PETSMART INC - FORM 10-Q - August 28, 2014

Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - PETSMART INCFinancial_Report.xls
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AS REQUIRED BY RULE 13A-14(B) - PETSMART INCpetm-20140803xex321.htm
EX-15.1 - AWARENESS LETTER FROM DELOITTE & TOUCHE LLP - PETSMART INCpetm-20140803xex151.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER AS REQUIRED BY RULE 13A-14(B) - PETSMART INCpetm-20140803xex322.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AS REQUIRED BY RULE 13A-14(A) - PETSMART INCpetm-20140803xex311.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER AS REQUIRED BY RULE 13A-14(A) - PETSMART INCpetm-20140803xex312.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________ 
FORM 10-Q
_________________________________________ 
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended August 3, 2014
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             
Commission file number: 0-21888
_________________________________________ 
PetSmart, Inc.
(Exact name of registrant as specified in its charter)
_________________________________________ 
Delaware
94-3024325
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
19601 N. 27th Avenue
Phoenix, Arizona
85027
(Address of principal executive offices)
(Zip Code)
(623) 580-6100
(Registrant’s telephone number, including area code)
 _________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
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  x    No  ¨
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.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
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  ¨    No  x
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, 99,331,901 Shares at August 15, 2014



PetSmart, Inc. and Subsidiaries
INDEX


 
Page
Number
 
 
 

2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the accompanying condensed consolidated balance sheets of PetSmart, Inc. and subsidiaries (the “Company”) as of August 3, 2014 and August 4, 2013, and the related condensed consolidated statements of income and comprehensive income for the thirteen week and twenty-six week periods then ended, and of cash flows for the twenty-six 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 February 2, 2014, 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 27, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 2, 2014 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
August 28, 2014


3
PetSmart, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except par value)
(Unaudited)



 
August 3,
2014
 
February 2,
2014
 
August 4,
2013
ASSETS
 
 
 
 
 
Cash and cash equivalents
$
251,757

 
$
285,622

 
$
281,554

Short-term investments
—

 
—

 
3,087

Restricted cash
71,226

 
71,226

 
71,226

Receivables, net
79,446

 
72,685

 
69,118

Merchandise inventories
793,364

 
740,302

 
770,268

Deferred income taxes
71,940

 
71,945

 
62,859

Prepaid expenses and other current assets
107,156

 
76,463

 
115,319

Total current assets
1,374,889

 
1,318,243

 
1,373,431

Property and equipment, net
954,109

 
952,955

 
951,499

Equity investment in Banfield
31,851

 
33,577

 
29,678

Deferred income taxes
103,011

 
110,408

 
98,162

Goodwill
41,659

 
41,140

 
43,031

Other noncurrent assets
60,228

 
65,645

 
54,105

Total assets
$
2,565,747

 
$
2,521,968

 
$
2,549,906

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Accounts payable and bank overdraft
$
246,995

 
$
255,251

 
$
248,467

Accrued payroll, bonus, and employee benefits
146,513

 
160,008

 
163,494

Accrued occupancy expenses and deferred rents
73,624

 
81,867

 
72,829

Current maturities of capital lease obligations
70,072

 
66,887

 
64,449

Other current liabilities
250,756

 
230,332

 
221,150

Total current liabilities
787,960

 
794,345

 
770,389

Capital lease obligations
449,873

 
451,597

 
454,673

Deferred rents
61,528

 
65,932

 
68,856

Other noncurrent liabilities
106,590

 
116,312

 
108,649

Total liabilities
1,405,951

 
1,428,186

 
1,402,567

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, 169,873, 169,178, and 168,891 shares issued
17

 
17

 
17

Additional paid-in capital
1,547,068

 
1,515,333

 
1,487,860

Retained earnings
2,335,983

 
2,173,005

 
1,989,401

Accumulated other comprehensive (loss) income
(858
)
 
(2,159
)
 
2,475

Less: Treasury stock, at cost, 70,546, 68,520, and 64,951 shares
(2,722,414
)
 
(2,592,414
)
 
(2,332,414
)
Total stockholders’ equity
1,159,796

 
1,093,782

 
1,147,339

Total liabilities and stockholders’ equity
$
2,565,747

 
$
2,521,968

 
$
2,549,906

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

4
PetSmart, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share data)
(Unaudited)


 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
August 3,
2014
 
August 4,
2013
 
August 3,
2014
 
August 4,
2013
Merchandise sales
$
1,505,003

 
$
1,492,457

 
$
3,024,009

 
$
3,001,829

Services sales
214,279

 
204,707

 
414,434

 
396,284

Other revenue
10,657

 
8,833

 
20,628

 
18,480

Net sales
1,729,939

 
1,705,997

 
3,459,071

 
3,416,593

Cost of merchandise sales
1,062,446

 
1,040,814

 
2,114,090

 
2,077,928

Cost of services sales
141,719

 
141,130

 
278,398

 
275,219

Cost of other revenue
10,657

 
8,833

 
20,628

 
18,480

Total cost of sales
1,214,822

 
1,190,777

 
2,413,116

 
2,371,627

Gross profit
515,117

 
515,220

 
1,045,955

 
1,044,966

Operating, general, and administrative expenses
352,165

 
358,670

 
711,245

 
720,898

Operating income
162,952

 
156,550

 
334,710

 
324,068

Interest expense, net
(12,890
)
 
(12,828
)
 
(26,073
)
 
(25,996
)
Income before income tax expense and equity income from Banfield
150,062

 
143,722

 
308,637

 
298,072

Income tax expense
(58,037
)
 
(54,493
)
 
(116,629
)
 
(110,040
)
Equity income from Banfield
6,091

 
4,139

 
9,874

 
7,751

Net income
98,116

 
93,368

 
201,882

 
195,783

Other comprehensive income (loss), net of income tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
419

 
(2,030
)
 
1,301

 
(3,017
)
Other
—

 
(5
)
 
—

 
(14
)
Comprehensive income
$
98,535

 
$
91,333

 
$
203,183

 
$
192,752

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.99

 
$
0.90

 
$
2.03

 
$
1.89

Diluted
$
0.98

 
$
0.89

 
$
2.02

 
$
1.87

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
99,226

 
103,474

 
99,215

 
103,390

Diluted
99,689

 
104,512

 
99,766

 
104,547

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

5
PetSmart, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)



 
Twenty-Six Weeks Ended
 
August 3,
2014
 
August 4,
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
201,882

 
$
195,783

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
117,691

 
117,939

Loss on disposal of property and equipment
1,581

 
1,281

Stock-based compensation expense
9,983

 
12,889

Deferred income taxes
6,570

 
6,758

Equity income from Banfield
(9,874
)
 
(7,751
)
Dividends received from Banfield
11,600

 
18,007

Excess tax benefits from stock-based compensation
(5,611
)
 
(21,576
)
Non-cash interest expense
294

 
311

Changes in assets and liabilities:
 
 
 
Merchandise inventories
(52,499
)
 
(92,363
)
Other assets
(34,379
)
 
(24,092
)
Accounts payable
3,692

 
56,007

Accrued payroll, bonus, and employee benefits
(13,558
)
 
(12,357
)
Other liabilities
(9,002
)
 
(16,801
)
Net cash provided by operating activities
228,370

 
234,035

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investments
(2,127
)
 
(6,846
)
Proceeds from maturities of investments
4,205

 
7,165

Proceeds from sales of investments
240

 
580

Decrease in restricted cash
—

 
690

Cash paid for property and equipment
(68,273
)
 
(61,306
)
Proceeds from sales of property and equipment
—

 
8,915

Net cash used in investing activities
(65,955
)
 
(50,802
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from common stock issued under stock incentive plans
21,645

 
38,330

Minimum statutory withholding requirements
(4,823
)
 
(5,767
)
Cash paid for treasury stock
(130,000
)
 
(225,404
)
Payments of capital lease obligations
(38,715
)
 
(36,343
)
Change in bank overdraft and other financing activities
(12,072
)
 
(9,507
)
Excess tax benefits from stock-based compensation
5,611

 
21,576

Cash dividends paid to stockholders
(38,966
)
 
(17,043
)
Net cash used in financing activities
(197,320
)
 
(234,158
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
1,040

 
(2,676
)
DECREASE IN CASH AND CASH EQUIVALENTS
(33,865
)
 
(53,601
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
285,622

 
335,155

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
251,757

 
$
281,554

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Interest paid
$
26,221

 
$
26,224

Income taxes paid, net of refunds
$
140,883

 
$
155,771

Assets acquired using capital lease obligations
$
37,971

 
$
28,672

Accruals and accounts payable for capital expenditures
$
21,983

 
$
32,711

Dividends declared, but unpaid
$
20,417

 
$
17,677

Non-cash construction in progress acquired with notes payable
$
10,500

 
$
—

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

6
PetSmart, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)



Note 1 — General
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended February 2, 2014.

PetSmart, Inc., including its wholly owned subsidiaries (the “Company,” “PetSmart,” “we,” or “us”), 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 services including professional grooming and boarding for cats and dogs, and training and day camp for dogs. We also offer pet products through our e-commerce website, PetSmart.com. As of August 3, 2014, we operated 1,352 stores and had full-service veterinary hospitals in 856 of our stores. We have a 21.0% investment in MMI Holdings, Inc., which is accounted for under the equity method of accounting. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 850 of the veterinary hospitals under the registered trade name of “Banfield, The Pet Hospital.” The remaining 6 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 our opinion, the accompanying condensed consolidated financial statements reflect all adjustments, which are of a normal, recurring nature, necessary for a fair presentation of the interim periods presented.

Due to the seasonal nature of our business, the results of operations for the thirteen and twenty-six weeks ended August 3, 2014, 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 2014 ends on February 1, 2015, while fiscal 2013 ended on February 2, 2014, both 52-week years. Unless otherwise specified, all references to years in these condensed consolidated financial statements are to fiscal years.
Note 2 — Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or “FASB,” issued a new revenue recognition standard, which supersedes the existing standard and eliminates all industry-specific standards. The largely principles-based standard provides a comprehensive framework that can be applied to all contracts with customers, regardless of industry-specific or transaction-specific fact patterns. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities should apply the five-step model outlined in the standard to achieve that core principal. The standard will be effective for us beginning with fiscal year 2017, and may be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the financial statement impact of adopting this new standard.

In June 2014, FASB issued an update regarding accounting for share-based payments for which the terms of an award provide that a performance target could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The updated standard clarifies that such awards should be treated as a performance condition that affects vesting. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The standard will be effective for us beginning with fiscal year 2016, and may be applied either prospectively or retrospectively. We do not anticipate that this will materially impact our financial statements.
Note 3 — Foreign Currency
Foreign currency translation adjustments are included in other comprehensive income (loss) and are reported in stockholders' equity in the Condensed Consolidated Balance Sheets. Transaction gains and losses are included in net income in the Condensed Consolidated Statements of Income and Comprehensive Income.

7
PetSmart, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Activities related to foreign currency adjustments were as follows (in thousands):
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
August 3,
2014
 
August 4,
2013
 
August 3,
2014
 
August 4,
2013
Deferred tax (expense) benefit on translation adjustments
$
(268
)
 
$
1,297

 
$
(832
)
 
$
1,928

Transaction loss
(142
)
 
(429
)
 
(193
)
 
(632
)

The carrying value of goodwill changed solely from the impact of foreign currency translation adjustments during the thirteen and twenty-six weeks ended August 3, 2014, and August 4, 2013.
Note 4 — Investments
Short-term Investments
As of August 4, 2013, our short-term investments consisted of municipal bonds with various maturities, representing funds available for current operations. These short-term investments were classified as available-for-sale and were carried at fair value using quoted prices in active markets for identical assets or liabilities (Level 1). At August 4, 2013, the amortized cost basis was $3.1 million, and accrued interest was immaterial. Unrealized gains and losses were included in other comprehensive income in the Condensed Consolidated Statements of Income and Comprehensive Income. We did not have any short-term investments as of August 3, 2014, or February 2, 2014.

Investments in Negotiable Certificates of Deposit
At August 3, 2014, February 2, 2014, and August 4, 2013, we had investments in negotiable certificates of deposit, or “NCDs,” with various maturities. These investments are classified as held-to-maturity and are carried at their amortized cost basis.

The amortized cost basis of our investments in NCDs was classified in the Condensed Consolidated Balance Sheets as follows (in thousands):
 
August 3,
2014
 
February 2, 2014
 
August 4,
2013
Prepaid expenses and other current assets
$
7,153

 
$
7,045

 
$
5,409

Other noncurrent assets
3,334

 
5,760

 
2,400


The aggregate fair value of our investments in NCDs was $10.5 million, $12.8 million, and $7.8 million at August 3, 2014, February 2, 2014, and August 4, 2013, respectively. The fair value is determined using pricing models, which use inputs based on observable market data (Level 2). The inputs of the pricing models are issuer spreads and reported trades. We had no unrecognized gains or losses for the thirteen and twenty-six weeks ended August 3, 2014, and August 4, 2013.

Equity Investment in Banfield
Our investment in Banfield is accounted for using the equity method of accounting. As of August 3, 2014, February 2, 2014, and August 4, 2013, our investment represented 21.4% of the voting common stock and 21.0% of the combined voting and non-voting stock of Banfield. 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):
 
August 3,
2014
 
February 2, 2014
 
August 4,
2013
Current assets
$
452,254

 
$
450,657

 
$
422,450

Noncurrent assets
169,236

 
160,268

 
157,506

Current liabilities
505,161

 
448,665

 
466,992

Noncurrent liabilities
25,416

 
26,776

 
26,451


8
PetSmart, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
August 3,
2014
 
August 4,
2013
 
August 3,
2014
 
August 4,
2013
Net sales
$
269,361

 
$
235,361

 
$
520,218

 
$
457,490

Income from operations
43,775

 
34,608

 
75,749

 
64,224

Net income
29,006

 
19,709

 
47,021

 
36,908


We recognized license fees and reimbursements for specific operating expenses from Banfield of $10.7 million and $8.8 million during the thirteen weeks ended August 3, 2014, and August 4, 2013, respectively, and $20.6 million and $18.5 million during the twenty-six weeks ended August 3, 2014, and August 4, 2013, respectively, in other revenue in 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 $3.7 million, $3.3 million, and $3.4 million at August 3, 2014, February 2, 2014, and August 4, 2013, respectively, and were included in receivables, net in the Condensed Consolidated Balance Sheets.
Note 5 — Reserve for Closed Stores and Distribution Center
The components of the reserve for closed stores and distribution center were as follows (in thousands):
 
August 3,
2014
 
February 2, 2014
 
August 4,
2013
Total remaining gross occupancy costs
$
12,509

 
$
13,180

 
$
19,516

Less:
 
 
 
 
 
Expected sublease income
(7,885
)
 
(8,922
)
 
(12,709
)
Interest costs
(231
)
 
(312
)
 
(459
)
Reserve for closed stores and distribution center
$
4,393

 
$
3,946

 
$
6,348


 
 
 
 
 
Current portion, included in other current liabilities
2,755

 
1,690

 
2,973

Noncurrent portion, included in other noncurrent liabilities
1,638

 
2,256

 
3,375

Reserve for closed stores and distribution center
$
4,393

 
$
3,946

 
$
6,348


Activities related to the reserve for closed stores and distribution center were as follows (in thousands):
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
August 3,
2014
 
August 4,
2013
 
August 3,
2014
 
August 4,
2013
Opening balance
$
3,200

 
$
8,121

 
$
3,946

 
$
8,726

Provision for new store and distribution center closures
1,615

 
—

 
1,615

 
669

Lease terminations
—

 
—

 
(53
)
 
—

Changes in sublease assumptions
46

 
(474
)
 
(5
)
 
(495
)
Other charges
41

 
103

 
91

 
170

Payments
(509
)
 
(1,402
)
 
(1,201
)
 
(2,722
)
Ending balance
$
4,393

 
$
6,348

 
$
4,393

 
$
6,348


9
PetSmart, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

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
 
Twenty-Six Weeks Ended
 
August 3,
2014
 
August 4,
2013
 
August 3,
2014
 
August 4,
2013
Basic
99,226

 
103,474

 
99,215

 
103,390

Dilutive stock-based compensation awards
463

 
1,038

 
551

 
1,157

Diluted
99,689

 
104,512

 
99,766

 
104,547


Certain stock-based compensation awards representing 0.7 million and 0.5 million shares of common stock in the thirteen weeks ended August 3, 2014, and August 4, 2013, respectively, and 0.6 million and 0.4 million shares of common stock in the twenty-six weeks ended August 3, 2014, and August 4, 2013, 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 Programs
The following tables present our purchases of our common stock under the respective share purchase programs (in thousands):
 
 
 
 
 
 
Thirteen Weeks Ended
Share Purchase Programs
 
August 3, 2014
 
August 4, 2013
Authorized
Amount
 
Date Approved by Board
 
Program Termination Date
 
Shares Purchased
 
Purchase Value
 
Shares Purchased
 
Purchase Value
$525,000
 
June 2012
 
January 31, 2014
 
—

 
$
—

 
336

 
$
24,076

$535,000
 
September 2013
 
January 31, 2015
 
—

 
—

 
—

 
—

 
 
 
 
 
 
—

 
$
—

 
336

 
$
24,076


 
 
 
 
 
 
Twenty-Six Weeks Ended
Share Purchase Programs
 
August 3, 2014
 
August 4, 2013
Authorized
Amount
 
Date Approved by Board
 
Program Termination Date
 
Shares Purchased
 
Purchase Value
 
Shares Purchased
 
Purchase Value
$525,000
 
June 2012
 
January 31, 2014
 
—

 
$
—

 
3,072

 
$
204,076

$535,000
 
September 2013
 
January 31, 2015
 
2,026

 
130,000

 
—

 
—

 
 
 
 
 
 
2,026

 
$
130,000

 
3,072

 
$
204,076


As of August 3, 2014, $287.9 million remained available under the $535.0 million program.
Dividends
During the twenty-six weeks ended August 3, 2014, the Board of Directors declared the following dividends:
Date Declared
 
Dividend Amount
per Share
 
Stockholders of
Record Date
 
Payment
Date
March 19, 2014
 
$0.195
 
May 2, 2014
 
May 16, 2014
June 18, 2014
 
$0.195
 
August 1, 2014
 
August 15, 2014

10
PetSmart, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Note 8 — Stock-based Compensation
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
 
Twenty-Six Weeks Ended
 
August 3,
2014
 
August 4,
2013
 
August 3,
2014
 
August 4,
2013
Stock options expense
$
1,092

 
$
1,295

 
$
3,302

 
$
4,992

Restricted stock expense
2,478

 
2,102

 
4,740

 
3,456

Performance share unit (benefit) expense
(184
)
 
396

 
1,941

 
4,441

Stock-based compensation expense – equity awards
3,386

 
3,793

 
9,983

 
12,889

Management equity unit expense
19

 
1,685

 
1,396

 
3,320

Total stock-based compensation expense
$
3,405

 
$
5,478

 
$
11,379

 
$
16,209

Tax benefit
$
1,328

 
$
2,100

 
$
4,438

 
$
6,249


At August 3, 2014, the total unrecognized stock-based compensation expense for equity awards, net of estimated forfeitures, was $39.6 million and is expected to be recognized over a weighted average period of 2.3 years.

The 2011 annual management equity unit grant vested on March 28, 2014, and $10.4 million was paid in cash in April 2014. The 2010 annual management equity unit grant vested on March 29, 2013, and $10.8 million was paid in cash in April 2013. The remaining unvested management equity units will vest during fiscal 2014 and are not material to the Condensed Consolidated Statements of Income and Comprehensive Income.
Note 9 — Income Taxes
At the end of each interim period, we estimate the annual effective tax rate and apply that rate to our quarterly earnings. The tax expense or benefit related to significant, unusual, or extraordinary items is recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws, rates, or tax status is recognized in the interim period in which the change occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained, or the tax environment changes.
Note 10 — Credit Facilities
As of August 3, 2014, February 2, 2014, and August 4, 2013, we had no borrowings and $13.7 million, $14.3 million, and $17.9 million, respectively, in stand-by letter of credit issuances under our $100.0 million revolving credit facility agreement, or “Revolving Credit Facility.”

We had $69.2 million in outstanding letters of credit, issued for guarantees provided for insurance programs, under our $100.0 million stand-alone letter of credit facility agreement, or “Stand-alone Letter of Credit Facility,” as of August 3, 2014, February 2, 2014, and August 4, 2013. We had $71.2 million in restricted cash on deposit as of August 3, 2014, February 2, 2014, and August 4, 2013.

Our Revolving Credit Facility and Stand-alone Letter of Credit Facility permit the payment of dividends if we are not in default and payment conditions, as defined in each respective agreement, are satisfied. As of August 3, 2014, 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 financial assets.
Note 11 — Commitments and Contingencies
Advertising Purchase Commitments
As of August 3, 2014, we had obligations to purchase $10.8 million of advertising through the remainder of 2014.

11
PetSmart, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

Product Purchase Commitments
As of August 3, 2014, we had various commitments to purchase $15.5 million of merchandise from certain vendors through the remainder of 2014, and $103.5 million from 2015 through 2017.

Litigation and Settlements
We are involved in the legal proceedings described below and are subject to other claims and litigation arising in the normal course of our business. We have made accruals with respect to certain of these matters, where appropriate, that are reflected in our condensed consolidated financial statements but are not, individually or in the aggregate, considered material. For other matters, we have not made accruals because we have not yet determined that a loss is probable or because the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters described below cannot be determined, we currently do not expect that these proceedings and claims, individually or in the aggregate, will have a material effect on our consolidated financial position, results of operations, or cash flows. The outcome of any litigation is inherently uncertain, however, and if decided adversely to us, or if we determine that settlement of particular litigation is appropriate, we may be subject to liability that could have a material adverse effect on our consolidated financial position, results of operations, or cash flows. Accordingly, we disclose matters below for which a material loss is reasonably possible. In each case, however, we have either determined that the range of loss is not reasonably estimable or that any reasonably estimable range of loss is not material to our condensed consolidated financial statements.

In May 2012, we were named as a defendant in Moore, et al. v. PetSmart, Inc., et al., a lawsuit originally filed in the California Superior Court for the County of Alameda. PetSmart removed the case to the United States District Court for the Northern District of California. The complaint brings both individual and class action claims, first alleging that PetSmart failed to engage in the interactive process and failed to accommodate the disabilities of four current and former named associates. The complaint also alleges on behalf of current and former hourly store associates that PetSmart failed to provide pay for all hours worked, failed to properly reimburse associates for business expenses, failed to properly calculate and pay vacation, failed to provide suitable seating, and failed to provide timely and uninterrupted meal and rest periods. The lawsuit seeks compensatory damages, statutory penalties, and other relief, including attorneys' fees, costs, and injunctive relief. In January 2014, the parties entered a proposed settlement agreement to resolve this matter in line with reserves that were established for this case in the first and second quarters of 2013. The motion for preliminary approval of the settlement was filed on January 31, 2014. In March 2014, the court heard oral arguments on the motion for preliminary approval of the proposed settlement. In May 2014, the court approved the motion. Notices are expected to be mailed to potential class members in August 2014. A hearing on the final approval of the settlement is expected to be held in November 2014.

In September 2012, a former associate named us as a defendant in McKee, et al. v. PetSmart, Inc., which is currently pending before the United States District Court for the District of Delaware. The case seeks to assert a Fair Labor Standards Act collective action on behalf of PetSmart's operations managers nationwide. The complaint alleges that PetSmart has misclassified operations managers as exempt and as a result failed to pay them overtime for hours worked in excess of forty hours per week. The plaintiffs seek compensatory damages, liquidated damages, and other relief, including attorneys' fees, costs, and injunctive relief. The plaintiffs filed a motion for conditional certification in September 2013, which was granted. The court conditionally certified a collective action consisting of all current and former operations managers employed by PetSmart at any time in the preceding three-year period. Notices were sent to potential class members in February 2014, and the 60-day period within which recipients may consent to join the lawsuit closed in April 2014. Several individuals have joined the case as party-plaintiffs. Discovery is ongoing.

Also in September 2012, a former groomer filed a lawsuit against us captioned Negrete, et al. v. PetSmart, Inc. in the California Superior Court for the County of Shasta. The plaintiff seeks to assert claims on behalf of current and former California pet stylists that PetSmart failed to provide pay for all hours worked, failed to properly reimburse associates for business expenses, failed to provide proper wage statements, failed to properly calculate and pay vacation, and failed to provide timely and uninterrupted meal and rest periods. The lawsuit seeks compensatory damages, statutory penalties, and other relief, including attorneys' fees, costs, and injunctive relief. On June 14, 2013, we removed the case to the United States District Court for the Eastern District of California and subsequently filed a motion to transfer the case to the United States District Court for the Northern District of California. On November 1, 2013, the court deemed the Negrete and the Moore actions related and the Negrete action was reassigned to the same judge overseeing the Moore action. All deadlines have been stayed until the case management conference, which is currently scheduled for November 2014.


12
PetSmart, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements — (Continued)
(Unaudited)

On December 22, 2012, a customer filed a lawsuit against us captioned Matin, et al. v. Nestle Purina PetCare Company, et al. in the United States District Court for the Northern District of California. The plaintiff claims he purchased jerky treats containing duck or chicken imported from China that caused injury to his pet, and he seeks to assert claims on behalf of a nationwide class of consumers. We tendered the claim to Nestle Purina, and Nestle Purina defended the case on our behalf. In May 2013, the case was transferred to the Northern District of Illinois and consolidated with another case involving the same products, Adkins, et al. v. Nestle Purina PetCare Company, et al. Following a mediation, plaintiffs filed an amended complaint in May 2014, effectively dismissing the claims against PetSmart, as plaintiffs did not name PetSmart as a defendant.

On February 20, 2013, a former groomer in California filed a complaint in the Superior Court of California for the County of Orange captioned Pace v. PetSmart, Inc. PetSmart removed the case to the United States District Court for the Central District of California. The plaintiff sought to certify a class of all former PetSmart employees in California since February 20, 2010, who were not paid all wages owed within 72 hours of their separations. The plaintiff challenges PetSmart's use of pay cards for separation payments and seeks waiting time penalties, attorneys' fees, and other relief. The plaintiff also asserts claims under California's Private Attorney General Act as well as individual claims for wrongful termination and disability discrimination. The plaintiff filed a motion for class certification on January 31, 2014, and a hearing was held in March 2014. In June 2014, the court granted the motion in part and certified a class of associates from February 2010 to the present who elected to receive their pay through check or direct deposit but received their final wages in a pay card kit. The court declined to certify the larger proposed class of associates who were purportedly paid wages more than 72 hours after their last date of employment. Notices were mailed to potential class members in July 2014.
We are involved in the defense of various other legal proceedings that we do not believe are material to our condensed consolidated financial statements.
Note 12 — Subsequent Event
On August 16, 2014, we entered into a definitive agreement to acquire Pet360, an online pet specialty retailer, for $130 million with the possibility of additional performance-based payments totaling up to $30 million by the end of fiscal 2016. The primary reason for this acquisition is to expand our online presence with the addition of Pet360’s family of e-commerce websites, digital media programs, and content sites in order to better serve pet parents across all distribution channels. The transaction is expected to close in September 2014, subject to customary closing conditions, including the receipt of regulatory approvals.

13
PetSmart, Inc. and Subsidiaries


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion 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. Any statements made in this Quarterly Report on Form 10-Q, or “Quarterly Report,” that are not statements of historical fact, including statements concerning our expectations for future events, future financial performance, or events or developments that management expects or anticipates will or may occur in the future, are forward-looking statements.

Readers should not place undue reliance on these forward-looking statements, which are based on currently available information and 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,” or other comparable terminology. However, such terminology is not the exclusive means of identifying forward-looking statements and its absence does not mean that the statement is not forward-looking. Although we believe the expectations and beliefs reflected in the forward-looking statements are reasonable, such statements speak only as of the date this Quarterly Report is filed, and we disclaim any intent or obligation to update any of the forward-looking statements after such date unless required by law.

Forward-looking statements are not guarantees of future performance or results, and involve inherent risks and uncertainties such as those described below that could cause actual results to materially differ from those predicted in such forward-looking statements:

•
A decline in consumer spending, change in consumer preferences, or failure to successfully manage and execute our marketing initiatives 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.
•
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, and comparable store sales at our existing stores may decrease due to age or the impact of opening new stores in the same area, which could adversely impact our results of operations. 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.
•
A disruption, malfunction, or increased costs in the operation, expansion, or replenishment of our distribution centers or our supply chain, could impact our ability to manage our inventory, deliver products to our stores, or increase our expenses, which could harm our sales and results of operations.
•
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, 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, 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.
•
Our inability to attract, train, and retain qualified leaders and associates 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.

14
PetSmart, Inc. and Subsidiaries


•
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.
•
Changes in existing or new laws and regulations or regulatory enforcement priorities could adversely affect our business.
•
We may be subject to various types of litigation and our insurance may not be sufficient to cover damages related to those claims.
•
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.
•
We have implemented some anti-takeover provisions that may prevent or delay an acquisition of us that may not be beneficial to our stockholders.
For more information on our risk factors that could cause our actual results to differ from the results predicted in these forward-looking statements, please see “Item 1A. Risk Factors,” contained in Part I of our Annual Report on Form 10-K for the year ended February 2, 2014, filed with the Securities and Exchange Commission on March 27, 2014, which is incorporated herein by reference. Readers are also urged to carefully review and consider our various other disclosures in this Quarterly Report and in the other reports we file with the Securities and Exchange Commission, including our periodic reports on Form 10-Q and current reports on Form 8-K, and those described from time to time in our press releases and other communications, which attempt to advise interested parties of the risks that may affect our business, prospects, and results of operations.

15
PetSmart, Inc. and Subsidiaries


Overview
Based on our 2013 net sales of $6.9 billion, we are North America's leading specialty provider of products, services, and solutions for the lifetime needs of pets. As of August 3, 2014, we operated 1,352 stores, and we plan to continue our store growth during the remainder of 2014. Our stores carry a broad assortment of high-quality pet supplies at everyday low prices. We offer approximately 12,000 distinct items in our stores and 8,000 additional items on our e-commerce website, PetSmart.com, 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 services, including professional grooming, boarding, and training and day camp for dogs. All our stores feature pet styling salons that provide high-quality grooming services for dogs, and many of our pet styling salons provide services for cats. Most of our stores offer comprehensive dog training services. Our PetsHotels provide boarding for dogs and most of our PetsHotels provide boarding for cats. This includes 24-hour supervision by caregivers who are PetSmart trained to provide personalized pet care, temperature-controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs. As of August 3, 2014, we operated 200 PetsHotels.

We make full-service veterinary care available through our strategic relationships with certain third-party operators. As of August 3, 2014, we had full-service veterinary hospitals in 856 of our stores. We have a 21.0% investment in MMI Holdings, Inc., which is accounted for under the equity method of accounting. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 850 of the veterinary hospitals under the registered trade name of “Banfield, The Pet Hospital.” The remaining 6 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 volatility in the macro-economy. However, we believe we have a competitive advantage in our solutions for pet parents, which cannot be easily duplicated, including differentiated products and merchandising capabilities, as well as expansion of our proprietary and exclusive brands and unparalleled services. Additionally, we believe that our operating cash flow and cash on hand will be adequate to meet our operating, investing, and financing needs in the foreseeable future, and we continue to have access to our $100.0 million revolving credit facility. We continuously assess the economic environment and market conditions to guide our decisions regarding our uses of cash, including capital expenditures, investments, dividends, and the purchase of treasury stock.
Executive Summary
•
Diluted earnings per common share increased 10.1% to $0.98 on net income of $98.1 million for the thirteen weeks ended August 3, 2014, compared to diluted earnings per common share of $0.89 on net income of $93.4 million for the thirteen weeks ended August 4, 2013. Diluted earnings per common share were $2.02 and $1.87 for the twenty-six weeks ended August 3, 2014, and August 4, 2013, respectively.

•
Net sales were $1.7 billion for the thirteen weeks ended August 3, 2014, an increase of 1.4% over the thirteen weeks ended August 4, 2013. The increase in net sales for the thirteen weeks ended August 3, 2014, included an unfavorable impact from foreign currency fluctuations of $4.4 million. Net sales increased 1.2% to $3.5 billion for the twenty-six weeks ended August 3, 2014, compared to $3.4 billion for the twenty-six weeks ended August 4, 2013. The increase in net sales for the twenty-six weeks ended August 3, 2014, included an unfavorable impact from foreign currency fluctuations of $12.2 million.

•
Comparable store sales, or sales in stores open at least one year, including online sales, decreased 0.5% and 0.6% for the thirteen and twenty-six weeks ended August 3, 2014.
 
•
Services sales increased 4.7% to $214.3 million for the thirteen weeks ended August 3, 2014, compared to $204.7 million for the thirteen weeks ended August 4, 2013. Services sales increased 4.6% to $414.4 million for the twenty-six weeks ended August 3, 2014, compared to $396.3 million for the twenty-six weeks ended August 4, 2013.

•
As of August 3, 2014, we had $251.8 million in cash and cash equivalents and $71.2 million in restricted cash. We did not borrow against our revolving credit facility during the twenty-six weeks ended August 3, 2014.

•
We purchased 2.0 million shares of our common stock for $130.0 million during the twenty-six weeks ended August 3, 2014, and did not purchase any shares of our common stock during the thirteen weeks ended August 3, 2014.

16
PetSmart, Inc. and Subsidiaries


Critical Accounting Policies and Estimates
We discuss our critical accounting policies and estimates in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended February 2, 2014. We have made no significant changes in our critical accounting policies since February 2, 2014.

Recently Issued Accounting Pronouncements
See Note 2 — “Recently Issued Accounting Pronouncements,” in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a description of accounting pronouncements recently issued that could potentially impact our consolidated financial statements.
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
 
Twenty-Six Weeks Ended
 
August 3,
2014
 
August 4,
2013
 
August 3,
2014
 
August 4,
2013
Net sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Total cost of sales
70.2

 
69.8

 
69.8

 
69.4

Gross profit
29.8

 
30.2

 
30.2

 
30.6

Operating, general, and administrative expenses
20.4

 
21.0

 
20.6

 
21.1

Operating income
9.4

 
9.2

 
9.7

 
9.5

Interest expense, net
(0.7
)
 
(0.8
)
 
(0.8
)
 
(0.8
)
Income before income tax expense and equity income from Banfield
8.7

 
8.4

 
8.9

 
8.7

Income tax expense
(3.4
)
 
(3.2
)
 
(3.4
)
 
(3.2
)
Equity income from Banfield
0.4

 
0.2

 
0.3

 
0.2

Net income
5.7
%
 
5.5
%
 
5.8
%
 
5.7
%
Thirteen Weeks Ended August 3, 2014, Compared to the Thirteen Weeks Ended August 4, 2013
Net Sales
Net sales were $1.7 billion for the thirteen weeks ended August 3, 2014, an increase of 1.4% over the thirteen weeks ended August 4, 2013. The increase in net sales for the thirteen weeks ended August 3, 2014, included an unfavorable impact from foreign currency fluctuations of $4.4 million. The primary driver for the increase in net sales was the addition of 51 net new stores and 4 net new PetsHotels since August 4, 2013.

Comparable store sales are comprised of average sales per comparable transaction and comparable transactions, as follows:
 
Thirteen Weeks Ended
 
August 3, 2014
 
August 4, 2013
Average sales per comparable transaction growth
2.1%
 
2.4%
Comparable transaction (decline) growth
(2.6)%
 
1.0%
Comparable store sales (decline) growth
(0.5)%
 
3.4%

During the thirteen weeks ended August 3, 2014, comparable store sales were negatively impacted by declining sales in our specialty business, as well as foreign currency fluctuations, which were offset by the impact of inflation. Online sales, which are included in comparable store sales, were not material to comparable store sales for the thirteen weeks ended August 3, 2014, or August 4, 2013.

Merchandise sales were 87.0% and 87.5% of net sales for the thirteen weeks ended August 3, 2014, and August 4, 2013, respectively. Our merchandise categories include consumables, hardgoods, and specialty. In order to align with how we review the specialty business, the specialty category now includes live pets, as well as the consumables and hardgoods associated with

17
PetSmart, Inc. and Subsidiaries


these specialty pets. The following table presents the percent of net sales of each merchandise category, with 2013 amounts conformed to the current presentation for comparability:
 
 
Thirteen Weeks Ended
Merchandise Category
 
August 3, 2014
 
August 4, 2013
Consumables
 
49.0%
 
48.4%
Hardgoods
 
26.6%
 
26.8%
Specialty
 
11.3%
 
12.3%

As a percent of net sales, merchandise sales declined 50 basis points, which was driven by a 100 basis point decline in the specialty business from slowing industry trends, a 20 basis point decline in hardgoods, and offset by a 60 basis point improvement in consumables from resetting this category in April 2014 and rebalancing shelf space for widely-distributed foods in June 2014.

Services sales, which include professional grooming, boarding, and training and day camp for dogs, increased 4.7% to $214.3 million for the thirteen weeks ended August 3, 2014, compared to $204.7 million for the thirteen weeks ended August 4, 2013. Services sales represented 12.4% and 12.0% of net sales for the thirteen weeks ended August 3, 2014, and August 4, 2013, respectively. The increase in services sales was primarily due to continued strong demand for our grooming and boarding services, and the addition of new stores and PetsHotels since August 4, 2013.

Other revenue included in net sales during the thirteen weeks ended August 3, 2014, which represents license fees and reimbursements for specific operating expenses charged to Banfield under the master operating agreement, comprised 0.6% of net sales, or $10.7 million, compared to 0.5% of net sales, or $8.8 million, for the thirteen weeks ended August 4, 2013.
Gross Profit
Gross profit decreased 40 basis points to 29.8% of net sales for the thirteen weeks ended August 3, 2014, from 30.2% for the thirteen weeks ended August 4, 2013. Merchandise margin was down by 45 basis points, due to approximately one-third mix and two-thirds rate, as we ran various promotional offers during the thirteen weeks ended August 3, 2014. Warehouse and distribution costs were 35 basis points unfavorable, which included costs associated with opening our new distribution center in Bethel, Pennsylvania. Services margin added 45 basis points to the overall rate, primarily driven by improved safety claims from a focus on safety programs in recent years, as well as benefits from our efforts in optimizing grooming salon capacity and add-on packages.

Operating, General, and Administrative Expenses
Operating, general, and administrative expenses as a percentage of net sales decreased to 20.4% for the thirteen weeks ended August 3, 2014, compared to 21.0% for the thirteen weeks ended August 4, 2013. The 65 basis point improvement was primarily driven by lower store reset expenses since we did not have a store reset in the thirteen weeks ended August 3, 2014, as compared to the thirteen weeks ended August 4, 2013, when we reset dog hardgoods. Lower incentive compensation expense also contributed to the improvement in operating, general, and administrative expenses.

Interest Expense, net
Interest expense, which is primarily related to capital lease obligations, was $13.0 million during both the thirteen weeks ended August 3, 2014, and August 4, 2013. Interest expense, net included interest income of $0.1 million and $0.2 million for the thirteen weeks ended August 3, 2014, and August 4, 2013, respectively.

Income Tax Expense
Income tax expense was $58.0 million for the thirteen weeks ended August 3, 2014, representing an effective tax rate of 38.7%, compared with the thirteen weeks ended August 4, 2013, when we had income tax expense of $54.5 million, representing an effective tax rate of 37.9%. The increase in the effective tax rate was primarily due to the impact of equity income from Banfield during the thirteen weeks ended August 3, 2014. The effective tax rate is calculated by dividing our income tax expense, which includes the income tax expense related to our equity income from Banfield, by income before income tax expense and equity income from Banfield.

Equity Income from Banfield
Our equity income from our investment in Banfield was $6.1 million and $4.1 million for the thirteen weeks ended August 3, 2014, and August 4, 2013, respectively, based on our 21.0% ownership in Banfield.

18
PetSmart, Inc. and Subsidiaries


Twenty-Six Weeks Ended August 3, 2014, Compared to the Twenty-Six Weeks Ended August 4, 2013
Net Sales
Net sales increased 1.2% to $3.5 billion for the twenty-six weeks ended August 3, 2014, compared to $3.4 billion for the twenty-six weeks ended August 4, 2013. The increase in net sales for the twenty-six weeks ended August 3, 2014, included an unfavorable impact from foreign currency fluctuations of $12.2 million. The primary driver for the increase in net sales was the addition of 51 net new stores and 4 net new PetsHotels since August 4, 2013.

Comparable store sales are comprised of average sales per comparable transaction and comparable transactions, as follows:
 
Twenty-Six Weeks Ended
 
August 3, 2014
 
August 4, 2013
Average sales per comparable transaction growth
1.8%
 
2.6%
Comparable transaction (decline) growth
(2.4)%
 
0.9%
Comparable store sales (decline) growth
(0.6)%
 
3.5%

During the twenty-six weeks ended August 3, 2014, comparable store sales were negatively impacted by declining sales in our specialty business, as well as foreign currency fluctuations, which were partially offset by the impact of inflation. Online sales, which are included in comparable store sales, were not material to comparable store sales for the twenty-six weeks ended August 3, 2014, or August 4, 2013.

Merchandise sales were 87.4% and 87.9% of net sales for the twenty-six weeks ended August 3, 2014, and August 4, 2013, respectively. As discussed above, we changed our merchandise categories to better align with how we review the business. The following table presents the percent of net sales of each merchandise category, with 2013 amounts conformed to the current presentation for comparability:
 
 
Twenty-Six Weeks Ended
Merchandise Category
 
August 3, 2014
 
August 4, 2013
Consumables
 
49.5%
 
48.8%
Hardgoods
 
26.1%
 
26.3%
Specialty
 
11.9%
 
12.8%

As a percent of net sales, merchandise sales declined 45 basis points, which was driven by a 90 basis point decline in the specialty business from slowing industry trends, a 20 basis point decline in hardgoods, and offset by a 70 basis point improvement in consumables from resetting this category in April 2014 and rebalancing shelf space for widely-distributed foods in June 2014.

Services sales, which include professional grooming, boarding, and training and day camp for dogs, increased 4.6% to $414.4 million for the twenty-six weeks ended August 3, 2014, compared to $396.3 million for the twenty-six weeks ended August 4, 2013. Services sales represented 12.0% and 11.6% of net sales for the twenty-six weeks ended August 3, 2014, and August 4, 2013, respectively. The increase in services sales was primarily due to continued strong demand for our grooming and boarding services, and the addition of new stores and PetsHotels since August 4, 2013.

Other revenue included in net sales during the twenty-six weeks ended August 3, 2014, which represents license fees and reimbursements for specific operating expenses charged to Banfield under the master operating agreement, comprised 0.6% of net sales, or $20.6 million, compared to 0.5% of net sales, or $18.5 million, for the twenty-six weeks ended August 4, 2013.
Gross Profit
Gross profit decreased 35 basis points to 30.2% of net sales for the twenty-six weeks ended August 3, 2014, from 30.6% for the twenty-six weeks ended August 4, 2013. This was driven by a 35 basis point increase in warehouse and distribution costs primarily associated with opening our new distribution center in Bethel, Pennsylvania. Merchandise margin contributed 30 basis points of deleverage, which was more than offset by 40 basis points of leverage from services margin.


19
PetSmart, Inc. and Subsidiaries


Operating, General, and Administrative Expenses
Operating, general, and administrative expenses as a percentage of net sales decreased to 20.6% for the twenty-six weeks ended August 3, 2014, compared to 21.1% for the twenty-six weeks ended August 4, 2013. The 55 basis point improvement was primarily driven by lower incentive compensation expense, store reset expenses, and professional fees.

Interest Expense, net
Interest expense, which is primarily related to capital lease obligations, was $26.3 million during the twenty-six weeks ended August 3, 2014, compared to $26.4 million for the twenty-six weeks ended August 4, 2013. Interest expense, net included interest income of $0.2 million and $0.4 million for the twenty-six weeks ended August 3, 2014, and August 4, 2013, respectively.

Income Tax Expense
Income tax expense was $116.6 million for the twenty-six weeks ended August 3, 2014, representing an effective tax rate of 37.8%, compared with the twenty-six weeks ended August 4, 2013, when we had income tax expense of $110.0 million, representing an effective tax rate of 36.9%. The increase in the effective tax rate was primarily due to the impact of equity income and dividends received from Banfield in the twenty-six weeks ended August 3, 2014. The effective tax rate is calculated by dividing our income tax expense, which includes the income tax expense related to our equity income from Banfield, by income before income tax expense and equity income from Banfield.

Equity Income from Banfield
Our equity income from our investment in Banfield was $9.9 million and $7.8 million for the twenty-six weeks ended August 3, 2014, and August 4, 2013, respectively, based on our 21.0% ownership in Banfield.
Liquidity and Capital Resources
Cash Flow
We believe that our operating cash flow and cash on hand will be adequate to meet our operating, investing, and financing needs in the foreseeable future. In addition, we have access to our $100.0 million revolving credit facility, which expires on March 23, 2017. However, there can be no assurance of our ability to access credit markets on commercially acceptable terms in the future.

We continuously assess the economic environment and market conditions to guide our decisions regarding our uses of cash, including capital expenditures, investments, dividends, and the purchase of treasury stock. On August 16, 2014, we entered into a definitive agreement to acquire Pet360, an online pet specialty retailer, for $130 million with the possibility of additional performance-based payments totaling up to $30 million by the end of fiscal 2016. The primary reason for this acquisition is to expand our online presence with the addition of Pet360’s family of e-commerce websites, digital media programs, and content sites in order to better serve pet parents across all distribution channels. The transaction is expected to close in September 2014, subject to customary closing conditions, including the receipt of regulatory approvals. We are intending to use our cash on hand, which is generated from operating activities, to fund this acquisition.

We typically fund our operations, new store and PetsHotel openings, store remodels, growth plans, and other initiatives with 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 primarily used in operating activities to fund procurement of merchandise inventories and other assets, net of accounts payable and other accrued liabilities. Net cash provided by operating activities decreased to $228.4 million for the twenty-six weeks ended August 3, 2014, compared to $234.0 million for the twenty-six weeks ended August 4, 2013. The primary contributor to the decrease was a $52.3 million change in the accounts payable balance driven by timing of payments and inventory receipts. Offsetting this was a $39.9 million change in inventory levels, which increased more during the twenty-six weeks ended August 4, 2013, than during the twenty-six weeks ended August 3, 2014.

Net cash used in investing activities was primarily comprised of expenditures for opening new stores, reformatting existing stores, supporting our system initiatives with equipment and computer software, and continuing our growth plans and other initiatives. Net cash used in investing activities increased to $66.0 million for the twenty-six weeks ended August 3, 2014, compared to $50.8 million for the twenty-six weeks ended August 4, 2013. We did not receive any proceeds from sales of property and equipment during the twenty-six weeks ended August 3, 2014, as compared to $8.9 million received during the twenty-six weeks

20
PetSmart, Inc. and Subsidiaries


ended August 4, 2013. Additionally, cash paid for property and equipment was $7.0 million higher during the twenty-six weeks ended August 3, 2014, than in the prior comparable period.
 
Net cash used in financing activities was $197.3 million for the twenty-six weeks ended August 3, 2014, and primarily consisted of cash paid for treasury stock, cash dividends paid to stockholders, and payments of capital lease obligations. Net cash used in financing activities for the twenty-six weeks ended August 4, 2013, was $234.2 million. Cash used in financing activities decreased in the twenty-six weeks ended August 3, 2014, as compared to the twenty-six weeks ended August 4, 2013, primarily due to a $95.4 million decrease in cash paid for treasury stock. This was partially offset by a $21.9 million increase in cash dividends paid to stockholders, due to timing differences in payment of the December 2012 and December 2013 dividends declared. This resulted in two dividend payments in the twenty-six weeks ended August 3, 2014, and only one in the twenty-six weeks ended August 4, 2013. Further offsetting the decrease in cash used in financing activities was a $16.7 million decrease in net proceeds from common stock issued under stock incentive plans, and a $16.0 million decrease in excess tax benefits from stock-based compensation.
Operating Capital and Capital Expenditure Requirements
All our stores are leased facilities. We opened twenty new stores and closed one store in the twenty-six weeks ended August 3, 2014. Generally, each new store requires capital expenditures of approximately $0.6 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 expenditures to be $150 million to $160 million for 2014, based on our plan to continue our store growth, remodel or replace certain store assets, enhance our supply chain, including costs to fixture and equip a new distribution center in Bethel, Pennsylvania, continue our investment in the development of our information systems, and improve our infrastructure.

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.
Commitments
As of August 3, 2014, we had obligations to purchase $10.8 million of advertising through the remainder of 2014.

As of August 3, 2014, we had various commitments to purchase $15.5 million of merchandise from certain vendors through the remainder of 2014, and $103.5 million from 2015 through 2017.

There have been no other material changes in our contractual obligations since February 2, 2014. Information regarding our contractual obligations is provided in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended February 2, 2014.
Credit Facilities
We have a $100.0 million revolving credit facility agreement, or “Revolving Credit Facility,” which expires on March 23, 2017. Borrowings under this Revolving Credit Facility are subject to a borrowing base and bear interest, at our option, at LIBOR plus 1.25%, or Base Rate plus 0.25%. The Base Rate is defined as the highest of the following rates: the Federal Funds Rate plus 0.5%, the Adjusted LIBOR plus 1.0%, or the Prime Rate.

We are subject to fees payable each month 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, once issued, reduce the amount available under the Revolving Credit Facility. When drawn, letters of credit issued under the Revolving Credit Facility bear a letter of credit fee of 0.625% on the notional amount, applicable to both standby letters of credit and commercial letters of credit.

As of August 3, 2014, February 2, 2014, and August 4, 2013, we had no borrowings and $13.7 million, $14.3 million, and $17.9 million, respectively, 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 agreement, or “Stand-alone Letter of Credit Facility,” which expires on March 23, 2017. We are subject to fees payable each month at an annual rate of 0.175% of the average daily face amount of the letters of credit outstanding during the preceding month. In addition, we are required to maintain a cash deposit with the lender equal to 103% of the amount of outstanding letters of credit.


21
PetSmart, Inc. and Subsidiaries


We had $69.2 million in outstanding letters of credit, issued for guarantees provided for insurance programs, under our Stand-alone Letter of Credit Facility as of August 3, 2014, February 2, 2014, and August 4, 2013. We had $71.2 million in restricted cash on deposit as of August 3, 2014, February 2, 2014, and August 4, 2013.

Our Revolving Credit Facility and Stand-alone Letter of Credit Facility permit the payment of dividends if we are not in default and payment conditions, as defined in each respective agreement, are satisfied. As of August 3, 2014, 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 financial assets.
Share Purchase Programs
The following tables present our purchases of our common stock under the respective share purchase programs (in thousands):
 
 
 
 
 
 
Thirteen Weeks Ended
Share Purchase Programs
 
August 3, 2014
 
August 4, 2013
Authorized
Amount
 
Date Approved by Board
 
Program Termination Date
 
Shares Purchased
 
Purchase Value
 
Shares Purchased
 
Purchase Value
$525,000
 
June 2012
 
January 31, 2014
 
—

 
$
—

 
336

 
$
24,076

$535,000
 
September 2013
 
January 31, 2015
 
—

 
—

 
—

 
—

 
 
 
 
 
 
—

 
$
—

 
336

 
$
24,076


 
 
 
 
 
 
Twenty-Six Weeks Ended
Share Purchase Programs
 
August 3, 2014
 
August 4, 2013
Authorized
Amount
 
Date Approved by Board
 
Program Termination Date
 
Shares Purchased
 
Purchase Value
 
Shares Purchased
 
Purchase Value
$525,000
 
June 2012
 
January 31, 2014
 
—

 
$
—

 
3,072

 
$
204,076

$535,000
 
September 2013
 
January 31, 2015
 
2,026

 
130,000

 
—

 
—

 
 
 
 
 
 
2,026

 
$
130,000

 
3,072

 
$
204,076


As of August 3, 2014, $287.9 million remained available under the $535.0 million program.
Dividends
During the twenty-six weeks ended August 3, 2014, the Board of Directors declared the following dividends:
Date Declared
 
Dividend Amount
per Share
 
Stockholders of
Record Date
 
Payment
Date
March 19, 2014
 
$0.195
 
May 2, 2014
 
May 16, 2014
June 18, 2014
 
$0.195
 
August 1, 2014
 
August 15, 2014
Related Party Transactions
We have an investment in MMI Holdings, Inc., which is accounted for under the equity method of accounting. MMI Holdings Inc. through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated
850 full-service veterinary hospitals in our stores under the registered trade name of “Banfield, The Pet Hospital.” As of August 3, 2014, February 2, 2014, and August 4, 2013, our investment represented 21.4% of the voting common stock and 21.0% of the combined voting and non-voting stock of Banfield.

Our equity income from our investment in Banfield, which is recorded one month in arrears, was $6.1 million and $4.1 million for the thirteen weeks ended August 3, 2014, and August 4, 2013, respectively, and $9.9 million and $7.8 million for the twenty-six weeks ended August 3, 2014 and August 4, 2013, respectively. During the twenty-six weeks ended August 3, 2014, and August 4, 2013, we received dividends from Banfield of $11.6 million and $18.0 million, respectively.

We recognized license fees and reimbursements for specific operating expenses from Banfield of $10.7 million and $8.8 million during the thirteen weeks ended August 3, 2014, and August 4, 2013, respectively, and $20.6 million and $18.5 million during the twenty-six weeks ended August 3, 2014, and August 4, 2013, in other revenue in the Condensed Consolidated Statements of Income and Comprehensive Income. The related costs are included in cost of other revenue in the Condensed Consolidated

22
PetSmart, Inc. and Subsidiaries


Statements of Income and Comprehensive Income. Receivables from Banfield totaled $3.7 million, $3.3 million, and $3.4 million at August 3, 2014, February 2, 2014, and August 4, 2013, respectively, and were included in receivables, net in the Condensed Consolidated Balance Sheets.

Our 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 fluctuation. We typically realize a higher portion of net sales and operating profits during our fourth quarter, as compared to our other quarters, 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. Because our stores typically draw customers from a large trade 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 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. Controllable expenses could fluctuate from quarter-to-quarter in a year. 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 also contribute to lower store operating margins until these stores become established.

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 Act.” We are in compliance with the law in 2014 and intend to be in compliance with the employer mandate portion of the Act, which is effective in 2015. We do not expect the impact on our condensed consolidated financial statements to be material.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of August 3, 2014, there have been no material changes in the market risk information disclosed by us in our Annual Report on Form 10-K for the year ended February 2, 2014. More detailed information concerning market risk can be found in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended February 2, 2014.
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 August 3, 2014. 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 August 3, 2014, 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 August 3, 2014, 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.


23
PART II. OTHER INFORMATION




Item 1. Legal Proceedings
In May 2012, we were named as a defendant in Moore, et al. v. PetSmart, Inc., et al., a lawsuit originally filed in the California Superior Court for the County of Alameda. PetSmart removed the case to the United States District Court for the Northern District of California. The complaint brings both individual and class action claims, first alleging that PetSmart failed to engage in the interactive process and failed to accommodate the disabilities of four current and former named associates. The complaint also alleges on behalf of current and former hourly store associates that PetSmart failed to provide pay for all hours worked, failed to properly reimburse associates for business expenses, failed to properly calculate and pay vacation, failed to provide suitable seating, and failed to provide timely and uninterrupted meal and rest periods. The lawsuit seeks compensatory damages, statutory penalties, and other relief, including attorneys' fees, costs, and injunctive relief. In January 2014, the parties entered a proposed settlement agreement to resolve this matter in line with reserves that were established for this case in the first and second quarters of 2013. The motion for preliminary approval of the settlement was filed on January 31, 2014. In March 2014, the court heard oral arguments on the motion for preliminary approval of the proposed settlement. In May 2014, the court approved the motion. Notices are expected to be mailed to potential class members in August 2014. A hearing on the final approval of the settlement is expected to be held in November 2014.
 
In September 2012, a former groomer filed a lawsuit against us captioned Negrete, et al. v. PetSmart, Inc. in the California Superior Court for the County of Shasta. The plaintiff seeks to assert claims on behalf of current and former California groomers that PetSmart failed to provide pay for all hours worked, failed to properly reimburse associates for business expenses, failed to provide proper wage statements, failed to properly calculate and pay vacation, and failed to provide timely and uninterrupted meal and rest periods. The lawsuit seeks compensatory damages, statutory penalties, and other relief, including attorneys' fees, costs, and injunctive relief. On June 14, 2013, we removed the case to the United States District Court for the Eastern District of California and subsequently filed a motion to transfer the case to the United States District Court for the Northern District of California. On November 1, 2013, the Court deemed the Negrete and the Moore actions related and the Negrete action was reassigned to the same judge overseeing the Moore action. All deadlines have been stayed until the case management conference, which is currently scheduled for November 2014.

On December 22, 2012, a customer filed a lawsuit against us captioned Matin, et al. v. Nestle Purina PetCare Company, et al. in the United States District Court for the Northern District of California. The plaintiff claims he purchased jerky treats containing duck or chicken imported from China that caused injury to his pet, and he seeks to assert claims on behalf of a nationwide class of consumers. We tendered the claim to Nestle Purina, and Nestle Purina defended the case on our behalf. In May 2013, the case was transferred to the Northern District of Illinois and consolidated with another case involving the same products, Adkins, et al. v. Nestle Purina PetCare Company, et al. Following a mediation, plaintiffs filed an amended complaint in May 2014 effectively dismissing the claims against PetSmart as plaintiffs did not name PetSmart as a defendant.
On February 20, 2013, a former groomer in California filed a complaint in the Superior Court of California for the County of Orange captioned Pace v. PetSmart, Inc. PetSmart removed the case to the United States District Court for the Central District of California. The plaintiff sought to certify a class of all former PetSmart employees in California since February 20, 2010, who were not paid all wages owed within 72 hours of their separations. The plaintiff challenges PetSmart's use of pay cards for separation payments and seeks waiting time penalties, attorneys' fees, and other relief. The plaintiff also asserts claims under California's Private Attorney General Act as well as individual claims for wrongful termination and disability discrimination. The plaintiff filed a motion for class certification on January 31, 2014, and a hearing was held in March 2014. In June 2014, the court granted the motion in part and certified a class of associates from February 2010 to the present who elected to receive their pay through check or direct deposit but received their final wages in a pay card kit. The court declined to certify the larger proposed class of associates who were purportedly paid wages more than 72 hours after their last date of employment. Notices were mailed to potential class members in July 2014.

Other than as set forth above, there have been no material developments in the legal proceedings included in Part I, Item 3 of, and Note 12 to, the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended February 2, 2014.
Item 1A. Risk Factors
In addition to the other information in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors,” in our Annual Report on Form 10-K for the year ended February 2, 2014, which could materially affect our business, financial condition or future results.

24
PetSmart, Inc. and Subsidiaries


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows our purchases of our common stock and the available funds to purchase additional common stock for each period in the thirteen weeks ended August 3, 2014:
Period
 
Total
Number
of Shares
Purchased
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Value That May
Yet be Purchased
Under the Plans or
Programs(1)
May 5, 2014 to June 1, 2014
 
—
 
$—
 
—
 
$
287,866,000

June 2, 2014 to July 6, 2014
 
—
 
$—
 
—
 
$
287,866,000

July 7, 2014 to August 3, 2014
 
—
 
$—
 
—
 
$
287,866,000

   Thirteen Weeks Ended August 3, 2014
 
—
 
$—
 
—
 
$
287,866,000

____________

(1) In September 2013, the Board of Directors approved a share purchase program authorizing the purchase of up to $535.0 million of our common stock through January 31, 2015.

25
PetSmart, Inc. and Subsidiaries


Item 6. Exhibits
(a) Exhibits 
Exhibit 15.1
  
Awareness Letter from Deloitte & Touche LLP regarding unaudited interim financial statements.
 
 
 
Exhibit 31.1
  
Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
 
Exhibit 31.2
  
Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
 
Exhibit 32.1*
  
Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.
 
 
 
Exhibit 32.2*
  
Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.
 
 
 
Exhibit 101.INS
  
XBRL Instance
 
 
 
Exhibit 101.SCH
  
XBRL Taxonomy Extension Schema
 
 
 
Exhibit 101.CAL
  
XBRL Taxonomy Extension Calculation
 
 
 
Exhibit 101.LAB
  
XBRL Taxonomy Extension Labels
 
 
 
Exhibit 101.PRE
  
XBRL Taxonomy Extension Presentation
 
 
 
Exhibit 101.DEF
  
XBRL Taxonomy Extension Definition
____________
*
The certifications attached as Exhibit 32.1 and Exhibit 32.2 accompanying this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

26

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.
 
 
 
PetSmart, Inc.
 
 
(Registrant)
 
 
 
 
 
/s/ Carrie W. Teffner
Date:
August 28, 2014
Carrie W. Teffner
 
 
Executive Vice President and Chief Financial Officer
 
 
(Principal Financial Officer and Principal Accounting Officer)

27

PETSMART INC Reports