UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission file number: 0-21888

PetSmart, Inc.

(Exact name of registrant as specified in its charter)

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

19601 N. 27th Avenue
Phoenix, Arizona		85027
(Address of principal executive offices)		(Zip Code)

(623) 580-6100
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

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

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

     Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date:

Common Stock, $.0001 Par Value, 113,392,630 Shares at May 13, 2011

 

 

PetSmart, Inc. and Subsidiaries
INDEX

		Page
		Number
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Report of Independent Registered Public Accounting Firm			3
Condensed Consolidated Balance Sheets as of May 1, 2011, January 30, 2011, and May 2, 2010			4
Condensed Consolidated Statements of Income and Comprehensive Income for the thirteen weeks ended May 1, 2011, and May 2, 2010			5
Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended May 1, 2011, and May 2, 2010			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			20
Item 4. Controls and Procedures			20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			22
Item 1A. Risk Factors			23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			23
Item 6. Exhibits			24
Signatures			25
EX-15.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the accompanying condensed consolidated balance sheets of PetSmart, Inc. and subsidiaries (the “Company”) as of May 1, 2011 and May 2, 2010, and the related condensed consolidated statements of income and comprehensive income and of cash flows for the thirteen week periods then ended. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PetSmart, Inc. and subsidiaries as of January 30, 2011, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 24, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 30, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Phoenix, Arizona
May 27, 2011

PetSmart, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except par value)

(Unaudited)

		May 1,				January 30,				May 2,
		2011				2011				2010
ASSETS
Cash and cash equivalents		$	228,097			$	291,949			$	241,964
Short-term investments			9,761				9,708				—
Restricted cash			61,439				61,439				46,515
Receivables, net			52,802				53,971				47,460
Merchandise inventories			635,354				615,841				596,660
Deferred income taxes			44,999				44,999				36,805
Prepaid expenses and other current assets			72,286				46,022				61,007
Total current assets			1,104,738				1,123,929				1,030,411
Property and equipment, net			1,100,910				1,132,435				1,176,144
Equity investment in Banfield			29,473				42,858				33,924
Deferred income taxes			91,260				96,215				87,148
Goodwill			45,597				44,111				43,667
Other noncurrent assets			36,802				30,672				27,155
Total assets		$	2,408,780			$	2,470,220			$	2,398,449
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and bank overdraft		$	154,435			$	168,776			$	198,280
Accrued payroll, bonus and employee benefits			114,608				139,359				98,615
Accrued occupancy expenses and deferred rents			60,349				64,328				59,293
Current maturities of capital lease obligations			47,176				45,277				39,462
Other current liabilities			168,690				156,065				142,136
Total current liabilities			545,258				573,805				537,786
Capital lease obligations			515,139				521,552				533,893
Deferred rents			84,704				86,027				89,625
Other noncurrent liabilities			119,693				118,194				103,621
Total liabilities			1,264,794				1,299,578				1,264,925
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, 162,973, 162,586 and 161,253 shares issued			16				16				16
Additional paid-in capital			1,238,604				1,222,340				1,169,930
Retained earnings			1,334,534				1,277,803				1,137,466
Accumulated other comprehensive income			8,154				5,380				4,786
Less: Treasury stock, at cost, 49,582, 47,094 and 42,929 shares			(1,437,322	)			(1,334,897	)			(1,178,674	)
Total stockholders’ equity			1,143,986				1,170,642				1,133,524
Total liabilities and stockholders’ equity		$	2,408,780			$	2,470,220			$	2,398,449

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

PetSmart, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

(In thousands, except per share data)

(Unaudited)

		For the Thirteen Weeks Ended
		May 1, 2011				May 2, 2010
Merchandise sales		$	1,314,349			$	1,233,595
Services sales			167,096				153,287
Other revenue			8,921				8,271
Net sales			1,490,366				1,395,153
Cost of merchandise sales			919,476				869,842
Cost of services sales			120,554				112,748
Cost of other revenue			8,921				8,271
Total cost of sales			1,048,951				990,861
Gross profit			441,415				404,292
Operating, general and administrative expenses			319,732				301,031
Operating income			121,683				103,261
Interest expense, net			(14,447	)			(15,343	)
Income before income tax expense and equity in income from Banfield			107,236				87,918
Income tax expense			(38,906	)			(33,764	)
Equity in income from Banfield			2,575				1,438
Net income			70,905				55,592
Other comprehensive income, net of income tax:
Foreign currency translation adjustments			2,774				2,417
Comprehensive income		$	73,679			$	58,009
Earnings per common share:
Basic		$	0.62			$	0.47
Diluted		$	0.61			$	0.46
Weighted average shares outstanding:
Basic			113,541				117,976
Diluted			115,699				120,382

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

PetSmart, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

		For the Thirteen Weeks Ended
		May 1, 2011				May 2, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	70,905			$	55,592
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			60,001				59,738
Loss on disposal of property and equipment			793				3,758
Stock-based compensation expense			6,186				6,572
Deferred income taxes			3,181				6,311
Equity in income from Banfield			(2,575	)			(1,438	)
Dividend received from Banfield			15,960				—
Tax benefits from tax deductions in excess of the compensation cost recognized			(2,419	)			(4,462	)
Non-cash interest expense			196				308
Changes in other operating assets and liabilities:
Merchandise inventories			(18,482	)			(32,140	)
Other assets			(29,322	)			(1,334	)
Accounts payable			(7,335	)			(7,756	)
Accrued payroll, bonus and employee benefits			(24,915	)			(6,723	)
Other liabilities			24,202				7,858
Net cash provided by operating activities			96,376				86,284
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments			(4,211	)			—
Proceeds from maturities of investments			1,000				—
Decrease in restricted cash			—				1,657
Cash paid for property and equipment			(31,060	)			(31,063	)
Proceeds from sales of property and equipment			110				55
Net cash used in investing activities			(34,161	)			(29,351	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock traded under stock incentive plans			12,111				16,483
Minimum statutory withholding requirements			(6,161	)			(4,788	)
Cash paid for treasury stock			(102,425	)			(107,068	)
Payments of capital lease obligations			(12,535	)			(15,239	)
Decrease in bank overdraft			(7,257	)			(6,419	)
Tax benefits from tax deductions in excess of the compensation cost recognized			2,419				4,462
Cash dividends paid to stockholders			(14,436	)			(12,072	)
Net cash used in financing activities			(128,284	)			(124,641	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			2,217				1,312
DECREASE IN CASH AND CASH EQUIVALENTS			(63,852	)			(66,396	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			291,949				308,360
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	228,097			$	241,964

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

PetSmart, Inc. and Subsidiaries

NOTE 1 — GENERAL

     PetSmart, Inc., including its wholly owned subsidiaries (the “Company,” “PetSmart” or “we”), is the leading specialty provider of products, services and solutions for the lifetime needs of pets in North America. We offer a broad 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 May 1, 2011, we operated 1,192 retail stores and had full-service veterinary hospitals in 776 of our stores. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 766 of the veterinary hospitals under the registered trade name of “Banfield, The Pet Hospital.” The remaining 10 hospitals are operated by other third parties in Canada.

     The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or “GAAP,” for interim reporting. Accordingly, they do not include all the information and footnotes required by GAAP for annual financial statements. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments, which are of a normal, recurring nature, necessary for the fair statement of results for the interim periods presented. These condensed consolidated financial statements, which are unaudited, should be read in conjunction with the audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended January 30, 2011.

     Due to the seasonal nature of our business, the results of operations for the thirteen weeks ended May 1, 2011, are not necessarily indicative of the results expected for the full year. Our fiscal year consists of 52 or 53 weeks and ends on the Sunday nearest January 31. Fiscal 2011 ends on January 29, 2012, while fiscal 2010 ended on January 30, 2011, both 52 week years. Unless otherwise specified, all references to years in these condensed consolidated financial statements are to fiscal years.

NOTE 2 — DERIVATIVE FINANCIAL INSTRUMENTS

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

     At May 1, 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 liability related to these Foreign Exchange Contracts included in other current liabilities was immaterial at May 1, 2011. The fair value of the receivable related to these Foreign Exchange Contracts included in prepaid expenses and other current assets was also immaterial at January 30, 2011. During the thirteen weeks ended May 1, 2011, we recorded $0.6 million in losses on the Foreign Exchange Contracts. We did not enter into any Foreign Exchange Contracts during the thirteen weeks ended May 2, 2010.

NOTE 3 — INCOME TAXES

     We generally do not materially adjust deferred income taxes as part of our interim income tax provision. During the thirteen weeks ended May 1, 2011, changes in deferred income taxes were primarily due to tax benefits related to stock-based compensation, and changes in accumulated other comprehensive income. During the interim periods, we recognize the provision for income taxes in other current liabilities in the Condensed Consolidated Balance Sheets. The provision is calculated based on our estimated annual effective income tax rate applied to pretax income. A reclassification between other current liabilities and deferred income tax assets and liabilities is likely to occur during the fourth quarter of 2011. During the thirteen weeks ended May 1, 2011, we recognized a tax benefit of $3.9 million from dividends received from Banfield.

NOTE 4 — INVESTMENTS

     We have an investment in Banfield which is accounted for using the equity method of accounting. Our ownership interest in the stock of Banfield was as follows (in thousands):

		May 1, 2011								January 30, 2011								May 2, 2010
		Shares				Amount				Shares				Amount				Shares				Amount
Voting common stock and preferred stock			4,693			$	21,675				4,693			$	21,675				4,693			$	21,675
Equity in income from Banfield			—				23,758				—				21,183				—				12,249
Dividend received from Banfield			—				(15,960	)			—				—				—				—
Total equity investment in Banfield			4,693			$	29,473				4,693			$	42,858				4,693			$	33,924

     Our investment consisted of voting common stock, comprising 21.4% of all voting stock as of May 1, 2011, January 30, 2011, and May 2, 2010. Our ownership percentage as of May 1, 2011, January 30, 2011, and May 2, 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.

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

		May 1, 2011				January 30, 2011				May 2, 2010
Current assets		$	382,346			$	351,379			$	286,783
Noncurrent assets			128,793				119,175				125,090
Current liabilities			386,176				279,836				263,205
Noncurrent liabilities			13,253				12,367				15,767

		Thirteen Weeks Ended
		May 1, 2011				May 2, 2010
Net sales		$	164,858			$	149,308
Income from operations			21,387				11,717
Net income			12,262				6,844

     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.

     We recognized license fees and reimbursements for specific operating expenses from Banfield of $8.9 million and $8.3 million during the thirteen weeks ended May 1, 2011, and May 2, 2010, respectively, in other revenue on the Condensed Consolidated Statements of Income and Comprehensive Income. The related costs are included in cost of other revenue in the Condensed Consolidated Statements of Income and Comprehensive Income. Receivables from Banfield totaled $2.9 million, $2.7 million and $2.6 million at May 1, 2011, January 30, 2011, and May 2, 2010, respectively, and were included in receivables, net in the Condensed Consolidated Balance Sheets.

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

NOTE 5 — RESERVE FOR CLOSED STORES

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

		May 1, 2011				January 30, 2011				May 2, 2010
Total remaining gross occupancy costs		$	32,511			$	34,313			$	38,703
Less:
Expected sublease income			(19,447	)			(22,964	)			(26,691	)
Interest costs			(1,749	)			(1,585	)			(1,822	)
Reserve for closed stores		$	11,315			$	9,764			$	10,190
Current portion, included in other current liabilities		$	3,230			$	3,056			$	2,982
Noncurrent portion, included in other noncurrent liabilities			8,085				6,708				7,208
Reserve for closed stores		$	11,315			$	9,764			$	10,190

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

		Thirteen Weeks Ended
		May 1, 2011				May 2, 2010
Opening balance		$	9,764			$	8,216
Reserve for new store closures			—				2,802
Changes in sublease assumptions			2,530				—
Other			198				120
Charges, net			2,728				2,922
Payments			(1,177	)			(948	)
Ending balance		$	11,315			$	10,190

NOTE 6 — EARNINGS PER COMMON SHARE

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

		Thirteen Weeks Ended
		May 1, 2011				May 2, 2010
Basic			113,541				117,976
Effect of dilutive securities:
Stock options, restricted stock and performance share units			2,158				2,406
Diluted			115,699				120,382

     Certain stock-based compensation awards representing 1.9 million and 2.8 million shares of common stock in the thirteen weeks ended May 1, 2011, and May 2, 2010, respectively, were not included in the calculation of diluted earnings per common share because the inclusion of such awards would have been antidilutive for the periods presented.

NOTE 7 — STOCKHOLDERS’ EQUITY

     Share Purchase Program

     In June 2009, the Board of Directors approved a share purchase program authorizing the purchase of up to $350.0 million of our common stock through January 29, 2012. During the thirteen weeks ended May 2, 2010, we purchased 3.4 million shares of common stock for $107.1 million under this $350.0 million program.

     In June 2010, the Board of Directors approved a share purchase program authorizing the purchase of up to $400.0 million of our common stock through January 29, 2012, replacing the $350.0 million program. During the thirteen weeks ended May 1, 2011, we purchased 2.5 million shares of common stock for $102.4 million under the $400.0 million program. Since the inception of the share purchase authorization in June 2010, we have purchased 6.7 million shares of common stock for $258.6 million. As of May 1, 2011, $141.4 million remained available under the $400.0 million program.

     Dividends

     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.

NOTE 8 — STOCK-BASED COMPENSATION

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

		Thirteen Weeks Ended
		May 1, 2011				May 2, 2010
Stock options expense		$	2,929			$	2,297
Restricted stock expense			1,117				1,525
Performance share unit expense			2,140				1,568
Stock-based compensation cost — equity awards		$	6,186			$	5,390
Management equity unit expense			1,912				1,182
Total stock-based compensation cost		$	8,098			$	6,572
Tax benefit		$	2,673			$	2,307

     At May 1, 2011, the total unrecognized stock-based compensation expense, net of estimated forfeitures, was $62.7 million and is expected to be recognized over a weighted average period of 1.6 years.

NOTE 9 — FOREIGN CURRENCY

     Foreign currency translation adjustments were the primary component of other comprehensive income and are reported separately in stockholders’ equity in the Condensed Consolidated Balance Sheets. The income tax expense related to the foreign currency translation adjustments was $1.8 million and $1.4 million for the thirteen weeks ended May 1, 2011, and May 2, 2010, respectively. The transaction gain included in net income was $0.7 million for each of the thirteen weeks ended May 1, 2011, and May 2, 2010.

     The impact of foreign currency translation adjustments to the carrying value of goodwill was $1.5 million and $0.5 million for the thirteen weeks ended May 1, 2011, and May 2, 2010, respectively.

NOTE 10 — SUPPLEMENTAL SCHEDULE OF CASH FLOWS

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

		Thirteen Weeks Ended
		May 1, 2011				May 2, 2010
Interest paid		$	14,499			$	15,076
Income taxes paid, net of refunds			23,712				24,924
Assets acquired using capital lease obligations			6,965				14,085
Accruals and accounts payable for capital expenditures			17,329				14,822
Dividends declared but unpaid			14,174				11,833

NOTE 11 — CREDIT FACILITIES

     During the thirteen weeks ended May 1, 2011, we elected to reduce the aggregate commitment amount under our $350.0 million revolving credit facility, or “Revolving Credit Facility,” to $100.0 million, which allows us to avoid stand-by costs related to the excess commitment amount. This Revolving Credit Facility expires on August 15, 2012. The Revolving Credit Facility also gives us the ability to issue letters of credit, which reduce the amount available under the Revolving Credit Facility.

     We had no borrowings and $31.6 million in stand-by letter of credit issuances outstanding under our Revolving Credit Facility as of May 1, 2011. As of January 30, 2011, we had no borrowings and $31.6 million in stand-by letter of credit issuances outstanding, and as of May 2, 2010, we had no borrowings and $35.7 million in stand-by letter of credit issuances outstanding.

     We also have a $100.0 million stand-alone letter of credit facility, or “Stand-alone Letter of Credit Facility,” that expires on August 15, 2012. As of May 1, 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 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 May 2, 2010, we had

$46.5 million in outstanding letters of credit under the Stand-alone Letter of Credit Facility and $46.5 million in restricted cash on deposit with the lender.

     Our 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 May 1, 2011, we were in compliance with the terms and covenants of our revolving credit facility and stand-alone letter of credit facility.

NOTE 12 — COMMITMENTS AND CONTINGENCIES

     Advertising Purchase Commitments

     As of May 1, 2011, we had obligations to purchase $12.9 million of advertising through the remainder of 2011.

     Product Purchase Commitments

     As of May 1, 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. On October 14, 2008, the U.S. District Court approved the settlement, and the Canadian courts gave final approval on November 3, 2008. No appeals were filed in Canada and although an appeal of the U.S. settlement was filed in 2009, on April 5, 2011, the District Court reconfirmed on remand the settlement in its entirety, thus concluding these cases with no material impact on our condensed consolidated financial statements.

     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, therefore, we have not accrued any liability. 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.

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

     Except for historical information, the following discussion contains forward-looking statements that involve risks and uncertainties. In the normal course of business, our financial position is routinely subjected to a variety of risks, including market risks associated with store expansion, investments in information systems, international expansion, vendor reliability, competitive forces and government regulatory actions. Our actual results could differ materially from projected results due to some or all of the factors discussed below. You should carefully consider the risks and uncertainties described below:

	•		A decline in consumer spending or a change in consumer preferences could reduce our sales or profitability and harm our business.
	•		The pet products and services retail industry is very competitive and continued competitive forces may adversely impact our business and financial results.
	•		Comparable store sales growth may decrease. If we are unable to increase sales at our existing stores, our results of operations could be harmed.
	•		We may be unable to continue to open new stores and enter new markets successfully. If we are unable to successfully reformat existing stores and open new stores, our results of operations could be harmed. Also, store development may place increasing demands on management and operating systems and may erode sales at existing stores.
	•		Our quarterly operating results may fluctuate due to seasonal changes associated with the pet products and services retail industry and the timing of expenses, new store openings and store closures.
	•		Failure to successfully manage and execute our marketing initiatives could have a negative impact on our business.
	•		A disruption, malfunction or increased costs in the operation, expansion or replenishment of our distribution centers or our supply chain would impact our ability to deliver to our stores or increase our expenses, which could harm our sales and results of operations.
	•		Failure to successfully manage our inventory could harm our business.
	•		If our information systems fail to perform as designed or are interrupted for a significant period of time, our business could be harmed.
	•		If we fail to protect the integrity and security of customer and associate information, we could be exposed to litigation and our business could be adversely impacted.
	•		The disruption of the relationship with or the loss of any of our key vendors, 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.
	•		Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to product liability claims.
	•		Food safety, quality and health concerns could affect our business.
	•		We depend on key executives, store managers and other personnel and may not be able to retain or replace these employees or recruit additional qualified personnel, which could harm our business.
	•		Our international operations may result in additional market risks, which may harm our business.

	•		Our business may be harmed if the operation of veterinary hospitals at our stores is limited or fails to continue.
	•		We face various risks as an e-commerce retailer.
	•		Our business could be harmed if we were unable to effectively manage our cash flow and raise any needed additional capital on acceptable terms.
	•		Failure to successfully integrate any business we acquire could have an adverse impact on our financial results.
	•		Failure to protect our intellectual property could have a negative impact on our operating results.
	•		A determination that we are in violation of any contractual obligations or government regulations could result in a disruption to our operations and could impact our financial results.
	•		Failure of our internal controls over financial reporting could harm our business and financial results.
	•		Changes in laws, accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.
	•		An unfavorable determination by tax regulators may cause our provision for income and other taxes to be inadequate and may result in a material impact to our financial results.
	•		Failure to obtain commercial insurance at acceptable prices or failure to adequately reserve for self-insured exposures might have a negative impact on our business.
	•		Pending legislation, weather, catastrophic events, disease, or other factors, could disrupt our operations, supply chain and the supply of small pets and products we sell, which could harm our reputation and decrease sales.
	•		Fluctuations in the stock market, as well as general economic and market conditions, may impact our operations, sales, financial results and market price of our common stock.
	•		Continued volatility and disruption to the global capital and credit markets may adversely affect our ability to access credit and the financial soundness of our suppliers.
	•		Our operating and financial performance in any given period may differ from the guidance we have provided to the public.
	•		We have implemented some anti-takeover provisions that may prevent or delay an acquisition of us that may not be beneficial to our shareholders.

     For more information about these risks, see the discussion under the heading “Risk Factors” in our Form 10-K for the year ended January 30, 2011, filed with the Securities and Exchange Commission on March 24, 2011, which is incorporated herein by reference.

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 May 1, 2011, we operated 1,192 stores, and we anticipate opening 40 to 45 net new stores during the remainder of 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 May 1, 2011, we operated 184 PetsHotels, and we anticipate opening 5 to 10 additional PetsHotels during the remainder of 2011.

     We make full-service veterinary care available through our strategic relationship with certain third-party operators. As of May 1, 2011, 776 of our stores included full service veterinary hospitals. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 766 of the veterinary hospitals under the registered trade name of “Banfield, The Pet Hospital.” The remaining 10 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 continuing changes in the macro-economy. However, we believe we have a competitive advantage in our solutions for the Total Lifetime Care^SM of pets, including pet services and proprietary brands, which we believe cannot easily be duplicated. Additionally, we believe that our 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 increased 32.6% to $0.61, on net income of $70.9 million, for the thirteen weeks ended May 1, 2011, compared to diluted earnings per common share of $0.46 on net income of $55.6 million for the thirteen weeks ended May 2, 2010.
	•		Net sales increased 6.8% to $1.5 billion for the thirteen weeks ended May 1, 2011, compared to $1.4 billion for the thirteen weeks ended May 2, 2010. The increase in net sales was partially impacted by $4.2 million in favorable foreign currency fluctuations for the thirteen weeks ended May 1, 2011.
	•		Comparable store sales, or sales in stores open at least one year, increased 5.0% for the thirteen weeks ended May 1, 2011.
	•		Services sales increased 9.0% to $167.1 million for the thirteen weeks ended May 1, 2011, compared to $153.3 million for the thirteen weeks ended May 2, 2010.
	•		As of May 1, 2011, we had $289.5 million in cash, cash equivalents and restricted cash. We had no short-term debt, and did not borrow against our revolving credit facility during the thirteen weeks ended May 1, 2011.
	•		We purchased 2.5 million shares of our common stock for $102.4 million during the thirteen weeks ended May 1, 2011.

Critical Accounting Policies and Estimates

     We discuss our critical accounting policies and estimates in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended January 30, 2011. We have made no significant change in our critical accounting policies since January 30, 2011.

Results of Operations

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

		Thirteen Weeks Ended
		May 1, 2011				May 2, 2010
Net sales			100.0	%			100.0	%
Total cost of sales			70.4				71.0
Gross profit			29.6				29.0
Operating, general and administrative expenses			21.5				21.6
Operating income			8.2				7.4
Interest expense, net			(1.0	)			(1.1	)
Income before income tax expense and equity in income from Banfield			7.2				6.3
Income tax expense			(2.6	)			(2.4	)
Equity in income from Banfield			0.2				0.1
Net income			4.8	%			4.0	%

Thirteen Weeks Ended May 1, 2011, Compared to the Thirteen Weeks Ended May 2, 2010

     Net Sales

     Net sales increased $0.1 billion, or 6.8%, to $1.5 billion for the thirteen weeks ended May 1, 2011, compared to $1.4 billion for the thirteen weeks ended May 2, 2010. The increase in net sales was partially impacted by $4.2 million in favorable foreign currency fluctuations. Approximately 30% of the sales increase is due to the addition of 32 net new stores and 19 new PetsHotels since May 2, 2010, and 70% of the sales increase is due to a 5.0% increase in comparable store sales for the thirteen weeks ended May 1, 2011. The increase in comparable store sales was due to the impact of merchandising strategies, pricing strategies and new product offerings. An increase in the number of transactions represented 2.7% of the comparable store sales growth in the thirteen weeks ended May 1, 2011, compared to (0.4)% in the thirteen weeks ended May 2, 2010. An increase in the average sales per transaction represented 2.3% of the comparable store sales growth in the thirteen weeks ended May 1, 2011, compared to 3.2% in the thirteen weeks ended May 2, 2010.

     Services sales, included in the net sales amount discussed above, include grooming, training, boarding and day camp and increased 9.0%, or $13.8 million, to $167.1 million for the thirteen weeks ended May 1, 2011, compared to $153.3 million for the thirteen weeks ended May 2, 2010. The increase in services sales is primarily due to continued strong demand for our grooming services, improved occupancy in our PetsHotels and the addition of 32 net new stores and 19 new PetsHotels since May 2, 2010.

     Other revenue included in net sales during the thirteen weeks ended May 1, 2011, represents license fees and reimbursements for utilities and specific operating expenses charged to Banfield under the master operating agreement which comprised 0.6% of net sales, or $8.9 million, compared to 0.6% of net sales, or $8.3 million, for the thirteen weeks ended May 2, 2010. See the Related Party Transactions discussion for further information.

     Gross Profit

     Gross profit increased to 29.6% of net sales for the thirteen weeks ended May 1, 2011, from 29.0% for the thirteen weeks ended May 2, 2010, representing an increase of 60 basis points.

     Overall merchandise margin increased 15 basis points due to improvement in rate, which was slightly offset by mix. The rate improvement is the result of increased sales of higher margin goods within the product categories during the thirteen weeks ended May 1, 2011, relative to the thirteen weeks ended May 2, 2010. Mix was negatively impacted as the sales growth in our consumables continued to outpace the sales growth of our higher margin hardgoods category. 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.

     Services margin increased 15 basis points primarily due to increased sales and reduced operating costs of our PetsHotels services as well as a shift to higher margin offerings in our grooming services.

     Store occupancy costs included in margin provided 30 basis points due to leverage associated with the increase in net sales.

     Operating, General and Administrative Expenses

     Operating, general and administrative expenses decreased to 21.5% of net sales for the thirteen weeks ended May 1, 2011, compared to 21.6% of net sales for the thirteen weeks ended May 2, 2010, representing a decrease of 10 basis points.

     Operating, general and administrative expenses increased on a dollar basis by $18.7 million. The primary reasons for the year over year increase include store growth, planned incremental advertising spend focused on our differentiated offerings, higher benefit costs and higher bank fees associated with increases in debit card rates.

     Interest Expense, net

     Interest expense, which is primarily related to capital lease obligations, was $14.7 million during the thirteen weeks ended May 1, 2011, compared to $15.4 million for the thirteen weeks ended May 2, 2010. Included in interest expense, net was interest income of $0.3 million and $0.1 million for the thirteen weeks ended May 1, 2011, and May 2, 2010, respectively.

     Income Tax Expense

     In the thirteen weeks ended May 1, 2011, the $38.9 million income tax expense represents an effective tax rate of 36.3%, compared with the thirteen weeks ended May 2, 2010, when we had income tax expense of $33.8 million, which represented an effective tax rate of 38.4%. The decrease in the effective tax rate was primarily due to a tax deductible dividend received during the quarter from Banfield. 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 $2.6 million and $1.4 million for the thirteen weeks ended May 1, 2011, and May 2, 2010, 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 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 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. Cash provided by operating activities was $96.4 million for the thirteen weeks ended May 1, 2011, compared to $86.3 million for the thirteen weeks ended May 2, 2010. The primary differences between the thirteen weeks ended May 1, 2011, and May 2, 2010, resulted from the $16.0 million dividend received from Banfield.

     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. Cash used in investing activities was $34.2 million for the thirteen weeks

ended May 1, 2011, compared to $29.4 million for the thirteen weeks ended May 2, 2010. The primary differences between the thirteen weeks ended May 1, 2011, and May 2, 2010, were purchases of investments and a decrease in restricted cash.

     Net cash used in financing activities was $128.3 million for the thirteen weeks ended May 1, 2011, and consisted primarily of the cash paid for treasury stock, payments of cash dividends, payments on capital lease obligations, a decrease in our bank overdraft, offset by net proceeds from common stock issued under equity incentive plans. Net cash used in financing activities for the thirteen weeks ended May 2, 2010, was $124.6 million. The primary difference between the thirteen weeks ended May 1, 2011, and the thirteen weeks ended May 2, 2010, was a decrease in net proceeds from common stock issued under equity incentive plans.

Operating Capital and Capital Expenditure Requirements

     Substantially all our stores are leased facilities. We opened 5 new stores and did not close any stores in the thirteen weeks ended May 1, 2011. Generally, each new store requires capital expenditures of approximately $1.1 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 $130 million to $140 million for 2011, based on our plan to open 45 to 50 net new stores and 10 to 15 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 (in thousands):

		Thirteen Weeks Ended
		May 1, 2011				May 2, 2010
Capital Expenditures:
New stores		$	10,467			$	7,272
Store-related projects(1)			9,420				12,064
PetsHotel(2)			1,022				1,194
Information technology			8,438				5,839
Supply chain			1,487				4,518
Other			226				176
Total capital expenditures		$	31,060			$	31,063

Commitments

     As of May 1, 2011, we had obligations to purchase $12.9 million of advertising through the remainder of 2011.

     As of May 1, 2011, we had various commitments to purchase product from certain vendors that are not material to our total inventory purchases.

     There have been no other material changes in our contractual obligations since January 30, 2011. Information regarding our contractual obligations is provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended January 30, 2011.

Credit Facilities

     During the thirteen weeks ended May 1, 2011, we decreased the aggregate commitment amount under our $350.0 million revolving credit facility, or “Revolving Credit Facility,” to $100.0 million. We elected to reduce the Revolving Credit Facility as we do not anticipate borrowings, if any, in excess of $100.0 million, which allows us to avoid stand-by costs related to the excess commitment

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

     We had no borrowings and $31.6 million in stand-by letter of credit issuances outstanding under our Revolving Credit Facility as of May 1, 2011. As of January 30, 2011, we had no borrowings and $31.6 million in stand-by letter of credit issuances outstanding, and as of May 2, 2010, we had no borrowings and $35.7 million in stand-by letter of credit issuances outstanding.

     We also have a $100.0 million stand-alone letter of credit facility, or “Stand-alone Letter of Credit Facility,” that expires August 15, 2012. We are subject to fees payable to the lender each quarter at an annual rate of 0.45% of the average daily face amount of the letters of credit outstanding during the preceding calendar quarter. In addition, we are required to maintain a cash deposit with the lender equal to the amount of outstanding letters of credit or we may use other approved investments as collateral. If we use other approved investments as collateral, we must have an amount on deposit which, when multiplied by the advance rate of 85%, is equal to the amount of the outstanding letters of credit under the Stand-alone Letter of Credit Facility. As of May 1, 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 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 May 2, 2010, we had $46.5 million in outstanding letters of credit under the Stand-alone Letter of Credit Facility and $46.5 million in restricted cash on deposit with the lender.

     Our 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 May 1, 2011, we were in compliance with the terms and covenants of our Revolving Credit Facility and Stand-alone Letter of Credit Facility. Our Revolving Credit Facility and Stand-alone Letter of Credit Facility are secured by substantially all our personal property assets, our subsidiaries and certain real property.

Dividends

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

     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.

Share Purchase Program

     In June 2009, the Board of Directors approved a share purchase program authorizing the purchase of up to $350.0 million of our common stock through January 29, 2012. During the thirteen weeks ended May 2, 2010, we purchased 3.4 million shares of common stock for $107.1 million under this $350.0 million program.

     In June 2010, the Board of Directors approved a share purchase program authorizing the purchase of up to $400.0 million of our common stock through January 29, 2012, replacing the $350.0 million program. During the thirteen weeks ended May 1, 2011, we purchased 2.5 million shares of common stock for $102.4 million under the $400.0 million program. Since the inception of the share purchase authorization in June 2010, we have purchased 6.7 million shares of common stock for $258.6 million. As of May 1, 2011, $141.4 million remained available under the $400.0 million program.

Related Party Transactions

     We have an investment in Banfield, who through a wholly owned subsidiary, Medical Management International, Inc., operates full-service veterinary hospitals in 766 of our stores. Our investment consists of common and preferred stock. As of May 1, 2011, we owned 21.4% of the voting stock and 21.0% of the combined voting and non-voting stock of Banfield.

     Our equity in income from our investment in Banfield, which is recorded one month in arrears under the equity method of accounting, was $2.6 million and $1.4 million for the thirteen weeks ended May 1, 2011, and May 2, 2010, respectively. During the thirteen weeks ended May 1, 2011, we received a dividend from Banfield of $16.0 million.

     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.

     We recognized license fees and reimbursements for specific operating expenses from Banfield of $8.9 million and $8.3 million during the thirteen weeks ended May 1, 2011, and May 2, 2010, respectively, in other revenue on the Condensed Consolidated Statements of Income and Comprehensive Income. The related costs are included in cost of other revenue in the Condensed Consolidated Statements of Income and Comprehensive Income. Receivables from Banfield totaled $2.9 million, $2.7 million and $2.6 million at May 1, 2011, January 30, 2011, and May 2, 2010, respectively, and were included in receivables, net in the Condensed Consolidated Balance Sheets.

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

Seasonality and Inflation

     Our business is subject to seasonal fluctuations. We typically realize a higher portion of our net sales and operating profits during the fourth quarter due to increased holiday traffic. As a result of this seasonality, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. Controllable expenses could fluctuate from quarter-to-quarter in a year. Since our stores typically draw customers from a large trade area, sales also may be impacted by adverse weather or travel conditions, which are more prevalent during certain seasons of the year. As a result of our expansion plans, the timing of new store and PetsHotel openings and related preopening costs, the amount of revenue contributed by new and existing stores and PetsHotels and the timing and estimated obligations of store closures, our quarterly results of operations may fluctuate. Finally, because new stores tend to experience higher payroll, advertising and other store level expenses as a percentage of sales than mature stores, new store openings will also contribute to lower store operating margins until these stores become established. We expense preopening costs associated with each new location as the costs are incurred.

     While we have experienced inflationary pressure in recent years, we have been able to largely mitigate the effect by increasing retail prices accordingly. Although neither inflation nor deflation has had a material impact on net operating results, we can make no assurance that our business will not be affected by inflation or deflation in the future.

Impact of Federal Health Care Reform Legislation

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

Item 3.		Quantitative and Qualitative Disclosures about Market Risks

     As of May 1, 2011, there have been no material changes in any of the market risk information disclosed by us in our Annual Report on Form 10-K for the year ended January 30, 2011. More detailed information concerning market risk can be found in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended January 30, 2011.

Item 4.		Controls and Procedures

     Management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of May 1, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and

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

     No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the thirteen weeks ended May 1, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on the evaluation of our disclosure controls and procedures as of May 1, 2011, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level and designed to meet the objective at the reasonable assurance level.

PART II. OTHER INFORMATION

Item 1.		Legal Proceedings

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

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

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

     On May 21, 2008, the parties to the U.S. lawsuits comprising the In re: Pet Food Product Liability Litigation and the Canadian cases jointly submitted a comprehensive settlement arrangement for court approval. On October 14, 2008, the U.S. District Court approved the settlement, and the Canadian courts gave final approval on November 3, 2008. No appeals were filed in Canada and although an appeal of the U.S. settlement was filed in 2009, on April 5, 2011, the District Court reconfirmed on remand the settlement in its entirety, thus concluding these cases with no material impact on our condensed consolidated financial statements.

     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, therefore, we have not accrued any liability. 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.

Item 1A.		Risk Factors

     In addition to the other information in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended January 30, 2011, which could materially affect our business, financial condition or future results.

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

     The following table shows purchases of our common stock and the available funds to purchase additional common stock for each period in the thirteen weeks ended May 1, 2011

										Total Number of
		Total								Shares				Value That May
		Number								Purchased as Part of				Yet be Purchased
		of Shares				Average Price				Publicly Announced				Under the Plans or
Period		Purchased				Paid per Share				Plans or Programs				Programs(1)
January 31, 2011 to February 27, 2011			—				—				—			$	243,778,000
February 28, 2011 to April 3, 2011			2,488,000			$	41.17				2,488,000			$	141,353,000
April 4, 2011 to May 1, 2011			—				—				—			$	141,353,000
Thirteen Weeks Ended May 1, 2011			2,488,000			$	41.17				2,488,000			$	141,353,000

Item 6.		Exhibits

(a)

Exhibits

Exhibit 10.1		2011 Performance Share Unit Program(1)
Exhibit 15.1		Awareness Letter from Deloitte & Touche LLP regarding unaudited interim financial statements.
Exhibit 31.1		Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
Exhibit 31.2		Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
Exhibit 32.1*		Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.
Exhibit 32.2*		Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.
Exhibit 101.INS **		XBRL Instance
Exhibit 101.SCH **		XBRL Taxonomy Extension Schema
Exhibit 101.CAL **		XBRL Taxonomy Extension Calculation
Exhibit 101.LAB **		XBRL Taxonomy Extension Labels
Exhibit 101.PRE **		XBRL Taxonomy Extension Presentation
Exhibit 101.DEF **		XBRL Taxonomy Extension Definition

SIGNATURES

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