Attached files
file | filename |
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EX-32.2 - EX-32.2 - PETSMART INC | p16400exv32w2.htm |
EX-31.1 - EX-31.1 - PETSMART INC | p16400exv31w1.htm |
EX-15.1 - EX-15.1 - PETSMART INC | p16400exv15w1.htm |
EX-32.1 - EX-32.1 - PETSMART INC | p16400exv32w1.htm |
EX-31.2 - EX-31.2 - PETSMART INC | p16400exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Thirteen Weeks Ended November 1, 2009
OR
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number: 0-21888
PetSmart, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 94-3024325 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
19601 N. 27th Avenue | ||
Phoenix, Arizona | 85027 | |
(Address of principal executive offices) | (Zip Code) |
(623) 580-6100
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of Common Stock, as
of the latest practicable date:
Common Stock, $.0001 Par Value, 123,568,873 Shares at November 13, 2009
PetSmart, Inc. and Subsidiaries
INDEX
INDEX
Page | ||||||||
Number | ||||||||
PART I. FINANCIAL INFORMATION (UNAUDITED) |
||||||||
Item 1. Financial Statements |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
14 | ||||||||
23 | ||||||||
23 | ||||||||
25 | ||||||||
26 | ||||||||
26 | ||||||||
27 | ||||||||
28 | ||||||||
EX-15.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
2
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
PetSmart, Inc.
Phoenix, Arizona
PetSmart, Inc.
Phoenix, Arizona
We have reviewed the accompanying condensed consolidated balance sheets of PetSmart, Inc. and
subsidiaries (the Company) as of November 1, 2009 and November 2, 2008, and the related condensed
consolidated statements of operations and comprehensive income for the thirteen week and
thirty-nine week periods ended November 1, 2009 and November 2, 2008, and of cash flows for the
thirty-nine week periods ended November 1, 2009 and November 2, 2008. These interim financial
statements are the responsibility of the Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such
condensed consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of PetSmart, Inc. and subsidiaries
as of February 1, 2009, and the related consolidated statements of operations and comprehensive
income, stockholders equity, and cash flows for the year then ended (not presented herein); and in
our report dated March 26, 2009, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of February 1, 2009, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
November 25, 2009
November 25, 2009
3
Table of Contents
PetSmart,
Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except par value)
(Unaudited)
(In thousands, except par value)
(Unaudited)
November 1, | February 1, | November 2, | ||||||||||
2009 | 2009 | 2008 | ||||||||||
ASSETS |
||||||||||||
Cash and cash equivalents |
$ | 185,215 | $ | 126,314 | $ | 54,317 | ||||||
Restricted cash |
55,250 | | | |||||||||
Receivables, net |
52,144 | 48,609 | 39,352 | |||||||||
Merchandise inventories |
608,274 | 584,011 | 612,246 | |||||||||
Deferred income taxes |
29,333 | 28,223 | 28,826 | |||||||||
Prepaid expenses and other current assets |
88,126 | 87,677 | 77,787 | |||||||||
Total current assets |
1,018,342 | 874,834 | 812,528 | |||||||||
Property and equipment, net |
1,225,116 | 1,302,245 | 1,328,554 | |||||||||
Equity investment in affiliate |
30,865 | 25,938 | 26,242 | |||||||||
Deferred income taxes |
83,631 | 93,128 | 129,958 | |||||||||
Goodwill |
41,882 | 38,645 | 39,057 | |||||||||
Other noncurrent assets |
24,192 | 22,863 | 24,091 | |||||||||
Total assets |
$ | 2,424,028 | $ | 2,357,653 | $ | 2,360,430 | ||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||
Accounts payable and bank overdraft |
$ | 179,709 | $ | 194,630 | $ | 196,903 | ||||||
Accrued payroll, bonus and employee benefits |
103,526 | 88,337 | 93,484 | |||||||||
Accrued occupancy expenses and deferred rents |
65,495 | 55,642 | 58,718 | |||||||||
Short-term debt |
| | 50,000 | |||||||||
Current maturities of capital lease obligations |
36,151 | 32,233 | 30,873 | |||||||||
Other current liabilities |
126,745 | 107,315 | 126,120 | |||||||||
Total current liabilities |
511,626 | 478,157 | 556,098 | |||||||||
Capital lease obligations, net of current maturities |
545,226 | 553,760 | 558,518 | |||||||||
Deferred rents |
91,695 | 92,155 | 92,071 | |||||||||
Other noncurrent liabilities |
97,225 | 89,445 | 92,980 | |||||||||
Total liabilities |
1,245,772 | 1,213,517 | 1,299,667 | |||||||||
Commitments and contingencies |
||||||||||||
Stockholders equity: |
||||||||||||
Preferred stock; $.0001 par value; 10,000 shares authorized,
none issued and outstanding |
| | | |||||||||
Common stock; $.0001 par value; 625,000 shares authorized,
160,048, 159,770 and 159,556 shares issued |
16 | 16 | 16 | |||||||||
Additional paid-in capital |
1,137,132 | 1,117,557 | 1,108,260 | |||||||||
Retained earnings |
1,030,753 | 936,100 | 861,527 | |||||||||
Accumulated other comprehensive income (loss) |
2,053 | (2,714 | ) | (2,217 | ) | |||||||
Less: Treasury stock, at cost, 36,471, 32,408 and 32,408 shares |
(991,698 | ) | (906,823 | ) | (906,823 | ) | ||||||
Total stockholders equity |
1,178,256 | 1,144,136 | 1,060,763 | |||||||||
Total liabilities and stockholders equity |
$ | 2,424,028 | $ | 2,357,653 | $ | 2,360,430 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
PetSmart,
Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
(In thousands, except per share data)
(Unaudited)
For the Thirteen Weeks Ended | For the Thirty-Nine Weeks Ended | |||||||||||||||
November 1, | November 2, | November 1, | November 2, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Merchandise sales |
$ | 1,157,647 | $ | 1,124,587 | $ | 3,496,995 | $ | 3,310,021 | ||||||||
Services sales |
136,703 | 126,557 | 433,714 | 396,002 | ||||||||||||
Net sales |
1,294,350 | 1,251,144 | 3,930,709 | 3,706,023 | ||||||||||||
Cost of merchandise sales |
837,875 | 798,513 | 2,516,378 | 2,335,780 | ||||||||||||
Cost of services sales |
100,299 | 94,935 | 311,491 | 289,773 | ||||||||||||
Total cost of sales |
938,174 | 893,448 | 2,827,869 | 2,625,553 | ||||||||||||
Gross profit |
356,176 | 357,696 | 1,102,840 | 1,080,470 | ||||||||||||
Operating, general and administrative expenses |
284,896 | 285,571 | 867,902 | 852,678 | ||||||||||||
Operating income |
71,280 | 72,125 | 234,938 | 227,792 | ||||||||||||
Interest expense, net |
(15,031 | ) | (14,769 | ) | (44,975 | ) | (43,722 | ) | ||||||||
Income before income tax expense and equity in
income from investee |
56,249 | 57,356 | 189,963 | 184,070 | ||||||||||||
Income tax expense |
(20,453 | ) | (22,492 | ) | (71,594 | ) | (72,684 | ) | ||||||||
Equity in income from investee |
2,274 | 959 | 4,927 | 2,896 | ||||||||||||
Net income |
38,070 | 35,823 | 123,296 | 114,282 | ||||||||||||
Other comprehensive (loss) income, net of income tax: |
||||||||||||||||
Foreign currency translation adjustments |
(125 | ) | (6,436 | ) | 4,767 | (7,802 | ) | |||||||||
Comprehensive income |
$ | 37,945 | $ | 29,387 | $ | 128,063 | $ | 106,480 | ||||||||
Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.31 | $ | 0.29 | $ | 1.00 | $ | 0.92 | ||||||||
Diluted |
$ | 0.31 | $ | 0.28 | $ | 0.98 | $ | 0.90 | ||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
121,661 | 124,122 | 123,163 | 124,308 | ||||||||||||
Diluted |
123,781 | 126,795 | 125,396 | 126,761 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
PetSmart,
Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
(In thousands)
(Unaudited)
For the Thirty-Nine Weeks Ended | ||||||||
November 1, | November 2, | |||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 123,296 | $ | 114,282 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
177,001 | 166,402 | ||||||
Loss on disposal of property and equipment |
3,937 | 4,357 | ||||||
Stock-based compensation expense |
18,485 | 18,562 | ||||||
Deferred income taxes |
8,388 | (3,475 | ) | |||||
Equity in income from investee |
(4,927 | ) | (2,896 | ) | ||||
Tax benefits from tax deductions in excess of the compensation cost recognized |
(1,939 | ) | (2,912 | ) | ||||
Non-cash interest expense |
853 | 4,075 | ||||||
Changes in assets and liabilities: |
||||||||
Receivables, net |
(3,801 | ) | 10,942 | |||||
Merchandise inventories |
(21,889 | ) | (109,684 | ) | ||||
Prepaid expenses and other current assets |
(4,166 | ) | (5,272 | ) | ||||
Other noncurrent assets |
(1,527 | ) | 6,906 | |||||
Accounts payable |
3,330 | 34,372 | ||||||
Accrued payroll, bonus and employee benefits |
14,794 | 10,639 | ||||||
Accrued occupancy expenses and current deferred rents |
9,855 | 12,315 | ||||||
Other current liabilities |
13,942 | (14,610 | ) | |||||
Deferred rents |
(848 | ) | 4,138 | |||||
Other noncurrent liabilities |
8,589 | 8,458 | ||||||
Net cash provided by operating activities |
343,373 | 256,599 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Increase in restricted cash and short-term investments |
(55,250 | ) | | |||||
Cash paid for property and equipment |
(86,957 | ) | (194,562 | ) | ||||
Proceeds from sales of property and equipment |
3,867 | 2,980 | ||||||
Net cash used in investing activities |
(138,340 | ) | (191,582 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net proceeds from common stock traded under stock incentive plans |
7,252 | 10,601 | ||||||
Minimum statutory withholding requirements |
(3,373 | ) | (1,959 | ) | ||||
Cash paid for treasury stock |
(84,875 | ) | (49,955 | ) | ||||
Payments of capital lease obligations |
(28,660 | ) | (26,665 | ) | ||||
Proceeds from short-term debt |
| 464,000 | ||||||
Payments on short-term debt |
| (444,000 | ) | |||||
Decrease in bank overdraft |
(19,682 | ) | (7,871 | ) | ||||
Tax benefits from tax deductions in excess of the compensation cost recognized |
1,939 | 2,912 | ||||||
Cash dividends paid to stockholders |
(20,101 | ) | (11,451 | ) | ||||
Net cash used in financing activities |
(147,500 | ) | (64,388 | ) | ||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
1,368 | (4,634 | ) | |||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
58,901 | (4,005 | ) | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
126,314 | 58,322 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 185,215 | $ | 54,317 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Table of Contents
PetSmart, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 GENERAL
PetSmart, Inc., including its wholly owned subsidiaries (the Company, PetSmart or we),
is a leading specialty provider of products, services and solutions for the lifetime needs of pets.
We offer a broad line of products for all the life stages of pets and offer various pet services,
including professional grooming, training, boarding and day camp. We also offer pet products
through an e-commerce site. As of November 1, 2009, we operated 1,149 retail stores and had
full-service veterinary hospitals in 752 of our stores. Medical Management International, Inc.
operated 740 of the veterinary hospitals under the registered trade name of Banfield, The Pet
Hospital. See Note 4 for a discussion of our ownership interest in MMI Holdings, Inc., the parent
company of Medical Management International, Inc. The remaining 12 hospitals are operated by other
third parties in Canada.
The accompanying condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America, or GAAP, for
interim financial information. Accordingly, they do not include all the information and footnotes
required by GAAP for annual financial statements. In the opinion of management, the accompanying
condensed consolidated financial statements reflect all adjustments, which are of a normal,
recurring nature, necessary for the fair statement of results of the interim periods presented.
These condensed consolidated financial statements, which are unaudited, should be read in
conjunction with the audited consolidated financial statements and footnotes included in our Annual
Report on Form 10-K for the year ended February 1, 2009. As detailed in Note 1 to the audited
consolidated financial statements of said Annual Report, certain prior period amounts have been
reclassified to conform to the current year presentation. We evaluated subsequent events through
the time that we filed these condensed consolidated financial statements in our Form 10-Q with the
Securities and Exchange Commission on November 25, 2009.
Due to the seasonal nature of our business, the results of operations for the thirteen and
thirty-nine weeks ended November 1, 2009, are not necessarily indicative of the results expected
for the full year. Our fiscal year consists of 52 or 53 weeks and ends on the Sunday nearest
January 31. Fiscal 2009 ends on January 31, 2010, while fiscal 2008 ended on February 1, 2009, both
of which are 52 week years. Unless otherwise specified, all references to years in these condensed
consolidated financial statements are to fiscal years.
NOTE 2 FAIR VALUE MEASUREMENTS
The following table provides the fair value hierarchy for financial assets measured at fair
value on a recurring basis (in thousands):
Fair Value Measurements at November 1, 2009, using: | ||||||||||||||||
Significant | Significant | |||||||||||||||
Quoted Prices in | Observable | Unobservable | ||||||||||||||
Total Carrying | Active Markets | Other Inputs | Other Inputs | |||||||||||||
Value at November 1, 2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Money market funds |
$ | 183,793 | $ | 183,793 | | | ||||||||||
NOTE 3 INCOME TAXES
We establish deferred income tax assets and liabilities for temporary differences between the
financial reporting bases and the income tax bases of our assets and liabilities at enacted tax
rates expected to be in effect when such assets or liabilities are realized or settled. We record a
valuation allowance on the deferred income tax assets to reduce the total to an amount we believe
is more likely than not to be realized.
We recognize accrued interest and penalties related to unrecognized tax benefits as a
component of income tax expense in the Condensed Consolidated Statements of Operations and
Comprehensive Income. We believe it is reasonably possible that approximately $0.2 million of our
current remaining unrecognized tax positions may be recognized by October 31, 2010, as a result of
settlements or a lapse of the statute of limitations.
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Table of Contents
As of November 1, 2009, our gross tax liabilities associated with uncertain tax positions,
excluding interest and penalties, were $6.7 million. Based on the uncertainties associated with the
settlement of these types of items, we are unable to make reasonably reliable estimates of
potential cash settlements, if any, with taxing authorities.
We generally do not materially adjust deferred tax assets as part of our interim income tax
provision. During the thirty-nine weeks ended November 1, 2009, changes in deferred tax assets were
due to tax benefits related to stock-based compensation, and changes in accumulated other
comprehensive income. During the interim periods, we recognize the provision for income taxes in
other current liabilities in the Condensed Consolidated Balance Sheets. A reclassification between
other current liabilities and deferred income tax assets and liabilities is likely to occur during
the fourth quarter of 2009.
At November 1, 2009, accrued taxes of $25.8 million related to sales taxes and income taxes
were included in other current liabilities in the Condensed Consolidated Balance Sheets.
NOTE 4 INVESTMENTS
We have an investment in MMI Holdings, Inc., a provider of veterinary services. MMI Holdings,
Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively
referred to as MMIH, operates full-service veterinary hospitals in 740 of our stores under the
registered trade name Banfield, The Pet Hospital.
We use the equity method of accounting for our investment in MMIH. Our ownership interest in
the stock of MMIH was as follows (in thousands):
November 1, 2009 | February 1, 2009 | November 2, 2008 | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||
Voting common
stock and preferred
stock |
4,693 | $ | 21,675 | 4,693 | $ | 21,675 | 4,693 | $ | 21,675 | |||||||||||||||
Equity in income
from investee |
| 9,190 | | 4,263 | | 4,567 | ||||||||||||||||||
Total equity
investment in
affiliate |
4,693 | $ | 30,865 | 4,693 | $ | 25,938 | 4,693 | $ | 26,242 | |||||||||||||||
Our investment consisted of voting common stock, comprising 21.4% of all voting stock as of
November 1, 2009, and 21.5% as of February 1, 2009, and November 2, 2008. Our ownership percentage
as of November 1, 2009, February 1, 2009, and November 2, 2008, considering all classes of stock
(voting and non-voting), was 21.0%.
MMIHs financial data is summarized as follows (in thousands):
November 1, 2009 | February 1, 2009 | November 2, 2008 | ||||||||||
Current assets |
$ | 265,973 | $ | 187,066 | $ | 184,493 | ||||||
Noncurrent assets |
126,798 | 121,932 | 126,474 | |||||||||
Current liabilities |
256,274 | 196,070 | 197,195 | |||||||||
Noncurrent liabilities |
15,603 | 14,070 | 14,226 |
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
November 1, 2009 | November 2, 2008 | November 1, 2009 | November 2, 2008 | |||||||||||||
Net sales |
$ | 149,924 | $ | 127,147 | $ | 422,073 | $ | 374,318 | ||||||||
Gross profit |
23,553 | 17,419 | 56,478 | 56,960 | ||||||||||||
Net income before minority interest |
10,821 | 2,521 | 23,445 | 13,349 |
We have a master operating agreement with MMIH which covers license fees, utilities and other
cost reimbursements. We charge MMIH license fees for the space used by the veterinary hospitals
and for their portion of utilities costs. These amounts are classified as a reduction of the retail
stores occupancy costs, which are included as a component of cost of merchandise sales in the
Condensed Consolidated Statements of Operations and Comprehensive Income. We also charge MMIH for
its portion of specific operating expenses and classify the reimbursement as a reduction of the
retail stores operating expense.
We recognized license fees, utilities and other cost reimbursements of $8.5 million and $7.6
million during the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively, and
$25.2 million and $22.6 million during the thirty-nine weeks ended November 1, 2009, and November
2, 2008, respectively. Receivables from MMIH totaled $3.4 million, $3.3 million, and $3.2 million
at
8
Table of Contents
November 1, 2009, February 1, 2009, and November 2, 2008, respectively, and were included in
receivables in the Condensed Consolidated Balance Sheets.
The master operating agreement also includes a provision for the sharing of profits on the
sale of therapeutic pet foods sold in all stores with an operating Banfield hospital. The net sales
and gross profit on the sale of therapeutic pet food sales is not material to our condensed
consolidated financial statements.
NOTE 5 STOCK-BASED COMPENSATION
The stock-based compensation expense and the total income tax benefit recognized in the
Condensed Consolidated Statements of Operations and Comprehensive Income were as follows (in
thousands):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
November 1, 2009 | November 2, 2008 | November 1, 2009 | November 2, 2008 | |||||||||||||
Stock options expense |
$ | 2,051 | $ | 1,963 | $ | 6,225 | $ | 6,048 | ||||||||
Management equity unit expense |
418 | | 1,009 | | ||||||||||||
Performance share unit expense |
955 | | 2,321 | | ||||||||||||
Restricted stock expense |
2,937 | 3,854 | 8,930 | 11,070 | ||||||||||||
Employee stock purchase plan expense |
| 494 | | 1,444 | ||||||||||||
Total stock-based compensation expense |
$ | 6,361 | $ | 6,311 | $ | 18,485 | $ | 18,562 | ||||||||
Tax benefit |
$ | 2,165 | $ | 2,239 | $ | 6,596 | $ | 6,458 | ||||||||
Stock-based compensation expense has been adjusted to reflect both actual and estimated
forfeitures as follows (in thousands):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
November 1, 2009 | November 2, 2008 | November 1, 2009 | November 2, 2008 | |||||||||||||
Stock options forfeiture (benefit) expense |
$ | (22 | ) | $ | 106 | $ | (127 | ) | $ | 290 | ||||||
Management equity unit forfeiture benefit |
(74 | ) | | (117 | ) | | ||||||||||
Performance share unit forfeiture benefit |
(40 | ) | | (88 | ) | | ||||||||||
Restricted stock forfeiture benefit |
(135 | ) | (787 | ) | (799 | ) | (2,914 | ) | ||||||||
Total forfeiture benefit |
$ | (271 | ) | $ | (681 | ) | $ | (1,131 | ) | $ | (2,624 | ) | ||||
At November 1, 2009, the total unrecognized stock-based compensation expense, net of estimated
forfeitures, was $43.8 million and is expected to be recognized over a weighted average period of
1.9 years.
In accordance with our equity incentive plans, we granted the following (in thousands, except
per stock option, per unit or per share information):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
November 1, 2009 | November 2, 2008 | November 1, 2009 | November 2, 2008 | |||||||||||||
Stock options awarded |
6 | 17 | 1,690 | 1,807 | ||||||||||||
Weighted average fair value per stock option |
$ | 7.18 | $ | 8.59 | $ | 6.67 | $ | 6.43 | ||||||||
Weighted average exercise price per stock option |
$ | 24.30 | $ | 23.71 | $ | 16.93 | $ | 19.11 | ||||||||
Management equity units awarded |
| | 284 | | ||||||||||||
Fair value per management equity unit |
$ | | $ | | $ | 23.53 | $ | | ||||||||
Performance share units awarded |
2 | | 590 | | ||||||||||||
Weighted average fair value per performance share unit |
$ | 24.30 | $ | | $ | 16.93 | $ | | ||||||||
Restricted stock awarded |
| 31 | 82 | 966 | ||||||||||||
Weighted average fair value per share of restricted stock |
$ | | $ | 23.85 | $ | 18.05 | $ | 19.37 |
We estimated the fair value of stock option grants using a lattice option pricing model. The
following assumptions were used to value stock option grants:
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Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
November 1, 2009 | November 2, 2008 | November 1, 2009 | November 2, 2008 | |||||||||||||
Dividend yield |
1.96 | % | 0.42 | % | 0.61 | % | 0.42 | % | ||||||||
Expected volatility |
37.1 | % | 38.7 | % | 46.0 | % | 36.2 | % | ||||||||
Risk-free interest rate |
1.32 | % | 2.28 | % | 1.16 | % | 1.96 | % | ||||||||
Expected life |
5.3 years | 5.2 years | 5.3 years | 5.2 years | ||||||||||||
Vesting period |
4.0 years | 4.0 years | 4.0 years | 4.0 years | ||||||||||||
Term |
7.0 years | 7.0 years | 7.0 years | 7.0 years |
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan, or ESPP, that allows employees who meet certain
service requirements to purchase our common stock on semi-annual offering dates at a discount.
Prior to February 1, 2009, the ESPP allowed employees to purchase shares at 85% of the fair market
value of the shares on the offering date or, if lower, at 85% of the fair market value of the
shares on the purchase date. Effective February 1, 2009, the discount was reduced to 5%, allowing
participants to purchase our common stock on
semi-annual offering dates at 95% of the fair market value of the shares on the purchase date.
During the thirteen weeks ended November 1, 2009, and November 2, 2008, no shares were purchased
through the ESPP. During the thirty-nine weeks ended November 1, 2009, and November 2, 2008, 0.1
million and 0.2 million shares were purchased through the ESPP, respectively.
NOTE 6 RESERVE FOR CLOSED STORES
The components of the reserve for closed stores were as follows (in thousands):
November 1, 2009 | February 1, 2009 | November 2, 2008 | ||||||||||
Total remaining gross occupancy costs |
$ | 35,049 | $ | 34,107 | $ | 35,452 | ||||||
Less: |
||||||||||||
Expected sublease income |
(25,530 | ) | (26,604 | ) | (27,950 | ) | ||||||
Interest costs |
(1,457 | ) | (1,121 | ) | (1,191 | ) | ||||||
Reserve for closed stores |
$ | 8,062 | $ | 6,382 | $ | 6,311 | ||||||
Included in other current liabilities in the Condensed Consolidated Balance Sheets is $1.9
million, $2.3 million, and $2.0 million for the current portion of the reserve for closed stores at
November 1, 2009, February 1, 2009, and November 2, 2008, respectively. We can make no
assurances that additional charges related to closed stores will not be required based on the
changing real estate and macroeconomic environment.
The activity related to the reserve for closed stores was as follows (in thousands):
Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||
November 1, 2009 | November 2, 2008 | November 1, 2009 | November 2, 2008 | |||||||||||||
Opening balance |
$ | 7,633 | $ | 5,919 | $ | 6,382 | $ | 6,157 | ||||||||
Reserve for new store closures |
1,025 | | 1,025 | 2,585 | ||||||||||||
Changes in sublease assumptions |
1,145 | 1,265 | 3,743 | 1,265 | ||||||||||||
Lease terminations |
(565 | ) | | (565 | ) | (821 | ) | |||||||||
Other |
203 | 114 | 611 | 237 | ||||||||||||
Charges, net |
1,808 | 1,379 | 4,814 | 3,266 | ||||||||||||
Payments |
(1,379 | ) | (987 | ) | (3,134 | ) | (3,112 | ) | ||||||||
Ending balance |
$ | 8,062 | $ | 6,311 | $ | 8,062 | $ | 6,311 | ||||||||
NOTE 7 FOREIGN CURRENCY
Foreign currency translation adjustments were the only component of other comprehensive income
and are reported separately in stockholders equity in the Condensed Consolidated Balance Sheets.
The income tax (benefit) expense related to the foreign currency translation adjustments was $(0.1)
million and $(4.1) million for the thirteen weeks ended November 1, 2009, and November 2, 2008,
respectively, and $3.0 million and $(5.0) million for the thirty-nine weeks ended November 1, 2009,
and November 2, 2008, respectively.
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The transaction loss (gain) included in net income was $0.3 million and $2.8 million for the
thirteen weeks ended November 1, 2009, and November 2, 2008, respectively, and $(1.2) million and
$3.2 million for the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively.
The impact of foreign currency translation adjustments to the carrying value of goodwill was
$(0.1) million and $(4.3) million for the thirteen weeks ended November 1, 2009, and November 3,
2008, respectively, and $3.2 million and $(5.3) million for the thirty-nine weeks ended November 1,
2009, and November 3, 2008, respectively.
NOTE 8 STOCKHOLDERS EQUITY
Share Purchase Program
In August 2007, the Board of Directors approved a share purchase program authorizing the
purchase of up to $300.0 million of our common stock through August 2, 2009. During the thirteen
weeks ended May 3, 2009, we purchased 1.2 million shares of common stock for $25.0 million,
completing the $300.0 million program.
In June 2009, the Board of Directors approved a new share purchase program authorizing the
purchase of up to $350.0 million of our common stock through January 29, 2012. During the thirteen
weeks ended November 1, 2009, we purchased 1.7 million shares of
common stock for $35.0 million. Since the inception of the new share purchase authorization
in June 2009, we have purchased 2.9 million shares of common stock for $60.0 million. As of
November 1, 2009, $290.0 million remained available under the $350.0 million program.
Dividends
The Board of Directors declared the following dividends:
Date | Dividend Amount | Stockholders of | Date | |||||||||
Declared | per Share | Record Date | Paid | |||||||||
March 24, 2009 |
$ | 0.03 | May 1, 2009 | May 15, 2009 | ||||||||
June 22, 2009 |
$ | 0.10 | July 31, 2009 | August 14, 2009 | ||||||||
September 30, 2009 |
$ | 0.10 | October 30, 2009 | November 13, 2009 |
NOTE 9 EARNINGS PER COMMON SHARE
The following table presents a reconciliation of the weighted average shares outstanding used
in the earnings per common share calculations (in thousands):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
November 1, 2009 | November 2, 2008 | November 1, 2009 | November 2, 2008 | |||||||||||||
Basic |
121,661 | 124,122 | 123,163 | 124,308 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Stock options, restricted
stock and performance
share units |
2,120 | 2,673 | 2,233 | 2,453 | ||||||||||||
Diluted |
123,781 | 126,795 | 125,396 | 126,761 | ||||||||||||
Certain stock-based compensation awards representing 3.7 million and 4.1 million shares of
common stock in the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively, and
6.0 million and 4.8 million shares of common stock in the thirty-nine weeks ended November 1, 2009,
and November 2, 2008, respectively, were not included in the calculation of diluted earnings per
common share because the inclusion of such awards would have been antidilutive for the periods
presented.
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NOTE 10 SUPPLEMENTAL SCHEDULE OF CASH FLOWS
Supplemental cash flow information was as follows (in thousands):
Thirty-Nine Weeks Ended | ||||||||
November 1, 2009 | November 2, 2008 | |||||||
Interest paid |
$ | 44,539 | $ | 41,276 | ||||
Income taxes paid, net of refunds |
60,128 | 81,097 | ||||||
Assets acquired using capital lease obligations |
18,274 | 81,235 | ||||||
Accruals and accounts payable for capital expenditures |
14,081 | 34,035 | ||||||
Dividends declared but unpaid |
12,358 | 3,815 |
NOTE 11 LITIGATION AND SETTLEMENTS
On January 12, 2009, a former groomer filed suit on behalf of herself and a putative class of
current and former groomers in California State Court entitled Langton v. PetSmart. The plaintiff
alleged that she and other non-exempt groomers did not receive payment for all hours worked, did
not receive meal and rest breaks, did not receive all wages due upon termination, did not receive
accurate wage statements as required by law, and were not provided with necessary tools and
equipment. On February 17, 2009, we removed the action to the United States District Court for the
Central District of California, and have since resolved this matter for an amount that is not
material to our condensed consolidated financial statements.
We are also a party to several lawsuits arising from the pet food recalls announced by
several manufacturers beginning in March 2007. The named plaintiffs sued the major pet food
manufacturers and retailers claiming that their pets suffered injury and/or death as a result of
consuming allegedly contaminated pet food and pet snack products.
Bruski v. Nutro Products, et al., USDC, N.D. IL (filed 3/23/07) |
Rozman v. Menu Foods, et al., USDC, MN (filed 4/9/07) |
Ford v. Menu Foods, et al., USDC, S.D. CA (filed 4/23/07) |
Wahl, et al. v. Wal-Mart Stores Inc., et al., USDC, C.D. CA (filed 4/10/07) |
Demith v. Nestle, et al., USDC, N.D. IL (filed 4/23/07) |
Thompkins v. Menu Foods, et al., USDC, CO (filed 4/11/07) |
McBain v. Menu Foods, et al., Judicial Centre of Regina, Canada (filed 7/11/07) |
Dayman v. Hills Pet Nutrition Inc., et al., Ontario Superior Court of Justice (filed 8/8/07) |
Esau v. Menu Foods, et al., Supreme Court of Newfoundland and Labrador (filed 9/5/07) |
Ewasew v. Menu Foods, et al., Supreme Court of British Columbia (filed 3/23/07) |
Silva v. Menu Foods, et al., Canada Province of Manitoba (filed 3/30/07) |
Powell v. Menu Foods, et al., Ontario Superior Court of Justice (filed 3/28/07) |
By order dated June 28, 2007, the Bruski, Rozman, Ford, Wahl, Demith and Thompkins cases
were transferred to the U.S. District Court for the District of New Jersey and consolidated with
other pet food class actions under the federal rules for multi-district litigation (In re: Pet Food
Product Liability Litigation, Civil No. 07-2867). The Canadian cases were not consolidated.
On May 21, 2008, the parties to the U.S. lawsuits comprising the In re: Pet Food Product
Liability Litigation and the Canadian cases jointly submitted a comprehensive settlement
arrangement for court approval. Preliminary court approval was received from the U.S. District
Court on May 3, 2008, and from all of the Canadian courts as of July 8, 2008. On October 14, 2008,
the U.S. District Court approved the settlement, and the Canadian courts gave final approval on
November 3, 2008.
Two different groups of objectors filed notices of appeal with respect to the U.S. District
Courts approval of the U.S. settlement. Upon expiration of the prescribed appeal process, these
cases should be resolved, and we continue to believe they will not have a material adverse impact
on our condensed consolidated financial statements. Accordingly, we have not accrued any contingent
liability amount for these cases.
There have been no appeals filed in Canada.
We are involved in the defense of various other legal proceedings that we do not believe are
material to our condensed consolidated financial statements.
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NOTE 12 COMMITMENTS AND CONTINGENCIES
Letters of Credit
As of November 1, 2009, a total of $87.7 million was outstanding under letters of credit to
guarantee insurance policies, capital lease agreements and utilities.
Advertising Purchase Commitments
As of November 1, 2009, we had obligations to purchase $9.3 million of advertising through the
remainder of 2009, and $14.5 million in 2010.
NOTE 13 SHORT-TERM DEBT AND LETTERS OF CREDIT
We have a $350.0 million revolving credit facility, or Revolving Credit Facility, that
expires on August 15, 2012. Borrowings under the Revolving Credit Facility are subject to a
borrowing base and bear interest, at our option, at a banks prime rate plus 0% to 0.25% or LIBOR
plus 0.875% to 1.25%. We are subject to fees payable to lenders each quarter at an annual rate of
0.20% of the unused amount of the Revolving Credit Facility. The Revolving Credit Facility also
gives us the ability to issue letters of credit up to $100.0 million, which reduce the amount
available under the Revolving Credit Facility. Letter of credit issuances under the Revolving
Credit Facility are subject to interest payable to the lenders and bear interest of 0.875% to 1.25%
for standby letters of credit or 0.438% to 0.625% for commercial letters of credit.
Any borrowings under the Revolving Credit Facility that we intend to repay within 12 months
are classified as short-term debt in the Condensed Consolidated Balance Sheets. As of November 1,
2009, we had no short-term debt and $32.4 million in letter of credit issuances outstanding under
our Revolving Credit Facility. We had no short-term debt and $91.3 million in letter of credit
issuances outstanding as of February 1, 2009, while $50.0 million in short-term debt and $70.4
million in letter of credit issuances was outstanding as of November 2, 2008.
On May 13, 2009, we amended our $70.0 million stand-alone letter of credit facility to
increase the availability to $100.0 million. The $100.0 million stand-alone letter of credit
facility, or Stand-alone Letter of Credit Facility, expires August 15, 2012. We are subject to
fees payable to the lender each quarter at an annual rate of 0.45% of the average daily face amount
of the letters of credit outstanding during the preceding calendar quarter. In addition, we are
required to maintain a cash deposit with the lender equal to the amount of outstanding letters of
credit or we may use other approved investments as collateral. If we use other approved investments
as collateral, we must have an amount on deposit which, when multiplied by the advance rate of 85%,
is equal to the amount of the outstanding letters of credit under the Stand-alone Letter of Credit
Facility. As of November 1, 2009, we had $55.3 million in outstanding letters of credit under the
Stand-alone Letter of Credit Facility and $55.3 million in restricted cash on deposit with the
lender. As of February 1, 2009, and November 2, 2008, we had no outstanding letters of credit
under the Stand-alone Letter of Credit Facility, no restricted cash or short-term investments on
deposit with the lender, and no other investments related to the Stand-alone Letter of Credit
Facility.
As of November 1, 2009, we were in compliance with the terms and covenants of our Revolving
Credit Facility and Stand-alone Letter of Credit Facility. The Revolving Credit Facility and
Stand-alone Letter of Credit Facility are secured by substantially all our personal property
assets, our subsidiaries and certain real property.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Except for historical information, the following discussion contains forward-looking
statements that involve risks and uncertainties. In the normal course of business, our financial
position is routinely subjected to a variety of risks, including market risks associated with store
expansion, investments in information systems, international expansion, vendor reliability,
competitive forces and government regulatory actions. Our actual results could differ materially
from projected results due to some or all of the factors discussed below. You should carefully
consider the risks and uncertainties described below:
| A decline in consumer spending or a change in consumer preferences could reduce our sales or profitability and harm our business. |
| The pet products and services retail industry is very competitive and continued competitive forces may adversely impact our business and financial results. |
| Comparable store sales growth may decrease as stores grow older. If we are unable to increase sales at our existing stores, our results of operations could be harmed. |
| We may be unable to continue to open new stores and enter new markets successfully. If we are unable to successfully reformat existing stores and open new stores, our results of operations could be harmed. Also, store development may place increasing demands on management and operating systems and may erode sales at existing stores. |
| Our quarterly operating results may fluctuate due to seasonal changes associated with the pet products and services retail industry and the timing of expenses, new store openings and store closures. |
| Failure to successfully manage and execute our marketing initiatives could have a negative impact on our business. |
| Our operating margins at new stores may be lower than those of existing stores. |
| A disruption, malfunction or increased costs in the operation, expansion or replenishment of our distribution centers or our supply chain would impact our ability to deliver to our stores or increase our expenses, which could harm our sales and results of operations. |
| Failure to successfully manage our inventory could harm our business. |
| If our information systems fail to perform as designed or are interrupted for a significant period of time, our business could be harmed. |
| If we fail to protect the integrity and security of customer and associate information, we could be exposed to litigation and our business could be adversely impacted. |
| The disruption of the relationship with or the loss of any of our key vendors, a decision by our vendors to make their products available in supermarkets or through warehouse clubs and other mass and retail merchandisers, or the inability of our vendors to provide quality products in a timely or cost-effective manner or risks associated with the suppliers from whom products are sourced, could harm our business. |
| Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to product liability claims. |
| Food safety, quality and health concerns could affect our business. |
| Failure to successfully anticipate merchandise returns could have a negative impact on our business. |
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| We depend on key executives, store managers and other personnel and may not be able to retain or replace these employees or recruit additional qualified personnel, which could harm our business. |
| Our international operations may result in additional market risks, which may harm our business. |
| Our business may be harmed if the operation of veterinary hospitals at our stores is limited or fails to continue. |
| We face various risks as an e-commerce retailer. |
| Our business could be harmed if we were unable to effectively manage our cash flow and raise any needed additional capital on acceptable terms. |
| Failure to successfully integrate any business we acquire could have an adverse impact on our financial results. |
| Changes to estimates related to our property and equipment, or operating results that are lower than our current estimates at certain store locations, may cause us to incur impairment charges. |
| Failure to protect our intellectual property could have a negative impact on our operating results. |
| A determination that we are in violation of any contractual obligations or government regulations could result in a disruption to our operations and could harm our business. |
| Failure of our internal controls over financial reporting could harm our business and financial results. |
| Changes in laws, accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results. |
| An unfavorable determination by tax regulators may cause our provision for income and other taxes to be inadequate and may result in a material impact to our financial results. |
| Our business exposes us to claims, litigation and risk of loss that could result in adverse publicity, harm to our brand and impact our financial results. |
| Failure to obtain commercial insurance at acceptable prices or failure to adequately reserve for self-insured exposures might have a negative impact on our business. |
| Pending legislation, weather, catastrophic events, disease, or other factors, could disrupt our operations, supply chain and the supply of small pets and products we sell, which could harm our reputation and decrease sales. |
| Fluctuations in the stock market, as well as general economic and market conditions may impact our operations, sales, financial results and market price of our common stock. |
| Continued volatility and disruption to the global capital and credit markets may adversely affect our ability to access credit and the financial soundness of our suppliers. |
| Our operating and financial performance in any given period may differ from the guidance we have provided to the public. |
| We have implemented some anti-takeover provisions that may prevent or delay an acquisition of us that may not be beneficial to our stockholders. |
For more information about these risks, see the discussion under the heading Risk Factors in
our Form 10-K for the year ended February 1, 2009, filed with the Securities and Exchange
Commission on March 26, 2009, which is incorporated herein by reference.
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Overview
Based on our 2008 net sales of $5.1 billion, we are North Americas leading specialty provider
of products, services and solutions for the lifetime needs of pets. As of November 1, 2009, we
operated 1,149 stores, and we anticipate opening 2 to 5 new stores during the remainder of 2009.
Our stores carry a broad and deep selection of high-quality pet supplies at everyday low prices. We
offer approximately 10,000 distinct items, including nationally recognized brand names, as well as
an extensive selection of proprietary brands across a range of product categories.
We complement our extensive product assortment with a wide selection of pet services,
including grooming, training, boarding and day camp. All our stores offer complete pet training
services, and virtually all our stores feature pet styling salons that provide high-quality
grooming services. Our PetsHotels provide boarding for dogs and cats, which includes 24-hour
supervision, an on-call veterinarian, temperature controlled rooms and suites, daily specialty
treats and play time, as well as day camp for dogs. As of November 1, 2009, we operated 161
PetsHotels, and we anticipate opening one additional PetsHotel during the remainder of 2009.
We make full-service veterinary care available through our strategic relationship with certain
third-party operators. As of November 1, 2009, full-service veterinary hospitals were in 752 of our
stores. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International,
Inc., collectively referred to as MMIH, operated 740 of the veterinary hospitals under the
registered trade name of Banfield, The Pet Hospital. We have a 21.0% stock ownership interest in
MMIH. The remaining 12 hospitals are operated by other third parties in Canada.
The principal obstacles we face as a business are the highly competitive market in which we
operate and the recent macroeconomic challenges. However, we feel we have a competitive advantage
in our offering of pet services, which is a growing industry, that we believe cannot easily be
duplicated. Additionally, we have been able to generate cash flow from operations sufficient to
meet our financing needs and continue to have access to our $350.0 million revolving credit
facility, or Revolving Credit Facility. As our cash flow from operations increases, we expect to
continuously assess the economic environment and market conditions to guide our decisions regarding
our uses of cash, including capital expenditures, investments, dividends and share repurchases.
Executive Summary
| Diluted earnings per common share increased 10.7% to $0.31, on net income of $38.1 million, for the thirteen weeks ended November 1, 2009, compared to diluted earnings per common share of $0.28 on net income of $35.8 million for the thirteen weeks ended November 2, 2008. Diluted earnings per common share were $0.98 and $0.90 for the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively. |
| Net sales increased 3.5% to $1.29 billion for the thirteen weeks ended November 1, 2009, compared to $1.25 billion for the thirteen weeks ended November 2, 2008. Net sales increased 6.1% to $3.9 billion for the thirty-nine weeks ended November 1, 2009, compared to $3.7 billion for the thirty-nine weeks ended November 2, 2008. |
| Cash, cash equivalents, and restricted cash increased $114.2 million, or 90.4%, to $240.5 million during the thirty-nine weeks ended November 1, 2009. |
| We had no short-term debt as of November 1, 2009, and did not borrow against the Revolving Credit Facility during the thirty-nine weeks ended November 1, 2009. |
| We added 4 and 37 net new stores during the thirteen and thirty-nine weeks ended November 1, 2009, respectively. |
| Comparable store sales, or sales in stores open at least one year, increased 0.3% and 1.6% for the thirteen and thirty-nine weeks ended November 1, 2009, respectively. The increase in net sales was partially impacted by $0.7 million in favorable foreign currency fluctuations and $18.4 million in unfavorable foreign currency fluctuations for the thirteen and thirty-nine weeks ended November 1, 2009, respectively. |
| Services sales increased 8.0% to $136.7 million for the thirteen weeks ended November 1, 2009, compared to $126.6 million for the thirteen weeks ended November 2, 2008. Services sales represented 10.6% and 10.1% of net sales for the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively. Services sales increased 9.5% to $433.7 million for the thirty-nine weeks ended November 1, 2009, compared to $396.0 million for the |
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thirty-nine weeks ended November 2, 2008. Services sales represented 11.0% and 10.7% of net sales for the thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively. |
| We purchased 1.7 million and 4.1 million shares of our common stock for $35.0 million and $85.0 million during the thirteen and thirty-nine weeks ended November 1, 2009, respectively. |
Critical Accounting Policies and Estimates
We discuss our critical accounting policies and estimates in Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K
for the year ended February 1, 2009. We have made no significant change in our critical accounting
policies since February 1, 2009.
Results of Operations
The following table presents the percent of net sales of certain items included in our
Condensed Consolidated Statements of Operations and Comprehensive Income:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
November 1, 2009 | November 2, 2008 | November 1, 2009 | November 2, 2008 | |||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Total cost of sales |
72.5 | 71.4 | 71.9 | 70.8 | ||||||||||||
Gross profit |
27.5 | 28.6 | 28.1 | 29.2 | ||||||||||||
Operating, general and administrative expenses |
22.0 | 22.8 | 22.1 | 23.0 | ||||||||||||
Operating income |
5.5 | 5.8 | 6.0 | 6.1 | ||||||||||||
Interest expense, net |
(1.2 | ) | (1.2 | ) | (1.1 | ) | (1.2 | ) | ||||||||
Income before income tax expense and equity
in income from investee |
4.3 | 4.6 | 4.8 | 5.0 | ||||||||||||
Income tax expense |
(1.6 | ) | (1.8 | ) | (1.8 | ) | (2.0 | ) | ||||||||
Equity in income from investee |
0.2 | 0.1 | 0.1 | 0.1 | ||||||||||||
Net income |
2.9 | % | 2.9 | % | 3.1 | % | 3.1 | % | ||||||||
Thirteen Weeks Ended November 1, 2009, Compared to the Thirteen Weeks Ended November 2, 2008
Net Sales
Net sales increased $43.2 million, or 3.5%, to $1.29 billion for the thirteen weeks ended
November 1, 2009, compared to $1.25 billion for the thirteen weeks ended November 2, 2008. The
increase in net sales was partially impacted by $0.7 million in favorable foreign currency
fluctuations. Approximately 92% of the sales increase is due to the addition of 42 net new stores
and 29 new PetsHotels since November 2, 2008, and 8% of the sales increase is due to a 0.3%
increase in comparable store sales for the thirteen weeks ended November 1, 2009. The increase in
comparable store sales was due to the impact of key merchandising and pricing strategies, partially
offset by economic conditions and the slowdown in consumer spending, primarily in our hardgoods
category. A decrease in the number of transactions represented (0.9)% of the comparable store sales
growth in the thirteen weeks ended November 1, 2009, compared to (0.9)% in the thirteen weeks ended
November 2, 2008. An increase in the average sales per transaction represented 1.2% of the
comparable store sales growth in the thirteen weeks ended November 1, 2009, compared to 6.3% in the
thirteen weeks ended November 2, 2008.
Services sales, which are included in the net sales amount discussed above and include
grooming, training, boarding and day camp, increased 8.0%, or $10.1 million, to $136.7 million for
the thirteen weeks ended November 1, 2009, compared to $126.6 million for the thirteen weeks ended
November 2, 2008. Services sales represented 10.6% and 10.1% of net sales for the thirteen weeks
ended November 1, 2009, and November 2, 2008, respectively. The increase in services sales is
primarily due to continued strong demand for our grooming services, and the addition of 42 net new
stores and 29 new PetsHotels since November 2, 2008.
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Gross Profit
Gross profit decreased to 27.5% of net sales for the thirteen weeks ended November 1, 2009,
from 28.6% for the thirteen weeks ended November 2, 2008, representing a decrease of 110 basis
points.
Overall merchandise margin decreased 160 basis points. Merchandise product margin decreased
130 basis points, with mix representing 45% and rate representing 55% of the decline. The mix
shift is due to an increase in consumables merchandise sales mix relative to net sales. The rate
impact is a result of markdowns related to major hardgoods category resets and strategic pricing
changes for hardgoods merchandise to drive additional customer traffic. Difficult macroeconomic
conditions, including reduced discretionary consumer spending, challenged our merchandise product
margins as we have experienced a mix shift from higher margin discretionary
hardgoods into consumables. Consumables merchandise sales, which includes pet food, treats,
and litter, typically generate a lower gross product margin as compared to hardgoods merchandise.
Hardgoods merchandise includes pet supplies such as collars, leashes, health care supplies,
grooming and beauty aids, toys, and apparel, as well as pet beds and carriers. Merchandise margin
related to the amortization of previously capitalized inbound freight, as well as certain
procurement and distribution costs, decreased 30 basis points.
Services margin increased 15 basis points primarily due to continued strong demand for our
grooming services, and the addition of 29 new PetsHotels since November 2, 2008. Services sales
typically generate lower gross margins than merchandise sales as service-related labor is included
in cost of sales; however, services generate higher operating margins than merchandise sales. As
discussed above, the shift in merchandise sales to consumables merchandise has contributed to the
overall decrease in margin.
Store occupancy costs included in margin increased 10 basis points primarily due to the
addition of new stores, and new store growth outpacing the rate of sales growth.
Supply chain costs decreased 45 basis points due to lower fuel costs, transportation
efficiencies and improved productivity in our distribution centers.
Operating, General and Administrative Expenses
Operating, general and administrative expenses were 22.0% and 22.8% of net sales for the
thirteen weeks ended November 1, 2009, and November 2, 2008, respectively, representing an
improvement of 80 basis points.
The primary reasons for the decrease in operating, general and administrative expenses as a
percentage of net sales during the thirteen weeks ended November 1, 2009, were increased
efficiencies in our advertising spending due to lower advertising rates, and lower store preopening
expenses due to slower store growth. Store labor expense and travel costs were also lower due to
various cost control initiatives.
Interest Expense, net
Interest expense, which is primarily related to capital lease obligations, was $15.1 million
during the thirteen weeks ended November 1, 2009, compared to $14.9 million for the thirteen weeks
ended November 2, 2008. Included with interest expense, net was interest income of $0.1 million for
the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively.
Income Tax Expense
In the thirteen weeks ended November 1, 2009, the $20.5 million income tax expense represents
an effective tax rate of 36.4%, compared with the thirteen weeks ended November 2, 2008, when we
had income tax expense of $22.5 million, which represents an effective tax rate of 39.2%. The
decrease in the effective tax rate was primarily due to tax exempt gains from our deferred
compensation plan. The effective tax rate is calculated by dividing our income tax expense, which
includes the income tax expense related to our equity in income from investee, by income before
income tax expense and equity in income from investee.
Equity in Income from Investee
Our equity in income from our investment in MMIH was $2.3 million and $1.0 million for the
thirteen weeks ended November 1, 2009, and November 2, 2008, respectively, based on our ownership
percentage in MMIHs net income.
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Thirty-Nine Weeks Ended November 1, 2009, Compared to the Thirty-Nine Weeks Ended November 2, 2008
Net Sales
Net sales increased $224.7 million, or 6.1%, to $3.9 billion for the thirty-nine weeks ended
November 1, 2009, compared to $3.7 billion for the thirty-nine weeks ended November 2, 2008. The
increase in net sales was partially impacted by $18.4 million in unfavorable foreign currency
fluctuations during the thirty-nine weeks ended November 1, 2009. Approximately 73% of the sales
increase is due to the addition of 42 net new stores and 29 new PetsHotels since November 2, 2008,
and 27% of the increase is due to a 1.6% increase in comparable store sales for the thirty-nine
weeks ended November 1, 2009. The increase in comparable store sales was due to the impact of key
merchandising and pricing strategies, primarily in our hardgoods categories, partially offset by
economic conditions and the slowdown in consumer spending. A decrease in the number of transactions
represented (0.5)% of the comparable store sales growth in the thirty-nine weeks ended November 1,
2009, compared to (1.6)% in the thirty-nine weeks ended November 2,
2008. An increase in the average sales per transaction represented 2.1% of the comparable
store sales growth in the thirty-nine weeks ended November 1, 2009, compared to 5.7% in the
thirty-nine weeks ended November 2, 2008.
Services sales, which are included in the net sales amount discussed above and include
grooming, training, boarding and day camp, increased 9.5%, or $37.7 million, to $433.7 million for
the thirty-nine weeks ended November 1, 2009, compared to $396.0 million for the thirty-nine weeks
ended November 2, 2008. Services sales represented 11.0% and 10.7% of net sales for the thirty-nine
weeks ended November 1, 2009, and November 2, 2008, respectively. The increase in services sales is
primarily due to continued strong demand for our grooming services, and the addition of 42 net new
stores and 29 new PetsHotels since November 2, 2008.
Gross Profit
Gross profit decreased to 28.1% of net sales for the thirty-nine weeks ended November 1, 2009,
from 29.2% for the thirty-nine weeks ended November 2, 2008, representing a decrease of 110 basis
points.
Overall merchandise margin decreased 170 basis points. Merchandise product margin decreased
170 basis points, with mix representing 48% and rate representing 52% of the decline. The mix
shift is due to an increase in consumables merchandise sales mix relative to net sales. The rate
impact is due to select price reductions, an increase in promotions for hardgoods merchandise, and
broad category promotions to drive additional customer traffic. Difficult macroeconomic conditions,
including reduced discretionary consumer spending, challenged our merchandise product margins as we
have experienced a mix shift from higher margin discretionary hardgoods into consumables.
Consumables merchandise sales, which includes pet food, treats, and litter, typically generate a
lower gross margin as compared to hardgoods merchandise. Hardgoods merchandise includes pet
supplies such as collars, leashes, health care supplies, grooming and beauty aids, toys, and
apparel, as well as pet beds and carriers.
Services margin increased 15 basis points primarily due to continued strong demand for our
grooming services, and the addition of 29 new PetsHotels since November 2, 2008. Services sales
typically generate lower gross margins than merchandise sales as service-related labor is included
in cost of sales; however, services generate higher operating margins than merchandise sales. As
discussed above, the shift in merchandise sales to consumables merchandise has contributed to the
overall decrease in margin.
Store occupancy costs included in margin increased 20 basis points primarily due to the
addition of new stores, and new store growth outpacing the rate of sales growth.
Supply chain costs decreased 65 basis points due to lower fuel costs, transportation
efficiencies and improved productivity in our distribution centers.
Operating, General and Administrative Expenses
Operating, general and administrative expenses were 22.1% and 23.0% of net sales for the
thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively, representing an
improvement of 90 basis points.
The primary reasons for the decrease in operating, general and administrative expenses as a
percentage of net sales during the thirty-nine weeks ended November 1, 2009, were increased
efficiencies in our advertising spending due to lower advertising rates, and lower store preopening
expenses due to slower store growth. Store maintenance expense, travel, and supplies costs were
also lower due to vendor renegotiations and various cost control initiatives.
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Interest Expense, net
Interest expense, which is primarily related to capital lease obligations, increased to $45.5
million during the thirty-nine weeks ended November 1, 2009, compared to $44.1 million for the
thirty-nine weeks ended November 2, 2008. Included with interest expense, net was interest income
of $0.5 million and $0.4 million during the thirty-nine weeks ended November 1, 2009, and November
2, 2008, respectively.
Income Tax Expense
In the thirty-nine weeks ended November 1, 2009, the $71.6 million income tax expense
represents an effective tax rate of 37.7%, compared with the thirty-nine weeks ended November 2,
2008, when we had income tax expense of $72.7 million, which represents an effective tax rate of
39.5%. The decrease in the effective tax rate was primarily due to tax exempt gains from our
deferred compensation plan. The effective tax rate is calculated by dividing our income tax
expense, which includes the income tax expense related to our equity in income from investee, by
income before income tax expense and equity in income from investee.
Equity in Income from Investee
Our equity in income from our investment in MMIH was $4.9 million and $2.9 million for the
thirty-nine weeks ended November 1, 2009, and November 2, 2008, respectively, based on our
ownership percentage in MMIHs net income.
Liquidity and Capital Resources
Cash Flow
We continue to generate operating cash flow sufficient to meet our needs. We believe that our
operating cash flow and cash on hand will be adequate to meet our operating, investing and
financing needs in the foreseeable future. Global capital and credit markets have recently
experienced increased volatility and disruption. Despite this volatility and disruption, we
continue to have access to our $350.0 million revolving credit facility. However, there can be no
assurance that continued or increased volatility and disruption in the global capital and credit
markets will not impair our ability to access these markets on commercially acceptable terms. As we
generate cash flow from operations, we expect to continuously assess the economic environment and
market conditions to guide our decisions regarding our uses of cash, including capital
expenditures, investments, dividends and share repurchases.
We finance our operations, new store and PetsHotel growth, store remodels and other
expenditures to support our growth initiatives primarily through cash generated by operating
activities. Net cash provided by operating activities was $343.4 million for the thirty-nine weeks
ended November 1, 2009, compared to $256.6 million for the thirty-nine weeks ended November 2,
2008. Receipts from our sales come from cash, checks and third-party debit and credit cards, and
therefore provide a significant source of liquidity. Cash is used in operating activities primarily
to fund procurement of merchandise inventories and other assets, net of accounts payable and other
accrued liabilities. The primary differences between the thirty-nine weeks ended November 1, 2009,
and November 2, 2008, were decreased purchases of merchandise inventories and an increase in
current liabilities primarily as a result of increases in tax accruals, offset by an increase in
receivables and a decrease in accounts payable.
Net cash used in investing activities was $138.3 million for the thirty-nine weeks ended
November 1, 2009, compared to $191.6 million for the thirty-nine weeks ended November 2, 2008. Cash
used in investing activities consisted primarily of expenditures associated with opening or
acquiring new stores, reformatting existing stores, expenditures associated with equipment and
computer software in support of our system initiatives, PetsHotel construction costs, and other
expenditures to support our growth plans and initiatives. The primary differences between the
thirty-nine weeks ended November 1, 2009, and November 2, 2008, were a decrease in cash paid for
property and equipment as a result of the slow-down in store openings, and an increase in
restricted cash.
Net cash used in financing activities was $147.5 million for the thirty-nine weeks ended
November 1, 2009, and consisted primarily of the cash paid for treasury stock, a decrease in our
bank overdraft, payments on capital lease obligations, payments of cash dividends, offset by net
proceeds from common stock issued under equity incentive plans, and proceeds from tax deductions in
excess of the compensation cost recognized. Net cash used in financing activities for the
thirty-nine weeks ended November 2, 2008, was $64.4
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million. The primary difference between the
thirty-nine weeks ended November 1, 2009, and the thirty-nine weeks ended November 2, 2008, was an
increase in cash paid for treasury stock and no short-term debt borrowings.
Operating Capital and Capital Expenditure Requirements
Substantially all our stores are leased facilities. We opened 43 new stores and closed 6
stores in the thirty-nine weeks ended November 1, 2009. Generally, each new store requires capital
expenditures of approximately $0.7 million for fixtures, equipment and leasehold improvements,
approximately $0.3 million for inventory and approximately $0.1 million for preopening costs. We
expect total capital spending to be $115 million to $125 million for 2009 for opening new stores
and PetsHotels, continuing our investment in the development of our information systems, adding to
our services capacity with the expansion of certain grooming salons, remodeling or replacing
certain store assets and continuing our store refresh program.
Our ability to fund our operations and make planned capital expenditures depends on our future
operating performance and cash flow, which are subject to prevailing economic conditions and to
financial, business and other factors, some of which are beyond our control.
The following table presents our capital expenditures (in thousands):
Thirty-Nine Weeks Ended | ||||||||
November 1, 2009 | November 2, 2008 | |||||||
Capital Expenditures: |
||||||||
New stores |
$ | 22,345 | $ | 68,623 | ||||
Store-related projects(1) |
38,201 | 46,288 | ||||||
PetsHotel(2) |
4,982 | 34,459 | ||||||
Information technology |
12,471 | 16,253 | ||||||
Supply chain |
8,403 | 18,482 | ||||||
Other(3) |
555 | 10,457 | ||||||
Total capital expenditures |
$ | 86,957 | $ | 194,562 | ||||
(1) | Includes store remodels, grooming salon expansion, equipment replacement, relocations, and various merchandising projects. | |
(2) | For new and existing stores. | |
(3) | Includes corporate office related expenditures, including costs related to the expansion and renovation of our corporate offices during 2008. |
Commitments and Contingencies
As of November 1, 2009, we had obligations to purchase $9.3 million of advertising through the
remainder of 2009, and $14.5 million in 2010.
There have been no other material changes in our contractual obligations since February 1,
2009. Information regarding our contractual obligations is provided in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on
Form 10-K for the year ended February 1, 2009.
Credit Facilities
We have a $350.0 million revolving credit facility, or Revolving Credit Facility, that
expires on August 15, 2012. Borrowings under the Revolving Credit Facility are subject to a
borrowing base and bear interest, at our option, at a banks prime rate plus 0% to 0.25% or LIBOR
plus 0.875% to 1.25%. We are subject to fees payable to lenders each quarter at an annual rate of
0.20% of the unused amount of the Revolving Credit Facility. The Revolving Credit Facility also
gives us the ability to issue letters of credit, which reduce the amount available under the
Revolving Credit Facility. Letter of credit issuances under the Revolving Credit Facility are
subject to interest payable to the lenders and bear interest of 0.875% to 1.25% for standby letters
of credit or 0.438% to 0.625% for commercial letters of credit. As of November 1, 2009, we had no
borrowings and $32.4 million in stand-by letter of credit issuances under our Revolving Credit
Facility.
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We also have a $100.0 million stand-alone letter of credit facility, or Stand-alone Letter of
Credit Facility, that expires on August 15, 2012. We are subject to fees payable to the lender
each quarter at an annual rate of 0.45% of the average daily face amount of the letters of credit
outstanding during the preceding calendar quarter. In addition, we are required to maintain a cash
deposit with the lender equal to the amount of outstanding letters of credit or we may use other
approved investments as collateral. If we use other approved investments as collateral, we must
have an amount on deposit which, when multiplied by the advance rate of 85%, is equal to the amount
of the outstanding letters of credit under the Stand-alone Letter of Credit Facility. As of
November 1, 2009, we had $55.3 million in outstanding letters of credit under the Stand-alone
Letter of Credit Facility and $55.3 million in restricted cash on deposit with the lender. As of
February 1, 2009, and November 2, 2008, we had no outstanding letters of credit under the
Stand-alone Letter of Credit Facility, no restricted cash or short-term investments on deposit with
the lender, and no other investments related to the Stand-alone Letter of Credit Facility.
We issue letters of credit for guarantees provided for insurance programs, capital lease
agreements and utilities.
The Revolving Credit Facility and Stand-alone Letter of Credit Facility permit the payment of
dividends, if we are not in default and the payment of dividends would not result in default of the
Revolving Credit Facility and Stand-alone Letter of Credit Facility. As of November 1, 2009, we
were in compliance with the terms and covenants of our Revolving Credit Facility and Stand-alone
Letter of Credit Facility. The Revolving Credit Facility and Stand-alone Letter of Credit Facility
are secured by substantially all our personal property assets, our wholly owned subsidiaries and
certain real property.
Common Stock Dividends
We believe our ability to generate cash allows us to invest in the growth of our business and,
at the same time, distribute a quarterly dividend.
During the thirty-nine weeks ended November 1, 2009, the Board of Directors declared the
following dividends:
Date | Dividend Amount | Stockholders of | Date | |||||||||
Declared | per Share | Record Date | Paid | |||||||||
March 24, 2009 |
$ | 0.03 | May 1, 2009 | May 15, 2009 | ||||||||
June 22, 2009 |
$ | 0.10 | July 31, 2009 | August 14, 2009 | ||||||||
September 30, 2009 |
$ | 0.10 | October 30, 2009 | November 13, 2009 |
Common Stock Purchase Program
In August 2007, the Board of Directors approved a program authorizing the purchase of up to
$300.0 million of our common stock through November 1, 2009. We purchased 1.2 million shares of our
common stock for $25.0 million during the thirteen weeks ended May 3, 2009, completing the $300.0
million program.
In June 2009, the Board of Directors approved a new share purchase program authorizing the
purchase of up to $350.0 million of our common stock through January 29, 2012. During the thirteen
weeks ended November 1, 2009, we purchased 1.7 million shares of common stock for $35.0 million.
Since the inception of the new share purchase authorization in June 2009, we have purchased 2.9
million shares of common stock for $60.0 million. As of November 1, 2009, $290.0 million remained
available under the $350.0 million program.
Related Party Transactions
We have an investment in MMIH, who through a wholly owned subsidiary, Medical Management
International, Inc., operates full-service veterinary hospitals in 740 of our stores. Our
investment consists of common and preferred stock.
We use the equity method of accounting for our investment in MMIH. As of November 1, 2009, we
owned approximately 21.4% of the voting stock and approximately 21.0% of the combined voting and
non-voting stock of MMIH.
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Our equity in income from our investment in MMIH, which is recorded one month in arrears, was
$2.3 million and $1.0 million for the thirteen weeks ended November 1, 2009, and November 2, 2008,
respectively, and $4.9 million and $2.9 million for the thirty-nine weeks ended November 1, 2009,
and November 2, 2008, respectively.
We have a master operating agreement with MMIH which covers license fees, utilities and other
cost reimbursements. We charge MMIH license fees for the space used by the veterinary hospitals
and for their portion of utilities costs. These amounts are classified as a reduction of the retail
stores occupancy costs, which are included as a component of cost of merchandise sales in the
Condensed Consolidated Statements of Operations and Comprehensive Income. We also charge MMIH for
its portion of specific operating expenses and classify the reimbursement as a reduction of the
stores operating expense.
We recognized license fees, utilities and other cost reimbursements of $8.5 million and $7.6
million during the thirteen weeks ended November 1, 2009, and November 2, 2008, respectively, and
$25.2 million and $22.6 million during the thirty-nine weeks ended November 1, 2009, and November
2, 2008, respectively. Receivables from MMIH totaled $3.4 million, $3.3 million, and $3.2 million
at November 1, 2009, February 1, 2009, and November 2, 2008, respectively, and were included in
receivables in the Condensed Consolidated Balance Sheets.
The master operating agreement also includes a provision for the sharing of profits on the
sale of therapeutic pet foods sold in all stores with an operating Banfield hospital. The net sales
and gross profit on the sale of therapeutic pet food sales is not material to our condensed
consolidated financial statements.
Seasonality and Inflation
Our business is subject to seasonal fluctuations. We typically realize a higher portion of our
net sales and operating profits during the fourth quarter. As a result of this seasonality, we
believe that quarter-to-quarter comparisons of our operating results are not necessarily
meaningful, and that these comparisons cannot be relied upon as indicators of future performance.
Controllable expenses could fluctuate from quarter-to-quarter in a year. Since our stores typically
draw customers from a large trade area, sales also may be impacted by adverse weather or travel
conditions, which are more prevalent during certain seasons of the year. As a result of our
expansion plans, the timing of new store and PetsHotel openings and related preopening costs, the
amount of revenue contributed by new and existing stores and PetsHotels and the timing and
estimated obligations of store closures, our quarterly results of operations may fluctuate.
Finally, because new stores tend to experience higher payroll, advertising and other store level
expenses as a percentage of sales than mature
stores, new store openings will also contribute to lower store operating margins until these
stores become established. We expense preopening costs associated with each new location as the
costs are incurred.
While we continue to experience inflationary pressure, we have been able to largely mitigate
the effect by increasing retail prices accordingly. Although neither inflation nor deflation has
had a material impact on net operating results, we can make no assurance that our business will not
be affected by inflation or deflation in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
As of November 1, 2009, there have been no material changes in any of the market risk
information disclosed by us in our Annual Report on Form 10-K for the year ended February 1, 2009.
More detailed information concerning market risk can be found in Part II, Item 7A., Quantitative
and Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K for the year ended
February 1, 2009.
Item 4. Controls and Procedures
Management, with the participation of our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures as of November 1, 2009. The
term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, or Exchange Act, means controls and other procedures
of a company that are designed to ensure that information required to be disclosed by a company in
the reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions 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 companys
management, including its principal executive and principal financial officers, as appropriate to
allow timely decisions regarding required disclosure.
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No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the thirteen weeks ended November 1, 2009, that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. Based on the evaluation of our disclosure controls and procedures as of
November 1, 2009, our chief executive officer and chief financial officer concluded that, as of
such date, our disclosure controls and procedures were effective at the reasonable assurance level
and designed to meet the objective at the reasonable assurance level.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On January 12, 2009, a former groomer filed suit on behalf of herself and a putative class of
current and former groomers in California State Court entitled Langton v. PetSmart. The plaintiff
alleged that she and other non-exempt groomers did not receive payment for all hours worked, did
not receive meal and rest breaks, did not receive all wages due upon termination, did not receive
accurate wage statements as required by law, and were not provided with necessary tools and
equipment. On February 17, 2009, we removed the action to the United States District Court for the
Central District of California, and have since resolved this matter for an amount that is not
material to our condensed consolidated financial statements.
We are also a party to several lawsuits arising from the pet food recalls announced by several
manufacturers beginning in March 2007. The named plaintiffs sued the major pet food manufacturers
and retailers claiming that their pets suffered injury and/or death as a result of consuming
allegedly contaminated pet food and pet snack products.
Bruski v. Nutro Products, et al., USDC, N.D. IL (filed 3/23/07)
Rozman v. Menu Foods, et al., USDC, MN (filed 4/9/07)
Ford v. Menu Foods, et al., USDC, S.D. CA (filed 4/23/07)
Wahl, et al. v. Wal-Mart Stores Inc., et al., USDC, C.D. CA (filed 4/10/07)
Demith v. Nestle, et al., USDC, N.D. IL (filed 4/23/07)
Thompkins v. Menu Foods, et al., USDC, CO (filed 4/11/07)
McBain v. Menu Foods, et al., Judicial Centre of Regina, Canada (filed 7/11/07)
Dayman v. Hills Pet Nutrition Inc., et al., Ontario Superior Court of Justice (filed 8/8/07)
Esau v. Menu Foods, et al., Supreme Court of Newfoundland and Labrador (filed 9/5/07)
Ewasew v. Menu Foods, et al., Supreme Court of British Columbia (filed 3/23/07)
Silva v. Menu Foods, et al., Canada Province of Manitoba (filed 3/30/07)
Powell v. Menu Foods, et al., Ontario Superior Court of Justice (filed 3/28/07)
Rozman v. Menu Foods, et al., USDC, MN (filed 4/9/07)
Ford v. Menu Foods, et al., USDC, S.D. CA (filed 4/23/07)
Wahl, et al. v. Wal-Mart Stores Inc., et al., USDC, C.D. CA (filed 4/10/07)
Demith v. Nestle, et al., USDC, N.D. IL (filed 4/23/07)
Thompkins v. Menu Foods, et al., USDC, CO (filed 4/11/07)
McBain v. Menu Foods, et al., Judicial Centre of Regina, Canada (filed 7/11/07)
Dayman v. Hills Pet Nutrition Inc., et al., Ontario Superior Court of Justice (filed 8/8/07)
Esau v. Menu Foods, et al., Supreme Court of Newfoundland and Labrador (filed 9/5/07)
Ewasew v. Menu Foods, et al., Supreme Court of British Columbia (filed 3/23/07)
Silva v. Menu Foods, et al., Canada Province of Manitoba (filed 3/30/07)
Powell v. Menu Foods, et al., Ontario Superior Court of Justice (filed 3/28/07)
By order dated June 28, 2007, the Bruski, Rozman, Ford, Wahl, Demith and Thompkins cases were
transferred to the U.S. District Court for the District of New Jersey and consolidated with other
pet food class actions under the federal rules for multi-district litigation (In re: Pet Food
Product Liability Litigation, Civil No. 07-2867). The Canadian cases were not consolidated.
On May 21, 2008, the parties to the U.S. lawsuits comprising the In re: Pet Food Product
Liability Litigation and the Canadian cases jointly submitted a comprehensive settlement
arrangement for court approval. Preliminary court approval was received from the U.S. District
Court on May 3, 2008, and from all of the Canadian courts as of July 8, 2008. On October 14, 2008,
the U.S. District Court approved the settlement, and the Canadian courts gave final approval on
November 3, 2008.
Two different groups of objectors filed notices of appeal with respect to the U.S. District
Courts approval of the U.S. settlement. Upon expiration of the prescribed appeal process, these
cases should be resolved, and we continue to believe they will not have a material adverse impact
on our condensed consolidated financial statements. Accordingly, we have not accrued any contingent
liability amount for these cases.
There have been no appeals filed in Canada.
We are involved in the defense of various other legal proceedings that we do not believe are
material to our condensed consolidated financial statements.
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Item 1A. Risk Factors
In addition to the other information in this report, you should carefully consider the factors
discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended
February 1, 2009, which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are not the only risks facing us.
Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial condition and/or operating
results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows purchases of our common stock and the available funds to purchase
additional common stock for each period in the thirteen weeks ended November 1, 2009:
Total Number of | ||||||||||||||||
Total | Shares | Value That May | ||||||||||||||
Number | Purchased as Part of | Yet be Purchased | ||||||||||||||
of Shares | Average Price | Publicly Announced | Under the Plans or | |||||||||||||
Period | Purchased | Paid per Share | Plans or Programs | Programs(1) | ||||||||||||
August 3, 2009, to August 30, 2009 |
1,717,900 | 20.34 | 1,717,900 | $ | 290,000,000 | |||||||||||
August 31, 2009, to October 4, 2009 |
| | | $ | 290,000,000 | |||||||||||
October 5, 2009, to November 1, 2009 |
| | | $ | 290,000,000 | |||||||||||
Thirteen Weeks Ended November 1, 2009 |
1,717,900 | $ | 20.34 | 1,717,900 | $ | 290,000,000 | ||||||||||
(1) | 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. |
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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. |
* | The certifications attached as Exhibit 32.1 and Exhibit 32.2 accompany 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. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 25, 2009
/s/ Lawrence P. Molloy | ||||
Lawrence P. Molloy | ||||
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
||||
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