2009
  $ 24.08     $ 16.17  
Second Quarter ended August 2, 2009
  $ 23.70     $ 19.61  
Third Quarter ended November 1, 2009
  $ 26.85     $ 19.50  
Fourth Quarter ended January 31, 2010
  $ 27.50     $ 23.07  
 
Common Stock Dividends.  We believe our ability to generate cash allows us to invest in the growth of the business and, at the same time, distribute a quarterly dividend. Our credit facility and letter of credit facility permit us to pay dividends, as long as we are not in default and the payment of dividends would not result in default.


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In 2010, the following dividends were declared by the Board of Directors:
 
                         
    Dividend
       
    Amount per
  Stockholders of
   
Date Declared   Share   Record Date   Date Paid
 
March 23, 2010
  $ 0.10       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  
December 9, 2010
  $ 0.125       January 28, 2011       February 11, 2011  
 
In 2009, the following dividends were declared by the Board of Directors:
 
                         
    Dividend
       
    Amount per
  Stockholders of
   
Date Declared   Share   Record Date   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  
December 10, 2009
  $ 0.10       January 29, 2010       February 12, 2010  
 
On March 23, 2011, the Board of Directors declared a quarterly cash dividend of $0.125 per share payable on May 13, 2011 to stockholders of record on April 29, 2011.
 
Holders.  On March 11, 2011, there were 4,777 holders of record of our common stock.
 
Equity Compensation Plan Information.  Information regarding our equity compensation plans will be included in our proxy statement with respect to our Annual Meeting of Stockholders to be held on June 15, 2011 under the caption “Equity Compensation Plans” and is incorporated by reference in this Annual Report on Form 10-K.
 
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 2009, we purchased 5.9 million shares of our common stock for $140.0 million under the June 2009 share purchase program. 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 January 30, 2011, we purchased 2.6 million shares of common stock for $99.9 million. Since the inception of the $400.0 million authorization in June 2010, we have purchased 4.2 million shares of common stock for $156.2 million. As of January 30, 2011, $243.8 million remained available under the $400.0 million program.
 
The following table shows purchases of our common stock and the available funds to purchase additional common stock under this program for each period in the thirteen weeks ended January 30, 2011:
 
                                 
                Total
       
                Number
       
    Total
          of 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)  
 
November 1, 2010, to November 28, 2010
    349,938     $ 38.39       349,938     $ 330,267,000  
November 29, 2010, to January 2, 2011
    2,201,208     $ 39.29       2,201,208     $ 243,778,000  
January 3, 2011, to January 30, 2011
                    $ 243,778,000  
                                 
Thirteen Weeks Ended January 30, 2011
    2,551,146     $ 39.17       2,551,146     $ 243,778,000  


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Stock Performance Graph.  The following performance graph and related information shall not be deemed “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
 
The following graph shows a five-year comparison of the cumulative total return for our common stock, the S&P 500 Index, and the S&P Specialty Stores Index based on a $100 investment on January 29, 2006 in stock or on January 31, 2006 in the index. The comparison of the total cumulative return on investment includes reinvestment of dividends. Indices are calculated on a month-end basis.
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among PetSmart, Inc., The S&P 500 Index
And The S&P Specialty Stores Index
 
(PERFORMANCE GRAPH)
 
                                                 
    1/29/06   1/28/07   2/3/08   2/1/09   1/31/10   1/30/11
 
PetSmart, Inc. 
  $ 100.0     $ 121.08     $ 95.98     $ 75.56     $ 105.09     $ 166.16  
S & P 500
  $ 100.0     $ 114.51     $ 111.87     $ 68.66     $ 91.41     $ 111.69  
S & P Specialty Stores
  $ 100.0     $ 113.57     $ 86.67     $ 47.73     $ 77.85     $ 82.78  


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Item 6.   Selected Financial Data
 
The following selected financial data is derived from our consolidated financial statements. The data below should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto.
 
                                         
    As of and for the Year Ended(1)  
    January 30,
    January 31,
    February 1,
    February 3,
    January 28,
 
    2011     2010     2009     2008     2007  
    (In thousands, except per share amounts and operating data)  
 
Statement of Operations Data:
                                       
Net sales
  $ 5,693,797     $ 5,336,392     $ 5,065,293     $ 4,672,656     $ 4,233,857  
                                         
Gross profit
    1,654,531       1,519,217       1,495,433       1,436,821       1,307,770  
Operating, general and administrative expenses
    1,225,803       1,150,138       1,125,579       1,085,308       985,936  
                                         
Operating income
    428,728       369,079       369,854       351,513       321,834  
Gain on sale of equity investment
                      95,363        
Interest expense, net
    (58,837 )     (59,748 )     (58,757 )     (44,683 )     (31,717 )
                                         
Income before income tax expense and equity in income from Banfield
    369,891       309,331       311,097       402,193       290,117  
Income tax expense
    (140,396 )     (117,554 )     (121,019 )     (145,180 )     (105,048 )
Equity in income from Banfield
    10,372       6,548       2,592       1,671        
                                         
Net income
  $ 239,867     $ 198,325     $ 192,670     $ 258,684     $ 185,069  
                                         
Earnings Per Common Share Data:
                                       
Basic
  $ 2.05     $ 1.62     $ 1.55     $ 1.99     $ 1.36  
Diluted
  $ 2.01     $ 1.59     $ 1.52     $ 1.95     $ 1.33  
Dividends declared per common share
  $ 0.475     $ 0.33     $ 0.12     $ 0.12     $ 0.12  
Weighted average shares outstanding:
                                       
Basic
    116,799       122,363       124,342       129,851       135,836  
Diluted
    119,405       124,701       126,751       132,954       139,537  
Selected Operating Data:
                                       
Stores open at end of period
    1,187       1,149       1,112       1,008       908  
Square footage at end of period
    26,617,162       25,876,510       25,102,528       22,825,783       20,787,903  
Net sales per square foot(2)
  $ 214     $ 205     $ 208     $ 210     $ 208  
Net sales growth
    6.7 %     5.4 %     8.4 %     10.4 %     12.6 %
Increase in comparable store sales(3)
    4.8 %     1.6 %     3.8 %     2.4 %     5.0 %
Selected Balance Sheet Data:
                                       
Merchandise inventories
  $ 615,841     $ 563,389     $ 584,011     $ 501,212     $ 487,400  
Average inventory per store(4)
  $ 519     $ 490     $ 525     $ 497     $ 537  
Working capital
  $ 550,124     $ 501,381     $ 396,677     $ 214,404     $ 324,887  
Total assets
  $ 2,470,220     $ 2,461,986     $ 2,357,653     $ 2,167,257     $ 2,053,477  
Total debt(5)
  $ 566,829     $ 571,474     $ 585,993     $ 563,747     $ 449,001  
Total stockholders’ equity
  $ 1,170,642     $ 1,172,715     $ 1,144,136     $ 986,597     $ 1,000,894  
Current ratio
    1.96       1.89       1.83       1.31       1.63  
Long-term debt-to-equity
    45 %     46 %     48 %     52 %     43 %
Total debt-to-capital
    33 %     33 %     34 %     36 %     31 %
 
 
(1) The year ended February 3, 2008 consisted of 53 weeks while all other periods presented consisted of 52 weeks. As a result, all comparisons for the year ended February 3, 2008, other than comparable store sales, which was calculated on an equivalent 52 week basis, also reflect the impact of one additional week. The estimated impact


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of this additional week resulted in the following increases: net sales, $89.7 million; gross profit, $34.4 million; operating, general and administrative expenses, $18.3 million; income before income tax expense and equity in income from Banfield, $16.0 million; net income, $9.8 million; and diluted earnings per common share, $0.07.
 
(2) Net sales per square foot were calculated by dividing net sales, excluding catalog and e-commerce sales, by average square footage.
 
(3) Retail stores only, excludes catalog and e-commerce sales in all periods. For the year ended February 3, 2008, includes sales through week 52.
 
(4) Represents merchandise inventories divided by stores open at end of period.
 
(5) Represents borrowings under credit facility and capital lease obligations.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could materially differ from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, as well as in the sections entitled “Competition,” “Distribution” and “Government Regulation” included in Item 1 Part I and Risk Factors included in Item 1 Part 1A of this Annual Report on Form 10-K.
 
Overview
 
Based on our 2010 net sales of $5.7 billion, we are North America’s leading specialty provider of products, services and solutions for the lifetime needs of pets. As of January 30, 2011, we operated 1,187 stores, and we anticipate opening 45 to 50 net new stores in 2011. 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 January 30, 2011, we operated 180 PetsHotels, and we anticipate opening 8 to 10 PetsHotels in 2011.
 
We make full-service veterinary care available through our strategic relationship with certain third-party operators. As of January 30, 2011, full-service veterinary hospitals were in 768 of our stores. Banfield operated 757 of the veterinary hospitals. 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 recent changes in the macroeconomy. However, we believe we have a competitive advantage in our solutions for the Total Lifetime CareSM of pets, including pet services and proprietary brands, which we believe cannot be easily duplicated. Additionally, we believe that our cash flow from operations 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 for 2010 increased 26.4% to $2.01 on net income of $239.9 million compared to diluted earnings per common share of $1.59 on net income of $198.3 million in 2009.
 
  •  Net sales increased 6.7% to $5.7 billion in 2010 compared to $5.3 billion in 2009 due to new store openings and an increase in comparable store sales, or sales in stores open at least one year.
 
  •  Comparable store sales, or sales in stores open at least one year, increased 4.8% during 2010 compared to a 1.6% increase during 2009. The increase in sales was partially impacted by $24.6 million in favorable


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  foreign currency fluctuations in 2010, compared to $(8.3) million in unfavorable foreign currency fluctuations in 2009.
 
  •  Services sales increased 7.5% to $618.8 million, or 10.9% of net sales, for 2010 compared to $575.4 million, or 10.8% of net sales, during 2009.
 
  •  As of January 30, 2011, we had $353.4 million in cash, cash equivalents and restricted cash. We had no short-term debt, and did not borrow against the revolving credit facility during 2010.
 
  •  We purchased 7.6 million and 7.1 million shares of our common stock for $263.3 million and $165.0 million during 2010 and 2009, respectively.
 
  •  We added 38 net new stores during 2010 and operated 1,187 stores as of the end of the year.
 
Critical Accounting Policies and Estimates
 
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates for inventory valuation reserves, asset impairments, reserve for closed stores, insurance liabilities and reserves, and reserves against deferred tax assets and uncertain tax positions. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Under different assumptions or conditions, actual results may differ from these estimates. We believe the following critical accounting policies reflect the more significant judgments and estimates we use in preparing our consolidated financial statements.
 
Inventory Valuation Reserves
 
We have established reserves for estimated inventory shrinkage between physical inventories. Distribution centers perform cycle counts encompassing all inventory items at least once every quarter. Stores generally perform physical inventories at least once a year. Between the physical inventories, stores perform counts on certain inventory items. For each reporting period presented, we estimate the inventory shrinkage based on a two-year historical trend analysis. Changes in shrink results or market conditions could cause actual results to vary from estimates used to establish the inventory reserves.
 
We also have reserves for estimated obsolescence and to reduce merchandise inventory to the lower of cost or market. We evaluate inventories for excess, obsolescence or other factors that may render inventories unmarketable at their historical cost. Factors included in determining obsolescence reserves include current and anticipated demand, customer preferences, age of merchandise, seasonal trends and decisions to discontinue certain products. If assumptions about future demand change, or actual market conditions are less favorable than those projected by management, we may require additional reserves.
 
We have not made any significant changes in the accounting methodology we use to establish our inventory valuation reserves during the past three fiscal years. We do not presently believe there is a reasonable likelihood of a material change in the accounting methodology and assumed factors used to create the estimates we use to calculate our inventory valuation reserves.
 
As of January 30, 2011, and January 31, 2010, we had inventory valuation reserves of $10.0 million and $16.4 million, respectively. Additionally, we believe that a 10% change in our inventory valuation reserves would not be material to our consolidated financial statements.
 
Asset Impairments
 
We review long-lived assets for impairment on a quarterly basis and whenever events or changes in circumstances indicate that the book value of such assets may not be recoverable.


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We have not made any significant changes in our impairment loss assessment methodology during the past three fiscal years. We do not presently believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. There were no material asset impairments identified during 2010, 2009 or 2008.
 
Reserve for Closed Stores
 
We continuously evaluate the performance of our stores and periodically close those that are under-performing. Closed stores are generally replaced by a new store in a nearby location. We establish reserves for future occupancy payments on closed stores in the period the store is closed. These costs are classified in operating, general and administrative expenses in the Consolidated Statements of Income and Comprehensive Income. As of January 30, 2011, and January 31, 2010, our reserve for closed stores was $9.8 million and $8.2 million, respectively. We do not presently believe there is a reasonable likelihood of a material change in the future estimates or assumptions that we use to determine our reserve for closed stores, including cash flow projections and sublease assumptions. In any event, a 10% change in our reserve for closed stores would not be material to our consolidated financial statements.
 
Insurance Liabilities and Reserves
 
We maintain workers’ compensation, general liability, product liability and property insurance, on all our operations, properties and leasehold interests. We utilize high deductible plans for each of these areas including a self insured health plan for our eligible associates. Workers’ compensation deductibles generally carry a $1.0 million per occurrence risk of claim liability. Our general liability plan specifies a $0.5 million per occurrence risk of claim liability. We establish reserves for claims under workers’ compensation and general liability plans based on periodic actuarial estimates of the amount of loss for all pending claims, including estimates for which claims have been incurred but not reported. Our loss estimates rely on actuarial observations of ultimate loss experience for similar historical events and changes in such assumptions could result in an adjustment, favorable or adverse, to our reserves. As of January 30, 2011, and January 31, 2010, we had approximately $99.9 million and $95.4 million, respectively, in reserves related to workers’ compensation, general liability and self-insured health plans.
 
We have not made any material changes in the accounting methodology we use to establish our insurance reserves during the past three years. We do not presently believe there is a reasonable likelihood of a material change in the estimates or assumptions that we use to calculate our insurance reserves, including factors such as historical claims experience, demographic factors, severity factors and other valuations. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10% change in our insurance reserves would have affected net income by approximately $6.2 million in 2010.
 
Reserves Against Deferred Tax Assets and Uncertain Tax Positions
 
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. Valuation allowances at January 30, 2011, and January 31, 2010, were principally to offset certain deferred income tax assets for net operating and capital loss carryforwards.
 
We operate in multiple tax jurisdictions and could be subject to audit in any of these jurisdictions. These audits can involve complex issues that may require an extended period of time to resolve and may cover multiple years. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given fiscal period could be materially affected. An unfavorable tax settlement would require use of our cash and could result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement could result in a reduction in our effective income tax rate in the period of resolution.
 
Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material.


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Results of Operations
 
The following table presents the percent to net sales of certain items included in our Consolidated Statements of Income and Comprehensive Income:
 
                         
    Year Ended  
    January 30,
    January 31,
    February 1,
 
    2011     2010     2009  
 
Statement of Operations Data:
                       
Net sales
    100.0 %     100.0 %     100.0 %
Cost of sales
    70.9       71.5       70.5  
                         
Gross profit
    29.1       28.5       29.5  
Operating, general and administrative expenses
    21.5       21.6       22.2  
                         
Operating income
    7.5       6.9       7.3  
Interest expense, net
    (1.0 )     (1.1 )     (1.2 )
                         
Income before income tax expense and equity in income from Banfield
    6.5       5.8       6.1  
Income tax expense
    (2.5 )     (2.2 )     (2.4 )
Equity in income from Banfield
    0.2       0.1       0.1  
                         
Net income
    4.2 %     3.7 %     3.8 %
                         
 
2010 compared to 2009
 
Net Sales
 
Net sales increased $0.4 billion, or 6.7%, to $5.7 billion in 2010, compared to net sales of $5.3 billion in 2009. The increase in net sales was partially impacted by $24.6 million in favorable foreign currency fluctuations during 2010. Approximately 20% of the sales increase is due to the addition of 38 net new stores and 18 new PetsHotels since January 31, 2010, and 70% of the increase is due to a 4.8% increase in comparable store sales for 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 210 basis points of the comparable store sales growth in 2010, compared to a 30 basis point decline in 2009. An increase in the average sales per transaction represented 270 basis points of the comparable store sales growth in 2010, compared to 190 basis points in 2009.
 
Services sales, which include grooming, training, boarding and day camp, increased 7.5%, or $43.4 million, to $618.8 million for 2010, compared to $575.4 million for 2009. Services sales represented 10.9% and 10.8% of net sales for 2010 and 2009, respectively. The increase in services sales is primarily due to continued strong demand for our grooming services, and the addition of 38 net new stores and 18 new PetsHotels since 2009.
 
Gross Profit
 
Gross profit increased 60 basis points to 29.1% of net sales for 2010, from 28.5% for 2009.
 
Overall merchandise margin increased 30 basis points due to the sales of a higher margin mix of products within the product categories. Our hardgoods sales outpaced the sales growth of our consumables category during 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. 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. Consumables merchandise sales, which include pet food, treats, and litter, generate lower gross margins on average compared to hardgoods merchandise.


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Services negatively contributed to gross margin by 10 basis points. 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. Store occupancy costs included in gross margin provided 40 basis points of improvement due to leverage 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 15 basis points due to leverage associated with the increase in net sales.
 
Recognizing reimbursements from Banfield as other revenue negatively impacted gross margin by 15 basis points. 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.
 
Operating, General and Administrative Expenses
 
Operating, general and administrative expenses decreased to 21.5% of net sales from 21.6% of net sales for 2010 and 2009, respectively. Operating, general and administrative expenses increased on a dollar basis by $75.7 million. The primary reasons for the year over year increase include increases in costs for incentive compensation associated with better than expected financial results, increased advertising costs, 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, decreased to $59.6 million for 2010, compared to $60.3 million for 2009. Included in interest expense, net was interest income of $0.8 million and $0.6 million for 2010 and 2009, respectively.
 
Income Tax Expense
 
For 2010, income tax expense was $140.4 million, compared with 2009 income tax expense of $117.6 million. The effective tax rate was 38.0% for both years. 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 Banfield, by income before income tax expense and equity in income from Banfield.
 
Equity in Income from Banfield
 
Our equity in income from our investment in Banfield was $10.4 million and $6.5 million for 2010 and 2009, respectively, based on our ownership percentage in Banfield.
 
2009 compared to 2008
 
Net Sales
 
Net sales increased $0.2 billion, or 5.4%, to $5.3 billion in 2009, compared to net sales of $5.1 billion in 2008. The increase in net sales was partially impacted by $8.3 million in unfavorable foreign currency fluctuations during 2009. Approximately 70% of the sales increase is due to the addition of 37 net new stores and 20 new PetsHotels since February 1, 2009, and 30% of the increase is due to a 1.6% increase in comparable store sales for 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 a 30 basis point decline of the comparable store sales growth in 2009, compared to 200 basis point decline in 2008. An increase in the average sales per transaction represented 190 basis points of the comparable store sales growth in 2009, compared to 580 basis points in 2008.


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Services sales, which are included in the net sales amount discussed above and include grooming, training, boarding and day camp, increased 9.2%, or $48.7 million, to $575.4 million for 2009, compared to $526.7 million for 2008. Services sales represented 10.8% and 10.4% of net sales for 2009 and 2008, respectively. The increase in services sales is primarily due to the demand for our grooming services, and the addition of 37 net new stores and 20 new PetsHotels since 2008.
 
Gross Profit
 
Gross profit decreased to 28.5% of net sales for 2009, from 29.5% for 2008, representing a decrease of 100 basis points.
 
Overall merchandise margin decreased 150 basis points. Merchandise product margin decreased 115 basis points, with mix representing 52% and rate representing 48% of the decline. The mix shift is due to an increase in consumables merchandise sales 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 include pet food, treats, and litter, generate lower gross margins on average 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 margins related to the flow through of previously capitalized inbound freight, as well as certain procurement and distribution costs, decreased 35 basis points.
 
Services margin increased 10 basis points primarily due to the demand for our grooming services, and the addition of 20 new PetsHotels since 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 15 basis points primarily due to the addition of new stores and new store growth outpacing the rate of sales growth.
 
Supply chain costs decreased 50 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 21.6% and 22.2% of net sales for 2009 and 2008, respectively, representing an improvement of 60 basis points.
 
The primary reasons for the decrease in operating, general and administrative expenses as a percentage of net sales during 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, 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 $60.3 million for 2009, compared to $59.3 million for 2008. Included in interest expense, net was interest income of $0.6 million for both 2009 and 2008.
 
Income Tax Expense
 
In 2009, the $117.6 million income tax expense represents an effective tax rate of 38.0%, compared with 2008 income tax expense of $121.0 million, which represented an effective tax rate of 38.9%. The decrease in the effective tax rate was primarily due to tax exempt gains from invested assets to fund our deferred compensation plan. The effective tax rate is calculated by dividing our income tax expense, which includes the income tax expense


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related to our equity in income from Banfield, by income before income tax expense and equity in income from Banfield.
 
Equity in Income from Banfield
 
Our equity in income from our investment in Banfield was $6.5 million and $2.6 million for 2009 and 2008, respectively, based on our ownership percentage in Banfield’s net income.
 
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 our common 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 $457.6 million for 2010, $566.9 million for 2009 and $420.7 million for 2008. The primary differences between 2010 and 2009 were increased purchases of merchandise inventories and income tax payments. Income tax payments were greater in 2010 as a result of increased earnings and due to the benefit provided in 2009 by the prepaid tax position at the end of 2008. The primary differences between 2009 and 2008 were lower levels of merchandise inventories and prepaid assets and an increase in other current liabilities, offset by an increase in deferred income taxes. Included in 2008 were $27.1 million of tax benefits from the Economic Stimulus Act of 2008, which provided for an accelerated depreciation deduction for certain qualifying property.
 
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 $147.9 million for 2010, $157.2 million for 2009 and $235.2 million for 2008. The primary differences between 2010 and 2009 resulted from an increase in restricted cash during 2009, an increase in cash paid for property and equipment in 2010 and our investment in short-term available for sale securities during 2010. The primary differences between 2009 and 2008 were a decrease in cash paid for property and equipment as a result of the slowdown in store openings, and an increase in restricted cash.
 
Net cash used in financing activities was $328.1 million for 2010, $229.4 million for 2009 and $113.8 million for 2008. The net cash used in 2010 consisted primarily of the purchase of treasury stock, payments on capital lease obligations, and payments of cash dividends offset by net proceeds from common stock issued under equity incentive plans. The primary difference between 2010 and 2009 was an increase in cash paid for treasury stock. The primary differences between 2009 and 2008 were increased purchases of treasury stock and no short-term debt borrowings.
 
Free Cash Flow
 
Free cash flow is considered a non-GAAP financial measure under the SEC’s rules. Management believes, however, that free cash flow is an important financial measure for use in evaluating our financial performance, or our ability to generate future cash from our business operations. Free cash flow should be considered in addition to, rather than as a substitute for, net income as a measure of our performance and net cash provided by operating activities as a measure of our liquidity.


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Although other companies report free cash flow, numerous methods exist for calculating free cash flow. As a result, the method used by our management to calculate free cash flow may differ from the methods other companies use to calculate free cash flow. We urge you to understand the methods used by another company to calculate free cash flow before comparing our free cash flow to that of another company.
 
We define free cash flow as net cash provided by operating activities minus cash paid for property and equipment, and payments of capital lease obligations. We generated free cash flow of $280.9 million, $415.6 million, and $148.7 million for 2010, 2009, and 2008, respectively. For the year ended January 30, 2011, our free cash flow decreased primarily due to increases in merchandise inventory balances, income tax payments, capital spending and capital lease payments during 2010. For the year ended January 31, 2010, our free cash flow increased primarily due to a decrease in capital spending as a result of the slowdown in store openings.
 
The following table reconciles net cash provided by operating activities, a GAAP measure, to free cash flow, a non-GAAP measure (in thousands).
 
                         
    Year Ended  
    January 30,
    January 31,
    February 1,
 
    2011     2010     2009  
 
Net cash provided by operating activities
  $ 457,645     $ 566,943     $ 420,700  
Cash paid for property and equipment
    (125,074 )     (112,920 )     (238,188 )
Payments of capital lease obligations
    (51,668 )     (38,439 )     (33,853 )
                         
Free cash flow
  $ 280,903     $ 415,584     $ 148,659  
                         
 
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. We purchased 7.0 million shares for $225.0 million during 2007. We purchased 2.3 million shares of our common stock for $50.0 million during 2008, and 1.2 million shares of 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 share purchase program authorizing the purchase of up to $350.0 million of our common stock through January 29, 2012. During 2009, we purchased 5.9 million shares of our common stock for $140.0 million under the June 2009 share purchase program. 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 replaced the $350.0 million program with a new share purchase program authorizing the purchase of up to $400.0 million of our common stock through January 29, 2012. During the thirteen weeks ended January 30, 2011, we purchased 2.6 million shares of common stock for $99.9 million. Since the inception of the $400.0 million authorization in June 2010, we have purchased 4.2 million shares of common stock for $156.2 million. As of January 30, 2011, $243.8 million remained available under the $400.0 million program.
 
Common Stock Dividends
 
We presently believe our ability to generate cash allows us to invest in the growth of the business and, at the same time, distribute a quarterly dividend. Our credit facility and letter of credit facility permit us to pay dividends, so long as we are not in default and the payment of dividends would not result in default. During 2010, 2009, and 2008, we paid aggregate dividends of $0.45 per share, $0.26 per share, and $0.12 per share, respectively.
 
Operating Capital and Capital Expenditure Requirements
 
Substantially all our stores are leased facilities. We opened 46 new stores and closed 8 stores in 2010. Generally, each new store requires capital expenditures of approximately $1.0 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 approximately $130.0 to $140.0 million for 2011, based on our plan to


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open 45 to 50 net new stores and 8 to 10 new 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 for each of the past three years (in thousands):
 
                         
    Year Ended  
    January 30,
    January 31,
    February 1,
 
    2011     2010     2009  
 
Capital Expenditures:
                       
New stores
  $ 38,715     $ 28,470     $ 83,124  
Store-related projects(1)
    49,989       48,051       51,908  
PetsHotel(2)
    9,980       6,510       43,098  
Information technology
    20,222       20,297       27,464  
Supply chain
    5,484       8,851       20,480  
Other(3)
    684       741       12,114  
                         
Total capital expenditures
  $ 125,074     $ 112,920     $ 238,188  
                         
 
 
(1) Includes store remodels, grooming salon expansions, equipment replacements, relocations, and various merchandising projects.
 
(2) For new and existing stores.
 
(3) Includes corporate office related expenses, including costs related to the expansion and renovation of our corporate offices during 2008.
 
Lease and Other Commitments
 
Operating and Capital Lease Commitments and Other Obligations
 
The following table summarizes our contractual obligations, net of estimated sublease income, and includes obligations for executed agreements for which we do not yet have the right to control the use of the property at January 30, 2011, and the effect that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
 
                                                 
          2012 &
    2014 &
    2016 and
             
Contractual Obligation   2011     2013     2015     Beyond     Other     Total  
 
Operating lease obligations(1)
  $ 307,177     $ 580,861     $ 466,353     $ 542,175     $     $ 1,896,566  
Capital lease obligations(1)(2)
    99,888       218,477       203,087       337,847             859,299  
Purchase obligations(3)
    58,666       41,000       25,000                   124,666  
Uncertain tax positions(4)
                            16,735       16,735  
Insurance obligations(5)
    30,118                         69,811       99,929  
                                                 
Total
  $ 495,849     $ 840,338     $ 694,440     $ 880,022     $ 86,546     $ 2,997,195  
Less: Sublease income
    4,196       6,220       5,466       3,077             18,959  
                                                 
Net Total
  $ 491,653     $ 834,118     $ 688,974     $ 876,945     $ 86,546     $ 2,978,236  
                                                 
 
 
(1) In addition to the commitments scheduled above, we have executed operating and capital lease agreements with total minimum lease payments of $82.1 million. The typical lease term for these agreements is 10 years. We do not have the right to control the use of the property under these leases as of January 30, 2011 because we have not taken physical possession of the property.


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(2) Includes $292.5 million in interest.
 
(3) Represents purchase obligations for product and advertising commitments.
 
(4) Approximately $16.7 million of unrecognized tax benefits, as shown in “Other,” have been recorded as liabilities, and we are uncertain as to if or when such amounts may be settled.
 
(5) Approximately $69.8 million of insurance obligations, as shown in “Other” have been classified as noncurrent liabilities. We are unable to estimate the specific year to which the obligations will relate beyond 2011.
 
Letters of Credit
 
We issue letters of credit for guarantees provided for insurance programs. As of January 30, 2011, $93.0 million was outstanding under our letters of credit.
 
Off-Balance Sheet Arrangements
 
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.
 
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 757 of our stores. We use the equity method of accounting for our investment in Banfield, which consists of common and convertible preferred stock. As of January 30, 2011 and January 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, was $10.4 million, $6.5 million and $2.6 million for 2010, 2009, and 2008, 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 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, utilities and other cost reimbursements of $34.2 million, $33.2 million, and $30.1 million during 2010, 2009, and 2008, respectively. Receivables from Banfield totaled $2.7 million and $2.4 million at January 30, 2011, and January 31, 2010, respectively, and were included in the receivables in the accompanying Consolidated Balance Sheets.
 
The master operating agreement also includes a provision for the sharing of profits on the sales of therapeutic pet foods sold in all stores with a hospital operated by Banfield. The net sales and gross profits on the sale of therapeutic pet foods are not material to our consolidated financial statements.
 
Credit Facility
 
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 January 30, 2011, we had no borrowings and $31.6 million in stand-by letter of


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credit issuances under our Revolving Credit Facility. As of January 31, 2010, we had no borrowings and $35.7 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 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 January 30, 2011, we had $61.4 million in outstanding letters of credit under the Stand-alone Letter of Credit Facility and $61.4 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.
 
We issue letters of credit for guarantees provided for insurance programs.
 
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 or Stand-alone Letter of Credit Facility. As of January 30, 2011, 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.
 
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 consolidated financial statements in the short term. The longer term potential impacts of the Acts to our business and the consolidated financial statements are currently uncertain. We will continue to assess the impact of the Acts on our health care plans.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
We are subject to certain market risks arising from transactions in the normal course of our business. Such risk is principally associated with foreign exchange fluctuations.


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Foreign Currency Risk
 
Our Canadian subsidiary operates 69 stores and uses the Canadian dollar as the functional currency and the United States dollar as the reporting currency. We have certain exposures to foreign currency risk. Net sales in Canada, denominated in United States dollars, were $296.7 million, or 5.2%, of our consolidated net sales for 2010. Transaction gains and losses denominated in the United States dollar are recorded in cost of sales or operating, general and administrative expenses in the Consolidated Statements of Income and Comprehensive Income depending on the nature of the underlying transaction.
 
The transaction (gain)/loss included in net income was $(0.7) million, $(1.3) million and $3.4 million for 2010, 2009 and 2008, respectively.
 
From time to time we enter into foreign currency forward contracts, or “Foreign Exchange Contracts,” as a way to manage the impact of foreign currency exchange rate fluctuations related to certain balance sheet accounts, primarily to mitigate risk related to non-functional currency exposures. These Foreign Exchange Contracts are not designated as hedges, and therefore, are recorded at fair value through earnings using quoted prices for similar assets or liabilities in active markets. The loss included in net income was $0.4 million for 2010. We did not enter into Foreign Exchange Contracts during 2009 or 2008.
 
Item 8.   Financial Statements and Supplementary Data
 
The information required by this Item is attached as Appendix F.
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.   Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate, to allow timely decisions regarding required disclosure.
 
As required by Rule 13a-15(b) under the Exchange Act, our management conducted an evaluation (under the supervision and with the participation of our CEO and our CFO) as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. In performing this evaluation, our CEO and CFO concluded that, as of January 30, 2011, our disclosure controls and procedures were designed to meet the objective at the reasonable assurance level and were effective at the reasonable assurance level.
 
Management’s Report on Internal Control Over Financial Reporting
 
We are responsible for the preparation and integrity of the consolidated financial statements appearing in our Annual Report on Form 10-K. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and, accordingly, include certain amounts based on our best judgments and estimates. Financial information in this Annual Report on Form 10-K is consistent with that in the consolidated financial statements.
 
We are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) under the Exchange Act. Our internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements. Our internal control over financial reporting is supported by a program of internal audits and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel and a written Code of Business Conduct adopted by our Board of Directors, applicable to all our


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Directors, officers, employees and subsidiaries. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
We assessed the effectiveness of our internal control over financial reporting as of January 30, 2011. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, we maintained effective internal control over financial reporting as of January 30, 2011.
 
The effectiveness of our internal control over financial reporting as of January 30, 2011, has been audited by Deloitte & Touche, LLP, an independent registered accounting firm, as stated in their attestation report, which is included herein.
 
Changes in Internal Control Over Financial Reporting
 
There was no change in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act during the thirteen weeks ended January 30, 2011, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
PetSmart, Inc.
Phoenix, Arizona
 
We have audited the internal control over financial reporting of PetSmart, Inc. and subsidiaries (the “Company”) as of January 30, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 30, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended January 30, 2011 of the Company and our reports dated March 24, 2011 expressed unqualified opinions on those financial statements and the financial statement schedule.
 
/s/ DELOITTE & TOUCHE LLP
 
Phoenix, Arizona
March 24, 2011


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Item 9B.   Other Information
 
None
 
PART III
 
Item 10.   Directors, Executive Officers and Corporate Governance
 
The required information concerning our executive officers is contained in Item 1, Part I of this Annual Report on Form 10-K.
 
The remaining information required by this item is incorporated by reference from the information under the captions “Corporate Governance and the Board of Directors,” “Audit Committee,” “Report of the Audit Committee of the Board of Directors,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our proxy statement for our Annual Meeting of Stockholders to be held on June 15, 2011.
 
Our associates must act ethically at all times and in accordance with the policies in PetSmart’s Code of Business Ethics and Policies. We require full compliance with this policy and all designated associates including our CEO, CFO and other individuals performing similar positions, to sign a certificate acknowledging that they have read, understand and will continue to comply with the policy. We publish the policy and any amendments or waivers to the policy in the Corporate Governance section of our Internet Website located at www.petm.com.
 
Item 11.   Executive Compensation
 
The information required by this item is incorporated by reference from the information under the captions “Compensation Discussion and Analysis,” “Executive Compensation,” “Stock Award Grants,” “Exercises and Plans,” “Employment and Severance Agreements,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Report of the Compensation Committee of the Board of Directors” in our proxy statement.
 
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The information required by this item is incorporated by reference from the information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plans” in our proxy statement.
 
Item 13.   Certain Relationships and Related Transactions, and Director Independence
 
The information required by this item is incorporated by reference from the information under the captions “Certain Relationships and Transactions” and “Corporate Governance and the Board of Directors Independence” in our proxy statement.
 
Item 14.   Principal Accounting Fees and Services
 
The information required by this item is incorporated by reference from the information under caption “Fees to Independent Registered Public Accounting Firm for Fiscal Years 2011 and 2010” in our proxy statement.
 
PART IV
 
Item 15.   Exhibits, Financial Statement Schedule
 
(a) The following documents are filed as part of this Annual Report on Form 10-K.
 
1. Consolidated Financial Statements:  Our consolidated financial statements are included as Appendix F of this Annual Report. See Index to Consolidated Financial Statements and Financial Statement Schedule on page F-1.


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2. Consolidated Financial Statement Schedule:  The financial statement schedule required under the related instructions is included within Appendix F of this Annual Report. See Index to Consolidated Financial Statements and Financial Statement Schedule on page F-1.
 
3. Exhibits:  The exhibits which are filed with this Annual Report or which are incorporated herein by reference are set forth in the Exhibit Index on page E-1.


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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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, on March 24, 2011.
 
PetSmart, Inc.
 
  By: 
/s/  Robert F. Moran
Robert F. Moran
President, Chief Executive Officer and Director
 
POWER OF ATTORNEY
 
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert F. Moran and Lawrence P. Molloy, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
             
Signature   Title   Date
 
         
/s/  PHILIP L. FRANCIS

Philip L. Francis
  Executive Chairman   March 24, 2011
         
/s/  ROBERT F. MORAN

Robert F. Moran
  President, Chief Executive Officer and Director (Principal Executive Officer)   March 24, 2011
         
/s/  LAWRENCE P. MOLLOY

Lawrence P. Molloy
  Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)   March 24, 2011
         
/s/  ANGEL CABRERA

Angel Cabrera
  Director   March 24, 2011
         
/s/  LAWRENCE A. DEL SANTO

Lawrence A. Del Santo
  Director   March 24, 2011
         
/s/  RITA V. FOLEY

Rita V. Foley
  Director   March 24, 2011
         
/s/  RAKESH GANGWAL

Rakesh Gangwal
  Director   March 24, 2011


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Signature   Title   Date
 
         
/s/  JOSEPH S. HARDIN, JR.

Joseph S. Hardin, Jr.
  Director   March 24, 2011
         
/s/  GREGORY P. JOSEFOWICZ

Gregory P. Josefowicz
  Director   March 24, 2011
         
/s/  AMIN I. KHALIFA

Amin I. Khalifa
  Director   March 24, 2011
         
/s/  RICHARD K. LOCHRIDGE

Richard K. Lochridge
  Director   March 24, 2011
         
/s/  BARBARA A. MUNDER

Barbara A. Munder
  Director   March 24, 2011
         
/s/  THOMAS G. STEMBERG

Thomas G. Stemberg
  Director   March 24, 2011


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APPENDIX F
 
PetSmart, Inc. and Subsidiaries
 
Index to Consolidated Financial Statements and
Financial Statement Schedule
 
 
         
    Page  
 
    F-2  
    F-3  
    F-4  
    F-5  
    F-6  
    F-7  
    A-1  
    A-2  


F-1


Table of Contents

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
PetSmart, Inc.
Phoenix, Arizona
 
We have audited the accompanying consolidated balance sheets of PetSmart, Inc. and subsidiaries (the “Company”) as of January 30, 2011 and January 31, 2010, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended January 30, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PetSmart, Inc. and subsidiaries as of January 30, 2011 and January 31, 2010, and the results of their operations and their cash flows for each of the three years in the period ended January 30, 2011, in conformity with accounting principles generally accepted in the United States of America.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 30, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 24, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
 
/s/  DELOITTE & TOUCHE LLP
 
Phoenix, Arizona
March 24, 2011


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PetSmart, Inc. and Subsidiaries
 
Consolidated Balance Sheets
(In thousands, except par value)
 
                 
    January 30,
    January 31,
 
    2011     2010  
 
ASSETS
Cash and cash equivalents
  $ 291,949     $ 308,360  
Short-term investments
    9,708        
Restricted cash
    61,439       48,172  
Receivables, net
    53,971       52,232  
Merchandise inventories
    615,841       563,389  
Deferred income taxes
    44,999       36,805  
Prepaid expenses and other current assets
    46,022       57,652  
                 
Total current assets
    1,123,929       1,066,610  
Property and equipment, net
    1,132,435       1,201,857  
Equity investment in Banfield
    42,858       32,486  
Deferred income taxes
    96,215       94,901  
Goodwill
    44,111       42,200  
Other noncurrent assets
    30,672       23,932  
                 
Total assets
  $ 2,470,220     $ 2,461,986  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and bank overdraft
  $ 168,776     $ 212,121  
Accrued payroll, bonus and employee benefits
    139,359       105,162  
Accrued occupancy expenses and deferred rents
    64,328       63,142  
Current maturities of capital lease obligations
    45,277       37,839  
Other current liabilities
    156,065       146,965  
                 
Total current liabilities
    573,805       565,229  
Capital lease obligations
    521,552       533,635  
Deferred rents
    86,027       91,030  
Other noncurrent liabilities
    118,194       99,377  
                 
Total liabilities
    1,299,578       1,289,271  
                 
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, 162,586 and 160,311 shares issued
    16       16  
Additional paid-in capital
    1,222,340       1,148,228  
Retained earnings
    1,277,803       1,093,708  
Accumulated other comprehensive income
    5,380       2,369  
Less: Treasury stock, at cost, 47,094 and 39,517 shares
    (1,334,897 )     (1,071,606 )
                 
Total stockholders’ equity
    1,170,642       1,172,715  
                 
Total liabilities and stockholders’ equity
  $ 2,470,220     $ 2,461,986  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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PetSmart, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share data)
 
                         
    Year Ended  
    January 30,
    January 31,
    February 1,
 
    2011     2010     2009  
 
Merchandise sales
  $ 5,040,807     $ 4,761,039     $ 4,538,563  
Services sales
    618,755       575,353       526,730  
Other revenue
    34,235              
                         
Net sales
    5,693,797       5,336,392       5,065,293  
Cost of merchandise sales
    3,554,387       3,402,021       3,184,819  
Cost of services sales
    450,644       415,154       385,041  
Cost of other revenue
    34,235              
                         
Total cost of sales
    4,039,266       3,817,175       3,569,860  
                         
Gross profit
    1,654,531       1,519,217       1,495,433  
Operating, general and administrative expenses
    1,225,803       1,150,138       1,125,579  
                         
Operating income
    428,728       369,079       369,854  
Interest expense, net
    (58,837 )     (59,748 )     (58,757 )
                         
Income before income tax expense and equity in income from Banfield
    369,891       309,331       311,097  
Income tax expense
    (140,396 )     (117,554 )     (121,019 )
Equity in income from Banfield
    10,372       6,548       2,592  
                         
Net income
    239,867       198,325       192,670  
Other comprehensive income (loss), net of income tax:
                       
Foreign currency translation adjustments
    3,011       5,083       (8,299 )
                         
Comprehensive income
  $ 242,878     $ 203,408     $ 184,371  
                         
Earnings per common share:
                       
Basic
  $ 2.05     $ 1.62     $ 1.55  
                         
Diluted
  $ 2.01     $ 1.59     $ 1.52  
                         
Weighted average shares outstanding:
                       
Basic
    116,799       122,363       124,342  
                         
Diluted
    119,405       124,701       126,751  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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PetSmart, Inc. and Subsidiaries
 
Consolidated Statements of Stockholders’ Equity
(In thousands, except per share data)
 
                                                                 
                                  Accumulated
             
                                  Other
             
    Shares           Additional
          Comprehensive
             
    Common
    Treasury
    Common
    Paid-In
    Retained
    (Loss)
    Treasury
       
    Stock     Stock     Stock     Capital     Earnings     Income     Stock     Total  
 
BALANCE AT FEBRUARY 3, 2008
    158,104       (30,066 )   $ 16     $ 1,079,190     $ 758,674     $ 5,585     $ (856,868 )   $ 986,597  
Stock options and employee stock purchase plan compensation cost
                            10,074                               10,074  
Net tax benefits from tax deductions in excess of the compensation cost recognized
                            1,980                               1,980  
Issuance of common stock under stock incentive plans
    1,109               1       14,108                               14,109  
Issuance of restricted stock and compensation cost, net of award reacquisitions and adjustments
    557               (1 )     12,205                               12,204  
Dividends declared ($0.12 per share)
                                    (15,244 )                     (15,244 )
Other comprehensive income, net of income tax:
                                                               
Foreign currency translation adjustments
                                            (8,299 )             (8,299 )
Purchase of treasury stock, at cost
            (2,342 )                                     (49,955 )     (49,955 )
Net income
                                    192,670                       192,670  
                                                                 
BALANCE AT FEBRUARY 1, 2009
    159,770       (32,408 )     16       1,117,557       936,100       (2,714 )     (906,823 )     1,144,136  
Stock options compensation cost
                            8,263                               8,263  
Net tax benefits from tax deductions in excess of the compensation cost recognized
                            (1,062 )                             (1,062 )
Issuance of common stock under stock incentive plans
    914               1       11,848                               11,849  
Issuance of restricted stock and compensation cost, net of award reacquisitions and adjustments
    (373 )             (1 )     8,253                               8,252  
Issuance of performance shares and compensation cost, net of award reacquisitions and adjustments
                            3,369                               3,369  
Dividends declared ($0.33 per share)
                                    (40,717 )                     (40,717 )
Other comprehensive income, net of income tax:
                                                               
Foreign currency translation adjustments
                                            5,083               5,083  
Purchase of treasury stock, at cost
            (7,109 )                                     (164,783 )     (164,783 )
Net income
                                    198,325                       198,325  
                                                                 
BALANCE AT JANUARY 31, 2010
    160,311       (39,517 )     16       1,148,228       1,093,708       2,369       (1,071,606 )     1,172,715  
Stock options compensation cost
                            9,668                               9,668  
Net tax benefits from tax deductions in excess of the compensation cost recognized
                            8,436                               8,436  
Issuance of common stock under stock incentive plans
    2,570               1       47,217                               47,218  
Issuance of restricted stock and compensation cost, net of award reacquisitions and adjustments
    (296 )             (1 )     1,093                               1,092  
Issuance of performance shares and compensation cost, net of award reacquisitions and adjustments
    1                       7,698                               7,698  
Dividends declared ($0.475 per share)
                                    (55,772 )                     (55,772 )
Other comprehensive income, net of income tax:
                                                               
Foreign currency translation adjustments
                                            3,011               3,011  
Purchase of treasury stock, at cost
            (7,577 )                                     (263,291 )     (263,291 )
Net income
                                    239,867                       239,867  
                                                                 
BALANCE AT JANUARY 30, 2011
    162,586       (47,094 )   $ 16     $ 1,222,340     $ 1,277,803     $ 5,380     $ (1,334,897 )   $ 1,170,642  
                                                                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents

 
PetSmart, Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows
(In thousands)
 
                         
    Year Ended  
    January 30,
    January 31,
    February 1,
 
    2011     2010     2009  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net income
  $ 239,867     $ 198,325     $ 192,670  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    235,926       236,538       225,054  
Loss on disposal of property and equipment
    7,220       7,013       5,589  
Stock-based compensation expense
    23,928       24,792       24,301  
Deferred income taxes
    (11,325 )     (13,572 )     33,957  
Equity in income from Banfield
    (10,372 )     (6,548 )     (2,592 )
Tax benefits from tax deductions in excess of the compensation cost recognized
    (8,539 )     (2,901 )     (3,215 )
Non-cash interest expense
    509       1,006       4,576  
Changes in assets and liabilities:
                       
Merchandise inventories
    (51,068 )     23,403       (86,151 )
Other assets
    2,771       21,474       (4,007 )
Accounts payable
    (33,840 )     21,842       25,201  
Accrued payroll, bonus and employee benefits
    34,114       16,638       4,280  
Other liabilities
    28,454       38,933       1,037  
                         
Net cash provided by operating activities
    457,645       566,943       420,700  
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Cash paid for short-term available-for-sale investments
    (9,749 )            
Increase in restricted cash
    (13,267 )     (48,172 )      
Cash paid for property and equipment
    (125,074 )     (112,920 )     (238,188 )
Proceeds from sales of property and equipment
    198       3,894       2,951  
                         
Net cash used in investing activities
    (147,892 )     (157,198 )     (235,237 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Net proceeds from common stock traded under stock incentive plans
    47,217       11,848       14,108  
Minimum statutory withholding requirements
    (5,486 )     (3,405 )     (2,026 )
Cash paid for treasury stock
    (263,291 )     (164,783 )     (49,955 )
Payments of capital lease obligations
    (51,668 )     (38,439 )     (33,853 )
Proceeds from short-term debt
                576,000  
Payments on short-term debt
                (606,000 )
(Decrease) increase in bank overdraft. 
    (9,982 )     (5,082 )     15  
Tax benefits from tax deductions in excess of the compensation cost recognized
    8,539       2,901       3,215  
Cash dividends paid to stockholders
    (53,409 )     (32,459 )     (15,265 )
                         
Net cash used in financing activities
    (328,080 )     (229,419 )     (113,761 )
                         
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    1,916       1,720       (3,710 )
                         
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (16,411 )     182,046       67,992  
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    308,360       126,314       58,322  
                         
CASH AND CASH EQUIVALENTS AT END OF YEAR
  $ 291,949     $ 308,360     $ 126,314  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


F-6


Table of Contents

 
 
PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements
 
Note 1 — The Company and its Significant Accounting Policies
 
Business
 
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 selection 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 January 30, 2011, we operated 1,187 retail stores and had full-service veterinary hospitals in 768 of our stores. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 757 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.
 
Principles of Consolidation
 
Our consolidated financial statements include the accounts of PetSmart and our wholly owned subsidiaries. We have eliminated all intercompany accounts and transactions.
 
Fiscal Year
 
Our fiscal year consists of the 52 or 53 weeks ending on the Sunday nearest January 31. The 2010 fiscal year ended on January 30, 2011, and was a 52-week year. The 2009 and 2008 fiscal years were also 52-week years. Unless otherwise specified, all references in these consolidated financial statements to years are to fiscal years.
 
Reclassifications
 
We have combined the receivables, net, other noncurrent assets, and prepaid expenses and other current assets line items in the 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 Consolidated Statements of Cash Flows into a single line item called other liabilities. Prior year amounts have been combined to conform to this current year presentation. Finally, as of February 1, 2010, Banfield license fees and operating expense reimbursements, and the related costs, have been separately presented on a gross basis as detailed in Note 3.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or “GAAP,” requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Under different assumptions or conditions, actual results could differ from these estimates.
 
Segment Reporting
 
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Utilizing these criteria, we manage our business on the basis of one reportable operating segment.


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Table of Contents

PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
Net sales in the United States were $5.4 billion, $5.1 billion and $4.9 billion for 2010, 2009 and 2008, respectively. Net sales in Canada, denominated in United States dollars, were $296.7 million, $245.5 million and $217.6 million for 2010, 2009 and 2008, respectively. Substantially all our long-lived assets are located in the United States.
 
Financial Instruments
 
Our financial instruments consist primarily of cash and cash equivalents, restricted cash, receivables and accounts payable. These balances, as presented in the consolidated financial statements at January 30, 2011, and January 31, 2010, approximate fair value because of the short-term nature. We also have short-term investments in municipal bonds, which are recorded at fair value using quoted prices in active markets for identical assets or liabilities as detailed in Note 3. Finally, we have foreign exchange currency contracts, which are recorded at fair value using quoted prices for similar assets or liabilities in active markets, as detailed in Note 2.
 
Cash and Cash Equivalents
 
We consider any liquid investments with a maturity of three months or less at purchase to be cash equivalents. Included in cash and cash equivalents are credit and debit card receivables from banks, which typically settle within five business days, of $48.9 million and $44.1 million as of January 30, 2011, and January 31, 2010, respectively.
 
Under our cash management system, a bank overdraft balance exists for our primary disbursement accounts. This overdraft represents uncleared checks in excess of cash balances in the related bank accounts. Our funds are transferred on an as-needed basis to pay for clearing checks. As of January 30, 2011, and January 31, 2010, bank overdrafts of $32.5 million and $42.5 million, respectively, were included in accounts payable and bank overdraft in the Consolidated Balance Sheets.
 
Restricted Cash
 
We are required to maintain a cash deposit with the lenders of our stand-alone letter of credit facility equal to the amount of the 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.
 
Vendor Rebates and Cooperative Advertising Incentives
 
We receive vendor allowances, in the form of purchase rebates and cooperative advertising incentives, from agreements made with certain merchandise suppliers. Rebate incentives are initially deferred as a reduction of the cost of inventory purchased and then recognized as a reduction of cost of sales as the related inventory is sold. Cooperative advertising incentives are recorded as a reduction of operating, general and administrative expenses in the Consolidated Statements of Income and Comprehensive Income. Unearned purchase rebates recorded as a reduction of inventory, and rebate and cooperative advertising incentives remaining in receivables in the Consolidated Balance Sheets as of January 30, 2011, and January 31, 2010, were not material.
 
Merchandise Inventories and Valuation Reserves
 
Merchandise inventories represent finished goods and are recorded at the lower of cost or market. Cost is determined by the moving average cost method and includes inbound freight, as well as certain procurement and distribution costs related to the processing of merchandise.
 
We have established reserves for estimated inventory shrinkage between physical inventories. Physical inventory counts are taken on a regular basis, and inventory is adjusted accordingly. For each reporting period


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Table of Contents

PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
presented, we estimate the inventory shrinkage based on a two-year historical trend analysis. Changes in shrink results or market conditions could cause actual results to vary from estimates used to establish the reserves.
 
We have reserves for estimated obsolescence and to reduce inventory to the lower of cost or market. We evaluate inventory for excess, obsolescence or other factors that may render inventories unmarketable at their historical cost. If assumptions about future demand change or actual market conditions are less favorable than those projected by management, we may require additional reserves.
 
As of January 30, 2011, and January 31, 2010, our inventory valuation reserves were $10.0 million and $16.4 million, respectively.
 
Property and Equipment
 
Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is provided on buildings, furniture, fixtures and equipment and computer software using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements and capital lease assets are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets. Computer software consists primarily of third-party software purchased for internal use. Costs associated with the preliminary stage of a project are expensed as incurred. Once the project is in the development phase, external consulting costs, as well as qualifying internal labor costs, are capitalized. Training costs, data conversion costs and maintenance costs are expensed as incurred. Maintenance and repairs to furniture, fixtures and equipment are expensed as incurred.
 
Long-lived assets are reviewed for impairment based on undiscounted cash flows. We conduct this review quarterly and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If this review indicates that the carrying amount of the long-lived assets is not recoverable, we will recognize an impairment loss, measured at fair value by estimated discounted cash flows or market appraisals. There were no material asset impairments identified during 2010, 2009 or 2008.
 
Our property and equipment are depreciated using the following estimated useful lives:
 
     
Buildings
  39 years or term of lease
Furniture, fixtures and equipment
  2 - 12 years
Leasehold improvements
  1 - 20 years
Computer software
  3 - 7 years
 
Goodwill
 
The carrying value of goodwill of $44.1 million and $42.2 million as of January 30, 2011, and January 31, 2010, respectively, represents the excess of the cost of acquired businesses over the fair market value of their net assets. During 2010 and 2009, goodwill increased approximately $1.9 million and $3.6 million, respectively, as a result of foreign currency translation. Other than the effects of foreign currency translation, there have been no other changes to goodwill.
 
Insurance Liabilities and Reserves
 
We maintain workers’ compensation, general liability, product liability and property insurance, on all our operations, properties and leasehold interests. We utilize high deductible plans for each of these areas including a self insured health plan for our eligible associates. Workers’ compensation deductibles generally carry a $1.0 million per occurrence risk of claim liability. Our general liability plan specifies a $0.5 million per occurrence risk of claim liability. We establish reserves for claims under workers’ compensation and general liability plans based on periodic actuarial estimates of the amount of loss for all pending claims, including estimates for which claims have been incurred but not reported. Our loss estimates rely on actuarial observations of ultimate loss


F-9


Table of Contents

PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
experience for similar historical events and changes in such assumptions could result in an adjustment, favorable or adverse, to our reserves. As of January 30, 2011, and January 31, 2010, we had approximately $99.9 million and $95.4 million, respectively, in reserves related to workers’ compensation, general liability and self-insured health plans, of which $69.8 million and $66.5 million were classified as other noncurrent liabilities in the Consolidated Balance Sheets.
 
Reserve for Closed Stores
 
We continuously evaluate the performance of our retail stores and periodically close those that are under-performing. Closed stores are generally replaced by a new store in a nearby location. We establish reserves for future occupancy payments on closed stores in the period the store closes. The costs for future occupancy payments are reported in operating, general and administrative expenses in the Consolidated Statements of Income and Comprehensive Income. We calculate the cost for future occupancy payments, net of expected sublease income, associated with closed stores using the net present value method at a credit-adjusted risk-free interest rate over the remaining life of the lease. Judgment is used to estimate the underlying real estate market related to the expected sublease income, and we can make no assurances that additional charges will not be required based on the changing real estate environment.
 
Property and equipment retirement losses at closed stores are recorded as operating, general and administrative expenses in the Consolidated Statements of Income and Comprehensive Income.
 
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. Valuation allowances at January 30, 2011, and January 31, 2010, were principally to offset certain deferred income tax assets for net operating and capital loss carryforwards.
 
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.
 
We operate in multiple tax jurisdictions and could be subject to audit in any of these jurisdictions. These audits can involve complex issues that may require an extended period of time to resolve and may cover multiple years. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given fiscal period could be materially affected. An unfavorable tax settlement would require use of our cash and could result in an increase in our effective income tax rate in the period of resolution, while a favorable tax settlement could result in a reduction in our effective income tax rate in the period of resolution.
 
Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material.


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Table of Contents

PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
Other Current Liabilities
 
Other current liabilities consisted of the following (in thousands):
 
                 
    January 30,
    January 31,
 
    2011     2010  
 
Accrued income and sales tax
  $ 46,696     $ 43,428  
Other*
    109,369       103,537  
                 
    $ 156,065     $ 146,965  
                 
 
 
* There are no other individual items within other current liabilities greater than 5% of total current liabilities.
 
Revenue Recognition
 
We recognize revenue for store merchandise sales when the customer receives and pays for the merchandise at the register. Services sales are recognized at the time the service is provided. E-commerce sales are recognized at the time we estimate that the customer receives the product. We estimate and defer revenue and the related product costs for shipments that are in-transit to the customer. Customers typically receive goods within a few days of shipment. Such amounts were immaterial as of January 30, 2011, and January 31, 2010. Amounts related to shipping and handling that are billed to customers are reflected in merchandise sales, and the related costs are reflected in cost of merchandise sales.
 
We record deferred revenue for the sale of gift cards and recognize this revenue in net sales when cards are redeemed. Gift card breakage income is recognized over two years based upon historical redemption patterns and represents the balance of gift cards for which we believe the likelihood of redemption by the customer is remote. During 2010, 2009 and 2008, we recognized $1.8 million, $2.1 million and $2.0 million of gift card breakage income, respectively. Gift card breakage is recorded monthly and is included in the Consolidated Statements of Income and Comprehensive Income as a reduction of operating, general and administrative expenses.
 
We record allowances for estimated returns based on historical return patterns.
 
Revenue is recognized net of applicable sales tax in the Consolidated Statements of Income and Comprehensive Income. We record the sales tax liability in other current liabilities on the Consolidated Balance Sheets.
 
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 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.
 
Cost of Merchandise Sales
 
Cost of merchandise sales includes the following types of expenses:
 
  •  Purchase price of inventory sold;
 
  •  Transportation costs associated with inventory;
 
  •  Inventory shrinkage costs and valuation adjustments;
 
  •  Costs associated with operating our distribution network, including payroll and benefit costs, occupancy costs, utilities costs and depreciation;


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Table of Contents

PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
 
  •  Procurement costs, including merchandising and other costs directly associated with the procurement, storage and handling of inventory;
 
  •  Store occupancy costs, including rent, common area maintenance, real estate taxes, utilities and depreciation of leasehold improvements and capitalized lease assets; and
 
  •  Reductions for vendor rebates, promotions and discounts.
 
Cost of Services Sales
 
Cost of services sales includes payroll and benefit costs, as well as professional fees for the training of groomers, training instructors and PetsHotel associates.
 
Cost of Other Revenue
 
Cost of other revenue includes the costs related to license fees, utilities and specific operating expenses charged to Banfield.
 
Vendor Concentration Risk
 
We purchase merchandise inventories from several hundred vendors worldwide. Sales of products from our two largest vendors approximated 17.8%, 22.4% and 21.9% of our net sales for 2010, 2009 and 2008, respectively.
 
Advertising
 
We charge advertising costs to expense as incurred, which are classified within operating, general and administrative expenses in the Consolidated Statements of Income and Comprehensive Income. Total advertising expenditures, net of cooperative income and vendor funding, and including direct response advertising, were $83.5 million, $67.1 million and $79.5 million for 2010, 2009 and 2008, respectively. Vendor cooperative income reduced total advertising expense by $8.4 million, $12.7 million and $11.0 million for 2010, 2009 and 2008, respectively. Vendor funding for advertising, which began in 2009, reduced total advertising expense by $16.1 million and $6.8 million in 2010 and 2009, respectively.
 
Stock-based Compensation
 
We recognize stock-based compensation expense based on the fair value of the awards at the grant date for all awards except management equity units which are evaluated quarterly based upon the current market value of our common stock. We use option pricing methods that require the input of highly subjective assumptions, including the expected stock price volatility. Compensation cost is recognized ratably over the vesting period of the related stock-based compensation award.
 
Foreign Currency
 
The local currency is used as the functional currency in Canada. We translate assets and liabilities denominated in foreign currency into United States dollars at the current rate of exchange at year-end, and translate revenues and expenses at the average exchange rate during the year. Foreign currency translation adjustments were included in other comprehensive income and are reported separately in stockholders’ equity in the Consolidated Balance Sheets. The income tax expense (benefit) related to the foreign currency translation adjustments was $1.8 million, $3.3 million and $(5.3) million for 2010, 2009 and 2008, respectively. The transaction (gain)/loss included in net income was $(0.7) million, $(1.3) million and $3.4 million for 2010, 2009 and 2008, respectively.


F-12


Table of Contents

PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
Earnings Per Common Share
 
Basic earnings per common share is calculated by dividing net income by the weighted average of shares outstanding during each period. Diluted earnings per common share reflects the potential dilution of securities that could share in earnings, such as potentially dilutive common shares that may be issuable upon the exercise of outstanding stock options and unvested restricted stock, and is calculated by dividing net income by the weighted average shares, including dilutive securities, outstanding during the period.
 
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 January 30, 2011, we had Foreign Exchange Contracts outstanding with a notional amount of $10.0 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 receivable related to these Foreign Exchange Contracts included in prepaid expenses and other current assets was immaterial at January 30, 2011. During 2010, we recorded $0.4 million in losses on the Foreign Exchange Contracts. We did not enter into Foreign Exchange Contracts during 2009 or 2008.
 
Note 3 — Investments
 
Short-term Investments
 
At January 30, 2011, our short term investments consisted of municipal bonds with various maturities, representing funds available for current operations. These short term investments are classified as available-for-sale and are carried at fair value, which includes $0.1 million of accrued interest. The amortized cost basis at January 30, 2011 was $9.6 million. Unrealized holding gains and losses are included in comprehensive income and were not material during 2010.
 
Equity Investment in Banfield
 
We have an investment in Banfield which is accounted for using the equity method of accounting. Philip L. Francis, our Executive Chairman, and Robert F. Moran, our President and Chief Executive Officer are members of the Banfield Board of Directors.
 
Our ownership interest in the stock of Banfield was as follows (in thousands):
 
                                 
    January 30, 2011     January 31, 2010  
    Shares     Amount     Shares     Amount  
 
Voting common stock and preferred stock
    4,693     $ 21,675       4,693     $ 21,675  
Equity in income from Banfield
          21,183             10,811  
                                 
Total equity investment in Banfield
    4,693     $ 42,858       4,693     $ 32,486  
                                 
 
Our investment consisted of voting common stock, comprising 21.4% of all voting stock as of January 30, 2011, and January, 31, 2010. Our ownership percentage as of January 30, 2011, and January 31, 2010, considering all classes of stock (voting and non-voting), was 21.0%. Our investment includes goodwill of $15.9 million. The goodwill is calculated as the excess of the purchase price for each step of the acquisition of our ownership interest in Banfield relative to that step’s portion of Banfield’s net assets at the respective acquisition date.


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Table of Contents

PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
Of the 4.7 million shares of voting stock of Banfield, we held:
 
(a) 2.9 million shares of voting preferred stock that may be converted into voting common stock at any time at our option; and
 
(b) 1.8 million shares of voting common stock.
 
Banfield’s financial data is summarized as follows (in thousands):
 
                 
    January 30,
  January 31,
    2011   2010
 
Current assets
  $ 351,379     $ 269,381  
Noncurrent assets
    119,175       122,934  
Current liabilities
    279,836       247,138  
Noncurrent liabilities
    12,367       16,216  
 
                         
    Year Ended  
    January 30,
    January 31,
    February 1,
 
    2011     2010     2009  
 
Net sales
  $ 676,591     $ 617,508     $ 448,528  
Income from operations
    82,864       49,851       21,897  
Net income
  $ 49,390     $ 29,723     $ 13,626  
 
We recognized license fees and reimbursements for specific operating expenses from Banfield of $34.2 million, $33.2 million and $30.1 million during 2010, 2009 and 2008, respectively. Receivables from Banfield totaled $2.7 million and $2.4 million at January 30, 2011, and January 31, 2010, respectively, and were included in receivables, net in the Consolidated Balance Sheets.
 
The master operating agreement also includes a provision for the sharing of profits on the sales 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 foods are not material to our consolidated financial statements.
 
Note 4 — Property and Equipment
 
Property and equipment consists of the following (in thousands):
 
                 
    January 30,
    January 31,
 
    2011     2010  
 
Land
  $ 1,032     $ 691  
Buildings
    15,520       15,089  
Furniture, fixtures and equipment
    984,755       926,763  
Leasehold improvements
    617,735       581,684  
Computer software
    110,398       97,319  
Buildings under capital leases
    720,959       683,712  
                 
      2,450,399       2,305,258  
Less: accumulated depreciation and amortization
    1,347,380       1,141,122  
                 
      1,103,019       1,164,136  
Construction in progress
    29,416       37,721  
                 
Property and equipment, net
  $ 1,132,435     $ 1,201,857  
                 


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PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
We record capitalized interest primarily for interest expense incurred during the construction period for new stores. Capitalized interest was approximately $0.8 million, $0.2 million and $1.6 million in 2010, 2009 and 2008, respectively. Capitalized interest is included in property and equipment, net in the Consolidated Balance Sheets.
 
Note 5 — Reserve for Closed Stores
 
The components of the reserve for closed stores were as follows (in thousands):
 
                 
    January 30,
    January 31,
 
    2011     2010  
 
Total remaining gross occupancy costs
  $ 34,313     $ 33,577  
Less:
               
Expected sublease income
    (22,964 )     (24,018 )
Interest costs
    (1,585 )     (1,343 )
                 
Reserve for closed stores
  $ 9,764     $ 8,216  
                 
Current portion, included in other current liabilities
    3,056       2,395  
Noncurrent portion, included in other noncurrent liabilities
    6,708       5,821  
                 
Reserve for closed stores
  $ 9,764     $ 8,216  
                 
 
The activity related to the reserve for closed stores was as follows (in thousands):
 
                         
    Year Ended  
    January 30,
    January 31,
    February 1,
 
    2011     2010     2009  
 
Opening balance
  $ 8,216     $ 6,382     $ 6,157  
Reserve for new store closures
    4,921       1,526       3,132  
Changes in sublease assumptions
    1,072       4,173       1,734  
Lease terminations
    (562 )     (565 )     (821 )
Other
    995       769       517  
                         
Charges, net
    6,426       5,903       4,562  
Payments
    (4,878 )     (4,069 )     (4,337 )
                         
Ending balance
  $ 9,764     $ 8,216     $ 6,382  
                         
 
We record charges for new closures and adjustments related to changes in subtenant assumptions and other occupancy payments in operating, general and administrative expenses in the Consolidated Statements of Income and Comprehensive Income. We can make no assurances that additional charges related to closed stores will not be required based on the changing real estate environment.
 
Note 6 — Income Taxes
 
Income before income tax expense and equity in income from Banfield was as follows (in thousands):
 
                         
    Year Ended  
    January 30,
    January 31,
    February 1,
 
    2011     2010     2009  
 
United States
  $ 361,106     $ 301,644     $ 309,311  
Foreign
    8,785       7,687       1,786  
                         
    $ 369,891     $ 309,331     $ 311,097  
                         


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PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
Income tax expense consisted of the following (in thousands):
 
                         
    Year Ended  
    January 30,
    January 31,
    February 1,
 
    2011     2010     2009  
 
Current provision:
                       
Federal
  $ 133,753     $ 111,911     $ 73,017  
State/Foreign
    17,968       19,215       9,056  
                         
      151,721       131,126       82,073  
                         
Deferred:
                       
Federal
    (7,906 )     (4,439 )     34,372  
State/Foreign
    (3,419 )     (9,133 )     4,574  
                         
      (11,325 )     (13,572 )     38,946  
                         
Income tax expense
  $ 140,396     $ 117,554     $ 121,019  
                         
 
A reconciliation of the federal statutory income tax rate to our effective tax rate is as follows (dollars in thousands):
 
                                                 
    Year Ended  
    January 30,
    January 31,
    February 1,
 
    2011     2010     2009  
 
Provision at federal statutory tax rate
  $ 129,462       35.0 %   $ 108,266       35.0 %   $ 108,882       35.0 %
State income taxes, net of federal income tax benefit
    5,591       1.5       8,725       2.8       8,860       2.8  
Adjustments to tax reserves
    3,636       1.0       (295 )     (0.1 )     (486 )     (0.2 )
Tax exempt interest income
    (96 )     (0.0 )     (90 )     (0.0 )            
Adjustment to valuation allowance
    8       0.0       (343 )     (0.1 )     158       0.1  
Tax on equity income from Banfield
    3,630       1.0       2,292       0.7       907       0.3  
Other
    (1,835 )     (0.5 )     (1,001 )     (0.3 )     2,698       0.9  
                                                 
    $ 140,396       38.0 %   $ 117,554       38.0 %   $ 121,019       38.9 %
                                                 


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Table of Contents

PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
The components of the net deferred income tax assets (liabilities) included in the Consolidated Balance Sheets are as follows (in thousands):
 
                 
    January 30,
    January 31,
 
    2011     2010  
 
Deferred income tax assets:
               
Capital lease obligations
  $ 192,825     $ 200,108  
Employee benefit expense
    82,228       74,613  
Deferred rents
    37,596       39,283  
Net operating loss carryforwards
    17,717       18,690  
Reserve for closed stores
    3,932       3,132  
Miscellaneous reserves and accruals
    9,589       10,501  
Tenant incentives
    11,238       11,328  
Other
    7,698       4,292  
                 
Total deferred income tax assets
    362,823       361,947  
Valuation allowance
    (7,700 )     (7,693 )
                 
Deferred income tax assets, net of valuation allowance
    355,123       354,254  
Deferred income tax liabilities:
               
Property and equipment
    (188,654 )     (200,150 )
Inventory
    (6,113 )     (6,913 )
Prepaid expenses
    (7,593 )     (7,452 )
Other
    (11,549 )     (8,033 )
                 
Total deferred income tax liabilities
    (213,909 )     (222,548 )
                 
Net deferred income tax assets
  $ 141,214     $ 131,706  
                 
 
We are subject to United States of America federal income tax, as well as the income tax of multiple state and foreign jurisdictions. We have substantially settled all federal income tax matters through 2006, state and local jurisdictions through 1999 and foreign jurisdictions through 2003. We could be subject to audits in these jurisdictions. These audits can involve complex issues that may require an extended period of time to resolve and may cover multiple years. During 2010, 2009 and 2008, we recorded a net benefit of approximately $0.2 million, $1.0 million and $1.2 million, respectively, from the settlement of uncertain tax positions with various state tax jurisdictions and the lapse of the statute of limitations for certain tax positions. The net benefits are reflected in income tax expense in the Consolidated Statements of Income and Comprehensive Income. We cannot make an estimate of the range of possible changes that may result from other audits.


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PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
 
                         
    Year Ended  
    January 30,
    January 31,
    February 1,
 
    2011     2010     2009  
 
Unrecognized tax benefits, beginning balance
  $ 7,652     $ 8,127     $ 8,824  
Gross increases — tax positions related to the current year
    1,655       1,299       1,314  
Gross increases — tax positions in prior periods
    7,933       716       290  
Gross decreases — tax positions in prior periods
    (24 )     (153 )     (674 )
Gross settlements
    (405 )     (394 )     (663 )
Lapse of statute of limitations
    (221 )     (2,215 )     (558 )
Gross (decreases) increases — foreign currency translation
    145       272       (406 )
                         
Unrecognized tax benefits, ending balance
  $ 16,735     $ 7,652     $ 8,127  
                         
 
Included in the balance of unrecognized tax benefits at January 30, 2011, January 31, 2010, and February 1, 2009, are $9.7 million, $6.8 million, and $7.3 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.
 
We continue to recognize penalties and interest accrued related to unrecognized tax benefits as income tax expense. During 2010, the impact of accrued interest and penalties related to unrecognized tax benefits on the Consolidated Statement of Operations was $0.5 million. In total, as of January 30, 2011, we had recognized a liability for penalties of $0.9 million and interest of $2.2 million. As of January 31, 2010, and February 1, 2009, we had recognized a liability for penalties of $0.7 million and $0.8 million, respectively, and interest of $1.7 million and $1.8 million, respectively.
 
Our unrecognized tax benefits largely include state exposures from filing positions taken on state tax returns and characterization of income and timing of deductions on federal and state tax returns. We believe that it is reasonably possible that approximately $0.7 million of our currently remaining unrecognized tax positions, each of which are individually insignificant, may be recognized by the end of 2011 as a result of settlements or a lapse of the statute of limitations.
 
As of January 30, 2011, we had, for income tax reporting purposes, federal net operating loss carryforwards of $50.4 million which expire in varying amounts between 2019 and 2020. The federal net operating loss carryforwards are subject to certain limitations on their utilization pursuant to the Internal Revenue Code. We also had a Canadian capital loss carryforward of $11.6 million which can be carried forward indefinitely.
 
Note 7 — Earnings Per Common Share
 
The following table presents a reconciliation of the weighted average shares outstanding used to calculate earnings per common share (in thousands):
 
                         
    Year Ended  
    January 30,
    January 31,
    February 1,
 
    2011     2010     2009  
 
Basic
    116,799       122,363       124,342  
Effect of dilutive securities:
                       
Stock options, restricted stock and performance share units
    2,606       2,338       2,409  
                         
Diluted
    119,405       124,701       126,751  
                         


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PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
Certain stock-based compensation awards representing 1.5 million, 3.0 million and 4.8 million shares of common stock in 2010, 2009 and 2008, respectively, were not included in the calculation of diluted earnings per common share because the inclusion of the awards would have been antidilutive for the periods presented.
 
Note 8 — Stockholders’ Equity
 
Share Purchase Programs
 
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. We purchased 7.0 million shares for $225.0 million in 2009. We purchased 2.3 million shares of our common stock for $50.0 million during 2008, and 1.2 million shares of 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 share purchase program authorizing the purchase of up to $350.0 million of our common stock through January 29, 2012. During 2009, we purchased 5.9 million shares of our common stock for $140.0 million under the June 2009 share purchase program. 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 replaced the $350 million program with a new share purchase program authorizing the purchase of up to $400.0 million of our common stock through January 29, 2012. During the thirteen weeks ended January 30, 2011, we purchased 2.6 million shares of common stock for $99.9 million. Since the inception of the $400.0 million authorization in June 2010, we have purchased 4.2 million shares of common stock for $156.2 million. As of January 30, 2011, $243.8 million remained available under the $400.0 million program.
 
Dividends
 
In 2010 and 2009, the Board of Directors declared the following dividends:
 
                         
    Dividend
             
    Amount per
    Stockholders of
       
Date Declared   Share     Record Date     Date Paid  
 
2010:
                       
March 23
  $ 0.10       April 30, 2010       May 14, 2010  
June 16
  $ 0.125       July 30, 2010       August 13, 2010  
September 29
  $ 0.125       October 29, 2010       November 12, 2010  
December 9
  $ 0.125       January 28, 2011       February 11, 2011  
2009:
                       
March 24
  $ 0.03       May 1, 2009       May 15, 2009  
June 22
  $ 0.10       July 31, 2009       August 14, 2009  
September 30
  $ 0.10       October 30, 2009       November 13, 2009  
December 10
  $ 0.10       January 29, 2010       February 12, 2010  
 
Note 9 — Stock-Based Compensation
 
We have several long-term incentive plans, including plans for stock options, restricted stock, performance share units, management equity units and employee stock purchases. Shares issued under our long-term incentive plans are issued from new shares.


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PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
Stock Options
 
At January 30, 2011, stock option grants representing 6.0 million shares of common stock were outstanding under all of the stock option plans, and 3.7 million of additional stock options or awards may be issued under the 2006 Equity Incentive Plan. These grants are made to employees, including officers and our Directors, at the fair market value on the date of the grant.
 
Activity in all of our stock option plans is as follows (in thousands, except per share data):
 
                                 
    Year Ended January 30, 2011  
                Weighted-Average
       
          Weighted-Average
    Remaining
    Aggregate
 
    Shares     Exercise Price     Contractual Term     Intrinsic Value  
 
Outstanding at beginning of year
    7,309     $ 19.65                  
Granted
    1,391     $ 31.78                  
Exercised
    (2,492 )   $ 18.00             $ 38,237  
Forfeited/cancelled
    (223 )   $ 22.01                  
                                 
Outstanding at end of year
    5,985     $ 23.07       4.23     $ 102,326  
                                 
Vested and expected to vest at end of year
    5,788     $ 22.95       4.18     $ 99,690  
                                 
Exercisable at end of year
    2,636     $ 21.72       2.96     $ 48,624  
                                 
 
                                 
    Year Ended January 31, 2010  
                Weighted-Average
       
          Weighted-Average
    Remaining
    Aggregate
 
    Shares     Exercise Price     Contractual Term     Intrinsic Value  
 
Outstanding at beginning of year
    7,080     $ 19.77                  
Granted
    1,696     $ 16.97                  
Exercised
    (733 )   $ 10.52             $ 9,810  
Forfeited/cancelled
    (734 )   $ 23.69                  
                                 
Outstanding at end of year
    7,309     $ 19.65       4.29     $ 51,205  
                                 
Vested and expected to vest at end of year
    7,026     $ 19.72       4.23     $ 48,978  
                                 
Exercisable at end of year
    4,028     $ 19.64       3.38     $ 29,128  
                                 
 


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PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
                                 
    Year Ended February 1, 2009  
                Weighted-Average
       
          Weighted-Average
    Remaining
    Aggregate
 
    Shares     Exercise Price     Contractual Term     Intrinsic Value  
 
Outstanding at beginning of year
    6,322     $ 19.10                  
Granted
    1,816     $ 19.10                  
Exercised
    (755 )   $ 10.42             $ 11,684  
Forfeited/cancelled
    (303 )   $ 25.12                  
                                 
Outstanding at end of year
    7,080     $ 19.77       4.56     $ 19,736  
                                 
Vested and expected to vest at end of year
    6,367     $ 19.35       4.45     $ 19,732  
                                 
Exercisable at end of year
    4,238     $ 17.60       3.84     $ 19,719  
                                 
 
Restricted Stock
 
We may grant restricted stock under the 2006 Equity Incentive Plan. Under the terms of the plan, employees may be awarded shares of our common stock, subject to approval by the Board of Directors. The employee may be required to pay par value for the shares depending on their length of service. The shares of common stock awarded under the plan are subject to a reacquisition right held by us. In the event that the award recipient’s employment by, or service to, us is terminated for any reason, we are entitled to simultaneously and automatically reacquire for no consideration all of the unvested shares of restricted common stock previously awarded to the recipient.
 
Restricted stock activity in our restricted stock plan is as follows (in thousands):
 
                                                 
    Year Ended  
    January 30, 2011     January 31, 2010     February 1, 2009  
          Weighted-Average
          Weighted-Average
          Weighted-Average
 
          Grant Date
          Grant Date
          Grant Date
 
    Shares     Fair Value     Shares     Fair Value     Shares     Fair Value  
 
Nonvested at beginning of year
    1,898     $ 24.38       2,685     $ 25.50       2,391     $ 27.92  
Granted
    39     $ 32.47       82     $ 18.05       978     $ 19.33  
Vested
    (611 )   $ 23.94       (599 )   $ 28.58       (367 )   $ 24.85  
Forfeited
    (138 )   $ 24.53       (270 )   $ 24.29       (317 )   $ 25.48  
                                                 
Nonvested at end of year
    1,188     $ 24.85       1,898     $ 24.38       2,685     $ 25.50  
                                                 
 
The total fair value of restricted stock which vested during 2010, 2009 and 2008 was $17.2 million, $11.0 million, and $7.2 million, respectively.
 
Performance Share Units
 
The 2009 Performance Share Unit Program, approved by the Board of Directors in January 2009, provides for the issuance of performance share units, or “PSUs,” under the 2006 Equity Incentive Plan to executive officers and certain other members of our management team based upon an established performance goal. For units granted in 2010, the performance goal was defined as a specified end-of-year pre-tax income. The actual number of PSUs awarded to each participant was set at a minimum threshold of 50% of his or her target number of PSUs, regardless of performance results, and could increase up to 150% based upon performance results. Actual performance against the end-of-year pre-tax income target was approved by the Board in March 2011, and qualified participants received 150% of their target awards. For units granted in 2009, the performance goal was defined as a specified end-of-year

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PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
net cash balance. The actual number of PSUs awarded to each participant was set at a minimum threshold of 50% of his or her target number of PSUs, regardless of performance results, and could increase up to 150% based upon performance results. Our actual performance against the end-of-year net cash target was approved by the Board in March 2010, and qualified participants received 150% of their target awards. The PSUs are subject to time-based vesting, cliff vesting on the third anniversary of the initial grant date, and settle in shares at that time.
 
Activity for PSUs in 2010 and 2009 was as follows (in thousands):
 
                                 
    Year Ended  
    January 30, 2011     January 31, 2010  
          Weighted-Average
          Weighted-Average
 
          Grant Date
          Grant Date
 
    Units     Fair Value     Units     Fair Value  
 
Nonvested at beginning of year
    570     $ 16.97           $  
Granted
    288     $ 31.77       592     $ 16.96  
Additional units granted for performance achievement
    262     $ 16.96           $  
Vested
                    $  
Forfeited
    (55 )   $ 18.89       (22 )   $ 16.69  
                                 
Nonvested at end of year
    1,065     $ 22.14       570     $ 16.97  
                                 
 
Management Equity Units
 
Beginning in 2009, certain members of management receive Management Equity Units or “MEUs.” The value of one MEU is equal to the value of one share of our common stock and cliff vests on the third anniversary of the grant date. The payout value of the vested MEU grants will be determined using our closing stock price on the vest date and will be paid out in cash.
 
Activity for MEUs in 2010 and 2009 was as follows (in thousands):
 
                                 
    Year Ended  
    January 30, 2011     January 31, 2010  
          Weighted-Average
          Weighted-Average
 
          Grant Date
          Grant Date
 
    Units     Fair Value     Units     Fair Value  
 
Nonvested at beginning of year
    255     $ 25.75           $  
Granted
    248     $ 40.17       285     $ 25.75  
Vested
        $           $  
Forfeited
    (53 )   $ 40.17       (30 )   $ 25.75  
                                 
Nonvested at end of year
    450     $ 40.17       255     $ 25.75  
                                 
 
Employee Stock Purchase Plan
 
We have an Employee Stock Purchase Plan, or “ESPP,” that allows essentially all employees who meet certain service requirements to purchase our common stock on semi-annual offering dates at a discount. Prior to February 2, 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 2, 2009, the discount rate changed 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. A maximum of 4.0 million shares is authorized for


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PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
purchase until the ESPP plan termination date of July 31, 2012. Share purchases and proceeds were as follows (in thousands):
 
                         
    Year Ended
    January 30,
  January 31,
  February 1,
    2011   2010   2009
 
Shares purchased
    68       167       338  
Aggregate proceeds
  $ 1,999     $ 3,784     $ 5,918  
 
Stock-Based Compensation Expense
 
Stock-based compensation expense and the total income tax benefit recognized in the Consolidated Statements of Income and Comprehensive Income were as follows (in thousands):
 
                         
    Year Ended  
    January 30,
    January 31,
    February 1,
 
    2011     2010     2009  
 
Stock options expense
  $ 9,668     $ 8,263     $ 7,959  
Restricted stock expense
    6,559       11,626       14,227  
PSU expense
    7,701       3,369        
Employee stock purchase plan expense
                2,115  
                         
Stock-based compensation cost — equity awards
    23,928       23,258       24,301  
MEU expense
    5,481       1,534        
                         
Total stock-based compensation cost
  $ 29,409     $ 24,792     $ 24,301  
                         
Tax benefit
  $ 10,286     $ 8,824     $ 8,304  
                         
 
At January 30, 2011, the total unrecognized stock-based compensation expense, net of estimated forfeitures, was $39.7 million and is expected to be recognized over a weighted average period of 1.3 years.
 
We estimated the fair value of stock options issued using a lattice option pricing model. Expected volatilities are based on implied volatilities from traded call options on our stock, historical volatility of our stock and other factors. We use historical data to estimate option exercises and employee terminations within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time we expect options granted to be outstanding. The risk-free rates for the periods within the contractual life of the option are based on the monthly U.S. Treasury yield curve in effect at the time of the option grant using the expected life of the option. Stock options are amortized straight-line over the vesting period net of estimated forfeitures by a charge to income. Actual values of grants could vary significantly from the results of the calculations. The following assumptions were used to value grants:
 
                         
    Year Ended
    January 30,
  January 31,
  February 1,
    2011   2010   2009
 
Dividend yield
    1.66 %     0.62 %     0.42 %
Expected volatility
    31.0 %     46.0 %     36.2 %
Risk-free interest rate
    1.31 %     1.17 %     1.96 %
Forfeiture rate
    14.8 %     15.1 %     15.4 %
Expected lives
    5.1 years       5.3 years       5.2 years  
Vesting periods
    4.0 years       4.0 years       4.0 years  
Term
    7.0 years       7.0 years       7.0 years  
Weighted average fair value
  $ 8.10     $ 6.68     $ 6.44  


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PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
Restricted stock expense, which reflects the fair market value on the date of the grant net of estimated forfeitures and cliff vests after four years, is being amortized ratably by a charge to income over the four-year term of the restricted stock awards.
 
PSU expense, net of forfeitures, is recognized over the requisite service period, or three years, based upon the fair market value on the date of grant, adjusted for the anticipated or actual achievement against the established performance goal.
 
Compensation expense, net of forfeitures, for MEUs is recognized over the requisite service period, or three years, and is evaluated quarterly based upon the current market value of our common stock.
 
Note 10 — Employee Benefit Plans
 
We have a defined contribution plan, or the “Plan,” pursuant to Section 401(k) of the Internal Revenue Code. The Plan covers all employees that meet certain service requirements. We match employee contributions, up to specified percentages of those contributions, as approved by the Board of Directors. In addition, certain employees can elect to defer receipt of certain salary and cash bonus payments pursuant to our Non-Qualified Deferred Compensation Plan. We match employee contributions up to certain amounts as defined in the Non-Qualified Deferred Compensation Plan documents. During 2010, 2009 and 2008, we recognized expense related to matching contributions under these Plans of $6.3 million, $5.6 million, and $4.9 million, respectively.
 
Note 11 — Financing Arrangements and Lease Obligations
 
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, 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 January 30, 2011, we had no borrowings and $31.6 million in stand-by letter of credit issuances under our Revolving Credit Facility. As of January 31, 2010, we had no borrowings and $35.7 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 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 January 30, 2011, we had $61.4 million in outstanding letters of credit under the Stand-alone Letter of Credit Facility and $61.4 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.
 
We issue letters of credit for guarantees provided for insurance programs.
 
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 January 30, 2011, 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-


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PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
alone Letter of Credit Facility are secured by substantially all our personal property assets, our wholly owned subsidiaries and certain real property.
 
Operating and Capital Leases
 
We lease substantially all our stores, distribution centers and corporate offices under noncancelable leases. The terms of the store leases generally range from 10 to 15 years and typically allow us to renew for 2 to 4 additional 5-year terms. Store leases, excluding renewal options, expire at various dates through 2026. Generally, the leases require payment of property taxes, utilities, common area maintenance, insurance and if annual sales at certain stores exceed specified amounts, provide for additional rents. We also lease certain equipment under operating leases and capital leases. Total operating lease expense incurred, net of sublease income, during 2010, 2009 and 2008 was $302.4 million, $296.0 million and $275.1 million, respectively. Additional rent included in those amounts was not material.
 
At January 30, 2011, the future minimum annual rental commitments under all noncancelable leases were as follows (in thousands):
 
                 
    Operating
    Capital
 
    Leases     Leases  
 
2011
  $ 307,177     $ 99,888  
2012
    301,541       109,696  
2013
    279,320       108,781  
2014
    251,803       104,609  
2015
    214,550       98,478  
Thereafter
    542,175       337,847  
                 
Total minimum rental commitments
  $ 1,896,566     $ 859,299  
                 
Less: amounts representing interest
            (292,470 )
                 
Present value of minimum lease payments
            566,829  
Less: current portion
            (45,277 )
                 
Long-term obligations
          $ 521,552  
                 
 
The rental commitments schedule includes all locations for which we have the right to control the use of the property and includes open stores, closed stores, stores to be opened in the future, distribution centers and corporate offices. We have recorded accrued rent of $0.9 million and $1.7 million in the Consolidated Balance Sheets as of January 30, 2011, and January 31, 2010, respectively. In addition to the commitments scheduled above, we have executed lease agreements with total minimum lease payments of $82.1 million. The typical lease term for these agreements is 10 years. We do not have the right to control the use of the property under these leases as of January 30, 2011 because we have not taken physical possession of the property.


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PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
Future minimum annual rental commitments have not been reduced by amounts expected to be received from subtenants. At January 30, 2011, the future annual payments expected to be collected from subtenants are as follows (in thousands):
 
         
2011
  $ 4,196  
2012
    3,153  
2013
    3,067  
2014
    2,726  
2015
    2,740  
Thereafter
    3,077  
         
    $ 18,959  
         
 
Note 12 — Commitments and Contingencies
 
Advertising Purchase Commitments
 
As of January 30, 2011, we had advertising commitments of approximately $22.7 million in 2011.
 
Product Purchase Commitments
 
As of January 30, 2011, 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


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PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
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, and the Court of Appeals remanded one point of fact to the motions judge for additional clarification. Once the point remanded by the appeals court is addressed, these cases should be resolved, and we continue to believe they will not have a material adverse impact on our consolidated financial statements.
 
There have been no appeals filed in Canada.
 
In January 2011, we were named as a defendant in Pedroza v. PetSmart, Inc., et al., a lawsuit originally filed in California Superior Court for the County of San Bernardino. The case has been removed to the U.S. District Court for the Central District of California. The complaint alleges, purportedly on behalf of current and former exempt store management in California, that we improperly classified our store management as exempt pursuant to the California Labor Code, and as a result failed to: (i) pay or provide to such managers proper wages, overtime compensation, or rest or meal periods, (ii) maintain and provide accurate wage-related statements and records, and (iii) reimburse certain business expenses, in each case as is required by the California Labor Code.
 
The lawsuit seeks compensatory damages, statutory penalties and other relief, including liquidated damages, attorneys’ fees, costs and injunctive relief. At this time, we are not able to predict the outcome of this lawsuit, or any possible monetary exposure associated with the lawsuit. We believe, however, that the lawsuit is without merit and that the case should not be certified as a class or collective action, and we are vigorously defending these claims.
 
We are involved in the defense of various other legal proceedings that we do not believe are material to our consolidated financial statements.
 
Note 13 — Supplemental Schedule of Cash Flows
 
Supplemental cash flow information for 2010, 2009 and 2008 was as follows (in thousands):
 
                         
    2010     2009     2008  
 
Interest paid
  $ 59,419     $ 59,153     $ 55,937  
Income taxes paid, net of refunds
  $ 137,869     $ 81,511     $ 92,786  
Assets acquired using capital lease obligations
  $ 42,175     $ 18,849     $ 86,083  
Accruals and accounts payable for capital expenditures
  $ 29,114     $ 25,827     $ 19,770  
Dividends declared but unpaid
  $ 14,436     $ 12,073     $ 3,816  


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PetSmart, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements — (Continued)
 
Note 14 — Selected Quarterly Financial Data (Unaudited)
 
Summarized quarterly financial information for 2010 and 2009 is as follows:
 
                                 
    First
    Second
    Third
    Fourth
 
Year Ended January 30, 2011   Quarter     Quarter     Quarter     Quarter  
    (13 weeks)     (13 weeks)     (13 weeks)     (13 weeks)  
    (In thousands, except per share data)  
 
Merchandise sales
  $ 1,233,595     $ 1,216,682     $ 1,230,911     $ 1,359,619  
Services sales
    153,287       165,305       148,282       151,881  
Other revenue
    8,271       8,553       8,877       8,534  
Net sales
    1,395,153       1,390,540       1,388,070       1,520,034  
Gross profit
    404,292       396,295       388,985       464,959  
Operating income
    103,261       92,007       83,640       149,820  
Income before income tax expense and equity in income from Banfield
    87,918       77,417       69,351       135,205  
Net income
    55,592       48,386       45,613       90,276  
Earnings per common share:
                               
Basic
  $ 0.47     $ 0.41     $ 0.39     $ 0.78  
Diluted
    0.46       0.41       0.38       0.77  
Weighted average shares outstanding:
                               
Basic
    117,976       117,079       116,943       115,222  
Diluted
    120,382       119,423       119,360       117,712  
 
                                 
    First
    Second
    Third
    Fourth
 
Year Ended January 31, 2010   Quarter     Quarter     Quarter     Quarter  
    (13 weeks)     (13 weeks)     (13 weeks)     (13 weeks)  
    (In thousands, except per share data)  
 
Merchandise sales
  $ 1,184,755     $ 1,154,593     $ 1,157,647     $ 1,264,044  
Services sales
    142,819       154,192       136,703       141,639  
Other revenue
                       
Net sales
    1,327,574       1,308,785       1,294,350       1,405,683  
Gross profit
    377,252       369,412       356,176       416,377  
Operating income
    89,869       73,789       71,280       134,141  
Income before income tax expense and equity in income from Banfield
    74,895       58,819       56,249       119,368  
Net income
    46,262       38,964       38,070       75,029  
Earnings per common share:
                               
Basic
  $ 0.37     $ 0.32     $ 0.31     $ 0.63  
Diluted
    0.37       0.31       0.31       0.61  
Weighted average shares outstanding:
                               
Basic
    124,355       123,474       121,661       119,962  
Diluted
    126,524       125,504       123,781       122,658  


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Table of Contents

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
PetSmart, Inc.
Phoenix, Arizona
 
We have audited the consolidated financial statements of PetSmart, Inc. and subsidiaries (the “Company”) as of January 30, 2011 and January 31, 2010, and for each of the three years in the period ended January 30, 2011, and the Company’s internal control over financial reporting as of January 30, 2011, and have issued our reports thereon dated March 24, 2011; such consolidated financial statements and reports are included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of the Company listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
 
/s/  DELOITTE & TOUCHE LLP
 
Phoenix, Arizona
March 24, 2011


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Schedule II

Valuation and Qualifying Accounts

SCHEDULE II
 
PetSmart, Inc. and Subsidiaries
 
Valuation and Qualifying Accounts
 
                                 
    Balance at
                Balance at
 
    Beginning
    Charged to
          End of
 
Description   of Period     Expense     Deductions     Period  
          (In thousands)        
 
Valuation reserves deducted in the Consolidated Balance Sheets from the asset to which it applies:
                               
Merchandise inventories:
                               
Lower of cost or market
                               
2008
  $ 5,868     $ 4,736     $ (2,827 )   $ 7,777  
                                 
2009
  $ 7,777     $ 9,652     $ (4,865 )   $ 12,564  
                                 
2010
  $ 12,564     $ 6,493     $ (12,243 )   $ 6,814  
                                 
Shrink
                               
2008
  $ 7,424     $ 26,430     $ (27,032 )   $ 6,822  
                                 
2009
  $ 6,822     $ 24,250     $ (27,205 )   $ 3,867  
                                 
2010
  $ 3,867     $ 30,046     $ (30,723 )   $ 3,190  
                                 


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Table of Contents

APPENDIX E
 
PetSmart, Inc.
 
ANNUAL REPORT ON FORM 10-K
 
EXHIBIT INDEX
 
                             
        Incorporated By Reference
Exhibit
                      Filed
Number   Exhibit Description   Form   File No.   Exhibit   Filing Date   Herewith
 
  3 .1   Restated Certificate of Incorporation of PetSmart   S-1   33-63912   3.3(i)   6/4/1993    
  3 .2   Certificate of Amendment of Restated Certificate of Incorporation of PetSmart   10-Q   0-21888   3.5   9/7/2005    
  3 .3   Form of Certificate of Designation of Series A Junior Participating Preferred Stock of PetSmart   8-K   0-21888   99.3   8/21/1997    
  3 .35   Certificate of Amendment of Restated Certificate of Incorporation of PetSmart   8-K   0-21888   3.4   6/23/2009    
  3 .4   Bylaws of PetSmart, as amended   8-K   0-21888   3.5   6/23/2009    
  4 .1   Reference is made to Exhibits 3.1 through 3.4                    
  4 .2   Form of Stock Certificate   S-1   33-63912   4.4   6/4/1993    
  10 .1†   Form of Indemnity Agreement between PetSmart and its Directors and Officers   S-1   33-63912   10.1   6/4/1993    
  10 .2†   2003 Equity Incentive Plan   Proxy
Statement
  0-21888   Appendix B   5/12/2003    
  10 .3†   1996 Non-Employee Directors’ Equity Plan, as amended   S-8   333-58605   10.5   7/7/1998    
  10 .4†   1997 Equity Incentive Plan, as amended   10-K   0-21888   10.4   4/18/2003    
  10 .5†   2002 Employee Stock Purchase Plan, as amended   10-K                
  10 .6†   Non-Qualified 2005 Deferred Compensation Plan, as amended   10-Q   0-21888   10.10   11/30/2007    
  10 .7†   Executive Short-Term Incentive Plan, as amended   Proxy
Statement
  0-21888   Appendix A   5/3/2010    
  10 .8†   Amended and Restated Employment Agreement, between PetSmart and Philip L. Francis, Chairman of the Board of Directors and Chief Executive Officer   10-Q   0-21888   10.12   11/26/2008    
  10 .9†   Amended and Restated Employment Agreement, between PetSmart and Robert F. Moran, President and Chief Operating Officer   10-Q   0-21888   10.13   11/26/2008    
  10 .10†   Form of Performance Share Unit Grant Notice and Performance Share Unit Agreement   10-Q   0-21888   10.22   5/29/2009    


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        Incorporated By Reference
Exhibit
                      Filed
Number   Exhibit Description   Form   File No.   Exhibit   Filing Date   Herewith
 
  10 .11†   Form of Offer Letter between PetSmart and executive officers   10-K   0-21888   10.15   4/18/2003    
  10 .12†   Amended and Restated Executive Change in Control and Severance Benefit Plan   10-Q   0-21888   10.16   11/26/2008    
  10 .13†   Forms of Stock Award Grant Agreements for the 2003 Equity Incentive Plan and 1997 Equity Incentive Plan   10-Q   0-21888   10.17   9/8/2004    
  10 .14†   Forms of Revised Stock Option Grant Agreements for the 2003 Equity Incentive Plan and 1997 Equity Incentive Plan   8-K   0-21888   10.20   2/3/2006    
  10 .15†   Forms of Revised Restricted Stock Grant Agreements for the 2003 Equity Incentive Plan and 1997 Equity Incentive Plan   8-K   0-21888   10.19   2/7/2005    
  10 .16†   2006 Equity Incentive Plan   10-K   0-21888   10.21   3/28/2007    
  10 .17†   Form of Nonstatutory Stock Agreement for 2006 Equity Incentive Plan   8-K   0-21888   10.2   6/28/2006    
  10 .18†   Form of Restricted Stock Agreement for 2006 Equity Incentive Plan   8-K   0-21888   10.3   6/28/2006    
  10 .19†   Offer letter to Lawrence “Chip” Molloy dated August 23, 2007   8-K   0-21888   10.27   9/7/2007    
  10 .20   Letter of Credit Agreement, dated June 30, 2006, between PetSmart, Inc. and Bank of America, N.A.   8-K   0-21888   10.21   7/3/2006    
  10 .21   Second Amendment to Letter of Credit Agreement, dated as of May 13, 2009   10-Q   0-21888   10.20   8/28/2009    
  10 .22   Credit Agreement dated as of August 15, 2007 among PetSmart, Inc., PetSmart Store Support Group, Inc., the Lenders Party thereto, Bank of America, N.A., as issuing bank, administrative agent and collateral agent, and Banc of America Securities LLC, as sole arranger and sole bookrunner.   8-K   0-21888   10.2   8/17/2007    
  10 .23   2010 Performance Share Unit Program   8-K   0-21888   10.1   3/26/2010    
  23 .1   Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm                   X
  31 .1   Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended                   X

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Table of Contents

                             
        Incorporated By Reference
Exhibit
                      Filed
Number   Exhibit Description   Form   File No.   Exhibit   Filing Date   Herewith
 
  31 .2   Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended                   X
  32 .1*   Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended                   X
  32 .2*   Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended                   X
  101 .INS   XBRL Instance                   X
  101 .SCH   XBRL Taxonomy Extension Schema                   X
  101 .CAL   XBRL Taxonomy Extension Calculation                   X
  101 .LAB   XBRL Taxonomy Extension Labels                   X
  101 .PRE   XBRL Taxonomy Extension Presentation                   X
  101 .DEF   XBRL Taxonomy Extension Definition                   X
 
 
Compensation plans or arrangements in which directors or executive officers are eligible to participate.
 
* The certifications attached as Exhibit 32.1 and Exhibit 32.2 accompany this Annual Report on Form 10-K, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of PetSmart, Inc., under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.

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