Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - PETSMART INC | Financial_Report.xls |
| EX-15.1 - AWARENESS LETTER FROM DELOITTE & TOUCHE LLP - PETSMART INC | petm-20131103xex151.htm |
| EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AS REQUIRED BY RULE 13A-14(A) - PETSMART INC | petm-20131103xex311.htm |
| EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER AS REQUIRED BY RULE 13A-14(A) - PETSMART INC | petm-20131103xex312.htm |
| EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AS REQUIRED BY RULE 13A-14(B) - PETSMART INC | petm-20131103xex321.htm |
| EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER AS REQUIRED BY RULE 13A-14(B) - PETSMART INC | petm-20131103xex322.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________
FORM 10-Q
_________________________________________
(Mark One)
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended November 3, 2013
OR
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number: 0-21888
_________________________________________
PetSmart, Inc.
(Exact name of registrant as specified in its charter)
_________________________________________
Delaware | 94-3024325 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
19601 N. 27th Avenue Phoenix, Arizona | 85027 |
(Address of principal executive offices) | (Zip Code) |
(623) 580-6100
(Registrant’s telephone number, including area code)
_________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date:
Common Stock, $.0001 Par Value, 103,729,991 Shares at November 15, 2013
Page Number | |
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
PetSmart, Inc.
Phoenix, Arizona
We have reviewed the accompanying condensed consolidated balance sheets of PetSmart, Inc. and subsidiaries (the “Company”) as of November 3, 2013 and October 28, 2012, and the related condensed consolidated statements of income and comprehensive income for the thirteen week and thirty-nine week periods then ended, and of cash flows for the thirty-nine week periods then ended. These interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PetSmart, Inc. and subsidiaries as of February 3, 2013, 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 28, 2013, 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 3, 2013, 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 27, 2013
3
PetSmart, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except par value)
(Unaudited)
November 3, 2013 | February 3, 2013 | October 28, 2012 | |||||||||
ASSETS | |||||||||||
Cash and cash equivalents | $ | 295,868 | $ | 335,155 | $ | 298,090 | |||||
Short-term investments | 1,967 | 9,150 | 13,862 | ||||||||
Restricted cash | 71,226 | 71,916 | 71,916 | ||||||||
Receivables, net | 52,576 | 72,198 | 49,811 | ||||||||
Merchandise inventories | 797,533 | 679,090 | 765,831 | ||||||||
Deferred income taxes | 62,859 | 62,859 | 51,381 | ||||||||
Prepaid expenses and other current assets | 118,757 | 86,768 | 111,164 | ||||||||
Total current assets | 1,400,786 | 1,317,136 | 1,362,055 | ||||||||
Property and equipment, net | 956,653 | 985,707 | 997,361 | ||||||||
Equity investment in Banfield | 30,326 | 39,934 | 35,412 | ||||||||
Deferred income taxes | 101,321 | 102,992 | 85,308 | ||||||||
Goodwill | 42,951 | 44,242 | 44,248 | ||||||||
Other noncurrent assets | 63,945 | 46,970 | 44,623 | ||||||||
Total assets | $ | 2,595,982 | $ | 2,536,981 | $ | 2,569,007 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Accounts payable and bank overdraft | $ | 240,603 | $ | 202,122 | $ | 266,708 | |||||
Accrued payroll, bonus and employee benefits | 164,111 | 176,082 | 161,030 | ||||||||
Accrued occupancy expenses and deferred rents | 79,716 | 70,671 | 74,106 | ||||||||
Current maturities of capital lease obligations | 66,517 | 61,581 | 60,023 | ||||||||
Other current liabilities | 208,133 | 244,436 | 181,381 | ||||||||
Total current liabilities | 759,080 | 754,892 | 743,248 | ||||||||
Capital lease obligations | 453,620 | 464,578 | 475,552 | ||||||||
Deferred rents | 67,439 | 73,855 | 75,948 | ||||||||
Other noncurrent liabilities | 110,769 | 120,064 | 117,248 | ||||||||
Total liabilities | 1,390,908 | 1,413,389 | 1,411,996 | ||||||||
Commitments and contingencies | |||||||||||
Stockholders’ equity: | |||||||||||
Preferred stock; $.0001 par value; 10,000 shares authorized, none issued and outstanding | — | — | — | ||||||||
Common stock; $.0001 par value; 625,000 shares authorized, 169,083, 167,209 and 166,797 shares issued | 17 | 17 | 17 | ||||||||
Additional paid-in capital | 1,504,135 | 1,418,411 | 1,393,158 | ||||||||
Retained earnings | 2,061,254 | 1,827,996 | 1,711,574 | ||||||||
Accumulated other comprehensive income | 2,082 | 5,506 | 5,600 | ||||||||
Less: Treasury stock, at cost, 65,356, 61,879 and 59,324 shares | (2,362,414 | ) | (2,128,338 | ) | (1,953,338 | ) | |||||
Total stockholders’ equity | 1,205,074 | 1,123,592 | 1,157,011 | ||||||||
Total liabilities and stockholders’ equity | $ | 2,595,982 | $ | 2,536,981 | $ | 2,569,007 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
PetSmart, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | ||||||||||||
Merchandise sales | $ | 1,500,443 | $ | 1,444,683 | $ | 4,502,272 | $ | 4,303,625 | |||||||
Services sales | 184,190 | 175,018 | 580,474 | 546,899 | |||||||||||
Other revenue | 10,535 | 9,810 | 29,015 | 28,547 | |||||||||||
Net sales | 1,695,168 | 1,629,511 | 5,111,761 | 4,879,071 | |||||||||||
Cost of merchandise sales | 1,045,743 | 1,008,278 | 3,123,671 | 2,989,671 | |||||||||||
Cost of services sales | 133,917 | 128,911 | 409,136 | 392,152 | |||||||||||
Cost of other revenue | 10,535 | 9,810 | 29,015 | 28,547 | |||||||||||
Total cost of sales | 1,190,195 | 1,146,999 | 3,561,822 | 3,410,370 | |||||||||||
Gross profit | 504,973 | 482,512 | 1,549,939 | 1,468,701 | |||||||||||
Operating, general and administrative expenses | 352,304 | 342,958 | 1,073,202 | 1,038,736 | |||||||||||
Operating income | 152,669 | 139,554 | 476,737 | 429,965 | |||||||||||
Interest expense, net | (12,930 | ) | (13,375 | ) | (38,926 | ) | (41,054 | ) | |||||||
Income before income tax expense and equity income from Banfield | 139,739 | 126,179 | 437,811 | 388,911 | |||||||||||
Income tax expense | (51,054 | ) | (48,335 | ) | (161,094 | ) | (144,840 | ) | |||||||
Equity income from Banfield | 3,536 | 4,472 | 11,287 | 11,448 | |||||||||||
Net income | 92,221 | 82,316 | 288,004 | 255,519 | |||||||||||
Other comprehensive income, net of income tax: | |||||||||||||||
Foreign currency translation adjustments | (390 | ) | 289 | (3,407 | ) | 124 | |||||||||
Other | (3 | ) | (11 | ) | (17 | ) | (14 | ) | |||||||
Comprehensive income | $ | 91,828 | $ | 82,594 | $ | 284,580 | $ | 255,629 | |||||||
Earnings per common share: | |||||||||||||||
Basic | $ | 0.89 | $ | 0.76 | $ | 2.78 | $ | 2.36 | |||||||
Diluted | $ | 0.88 | $ | 0.75 | $ | 2.75 | $ | 2.32 | |||||||
Weighted average shares outstanding: | |||||||||||||||
Basic | 103,957 | 107,719 | 103,579 | 108,303 | |||||||||||
Diluted | 104,753 | 109,333 | 104,637 | 110,117 | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
PetSmart, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Thirty-Nine Weeks Ended | |||||||
November 3, 2013 | October 28, 2012 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net income | $ | 288,004 | $ | 255,519 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 176,794 | 179,497 | |||||
Loss on disposal of property and equipment | 1,914 | 4,784 | |||||
Stock-based compensation expense | 21,353 | 21,664 | |||||
Deferred income taxes | 3,489 | 8,098 | |||||
Equity income from Banfield | (11,287 | ) | (11,448 | ) | |||
Dividend received from Banfield | 20,895 | 13,860 | |||||
Excess tax benefits from stock-based compensation | (24,291 | ) | (38,051 | ) | |||
Non-cash interest expense | 459 | 702 | |||||
Changes in assets and liabilities: | |||||||
Merchandise inventories | (119,702 | ) | (120,835 | ) | |||
Other assets | (19,361 | ) | (42,210 | ) | |||
Accounts payable | 39,036 | 62,574 | |||||
Accrued payroll, bonus and employee benefits | (11,729 | ) | 2,914 | ||||
Other liabilities | (24,301 | ) | 27,710 | ||||
Net cash provided by operating activities | 341,273 | 364,778 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Purchases of investments | (12,526 | ) | (4,027 | ) | |||
Proceeds from maturities of investments | 8,995 | 16,825 | |||||
Proceeds from sales of investments | 580 | 2,308 | |||||
Decrease (Increase) in restricted cash | 690 | (1,727 | ) | ||||
Cash paid for property and equipment | (112,435 | ) | (110,658 | ) | |||
Proceeds from sales of property and equipment | 8,915 | 2,484 | |||||
Net cash used in investing activities | (105,781 | ) | (94,795 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Net proceeds from common stock issued under stock incentive plans | 46,247 | 43,465 | |||||
Minimum statutory withholding requirements | (5,772 | ) | (22,968 | ) | |||
Cash paid for treasury stock | (255,404 | ) | (281,611 | ) | |||
Payments of capital lease obligations | (54,045 | ) | (47,896 | ) | |||
Change in bank overdraft and other financing activities | 6,818 | 4,898 | |||||
Excess tax benefits from stock-based compensation | 24,291 | 38,051 | |||||
Cash dividends paid to stockholders | (34,147 | ) | (48,683 | ) | |||
Net cash used in financing activities | (272,012 | ) | (314,744 | ) | |||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (2,767 | ) | (41 | ) | |||
DECREASE IN CASH AND CASH EQUIVALENTS | (39,287 | ) | (44,802 | ) | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 335,155 | 342,892 | |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 295,868 | $ | 298,090 | |||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||
Interest paid | $ | 39,228 | $ | 41,243 | |||
Income taxes paid, net of refunds | $ | 208,129 | $ | 160,005 | |||
Assets acquired using capital lease obligations | $ | 47,998 | $ | 22,956 | |||
Accruals and accounts payable for capital expenditures | $ | 26,202 | $ | 24,360 | |||
Dividends declared but unpaid | $ | 20,941 | $ | 17,983 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
PetSmart, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1 — General
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended February 3, 2013.
PetSmart, Inc., including its wholly owned subsidiaries (the “Company,” “PetSmart,” “we,” or “us”), is the leading specialty provider of products, services, and solutions for the lifetime needs of pets in North America. We offer a broad selection of products for all the life stages of pets, as well as various pet services including training and day camp for dogs, professional grooming, and boarding. We also offer pet products through our website, PetSmart.com. As of November 3, 2013, we operated 1,314 stores and had full-service veterinary hospitals in 839 of our stores. We have a 21.0% investment in MMI Holdings, Inc., which is accounted for under the equity method of accounting. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 832 of the veterinary hospitals under the registered trade name of “Banfield, The Pet Hospital.” The remaining 7 hospitals are operated by other third parties in Canada.
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or “GAAP,” for interim reporting. Accordingly, they do not include all the information and footnotes required by GAAP for annual financial statements. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments, which are of a normal, recurring nature, necessary for a fair presentation of the interim periods presented.
Due to the seasonal nature of our business, the results of operations for the thirteen and thirty-nine weeks ended November 3, 2013, 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 2013, a 52-week year, ends on February 2, 2014, while fiscal 2012, a 53-week year, ended on February 3, 2013. Unless otherwise specified, all references to years in these condensed consolidated financial statements are to fiscal years.
Note 2 — Correction to the Condensed Consolidated Statement of Cash Flows
The Condensed Consolidated Statement of Cash Flows for the thirty-nine weeks ended October 28, 2012, has been adjusted from amounts previously reported to reflect a correction to the excess tax benefits from stock-based compensation included in cash flows from operating activities and cash flows from financing activities. This was due to the exclusion of the amount of excess tax benefits relating to restricted stock awards and performance share units that should have been included. The correction resulted in a decrease to net cash provided by operating activities and a corresponding decrease to net cash used in financing activities. The correction is not material to our previously issued condensed consolidated financial statements.
The following table reflects the effects on the financial statement line items of the Condensed Consolidated Statement of Cash Flows (in thousands):
Thirty-Nine Weeks Ended October 28, 2012 | |||||||||||
As Reported | Correction | Adjusted | |||||||||
Excess tax benefits from stock-based compensation included in operating activities | $ | (16,239 | ) | $ | (21,812 | ) | $ | (38,051 | ) | ||
Net cash provided by operating activities | 386,590 | (21,812 | ) | 364,778 | |||||||
Excess tax benefits from stock-based compensation included in financing activities | 16,239 | 21,812 | 38,051 | ||||||||
Net cash used in financing activities | (336,556 | ) | 21,812 | (314,744 | ) | ||||||
Decrease in cash and cash equivalents | (44,802 | ) | — | (44,802 | ) | ||||||
Note 3 — Foreign Currency
Foreign currency translation adjustments are included in other comprehensive income and are reported in stockholders' equity in the Condensed Consolidated Balance Sheets. Transaction gains and losses are included in net income in the Condensed Consolidated Statements of Income and Comprehensive Income.
7
PetSmart, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements — (Continued)
(Unaudited)
Activities related to foreign currency adjustments were as follows (in thousands):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | ||||||||||||
Deferred tax (expense) benefit on translation adjustments | $ | (109 | ) | $ | (185 | ) | $ | 1,819 | $ | (79 | ) | ||||
Transaction loss | (259 | ) | (153 | ) | (891 | ) | (195 | ) | |||||||
The carrying value of goodwill changed due to the impact of foreign currency translation adjustments during the thirteen and thirty-nine weeks ended November 3, 2013, and October 28, 2012.
Note 4 — Investments
Short-term Investments
At November 3, 2013, February 3, 2013, and October 28, 2012, our short-term investments consisted of municipal bonds with various maturities, representing funds available for current operations. These short-term investments are classified as available-for-sale and are carried at fair value using quoted prices in active markets for identical assets or liabilities (Level 1). Accrued interest was immaterial at November 3, 2013, February 3, 2013, and October 28, 2012. The amortized cost basis at November 3, 2013, February 3, 2013, and October 28, 2012, was $1.9 million, $9.1 million, and $13.7 million, respectively. Unrealized gains and losses are included in other comprehensive income in the Condensed Consolidated Statements of Income and Comprehensive Income.
Investments in Negotiable Certificates of Deposit
At November 3, 2013, February 3, 2013, and October 28, 2012, we had investments in negotiable certificates of deposit, or “NCDs,” with various maturities. These investments are classified as held-to-maturity and are carried at their amortized cost basis.
The amortized cost basis of our investments in NCDs was classified in the Condensed Consolidated Balance Sheets as follows (in thousands):
November 3, 2013 | February 3, 2013 | October 28, 2012 | |||||||||
Prepaid expenses and other current assets | $ | 8,447 | $ | 2,571 | $ | 5,366 | |||||
Noncurrent assets | 4,320 | 240 | 730 | ||||||||
The aggregate fair value of our investments in NCDs was $12.8 million, $2.8 million, and $6.1 million at November 3, 2013, February 3, 2013, and October 28, 2012, respectively. The fair value is determined using pricing models which use inputs based on observable market data (Level 2). The inputs of the pricing models are issuer spreads and reported trades. Unrecognized gains and losses for the thirteen and thirty-nine weeks ended November 3, 2013, and October 28, 2012, were immaterial.
Equity Investment in Banfield
Our investment in Banfield is accounted for using the equity method of accounting. As of November 3, 2013, February 3, 2013, and October 28, 2012, our investment represented 21.4% of the voting common stock and 21.0% of the combined voting and non-voting stock. Our investment includes goodwill of $15.9 million. The goodwill is calculated as the excess of the purchase price for each step of the acquisition of our ownership interest in Banfield relative to that step’s portion of Banfield’s net assets at the respective acquisition date.
Banfield’s financial data is summarized as follows (in thousands):
November 3, 2013 | February 3, 2013 | October 28, 2012 | |||||||||
Current assets | $ | 446,275 | $ | 429,787 | $ | 432,472 | |||||
Noncurrent assets | 165,959 | 141,209 | 144,345 | ||||||||
Current liabilities | 481,889 | 388,729 | 412,100 | ||||||||
Noncurrent liabilities | 26,994 | 16,508 | 24,731 | ||||||||
8
PetSmart, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements — (Continued)
(Unaudited)
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | ||||||||||||
Net sales | $ | 237,697 | $ | 209,492 | $ | 695,187 | $ | 615,545 | |||||||
Income from operations | 30,177 | 35,818 | 94,401 | 93,684 | |||||||||||
Net income | 16,838 | 21,293 | 53,746 | 54,519 | |||||||||||
We recognized license fees and reimbursements for specific operating expenses from Banfield of $10.5 million and $9.8 million during the thirteen weeks ended November 3, 2013, and October 28, 2012, respectively, and $29.0 million and $28.5 million during the thirty-nine weeks ended November 3, 2013, and October 28, 2012, respectively, in other revenue in the Condensed Consolidated Statements of Income and Comprehensive Income. The related costs are included in cost of other revenue in the Condensed Consolidated Statements of Income and Comprehensive Income. Receivables from Banfield totaled $3.3 million, $3.2 million, and $3.2 million at November 3, 2013, February 3, 2013, and October 28, 2012, respectively, and were included in receivables, net in the Condensed Consolidated Balance Sheets.
Note 5 — Reserve for Closed Stores
The components of the reserve for closed stores were as follows (in thousands):
November 3, 2013 | February 3, 2013 | October 28, 2012 | |||||||||
Total remaining gross occupancy costs | $ | 15,653 | $ | 22,699 | $ | 24,639 | |||||
Less: | |||||||||||
Expected sublease income | (9,617 | ) | (13,117 | ) | (13,823 | ) | |||||
Interest costs | (390 | ) | (856 | ) | (938 | ) | |||||
Reserve for closed stores | $ | 5,646 | $ | 8,726 | $ | 9,878 | |||||
Current portion, included in other current liabilities | 2,785 | 3,466 | 3,828 | ||||||||
Noncurrent portion, included in other noncurrent liabilities | 2,861 | 5,260 | 6,050 | ||||||||
Reserve for closed stores | $ | 5,646 | $ | 8,726 | $ | 9,878 | |||||
The activity related to the reserve for closed stores was as follows (in thousands):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | ||||||||||||
Opening balance | $ | 6,348 | $ | 7,786 | $ | 8,726 | $ | 10,007 | |||||||
Provision for new store closures | 502 | 2,960 | 1,171 | 5,125 | |||||||||||
Lease terminations | — | — | — | (584 | ) | ||||||||||
Changes in sublease assumptions | 182 | 267 | (313 | ) | 98 | ||||||||||
Other charges | 51 | 120 | 221 | 290 | |||||||||||
Payments | (1,437 | ) | (1,255 | ) | (4,159 | ) | (5,058 | ) | |||||||
Ending balance | $ | 5,646 | $ | 9,878 | $ | 5,646 | $ | 9,878 | |||||||
9
PetSmart, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements — (Continued)
(Unaudited)
Note 6 — Earnings per Common Share
The following table presents a reconciliation of the weighted average shares outstanding used in the earnings per common share calculations (in thousands):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||
November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | ||||||||
Basic | 103,957 | 107,719 | 103,579 | 108,303 | |||||||
Dilutive stock-based compensation awards | 796 | 1,614 | 1,058 | 1,814 | |||||||
Diluted | 104,753 | 109,333 | 104,637 | 110,117 | |||||||
Certain stock-based compensation awards representing 0.3 million and 0.6 million shares of common stock in the thirteen weeks ended November 3, 2013, and October 28, 2012, respectively, and 0.3 million and 0.5 million shares of common stock in the thirty-nine weeks ended November 3, 2013, and October 28, 2012, respectively, were not included in the calculation of diluted earnings per common share because the inclusion of such awards would have been antidilutive for the periods presented.
Note 7 — Stockholders’ Equity
Share Purchase Programs
In September 2013, the Board of Directors approved a share purchase program authorizing the purchase of up to $535.0 million through January 31, 2015. The $535.0 million program commenced on October 1, 2013, and is in addition to any unused amount remaining under the previous $525.0 million program. As of November 3, 2013, $647.9 million remained available under these programs.
The following tables present purchases of our common stock under the respective share purchase programs (in thousands):
Thirteen Weeks Ended | ||||||||||||||||||
Share Purchase Programs | November 3, 2013 | October 28, 2012 | ||||||||||||||||
Authorized Amount | Date Approved by Board | Program Termination Date | Shares Purchased | Purchase Value | Shares Purchased | Purchase Value | ||||||||||||
$450,000 | June 2011 | January 31, 2013 | — | $ | — | 816 | $ | 56,941 | ||||||||||
$525,000 | June 2012 | January 31, 2014 | 405 | 30,000 | 44 | 3,059 | ||||||||||||
$535,000 | September 2013 | January 31, 2015 | — | — | — | — | ||||||||||||
405 | $ | 30,000 | 860 | $ | 60,000 | |||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||
Share Purchase Programs | November 3, 2013 | October 28, 2012 | ||||||||||||||||
Authorized Amount | Date Approved by Board | Program Termination Date | Shares Purchased | Purchase Value | Shares Purchased | Purchase Value | ||||||||||||
$450,000 | June 2011 | January 31, 2013 | — | $ | — | 4,594 | $ | 278,553 | ||||||||||
$525,000 | June 2012 | January 31, 2014 | 3,477 | 234,076 | 44 | 3,059 | ||||||||||||
$535,000 | September 2013 | January 31, 2015 | — | — | — | — | ||||||||||||
3,477 | $ | 234,076 | 4,638 | $ | 281,612 | |||||||||||||
Dividends
During the thirty-nine weeks ended November 3, 2013, the Board of Directors declared the following dividends:
Date Declared | Dividend Amount per Share | Stockholders of Record Date | Payment Date | |||
March 26, 2013 | $0.165 | May 3, 2013 | May 17, 2013 | |||
June 14, 2013 | $0.165 | August 2, 2013 | August 16, 2013 | |||
September 25, 2013 | $0.195 | November 1, 2013 | November 15, 2013 | |||
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PetSmart, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements — (Continued)
(Unaudited)
Note 8 — Stock-based Compensation
Stock-based compensation expense, net of forfeitures, and the total income tax benefit recognized in the Condensed Consolidated Statements of Income and Comprehensive Income were as follows (in thousands):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | ||||||||||||
Stock options expense | $ | 3,946 | $ | 2,823 | $ | 8,938 | $ | 8,166 | |||||||
Restricted stock expense | 1,844 | 1,193 | 5,300 | 3,618 | |||||||||||
Performance share unit expense | 2,674 | 3,020 | 7,115 | 9,880 | |||||||||||
Stock-based compensation expense – equity awards | 8,464 | 7,036 | 21,353 | 21,664 | |||||||||||
Management equity unit expense | 524 | 1,460 | 3,844 | 8,791 | |||||||||||
Total stock-based compensation expense | $ | 8,988 | $ | 8,496 | $ | 25,197 | $ | 30,455 | |||||||
Tax benefit | $ | 3,469 | $ | 3,146 | $ | 9,718 | $ | 11,377 | |||||||
At November 3, 2013, the total unrecognized stock-based compensation expense for equity awards, net of estimated forfeitures, was $39.5 million and is expected to be recognized over a weighted average period of 2.0 years. At November 3, 2013, the total unrecognized stock-based compensation expense for liability awards, net of estimated forfeitures, was $1.5 million and is expected to be recognized over a weighted average period of 0.4 years.
The 2010 management equity unit grant vested on March 29, 2013, and $10.8 million was paid in cash in April 2013. The 2009 management equity unit grant vested on March 9, 2012, and $11.9 million was paid in cash in March 2012.
Note 9 — Income Taxes
At the end of each interim period, we estimate the annual effective tax rate and apply that rate to our quarterly earnings. The tax expense or benefit related to significant, unusual, or extraordinary items is recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws, rates, or tax status is recognized in the interim period in which the change occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained, or the tax environment changes.
In July 2013, the Financial Accounting Standards Board, or “FASB,” issued an accounting standards update on the presentation of unrecognized tax benefits. The update clarifies that unrecognized tax benefits related to a net operating loss carryforward, or similar tax loss, or tax credit carryforward, should generally be presented in the financial statements as a reduction to a deferred tax asset. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The update allows for early adoption. We have accordingly presented applicable uncertain tax positions as reductions to deferred income tax assets in the Condensed Consolidated Balance Sheet as of November 3, 2013. These amounts are presented in other current liabilities and other noncurrent liabilities in the Condensed Consolidated Balance Sheets as of February 3, 2013, and October 28, 2012. The adoption of the new guidance did not have a material impact on our condensed consolidated financial statements.
Note 10 — Credit Facilities
As of November 3, 2013, February 3, 2013, and October 28, 2012, we had no borrowings and $17.9 million, $17.9 million, and $24.4 million in stand-by letter of credit issuances under our $100.0 million revolving credit facility, respectively.
We had $69.2 million, $69.8 million, and $69.8 million in outstanding letters of credit, issued for guarantees provided for insurance programs, under our $100.0 million stand-alone letter of credit facility as of November 3, 2013, February 3, 2013, and October 28, 2012, respectively. We had $71.2 million, $71.9 million, and $71.9 million in restricted cash on deposit with the stand-alone letter of credit facility lender as of November 3, 2013, February 3, 2013, and October 28, 2012, respectively.
Our revolving credit facility and stand-alone letter of credit facility permit the payment of dividends if we are not in default and payment conditions as defined in the agreement are satisfied. As of November 3, 2013, we were in compliance with the terms and covenants of our revolving credit facility and stand-alone letter of credit facility. The revolving credit facility and stand-alone letter of credit facility are secured by substantially all our financial assets.
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PetSmart, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements — (Continued)
(Unaudited)
Note 11 — Commitments and Contingencies
Advertising Purchase Commitments
As of November 3, 2013, we had obligations to purchase $19.9 million of advertising through the remainder of 2013, and$30.5 million in 2014.
Product Purchase Commitments
As of November 3, 2013, we had various commitments to purchase $19.6 million of merchandise from certain vendors through the remainder of 2013, and $31.1 million from 2014 through 2016.
Litigation and Settlements
We are involved in the legal proceedings described below and are subject to other claims and litigation arising in the normal course of our business. We have made accruals with respect to certain of these matters, where appropriate, that are reflected in our condensed consolidated financial statements but are not, individually or in the aggregate, considered material. For other matters, we have not made accruals because we have not yet determined that a loss is probable or because the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters described below cannot be determined, we currently do not expect that these proceedings and claims, individually or in the aggregate, will have a material effect on our consolidated financial position, results of operations, or cash flows. The outcome of any litigation is inherently uncertain, however, and if decided adversely to us, or if we determine that settlement of particular litigation is appropriate, we may be subject to liability that could have a material adverse effect on our consolidated financial position, results of operations, or cash flows. Accordingly, we disclose matters below for which a material loss is reasonably possible. In each case, however, we have either determined that the range of loss is not reasonably estimable or that any reasonably estimable range of loss is not material to our condensed consolidated financial statements.
In May 2012, we were named as a defendant in Moore, et al. v. PetSmart, Inc., et al., a lawsuit originally filed in the California Superior Court for the County of Alameda. PetSmart removed the case to the United States District Court for the Northern District of California. The complaint brings both individual and class action claims, first alleging that PetSmart failed to engage in the interactive process and failed to accommodate the disabilities of four current and former named associates. The complaint also alleges on behalf of current and former hourly store associates that PetSmart failed to provide pay for all hours worked, failed to properly reimburse associates for business expenses, and failed to provide timely and uninterrupted meal and rest periods. The lawsuit seeks compensatory damages, statutory penalties, and other relief, including attorneys' fees, costs, and injunctive relief.
In September 2012, a former associate named us as a defendant in McKee, et al. v. PetSmart, Inc., which is currently pending before the United States District Court for the District of Delaware. The case seeks to assert a Fair Labor Standards Act collective action on behalf of PetSmart's operations managers and similarly situated employees. The complaint alleges that PetSmart has misclassified operations managers as exempt and as a result failed to pay them overtime for hours worked in excess of forty hours per week. The plaintiffs seek compensatory damages, liquidated damages, and other relief, including attorneys' fees, costs, and injunctive relief. The plaintiffs filed a motion for conditional certification in September 2013, which is currently pending.
Also in September 2012, a former groomer filed a lawsuit against us captioned Negrete, et al. v. PetSmart, Inc. in the California Superior Court for the County of Shasta. The plaintiff seeks to assert claims on behalf of current and former California pet stylists that PetSmart failed to provide pay for all hours worked, failed to properly reimburse associates for business expenses, failed to provide proper wage statements, and failed to provide timely and uninterrupted meal and rest periods. The lawsuit seeks compensatory damages, statutory penalties, and other relief, including attorneys' fees, costs, and injunctive relief. On June 14, 2013, we removed the case to the United States District Court for the Eastern District of California and subsequently filed a motion to transfer the case to the United States District Court for the Northern District of California so that it could be consolidated with the Moore, et al. v. PetSmart, Inc., et al. case discussed above. That motion was granted.
On December 14, 2012, a group of four former managers filed a lawsuit against us captioned Miller, et al. v. PetSmart, Inc. in the United States District Court for the Eastern District of California. The plaintiffs seek to assert claims on behalf of hourly and exempt store management personnel from December 14, 2008, to the present for alleged unreimbursed mileage expenses. The lawsuit sought compensatory damages, statutory penalties, and other relief, including attorneys’ fees, costs, and injunctive relief. The case was dismissed in September 2013, without prejudice to the class claims, but with prejudice to the individual plaintiffs' claims.
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PetSmart, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements — (Continued)
(Unaudited)
On December 22, 2012, a customer filed a lawsuit against us captioned Matin, et al. v. Nestle Purina PetCare Company, et al. in the United States District Court for the Northern District of California. The plaintiff claims he purchased jerky treats containing duck or chicken imported from China that caused injury to his pet, and he seeks to assert claims on behalf of a nationwide class of consumers. We tendered the claim to Nestle Purina, and Nestle Purina is currently defending the case on our behalf. The case was subsequently transferred to the Northern District of Illinois and consolidated with another case involving the same products, Adkins, et al. v. Nestle Purina PetCare Company, et al.
On February 20, 2013, a former employee filed a complaint in the Superior Court of California for the County of Orange captioned Pace v. PetSmart, Inc. PetSmart removed the case to the United States District Court for the Central District of California. The complaint seeks to certify a class of all former PetSmart employees in California since February 20, 2010, who were not paid all wages owed upon their separations. The complaint challenges PetSmart's use of pay cards for separation payments and seeks waiting time penalties, attorneys' fees, and other relief. The complaint also asserts claims under California's Private Attorney General Act as well as individual claims for wrongful termination and disability discrimination.
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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Except for historical information, the following discussion contains forward-looking statements that involve risks and uncertainties. In the normal course of business, our financial position is routinely subjected to a variety of risks, including market risks associated with store expansion, investments in information systems, international expansion, vendor reliability, competitive forces, and government regulatory actions. Our actual results could differ materially from projected results due to some or all of the factors discussed below. You should carefully consider the risks and uncertainties described below:
• | A decline in consumer spending or a change in consumer preferences could reduce our sales or profitability and harm our business. |
• | The pet products and services retail industry is very competitive and continued competitive forces may adversely impact our business and financial results. |
• | Comparable store sales growth may decrease. If we are unable to increase sales at our existing stores, our results of operations could be harmed. |
• | We may be unable to continue to open new stores and enter new markets successfully. If we are unable to successfully reformat existing stores and open new stores, our results of operations could be harmed. Also, store development may place increasing demands on management and operating systems and may erode sales at existing stores. |
• | Our quarterly operating results may fluctuate due to seasonal changes associated with the pet products and services retail industry and the timing of expenses, new store openings, and store closures. |
• | Failure to successfully manage and execute our marketing initiatives could have a negative impact on our business. |
• | A disruption, malfunction, or increased costs in the operation, expansion, or replenishment of our distribution centers, or our supply chain, would impact our ability to deliver to our stores or increase our expenses, which could harm our sales and results of operations. |
• | Failure to successfully manage our inventory could harm our business. |
• | If our information systems fail to perform as designed, or are interrupted for a significant period of time, our business could be harmed. |
• | If we fail to protect the integrity and security of customer and associate information, our business could be adversely impacted. |
• | The disruption of the relationship with or the loss of any of our key vendors, including our vendors with whom we have exclusive relationships, a decision by our vendors to make their products available in supermarkets or through warehouse clubs and other mass and retail merchandisers, the inability of our vendors to provide quality products in a timely or cost-effective manner, the availability of generic products, or risks associated with the suppliers from whom products are sourced, all could harm our business. |
• | Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to product liability claims. |
• | Food safety, quality, and health concerns could affect our business. |
• | We depend on key executives, store managers, and other personnel and may not be able to retain or replace these employees or recruit additional qualified personnel, which could harm our business. |
• | Our international operations may result in additional market risks, which may harm our business. |
• | Our business may be harmed if the operation of veterinary hospitals at our stores is limited or fails to continue. |
• | We face various risks as an e-commerce retailer. |
• | Our business could be harmed if we were unable to effectively manage our cash flow and raise any needed additional capital on acceptable terms. |
• | Volatility and disruption to the global capital and credit markets could adversely affect our ability to access credit and the financial soundness of our suppliers. |
• | 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. |
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• | 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. |
• | We have implemented some anti-takeover provisions that may prevent or delay an acquisition of us that may not be beneficial to our shareholders. |
For more information about these risks, see the discussion under the heading “Risk Factors” in our Form 10-K for the year ended February 3, 2013, filed with the Securities and Exchange Commission on March 28, 2013, which is incorporated herein by reference.
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Overview
Based on our 2012 net sales of $6.8 billion, we are North America's leading specialty provider of products, services, and solutions for the lifetime needs of pets. As of November 3, 2013, we operated 1,314 stores, and we plan to continue our store growth during the remainder of 2013. Our stores carry a broad assortment of high-quality pet supplies at everyday low prices. We offer approximately 11,000 distinct items in our stores and 10,000 additional items on our website, PetSmart.com, including nationally recognized brand names, as well as an extensive selection of proprietary brands across a range of product categories.
We complement our extensive product assortment with a wide selection of pet services, including training and day camp for dogs, professional grooming, and boarding. All our stores feature pet styling salons that provide high-quality grooming services and offer comprehensive pet training services. Our PetsHotels provide boarding for dogs and cats, which includes 24-hour supervision by caregivers who are PetSmart trained to provide personalized pet care, temperature controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs. As of November 3, 2013, we operated 196 PetsHotels.
We make full-service veterinary care available through our strategic relationship with certain third-party operators. As of November 3, 2013, full-service veterinary hospitals were in 839 of our stores. We have a 21.0% investment in MMI Holdings, Inc., which is accounted for under the equity method of accounting. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 832 of the veterinary hospitals under the registered trade name of “Banfield, The Pet Hospital.” The remaining 7 hospitals are operated by other third parties in Canada.
The principal challenges we face as a business are the highly competitive market in which we operate and the volatility in the macro-economy. However, we believe we have a competitive advantage in our solutions for the Total Lifetime CareSM of pets, including pet services and proprietary brands, which we think cannot be easily duplicated. Additionally, we consider our consolidated cash flow from operations and consolidated cash on hand to be adequate to meet our operating, investing, and financing needs in the foreseeable future, and we continue to have access to our revolving credit facility. We continuously assess the economic environment and market conditions to guide our decisions regarding our uses of cash, including capital expenditures, investments, dividends, and the purchase of treasury stock.
Executive Summary
• | Diluted earnings per common share increased 17.3% to $0.88 on net income of $92.2 million, for the thirteen weeks ended November 3, 2013, compared to diluted earnings per common share of $0.75 on net income of $82.3 million for the thirteen weeks ended October 28, 2012. Diluted earnings per common share were $2.75 and $2.32 for the thirty-nine weeks ended November 3, 2013, and October 28, 2012, respectively. |
• | Net sales increased 4.0% to $1.7 billion for the thirteen weeks ended November 3, 2013, compared to $1.6 billion for the thirteen weeks ended October 28, 2012. The increase in net sales for the thirteen weeks ended November 3, 2013, included an unfavorable impact from foreign currency fluctuations of $4.9 million. Net sales increased 4.8% to $5.1 billion for the thirty-nine weeks ended November 3, 2013, compared to $4.9 billion for the thirty-nine weeks ended October 28, 2012. The increase in net sales for the thirty-nine weeks ended November 3, 2013, included an unfavorable impact from foreign currency fluctuations of $8.2 million. |
• | Comparable store sales, or sales in stores open at least one year, increased 2.7% and 3.2% for the thirteen and thirty-nine weeks ended November 3, 2013. Internet sales are included in comparable store sales. |
• | Services sales increased 5.2% to $184.2 million for the thirteen weeks ended November 3, 2013, compared to $175.0 million for the thirteen weeks ended October 28, 2012. Services sales increased 6.1% to $580.5 million for the thirty-nine weeks ended November 3, 2013, compared to $546.9 million for the thirty-nine weeks ended October 28, 2012. |
• | As of November 3, 2013, we had $295.9 million in cash and cash equivalents and $71.2 million in restricted cash. We did not borrow against our revolving credit facility during the thirty-nine weeks ended November 3, 2013. |
• | We purchased 0.4 million shares of our common stock for $30.0 million during the thirteen weeks ended November 3, 2013, and 3.5 million shares of our common stock for $234.1 million during the thirty-nine weeks ended November 3, 2013. |
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Critical Accounting Policies and Estimates
We discuss our critical accounting policies and estimates in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended February 3, 2013. We have made no significant change in our critical accounting policies since February 3, 2013.
Recently Issued Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board, or “FASB,” issued an accounting standards update on the presentation of unrecognized tax benefits. The update clarifies that unrecognized tax benefits related to a net operating loss carryforward, or similar tax loss, or tax credit carryforward, should generally be presented in the financial statements as a reduction to a deferred tax asset. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The update allows for early adoption. We have accordingly presented applicable uncertain tax positions as reductions to deferred income tax assets in the Condensed Consolidated Balance Sheet as of November 3, 2013. These amounts are presented in other current liabilities and other noncurrent liabilities in the Condensed Consolidated Balance Sheets as of February 3, 2013, and October 28, 2012. The adoption of the new guidance did not have a material impact on our condensed consolidated financial statements.
Results of Operations
The following table presents the percent to net sales of certain items included in our Condensed Consolidated Statements of Income and Comprehensive Income:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||
November 3, 2013 | October 28, 2012 | November 3, 2013 | October 28, 2012 | ||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
Total cost of sales | 70.2 | 70.4 | 69.7 | 69.9 | |||||||
Gross profit | 29.8 | 29.6 | 30.3 | 30.1 | |||||||
Operating, general and administrative expenses | 20.8 | 21.0 | 21.0 | 21.3 | |||||||
Operating income | 9.0 | 8.6 | 9.3 | 8.8 | |||||||
Interest expense, net | (0.8 | ) | (0.8 | ) | (0.8 | ) | (0.8 | ) | |||
Income before income tax expense and equity income from Banfield | 8.2 | 7.8 | 8.5 | 8.0 | |||||||
Income tax expense | (3.0 | ) | (3.0 | ) | (3.2 | ) | (3.0 | ) | |||
Equity income from Banfield | 0.2 | 0.3 | 0.2 | 0.2 | |||||||
Net income | 5.4 | % | 5.1 | % | 5.5 | % | 5.2 | % | |||
Thirteen Weeks Ended November 3, 2013, Compared to the Thirteen Weeks Ended October 28, 2012
Net Sales
Net sales increased 4.0% to $1.7 billion for the thirteen weeks ended November 3, 2013, compared to $1.6 billion for the thirteen weeks ended October 28, 2012. The increase in net sales for the thirteen weeks ended November 3, 2013, included an unfavorable impact from foreign currency fluctuations of $4.9 million. Approximately 65% of the sales increase is due to a 2.7% increase in comparable store sales for the thirteen weeks ended November 3, 2013, and 35% of the sales increase is due to the addition of 45 net new stores and 1 net new PetsHotel since October 28, 2012. Internet sales, which are included in comparable store sales, were not material to net sales or comparable store sales for the thirteen weeks ended November 3, 2013, or October 28, 2012.
Comparable store sales is comprised of average sales per comparable transaction and comparable transactions. Average sales per comparable transaction grew by 2.5% and 4.2% for the thirteen weeks ended November 3, 2013, and October 28, 2012, respectively. Comparable transactions grew 0.2% and 2.3% for the thirteen weeks ended November 3, 2013, and October 28, 2012, respectively.
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During the thirteen weeks ended November 3, 2013, we continued to see strength in our natural foods, and stabilization in the science category in both dog and cat foods across top channel-exclusive brands. Additionally, we expanded the assortment of natural chews and treats, as well as channel-exclusive treats. In hardgoods, we focused on innovation and newness and continued to build our portfolio of exclusive and proprietary brands across key categories.
Services sales, which include training and day camp for dogs, professional grooming, and boarding, increased 5.2% to $184.2 million for the thirteen weeks ended November 3, 2013, compared to $175.0 million for the thirteen weeks ended October 28, 2012. Services sales represented 10.9% and 10.7% of net sales for the thirteen weeks ended November 3, 2013, and October 28, 2012, respectively. The increase in services sales is primarily due to continued strong demand for our grooming services and PetsHotels, and the addition of new stores since October 28, 2012. In order to support continued strength in services, we have built a portfolio of add-on packages and upgrades, including customizable and seasonal packages with tie-ins to key exclusive brands.
Other revenue included in net sales during the thirteen weeks ended November 3, 2013, which represents license fees and reimbursements for utilities and specific operating expenses charged to Banfield under the master operating agreement, comprised 0.6% of net sales, or $10.5 million, compared to 0.6% of net sales, or $9.8 million, for the thirteen weeks ended October 28, 2012.
Gross Profit
Gross profit increased 20 basis points to 29.8% of net sales for the thirteen weeks ended November 3, 2013, from 29.6% for the thirteen weeks ended October 28, 2012. The increase was primarily driven by services leverage.
Operating, General and Administrative Expenses
Operating, general and administrative expenses as a percentage of net sales decreased to 20.8% for the thirteen weeks ended November 3, 2013, compared to 21.0% for the thirteen weeks ended October 28, 2012. The improvement was primarily driven by a decrease in payroll-related benefit costs.
Interest Expense, net
Interest expense, which is primarily related to capital lease obligations, was $13.1 million during the thirteen weeks ended November 3, 2013, compared to $13.7 million for the thirteen weeks ended October 28, 2012. The decrease in interest expense was due to more store capital leases entering the latter part of their lease lives. Included in interest expense, net was interest income of $0.2 million and $0.3 million for the thirteen weeks ended November 3, 2013, and October 28, 2012, respectively.
Income Tax Expense
For the thirteen weeks ended November 3, 2013, the $51.1 million income tax expense represents an effective tax rate of 36.5% compared with the thirteen weeks ended October 28, 2012, when we had income tax expense of $48.3 million, which represented an effective tax rate of 38.3%. The decrease in the effective tax rate was primarily due to a tax deductible dividend received from Banfield during the thirteen weeks ended November 3, 2013, and a decrease in certain state tax liabilities. The effective tax rate is calculated by dividing our income tax expense, which includes the income tax expense related to our equity income from Banfield, by income before income tax expense and equity income from Banfield.
Equity Income from Banfield
Our equity income from our investment in Banfield was $3.5 million and $4.5 million for the thirteen weeks ended November 3, 2013, and October 28, 2012, respectively, based on our 21.0% ownership in Banfield.
Thirty-Nine Weeks Ended November 3, 2013, Compared to the Thirty-Nine Weeks Ended October 28, 2012
Net Sales
Net sales increased 4.8% to $5.1 billion for the thirty-nine weeks ended November 3, 2013, compared to $4.9 billion for the thirty-nine weeks ended October 28, 2012. The increase in net sales for the thirty-nine weeks ended November 3, 2013, included an unfavorable impact from foreign currency fluctuations of $8.2 million. Approximately 65% of the sales increase is due to a 3.2% increase in comparable store sales for the thirty-nine weeks ended November 3, 2013, and 35% of the sales increase is due to the addition of 45 net new stores and 1 net new PetsHotel since October 28, 2012. Internet sales, which are included in comparable store sales, were not material to net sales or comparable store sales for the thirty-nine weeks ended November 3, 2013, or October 28, 2012.
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Comparable store sales is comprised of average sales per comparable transaction and comparable transactions. Average sales per comparable transaction grew by 2.5% and 4.1% for the thirty-nine weeks ended November 3, 2013, and October 28, 2012, respectively. Comparable transactions grew 0.7%, and 2.9% for the thirty-nine weeks ended November 3, 2013, and October 28, 2012, respectively.
We implemented initiatives to drive traffic and average sales per transaction. We expanded the space dedicated to certain brands of natural foods, including our proprietary brand Simply Nourish. We also introduced new formulations in both dog and cat foods across our top channel-exclusive brands, which further expanded the grain-free and high protein offerings. During the latter half of the thirty-nine weeks ended November 3, 2013, we expanded the assortment of natural chews and treats, as well as channel-exclusive treats. We continued to see strength in our natural foods, and stabilization in the science category in both dog and cat foods across top channel-exclusive brands, as a result of these initiatives.
In hardgoods, we introduced new brands of pet apparel and toys available exclusively at PetSmart, and refreshed the assortments of existing brands during the thirty-nine weeks ended November 3, 2013. We focused on innovation and newness in hardgoods, and continued to build our portfolio of exclusive and proprietary brands across key categories. We also reset the space dedicated to reptiles, our fastest growing species in specialty. We focused on solutions in this space by improving adjacencies and layouts and adding educational signage to provide an easier shopping experience for our customers.
Services sales, which include training and day camp for dogs, professional grooming, and boarding, increased 6.1% to $580.5 million for the thirty-nine weeks ended November 3, 2013, compared to $546.9 million for the thirty-nine weeks ended October 28, 2012. Services sales represented 11.4% and 11.2% of net sales for the thirty-nine weeks ended November 3, 2013, and October 28, 2012, respectively. The increase in services sales is primarily due to continued strong demand for our grooming services and PetsHotels, and the addition of new stores since October 28, 2012. During the thirty-nine weeks ended November 3, 2013 we rolled out several new services offerings in the grooming salon, such as new puppy bath packages and application of flea and tick solution. We also continued to develop our pipeline of innovative services and exclusive offerings that are integrated with our merchandise brands and supported by marketing.
Other revenue included in net sales during the thirty-nine weeks ended November 3, 2013, which represents license fees and reimbursements for utilities and specific operating expenses charged to Banfield under the master operating agreement, comprised 0.6% of net sales, or $29.0 million, compared to 0.6% of net sales, or $28.5 million, for the thirty-nine weeks ended October 28, 2012.
Gross Profit
Gross profit increased 20 basis points to 30.3% of net sales for the thirty-nine weeks ended November 3, 2013, from 30.1% for the thirty-nine weeks ended October 28, 2012. Services margin increased by 20 basis points, while merchandise margin decreased by 25 basis points. Store occupancy costs and supply chain costs included in margin provided 15 basis points, and 10 basis points of leverage, respectively.
Operating, General and Administrative Expenses
Operating, general and administrative expenses as a percentage of net sales decreased to 21.0% for the thirty-nine weeks ended November 3, 2013, compared to 21.3% for the thirty-nine weeks ended October 28, 2012. The improvement was driven by a decrease in payroll-related benefit costs. This was partially offset by increased advertising spend in support of our sales initiatives and an increase in professional fees.
Interest Expense, net
Interest expense, which is primarily related to capital lease obligations, was $39.5 million during the thirty-nine weeks ended November 3, 2013, compared to $42.1 million for the thirty-nine weeks ended October 28, 2012. The decrease in interest expense was due to more store capital leases entering the latter part of their lease lives. Included in interest expense, net was interest income of $0.6 million and $1.0 million for the thirty-nine weeks ended November 3, 2013, and October 28, 2012, respectively.
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Income Tax Expense
For the thirty-nine weeks ended November 3, 2013, the $161.1 million income tax expense represents an effective tax rate of 36.8% compared with the thirty-nine weeks ended October 28, 2012, when we had income tax expense of $144.8 million, which represented an effective tax rate of 37.2%. The decrease in the effective tax rate was primarily due to an increase in tax deductible dividends received from Banfield. The effective tax rate is calculated by dividing our income tax expense, which includes the income tax expense related to our equity income from Banfield, by income before income tax expense and equity income from Banfield.
Equity Income from Banfield
Our equity income from our investment in Banfield was $11.3 million and $11.4 million for the thirty-nine weeks ended November 3, 2013, and October 28, 2012, respectively, based on our 21.0% ownership in Banfield.
Liquidity and Capital Resources
Cash Flow
We believe that our operating cash flow and cash on hand will be adequate to meet our operating, investing, and financing needs in the foreseeable future. In addition, we have access to our $100.0 million revolving credit facility, which expires on March 23, 2017. However, there can be no assurance of our ability to access credit markets on commercially acceptable terms in the future. We continuously assess the economic environment and market conditions to guide our decisions regarding our uses of cash, including capital expenditures, investments, dividends, and the purchase of treasury stock.
We finance our operations, new store and PetsHotel growth, store remodels, and other expenditures to support our growth initiatives primarily through cash generated by operating activities. Receipts from our sales come from cash, checks, and third-party debit and credit cards, and therefore provide a significant source of liquidity. Cash is used in operating activities primarily to fund procurement of merchandise inventories and other assets, net of accounts payable and other accrued liabilities. Net cash provided by operating activities was $341.3 million for the thirty-nine weeks ended November 3, 2013, compared to $364.8 million for the thirty-nine weeks ended October 28, 2012. Cash provided by operating activities decreased due to changes in accounts payable, current liabilities for income taxes payable, and accrued payroll, bonus, and employee benefits balances of $23.5 million, $20.5 million, and $14.6 million, respectively. This was offset by a $32.5 million increase in net income for the thirty-nine weeks ended November 3, 2013, as compared to the thirty-nine weeks ended October 28, 2012.
Net 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, and other expenditures to support our growth plans and initiatives. Net cash used in investing activities was $105.8 million for the thirty-nine weeks ended November 3, 2013, compared to $94.8 million for the thirty-nine weeks ended October 28, 2012. The primary differences between the thirty-nine weeks ended November 3, 2013, and October 28, 2012, were an increase in purchases of investments of $8.5 million, lower proceeds from maturities of investments of $7.8 million, partially offset by an increase in proceeds from sales of property and equipment of $6.4 million.
Net cash used in financing activities was $272.0 million for the thirty-nine weeks ended November 3, 2013, and consisted primarily of the cash paid for treasury stock, payments on capital lease obligations, offset by net proceeds from common stock issued under equity incentive plans. Net cash used in financing activities for the thirty-nine weeks ended October 28, 2012, was $314.7 million. The primary differences between the thirty-nine weeks ended November 3, 2013, and the thirty-nine weeks ended October 28, 2012, were a decrease in cash paid for treasury stock of $26.2 million and a decrease in cash dividends paid to stockholders of $14.5 million. Dividends declared in December are typically paid to stockholders in February of the following year, which was the case for the dividend declared on December 7, 2011. The Board of Directors approved the payment date for the dividend declared on December 7, 2012, to be accelerated to December 31, 2012.
Operating Capital and Capital Expenditure Requirements
All our stores are leased facilities. We opened 41 new stores and closed 5 stores in the thirty-nine weeks ended November 3, 2013. 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 expenditures to be $140 million to $150 million for 2013, based on our plan to continue our store growth, remodel or
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replace certain store assets, enhance our supply chain, including costs to fixture and equip a new distribution center in Bethel, Pennsylvania, continue our investment in the development of our information systems, and improve our infrastructure.
Our ability to fund our operations and make planned capital expenditures depends on our future operating performance and cash flow, which are subject to prevailing economic conditions and to financial, business, and other factors, some of which are beyond our control.
Commitments
As of November 3, 2013, we had obligations to purchase $19.9 million of advertising through the remainder of 2013, and $30.5 million in 2014.
As of November 3, 2013, we had various commitments to purchase $19.6 million of merchandise from certain vendors through the remainder of 2013, and $31.1 million from 2014 through 2016.
There have been no other material changes in our contractual obligations since February 3, 2013. Information regarding our contractual obligations is provided in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended February 3, 2013.
Credit Facilities
We have a $100.0 million revolving credit facility agreement, or “Revolving Credit Facility,” which expires on March 23, 2017. Borrowings under this Revolving Credit Facility are subject to a borrowing base and bear interest, at our option, at LIBOR plus 1.25%, or Base Rate plus 0.25%. The Base Rate is defined as the highest of the following rates: the Federal Funds Rate plus 0.5%, the Adjusted LIBOR plus 1.0%, or the Prime Rate.
We are subject to fees payable each month at an annual rate of 0.20% of the unused amount of the Revolving Credit Facility. The Revolving Credit Facility also gives us the ability to issue letters of credit, which reduce the amount available under the Revolving Credit Facility. Letter of credit issuances under the Revolving Credit Facility are subject to interest payable and bear interest of 0.625% for standby letters of credit and commercial letters of credit.
As of November 3, 2013, February 3, 2013, and October 28, 2012, we had no borrowings and $17.9 million, $17.9 million, and $24.4 million in stand-by letter of credit issuances under our Revolving Credit Facility, respectively.
We also have a $100.0 million stand-alone letter of credit facility agreement, or “Stand-alone Letter of Credit Facility,” which expires on March 23, 2017. We are subject to fees payable each month at an annual rate of 0.175% of the average daily face amount of the letters of credit outstanding during the preceding month. In addition, we are required to maintain a cash deposit with the lender equal to 103% of the amount of outstanding letters of credit.
We had $69.2 million, $69.8 million, and $69.8 million in outstanding letters of credit, issued for guarantees provided for insurance programs, under our Stand-alone Letter of Credit Facility as of November 3, 2013, February 3, 2013, and October 28, 2012, respectively. We had $71.2 million, $71.9 million, and $71.9 million in restricted cash on deposit with the Stand-alone Letter of Credit Facility lender as of November 3, 2013, February 3, 2013, and October 28, 2012, respectively.
Our Revolving Credit Facility and Stand-alone Letter of Credit Facility permit the payment of dividends if we are not in default and payment conditions as defined in the agreement are satisfied. As of November 3, 2013, we were in compliance with the terms and covenants of our Revolving Credit Facility and Stand-alone Letter of Credit Facility. The Revolving Credit Facility and Stand-alone Letter of Credit Facility are secured by substantially all our financial assets.
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Share Purchase Programs
In September 2013, the Board of Directors approved a share purchase program authorizing the purchase of up to $535.0 million through January 31, 2015. The $535.0 million program commenced on October 1, 2013, and is in addition to any unused amount remaining under the previous $525.0 million program. As of November 3, 2013, $647.9 million remained available under these programs.
The following tables present purchases of our common stock under the respective share purchase programs (in thousands):
Thirteen Weeks Ended | ||||||||||||||||||
Share Purchase Programs | November 3, 2013 | October 28, 2012 | ||||||||||||||||
Authorized Amount | Date Approved by Board | Program Termination Date | Shares Purchased | Purchase Value | Shares Purchased | Purchase Value | ||||||||||||
$450,000 | June 2011 | January 31, 2013 | — | $ | — | 816 | $ | 56,941 | ||||||||||
$525,000 | June 2012 | January 31, 2014 | 405 | 30,000 | 44 | 3,059 | ||||||||||||
$535,000 | September 2013 | January 31, 2015 | — | — | — | — | ||||||||||||
405 | $ | 30,000 | 860 | $ | 60,000 | |||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||
Share Purchase Programs | November 3, 2013 | October 28, 2012 | ||||||||||||||||
Authorized Amount | Date Approved by Board | Program Termination Date | Shares Purchased | Purchase Value | Shares Purchased | Purchase Value | ||||||||||||
$450,000 | June 2011 | January 31, 2013 | — | $ | — | 4,594 | $ | 278,553 | ||||||||||
$525,000 | June 2012 | January 31, 2014 | 3,477 | 234,076 | 44 | 3,059 | ||||||||||||
$535,000 | September 2013 | January 31, 2015 | — | — | — | — | ||||||||||||
3,477 | $ | 234,076 | 4,638 | $ | 281,612 | |||||||||||||
Dividends
During the thirty-nine weeks ended November 3, 2013, the Board of Directors declared the following dividends:
Date Declared | Dividend Amount per Share | Stockholders of Record Date | Payment Date | |||
March 26, 2013 | $0.165 | May 3, 2013 | May 17, 2013 | |||
June 14, 2013 | $0.165 | August 2, 2013 | August 16, 2013 | |||
September 25, 2013 | $0.195 | November 1, 2013 | November 15, 2013 | |||
Related Party Transactions
Our investment in Banfield is accounted for using the equity method of accounting. As of November 3, 2013, February 3, 2013, and October 28, 2012, our investment represented 21.4% of the voting common stock and 21.0% of the combined voting and non-voting stock.
Our equity income from our investment in Banfield, which is recorded one month in arrears under the equity method of accounting, was $3.5 million and $4.5 million for the thirteen weeks ended November 3, 2013, and October 28, 2012, respectively, and $11.3 million and $11.4 million for the thirty-nine weeks ended November 3, 2013, and October 28, 2012, respectively. During the thirty-nine weeks ended November 3, 2013, and October 28, 2012, we received dividends from Banfield of $20.9 million and $13.9 million, respectively.
We recognized license fees and reimbursements for specific operating expenses from Banfield of $10.5 million and $9.8 million during the thirteen weeks ended November 3, 2013, and October 28, 2012, respectively, and $29.0 million and $28.5 million during the thirty-nine weeks ended November 3, 2013, and October 28, 2012, in other revenue in the Condensed Consolidated Statements of Income and Comprehensive Income. The related costs are included in cost of other revenue in the Condensed Consolidated Statements of Income and Comprehensive Income. Receivables from Banfield totaled $3.3 million, $3.2 million, and $3.2 million at November 3, 2013, February 3, 2013, and October 28, 2012, respectively, and were included in receivables, net in the Condensed Consolidated Balance Sheets.
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Our master operating agreement also includes a provision for the sharing of profits on the sale of therapeutic pet foods sold in all stores with an operating Banfield hospital. The net sales and gross profit on the sale of therapeutic pet food are not material to our condensed consolidated financial statements.
Seasonality and Inflation
Our business is subject to seasonal fluctuations. We typically realize a higher portion of our net sales and operating profits during the fourth quarter due to increased holiday traffic. As a result of this seasonality, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. Because 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. Controllable expenses could fluctuate from quarter-to-quarter in a year. Finally, because new stores tend to experience higher payroll, advertising, and other store level expenses as a percentage of sales than mature stores, new store openings will also contribute to lower store operating margins until these stores become established.
While we have experienced inflationary pressure in recent years, we have been able to largely mitigate the effect by increasing retail prices accordingly. Although neither inflation nor deflation has had a material impact on net operating results, we can make no assurance that our business will not be affected by inflation or deflation in the future.
Impact of Federal Health Care Reform Legislation
In March 2010, the President of the United States signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or “the Act.” We expect to be in compliance with the law in 2014 and intend to be in compliance with the employer mandate portion of the Act, which is effective in 2015. We do not expect the impact on our condensed consolidated financial statements to be material.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of November 3, 2013, there have been no material changes in the market risk information disclosed by us in our Annual Report on Form 10-K for the year ended February 3, 2013. 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 3, 2013.
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 3, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the thirteen weeks ended November 3, 2013, 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 3, 2013, 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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Item 1. Legal Proceedings
Reference is made to the lawsuit against us captioned Negrete, et al. v. PetSmart, Inc., originally filed in September 2012, in the California Superior Court for the County of Shasta, and previously disclosed in our Annual Report on Form 10-K for the fiscal year ended February 3, 2013, (the "2012 Form 10-K") and our Quarterly Reports on Form 10-Q for the periods ended May 5, 2013, and August 4, 2013, (collectively the "2013 Form 10-Q Filings"). As previously disclosed, the plaintiff in that proceeding, a former groomer, seeks to assert claims on behalf of current and former California pet stylists that PetSmart failed to provide pay for all hours worked, failed to properly reimburse associates for business expenses, failed to provide proper wage statements, and failed to provide timely and uninterrupted meal and rest periods. The lawsuit seeks compensatory damages, statutory penalties, and other relief, including attorneys' fees, costs, and injunctive relief.
On June 14, 2013, we removed the Negrete case to the United States District Court for the Eastern District of California and subsequently filed a motion to transfer the case to the United States District Court for the Northern District of California so that it could be consolidated with the lawsuit captioned Moore, et al. v. PetSmart, Inc., et al., which was also previously disclosed in our 2012 Form 10-K and 2013 Form 10-Q Filings. That motion was granted during the thirteen weeks ended November 3, 2013.
The Moore proceeding was filed in May 2012, in the California Superior Court for the County of Alameda, and PetSmart removed it to the United States District Court for the Northern District of California. The Moore complaint brings both individual and class action claims, first alleging that PetSmart failed to engage in the interactive process and failed to accommodate the disabilities of four current and former named associates. The complaint also alleges on behalf of current and former hourly store associates that PetSmart failed to provide pay for all hours worked, failed to properly reimburse associates for business expenses, and failed to provide timely and uninterrupted meal and rest periods. The lawsuit seeks compensatory damages, statutory penalties, and other relief, including attorneys' fees, costs, and injunctive relief.
Reference is made to the lawsuit against us captioned McKee, et al. v. PetSmart, Inc., which was filed in September 2012 by a former associate in the United States District court for the District of Delaware. As previously disclosed in the 2012 Form 10-K, and the 10-Q filing for the period ended May 5, 2013, the case seeks to assert a Fair Labor Standards Act collective action on behalf of PetSmart's operations managers and similarly situated employees. The complaint alleges that PetSmart has misclassified operations managers as exempt and as a result failed to pay them overtime for hours worked in excess of forty hours per week. The plaintiffs seek compensatory damages, liquidated damages, and other relief, including attorneys' fees, costs, and injunctive relief. The plaintiffs filed a motion for conditional certification, which is currently pending.
Reference is made to the lawsuit against us captioned Miller, et al. v. PetSmart, Inc., filed in December 2012 by a group of four former managers in the United States District Court for the Eastern District of California, and previously disclosed in the 2012 Form 10-K, and the Form 10-Q filing for the period ended May 5, 2013. As previously disclosed, the plaintiffs sought to assert claims on behalf of hourly and exempt store management personnel from December 14, 2008, to the present for alleged unreimbursed mileage expenses. The lawsuit sought compensatory damages, statutory penalties, and other relief, including attorneys’ fees, costs, and injunctive relief. The case was dismissed in September 2013, without prejudice to the class claims, but with prejudice to the individual plaintiffs' claims.
Reference is made to the lawsuit against us captioned Pace v. PetSmart, Inc., originally filed in February 2013 in the Superior Court of California for the County of Orange by a former employee and previously disclosed in the Form 10-Q filing for the period ended May 5, 2013. We removed the case to the United States District Court for the Central District of California. As previously disclosed, the complaint seeks to certify a class of all former PetSmart employees in California since February 20, 2010, who were not paid all wages owed upon their separations. The complaint challenges PetSmart's use of pay cards for separation payments and seeks waiting time penalties, attorneys' fees, and other relief. On May 14, 2013, as well as on June 4, 2013, the complaint was amended to also assert claims under California's Private Attorney General Act as well as individual claims for wrongful termination and disability discrimination.
Except as noted above, there have not been any material developments in any legal proceedings previously reported in our 2012 Form 10-K or 2013 Form 10-Q Filings. See Item 1 of Part I, "Financial Statements - Note 11 - Commitments and Contingencies - Litigation and Settlements" of this Quarterly Report on Form 10-Q for information concerning previously reported proceedings. 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 3, 2013, which could materially affect our business, financial condition or future results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows our purchases of our common stock and the available funds to purchase additional common stock for each period in the thirteen weeks ended November 3, 2013:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Value That May Yet be Purchased Under the Plans or Programs(1) | ||||||||
August 5, 2013 to September 1, 2013 | — | $ | — | — | $ | 142,865,000 | ||||||
September 2, 2013 to October 6, 2013 | — | $ | — | — | $ | 677,865,000 | ||||||
October 7, 2013 to November 3, 2013 | 404,554 | $ | 74.16 | 404,554 | $ | 647,866,000 | ||||||
Thirteen Weeks Ended November 3, 2013 | 404,554 | $ | 74.16 | 404,554 | $ | 647,866,000 | ||||||
__________
(1) | In June 2012, the Board of Directors approved a share purchase program authorizing the purchase of up to $525.0 million of our common stock through January 31, 2014. In September 2013, the Board of Directors approved a share purchase program authorizing the purchase of up to $535.0 million through January 31, 2015. The $535.0 million program commenced on October 1, 2013, and is in addition to any unused amount remaining under the previous $525.0 million program. As of November 3, 2013, $647.9 million remained available under these programs. |
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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. | |
Exhibit 101.INS | XBRL Instance | |
Exhibit 101.SCH | XBRL Taxonomy Extension Schema | |
Exhibit 101.CAL | XBRL Taxonomy Extension Calculation | |
Exhibit 101.LAB | XBRL Taxonomy Extension Labels | |
Exhibit 101.PRE | XBRL Taxonomy Extension Presentation | |
Exhibit 101.DEF | XBRL Taxonomy Extension Definition | |
____________
* | The certifications attached as Exhibit 32.1 and Exhibit 32.2 accompanying this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of PetSmart, Inc., under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing. |
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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.
PetSmart, Inc. | ||
(Registrant) | ||
/s/ Carrie W. Teffner | ||
Date: | November 27, 2013 | Carrie W. Teffner |
Senior Vice President and Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer) | ||
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