XNAS:PETM PetSmart Inc. Quarterly Report 10-Q Filing - 4/29/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended April 29, 2012

OR

For the transition period from              to             

Commission file number: 0-21888

PetSmart, Inc.

(Exact name of registrant as specified in its charter)

(623) 580-6100

(Registrant’s telephone number, including area code)

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

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  ¨

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.

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

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

Common Stock, $.0001 Par Value, 108,392,554 Shares at May 11, 2012

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PetSmart, Inc. and Subsidiaries

INDEX

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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 April 29, 2012 and May 1, 2011, and the related condensed consolidated statements of income and comprehensive income and of cash flows for the thirteen week periods then ended. These interim financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PetSmart, Inc. and subsidiaries as of January 29, 2012, 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 23, 2012, 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 29, 2012, 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 24, 2012

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PetSmart, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except par value)

(Unaudited)

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

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PetSmart, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

(In thousands, except per share data)

(Unaudited)

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

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PetSmart, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

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

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PetSmart, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Note 1 — General

PetSmart, Inc., including its wholly owned subsidiaries (the “Company,” “PetSmart” or “we”), is the leading specialty provider of products, services and solutions for the lifetime needs of pets in the United States, Puerto Rico and Canada. We offer a broad selection of products for all the life stages of pets, as well as various pet services including professional grooming, training, boarding and day camp. We also offer pet products through an e-commerce site. As of April 29, 2012, we operated 1,241 retail stores and had full-service veterinary hospitals in 807 of our stores. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 800 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. These condensed consolidated financial statements, which are unaudited, should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 29, 2012.

Due to the seasonal nature of our business, the results of operations for the thirteen weeks ended April 29, 2012, 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 2012, a 53-week year, ends on February 3, 2013, while fiscal 2011, a 52-week year, ended on January 29, 2012. Unless otherwise specified, all references to years in these condensed consolidated financial statements are to fiscal years.

Note 2 — 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.

Activity related to foreign currency adjustments was as follows (in thousands):

The impact of foreign currency translation adjustments to the carrying value of goodwill was $0.7 million and $1.5 million for the thirteen weeks ended April 29, 2012, and May 1, 2011, respectively.

Note 3 — Investments

Short-term Investments

At April 29, 2012, January 29, 2012, and May 1, 2011, 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 April 29, 2012, January 29, 2012, and May 1, 2011. The amortized cost basis at April 29, 2012, January 29, 2012, and May 1, 2011, was $22.0 million, $20.1 million and $9.6 million, respectively. Unrealized holding gains and losses are included in other comprehensive income in the Condensed Consolidated Statements of Income and Comprehensive Income.

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Investments in Negotiable Certificates of Deposit

At April 29, 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):

The aggregate fair value of our investments in NCDs was $13.6 million, $15.2 million and $3.1 million at April 29, 2012, January 29, 2012, and May 1, 2011, respectively. Unrecognized holding gains for the thirteen weeks ended April 29, 2012, and May 1, 2011, were immaterial.

Equity Investment in Banfield

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

Our investment consisted of voting common stock, comprising 21.4% of all voting stock as of April 29, 2012, January 29, 2012, and May 1, 2011. Our ownership percentage as of April 29, 2012, January 29, 2012, and May 1, 2011, considering all classes of stock (voting and non-voting) was 21.0%. Our investment includes goodwill of $15.9 million. The goodwill is calculated as the excess of the purchase price for each step of the acquisition of our ownership interest in Banfield relative to that step’s portion of Banfield’s net assets at the respective acquisition date.

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

We recognized license fees and reimbursements for specific operating expenses from Banfield of $9.3 million and $8.9 million during the thirteen weeks ended April 29, 2012, and May 1, 2011, 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 $3.1 million, $3.1 million and $2.9 million at April 29, 2012, January 29, 2012, and May 1, 2011, respectively, and were included in receivables, net in the Condensed Consolidated Balance Sheets.

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

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Note 4 — Reserve for Closed Stores

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

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

Note 5 — 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):

Certain stock-based compensation awards representing 0.3 million and 1.9 million shares of common stock in the thirteen weeks ended April 29, 2012, and May 1, 2011, 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 6 — Stockholders’ Equity

Share Purchase Program

In June 2010, the Board of Directors approved a share purchase program authorizing the purchase of up to $400.0 million of our common stock through January 29, 2012. During the thirteen weeks ended May 1, 2011, we purchased 2.5 million shares of our common stock for $102.4 million under the $400.0 million program.

In June 2011, the Board of Directors approved a share purchase program authorizing the purchase of up to $450.0 million of our common stock through January 31, 2013, replacing the $400.0 million program, effective August 1, 2011. During the thirteen weeks ended April 29, 2012, we purchased 3.0 million shares of our common stock for $174.9 million under the $450.0 million program. Since the inception of the share purchase authorization in June 2011, we have purchased 6.7 million shares of our common stock for $346.4 million. As of April 29, 2012, $103.6 million remained available under the $450.0 million program.

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Dividends

During the thirteen weeks ended April 29, 2012, the Board of Directors declared the following dividend:

Note 7 — Stock-based Compensation

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

At April 29, 2012, the total unrecognized stock-based compensation expense for equity awards, net of estimated forfeitures, was $56.7 million and is expected to be recognized over a weighted average period of 2.6 years. At April 29, 2012, the total unrecognized stock-based compensation expense for liability awards, net of estimated forfeitures, was $9.0 million and is expected to be recognized over a weighted average period of 1.6 years.

The 2009 management equity unit grant vested on March 9, 2012, and $11.9 million was paid in cash in March 2012.

Note 8 — Credit Facilities

On March 23, 2012, we entered into a new $100.0 million revolving credit facility agreement, or “Revolving Credit Facility,” which replaced our former revolving credit facility agreement, or “Former Revolving Credit Facility.” The Revolving Credit Facility 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 April 29, 2012, we had no borrowings under our Revolving Credit Facility and $24.4 million in stand-by letter of credit issuances under our Revolving Credit Facility. As of January 29, 2012, and May 1, 2011, we had no borrowings under our Former Revolving Credit Facility and $24.4 million and $31.6 million in stand-by letter of credit issuances, respectively.

We also entered into a new $100.0 million stand-alone letter of credit facility agreement, or “Stand-alone Letter of Credit Facility,” which replaced our former stand-alone letter of credit facility, or “Former Stand-alone Letter of Credit Facility.” The Stand-alone Letter of Credit Facility 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.

As of April 29, 2012, we had $69.8 million in outstanding letters of credit under our Stand-alone Letter of Credit Facility and $71.9 million in restricted cash on deposit with the lender. As of January 29, 2012, and May 1, 2011, we had $70.2 million and $61.4 million in outstanding letters of credit under our Former Stand-alone Letter of Credit Facility, respectively. We had $70.2 million and $61.4 million in restricted cash on deposit with the Former Stand-alone Letter of Credit Facility lender as of January 29, 2012, and May 1, 2011, respectively.

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We issue letters of credit for guarantees provided for insurance programs.

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 April 29, 2012, we were in compliance with the terms and covenants of our Revolving Credit Facility and Stand-alone Letter of Credit Facility. The Revolving Credit Facility and Stand-alone Letter of Credit Facility are secured by substantially all our financial assets.

Note 9 — Commitments and Contingencies

Advertising Purchase Commitments

As of April 29, 2012, we had obligations to purchase $23.3 million of advertising through the remainder of 2012.

Product Purchase Commitments

As of April 29, 2012, we had various commitments to purchase product from certain vendors that are not material to our total inventory purchases.

Litigation and Settlements

In January 2011, we were named as a defendant in Pedroza v. PetSmart, Inc., et al., a lawsuit originally filed in California Superior Court for the County of San Bernardino. The case has been removed to the U.S. District Court for the Central District of California. The complaint alleges, purportedly on behalf of current and former exempt store management in California, that we improperly classified our store management as exempt pursuant to the California Labor Code, and as a result failed to: (i) pay or provide to such managers proper wages, overtime compensation, or rest or meal periods, (ii) maintain and provide accurate wage-related statements and records, and (iii) reimburse certain business expenses, in each case as is required by the California Labor Code. The lawsuit seeks compensatory damages, statutory penalties and other relief, including liquidated damages, attorneys’ fees, costs and injunctive relief. This case is still in its early stages and, accordingly, we are not yet able to reasonably estimate the monetary exposure associated with the lawsuit. We believe, however, that the lawsuit is without merit and that the case should not be certified as a class or collective action, and we are vigorously defending these claims. For these reasons, we have not accrued any liability.

Additionally, in October 2011, we were named as a defendant in Acosta v. PetSmart, Inc., et. al., a lawsuit originally filed in California Superior Court for the County of Los Angeles. The Acosta complaint raises substantially similar allegations to those raised in the Pedroza case, but the allegations in Acosta are limited to store Operations Managers only. Like Pedroza, the Acosta lawsuit seeks compensatory damages, statutory penalties, and other relief, including liquidated damages, attorneys’ fees, and costs. This case is just entering the early stages of discovery and, accordingly, we are not yet able to reasonably estimate the monetary exposure associated with the lawsuit. As with Pedroza, we do not believe the allegations in Acosta have merit, we do not believe that the case should be certified as a class or collective action, and we are vigorously defending these claims. For these reasons, we have not accrued any liability.

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. 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:

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For more information about these risks, see the discussion under the heading “Risk Factors” in our Form 10-K for the year ended January 29, 2012, filed with the Securities and Exchange Commission on March 23, 2012, which is incorporated herein by reference.

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Overview

Based on our 2011 net sales of $6.1 billion, we are North America’s leading specialty provider of products, services and solutions for the lifetime needs of pets. As of April 29, 2012, we operated 1,241 stores, and we anticipate opening 35 to 40 net new stores during the remainder of 2012. Our stores carry a broad assortment of high-quality pet supplies at everyday low prices. We offer approximately 10,000 distinct items, including nationally recognized brand names, as well as an extensive selection of proprietary brands across a range of product categories.

We complement our extensive product assortment with a wide selection of pet services, including grooming, training, boarding and day camp. All our stores 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, an on-call veterinarian, temperature controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs. As of April 29, 2012, we operated 194 PetsHotels, and we anticipate opening 2 additional PetsHotels during the remainder of 2012.

We make full-service veterinary care available through our strategic relationship with certain third-party operators. As of April 29, 2012, full-service veterinary hospitals were in 807 of our stores. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 800 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 continuing changes in the macro-economy. However, we believe we have a competitive advantage in our solutions for the Total Lifetime Care^SM of pets, including pet services and proprietary brands, which we believe cannot be easily duplicated. Additionally, we consider our cash flow from operations and 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 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.

Executive Summary

Critical Accounting Policies and Estimates

We discuss our critical accounting policies and estimates in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended January 29, 2012. We have made no significant change in our critical accounting policies since January 29, 2012.

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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 April 29, 2012, Compared to the Thirteen Weeks Ended May 1, 2011

Net Sales

Net sales increased 9.4% to $1.6 billion for the thirteen weeks ended April 29, 2012, compared to $1.5 billion for the thirteen weeks ended May 1, 2011. The increase in net sales was partially impacted by $1.8 million in unfavorable foreign currency fluctuations for the thirteen weeks ended April 29, 2012. Approximately 80% of the sales increase is due to a 7.4% increase in comparable store sales for the thirteen weeks ended April 29, 2012, and 20% of the sales increase is due to the addition of 49 net new stores and 10 net new PetsHotels since May 1, 2011.

Comparable store sales growth was driven by an increase in comparable transactions and average sales per comparable transaction due to the impact of merchandising strategies, pricing strategies and new product offerings. Comparable transactions were 3.3% for the thirteen weeks ended April 29, 2012, and 2.7% for the thirteen weeks ended May 1, 2011.

Services sales, which include grooming, training, boarding and day camp, increased 8.3% or $13.9 million, to $181.0 million for the thirteen weeks ended April 29, 2012, compared to $167.1 million for the thirteen weeks ended May 1, 2011. The increase in services sales is primarily due to continued strong demand for our grooming services, improved occupancy in our PetsHotels and the addition of new stores and PetsHotels since May 1, 2011.

Other revenue included in net sales during the thirteen weeks ended April 29, 2012, 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 $9.3 million, compared to 0.6% of net sales, or $8.9 million, for the thirteen weeks ended May 1, 2011.

Gross Profit

Gross profit increased 90 basis points to 30.5% of net sales for the thirteen weeks ended April 29, 2012, from 29.6% for the thirteen weeks ended May 1, 2011.

Overall merchandise margin increased 15 basis points due to rate improvement which was offset by a decline in mix. Mix was negatively impacted as the sales growth in our consumables continued to outpace the sales growth of our higher margin hardgoods category.

Services margin increased 10 basis points primarily due to increased sales as well as improved labor utilization.

Store occupancy and supply chain costs included in margin provided 55 and 10 basis points of leverage, respectively.

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Operating, General and Administrative Expenses

Operating, general and administrative expenses decreased to 21.0% of net sales for the thirteen weeks ended April 29, 2012, compared to 21.5% of net sales for the thirteen weeks ended May 1, 2011. In addition to leverage provided by increased sales, the decrease is also due to lower depreciation, credit card merchant fees and store payroll, offset by an increase in advertising.

Interest Expense, net

Interest expense, which is primarily related to capital lease obligations, was $14.5 million during the thirteen weeks ended April 29, 2012, compared to $14.7 million for the thirteen weeks ended May 1, 2011. The decrease in interest expense was due to a decrease in capital lease obligations. Included in interest expense, net was interest income of $0.4 million and $0.3 million for the thirteen weeks ended April 29, 2012, and May 1, 2011, respectively.

Income Tax Expense

For the thirteen weeks ended April 29, 2012, the $48.2 million income tax expense represents an effective tax rate of 34.4% compared with the thirteen weeks ended May 1, 2011, when we had income tax expense of $38.9 million, which represented an effective tax rate of 36.3%. The decrease in the effective tax rate was primarily due to favorable settlements with certain states and municipalities. The effective tax rate is calculated by dividing our income tax expense, which includes the income tax expense related to our equity in income from Banfield, by income before income tax expense and equity in income from Banfield.

Equity in Income from Banfield

Our equity in income from our investment in Banfield was $2.6 million for the thirteen weeks ended April 29, 2012, and May 1, 2011, 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 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. 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 $149.6 million for the thirteen weeks ended April 29, 2012, compared to $96.4 million for the thirteen weeks ended May 1, 2011. The primary differences between the thirteen weeks ended April 29, 2012, and May 1, 2011, include increased net income of $23.8 million and an increase in trade accounts payable resulting from the extension of vendor terms of $47.7 million, offset by an increase in the growth of merchandise inventories of $(19.0) million.

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, PetsHotel construction costs, and other expenditures to support our growth plans and initiatives. Net cash used in investing activities was $38.0 million for the thirteen weeks ended April 29, 2012, compared to $34.2 million for the thirteen weeks ended May 1, 2011. The primary difference between the thirteen weeks ended April 29, 2012, and May 1, 2011, was an increase in cash paid for property and equipment of $4.9 million.

Net cash used in financing activities was $186.2 million for the thirteen weeks ended April 29, 2012, and consisted primarily of the cash paid for treasury stock, payments of cash dividends, payments on capital lease obligations, offset by net proceeds from common stock issued under equity incentive plans and an increase in our bank overdraft. Net cash used in financing activities for the thirteen weeks ended May 1, 2011, was $128.3 million. The primary differences between the thirteen weeks ended April 29, 2012, and the thirteen weeks ended May 1, 2011, were an increase of $72.5 million in cash paid for treasury stock and an increase of $14.2 million in our bank overdraft.

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Operating Capital and Capital Expenditure Requirements

Substantially all our stores are leased facilities. We opened 14 new stores and closed 5 stores in the thirteen weeks ended April 29, 2012. 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 $130 million to $140 million for 2012, based on our plan to open approximately 47 net new stores and 4 net 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):

Commitments

As of April 29, 2012, we had obligations to purchase $23.3 million of advertising through the remainder of 2012.

As of April 29, 2012, 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 29, 2012. Information regarding our contractual obligations is provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended January 29, 2012.

Credit Facilities

On March 23, 2012, we entered into a new $100.0 million revolving credit facility agreement, or “Revolving Credit Facility,” which replaced our former revolving credit facility agreement, or “Former Revolving Credit Facility.” The Revolving Credit Facility 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 April 29, 2012, we had no borrowings under our Revolving Credit Facility and $24.4 million in stand-by letter of credit issuances under our Revolving Credit Facility. As of January 29, 2012, and May 1, 2011, we had no borrowings under our Former Revolving Credit Facility and $24.4 million and $31.6 million in stand-by letter of credit issuances, respectively.

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We also entered into a new $100.0 million stand-alone letter of credit facility agreement, or “Stand-alone Letter of Credit Facility,” which replaced our former stand-alone letter of credit facility, or “Former Stand-alone Letter of Credit Facility.” The Stand-alone Letter of Credit Facility 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.

As of April 29, 2012, we had $69.8 million in outstanding letters of credit under our Stand-alone Letter of Credit Facility and $71.9 million in restricted cash on deposit with the lender. As of January 29, 2012, and May 1, 2011, we had $70.2 million and $61.4 million in outstanding letters of credit under our Former Stand-alone Letter of Credit Facility, respectively. We had $70.2 million and $61.4 million in restricted cash on deposit with the Former Stand-alone Letter of Credit Facility lender as of January 29, 2012, and May 1, 2011, respectively.

We issue letters of credit for guarantees provided for insurance programs.

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 April 29, 2012, we were in compliance with the terms and covenants of our Revolving Credit Facility and Stand-alone Letter of Credit Facility. The Revolving Credit Facility and Stand-alone Letter of Credit Facility are secured by substantially all our financial assets.

Share Purchase Program

In June 2010, the Board of Directors approved a share purchase program authorizing the purchase of up to $400.0 million of our common stock through January 29, 2012. During the thirteen weeks ended May 1, 2011, we purchased 2.5 million shares of our common stock for $102.4 million under the $400.0 million program.

In June 2011, the Board of Directors approved a share purchase program authorizing the purchase of up to $450.0 million of our common stock through January 31, 2013, replacing the $400.0 million program, effective August 1, 2011. During the thirteen weeks ended April 29, 2012, we purchased 3.0 million shares of our common stock for $174.9 million under the $450.0 million program. Since the inception of the share purchase authorization in June 2011, we have purchased 6.7 million shares of our common stock for $346.4 million. As of April 29, 2012, $103.6 million remained available under the $450.0 million program.

Dividends

During the thirteen weeks ended April 29, 2012, the Board of Directors declared the following dividend:

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 800 of our stores. Our investment consists of common and preferred stock. As of April 29, 2012, we owned 21.4% of the voting stock and 21.0% of the combined voting and non-voting stock of Banfield.

Our equity in income from our investment in Banfield, which is recorded one month in arrears under the equity method of accounting, was $2.6 million for the thirteen weeks ended April 29, 2012, and May 1, 2011, respectively. During the thirteen weeks ended April 29, 2012, and May 1, 2011, we received a dividend from Banfield of $13.9 million and $16.0 million, respectively.

We recognized license fees and reimbursements for specific operating expenses from Banfield of $9.3 million and $8.9 million during the thirteen weeks ended April 29, 2012, and May 1, 2011, respectively, in other revenue on the Condensed Consolidated Statements of Income and Comprehensive Income. The related costs are included in cost of other revenue in the Condensed Consolidated Statements of Income and Comprehensive Income. Receivables from Banfield totaled $3.1 million, $3.1 million and $2.9 million at April 29, 2012, January 29, 2012, and May 1, 2011, respectively, and were included in receivables, net in the Condensed Consolidated Balance Sheets.

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

Seasonality and Inflation

Our business is subject to seasonal fluctuations. We typically realize a higher portion of our net sales and operating profits during the fourth quarter due to increased holiday traffic. As a result of this seasonality, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. 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. 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. We expense preopening costs associated with each new location as the costs are incurred.

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

Impact of Federal Health Care Reform Legislation

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of April 29, 2012, 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 January 29, 2012. 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 29, 2012.

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 April 29, 2012. 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 April 29, 2012, 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 April 29, 2012, 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

In January 2011, we were named as a defendant in Pedroza v. PetSmart, Inc., et al., a lawsuit originally filed in California Superior Court for the County of San Bernardino. The case has been removed to the U.S. District Court for the Central District of California. The complaint alleges, purportedly on behalf of current and former exempt store management in California, that we improperly classified our store management as exempt pursuant to the California Labor Code, and as a result failed to: (i) pay or provide to such managers proper wages, overtime compensation, or rest or meal periods, (ii) maintain and provide accurate wage-related statements and records, and (iii) reimburse certain business expenses, in each case as is required by the California Labor Code. The lawsuit seeks compensatory damages, statutory penalties and other relief, including liquidated damages, attorneys’ fees, costs and injunctive relief. This case is still in its early stages and, accordingly, we are not yet able to reasonably estimate the monetary exposure associated with the lawsuit. We believe, however, that the lawsuit is without merit and that the case should not be certified as a class or collective action, and we are vigorously defending these claims. For these reasons, we have not accrued any liability.

Additionally, in October 2011, we were named as a defendant in Acosta v. PetSmart, Inc., et. al., a lawsuit originally filed in California Superior Court for the County of Los Angeles. The Acosta complaint raises substantially similar allegations to those raised in the Pedroza case, but the allegations in Acosta are limited to store Operations Managers only. Like Pedroza, the Acosta lawsuit seeks compensatory damages, statutory penalties, and other relief, including liquidated damages, attorneys’ fees, and costs. This case is just entering the early stages of discovery and, accordingly, we are not yet able to reasonably estimate the monetary exposure associated with the lawsuit. As with Pedroza, we do not believe the allegations in Acosta have merit, we do not believe that the case should be certified as a class or collective action, and we are vigorously defending these claims. For these reasons, we have not accrued any liability.

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 29, 2012, which could materially affect our business, financial condition or future results.

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

The following table shows purchases of our common stock and the available funds to purchase additional common stock for each period in the thirteen weeks ended April 29, 2012:

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Item 6. Exhibits

(a) Exhibits

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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.

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