XNAS:PETM Quarterly Report 10-Q Filing - 7/29/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

þ

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended July 29, 2012

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.)

 

LOGO

 

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  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.

 

Large accelerated filer

 

þ

  

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  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, 108,185,720 Shares at August 10, 2012

 

 

 


Table of Contents

PetSmart, Inc. and Subsidiaries

INDEX

 

     Page
Number
 
PART I. FINANCIAL INFORMATION (UNAUDITED)   

Item 1. Financial Statements

  

Report of Independent Registered Public Accounting Firm

     3   

Condensed Consolidated Balance Sheets as of July 29, 2012, January  29, 2012, and July 31, 2011

     4   

Condensed Consolidated Statements of Income and Comprehensive Income for the thirteen and twenty-six weeks ended July 29, 2012, and July 31, 2011

     5   

Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended July  29, 2012, and July 31, 2011

     6   

Notes to the Condensed Consolidated Financial Statements

     7   

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     12   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     21   

Item 4. Controls and Procedures

     21   
PART II. OTHER INFORMATION   

Item 1. Legal Proceedings

     22   

Item 1A. Risk Factors

     22   

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

     23   

Item 6. Exhibits

     24   

Signatures

     25   

 

2


Table of Contents

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 July 29, 2012 and July 31, 2011, and the related condensed consolidated statements of income and comprehensive income for the thirteen week and twenty-six week periods then ended, and of cash flows for the twenty-six week periods then ended. These interim financial statements are the responsibility of the Company’s management.

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

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

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

August 23, 2012

 

3


Table of Contents

PetSmart, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except par value)

(Unaudited)

 

     July 29,
2012
    January 29,
2012
    July 31,
2011
 
ASSETS       

Cash and cash equivalents

   $ 282,011      $ 342,892      $ 259,180   

Short-term investments

     16,730        20,311        11,833   

Restricted cash

     71,916        70,189        61,439   

Receivables, net

     56,358        53,899        63,991   

Merchandise inventories

     691,820        644,864        638,294   

Deferred income taxes

     51,381        51,381        44,999   

Prepaid expenses and other current assets

     131,521        80,352        84,177   
  

 

 

   

 

 

   

 

 

 

Total current assets

     1,301,737        1,263,888        1,163,913   

Property and equipment, net

     1,016,359        1,067,028        1,072,269   

Equity investment in Banfield

     30,940        37,824        32,256   

Deferred income taxes

     84,288        93,485        92,198   

Goodwill

     44,043        44,084        45,428   

Other noncurrent assets

     44,115        37,775        37,553   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,521,482      $ 2,544,084      $ 2,443,617   
  

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY       

Accounts payable and bank overdraft

   $ 248,072      $ 199,177      $ 189,959   

Accrued payroll, bonus and employee benefits

     140,607        158,079        123,557   

Accrued occupancy expenses and deferred rents

     71,543        68,584        65,704   

Current maturities of capital lease obligations

     58,152        54,219        49,362   

Other current liabilities

     188,978        201,247        142,081   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     707,352        681,306        570,663   

Capital lease obligations

     482,099        505,273        514,724   

Deferred rents

     77,992        81,403        83,675   

Other noncurrent liabilities

     117,272        122,273        118,620   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     1,384,715        1,390,255        1,287,682   
  

 

 

   

 

 

   

 

 

 

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, 166,607, 164,801 and 163,748 shares issued

     17        16        16   

Additional paid-in capital

     1,377,678        1,312,996        1,268,297   

Retained earnings

     1,647,088        1,507,054        1,379,937   

Accumulated other comprehensive income

     5,322        5,490        7,964   

Less: Treasury stock, at cost, 58,464, 54,686 and 51,003 shares

     (1,893,338     (1,671,727     (1,500,279
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     1,136,767        1,153,829        1,155,935   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,521,482      $ 2,544,084      $ 2,443,617   
  

 

 

   

 

 

   

 

 

 

 

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

 

4


Table of Contents

PetSmart, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

(In thousands, except per share data)

(Unaudited)

 

     For the Thirteen Weeks Ended     For the Twenty-Six Weeks Ended  
     July 29, 2012     July 31, 2011     July 29, 2012     July 31, 2011  

Merchandise sales

   $ 1,419,383      $ 1,300,473      $ 2,858,942      $ 2,614,822   

Services sales

     190,867        177,945        371,881        345,041   

Other revenue

     9,417        9,135        18,737        18,056   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

     1,619,667        1,487,553        3,249,560        2,977,919   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of merchandise sales

     986,885        916,736        1,981,393        1,836,212   

Cost of services sales

     134,550        124,698        263,241        245,252   

Cost of other revenue

     9,417        9,135        18,737        18,056   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

     1,130,852        1,050,569        2,263,371        2,099,520   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     488,815        436,984        986,189        878,399   

Operating, general and administrative expenses

     352,755        326,708        695,778        646,440   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     136,060        110,276        290,411        231,959   

Interest expense, net

     (13,550     (14,255     (27,679     (28,702
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense and equity in income from Banfield

     122,510        96,021        262,732        203,257   

Income tax expense

     (48,333     (37,624     (96,505     (76,530

Equity in income from Banfield

     4,343        2,783        6,976        5,358   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     78,520        61,180        173,203        132,085   

Other comprehensive income, net of income tax:

        

Foreign currency translation adjustments

     (1,384     (194     (165     2,572   

Other

     —          5        (3     13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 77,136      $ 60,991      $ 173,035      $ 134,670   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share:

        

Basic

   $ 0.73      $ 0.54      $ 1.59      $ 1.17   

Diluted

   $ 0.71      $ 0.54      $ 1.57      $ 1.15   

Weighted average shares outstanding:

        

Basic

     108,260        112,396        108,595        112,972   

Diluted

     109,934        114,341        110,507        115,039   

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

 

5


Table of Contents

PetSmart, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     For the Twenty-Six Weeks Ended  
     July 29, 2012     July 31, 2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 173,203      $ 132,085   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     119,777        119,595   

Loss on disposal of property and equipment

     3,342        4,659   

Stock-based compensation expense

     14,628        13,627   

Deferred income taxes

     9,302        2,373   

Equity in income from Banfield

     (6,976     (5,358

Dividend received from Banfield

     13,860        15,960   

Excess tax benefits from stock-based compensation

     (13,892     (6,977

Non-cash interest expense

     478        363   

Changes in assets and liabilities:

    

Merchandise inventories

     (46,967     (21,650

Other assets

     (64,768     (46,244

Accounts payable

     44,926        8,175   

Accrued payroll, bonus and employee benefits

     (17,458     (15,941

Other liabilities

     23,916        4,579   
  

 

 

   

 

 

 

Net cash provided by operating activities

     253,371        205,246   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of investments

     (4,027     (15,661

Proceeds from maturities of investments

     11,915        3,240   

Proceeds from sales of investments

     1,059        838   

Increase in restricted cash

     (1,727     —     

Cash paid for property and equipment

     (71,011     (51,186

Proceeds from sales of property and equipment

     1,334        212   
  

 

 

   

 

 

 

Net cash used in investing activities

     (62,457     (62,557
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net proceeds from common stock issued under stock incentive plans

     37,288        30,009   

Minimum statutory withholding requirements

     (22,466     (6,474

Cash paid for treasury stock

     (221,611     (165,382

Payments of capital lease obligations

     (32,103     (26,947

Increase in bank overdraft

     3,978        12,738   

Excess tax benefits from stock-based compensation

     13,892        6,977   

Cash dividends paid to stockholders

     (30,590     (28,611
  

 

 

   

 

 

 

Net cash used in financing activities

     (251,612     (177,690
  

 

 

   

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

     (183     2,232   
  

 

 

   

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

     (60,881     (32,769

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     342,892        291,949   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 282,011      $ 259,180   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Interest paid

   $ 27,790      $ 29,103   

Income taxes paid, net of refunds

   $ 123,508      $ 100,201   

Assets acquired using capital lease obligations

   $ 12,468      $ 21,028   

Accruals and accounts payable for capital expenditures

   $ 31,589      $ 18,368   

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

 

6


Table of Contents

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 July 29, 2012, we operated 1,249 retail stores and had full-service veterinary hospitals in 809 of our stores. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 802 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 and twenty-six weeks ended July 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.

Activities related to foreign currency adjustments were as follows (in thousands):

 

     Thirteen Weeks Ended     Twenty-Six Weeks Ended  
     July 29, 2012     July 31, 2011     July 29, 2012     July 31, 2011  

Deferred tax (benefit) expense on translation adjustments

   $ (886   $ (129   $ (106   $ 1,652   

Transaction loss (gain)

     99        416        42        (314

The change in the carrying value of goodwill was due to the impact of foreign currency translation adjustments during the thirteen and twenty-six weeks ended July 29, 2012, and July 31, 2011.

Note 3 — Investments

Short-term Investments

At July 29, 2012, January 29, 2012, and July 31, 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 July 29, 2012, January 29, 2012, and July 31, 2011. The amortized cost basis at July 29, 2012, January 29, 2012, and July 31, 2011, was $16.6 million, $20.1 million and $11.7 million, respectively. Unrealized holding gains and losses are included in other comprehensive income in the Condensed Consolidated Statements of Income and Comprehensive Income.

 

7


Table of Contents

Investments in Negotiable Certificates of Deposit

At July 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):

 

     July 29, 2012      January 29, 2012      July 31, 2011  

Prepaid expenses and other current assets

   $ 8,487       $ 13,068       $ 5,484   

Noncurrent assets

     975         2,110         3,821   

The aggregate fair value of our investments in NCDs was $9.5 million, $15.2 million and $9.3 million at July 29, 2012, January 29, 2012, and July 31, 2011, respectively. The fair value is determined using pricing models which use inputs based on observable market inputs (Level 2). The inputs of the pricing models are issuer spreads and reported trades. Unrecognized holding gains for the thirteen and twenty-six weeks ended July 29, 2012, and July 31, 2011, were immaterial.

Equity Investment in Banfield

We have an investment in Banfield which is accounted for using the equity method of accounting. As of July 29, 2012, January 29, 2012, and July 31, 2011, 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):

 

     July 29, 2012      January 29, 2012      July 31, 2011  

Current assets

   $ 381,683       $ 372,753       $ 340,116   

Noncurrent assets

     143,086         127,750         128,942   

Current liabilities

     324,189         329,491         332,841   

Noncurrent liabilities

     5,888         16,642         11,257   

 

     Thirteen Weeks Ended      Twenty-Six Weeks Ended  
     July 29, 2012      July 31, 2011      July 29, 2012      July 31, 2011  

Net sales

   $ 211,775       $ 176,428       $ 406,053       $ 341,286   

Income from operations

     36,545         23,532         57,866         44,919   

Net income

     20,683         13,250         33,226         25,512   

We recognized license fees and reimbursements for specific operating expenses from Banfield of $9.4 million and $9.1 million during the thirteen weeks ended July 29, 2012, and July 31, 2011, respectively, and $18.7 million and $18.1 million during the twenty-six weeks ended July 29, 2012, and July 31, 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 $3.4 million, $3.1 million and $3.1 million at July 29, 2012, January 29, 2012, and July 31, 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.

Note 4 — Reserve for Closed Stores

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

 

     July 29, 2012     January 29, 2012     July 31, 2011  

Total remaining gross occupancy costs

   $ 23,381      $ 29,974      $ 30,297   

Less:

      

Expected sublease income

     (14,719     (18,520     (18,574

 

8


Table of Contents

Interest costs

       (876      (1,447      (1,549
    

 

 

    

 

 

    

 

 

 

Reserve for closed stores

     $       7,786       $           10,007       $     10,174   
    

 

 

    

 

 

    

 

 

 

Current portion, included in other current liabilities

       3,003         2,756         2,972   

Noncurrent portion, included in other noncurrent liabilities

       4,783         7,251         7,202   
    

 

 

    

 

 

    

 

 

 

Reserve for closed stores

     $ 7,786       $ 10,007       $ 10,174   
    

 

 

    

 

 

    

 

 

 

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

 

     Thirteen Weeks Ended     Twenty-Six Weeks Ended  
     July 29, 2012     July 31, 2011     July 29, 2012     July 31, 2011  

Opening balance

   $ 9,892      $ 11,315      $ 10,007      $ 9,764   

Provision for new store closures

     642        —          2,165        —     

Lease terminations

     (584     —          (584     —     

Changes in sublease assumptions

     146        106        (169     2,636   

Other

     90        (29     170        169   
  

 

 

   

 

 

   

 

 

   

 

 

 

Charges, net

     294        77        1,582        2,805   

Payments

     (2,400     (1,218     (3,803     (2,395
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 7,786      $ 10,174      $ 7,786      $ 10,174   
  

 

 

   

 

 

   

 

 

   

 

 

 

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):

 

     Thirteen Weeks Ended      Twenty-Six Weeks Ended  
     July 29, 2012      July 31, 2011      July 29, 2012      July 31, 2011  

Basic

     108,260         112,396         108,595         112,972   

Dilutive stock-based compensation awards

     1,674         1,945         1,912         2,067   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     109,934         114,341         110,507         115,039   
  

 

 

    

 

 

    

 

 

    

 

 

 

Certain stock-based compensation awards representing 0.6 million and 2.7 million shares of common stock in the thirteen weeks ended July 29, 2012, and July 31, 2011, respectively, and 0.5 million and 2.3 million shares of common stock in the twenty-six weeks ended July 29, 2012, and July 31, 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 July 31, 2011, we purchased 1.4 million shares of our common stock for $63.0 million under the $400.0 million program. During the twenty-six weeks ended July 31, 2011, we purchased 3.9 million shares of common stock for $165.4 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 July 29, 2012, we purchased 0.7 million shares of our common stock for $46.7 million under the $450.0 million program. During the twenty-six weeks ended July 29, 2012, we purchased 3.8 million shares of our common stock for $221.6 million, under the $450.0 million program. Since the inception of the share purchase authorization in June 2011, we have purchased 7.5 million shares of our common stock for $393.1 million. As of July 29, 2012, $56.9 million remained available under the $450.0 million program.

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. This new share purchase authorization commenced on July 30, 2012, and is in addition to the unused amount remaining under the $450.0 million program.

 

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Dividends

During the twenty-six weeks ended July 29, 2012, the Board of Directors declared the following dividends:

 

Date Declared

   Dividend Amount
per Share
     Stockholders of
Record Date
     Payment Date  

March 14, 2012

   $ 0.14         April 27, 2012         May 11, 2012   

June 13, 2012

   $ 0.165         July 27, 2012         August 10, 2012   

Note 7 — Stock-based Compensation

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

 

     Thirteen Weeks Ended      Twenty-Six Weeks Ended  
     July 29, 2012      July 31, 2011      July 29, 2012      July 31, 2011  

Stock options expense

   $ 2,527       $ 2,788       $ 5,343       $ 5,717   

Restricted stock expense

     1,230         1,477         2,425         2,594   

Performance share unit expense

     3,556         3,176         6,860         5,316   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock-based compensation expense – equity awards

     7,313         7,441         14,628         13,627   

Management equity unit expense

     3,338         2,113         7,331         4,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 10,651       $ 9,554       $ 21,959       $ 17,652   
  

 

 

    

 

 

    

 

 

    

 

 

 

Tax benefit

   $ 3,987       $ 3,436       $ 8,231       $ 6,109   
  

 

 

    

 

 

    

 

 

    

 

 

 

At July 29, 2012, the total unrecognized stock-based compensation expense for equity awards, net of estimated forfeitures, was $52.1 million and is expected to be recognized over a weighted average period of 2.4 years. At July 29, 2012, the total unrecognized stock-based compensation expense for liability awards, net of estimated forfeitures, was $8.5 million and is expected to be recognized over a weighted average period of 1.4 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 July 29, 2012, we had no borrowings and $24.4 million in stand-by letter of credit issuances under our Revolving Credit Facility. As of January 29, 2012, and July 31, 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.

On March 23, 2012, 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 July 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 July 31, 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 July 31, 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 July 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 July 29, 2012, we had obligations to purchase $13.5 million of advertising through the remainder of 2012.

Product Purchase Commitments

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

Lease Commitment for Distribution Center

During the thirteen weeks ended July 29, 2012, we entered into a build-to-suit lease for a new distribution center in Bethel, Pennsylvania. The commitment for the initial fifteen-year lease term is $66.9 million. We do not have the right to control the use of the property under the lease as of July 29, 2012, because we have not taken physical possession of the property.

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.

In May 2012, we were named as a defendant in Moore, et al. v. PetSmart, Inc., et. al., a lawsuit originally filed in California Superior Court for the County of Alameda. On July 9, 2012, PetSmart removed the case to the U.S. District Court for the Northern District of California, San Jose Division. The complaint brings both individual and class action claims, first alleging that we failed to engage in the interactive process and/or failed to accommodate the disabilities of four current and former named associates. The complaint also alleges on behalf of all current and former hourly store associates that we 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. The case is in its early stages and we are thus unable to reasonably estimate the potential monetary exposure associated with the lawsuit. We do not believe that the claims alleged in the lawsuit have merit and do not believe class treatment is appropriate. As a result, we intend to oppose any attempt to certify a class in this case, and should the case be certified, we will vigorously defend on the merits. 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:

 

 

 

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.

 

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We face various risks as an e-commerce retailer.

 

 

 

Our business could be harmed if we were unable to effectively manage our cash flow and raise any needed additional capital on acceptable terms.

 

 

 

Failure to successfully integrate any business we acquire could have an adverse impact on our financial results.

 

 

 

Failure to protect our intellectual property could have a negative impact on our operating results.

 

 

 

A determination that we are in violation of any contractual obligations or government regulations could result in a disruption to our operations and could impact our financial results.

 

 

 

Failure of our internal controls over financial reporting could harm our business and financial results.

 

 

 

Changes in laws, accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.

 

 

 

An unfavorable determination by tax regulators may cause our provision for income and other taxes to be inadequate and may result in a material impact to our financial results.

 

 

 

Failure to obtain commercial insurance at acceptable prices or failure to adequately reserve for self-insured exposures might have a negative impact on our business.

 

 

 

Pending legislation, weather, catastrophic events, disease, or other factors, could disrupt our operations, supply chain and the supply of small pets and products we sell, which could harm our reputation and decrease sales.

 

 

 

Fluctuations in the stock market, as well as general economic and market conditions, may impact our operations, sales, financial results and market price of our common stock.

 

 

 

Volatility and disruption to the global capital and credit markets may adversely affect our ability to access credit and the financial soundness of our suppliers.

 

 

 

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 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 July 29, 2012, we operated 1,249 stores, and we anticipate opening 30 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 11,000 distinct items in our stores and 8,000 additional items on our website, 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 July 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 July 29, 2012, full-service veterinary hospitals were in 809 of our stores. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 802 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 CareSM of pets, including pet services and proprietary brands, which we think 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 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 31.5% to $0.71 on net income of $78.5 million, for the thirteen weeks ended July 29, 2012, compared to diluted earnings per common share of $0.54 on net income of $61.2 million for the thirteen weeks ended July 31, 2011. Diluted earnings per common share were $1.57 and $1.15 for the twenty-six weeks ended July 29, 2012, and July 31, 2011, respectively.

 

 

 

Net sales increased 8.9% to $1.6 billion for the thirteen weeks ended July 29, 2012, compared to $1.5 billion for the thirteen weeks ended July 31, 2011. The increase in net sales was partially impacted by $4.1 million in unfavorable foreign currency fluctuations for the thirteen weeks ended July 29, 2012. Net sales increased 9.1% to $3.2 billion for the twenty-six weeks ended July 29, 2012, compared to $3.0 billion for the twenty-six weeks ended July 31, 2011. The increase in net sales was partially impacted by $5.9 million in unfavorable foreign currency fluctuations for the twenty-six weeks ended July 29, 2012.

 

 

 

Comparable store sales, or sales in stores open at least one year, increased 7.0% and 7.2% for the thirteen and twenty-six weeks ended July 29, 2012.

 

 

 

Services sales increased 7.3% to $190.9 million for the thirteen weeks ended July 29, 2012, compared to $177.9 million for the thirteen weeks ended July 31, 2011. Services sales increased 7.8% to $371.9 million for the twenty-six weeks ended July 29, 2012, compared to $345.0 million for the twenty-six weeks ended July 31, 2011.

 

 

 

As of July 29, 2012, we had $282.0 million in cash and cash equivalents and $71.9 million in restricted cash. We had no short-term debt, and did not borrow against our revolving credit facility during the twenty-six weeks ended July 29, 2012.

 

 

 

We purchased 0.7 million shares of our common stock for $46.7 million during the thirteen weeks ended July 29, 2012, and 3.8 million shares of our common stock for $221.6 million during the twenty-six weeks ended July 29, 2012.

 

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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 January 29, 2012. We have made no significant change in our critical accounting policies since January 29, 2012.

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     Twenty-Six Weeks Ended  
     July 29, 2012     July 31, 2011     July 29, 2012     July 31, 2011  

Net sales

     100.0     100.0     100.0     100.0

Total cost of sales

     69.8        70.6        69.7        70.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     30.2        29.4        30.3        29.5   

Operating, general and administrative expenses

     21.8        22.0        21.4        21.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     8.4        7.4        8.9        7.8   

Interest expense, net

     (0.8     (1.0     (0.9     (1.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense and equity in income from Banfield

     7.6        6.5        8.1        6.8   

Income tax expense

     (3.0     (2.5     (3.0     (2.6

Equity in income from Banfield

     0.3        0.2        0.2        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     4.8     4.1     5.3     4.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Thirteen Weeks Ended July 29, 2012, Compared to the Thirteen Weeks Ended July 31, 2011

Net Sales

Net sales increased 8.9% to $1.6 billion for the thirteen weeks ended July 29, 2012, compared to $1.5 billion for the thirteen weeks ended July 31, 2011. The increase in net sales was partially impacted by $4.1 million in unfavorable foreign currency fluctuations for the thirteen weeks ended July 29, 2012. Approximately 80% of the sales increase is due to a 7.0% increase in comparable store sales for the thirteen weeks ended July 29, 2012, and 20% of the sales increase is due to the addition of 52 net new stores and 9 net new PetsHotels since July 31, 2011.

Comparable store sales growth was driven by an increase in comparable transactions and average sales per comparable transaction due to the impact of performance in consumables, hardgoods and live goods, as well as services. Comparable transactions were 2.9% for the thirteen weeks ended July 29, 2012, and 2.0% for the thirteen weeks ended July 31, 2011.

During 2012, we have implemented several initiatives to increase traffic and continue to improve average sales per transaction. Super premium channel exclusive foods continue to be our fastest growing category within consumables. We expanded the space in this category with a consumables reset during the thirteen weeks ended April 29, 2012, adding innovative new formulations and expanded grain-free and limited ingredient assortments in dog and cat. In hardgoods, we refreshed and rebranded the dog toy aisle during the thirteen weeks ended July 29, 2012, with the new PetSmart Toy Chest look and feel. Also during the thirteen weeks ended July 29, 2012, we reset the aquatics and small animal categories to support the growing trends by adding hundreds of new items and improving the category adjacencies and flow. We also added solutions-based signage designed to inspire and educate in order to drive continued momentum in this category.

Services sales, which include grooming, training, boarding and day camp, increased 7.3% to $190.9 million for the thirteen weeks ended July 29, 2012, compared to $177.9 million for the thirteen weeks ended July 31, 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 July 31, 2011.

Other revenue included in net sales during the thirteen weeks ended July 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 $9.4 million, compared to 0.6% of net sales, or $9.1 million, for the thirteen weeks ended July 31, 2011.

 

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Gross Profit

Gross profit increased 80 basis points to 30.2% of net sales for the thirteen weeks ended July 29, 2012, from 29.4% for the thirteen weeks ended July 31, 2011.

Overall merchandise margin increased 5 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 decreased 10 basis points due to the shift in mix from bath/brush to full service grooming. Store occupancy and supply chain costs included in margin provided 70 and 15 basis points of leverage, respectively.

Operating, General and Administrative Expenses

Operating, general and administrative expenses decreased to 21.8% of net sales for the thirteen weeks ended July 29, 2012, compared to 22.0% of net sales for the thirteen weeks ended July 31, 2011. In addition to leverage provided by increased sales, the decrease is also due to lower depreciation, credit card merchant fees and benefit costs, offset by an increase in advertising.

Interest Expense, net

Interest expense, which is primarily related to capital lease obligations, was $13.9 million during the thirteen weeks ended July 29, 2012, compared to $14.5 million for the thirteen weeks ended July 31, 2011. The decrease in interest expense was due to a decrease in capital lease obligations. Included in interest expense, net was interest income of $0.3 million and $0.2 million for the thirteen weeks ended July 29, 2012, and July 31, 2011, respectively.

Income Tax Expense

For the thirteen weeks ended July 29, 2012, the $48.3 million income tax expense represents an effective tax rate of 39.5% compared with the thirteen weeks ended July 31, 2011, when we had income tax expense of $37.6 million, which represented an effective tax rate of 39.2%. The increase in the effective tax rate was primarily due to an increase in equity in income from Banfield. 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 $4.3 million and $2.8 million for the thirteen weeks ended July 29, 2012, and July 31, 2011, respectively, based on our 21.0% ownership in Banfield.

Twenty-Six Weeks Ended July 29, 2012, Compared to the Twenty-Six Weeks Ended July 31, 2011

Net Sales

Net sales increased 9.1% to $3.2 billion for the twenty-six weeks ended July 29, 2012, compared to $3.0 billion for the twenty-six weeks ended July 31, 2011. The increase in net sales was partially impacted by $5.9 million in unfavorable foreign currency fluctuations for the twenty-six weeks ended July 29, 2012. Approximately 80% of the sales increase is due to a 7.2% increase in comparable store sales for the twenty-six weeks ended July 29, 2012, and 20% of the sales increase is due to the addition of 52 net new stores and 9 net new PetsHotels since July 31, 2011.

Comparable store sales growth was driven by an increase in comparable transactions and average sales per comparable transaction due to the impact of performance in consumables, hardgoods and live goods, as well as services. Comparable transactions were 3.1% for the twenty-six weeks ended July 29, 2012, and 2.4% for the twenty-six weeks ended July 31, 2011.

During 2012, we have implemented several initiatives to increase traffic and continue to improve average sales per transaction. Super premium channel exclusive foods continue to be our fastest growing category within consumables. We expanded the space in this category with a consumables reset during the thirteen weeks ended April 29, 2012, adding innovative new formulations and expanded grain-free and limited ingredient assortments in dog and cat. In hardgoods, we refreshed and rebranded the dog toy aisle during the thirteen weeks ended July 29, 2012, with the new PetSmart Toy Chest look and feel. Also during the thirteen weeks ended July 29, 2012, we reset the aquatics and small animal categories to support the growing trends by adding hundreds of new items and improving the category adjacencies and flow. We also added solutions-based signage designed to inspire and educate in order to drive continued momentum in this category.

 

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Services sales, which include grooming, training, boarding and day camp, increased 7.8% to $371.9 million for the twenty-six weeks ended July 29, 2012, compared to $345.0 million for the twenty-six weeks ended July 31, 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 July 31, 2011.

Other revenue included in net sales during the twenty-six weeks ended July 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 $18.7 million, compared to 0.6% of net sales, or $18.1 million, for the twenty-six weeks ended July 31, 2011.

Gross Profit

Gross profit increased 80 basis points to 30.3% of net sales for the twenty-six weeks ended July 29, 2012, from 29.5% for the twenty-six weeks ended July 31, 2011.

Overall merchandise margin increased 10 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 was flat. Store occupancy and supply chain costs included in margin provided 60 and 10 basis points of leverage, respectively.

Operating, General and Administrative Expenses

Operating, general and administrative expenses decreased to 21.4% of net sales for the twenty-six weeks ended July 29, 2012, compared to 21.7% of net sales for the twenty-six weeks ended July 31, 2011. In addition to leverage provided by increased sales, the decrease is also due to improved labor utilization, lower depreciation and credit card merchant fees, offset by an increase in advertising.

Interest Expense, net

Interest expense, which is primarily related to capital lease obligations, was $28.4 million during the twenty-six weeks ended July 29, 2012, compared to $29.3 million for the twenty-six weeks ended July 31, 2011. The decrease in interest expense was due to a decrease in capital lease obligations. Included in interest expense, net was interest income of $0.7 million and $0.6 million for the twenty-six weeks ended July 29, 2012, and July 31, 2011, respectively.

Income Tax Expense

For the twenty-six weeks ended July 29, 2012, the $96.5 million income tax expense represents an effective tax rate of 36.7% compared with the twenty-six weeks ended July 31, 2011, when we had income tax expense of $76.5 million, which represented an effective tax rate of 37.7%. 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 $7.0 million and $5.4 million for the twenty-six weeks ended July 29, 2012, and July 31, 2011, 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 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.

 

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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 $253.4 million for the twenty-six weeks ended July 29, 2012, compared to $205.2 million for the twenty-six weeks ended July 31, 2011. The primary differences between the twenty-six weeks ended July 29, 2012, and July 31, 2011, include increased net income of $41.1 million and the $47.7 million impact of the extension of vendor payment terms during the thirteen weeks ended April 29, 2012, offset by an increase in the growth of merchandise inventories of $25.3 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 $62.5 million for the twenty-six weeks ended July 29, 2012, compared to $62.6 million for the twenty-six weeks ended July 31, 2011. The primary difference between the twenty-six weeks ended July 29, 2012, and July 31, 2011, was an increase in cash paid for property and equipment of $19.8 million offset by a decrease in purchases of investments of $11.6 million and an increase in proceeds from maturities of investments of $8.7 million.

Net cash used in financing activities was $251.6 million for the twenty-six weeks ended July 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 twenty-six weeks ended July 31, 2011, was $177.7 million. The primary difference between the twenty-six weeks ended July 29, 2012, and the twenty-six weeks ended July 31, 2011, was an increase of $56.2 million in cash paid for treasury stock.

Operating Capital and Capital Expenditure Requirements

Substantially all our stores are leased facilities. We opened 25 new stores and closed 8 stores in the twenty-six weeks ended July 29, 2012. Generally, each new store requires capital expenditures of approximately $0.7 million for fixtures, equipment and leasehold improvements, approximately $0.3 million for inventory and approximately $0.1 million for preopening costs. We expect total capital spending to be $130 million to $140 million for 2012, based on our plan to open 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):

 

     Twenty-Six Weeks Ended  
     July 29, 2012      July 31, 2011  

Capital Expenditures:

     

New stores

   $ 15,633       $ 13,861   

Store-related projects(1)

     34,328         15,421   

PetsHotel(2)

     148         1,579   

Information technology

     16,245         17,513   

Supply chain

     4,420         2,588   

Other

     237         224   
  

 

 

    

 

 

 

Total capital expenditures

   $ 71,011       $ 51,186   
  

 

 

    

 

 

 

 

(1)

Includes store remodels, grooming salon expansion, equipment replacement, relocations, and various merchandising projects.

(2)

For new and existing stores.

Commitments

As of July 29, 2012, we had obligations to purchase $13.5 million of advertising through the remainder of 2012.

 

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

During the thirteen weeks ended July 29, 2012, we entered into a build-to-suit lease for a new distribution center in Bethel, Pennsylvania. The commitment for the initial fifteen-year lease term is $66.9 million. Lease payments are expected to commence in 2014.

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 July 29, 2012, we had no borrowings and $24.4 million in stand-by letter of credit issuances under our Revolving Credit Facility. As of January 29, 2012, and July 31, 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.

On March 23, 2012, 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 July 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 July 31, 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 July 31, 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 July 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 July 31, 2011, we purchased 1.4 million shares of our common stock for $63.0 million under the $400.0 million program. During the twenty-six weeks ended July 31, 2011, we purchased 3.9 million shares of common stock for $165.4 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 July 29, 2012, we purchased 0.7 million shares of our common stock for $46.7 million under the $450.0 million program. During

 

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the twenty-six weeks ended July 29, 2012, we purchased 3.8 million shares of our common stock for $221.6 million, under the $450.0 million program. Since the inception of the share purchase authorization in June 2011, we have purchased 7.5 million shares of our common stock for $393.1 million. As of July 29, 2012, $56.9 million remained available under the $450.0 million program.

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. This new share purchase authorization commenced on July 30, 2012, and is in addition to the unused amount remaining under the $450.0 million program.

Dividends

During the twenty-six weeks ended July 29, 2012, the Board of Directors declared the following dividends:

 

Date Declared

   Dividend Amount
per Share
     Stockholders of
Record Date
   Payment Date

March 14, 2012

   $ 0.14       April 27, 2012    May 11, 2012

June 13, 2012

   $ 0.165       July 27, 2012    August 10, 2012

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 802 of our stores. Our investment consists of common and preferred stock. As of July 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 $4.3 million and $2.8 million for the thirteen weeks ended July 29, 2012, and July 31, 2011, respectively, and $7.0 million and $5.4 million for the twenty-six weeks ended July 29, 2012, and July 31, 2011, respectively. During the twenty-six weeks ended July 29, 2012, and July 31, 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 $9.4 million and $9.1 million during the thirteen weeks ended July 29, 2012, and July 31, 2011, respectively, and $18.7 million and $18.1 million during the twenty-six weeks ended July 29, 2012, and July 31, 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 $3.4 million, $3.1 million and $3.1 million at July 29, 2012, January 29, 2012, and July 31, 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.

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. 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.

 

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Table of Contents

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.” Considerable uncertainty still exists regarding the magnitude of the impact on our condensed consolidated financial statements. The extent of the impact will not be known until more regulatory information is provided by the government and we make final decisions regarding the options available to manage costs for benefit programs impacted by the Acts. We will continue to assess the impact of the Acts on our health care plans.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

As of July 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 July 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 July 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 July 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.

 

21


Table of Contents

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.

In May 2012, we were named as a defendant in Moore, et al. v. PetSmart, Inc., et. al., a lawsuit originally filed in California Superior Court for the County of Alameda. On July 9, 2012, PetSmart removed the case to the U.S. District Court for the Northern District of California, San Jose Division. The Complaint brings both individual and class action claims, first alleging that we failed to engage in the interactive process and/or failed to accommodate the disabilities of four current and former named associates. The complaint also alleges on behalf of all current and former hourly store associates that we 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. The case is in its early stages and we are thus unable to reasonably estimate the potential monetary exposure associated with the lawsuit. We do not believe that the claims alleged in the lawsuit have merit and do not believe class treatment is appropriate. As a result, we intend to oppose any attempt to certify a class in this case, and should the case be certified, we will vigorously defend on the merits. 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.

 

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Table of Contents

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 July 29, 2012:

 

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)
 

April 30, 2012 to May 27, 2012

     50,000       $ 63.30         50,000       $ 100,479,000   

May 28, 2012 to July 1, 2012

     679,942       $ 64.03         679,942       $ 56,941,000   

July 2, 2012 to July 29, 2012

     —           —           —         $ 56,941,000   
  

 

 

       

 

 

    

Thirteen Weeks Ended July 29, 2012

     729,942       $ 63.98         729,942       $ 56,941,000   
  

 

 

       

 

 

    

 

(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. This new share purchase authorization commenced on July 30, 2012, and is in addition to the unused amount remaining under the $450.0 million program.

 

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Table of Contents

Item 6. Exhibits

(a) Exhibits

 

Exhibit 10.1(1)

  

PetSmart, Inc. 2012 Employee Stock Purchase Plan.

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.

**

In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

(1) 

Incorporated by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A, filed with the Securities and Exchange Commission on May 2, 2012.

 

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Table of Contents

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/ Lawrence P. Molloy

Date: August 23, 2012

     

Lawrence P. Molloy

     

Executive Vice President and Chief Financial Officer

     

(Principal Financial Officer and Principal Accounting Officer)

 

25

XNAS:PETM PetSmart Inc Quarterly Report 10-Q Filling

PetSmart Inc XNAS:PETM Stock - Get Quarterly Report SEC Filing of PetSmart Inc XNAS:PETM stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:PETM Quarterly Report 10-Q Filing - 7/29/2012
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