Attached files
file | filename |
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EX-15.1 - EX-15.1 - PETSMART INC | p17724exv15w1.htm |
EX-32.2 - EX-32.2 - PETSMART INC | p17724exv32w2.htm |
EX-31.1 - EX-31.1 - PETSMART INC | p17724exv31w1.htm |
EX-31.2 - EX-31.2 - PETSMART INC | p17724exv31w2.htm |
EX-32.1 - EX-32.1 - PETSMART INC | p17724exv32w1.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 May 2, 2010
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
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,118,330,562 Shares at May 14, 2010
PetSmart, Inc. and Subsidiaries
INDEX
INDEX
Page | ||||||||
Number | ||||||||
PART I. FINANCIAL INFORMATION (UNAUDITED) |
||||||||
Item 1. Financial Statements |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
14 | ||||||||
22 | ||||||||
22 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
25 | ||||||||
26 | ||||||||
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 May 2, 2010 and May 3, 2009, and the related condensed
consolidated statements of income and comprehensive income and of cash flows for the thirteen week
periods ended May 2, 2010 and May 3, 2009. 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 January 31, 2010, and the related consolidated statements of income and comprehensive income,
stockholders equity, and cash flows for the year then ended (not presented herein); and in our
report dated March 25, 2010, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of January 31, 2010, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP | ||||
Phoenix, Arizona | ||||
May 28, 2010 |
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PetSmart, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except par value)
(Unaudited)
(In thousands, except par value)
(Unaudited)
May 2, | January 31, | May 3, | ||||||||||
2010 | 2010 | 2009 | ||||||||||
ASSETS |
||||||||||||
Cash and cash equivalents |
$ | 241,964 | $ | 308,360 | $ | 209,913 | ||||||
Restricted cash |
46,515 | 48,172 | | |||||||||
Receivables, net |
47,460 | 52,232 | 56,208 | |||||||||
Merchandise inventories |
596,660 | 563,389 | 556,312 | |||||||||
Deferred income taxes |
36,805 | 36,805 | 29,334 | |||||||||
Prepaid expenses and other current assets |
61,007 | 57,652 | 89,348 | |||||||||
Total current assets |
1,030,411 | 1,066,610 | 941,115 | |||||||||
Property and equipment, net |
1,176,144 | 1,201,857 | 1,280,590 | |||||||||
Equity investment in investee |
33,924 | 32,486 | 27,054 | |||||||||
Deferred income taxes |
87,148 | 94,901 | 88,105 | |||||||||
Goodwill |
43,667 | 42,200 | 39,470 | |||||||||
Other noncurrent assets |
27,155 | 23,932 | 23,662 | |||||||||
Total assets |
$ | 2,398,449 | $ | 2,461,986 | $ | 2,399,996 | ||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||
Accounts payable and bank overdraft |
$ | 198,280 | $ | 212,121 | $ | 176,973 | ||||||
Accrued payroll, bonus and employee benefits |
98,615 | 105,162 | 90,109 | |||||||||
Accrued occupancy expenses and deferred rents |
59,293 | 63,142 | 55,423 | |||||||||
Current maturities of capital lease obligations |
39,462 | 37,839 | 34,222 | |||||||||
Other current liabilities |
142,136 | 146,965 | 136,251 | |||||||||
Total current liabilities |
537,786 | 565,229 | 492,978 | |||||||||
Capital lease obligations |
533,893 | 533,635 | 554,862 | |||||||||
Deferred rents |
89,625 | 91,030 | 92,777 | |||||||||
Other noncurrent liabilities |
103,621 | 99,377 | 94,346 | |||||||||
Total liabilities |
1,264,925 | 1,289,271 | 1,234,963 | |||||||||
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,
161,253, 160,311 and 159,646 shares issued |
16 | 16 | 16 | |||||||||
Additional paid-in capital |
1,169,930 | 1,148,228 | 1,119,735 | |||||||||
Retained earnings |
1,137,466 | 1,093,708 | 978,579 | |||||||||
Accumulated other comprehensive income (loss) |
4,786 | 2,369 | (1,510 | ) | ||||||||
Less: Treasury stock, at cost, 42,929, 39,517 and 33,590 shares |
(1,178,674 | ) | (1,071,606 | ) | (931,787 | ) | ||||||
Total stockholders equity |
1,133,524 | 1,172,715 | 1,165,033 | |||||||||
Total liabilities and stockholders equity |
$ | 2,398,449 | $ | 2,461,986 | $ | 2,399,996 | ||||||
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 Income and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
(In thousands, except per share data)
(Unaudited)
For the Thirteen Weeks Ended | ||||||||
May 2, 2010 | May 3, 2009 | |||||||
Merchandise sales |
$ | 1,233,595 | $ | 1,184,755 | ||||
Services sales |
153,287 | 142,819 | ||||||
Other revenue |
8,271 | | ||||||
Net sales |
1,395,153 | 1,327,574 | ||||||
Cost of merchandise sales |
869,842 | 847,874 | ||||||
Cost of services sales |
112,748 | 102,448 | ||||||
Cost of other revenue |
8,271 | | ||||||
Total cost of sales |
990,861 | 950,322 | ||||||
Gross profit |
404,292 | 377,252 | ||||||
Operating, general and administrative expenses |
301,031 | 287,383 | ||||||
Operating income |
103,261 | 89,869 | ||||||
Interest expense, net |
(15,343 | ) | (14,974 | ) | ||||
Income before income tax expense and equity in income from investee |
87,918 | 74,895 | ||||||
Income tax expense |
(33,764 | ) | (29,749 | ) | ||||
Equity in income from investee |
1,438 | 1,116 | ||||||
Net income |
55,592 | 46,262 | ||||||
Other comprehensive income, net of income tax: |
||||||||
Foreign currency translation adjustments |
2,417 | 1,204 | ||||||
Comprehensive income |
$ | 58,009 | $ | 47,466 | ||||
Earnings per common share: |
||||||||
Basic |
$ | 0.47 | $ | 0.37 | ||||
Diluted |
$ | 0.46 | $ | 0.37 | ||||
Weighted average shares outstanding: |
||||||||
Basic |
117,976 | 124,355 | ||||||
Diluted |
120,382 | 126,524 |
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 Thirteen Weeks Ended | ||||||||
May 2, 2010 | May 3, 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 55,592 | $ | 46,262 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
59,738 | 58,635 | ||||||
Loss on disposal of property and equipment |
3,758 | 595 | ||||||
Stock-based compensation expense |
6,572 | 6,112 | ||||||
Deferred income taxes |
6,311 | 3,913 | ||||||
Equity in income from investee |
(1,438 | ) | (1,116 | ) | ||||
Tax benefits from tax deductions in excess of the compensation cost recognized |
(4,462 | ) | (156 | ) | ||||
Non-cash interest expense |
308 | 685 | ||||||
Changes in other operating assets and liabilities: |
||||||||
Merchandise inventories |
(32,140 | ) | 28,223 | |||||
Other assets |
(1,334 | ) | (10,576 | ) | ||||
Accounts payable |
(7,756 | ) | (1,127 | ) | ||||
Accrued payroll, bonus and employee benefits |
(6,723 | ) | 1,608 | |||||
Other liabilities |
7,858 | 39,240 | ||||||
Net cash provided by operating activities |
86,284 | 172,298 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Decrease in restricted cash and short-term investments |
1,657 | | ||||||
Cash paid for property and equipment |
(31,063 | ) | (35,928 | ) | ||||
Proceeds from sales of property and equipment |
55 | 3,725 | ||||||
Net cash used in investing activities |
(29,351 | ) | (32,203 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net proceeds from common stock traded under stock incentive plans |
16,483 | 1,018 | ||||||
Minimum statutory withholding requirements |
(4,788 | ) | (2,995 | ) | ||||
Cash paid for treasury stock |
(107,068 | ) | (24,964 | ) | ||||
Payments of capital lease obligations |
(15,239 | ) | (9,312 | ) | ||||
Decrease in bank overdraft |
(6,419 | ) | (16,901 | ) | ||||
Tax benefits from tax deductions in excess of the compensation cost recognized |
4,462 | 156 | ||||||
Cash dividends paid to stockholders |
(12,072 | ) | (3,816 | ) | ||||
Net cash used in financing activities |
(124,641 | ) | (56,814 | ) | ||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
1,312 | 318 | ||||||
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(66,396 | ) | 83,599 | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
308,360 | 126,314 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 241,964 | $ | 209,913 | ||||
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)
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 May 2, 2010, we operated 1,160 retail stores and had full-service
veterinary hospitals in 762 of our stores. Medical Management International, Inc. operated 750 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 for the interim periods presented.
These condensed consolidated financial statements, which are unaudited, should be read in
conjunction with the audited consolidated financial statements and footnotes included in our Annual
Report on Form 10-K for the year ended January 31, 2010. Additionally, we have combined the
receivables, net, other noncurrent assets, and prepaid expenses and other current assets line items
in the Condensed Consolidated Statements of Cash Flows into a single line item called other assets.
Further, we have combined the accrued occupancy expenses and current deferred rents, other current
liabilities, deferred rents, and other noncurrent liabilities line items in the Condensed
Consolidated Statements of Cash Flows into a single line item called other liabilities. Prior year
amounts have been combined to reflect this condensed presentation. Finally, for the thirteen weeks
ended May 2, 2010, Banfield license fees and operating expense reimbursements, and the related
costs, have been separately presented on a gross basis as detailed in Note 4.
Due to the seasonal nature of our business, the results of operations for the thirteen weeks
ended May 2, 2010, are not necessarily indicative of the results expected for the full year. Our
fiscal year consists of 52 or 53 weeks and ends on the Sunday nearest January 31. Fiscal 2010 ends
on January 30, 2011, while fiscal 2009 ended on January 31, 2010, both of which are 52 week years.
Unless otherwise specified, all references to years in these condensed consolidated financial
statements are to fiscal years.
NOTE 2 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: | ||||||||||||||||
Significant | Significant | |||||||||||||||
Quoted Prices in | Observable | Unobservable | ||||||||||||||
Total Carrying | Active Markets | Other Inputs | Other Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Money market funds at May 2, 2010 |
$ | 220,271 | $ | 220,271 | | | ||||||||||
Money market funds at January 31, 2010 |
287,293 | 287,293 | | | ||||||||||||
Money market funds at May 3, 2009 |
151,015 | 151,015 | | |
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.
7
Table of Contents
We recognize accrued interest and penalties related to unrecognized tax benefits as a
component of income tax expense in the Condensed Consolidated Statements of Income and
Comprehensive Income. We believe it is reasonably possible that approximately $0.2 million of our
current remaining unrecognized tax positions may be recognized by May 1, 2011, as a result of
settlements or a lapse of the statute of limitations.
As of May 2, 2010, our gross tax liabilities associated with uncertain tax positions,
excluding interest and penalties, were $7.8 million. Based on the uncertainties associated with the
settlement of these types of items, we are unable to make reasonably reliable estimates of
potential cash settlements, if any, with taxing authorities.
We generally do not materially adjust deferred tax assets as part of our interim income tax
provision. During the thirteen weeks ended May 2, 2010, changes in deferred tax assets were due to
tax benefits related to stock-based compensation, and changes in accumulated other comprehensive
income. During the interim periods, we recognize the provision for income taxes in other current
liabilities in the Condensed Consolidated Balance Sheets. The provision is calculated based on our
estimated annual effective income tax rate applied to pretax income. A reclassification between
other current liabilities and deferred income tax assets and liabilities is likely to occur during
the fourth quarter of 2010.
At May 2, 2010, accrued taxes of $42.2 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 Banfield, operates full-service veterinary hospitals in 750 of our stores under
the registered trade name Banfield, The Pet Hospital.
We use the equity method of accounting for our investment in Banfield. Our ownership interest
in the stock of Banfield was as follows (in thousands):
May 2, 2010 | January 31, 2010 | May 3, 2009 | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||
Voting common stock and preferred stock |
4,693 | $ | 21,675 | 4,693 | $ | 21,675 | 4,693 | $ | 21,675 | |||||||||||||||
Equity in income from investee |
| 12,249 | | 10,811 | | 5,379 | ||||||||||||||||||
Total equity investment in affiliate |
4,693 | $ | 33,924 | 4,693 | $ | 32,486 | 4,693 | $ | 27,054 | |||||||||||||||
Our investment consisted of voting common stock, comprising 21.4% of all voting stock as of
May 2, 2010, January 31, 2010, and May 3, 2009. Our ownership percentage as of May 2, 2010, January
31, 2010, and May 3, 2009, considering all classes of stock, voting and non-voting, was 21.0%.
Banfields financial data is summarized as follows (in thousands):
May 2, 2010 | January 31, 2010 | May 3, 2009 | ||||||||||
Current assets |
$ | 286,783 | $ | 269,381 | $ | 206,434 | ||||||
Noncurrent assets |
125,090 | 122,934 | 127,566 | |||||||||
Current liabilities |
263,205 | 247,138 | 217,705 | |||||||||
Noncurrent liabilities |
15,767 | 16,216 | 13,552 |
Thirteen Weeks Ended | ||||||||
May 2, 2010 | May 3, 2009 | |||||||
Net sales |
$ | 149,308 | $ | 126,329 | ||||
Gross profit |
33,586 | 12,291 | ||||||
Net income |
6,844 | 5,308 |
We have a master operating agreement with Banfield which covers license fees, utilities and
other cost reimbursements. We charge Banfield license fees for the space used by the veterinary
hospitals and for their portion of utilities costs. We also charge Banfield for its portion of
specific operating expenses. Prior to February 1, 2010, license fees were treated as a reduction
of occupancy costs, which are
8
Table of Contents
included as a component of cost of merchandise sales, and reimbursements for specific
operating expenses were treated as a reduction of operating, general and administrative expenses in
the Condensed Consolidated Statement of Income and Comprehensive Income. Beginning February 1,
2010, license fees and the reimbursements for specific operating expenses are included in other
revenue, and the related costs are included in cost of other revenue in the Condensed Consolidated
Statements of Income and Other Comprehensive Income.
We recognized license fees, utilities and other cost reimbursements from Banfield of $8.3
million and $8.1 million during the thirteen weeks ended May 2, 2010, and May 3, 2009,
respectively. Receivables from Banfield totaled $2.6 million, $2.4 million, and $3.2 million at
May 2, 2010, January 31, 2010, and May 3, 2009, respectively, and were included in receivables, net
in the Condensed Consolidated Balance Sheets.
The master operating agreement also includes a provision for the sharing of profits on the
sale of therapeutic pet foods sold in all stores with an operating Banfield hospital. The net sales
and gross profit on the sale of therapeutic pet food sales are not material to our condensed
consolidated financial statements.
NOTE 5 RESERVE FOR CLOSED STORES
The components of the reserve for closed stores were as follows (in thousands):
May 2, 2010 | January 31, 2010 | May 3, 2009 | ||||||||||
Total remaining gross occupancy costs |
$ | 38,703 | $ | 33,577 | $ | 32,325 | ||||||
Less: |
||||||||||||
Expected sublease income |
(26,691 | ) | (24,018 | ) | (25,715 | ) | ||||||
Interest costs |
(1,822 | ) | (1,343 | ) | (1,016 | ) | ||||||
Reserve for closed stores |
$ | 10,190 | $ | 8,216 | $ | 5,594 | ||||||
Current portion, included in other current liabilities |
$ | 2,982 | $ | 2,395 | $ | 1,837 | ||||||
Noncurrent portion, included in other noncurrent liabilities |
7,208 | 5,821 | 3,757 | |||||||||
Reserve for closed stores |
$ | 10,190 | $ | 8,216 | $ | 5,594 | ||||||
The activity related to the reserve for closed stores was as follows (in thousands):
Thirteen Weeks Ended | ||||||||
May 2, 2010 | May 3, 2009 | |||||||
Opening balance |
$ | 8,216 | $ | 6,382 | ||||
Reserve for new store closures |
2,802 | | ||||||
Changes in sublease assumptions |
| 98 | ||||||
Lease terminations |
| | ||||||
Other |
120 | 109 | ||||||
Charges, net |
2,922 | 207 | ||||||
Payments |
(948 | ) | (995 | ) | ||||
Ending balance |
$ | 10,190 | $ | 5,594 | ||||
NOTE 6 EARNINGS PER COMMON SHARE
The following table presents a reconciliation of the weighted average shares outstanding used
in the earnings per common share calculations (in thousands):
Thirteen Weeks Ended | ||||||||
May 2, 2010 | May 3, 2009 | |||||||
Basic |
117,976 | 124,355 | ||||||
Effect of dilutive securities: |
||||||||
Stock options, restricted stock and performance share units |
2,406 | 2,169 | ||||||
Diluted |
120,382 | 126,524 | ||||||
9
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Certain stock-based compensation awards representing 2.8 million and 5.8 million shares
of common stock in the thirteen weeks ended May 2, 2010, and May 3, 2009, respectively, were not
included in the calculation of diluted earnings per common share because the inclusion of such
awards would have been antidilutive for the periods presented.
NOTE 7 STOCKHOLDERS EQUITY
Share Purchase Program
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 approved by the Board of Directors in
August 2007.
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 May 2, 2010, we purchased 3.4 million shares of common stock for $107.1 million. Since
the inception of the new share purchase authorization in June 2009, we have purchased 9.3 million
shares of common stock for $247.1 million. As of May 2, 2010, $102.9 million remained available
under the $350.0 million program.
Dividends
On March 23, 2010, the Board of Directors declared a quarterly cash dividend of $0.10 per
share payable on May 14, 2010 to stockholders of record on April 30, 2010.
NOTE 8 STOCK-BASED COMPENSATION
The stock-based compensation expense, net of forfeitures, and the total income tax benefit
recognized in the Condensed Consolidated Statements of Income and Comprehensive Income were as
follows (in thousands):
Thirteen Weeks Ended | ||||||||
May 2, 2010 | May 3, 2009 | |||||||
Stock options expense |
$ | 2,297 | $ | 2,217 | ||||
Management equity unit expense |
1,182 | 218 | ||||||
Performance share unit expense |
1,568 | 498 | ||||||
Restricted stock expense |
1,525 | 3,179 | ||||||
Total stock-based compensation expense, net of forfeitures |
$ | 6,572 | $ | 6,112 | ||||
Tax benefit |
$ | 2,307 | $ | 2,266 | ||||
At May 2, 2010, the total unrecognized stock-based compensation expense, net of estimated
forfeitures, was $58.4 million and is expected to be recognized over a weighted average period of
1.5 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 | ||||||||
May 2, 2010 | May 3, 2009 | |||||||
Stock options |
1,361 | 1,623 | ||||||
Weighted average fair value per stock option |
$ | 8.08 | $ | 6.65 | ||||
Weighted average exercise price per stock option |
$ | 31.76 | $ | 16.69 | ||||
Management equity units |
248 | 282 | ||||||
Fair value per management equity unit |
$ | 33.07 | $ | 21.90 | ||||
Performance share units |
282 | 567 | ||||||
Weighted average fair value per performance share unit |
$ | 31.76 | $ | 16.69 | ||||
Restricted stock |
36 | 71 | ||||||
Weighted average fair value per share of restricted stock |
$ | 31.89 | $ | 17.45 |
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 | ||||||||
May 2, 2010 | May 3, 2009 | |||||||
Dividend yield |
1.66 | % | 0.57 | % | ||||
Expected volatility |
30.9 | % | 46.3 | % | ||||
Risk-free interest rate |
1.31 | % | 1.15 | % | ||||
Expected life |
5.1 years | 5.3 years | ||||||
Vesting period |
4.0 years | 4.0 years | ||||||
Term |
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. The
ESPP allows participants to purchase our common stock on semi-annual offering dates at 95% of the
fair market value of the shares on the purchase date. The semi-annual offering dates did not fall
within the thirteen weeks ended May 2, 2010, and May 3, 2009, therefore, no shares were purchased
through the ESPP during these two periods.
NOTE 9 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 expense related to the foreign currency translation adjustments was $1.4 million and
$0.8 million for the thirteen weeks ended May 2, 2010, and May 3, 2009, respectively. The
transaction gain included in net income was $0.7 million and $0.3 million for the thirteen weeks
ended May 2, 2010, and May 3, 2009, respectively.
The impact of foreign currency translation adjustments to the carrying value of goodwill was
$0.5 million and $(4.1) million for the thirteen weeks ended May 2, 2010, and May 3, 2009,
respectively.
NOTE 10 SUPPLEMENTAL SCHEDULE OF CASH FLOWS
Supplemental cash flow information was as follows (in thousands):
Thirteen Weeks Ended | ||||||||
May 2, 2010 | May 3, 2009 | |||||||
Interest paid |
$ | 15,076 | $ | 14,397 | ||||
Income taxes paid, net of refunds |
24,924 | (1,180 | ) | |||||
Assets acquired using capital lease obligations |
14,085 | 11,440 | ||||||
Accruals and accounts payable for capital expenditures |
14,822 | 12,231 | ||||||
Dividends declared but unpaid |
11,833 | 3,783 |
NOTE 11 LETTERS OF CREDIT
We have a $350.0 million five-year revolving credit facility, or Revolving Credit Facility,
that expires on August 15, 2012. Borrowings under the 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 stand-by letters of credit or
0.438% to 0.625% for commercial letters of credit.
We had no borrowings and $35.7 million in stand-by letter of credit issuances outstanding
under our $350.0 million five-year Revolving Credit Facility as of May 2, 2010, and January 31,
2010. As of May 3, 2009, we had no borrowings and $89.3 million in stand-by letter of credit
issuances outstanding.
We also have a $100.0 million stand-alone letter of credit facility, or Stand-alone Letter of
Credit Facility, that expires August 15, 2012. We are subject to fees payable to the
lender each quarter at an annual rate of 0.45% of the average daily face amount of the letters
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of credit outstanding during the preceding calendar quarter. In addition, we are required to
maintain a cash deposit with the lender equal to the amount of outstanding letters of credit or we
may use other approved investments as collateral. If we use other approved investments as
collateral, we must have an amount on deposit which, when multiplied by the advance rate of 85%, is
equal to the amount of the outstanding letters of credit under the Stand-alone Letter of Credit
Facility. As of May 2, 2010, we had $46.5 million in outstanding letters of credit under the
Stand-alone Letter of Credit Facility and $46.5 million in restricted cash on deposit with the
lender. As of January 31, 2010, we had $48.2 million in outstanding letters of credit under the
Stand-alone Letter of Credit Facility and $48.2 million in restricted cash on deposit with the
lender. As of May 3, 2009, we had no outstanding letters of credit under this stand-alone letter of
credit facility, no restricted cash or short-term investments on deposit with the lender, and no
other investments related to this stand-alone letter of credit facility.
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 May 2, 2010, we were in
compliance with the terms and covenants of our Revolving Credit Facility and Stand-alone Letter of
Credit Facility. The Revolving Credit Facility and Stand-alone Letter of Credit Facility are
secured by substantially all our personal property assets, our subsidiaries and certain real
property.
NOTE 12 COMMITMENTS AND CONTINGENCIES
Advertising Purchase Commitments
As of May 2, 2010, we had obligations to purchase $14.2 million of advertising through the
remainder of 2010.
Product Purchase Commitments
As of May 2, 2010, we had various commitments to purchase product from certain vendors that
are not material to our total inventory purchases.
Litigation and Settlements
Beginning in March 2007, we were named as a party in the following lawsuits arising from pet
food recalls announced by several manufacturers. The plaintiffs sued the major pet food
manufacturers and retailers claiming that their pets suffered injury and/or death as a result of
consuming allegedly contaminated pet food and pet snack products.
Bruski v. Nutro Products, et al., USDC, N.D. IL (filed 3/23/07)
Rozman v. Menu Foods, et al., USDC, MN (filed 4/9/07)
Ford v. Menu Foods, et al., USDC, S.D. CA (filed 4/23/07)
Wahl, et al. v. Wal-Mart Stores Inc., et al., USDC, C.D. CA (filed 4/10/07)
Demith v. Nestle, et al., USDC, N.D. IL (filed 4/23/07)
Thompkins v. Menu Foods, et al., USDC, CO (filed 4/11/07)
McBain v. Menu Foods, et al., Judicial Centre of Regina, Canada (filed 7/11/07)
Dayman v. Hills Pet Nutrition Inc., et al., Ontario Superior Court of Justice (filed 8/8/07)
Esau v. Menu Foods, et al., Supreme Court of Newfoundland and Labrador (filed 9/5/07)
Ewasew v. Menu Foods, et al., Supreme Court of British Columbia (filed 3/23/07)
Silva v. Menu Foods, et al., Canada Province of Manitoba (filed 3/30/07)
Powell v. Menu Foods, et al., Ontario Superior Court of Justice (filed 3/28/07)
Rozman v. Menu Foods, et al., USDC, MN (filed 4/9/07)
Ford v. Menu Foods, et al., USDC, S.D. CA (filed 4/23/07)
Wahl, et al. v. Wal-Mart Stores Inc., et al., USDC, C.D. CA (filed 4/10/07)
Demith v. Nestle, et al., USDC, N.D. IL (filed 4/23/07)
Thompkins v. Menu Foods, et al., USDC, CO (filed 4/11/07)
McBain v. Menu Foods, et al., Judicial Centre of Regina, Canada (filed 7/11/07)
Dayman v. Hills Pet Nutrition Inc., et al., Ontario Superior Court of Justice (filed 8/8/07)
Esau v. Menu Foods, et al., Supreme Court of Newfoundland and Labrador (filed 9/5/07)
Ewasew v. Menu Foods, et al., Supreme Court of British Columbia (filed 3/23/07)
Silva v. Menu Foods, et al., Canada Province of Manitoba (filed 3/30/07)
Powell v. Menu Foods, et al., Ontario Superior Court of Justice (filed 3/28/07)
By order dated June 28, 2007, the Bruski, Rozman, Ford, Wahl, Demith and Thompkins cases were
transferred to the U.S. District Court for the District of New Jersey and consolidated with other
pet food class actions under the federal rules for multi-district litigation (In re: Pet Food
Product Liability Litigation, Civil No. 07-2867). The Canadian cases were not consolidated.
On May 21, 2008, the parties to the U.S. lawsuits comprising the In re: Pet Food Product
Liability Litigation and the Canadian cases jointly submitted a comprehensive settlement
arrangement for court approval. Preliminary court approval was received from the U.S. District
Court on May 3, 2008, and from all of the Canadian courts as of July 8, 2008. On October 14, 2008,
the U.S. District Court approved the settlement, and the Canadian courts gave final approval on
November 3, 2008.
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Two different groups of objectors filed notices of appeal with respect to the U.S. District
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 consolidated financial statements.
There have been no appeals filed in Canada.
We are involved in the defense of various other legal proceedings that we do not believe are
material to our consolidated financial statements.
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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. | |
| A disruption, malfunction or increased costs in the operation, expansion or replenishment of our distribution centers or our supply chain would impact our ability to deliver to our stores or increase our expenses, which could harm our sales and results of operations. | |
| Failure to successfully manage our inventory could harm our business. | |
| If our information systems fail to perform as designed or are interrupted for a significant period of time, our business could be harmed. | |
| If we fail to protect the integrity and security of customer and associate information, we could be exposed to litigation and our business could be adversely impacted. | |
| The disruption of the relationship with or the loss of any of our key vendors, a decision by our vendors to make their products available in supermarkets or through warehouse clubs and other mass and retail merchandisers, the inability of our vendors to provide quality products in a timely or cost-effective manner, or risks associated with the suppliers from whom products are sourced, could harm our business. | |
| Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to product liability claims. | |
| Food safety, quality and health concerns could affect our business. | |
| We depend on key executives, store managers and other personnel and may not be able to retain or replace these employees or recruit additional qualified personnel, which could harm our business. | |
| Our international operations may result in additional market risks, which may harm our business. |
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| Our business may be harmed if the operation of veterinary hospitals at our stores is limited or fails to continue. | |
| We face various risks as an e-commerce retailer. | |
| Our business could be harmed if we were unable to effectively manage our cash flow and raise any needed additional capital on acceptable terms. | |
| Failure to successfully integrate any business we acquire could have an adverse impact on our financial results. | |
| Failure to protect our intellectual property could have a negative impact on our operating results. | |
| A determination that we are in violation of any contractual obligations or government regulations could result in a disruption to our operations and could impact our financial results. | |
| Failure of our internal controls over financial reporting could harm our business and financial results. | |
| Changes in laws, accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results. | |
| An unfavorable determination by tax regulators may cause our provision for income and other taxes to be inadequate and may result in a material impact to our financial results. | |
| Failure to obtain commercial insurance at acceptable prices or failure to adequately reserve for self-insured exposures might have a negative impact on our business. | |
| Pending legislation, weather, catastrophic events, disease, or other factors, could disrupt our operations, supply chain and the supply of small pets and products we sell, which could harm our reputation and decrease sales. | |
| Fluctuations in the stock market, as well as general economic and market conditions, may impact our operations, sales, financial results and market price of our common stock. | |
| Continued volatility and disruption to the global capital and credit markets may adversely affect our ability to access credit and the financial soundness of our suppliers. | |
| Our operating and financial performance in any given period may differ from the guidance we have provided to the public. | |
| We have implemented some anti-takeover provisions that may prevent or delay an acquisition of us that may not be beneficial to our stockholders. |
For more information about these risks, see the discussion under the heading Risk Factors in
our Form 10-K for the year ended January 31, 2010, filed with the Securities and Exchange
Commission on March 25, 2010, which is incorporated herein by reference.
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Overview
Based on our 2009 net sales of $5.3 billion, we are North Americas leading specialty provider
of products, services and solutions for the lifetime needs of pets. As of May 2, 2010, we operated
1,160 stores, and we anticipate opening 23 to 26 net new stores during the remainder of 2010. 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 value-added pet
services, including grooming, training, boarding and day camp. All our stores offer
complete pet training services, and virtually all our stores feature pet styling salons that
provide high-quality grooming services. Our PetsHotels provide boarding for dogs and cats, which
includes 24-hour supervision, an on-call veterinarian, temperature controlled rooms and suites,
daily specialty treats and play time, as well as day camp for dogs. As of May 2, 2010, we operated
165 PetsHotels, and we anticipate opening 14 additional PetsHotels during the remainder of 2010.
We make full-service veterinary care available through our strategic relationship with certain
third-party operators. As of May 2, 2010, 762 of our stores included full service veterinary
hospitals. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International,
Inc., collectively referred to as Banfield, operated 750 of the veterinary hospitals under the
registered trade name of Banfield, The Pet Hospital. The remaining 12 hospitals are operated by
other third parties in Canada.
The principal challenges we face as a business are the highly competitive market in which we
operate and the recent changes in the macroeconomy. However, we believe we have a competitive
advantage in our solutions for the Total Lifetime CareSM of pets, including pet
services and proprietary brands, 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 Revolving Credit Facility. We expect to continuously assess the economic
environment and market conditions to guide our decisions regarding our uses of cash, including
capital expenditures, investments, dividends and share repurchases.
Executive Summary
| Diluted earnings per common share increased 24.3% to $0.46, on net income of $55.6 million, for the thirteen weeks ended May 2, 2010, compared to diluted earnings per common share of $0.37 on net income of $46.3 million for the thirteen weeks ended May 3, 2009. | ||
| Net sales increased 5.1% to $1.4 billion for the thirteen weeks ended May 2, 2010, compared to $1.3 billion for the thirteen weeks ended May 3, 2009. This increase included $8.3 million of other revenue from license fees, utilities, and specific operating expenses charged to Banfield during the thirteen weeks ended May 2, 2010. | ||
| Comparable store sales, or sales in stores open at least one year, increased 2.8% for the thirteen weeks ended May 2, 2010. The increase in net sales was partially impacted by $11.8 million in favorable foreign currency fluctuations for the thirteen weeks ended May 2, 2010. | ||
| Services sales increased 7.3% to $153.3 million for the thirteen weeks ended May 2, 2010, compared to $142.8 million for the thirteen weeks ended May 3, 2009. | ||
| We ended the quarter with $288.5 million in cash, cash equivalents and restricted cash. We had no short-term debt, and did not borrow against the Revolving Credit Facility during the thirteen weeks ended May 2, 2010. | ||
| We purchased 3.4 million shares of our common stock for $107.1 million during the thirteen weeks ended May 2, 2010. | ||
| During the quarter ended May 2, 2010, we added 11 net new stores. |
Critical Accounting Policies and Estimates
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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 January 31, 2010. We have made no significant change in our critical accounting
policies since January 31, 2010.
Results of Operations
The following table presents the percent of net sales of certain items included in our
Condensed Consolidated Statements of Income and Comprehensive Income:
Thirteen Weeks Ended | ||||||||
May 2, 2010 | May 3, 2009 | |||||||
Net sales |
100.0 | % | 100.0 | % | ||||
Total cost of sales |
71.0 | 71.6 | ||||||
Gross profit |
29.0 | 28.4 | ||||||
Operating, general and administrative expenses |
21.6 | 21.6 | ||||||
Operating income |
7.4 | 6.8 | ||||||
Interest expense, net |
(1.1 | ) | (1.1 | ) | ||||
Income before income tax expense and equity in income from investee |
6.3 | 5.6 | ||||||
Income tax expense |
(2.4 | ) | (2.2 | ) | ||||
Equity in income from investee |
0.1 | 0.1 | ||||||
Net income |
4.0 | % | 3.5 | % | ||||
Thirteen Weeks Ended May 2, 2010, Compared to the Thirteen Weeks Ended May 3, 2009
Net Sales
Net sales increased $0.1 billion, or 5.1%, to $1.4 billion for the thirteen weeks ended May 2,
2010, compared to $1.3 billion for the thirteen weeks ended May 3, 2009. The increase in net sales
was partially impacted by $11.8 million in favorable foreign currency fluctuations. Approximately
35% of the sales increase is due to the addition of 23 net new stores and 13 new PetsHotels since
May 3, 2009, 55% of the sales increase is due to a 2.8% increase in comparable store sales for the
thirteen weeks ended May 2, 2010 and the remaining 10% of the sales increase is due to other
revenue from reimbursements charged to Banfield. The increase in comparable store sales was due to
the impact of key merchandising strategies, pricing strategies and new product offerings, partially
offset by economic conditions and the slowdown in consumer spending, primarily in our hardgoods
category. A decrease in the number of transactions represented (0.4)% of the comparable store sales
growth in the thirteen weeks ended May 2, 2010, compared to 0.1% in the thirteen weeks ended May 3,
2009. An increase in the average sales per transaction represented 3.2% of the comparable store
sales growth in the thirteen weeks ended May 2, 2010, compared to 3.8% in the thirteen weeks ended
May 3, 2009.
Services sales, included in the net sales amount discussed above, include grooming, training,
boarding and day camp and increased 7.3%, or $10.5 million, to $153.3 million for the thirteen
weeks ended May 2, 2010, compared to $142.8 million for the thirteen weeks ended May 3, 2009. The
increase in services sales is primarily due to continued strong demand for our grooming services,
and the addition of 23 net new stores and 13 new PetsHotels since May 3, 2009.
Other revenue included in net sales during the thirteen weeks ended May 2, 2010 represents
license fees and reimbursements for utilities and specific operating expenses charged to Banfield
under the master operating agreement which comprised 0.6% of net sales, or $8.3 million. See the
Related Party Transactions discussion for further information.
Gross Profit
Gross profit increased to 29.0% of net sales for the thirteen weeks ended May 2, 2010, from
28.4% for the thirteen weeks ended May 3, 2009, representing an increase of 60 basis points.
Overall merchandise margin increased 55 basis points. Merchandise margin increased 40 basis
points due to improvement in rate, which was partially offset by mix. The rate improvement is the
result of decreased promotional pricing and increased sales of higher margin goods within the
product categories during the thirteen weeks ended May 2, 2010 relative to the thirteen weeks ended
May 3, 2009. Mix was negatively impacted as the sales growth in our consumables continued to outpace the
sales growth of our higher margin hardgoods
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category. 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.
Services margin decreased 20 basis points primarily due to increased labor costs based on the
mix of commissionable services.
Recognizing the license fees and occupancy related charges to Banfield as revenue negatively
impacted gross margin by approximately 20 basis points.
Store occupancy costs included in margin decreased 35 basis points due to leveraging
associated with the increase in net sales, favorable lease negotiations and decreased utility
costs gained from favorable rates and energy management efficiencies.
Operating, General and Administrative Expenses
Operating, general and administrative expenses remained flat at 21.6% of net sales for the
thirteen weeks ended May 2, 2010 and May 3, 2009, respectively.
During the thirteen weeks ended May 2, 2010, payroll costs decreased by 35 basis points due to
store labor reductions and scheduling efficiencies, while closed store costs increased 30 basis
points due to the closure of three stores. The remaining 5 basis point increase was primarily due
to increased insurance costs.
Interest Expense, net
Interest expense, which is primarily related to capital lease obligations, was $15.4 million
during the thirteen weeks ended May 2, 2010, compared to $15.2 million for the thirteen weeks ended
May 3, 2009. Included in interest expense, net was interest income of $0.1 million and $0.2 million
for the thirteen weeks ended May 2, 2010, and May 3, 2009, respectively.
Income Tax Expense
In the thirteen weeks ended May 2, 2010, the $33.8 million income tax expense represents an
effective tax rate of 38.4%, compared with the thirteen weeks ended May 3, 2009, when we had income
tax expense of $29.7 million, which represented an effective tax rate of 39.7%. The decrease in the
effective tax rate was primarily due to tax exempt gains from invested assets to fund our deferred
compensation plan. The effective tax rate is calculated by dividing our income tax expense, which
includes the income tax expense related to our equity in income from investee, by income before
income tax expense and equity in income from investee.
Equity in Income from Investee
Our equity in income from our investment in Banfield was $1.4 million and $1.1 million for the
thirteen weeks ended May 2, 2010, and May 3, 2009, respectively, based on our ownership percentage
in Banfields net income.
Liquidity and Capital Resources
Cash Flow
We continue to generate operating cash flow sufficient to meet our financing 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. In addition, we also have access to our
$350.0 million five-year revolving credit facility, although there can be no assurance of our
ability to access these markets on commercially acceptable terms in the future. We expect to
continuously assess the economic environment and market conditions to guide our decisions regarding
our uses of cash, including capital expenditures, investments, dividends and the purchase of
treasury stock.
We finance our operations, new store and PetsHotel growth, store remodels and other
expenditures to support our growth initiatives primarily through cash generated by operating
activities. Net cash provided by operating activities was $86.3 million for the thirteen weeks
ended May 2, 2010, compared to $172.3 million for the thirteen weeks ended May 3, 2009. 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
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activities primarily to fund procurement of merchandise inventories and other assets, net of
accounts payable and other accrued liabilities. The primary differences between the thirteen weeks
ended May 2, 2010, and May 3, 2009, were increased purchases of merchandise inventories and a
decrease in current liabilities primarily as a result of decreases in tax accruals.
Net cash used in investing activities was $29.4 million for the thirteen weeks ended May 2,
2010, compared to $32.2 million for the thirteen weeks ended May 3, 2009. Cash used in investing
activities consisted primarily of expenditures associated with opening new stores, reformatting
existing stores, expenditures associated with equipment and computer software in support of our
system initiatives, PetsHotel construction costs, and other expenditures to support our growth
plans and initiatives. The primary differences between the thirteen weeks ended May 2, 2010, and
May 3, 2009, were a decrease in cash paid for property and equipment as a result of the slow-down
in store openings, and a decrease in proceeds from sales of equipment.
Net cash used in financing activities was $124.6 million for the thirteen weeks ended May 2,
2010, 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 thirteen
weeks ended May 3, 2009, was $56.8 million. The primary difference between the thirteen weeks ended
May 2, 2010, and the thirteen weeks ended May 3, 2009, was an increase in cash paid for treasury
stock.
Operating Capital and Capital Expenditure Requirements
Substantially all our stores are leased facilities. We opened 14 new stores and closed 3
stores in the thirteen weeks ended May 2, 2010. Generally, each new store requires capital
expenditures of approximately $0.8 million for fixtures, equipment and leasehold improvements,
approximately $0.3 million for inventory and approximately $0.1 million for preopening costs. We
expect total capital spending to be $125 million to $135 million for 2010, based on our plan to
open 41 to 44 new stores and 17 new PetsHotels, continuing our investment in the development of our
information systems, adding to our services capacity with the expansion of certain grooming salons,
remodeling or replacing certain store assets and continuing our store refresh program.
Our ability to fund our operations and make planned capital expenditures depends on our future
operating performance and cash flow, which are subject to prevailing economic conditions and to
financial, business and other factors, some of which are beyond our control.
The following table presents our capital expenditures (in thousands):
Thirteen Weeks Ended | ||||||||
May 2, 2010 | May 3, 2009 | |||||||
Capital Expenditures: |
||||||||
New stores |
$ | 7,272 | $ | 15,092 | ||||
Store-related projects(1) |
12,064 | 9,071 | ||||||
PetsHotel(2) |
1,194 | 3,864 | ||||||
Information technology |
5,839 | 6,405 | ||||||
Supply chain |
4,518 | 1,251 | ||||||
Other |
176 | 245 | ||||||
Total capital expenditures |
$ | 31,063 | $ | 35,928 | ||||
(1) | Includes store remodels, grooming salon expansion, equipment replacement, relocations, and various merchandising projects. | |
(2) | For new and existing stores. |
Commitments and Contingencies
As of May 2, 2010, we had obligations to purchase $14.2 million of advertising through the
remainder of 2010.
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As of May 2, 2010, we had various commitments to purchase product from certain vendors that
are not material to our total inventory purchases.
There have been no other material changes in our contractual obligations since January 31,
2010. 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 January 31, 2010.
Credit Facilities
We have a $350.0 million five-year revolving credit facility, or Revolving Credit Facility,
that expires on August 15, 2012. Borrowings under the 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 stand-by letters of credit or
0.438% to 0.625% for commercial letters of credit.
We had no borrowings and $35.7 million in stand-by letter of credit issuances outstanding
under our $350.0 million five-year Revolving Credit Facility as of May 2, 2010, and January 31,
2010. As of May 3, 2009, we had no borrowings and $89.3 million in stand-by letter of credit
issuances outstanding.
We also have a $100.0 million stand-alone letter of credit facility, or Stand-alone Letter of
Credit Facility, that expires August 15, 2012. We are subject to fees payable to the
lender each quarter at an annual rate of 0.45% of the average daily face amount of the letters of
credit outstanding during the preceding calendar quarter. In addition, we are required to maintain
a cash deposit with the lender equal to the amount of outstanding letters of credit or we may use
other approved investments as collateral. If we use other approved investments as collateral, we
must have an amount on deposit which, when multiplied by the advance rate of 85%, is equal to the
amount of the outstanding letters of credit under the Stand-alone Letter of Credit Facility. As of
May 2, 2010, we had $46.5 million in outstanding letters of credit under the Stand-alone Letter of
Credit Facility and $46.5 million in restricted cash on deposit with the lender. As of January 31,
2010, we had $48.2 million in outstanding letters of credit under the Stand-alone Letter of Credit
Facility and $48.2 million in restricted cash on deposit with the lender. As of May 3, 2009, we had
no outstanding letters of credit under this stand-alone letter of credit facility, no restricted
cash or short-term investments on deposit with the lender, and no other investments related to this
stand-alone letter of credit facility.
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 May 2, 2010, we were in
compliance with the terms and covenants of our Revolving Credit Facility and Stand-alone Letter of
Credit Facility. The Revolving Credit Facility and Stand-alone Letter of Credit Facility are
secured by substantially all our personal property assets, our subsidiaries and certain real
property.
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 thirteen weeks ended May 2, 2010, the Board of Directors declared a quarterly cash
dividend of $0.10 per share payable on May 14, 2010 to stockholders of record on April 30, 2010.
Common Stock Purchase Program
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 approved by the Board of Directors in
August 2007.
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 May 2, 2010, we purchased 3.4 million shares of common
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stock for $107.1 million. Since the inception of the new share purchase authorization in June
2009, we have purchased 9.3 million shares of common stock for $247.1 million. As of May 2, 2010,
$102.9 million remained available under the $350.0 million program.
Related Party Transactions
We have an investment in Banfield, who through a wholly owned subsidiary, Medical Management
International, Inc., operates full-service veterinary hospitals in 750 of our stores. Our
investment consists of common and preferred stock.
We use the equity method of accounting for our investment in Banfield. As of May 2, 2010, we
owned approximately 21.4% of the voting stock and approximately 21.0% of the combined voting and
non-voting stock of Banfield.
Our equity in income from our investment in Banfield, which is recorded one month in arrears,
was $1.4 million and $1.1 million for the thirteen weeks ended May 2, 2010, and May 3, 2009,
respectively.
We have a master operating agreement with Banfield which covers license fees, utilities and
other cost reimbursements. We charge Banfield license fees for the space used by the veterinary
hospitals and for their portion of utilities costs. We also charge Banfield for its portion of
specific operating expenses. Prior to February 1, 2010, license fees were treated as a reduction
of occupancy costs, which are included as a component of cost of merchandise sales, and
reimbursements for specific operating expenses were treated as a reduction of operating, general
and administrative expense in the Condensed Consolidated Statement of Operations and Comprehensive
Income. Beginning February 1, 2010, license fees and the reimbursements for specific operating
expenses are included in other revenue, and the related costs are included in cost of other revenue
in the Condensed Consolidated Statements of Income and Other Comprehensive Income.
We recognized license fees, utilities and other cost reimbursements from Banfield of $8.3
million and $8.1 million during the thirteen weeks ended May 2, 2010, and May 3, 2009,
respectively. Receivables from Banfield totaled $2.6 million, $2.4 million, and $3.2 million at
May 2, 2010, January 31, 2010, and May 3, 2009, respectively, and were included in receivables, net
in the Condensed Consolidated Balance Sheets.
The master operating agreement also includes a provision for the sharing of profits on the
sale of therapeutic pet foods sold in all stores with an operating Banfield hospital. The net sales
and gross profit on the sale of therapeutic pet food sales are not material to our condensed
consolidated financial statements.
Seasonality and Inflation
Our business is subject to seasonal fluctuations. We typically realize a higher portion of our
net sales and operating profits during the fourth quarter. As a result of this seasonality, we
believe that quarter-to-quarter comparisons of our operating results are not necessarily
meaningful, and that these comparisons cannot be relied upon as indicators of future performance.
Controllable expenses could fluctuate from quarter-to-quarter in a year. Since our stores typically
draw customers from a large trade area, sales also may be impacted by adverse weather or travel
conditions, which are more prevalent during certain seasons of the year. As a result of our
expansion plans, the timing of new store and PetsHotel openings and related preopening costs, the
amount of revenue contributed by new and existing stores and PetsHotels and the timing and
estimated obligations of store closures, our quarterly results of operations may fluctuate.
Finally, because new stores tend to experience higher payroll, advertising and other store level
expenses as a percentage of sales than mature stores, new store openings will also contribute to
lower store operating margins until these stores become established. We expense preopening costs
associated with each new location as the costs are incurred.
While we have experienced inflationary pressure in recent years, we have been able to largely
mitigate the effect by increasing retail prices accordingly. Although neither inflation nor
deflation has had a material impact on net operating results, we can make no assurance that our
business will not be affected by inflation or deflation in the future.
Impact of Federal Health Care Reform Legislation
In March 2010, the President of the United States signed into law the Patient Protection and
Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or
the Acts. The provisions of the Acts are not expected to have a significant
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impact to our condensed consolidated financial statements in the short term. The longer term
potential impacts of the Acts to our business and the condensed consolidated financial statements
are currently uncertain. We will continue to assess how the Acts apply to us and how to best have
our healthcare plans meet the stated requirements.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
As of May 2, 2010, there have been no material changes in any of the market risk information
disclosed by us in our Annual Report on Form 10-K for the year ended January 31, 2010. More
detailed information concerning market risk can be found in Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K for the year ended
January 31, 2010.
Item 4. Controls and Procedures
Management, with the participation of our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures as of May 2, 2010. The term
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, or Exchange Act, means controls and other procedures
of a company that are designed to ensure that information required to be disclosed by a company in
the reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange 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.
No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the thirteen weeks ended May 2, 2010, that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. Based on the evaluation of our disclosure controls and procedures as of May 2,
2010, our chief executive officer and chief financial officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level and designed to
meet the objective at the reasonable assurance level.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Beginning in March 2007, we were named as a party in the following lawsuits arising from pet
food recalls announced by several manufacturers. The plaintiffs sued the major pet food
manufacturers and retailers claiming that their pets suffered injury and/or death as a result of
consuming allegedly contaminated pet food and pet snack products.
Bruski v. Nutro Products, et al., USDC, N.D. IL (filed 3/23/07)
Rozman v. Menu Foods, et al., USDC, MN (filed 4/9/07)
Ford v. Menu Foods, et al., USDC, S.D. CA (filed 4/23/07)
Wahl, et al. v. Wal-Mart Stores Inc., et al., USDC, C.D. CA (filed 4/10/07)
Demith v. Nestle, et al., USDC, N.D. IL (filed 4/23/07)
Thompkins v. Menu Foods, et al., USDC, CO (filed 4/11/07)
McBain v. Menu Foods, et al., Judicial Centre of Regina, Canada (filed 7/11/07)
Dayman v. Hills Pet Nutrition Inc., et al., Ontario Superior Court of Justice (filed 8/8/07)
Esau v. Menu Foods, et al., Supreme Court of Newfoundland and Labrador (filed 9/5/07)
Ewasew v. Menu Foods, et al., Supreme Court of British Columbia (filed 3/23/07)
Silva v. Menu Foods, et al., Canada Province of Manitoba (filed 3/30/07)
Powell v. Menu Foods, et al., Ontario Superior Court of Justice (filed 3/28/07)
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 consolidated financial statements.
There have been no appeals filed in Canada.
We are involved in the defense of various other legal proceedings that we do not believe are
material to our consolidated financial statements.
Item 1A. Risk Factors
In addition to the other information in this report, you should carefully consider the factors
discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended
January 31, 2010, which could materially affect our business, financial condition or future
results. 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 May 2, 2010:
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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) | ||||||||||||
February 1, 2010, to February 28, 2010 |
| | | $ | 210,000,000 | |||||||||||
March 1, 2010, to April 4, 2010 |
3,412,000 | $ | 31.38 | 3,412,000 | $ | 102,900,000 | ||||||||||
April 5, 2010, to May 2, 2010 |
| | | $ | 102,900,000 | |||||||||||
Thirteen Weeks Ended May 2, 2010 |
3,412,000 | $ | 31.38 | 3,412,000 | $ | 102,900,000 |
(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 10.1
|
2010 Performance Share Unit Program (1) | |
Exhibit 15.1
|
Awareness Letter from Deloitte & Touche LLP regarding unaudited interim financial statements. | |
Exhibit 31.1
|
Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | |
Exhibit 31.2
|
Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | |
Exhibit 32.1*
|
Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. | |
Exhibit 32.2*
|
Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. |
* | 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. | |
(1) | Incorporated by reference to Exhibit 10.1 to PetSmarts Current Report on Form 8-K (File No. 0-21888), filed with the Securities and Exchange Commission on March 26, 2010. |
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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: May 28, 2010
/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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