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PETSMART INC filed this Form 10-K on 03/28/2013
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PETM - 2013.02.03 - 10K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
Form 10-K
_______________
(Mark One)
 
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Fiscal Year Ended
February 3, 2013
 
 
 
 

or
 
 
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from         to          
 
Commission file number 0-21888
_______________
PetSmart, Inc.
(Exact name of registrant as specified in its charter)
_______________
Delaware
94-3024325
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
19601 N. 27th Avenue
85027
Phoenix, Arizona
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code:
(623) 580-6100
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $.0001 par value
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act:
None
_______________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ¨    No  x 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
                           (Do not check if a smaller reporting company)

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

The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing sale price of the registrant's common stock on July 29, 2012, the last business day of the registrant's most recently completed second fiscal quarter, as reported on the NASDAQ Global Select Market was approximately $7,319,012,000. This calculation excludes approximately 810,000 shares held by directors and executive officers of the registrant. This calculation does not exclude shares held by such organizations whose ownership exceeds 5% of the registrant's outstanding common stock as of December 31, 2012, that have represented to the registrant that they are registered investment advisers or investment companies registered under Section 8 of the Investment Company Act of 1940.

The number of shares of the registrant's common stock outstanding as of March 14, 2013, was 102,663,315.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2013 Annual Meeting of Stockholders to be held on June 14, 2013, to be filed on or about May 3, 2013, have been incorporated by reference into Part III of this Annual Report on Form 10-K.




TABLE OF CONTENTS

Item
 
Page
 
PART I
 
1.
1A.
1B.
2.
3.
4.
 
PART II
 
5.
6.
7.
7A.
8.
9.
9A.
9B.
 
PART III
 
10.
11.
12.
13.
14.
 
PART IV
 
15.


 




PART I

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on management's current expectations and beliefs about future events or future financial performance. We have attempted to identify forward-looking statements by words such as: “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” or other comparable terminology. These statements are not guarantees of future performance or results, and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Item 1A. Risk Factors” contained in Part I of this Annual Report, that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe the expectations and beliefs reflected in the forward-looking statements are reasonable, such statements speak only as of the date this Annual Report on Form 10-K is filed, and we disclaim any intent or obligation to update any of the forward-looking statements after such date, whether as a result of new information, actual results, future events or otherwise, unless required by law.

Our fiscal year consists of the 52 or 53 weeks ending on the Sunday nearest January 31 of the following year. The 2012 fiscal year ended on February 3, 2013, and was a 53-week year. The 2011 and 2010 fiscal years were 52-week years. Unless otherwise specified, all references in this Annual Report on Form 10-K to years are to fiscal years.

Item 1.  Business
General
We were incorporated in Delaware in 1986, opened our first stores in 1987 and have become the leading specialty provider of products, services and solutions for the lifetime needs of pets. We have identified a large group of pet owners we call “pet parents,” who are passionately committed to their pets and consider their pets to be members of the family. Our strategy is to attract and keep these customers by becoming the preferred provider for the Total Lifetime CareSM of pets.

We opened 46 net new stores in 2012 and at the end of the year operated 1,278 retail stores in the United States, Puerto Rico and Canada. Square footage in 2012 increased 0.6 million to 27.8 million compared to 27.2 million in 2011. Our stores typically range in size from 12,000 to 27,500 square feet and carry a broad selection of high-quality pet products at everyday low prices. We offer approximately 11,000 distinct items in our stores and 10,000 additional items on our website, PetSmart.com, including nationally recognized brand names, as well as an extensive selection of proprietary brands across a range of product categories.

We complement our strong product assortment with a wide selection of pet services, including grooming, training, day camp for dogs and boarding. All our stores feature pet styling salons that provide high-quality grooming services and offer comprehensive pet training services. As of February 3, 2013, we offered pet boarding at 196 of our stores through our PetSmart PetsHotels, or “PetsHotels.”

As of February 3, 2013, there were full-service veterinary hospitals in 816 of our stores. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 809 of the hospitals under the registered trade name of “Banfield, The Pet Hospital.” The remaining 7 hospitals are operated by other third parties in Canada.

Our PetPerks program enables us to understand the needs of our customers and target offers directly to them. We also reach customers through PetSmart.com, our pet e-commerce and community site, as well as selected social networking sites.

The Pet Industry
The pet industry serves a large and growing market. The American Pet Products Association, or “APPA,” estimated the calendar year 2012 market at approximately $52.9 billion, an increase of over 200% since calendar year 1994. Based on the 2011 - 2012 APPA National Pet Owners Survey, approximately 62% of households in the United States own a pet, which equates to nearly 73 million homes. In total, there are approximately 86 million cats and 78 million dogs owned as pets in the United States.

The APPA divides the pet industry into the following categories: food and treats, supplies and medicines, veterinary care, pet services (such as grooming and boarding) and live animal purchases. The APPA estimates that food and treats for dogs and cats are the largest volume categories of pet-related products and in calendar year 2012, accounted for an estimated $20.5 billion in sales, or 38.7% of the market.

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Pet supplies and medicine sales account for 23.8%, or $12.6 billion, of the market. These sales include dog and cat toys, collars and leashes, cages and habitats, books, vitamins and supplements, shampoos, flea and tick control and aquatic supplies. Veterinary care, pet services and live animal purchases represent 25.7%, 7.8% and 4.0%, respectively, of the market.

Competition
Based on total net sales, we are North America's leading specialty retailer of products, services and solutions for the lifetime needs of pets. The pet products retail industry is highly competitive and can be organized into seven different categories:

Warehouse clubs and other mass merchandisers;
Grocery stores;
Specialty pet supply stores;
Veterinarians;
General retail merchandisers;
Farm and feed stores; and
E-commerce and catalog retailers.

We believe the principal competitive factors influencing our business are product selection and quality, customer service, convenience of store locations, store environment, price and availability of other services. Many premium pet food brands, which offer higher levels of nutrition than non-premium brands, are not currently sold through grocery stores, warehouse clubs and other mass and general retail merchandisers due to manufacturers' restrictions, but are sold primarily through specialty pet supply stores, veterinarians and farm and feed stores. In addition, our unique relationship with Banfield allows us to sell therapeutic pet foods at our stores with Banfield hospitals. We believe our pet services business provides a competitive advantage that cannot be easily duplicated. We compete effectively in our various markets; however, some of our grocery store, warehouse club and other mass and general retail merchandise competitors are much larger in terms of overall sales volume and may have better access to capital or other competitive advantages.

Our Strategy
Our strategy is to be the preferred provider for the lifetime needs of pets. Our primary initiatives include:

Develop innovative products and services. We are focused on developing and strengthening our brand identity and enhancing the emotional connection pet parents make with their pets and with PetSmart. We remain committed to our promise of providing Total Lifetime CareSM for every pet, every parent, every time. We provide pet parents with information, knowledge, trust and product solutions, including both exclusive and private label offerings, that help their pets live long, healthy and happy lives. Our marketing and advertising efforts focus on emphasizing our unique offerings for customers and promoting our strong value proposition. Through extensive and on-going customer research, we are gaining valuable insights into the wants and needs of our customers and we are developing solutions and communication strategies to address them. Our PetPerks program, which is available in all our stores, plays a central role in this effort. We are also able to reach customers through various online communities and social networking sites. With increasingly greater capacity to customize offers relevant to our customers, we believe we are helping them build a stronger, more meaningful bond with their pets and greater loyalty to PetSmart. We continually seek opportunities to strengthen our merchandising capabilities allowing us to provide a differentiated product assortment, including pet specialty channel exclusive products and our proprietary brand offerings, to drive innovative solutions and value to our customers.

Based on net services sales, we are North America's leading specialty provider of pet services, which includes professional grooming, training, day camp for dogs and boarding. Full-service veterinary hospitals are available in 816 of our stores, through our partnership with Banfield and other third parties in Canada. Pet services are an integral part of our strategy, and we are focused on driving profitable growth in our services business. We believe services further differentiate us from our competitors, drive traffic and repeat visits to our stores, provide cross-selling opportunities, allow us to forge a strong relationship with our customers, increase transaction size and enhance operating margins.

Engaging with our customers in an authentic and personalized way. Our emphasis on the customer is designed to provide an unparalleled shopping experience every time a customer visits our stores. Using a detailed associate learning curriculum and role-playing techniques, we train store associates to identify customer needs and provide appropriate solutions. We measure our success

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in every store, and a portion of the annual incentive program for the store management team is linked to customer satisfaction. By providing pet parents with expertise and solutions, we believe we are strengthening our relationships with customers, building loyalty and enhancing our leading market position, thus differentiating ourselves from grocery and other mass merchandisers.

Our expansion strategy includes increasing our share in existing multi-store markets, penetrating new markets and achieving operating efficiencies and economies of scale in merchandising, distribution, information systems, procurement, marketing and store operations. We continually evaluate our store format to ensure we are meeting the needs and expectations of our customers, while providing a return on investment to our stockholders. A store format that emphasizes our highly differentiated products and pet services offerings, when combined with our other strategic initiatives, will typically contribute to higher comparable store sales growth (or sales in stores open at least one year), profitability and return on investment.

Driving consistent execution in our stores. Our commitment to operating excellence emphasizes retail basics like store cleanliness, short check-out lines, a strong in-stock position, an effective supply chain and outstanding care of the pets in our stores, which allows us to provide a consistently superior customer experience. This focus on operating excellence simplifies processes, makes our stores more efficient and easier to operate and allows associates to be more engaged and productive.

We believe these strategic initiatives will continue to generate comparable store sales and overall sales growth, allow us to focus on managing capital and leveraging costs and drive product margins to produce profitability and return on investment for our stockholders.

Our Stores
Typically, our stores are located at sites co-anchored by strong destination mass merchandisers and are in or near major regional shopping centers. We are engaged in an ongoing expansion program, opening new stores in both new and existing markets and relocating existing stores. Store activity was as follows:
 
Year Ended

February 3, 2013
 
January 29, 2012
 
January 30, 2011
 
(53 weeks)
 
(52 weeks)
 
(52 weeks)
Store count at beginning of year
1,232

 
1,187

 
1,149

New or relocated stores opened
60

 
53

 
46

Stores closed
(14
)
 
(8
)
 
(8
)
Store count at end of year
1,278

 
1,232

 
1,187


Distribution
Our distribution network and information systems are designed to optimize store inventory, drive efficiencies in store labor, facilitate a high in-stock position and promote high distribution center productivity. We operate two kinds of distribution centers: forward distribution centers and combination centers. Our forward distribution centers handle consumable products that require rapid replenishment, while our combination distribution centers handle both consumable and non-consumable products. We believe the combination distribution centers drive efficiencies in transportation costs and store labor. Our suppliers generally ship merchandise to our distribution centers, which receive and allocate merchandise to our stores. We contract the transportation of merchandise from our distribution centers to stores through third-party vendors.

Merchandise
Merchandise sales represented approximately 88.4%, 88.4% and 88.5% of our net sales in 2012, 2011 and 2010, respectively. Merchandise generally falls into three main categories:

Consumables. Consumables merchandise sales includes pet food, treats and litter. We emphasize super-premium, premium and therapeutic dog and cat foods, many of which are not available in grocery stores, warehouse clubs or other mass and general retail merchandisers, as well as our private label foods. We also offer quality national brands traditionally found in grocery stores, warehouse clubs or other mass and general retail merchandisers, and specialty pet supply stores. Consumables merchandise sales comprised 53.3%, 52.8% and 52.5% of our net sales in 2012, 2011 and 2010, respectively.

Hardgoods. Hardgoods merchandise sales includes pet supplies and other goods. Our broad assortment of pet supplies, including exclusive and private label products, includes collars, leashes, health care supplies, grooming and beauty aids, toys and apparel, as well as pet beds and carriers. We also offer a complete line of supplies for fish, birds, reptiles and

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small pets. These products include aquariums and habitats, as well as accessories, décor and filters. Hardgoods merchandise sales comprised 33.5%, 33.9% and 34.4% of our net sales in 2012, 2011 and 2010, respectively.

Pets. Our stores feature fresh-water fish, small birds, reptiles and small pets. Pets comprised 1.6%, 1.7% and 1.6% of our net sales in 2012, 2011 and 2010, respectively. We do not sell dogs or cats, but provide space in all stores for adoption and animal welfare organizations.

Pet Services
Pet services, which include grooming, training, day camp for dogs and boarding, represented 11.0%, 11.0% and 10.9% of our net sales in 2012, 2011 and 2010, respectively. We offer full-service, high quality grooming and training services in all our stores. We typically allocate approximately 900 square feet per store for grooming, including precision cuts, baths, nail trimming and grinding, and teeth brushing. Depending upon experience, our pet stylists are educated as part of a comprehensive program that teaches exceptional grooming skills using safe and gentle techniques. Pet training services range from puppy classes to advanced or private courses, led by our accredited pet training instructors who are passionate about pets.

PetsHotels provide boarding for dogs and cats, which includes 24-hour supervision by caregivers who are PetSmart trained to provide personalized pet care, temperature controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs. During 2012, our PetsHotels call center was implemented for all of our hotels allowing us to better serve our customers and improve operational efficiencies. As of February 3, 2013, we operated 196 PetsHotels.

Veterinary Services
The availability of comprehensive veterinary care in many of our stores further differentiates us, drives sales in our stores and reflects our overall commitment to pet care. Full-service veterinary hospitals in 816 of our stores offer routine examinations and vaccinations, dental care, a pharmacy and surgical procedures. As of February 3, 2013, Banfield operated 809 of the hospitals under the registered trade name of “Banfield, The Pet Hospital.” The remaining 7 hospitals are located in Canada and are operated by other third parties. See Note 4 in the Notes to the Consolidated Financial Statements for a discussion of our ownership interest in Banfield.

PetSmart Charities® and Adoptions
PetSmart Charities, Inc. and PetSmart Charities of Canada, Inc. ("PetSmart Charities") are independent, nonprofit organizations that save the lives of homeless pets. PetSmart Charities is a leader in pet adoptions and grant funding for animal welfare in North America. The organizations' vision is to find a lifelong, loving home for every pet. They do this through:

Finding homes for nearly 450,000 pets in 2012. PetSmart Charities connects pets with loving homes through their Adoption Centers located in every PetSmart store, as well as by sponsoring community adoption events.

Granting more than $28 million in 2012 to communities in the United States, Canada and Puerto Rico to reduce shelter intake and euthanasia.

Operating life-saving programs such as the Rescue Waggin'® dog transport and emergency relief for pets affected by natural and man-made disasters.

Government Regulation
We are subject to various federal, state, provincial and local laws and regulations governing, among other things: our relationships with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements; veterinary practices or the operation of veterinary hospitals in retail stores that may impact our ability to operate such veterinary hospitals in certain facilities; the transportation, handling and sale of small pets; the generation, handling, storage, transportation and disposal of waste and biohazardous materials; the manufacturing and distribution, import/export and sale of products; the handling, security, protection and use of customer and associate information; price and product labeling; and the licensing and certification of services.

We seek to structure our operations to comply with all federal, state, provincial and local laws and regulations of each jurisdiction in which we operate. Given varying and uncertain interpretations of these laws and regulations, and because laws and regulations are enforced by the courts and regulatory authorities with broad discretion, we can make no assurances we would be found to be in compliance in all jurisdictions at all times. We also could be subject to costs, including fines, penalties or sanctions and third-party claims as a result of violations of, or liabilities under, these laws and regulations.


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Intellectual Property
We believe our intellectual property has significant value and is an important component in our merchandising and marketing strategies. Some of our intellectual property includes numerous servicemarks and trademarks registered with the United States Patent and Trademark Office, or “USPTO,” including: PetSmart®, PetSmart.com®, PetSmart PetsHotel®, PetPerks®, and Where Pets Are Family®, as well as many others. We also have several servicemark and trademark applications that are pending with the USPTO and anticipate filing additional applications in the future. We also own numerous registered servicemarks, trademarks and pending applications in other countries, including Canada. We also own several trade names, domain names and copyrights for use in our business.

Employees
As of February 3, 2013, we employed approximately 52,000 associates, of which approximately 24,000 were employed full-time. We continue to invest in education and training for our full and part-time associates as part of our emphasis on customer service and providing pet care solutions. We are not subject to collective bargaining agreements and have not experienced work stoppages. We consider our relationship with our associates to be a positive one.

Financial Information by Business Segment and Geographic Data
We have identified two operating segments, Merchandise and Services. These operating segments have similar long-term economic characteristics, include sales to the same types of customers, have the same distribution method, and include sales similar in nature, therefore, they have been aggregated into one reportable segment.

Net sales in the United States and Puerto Rico were $6.4 billion, $5.8 billion and $5.4 billion for 2012, 2011 and 2010, respectively. Net sales in Canada, denominated in United States dollars, were $0.4 billion, $0.3 billion and $0.3 billion for 2012, 2011 and 2010, respectively. Substantially all our long-lived assets are located in the United States.

Available Information
We make available, free of charge through our investor relations internet website (www.petm.com), our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, including our XBRL instance documents, our current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission, or “SEC.”

The public may read and copy materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Management    
Our executive officers and their ages and positions on March 1, 2013, are as follows:
Name
 
Age
 
Position
Robert F. Moran
 
62
 
Chairman and Chief Executive Officer
David K. Lenhardt
 
43
 
President and Chief Operating Officer
Lawrence P. Molloy
 
51
 
Executive Vice President, Chief Financial Officer
Joseph D. O'Leary
 
54
 
Executive Vice President, Merchandising, Marketing, Supply Chain and Strategic Planning
John W. Alpaugh
 
47
 
Senior Vice President, Chief Marketing Officer
Donald E. Beaver
 
54
 
Senior Vice President, Chief Information Officer
Gene Eddie Burt II
 
47
 
Senior Vice President, Supply Chain
Paulette R. Dodson
 
49
 
Senior Vice President, General Counsel and Secretary
Erick M. Goldberg
 
50
 
Senior Vice President, Human Resources
Matthew R. McAdam
 
44
 
Senior Vice President, Merchandising
Jaye D. Perricone
 
54
 
Senior Vice President, Real Estate and Development
Bruce K. Thorn
 
45
 
Senior Vice President, Store Operations and Services
Melvin G. Tucker
 
48
 
Senior Vice President, Finance

Robert F. Moran was appointed Chairman effective January 30, 2012, and has been our Chief Executive Officer since June 2009. He joined PetSmart as President of North American Stores in July 1999 and in December 2001, he was appointed President

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and Chief Operating Officer. From 1998 to 1999, he was President of Toys 'R' Us, Ltd., Canada. Prior to 1991 and from 1993 to 1998, for a total of 20 years, he was with Sears, Roebuck and Company in a variety of financial and merchandising positions, including President and Chief Executive Officer of Sears de Mexico. He was also Chief Financial Officer and Executive Vice President of Galerias Preciados of Madrid, Spain from 1991 through 1993. Mr. Moran currently also serves on the boards of directors for Medical Management International, Inc., PetSmart Charities, USA Track & Field Foundation, and the Retail Industry Leaders Association. As we previously announced, Mr. Moran will resign as our Chief Executive Officer effective as of the close of our 2013 Annual Meeting of Stockholders, presently scheduled for June 14, 2013. Mr. Moran will remain with PetSmart as Chairman of the Board in an executive capacity.

David K. Lenhardt was appointed President and Chief Operating Officer effective January 30, 2012. He joined PetSmart as Senior Vice President of Services, Strategic Planning and Business Development in October 2000. He was appointed Senior Vice President, Store Operations and Services in February 2007 and in February 2009 was appointed Senior Vice President, Store Operations and Human Resources. In January 2011, he was appointed Executive Vice President, Store Operations, Human Resources and Information Systems. From 1996 to 2000, he was a manager with Bain & Company, Inc., where he led consulting teams for retail, technology and e-commerce clients. Prior to that, he worked in the corporate finance and Latin American groups of Merrill Lynch & Co., Inc.'s investment banking division. As we previously announced, Mr. Lenhardt will succeed Mr. Moran as our Chief Executive Officer effective as of the close of our 2013 Annual Meeting of Stockholders. In connection with this appointment, the PetSmart Board of Directors expects to elect Mr. Lenhardt to the Board effective as of the close of our 2013 Annual Meeting of Stockholders.

Lawrence P. Molloy joined PetSmart as Senior Vice President and Chief Financial Officer in September 2007 and was appointed Executive Vice President effective January 30, 2012. As the Executive Vice President, Chief Financial Officer, his duties include oversight of the finance, real estate and legal departments. Prior to joining PetSmart, he was employed by Circuit City Stores, Inc, a national consumer electronics retailer, from 2003 to 2007. While at Circuit City, he served as the Director of Financial Planning and Analysis from 2003 to 2004, the Vice President, Financial Planning and Analysis from 2004 to 2006 and from 2006 to 2007 was Chief Financial Officer of retail. Prior to Circuit City, he served in various leadership, planning and strategy roles for Capital One Financial Corporation; AGL Capital Investments, LLC; Deloitte & Touche Consulting Group; and the United States Navy. He served ten years in the Navy as a fighter pilot, later retiring from the Navy Reserve with a rank of Commander. In November 2012, Mr. Molloy announced that he will resign from his position in June 2013, but will remain with PetSmart as a special advisor through March 2014.

Joseph D. O'Leary was appointed Executive Vice President, Merchandising, Marketing, Supply Chain and Strategic Planning in January 2011. He joined PetSmart as Senior Vice President of Supply Chain in September 2006. From October 2008 to March 2010, he held the title of Senior Vice President, Merchandising and Supply Chain. From March 2010 to January 2011, he held the title of Senior Vice President, Merchandising. Prior to joining PetSmart, he was Chief Operating Officer for Interactive Health LLC, a manufacturer of robotic massage chairs. Prior to that, he served as Senior Vice President of Supply Chain Strategy and Global Logistics for The Gap, Inc. from 2003 to 2005, and Senior Vice President of Global Logistics from 2000 to 2003. Prior to 1999, he held positions at Mothercare plc, Coopers & Lybrand LLP and BP International. As we previously announced, Mr. O'Leary will succeed Mr. Lenhardt as our President and Chief Operating Officer effective as of the close of our 2013 Annual Meeting of Stockholders.

John W. Alpaugh was appointed Senior Vice President, Chief Marketing Officer in February 2010. He joined PetSmart in 1999 and has served in a number of leadership roles including Vice President, Marketing from February 2006 to April 2007, Vice President, Specialty Merchandising from April 2007 to March 2008, and from April 2008 to February 2010, Vice President of Strategic Planning and Business Development. Prior to joining PetSmart, he worked in Brand Management for Procter & Gamble Europe and in Financial Planning and Analysis for IBM.

Donald E. Beaver joined PetSmart as Senior Vice President and Chief Information Officer in May 2005. Prior to joining PetSmart, he was employed by H.E. Butt Grocery Company where he held the position of Senior Vice President and Chief Information Officer starting in 1999. Prior to that, he served 14 years at Allied Signal Aerospace, Inc. in various information systems leadership roles, the last being the CIO for the aftermarket support division.

Gene Eddie Burt II was appointed Senior Vice President, Supply Chain effective January 30, 2012. He joined PetSmart in April 2007 and served as the Vice President of Distribution until December 2009 when he was promoted to Vice President of Distribution and Transportation. Prior to joining PetSmart, he served as the Director for Domestic Distribution for The Home Depot, Inc. from October 2004 to April 2007. Prior to that, he served in various supply chain leadership roles with Target Corporation.

Paulette R. Dodson joined PetSmart in July 2012 as Senior Vice President, General Counsel and Secretary. Prior to joining PetSmart, she was employed by Sara Lee Corporation from January 2007 to July 2012. While at Sara Lee Corporation, she served

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as Chief Counsel, Sara Lee Food & Beverage from January 2007 to March 2008, Chief Counsel, North American Operations from March 2008 to December 2010, and as Senior Vice President, General Counsel and Corporate Secretary from March 2011 to July 2012, a position she held on an interim basis beginning December 2010. Prior to that, she served for over 14 years in various legal roles at Tribune Company.

Erick M. Goldberg was appointed Senior Vice President of Human Resources effective February 4, 2013. He joined PetSmart in June 2001 and served in various human resource leadership positions until his promotion to Vice President Field Human Resources in December 2009. Beginning August 2012 and until his appointment to his current role, he served as the Vice President of Human Resources for the Store Support Group and Distribution Centers. Prior to joining PetSmart, he served for 8 years at Distribution Architects International, Inc. in various leadership roles, the last being Director of Human Resources. He previously held human resource leadership positions with Management Technology America Ltd. and Triad Systems Corporation.

Matthew R. McAdam was appointed Senior Vice President, Merchandising effective January 30, 2012. He joined PetSmart in September 2008 as the Vice President of Merchandising, Hardgoods. Prior to joining PetSmart, he served as the Vice President of Merchandising Planning and Allocation for Kohl's Department Stores from June 2005 to September 2008. Previously, he held various merchandising roles at the Bon-Ton Stores, Inc. and The May Department Stores Company.

Jaye D. Perricone was appointed Senior Vice President, Real Estate and Development in December 2007, serving as Vice President, Real Estate during the year prior. She joined PetSmart in 1995, and served in a number of leadership roles including Regional Vice President from 1997 to 2000, Vice President of Services Operations from 2000 to 2001, Vice President of Customer Service and Store Operations from 2001 to 2004 and Vice President of Property Management and Store Design from 2004 to 2006. Prior to joining PetSmart, she held various leadership roles with Target Corporation, Pace Membership Warehouse, Inc. and Bizmart, Inc.

Bruce K. Thorn was appointed Senior Vice President, Store Operations and Services effective January 30, 2012. He joined PetSmart in 2007 as Vice President, Supply Chain Solutions, and served as Vice President, Supply Chain from 2008 until December 2009 when he was promoted to Senior Vice President, Supply Chain. From 2002 through 2007, he held leadership roles, including Chief Operating Officer from 2005 to 2007, for LESCO, Inc., prior to its merger with Deere & Company. He previously held leadership roles with The Gap, Inc., Cintas Corporation and the United States Army.

Melvin G. Tucker was appointed Senior Vice President, Finance effective January 30, 2012. He joined PetSmart as Vice President of Financial Planning and Analysis in December 2008. Prior to joining PetSmart, he served as Vice President of Financial Planning and Analysis at Circuit City Stores, Inc. from May 2005 to November 2008. Prior to Circuit City, he served in various finance leadership roles at The Home Depot, Inc. from April 1990 until April 2005.

Item 1A.  Risk Factors
In the normal course of business, our operations, financial condition and results of operations are routinely subjected to a variety of risks. Our actual financial 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, as well as those discussed in the “Competition,” “Our Stores,” Distribution,” and “Government Regulation” sections of this Annual Report on Form 10-K. In addition, current global economic conditions may amplify many of these risks.

A decline in consumer spending or a change in consumer preferences could reduce our sales or profitability and harm our business.
Our sales depend on consumer spending, which is influenced by factors beyond our control, including general economic conditions, the availability of discretionary income and credit, consumer confidence, tax or interest rate fluctuations, fuel and other energy costs, healthcare costs, weather and unemployment levels. Global or national political unrest or uncertainty may also impact the price paid by consumers for goods, services and commodities and reduce consumer spending and confidence, and reduce our sales or profitability. We may experience declines in sales or changes in the types of products sold during economic downturns. Any material decline in the amount of consumer spending could reduce our sales, and a decrease in the sales of higher-margin products could reduce profitability and, in each case, harm our business. The success of our business depends in part on our ability to identify and respond to evolving trends in demographics and consumer preferences. Failure to timely identify or effectively respond to changing consumer tastes, preferences and spending patterns, as well as pet ownership trends and pet care needs could adversely affect our business and financial results.


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The pet products and services retail industry is very competitive and continued competitive forces may adversely impact our business and financial results.
The pet products and services retail industry is very competitive. We compete with supermarkets, warehouse clubs and other mass and general retail merchandisers, many of which are larger and have significantly greater resources than we have. We also compete with a number of specialty pet supply stores and independent pet stores, veterinarians, catalog retailers and e-commerce retailers. The pet products and services retail industry has become increasingly competitive due to the expansion of pet-related product offerings by certain supermarkets, warehouse clubs and other mass and retail merchandisers and the entrance of other specialty retailers into the pet food and pet supply market, some of which have developed store formats similar to ours. We may face greater competition from these or other retailers in the future, and changes in their merchandising and operational strategies could impact our sales and profitability. In particular, if supermarket, warehouse club or other mass and retail merchandiser competitors seek to gain or retain market share by reducing prices, we would likely reduce our prices on similar product offerings in order to remain competitive, which may result in a decrease in our market share, sales, operating results and profitability and require a change in our operating strategies.

We also have been able to compete successfully by differentiating ourselves from our competitors through providing a careful combination of product assortment, competitive pricing, service offerings and unique customer experience. If changes in consumer preferences decrease the competitive advantage attributable to these factors, or if we fail to otherwise positively differentiate our customer experience from our competitors, our business and results of operations could be adversely affected.

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 can make no assurances that our stores will meet forecasted levels of sales and profitability. As a result of new store openings in existing markets, and because older stores will represent an increasing proportion of our store base over time, our comparable store sales performance may be materially impacted in future periods. In addition, a portion of a typical new store's sales comes from customers who previously shopped at other PetSmart stores in the existing market.

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.
We currently operate stores in most of the major market areas of the United States and Canada. Our ability to be successful with our store development efforts is dependent on various factors, some of which are outside our control, including:

Identifying store sites that offer attractive returns on our investment notwithstanding the impact of cannibalization of our existing stores;
Competition for those sites;
Successfully negotiating with landlords to achieve acceptable lease terms and obtaining any necessary governmental, regulatory or private approvals;
Timely construction of stores; 
Our ability to attract and retain qualified store personnel; and
Our ability to reformat existing stores in a manner that achieves appropriate returns on our investment.

To the extent we are unable to accomplish any of the above, our ability to open new stores and hotels or reformat existing ones may be harmed and our future sales and profits may be adversely affected. In addition, we can make no assurances that we will be able to meet the forecasted level of sales or operate our new stores or hotels profitably.

The increased demands placed on existing systems and procedures, and on management by our store development plans, also could result in operational inefficiencies and less effective management of our business and associates, which could in turn adversely affect our financial performance. Opening new stores in a market will attract some customers away from other stores already operated by us in that market and diminish their sales. An increase in construction costs and/or building material costs could also adversely affect our financial performance.

Our leases are typically signed approximately 9 months before a store opens. As a result of that timing, we may be unable to adjust our store opening schedule to new economic conditions or a change in strategy in a timely manner.


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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.
Our business is subject to seasonal fluctuation. We typically realize a higher portion of our net sales and operating profit during the fourth fiscal quarter. Sales of certain products and services are seasonal and because our stores typically draw customers from a large area, sales may also be impacted by adverse weather or travel conditions, which are more prevalent during certain seasons of the year. 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. Also, controllable expenses, such as advertising, may fluctuate from quarter to quarter within a year. As a result of our expansion plans, the timing of new store openings and related preopening expenses, the amount of revenue contributed by new and existing stores, and the timing and estimated obligations of store closures, our quarterly results of operations may fluctuate. Finally, because new stores tend to experience higher payroll, advertising and other store level expenses, as a percentage of net sales, than mature stores, new store openings will also contribute to lower store operating margins until these stores become established.

Failure to successfully manage and execute our marketing initiatives could have a negative impact on our business.
Our continued success and growth depend on cultivating a growing, loyal customer base, improving customer traffic and increasing the average transaction amount to gain sales momentum in our stores and on our e-commerce web site. Historically, we have utilized various media to reach the consumer, and we have experienced varying responses to our marketing efforts. We may not be able to successfully execute our marketing initiatives to realize the intended benefits and growth prospects due to factors outside of our control such as increased competition or deterioration of general economic conditions, thus limiting our ability to capitalize on business opportunities and expand our business. Also, our inability to accurately predict our customers' preferred method of communication or the customers' acceptance of our marketing initiatives could result in the failure to drive sales growth and thereby impact our business and financial performance.

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.
Our vendors generally ship merchandise to our distribution centers, which receive and allocate merchandise to our stores. Any interruption or malfunction in our distribution operations, including, but not limited to, disruptions to the transportation infrastructure, the loss of a key vendor that provides transportation of merchandise to or from our distribution centers, the failure of a key vendor to deliver on its commitments, or a material increase in our transportation and distribution costs, including, but not limited to, costs resulting from increases in the price of fuel and other energy costs or other commodities, could harm our sales and the results of our operations. We seek to optimize inventory levels to operate our business successfully. An interruption in the supply chain could result in out-of-stock or excess merchandise inventory levels that could harm our sales and the results of operations. We operate four fish distribution centers and have one fish distribution center that is operated by a third-party vendor. An interruption or malfunction in these operations or in the fulfillment of fish orders could harm our sales and results of operations. Operating the fish distribution centers is a very complex process, and if we lose the third-party operator, we can make no assurances that we could contract with another third-party to operate the fish distribution center on favorable terms, if at all, or that we could successfully operate all of the fish distribution centers ourselves. In addition, our growth plans require the development of new distribution centers to service the increasing number of stores. If we are unable to successfully expand our distribution network in a timely manner, our sales or results of operations could be harmed.

Failure to successfully manage our inventory could harm our business.
We are exposed to inventory risks that may adversely affect our operating results as a result of seasonality, new product launches, changes in customer preferences or demand and consumer spending patterns with respect to our products. We endeavor to accurately predict these trends and avoid overstocking or under stocking products that we sell. Demand for products, however, can change between the time inventory is ordered and the date of sale. In addition, when we begin selling a new product, it may be difficult to establish vendor relationships, determine appropriate product selection, and accurately forecast demand. We carry a broad selection of certain products and we may be unable to sell products in sufficient quantities or during the relevant selling seasons. Any one of the inventory risk factors set forth above may adversely affect our business and financial results.

If our information systems fail to perform as designed or are interrupted for a significant period of time, our business could be harmed.
The efficient operation of our business is dependent on our information systems. In particular, we rely on our information systems to effectively manage our financial and operational data, process payroll, manage the supply chain and to maintain our in-stock positions. We possess disaster recovery capabilities for our key information systems, and take measures intended to prevent security breaches and computer viruses. However, the failure of our information systems to perform as designed, due to failure to

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manage disasters, security breaches, computer viruses or any other interruption of our information systems for a significant period of time could disrupt our business.

We continue to invest in our information systems. Enhancement to or replacement of our major financial or operational information systems could result in disruption of normal operating processes and procedures and have a significant impact on our ability to conduct our core business operations. We can make no assurances that the costs of enhancement to or replacement of our information systems will not exceed estimates, that the systems will be implemented without material disruption, or that the systems will be as beneficial as predicted. If any of these events occur, the results of our operations could be harmed.

If we fail to protect the integrity and security of customer and associate information, our business could be adversely impacted.
The increasing costs associated with the implementation and on-going operation of our information security systems, such as increased investment in technology, the costs of compliance with privacy and information security laws, and costs resulting from potential data loss, could adversely impact our business. We also routinely possess sensitive customer and associate information and, while we believe we have taken reasonable and appropriate steps to protect that information from security breaches, data loss and computer viruses, if our security procedures and controls were compromised, unintentionally or through cyber-attacks, it could harm our business, consumer confidence, reputation, operating results and financial condition, result in litigation and may increase the costs we incur to protect against such information security breaches.

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.
Sales of premium pet food for dogs and cats comprise a significant portion of our net sales. Currently, most major vendors of premium pet food do not permit their products to be sold in supermarkets, warehouse clubs, or through other mass and retail merchandisers. If any premium pet food or pet supply vendor were to make its products available in supermarkets, warehouse clubs and other mass or retail merchandisers, our business could be harmed. In addition, if the grocery brands currently available to such retailers were to gain market share at the expense of the premium brands sold only through specialty pet food and pet supply outlets, our business could be harmed.

We purchase a substantial amount of pet supplies from a number of vendors with limited supply capabilities, and two of our largest vendors account for a material amount of products sold. We can make no assurances that we will be able to find new qualified vendors who meet our standards, or that our current pet supply vendors will be able to accommodate our anticipated needs or comply with existing or any new regulatory requirements. In addition, we purchase a substantial amount of pet supplies from vendors outside of the United States. Effective global sourcing of many of the products we sell is an important factor in our financial performance. We can make no assurances that our international vendors will be able to satisfy our requirements including, but not limited to, timeliness of delivery, acceptable product quality, and accurate packaging and labeling. Any inability of our existing vendors to provide products meeting such requirements in a timely or cost-effective manner could harm our business. While we believe our vendor relationships are good, we have no material long-term supply commitments from our vendors, and any vendor could discontinue selling to us at any time.

Many factors relating to our vendors and the countries in which they are located are beyond our control, including the stability of their political, economic and financial environments, their ability to operate in challenging economic environments or meet our standards and applicable U.S. and local legal requirements, the availability of labor and raw materials, labor unrest, merchandise quality issues, currency exchange rates, trade restrictions, transport availability and cost, inflation and other factors. In addition, Canada's and the United States' foreign trade policies, tariffs and other impositions on imported goods, trade sanctions imposed on certain countries, the limitation on the import of certain types of goods or of goods containing certain materials from other countries and other factors relating to foreign trade are beyond our control. These factors affecting our vendors and our access to products could adversely affect our operations and our financial performance.

Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to product liability claims.
We offer various proprietary branded products, for which we rely on third-party manufacturers. Such third-party manufacturers may prove to be unreliable, or the quality of the products may not meet our expectations. In such event, we may have increased exposure for quality-related claims or losses caused by such products. In addition, our proprietary branded products compete with other manufacturers' branded items that we offer. As we continue to evaluate the number and types of proprietary branded products that we sell, we may adversely affect our relationships with our vendors, who may decide to reduce their product offerings through

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us and increase their product offerings through our competitors. An increase in our proprietary branded product offerings also exposes us to risk that third parties will assert infringement claims against us with respect to such products, and we may be unable to fully protect our intellectual property rights on our proprietary branded products. Finally, if any of our customers are harmed by our proprietary branded products, they may bring product liability and other claims against us. Any of these circumstances could have an adverse effect on our business and financial performance.

Food safety, quality and health concerns could affect our business.
We could be adversely affected if consumers lose confidence in the safety and quality of vendor-supplied food products and hard-good products. All of our vendors are required to comply with applicable product safety laws, and we are dependent upon them to ensure such compliance. Adverse publicity about these types of concerns, whether valid or not, may discourage consumers from buying the products in our stores or cause vendor production and delivery disruptions. The real or perceived sale of contaminated food products by us could result in product liability claims against our vendors or us, expose us or our vendors to governmental enforcement action or private litigation, or lead to costly recalls and a loss of consumer confidence, any of which could have an adverse effect on our sales and operations and financial performance.

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 success is largely dependent on the efforts and abilities of our senior executive group and other key personnel. The loss of the services of one or more of our key executives or personnel could adversely impact our financial performance and our ability to execute our strategies. In addition, our future success depends on our ability to attract, train, manage and retain highly skilled store managers and qualified services personnel such as pet trainers and groomers. There is a high level of competition for these employees and our ability to operate our stores and expand our services depends on our ability to attract and retain these personnel. Competition for qualified management and services personnel could require us to pay higher wages or other compensation to attract a sufficient number of employees. Turnover, which has historically been high among entry-level or part-time associates at our stores and distribution centers, increases the risk that associates will not have the training and experience needed to provide competitive, high-quality customer service. Our ability to meet our labor needs while controlling our labor costs is subject to numerous external factors, including unemployment levels, prevailing wage rates, changing demographics and changes in employment legislation. If we are unable to retain qualified associates or our labor costs increase significantly, our business operations and our financial performance could be adversely impacted.

Our international operations may result in additional market risks, which may harm our business.
We operate stores outside of the United States. As these operations grow, they may require greater management and financial resources. International operations require the integration of personnel with varying cultural and business backgrounds and an understanding of the relevant differences in the cultural, legal and regulatory environments. Our results may be increasingly affected by the risks of our international activities, including:

    Fluctuations in currency exchange rates;
    Changes in international staffing and employment issues;
    Tariff and other trade barriers;
    Greater difficulty in utilizing and enforcing our intellectual property rights;
    Failure to understand the local culture and market;
    The burden of complying with foreign laws, including tax laws and financial accounting standards; and
    Political and economic instability and developments.

Our business may be harmed if the operation of veterinary hospitals at our stores is limited or fails to continue.
We and Banfield, the third-party operator of Banfield, The Pet Hospital, and our other third-party operators are subject to statutes and regulations in various states and Canadian provinces regulating the ownership of veterinary practices, or the operation of veterinary hospitals in retail stores, that may impact our ability to host and Banfield's ability to operate veterinary hospitals within our facilities. A determination that we, or Banfield, are in violation of any of these applicable statutes and regulations could require us, or Banfield, to restructure our operations to comply, or render us, or Banfield, unable to operate veterinary hospitals in a given location. If Banfield were to experience financial or other operating difficulties that would force it to limit its operations, or if Banfield were to cease operating the veterinary hospitals in our stores, our business may be harmed. We can make no assurances that we could contract with another third-party to operate the veterinary hospitals on favorable terms, if at all, or that we could

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successfully operate the veterinary hospitals ourselves. In addition, due to our equity investment in Banfield, any significant decrease in Banfield's financial results may negatively impact our financial position.

We face various risks as an e-commerce retailer.
We may require additional capital in the future to sustain or grow our e-commerce business. We have engaged a third-party to maintain our e-commerce website and process all customer orders placed through that site. Business risks related to our e-commerce business include our ability to keep pace with rapid technological change; failure in our, or any third-party processor's, security procedures and operational controls; failure or inadequacy in our, or any third-party processor's, systems or ability to process customer orders; government regulation and legal uncertainties with respect to e-commerce; and collection of sales or other taxes by one or more states or foreign jurisdictions. If any of these risks materialize, it could have an adverse effect on our business.

Our business could be harmed if we were unable to effectively manage our cash flow and raise any needed additional capital on acceptable terms.
We expect to fund our currently planned operations with existing capital resources, including cash flows from operations and the borrowing capacity under our credit facility. If, however, we are unable to effectively manage our cash flows or generate and maintain positive operating cash flows and operating income in the future, we may need additional funding. We may also choose to raise additional capital due to market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. Our credit facility and letter of credit facility are secured by substantially all our personal property assets, our subsidiaries and certain real property. This could limit our ability to obtain, or obtain on favorable terms, additional financing and may make additional debt financing outside our credit facility and letter of credit facility more costly. If additional capital were needed, an inability to raise capital on favorable terms could harm our business and financial condition. In addition, to the extent that we raise additional capital through the sale of equity or debt securities convertible into equity, the issuance of these securities could result in dilution or accretion to our stockholders.

Volatility and disruption to the global capital and credit markets could adversely affect our ability to access credit and the financial soundness of our suppliers.
Financial turmoil in the banking system and financial markets or the consolidation or insolvency of financial institutions could result in a tightening of the credit markets, a low level of liquidity in many financial markets, and volatility in credit, currency and equity markets. In such an environment, there is a risk that lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to: extending credit up to the maximum permitted by a credit facility, allowing access to additional credit features and otherwise accessing capital and/or honoring loan commitments. If our lender fails to honor its legal commitments under our credit facility, it could be difficult to replace our credit facility on similar terms. And if our suppliers or key third party vendors of necessary services and technical systems encounter similar difficulties with credit or liquidity in their own businesses, our business may also be adversely affected.

Failure to successfully integrate any business we acquire could have an adverse impact on our financial results.
We may, from time to time, acquire businesses we believe to be complementary to our business. Acquisitions may result in difficulties in assimilating acquired companies and may result in the diversion of our capital and our management's attention from other business issues and opportunities. We may not be able to successfully integrate operations that we acquire, including their personnel, financial systems, distribution, operations and general operating procedures. If we fail to successfully integrate acquisitions, we could experience increased costs associated with operating inefficiencies which could have an adverse effect on our financial results. Also, while we employ several different methodologies to assess potential business opportunities, the new businesses may not meet or exceed our expectations and, therefore, affect our financial performance.

Failure to protect our intellectual property could have a negative impact on our operating results.    
Our trademarks, servicemarks, copyrights, patents, trade secrets, domain names and other intellectual property are valuable assets that are critical to our success. The unauthorized reproduction or other misappropriation of our intellectual property could diminish the value of our brands or goodwill and cause a decline in our revenue or operating results. Protecting our intellectual property outside the United States could be time-consuming and costly, and the local laws and regulations outside the United States may not fully protect our rights in such intellectual property. Any infringement or other intellectual property claim made against us, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to enter into royalty or licensing agreements. As a result, any such claim could have an adverse effect on our operating results.


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A determination that we are in violation of any contractual obligations or government regulations could result in a disruption to our operations and could impact our financial results.
We are subject to various contractual obligations with third-party providers and federal, state, provincial and local laws and regulations governing, among other things: our relationships with employees, including minimum wage requirements, overtime, terms and conditions of employment, working conditions and citizenship requirements; veterinary practices, or the operation of veterinary hospitals in retail stores, that may impact our ability to operate veterinary hospitals in certain facilities; the transportation, handling and sale of small pets; the generation, handling, storage, transportation and disposal of waste and biohazardous materials; the distribution, import/export and sale of products; providing services to our customers; contracted services with various third-party providers; environmental regulation; credit and debit card processing; the handling, security, protection and use of customer and associate information; and the licensing and certification of services.

We seek to structure our operations to comply with all applicable federal, state, provincial and local laws and regulations of each jurisdiction in which we operate. Given varying and uncertain interpretations of these laws and regulations and the fact that the laws and regulations are enforced by the courts and by regulatory authorities with broad discretion, we can make no assurances that we would be found to be in compliance in all jurisdictions. We also could be subject to costs, including fines, penalties or sanctions and third-party claims as a result of violations of, or liabilities under, the above referenced contracts, laws and regulations.

Failure of our internal controls over financial reporting could harm our business and financial results.
We have documented and tested our internal controls over financial reporting to assess their design and operating effectiveness. Internal controls over financial reporting have inherent limitations and are not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. We may encounter problems or delays in completing the review and evaluation, or implementing improvements. Additionally, we may identify deficiencies that need to be addressed in our internal controls over financial reporting, or other matters that may raise concerns for investors. Should we, or our independent registered public accounting firm, determine in future periods that we have a material weakness in our internal controls over financial reporting, our results of operations or financial condition may be adversely affected and the price of our common stock may decline.

Changes in laws, accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.
Accounting principles generally accepted in the United States of America, or “GAAP,” and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters relevant to our business are highly complex, continually evolving and involve many subjective assumptions, estimates and judgments by us. Changes in these rules or their interpretation, or changes in facts, underlying assumptions, estimates or judgments could significantly impact our reported or expected financial performance.

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.
We are subject to periodic audits and examinations by the Internal Revenue Service and other taxing authorities. Outcomes from the tax audits or examinations that we may be subject to, or changes in the tax laws in any of the multiple jurisdictions in which we operate, could result in an unfavorable change in our effective tax rate which could have an adverse effect on our business and 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.
We procure insurance to help us manage a variety of risks. A failure of insurance to provide coverage for these risks may expose us to expensive defense costs and the costs of the ultimate outcome of the matter. Insurance costs continue to be volatile, affected by natural catastrophes, fear of terrorism, financial irregularities and fraud at other publicly traded companies and fiscal viability of insurers. We believe that commercial insurance coverage is prudent for risk management, and insurance costs may increase substantially in the future. In addition, for certain types or levels of risk, such as risks associated with earthquakes, hurricanes or terrorist attacks, we may determine that we cannot obtain commercial insurance at acceptable prices. Therefore, we may choose to forego or limit our purchase of relevant commercial insurance, choosing instead to self-insure one or more types or levels of risks. Provisions for losses related to self-insured risks are based upon independent actuarially determined estimates. We maintain stop-loss coverage to limit the exposure related to certain risks. The assumptions underlying the ultimate costs of existing claim losses are subject to a high degree of unpredictability, which can affect the liability recorded for such claims. For example, variability in inflation rates of health care costs inherent in these claims can affect the amounts realized. Similarly, changes in legal trends and interpretations, as well as a change in the nature and method of how claims are settled can impact

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ultimate costs. Although our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, any changes could have a considerable effect upon future claim costs and currently recorded liabilities and could have a material impact on our consolidated financial statements.

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.
There is generally a significant amount of legislation pending at the federal, state, provincial and local levels regarding the handling of pets. This legislation may impair our ability to transport the small pets we sell in our stores. The small pets we sell in our stores are susceptible to health risks and diseases that can quickly decrease or destroy the supply of these pets. In addition, our supply of products may be negatively impacted by weather, catastrophic events, disease, supply chain malfunctions, contamination or trade barriers. Any disruption in our operations or the supply of products to our stores could harm our reputation and decrease our 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.
Over the last several years, the market price of our common stock has been subject to significant fluctuations. The market price of our common stock may continue to be subject to significant fluctuations in response to the impact on our operations, sales and financial results of a variety of factors including, but not limited to:

    General economic changes;
    Actions taken by our competitors, including new product introductions and pricing changes;
    Changes in the strategy and capability of our competitors;
    Our ability to successfully integrate acquisitions;
    The prospects of our industry;
    Natural disasters, hostilities and acts of terrorism; and
    National or regional catastrophes or circumstances, such as a pandemic or other public health or welfare scare.

In addition, the stock market in recent years has experienced price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These fluctuations, as well as general economic and market conditions, including but not limited to those listed above, may harm the market price of our common stock. Further, a change in an analyst's published opinion or rating of our business could impact the market price of our common stock.

We have implemented some anti-takeover provisions that may prevent or delay an acquisition of us that may not be beneficial to our shareholders.
Our restated certificate of incorporation, as amended, and bylaws include provisions that may delay, defer or prevent a change in management or control that our shareholders may not believe is in their best interests. These provisions include:
The ability of our Board of Directors to issue, without stockholder approval, up to 10,000,000 shares of preferred stock in one or more series with rights, obligations and preferences determined by the Board of Directors;
    No right of stockholders to call special meetings of stockholders;
    No right of stockholders to act by written consent;
    Certain advance notice procedures for nominating candidates for election to the Board of Directors; and
    No right to cumulative voting.

In addition, our restated certificate of incorporation requires a 66 2/3% vote of stockholders to:
    alter or amend our bylaws;
    remove a director without cause; or
    alter, amend or repeal certain provisions of our restated certificate of incorporation.

We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, and the application of Section 203 could delay or prevent an acquisition of PetSmart.

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Item 1B.  Unresolved Staff Comments
None.

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Item 2.  Properties
Typically, our stores are located at sites co-anchored by strong destination mass merchandisers and are in or near major regional shopping centers. The following table summarizes the locations of the stores by country and state or territory as of February 3, 2013:

Number of
Stores
Alabama
14

Alaska
2

Arizona
48

Arkansas
8

California
133

Colorado
32

Connecticut
10

Delaware
3

Florida
74

Georgia
41

Idaho
4

Illinois
53

Indiana
24

Iowa
9

Kansas
7

Kentucky
9

Louisiana
16

Maine
3

Maryland
30

Massachusetts
19

Michigan
35

Minnesota
16

Mississippi
8

Missouri
22

Montana
3

Nebraska
7

Nevada
17

New Hampshire
6

New Jersey
41

New Mexico
6

New York
51

North Carolina
49

North Dakota
2

Ohio
41

Oklahoma
15

Oregon
15

Pennsylvania
51

Puerto Rico
7

Rhode Island
2

South Carolina
21

South Dakota
2

Tennessee
21

Texas
118

Utah
14

Vermont
1

Virginia
46

Washington
25

West Virginia
3

Wisconsin
14

United States and Puerto Rico
1,198

Canada
80

Total stores
1,278


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We lease substantially all our stores, distribution centers and corporate offices under noncancelable leases. The terms of the store leases generally range from 10 to 15 years and typically allow us to renew for 2 to 4 additional 5-year terms. Store leases, excluding renewal options, expire at various dates through 2027. Generally, the leases require payment of property taxes, utilities, common area maintenance, insurance and if annual sales at certain stores exceed specified amounts, provide for additional rents.

We lease approximately 365,000 square feet for our corporate offices. The lease expires in 2023.

Our distribution centers and respective lease expirations as of February 3, 2013, were as follows:
Location
 
Square
Footage
 
Date Opened
 
Distribution Type
 
Lease Expiration

 
(In thousands)
 

 

 

Ennis, Texas
 
230

 
May 1996
 
Forward distribution center
 
2017
Phoenix, Arizona
 
620

 
November 1999
 
Combination distribution center
 
2021
Columbus, Ohio
 
613

 
September 2000
 
Combination distribution center
 
2015
Gahanna, Ohio
 
276

 
October 2000
 
Forward distribution center
 
2015
Hagerstown, Maryland
 
252

 
October 2000
 
Forward distribution center
 
2015
Ottawa, Illinois
 
1,000

 
August 2005
 
Combination distribution center
 
2022
Newnan, Georgia
 
878

 
July 2007
 
Combination distribution center
 
2022
Reno, Nevada
 
873

 
April 2008
 
Combination distribution center
 
2023
Total
 
4,742

 

 

 


In July 2012, we entered into a build-to-suit lease for a new distribution center in Bethel, Pennsylvania. Once the construction of the Bethel location is completed, we will vacate two smaller distribution centers located in Gahanna, Ohio and Hagerstown, Maryland, both of which are nearing capacity. We expect to open this new distribution center in 2014.

Item 3.  Legal Proceedings
We are involved in the legal proceedings described below and are subject to other claims and litigation arising in the normal course of our business. We have made accruals with respect to certain of these matters, where appropriate, that are reflected in our consolidated financial statements but are not, individually or in the aggregate, considered material. For other matters, we have not made accruals because we have not yet determined that a loss is probable or because the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters described below cannot be determined, we currently do not expect that these proceedings and claims, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, or cash flows. The outcome of any litigation is inherently uncertain, however, and if decided adversely to PetSmart, or if PetSmart determines that settlement of particular litigation is appropriate, we may be subject to liability that could have a material adverse effect on the Company's financial position, results of operations, or cash flows. Accordingly, we disclose matters below for which a material loss is reasonably possible. In each case, however, we have either determined that the range of loss is not reasonably estimable or that any reasonably estimable range of loss is not material to our consolidated financial statements.

In January 2011, we were served with a lawsuit captioned Pedroza, et al. v. PetSmart, Inc., a case originally filed in California Superior Court for the County of San Bernardino. The case has been removed to the United States 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. The court has since dismissed the plaintiff's claim for statutory penalties for the alleged failures to provide accurate wage statements and pay all wages upon termination. On January 28, 2013, the court issued a decision denying class certification. The remaining claims were subsequently dismissed.

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. PetSmart removed the case to the United States District Court for the Northern District of California. The complaint brings both individual and class action claims, first alleging that PetSmart failed to engage in the interactive process and failed to accommodate the disabilities of four current and former named associates. The complaint also alleges on behalf of current and former hourly store associates that PetSmart failed to provide pay for all hours worked, failed to

17


properly reimburse associates for business expenses, and failed to provide timely and uninterrupted meal and rest periods. The lawsuit seeks compensatory damages, statutory penalties, and other relief, including attorneys' fees, costs, and injunctive relief.

In September 2012, a former associate named us as a defendant in McKee, et al. v. PetSmart, Inc., which is currently pending before the United States District Court for the District of Delaware. The case seeks to assert a Fair Labor Standards Act collective action on behalf of PetSmart's operations managers and similarly situated employees. The complaint alleges that PetSmart has misclassified operations managers as exempt and as a result failed to pay them overtime for hours worked in excess of forty hours per week. The plaintiffs seek compensatory damages, liquidated damages, and other relief, including attorneys' fees, costs, and injunctive relief. We do not believe that the claims alleged in the lawsuit have merit and do not believe collective treatment is appropriate.

Also in September 2012, a former groomer filed a lawsuit against us captioned Negrete, et al. v. PetSmart, Inc. that is currently pending in the California Superior Court for the County of Shasta. The plaintiff seeks to assert claims on behalf of current and former California pet stylists that PetSmart failed to provide pay for all hours worked, failed to properly reimburse associates for business expenses, failed to provide proper wage statements, and failed to provide timely and uninterrupted meal and rest periods. The lawsuit seeks compensatory damages, statutory penalties, and other relief, including attorneys' fees, costs, and injunctive relief.

On December 14, 2012, a group of four former managers filed a lawsuit against us captioned Miller, et al. v. PetSmart, Inc. in the United States District Court for the Eastern District of California. The plaintiffs seek to assert claims on behalf of hourly and exempt store management personnel from December 14, 2008 to the present for alleged unreimbursed mileage expenses. The lawsuit seeks compensatory damages, statutory penalties, and other relief, including attorneys’ fees, costs, and injunctive relief.

On December 22, 2012, a customer filed a lawsuit against us captioned Matin, et al. v. Nestle Purina Petcare Company, et al. in the United States District Court for the Northern District of California. The plaintiff claims he purchased jerky treats containing duck or chicken imported from China that caused injury to his pet, and he seeks to assert claims on behalf of a nationwide class of consumers. We tendered the claim to Nestle Purina, and Nestle Purina is currently defending the case on our behalf. We have filed a motion to transfer the case to the Northern District of Illinois so it can be consolidated with another case involving the same products, Adkins, et al. v. Nestle Purina PetCare Company, et al. We have not yet received a decision on that motion.

We are involved in the defense of various other legal proceedings that we do not believe are material to our consolidated financial statements.

Item 4.  Mine Safety Disclosures
Not applicable.


18



PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock. Our common stock is traded on the NASDAQ Global Select Market under the symbol PETM. The following table indicates the intra-day quarterly high and low price per share of our common stock. These prices represent quotations among dealers without adjustments for retail markups, markdowns or commissions, and may not represent actual transactions.
 
High
 
Low
Year Ended February 3, 2013
 
 
 
First Quarter ended April 29, 2012
$
59.36

 
$
52.82

Second Quarter ended July 29, 2012
$
69.97

 
$
55.06

Third Quarter ended October 28, 2012
$
72.75

 
$
64.21

Fourth Quarter ended February 3, 2013
$
71.68

 
$
62.63

 
 
 
 
Year Ended January 29, 2012
 
 
 
First Quarter ended May 1, 2011
$
43.39

 
$
39.29

Second Quarter ended July 31, 2011
$
46.60

 
$
41.61

Third Quarter ended October 30, 2011
$
48.57

 
$
37.76

Fourth Quarter ended January 29, 2012
$
54.96

 
$
45.27


Common Stock Dividends. We believe our ability to generate cash allows us to invest in the growth of the business and, at the same time, distribute a quarterly dividend. Our credit facility and letter of credit facility permit us to pay dividends, as long as we are not in default and the payment of dividends would not result in default.

In 2012 and 2011, 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
September 26, 2012
 
$0.165
 
October 26, 2012
 
November 9, 2012
December 7, 2012
 
$0.165
 
December 19, 2012
 
December 31, 2012
 
 
 
 
 
 
 
March 23, 2011
 
$0.125
 
April 29, 2011
 
May 13, 2011
June 15, 2011
 
$0.14
 
July 29, 2011
 
August 12, 2011
September 21, 2011
 
$0.14
 
October 28, 2011
 
November 11, 2011
December 7, 2011
 
$0.14
 
January 27, 2012
 
February 10, 2012

On March 26, 2013, the Board of Directors declared a quarterly cash dividend of $0.165 per share payable on May 17, 2013, to stockholders of record on May 3, 2013.

Holders.  On March 14, 2013, there were 2,791 holders of record of our common stock.

Equity Compensation Plan Information. Information regarding our equity compensation plans will be included in our proxy statement with respect to our Annual Meeting of Stockholders to be held on June 14, 2013, under the caption “Equity Compensation Plan Information” and is incorporated by reference in this Annual Report on Form 10-K.


19


Share Purchase Program. The following table presents purchases of our common stock under the respective share purchase programs (in thousands):
 
 
 
 
 
 
Year Ended
Share Purchase Program
 
February 3, 2013
 
January 29, 2012
 
January 30, 2011
 
(53 weeks)
 
(52 weeks)
 
(52 weeks)
Authorized Amount
 
Date Approved by Board
 
Program Termination Date
 
Shares Purchased
 
Purchase Value
 
Shares Purchased
 
Purchase Value
 
Shares Purchased
 
Purchase Value
$
350,000

 
June 2009
 
July 31, 2011
 

 
$

 

 
$

 
3,412

 
$
107,069

$
400,000

 
June 2010
 
July 31, 2011
 

 

 
3,909

 
165,383

 
4,165

 
156,222

$
450,000

 
June 2011
 
January 31, 2013
 
4,594

 
278,553

 
3,683

 
171,447

 

 

$
525,000

 
June 2012
 
January 31, 2014
 
2,599

 
178,058

 

 

 

 

 
 
 
 
 
 
7,193

 
$
456,611

 
7,592

 
$
336,830

 
7,577

 
$
263,291


The $450.0 million program was completed during the thirteen weeks ended October 28, 2012. As of February 3, 2013, $346.9 million remained available under the $525.0 million program.

The following table shows purchases of our common stock and the available funds to purchase additional common stock for each period in the fourteen weeks ended February 3, 2013:
Period
 
Total
Number
of Shares
Purchased
 
Average Price
Paid per Share
 
Total Number of
Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Value That May
Yet be Purchased
Under the Plans or
Programs
October 29, 2012 to November 25, 2012
 
261,473

 
$
68.80

 
261,473

 
$
503,951,000

November 26, 2012 to December 30, 2012
 
1,568,605

 
$
69.87

 
1,568,605

 
$
394,353,000

December 31, 2012 to February 3, 2013
 
725,468

 
$
65.35

 
725,468

 
$
346,941,000

Fourteen Weeks Ended February 3, 2013
 
2,555,546

 
$
68.48

 
2,555,546

 
$
346,941,000



20


Stock Performance Graph. The following performance graph and related information shall not be deemed “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

The following graph shows a five-year comparison of the cumulative total return for our common stock, the S&P 500 Index, and the S&P Specialty Stores Index based on a $100 investment on February 3, 2008, in our stock or on January 31, 2008, in the index. The comparison of the total cumulative return on investment includes reinvestment of dividends. Indices are calculated on a month-end basis.



 
2/3/2008

 
2/1/2009

 
1/31/2010

 
1/30/2011

 
1/29/2012

 
2/3/2013

PetSmart, Inc. 
$
100.0

 
$
78.73

 
$
109.49

 
$
173.12

 
$
233.37

 
$
281.70

S & P 500
$
100.0

 
$
61.37

 
$
81.71

 
$
99.84

 
$
104.05

 
$
121.51

S & P Specialty Stores
$
100.0

 
$
55.07

 
$
89.82

 
$
95.51

 
$
77.48

 
$
74.12






21



Item 6.  Selected Financial Data
The following selected financial data is derived from our consolidated financial statements. The data below should be read in conjunction with Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto.
 
As of and for the Year Ended(1)
 
February 3, 2013
 
January 29, 2012
 
January 30, 2011
 
January 31, 2010
 
February 1, 2009
 
(53 weeks)
 
(52 weeks)
 
(52 weeks)
 
(52 weeks)
 
(52 weeks)
 
(In thousands, except per share amounts and operating data)
Selected Income Statement Data:
 
 
 
 
 
 
 
 
 
Net sales(2)
$
6,758,237

 
$
6,113,304

 
$
5,693,797

 
$
5,336,392

 
$
5,065,293

Gross profit
2,062,139

 
1,804,423

 
1,654,531

 
1,519,217

 
1,495,433

Operating, general and administrative expenses
1,410,922

 
1,301,304

 
1,225,803

 
1,150,138

 
1,125,579

Operating income
651,217

 
503,119

 
428,728

 
369,079

 
369,854

Interest expense, net
(54,329
)
 
(56,842
)
 
(58,837
)
 
(59,748
)
 
(58,757
)
Income before income tax expense and equity income from Banfield
596,888

 
446,277

 
369,891

 
309,331

 
311,097

Income tax expense
(223,329
)
 
(166,960
)
 
(140,396
)
 
(117,554
)
 
(121,019
)
Equity income from Banfield
15,970

 
10,926

 
10,372

 
6,548

 
2,592

Net income
$
389,529

 
$
290,243

 
$
239,867

 
$
198,325

 
$
192,670

Earnings Per Common Share Data:
 
 
 
 
 
 
 
 
 
    Basic
$
3.61

 
$
2.59

 
$
2.05

 
$
1.62

 
$
1.55

    Diluted
$
3.55

 
$
2.55

 
$
2.01

 
$
1.59

 
$
1.52

Dividends declared per common share
$
0.635

 
$
0.545

 
$
0.475

 
$
0.33

 
$
0.12

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
    Basic
107,819

 
111,909

 
116,799

 
122,363

 
124,342

    Diluted
109,611

 
113,993

 
119,405

 
124,701

 
126,751

Selected Operating Data:
 
 
 
 
 
 
 
 
 
Stores open at end of period
1,278

 
1,232

 
1,187

 
1,149

 
1,112

Square footage at end of period
27,831,435

 
27,247,399

 
26,617,162

 
25,876,510

 
25,102,528

Net sales per square foot(3)
$
242

 
$
224

 
$
214

 
$
205

 
$
208

Net sales growth
10.5
%
 
7.4
%
 
6.7
%
 
5.4
%
 
8.4
%
Increase in comparable store sales(4)
6.3
%
 
5.4
%
 
4.8
%
 
1.6
%
 
3.8
%
Selected Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Merchandise inventories
$
679,090

 
$
644,864

 
$
615,841

 
$
563,389

 
$
584,011

Average inventory per store(5)
$
531

 
$
523

 
$
519

 
$
490

 
$
525

Working capital
$
562,244

 
$
582,582

 
$
550,124

 
$
501,381

 
$
396,677

Total assets
$
2,536,981

 
$
2,544,084

 
$
2,470,220

 
$
2,461,986

 
$
2,357,653

Total debt(6)
$
526,159

 
$
559,492

 
$
566,829

 
$
571,474

 
$
585,993

Total stockholders' equity
$
1,123,592

 
$
1,153,829

 
$
1,170,642

 
$
1,172,715

 
$
1,144,136

Current ratio
1.74

 
1.86

 
1.96

 
1.89

 
1.83

Long-term debt-to-equity
41
%
 
44
%
 
45
%
 
46
%
 
48
%
Total debt-to-capital
32
%
 
33
%
 
33
%
 
33
%
 
34
%


22


__________
(1)
The year ended February 3, 2013, consisted of 53 weeks while all other periods presented consisted of 52 weeks. As a result, all comparisons for the year ended February 3, 2013, reflect the impact of one additional week. The estimated impact of this additional week resulted in the following increases: net sales, $126.0 million; gross profit, $48.3 million; operating, general and administrative expenses, $18.3 million; income before income tax expense and equity income from Banfield, $29.9 million; net income, $18.6 million; and diluted earnings per common share, $0.17.
(2)
In accordance with our master operating agreement with Banfield, we charge Banfield license fees for the space used by the veterinary hospitals and for their portion of utilities costs. We also charge Banfield for its portion of specific operating expenses. Prior to February 1, 2010, license fees were treated as a reduction of occupancy costs, which are included as a component of cost of merchandise sales, and reimbursements for specific operating expenses were treated as a reduction of operating, general and administrative expenses in the Consolidated Statements of Income and Comprehensive Income.  Beginning February 1, 2010, license fees and the reimbursements for specific operating expenses are included in other revenue.
(3)
Net sales per square foot were calculated by dividing net sales, excluding e-commerce sales, by the square footage at the end of the period.
(4)
Comparable store sales, or sales in stores open at least one year, are calculated on an equivalent 53 week basis for the year ended February 3, 2013, as compared to the 53 weeks ended February 5, 2012. The impact of the additional week resulted in a 0.2% decrease to comparable store sales in 2012.
(5)
Represents merchandise inventories divided by stores open at end of period.
(6)
Represents capital lease obligations.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could materially differ from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, as well as in the sections entitled “Competition,” "Our Stores," “Distribution” and “Government Regulation” included in Item 1, Part I and Risk Factors included in Item 1A, Part I of this Annual Report on Form 10-K.

Overview
Based on our 2012 net sales of $6.8 billion, we are North America's leading specialty provider of products, services and solutions for the lifetime needs of pets. As of February 3, 2013, we operated 1,278 stores, and we plan to continue our store growth in 2013. Our stores carry a broad assortment of high-quality pet supplies at everyday low prices. We offer approximately 11,000 distinct items in our stores and 10,000 additional items on our website, PetSmart.com, including nationally recognized brand names, as well as an extensive selection of proprietary brands across a range of product categories.

We complement our extensive product assortment with a wide selection of pet services, including grooming, training, day camp for dogs and boarding. All our stores feature pet styling salons that provide high-quality grooming services and offer comprehensive pet training services. Our PetsHotels provide boarding for dogs and cats, which includes 24-hour supervision by caregivers who are PetSmart trained to provide personalized pet care, temperature controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs. As of February 3, 2013, we operated 196 PetsHotels.

We make full-service veterinary care available through our strategic relationship with certain third-party operators. As of February 3, 2013, full-service veterinary hospitals were in 816 of our stores. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as “Banfield,” operated 809 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 volatility in the macro-economy. However, we believe we have a competitive advantage in our solutions for the Total Lifetime CareSM of pets, including pet services and proprietary brands, which we think cannot be easily duplicated. Additionally, we consider our 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.


23


Executive Summary
The year ended February 3, 2013, consisted of 53 weeks while all other periods presented consisted of 52 weeks. As a result, all comparisons for the year ended February 3, 2013, other than comparable store sales, which was calculated on an equivalent 53 week basis, also reflect the impact of one additional week.
Diluted earnings per common share for 2012 increased 39.2% to $3.55 on net income of $389.5 million compared to diluted earnings per common share of $2.55 on net income of $290.2 million in 2011. The additional week increased diluted earnings per common share by approximately $0.17.

Net sales increased 10.5% to $6.8 billion in 2012 compared to $6.1 billion in 2011. The increase in net sales included an estimated impact from the additional week of $126.0 million and an unfavorable impact from foreign currency fluctuations of $1.9 million.

Comparable store sales, or sales in stores open at least one year, increased 6.3% during 2012 compared to a 5.4% increase during 2011.
 
Services sales increased 9.7% to $740.5 million, or 11.0% of net sales, for 2012 compared to $674.9 million, or 11.0% of net sales, during 2011. The increase in services sales included an estimated impact from the additional week of $12.8 million.

As of February 3, 2013, we had $335.2 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 2012.

We purchased 7.2 million shares of our common stock for $456.6 million during 2012, and 7.6 million shares of our common stock for $336.8 million during 2011.

We added 46 net new stores during 2012, and operated 1,278 stores at the end of the year.

Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates for inventory valuation reserves, asset impairments, reserve for closed stores, insurance liabilities and reserves, and income tax reserves. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Under different assumptions or conditions, actual results may differ from these estimates. We believe the following critical accounting policies reflect the more significant judgments and estimates we use in preparing our consolidated financial statements.

Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material.

Inventory Valuation Reserves
We have established reserves for estimated inventory shrinkage between physical inventories. Distribution centers perform cycle counts using a velocity based system that determines whether the inventory should be counted every 30, 90, 180, or 365 days. Stores generally perform physical inventories at least once a year. Between the physical inventories, stores perform counts on certain inventory items. For each reporting period presented, we estimate the inventory shrinkage based on a two-year historical trend analysis. Changes in shrink results or market conditions could cause actual results to vary from estimates used to establish the inventory reserves.

We also have reserves for estimated obsolescence and to reduce merchandise inventory to the lower of cost or market. We evaluate inventories for excess, obsolescence or other factors that may render inventories unmarketable at their historical cost. Factors included in determining obsolescence reserves include current and anticipated demand, customer preferences, age of merchandise, seasonal trends and decisions to discontinue certain products. If assumptions about future demand change, or actual market conditions are less favorable than those projected by management, we may require additional reserves.

We have not made any significant changes in the accounting methodology we use to establish our inventory valuation reserves during the past three fiscal years. We do not presently believe there is a reasonable likelihood of a material change in the accounting methodology and assumed factors used to create the estimates we use to calculate our inventory valuation reserves.

24



As of February 3, 2013, and January 29, 2012, we had inventory valuation reserves of $11.8 million and $11.6 million, respectively. Additionally, we do not believe that a 10% change in our inventory valuation reserves would be material to our consolidated financial statements.

Asset Impairments
We review long-lived assets for impairment on a quarterly basis and whenever events or changes in circumstances indicate that the book value of such assets may not be recoverable.

We have not made any significant changes in our impairment loss assessment methodology during the past three fiscal years. We do not presently believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate long-lived asset impairment losses. No material asset impairments were identified during 2012, 2011 or 2010.

Reserve for Closed Stores
We continuously evaluate the performance of our stores and periodically close those that are under-performing. Closed stores are generally replaced by a new store in a nearby location. We establish reserves for future occupancy payments on closed stores in the period the store is closed. These costs are classified in operating, general and administrative expenses in the Consolidated Statements of Income and Comprehensive Income. As of February 3, 2013, and January 29, 2012, our reserve for closed stores was $8.7 million and $10.0 million, respectively. We do not believe there is a reasonable likelihood of a material change in the future estimates or assumptions used to determine our reserve for closed stores, including cash flow projections and sublease assumptions. We do not believe that a 10% change in our reserve for closed stores would be material to our consolidated financial statements.

Insurance Liabilities and Reserves
We maintain workers' compensation, general liability, product liability and property and casualty insurance. We utilize high deductible plans for each of these areas as well as a self-insured health plan for our eligible associates. Workers' compensation deductibles generally carry a $1.0 million per occurrence risk of claim liability. Our general liability plan specifies a $0.5 million per occurrence risk of claim liability. We establish reserves for claims under workers' compensation and general liability plans based on periodic actuarial estimates of the amount of loss for all pending claims, including estimates for which claims have been incurred but not reported. Our loss estimates rely on actuarial observations of ultimate loss experience for similar historical events and changes in such assumptions could result in an adjustment, favorable or adverse, to our reserves. As of February 3, 2013, and January 29, 2012, we had approximately $107.2 million and $102.8 million, respectively, in reserves related to workers' compensation, general liability and self-insured health plans.

We have not made any material changes in the accounting methodology we use to establish our insurance reserves during the past three years. We do not believe there is a reasonable likelihood of a material change in the estimates or assumptions used to calculate our insurance reserves, including factors such as historical claims experience, demographic factors, severity factors and other valuations. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10% change in our insurance reserves would have affected net income by approximately $6.7 million in 2012.

Income Tax Reserves
We establish deferred income tax assets and liabilities for temporary differences between the financial reporting bases and the income tax bases of our assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled. We record a valuation allowance on the deferred income tax assets to reduce the total to an amount we believe is more likely than not to be realized. Valuation allowances at February 3, 2013, and January 29, 2012, were principally to offset certain deferred income tax assets for net operating loss carryforwards.

We operate in multiple tax jurisdictions and could be subject to audit in any of these jurisdictions. These audits can involve complex issues that may require an extended period of time to resolve and may cover multiple years. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given fiscal period could be materially affected. An unfavorable tax settlement would require use of our cash and could result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement could result in a reduction in our effective income tax rate in the period of resolution.



25


Recently Issued Accounting Pronouncements
See Note 2, Recently Issued Accounting Pronouncements, in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for a description of recently issued accounting pronouncements, including the impact to our consolidated financial statements.

Results of Operations
The following table presents the percent to net sales of certain items included in our Consolidated Statements of Income and Comprehensive Income:
 
Year Ended
 
February 3, 2013
 
January 29, 2012
 
January 30, 2011
 
(53 weeks)
 
(52 weeks)
 
(52 weeks)
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
Total cost of sales
69.5

 
70.5

 
70.9

Gross profit
30.5

 
29.5

 
29.1

Operating, general and administrative expenses
20.9

 
21.3

 
21.5

Operating income
9.6

 
8.2

 
7.5

Interest expense, net
(0.8
)
 
(0.9
)
 
(1.0
)
Income before income tax expense and equity income from Banfield
8.8

 
7.3

 
6.5

Income tax expense
(3.3
)
 
(2.7
)
 
(2.5
)
Equity income from Banfield
0.2

 
0.2

 
0.2

Net income
5.7
 %
 
4.7
 %
 
4.2
 %

2012 (53 weeks) Compared to 2011 (52 weeks)
Net Sales
Net sales increased 10.5% to $6.8 billion in 2012, compared to net sales of $6.1 billion in 2011. The increase in net sales included an estimated impact of the additional week of $126.0 million and an unfavorable impact from foreign currency fluctuations of $1.9 million. Approximately 60% of the sales increase is due to a 6.3% increase in comparable store sales for 2012, 20% of the sales increase is due to the addition of 46 net new stores and 4 new PetsHotels since January 29, 2012, and 20% of the sales increase is due to the 53rd week.

Comparable store sales growth was driven by an increase in comparable transactions and average sales per comparable transaction. Comparable transactions were 2.4% for 2012, including the impact of the additional week, and 2.5% for 2011.

During 2012, we have implemented several initiatives to increase traffic and continue to improve average sales per transaction. We continue to see strength in our super premium/natural food category and sales of our channel exclusive foods represented more than 75% of our food sales. We expanded the space in these categories 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 PetSmart Toy Chest reset. 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. During the thirteen weeks ended October 28, 2012, we began expanding our offerings of exclusive and proprietary brands. Finally, we have made more than twenty website enhancements this year and during the thirteen weeks ended October 28, 2012, we launched our Canada site on PetSmart.com.

Services sales, which include grooming, training, day camp for dogs and boarding, increased 9.7%, or $65.6 million, to $740.5 million for 2012, compared to $674.9 million for 2011. Services sales represented 11.0% of net sales for 2012 and 2011. The increase in services sales is primarily due to continued strong demand for our quality grooming services, the addition of 46 net new stores and 4 new PetsHotels since January 29, 2012, and the additional week, which increased services sales by $12.8 million.

Other revenue included in net sales during 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 $38.2 million, in 2012, compared to 0.6% of net sales, or $36.7 million, during 2011. There was no impact of the additional week on other revenue.

26



Gross Profit
Gross profit increased 100 basis points to 30.5% of net sales for 2012, from 29.5% for 2011. Overall merchandise margin increased 15 basis points primarily due to rate improvement. Services margin increased 5 basis points. Store occupancy and supply chain costs included in margin provided 55 and 10 basis points of leverage, respectively. The additional week increased margin by 15 basis points.

Operating, General and Administrative Expenses
Operating, general and administrative expenses decreased 40 basis points to 20.9% of net sales for 2012, from 21.3% of net sales for 2011. Operating, general and administrative expenses increased on a dollar basis by $109.6 million. The primary reasons for the year over year increase include store growth, planned incremental advertising spend focused on our differentiated offerings, and the additional week, which increased operating, general and administrative costs by $18.3 million.

Interest Expense, net
Interest expense, which is primarily related to capital lease obligations, decreased to $55.6 million for 2012, compared to $58.1 million for 2011 due to a decrease in capital lease obligations. Included in interest expense, net was interest income of $1.3 million for 2012 and for 2011.

Income Tax Expense
Income tax expense for 2012 and 2011 was $223.3 million and $167.0 million, respectively. Both 2012 and 2011 had an effective tax rate of 37.4%. The effective tax rate is calculated by dividing our income tax expense, which includes the income tax expense related to our equity income from Banfield, by income before income tax expense and equity income from Banfield.

Equity Income from Banfield
Our equity income from our investment in Banfield was $16.0 million and $10.9 million for 2012 and 2011, respectively, based on our 21.0% ownership in Banfield.

2011 (52 weeks) Compared to 2010 (52 weeks)

Net Sales
Net sales increased 7.4%, to $6.1 billion in 2011, compared to net sales of $5.7 billion in 2010. The increase in net sales was partially impacted by $11.2 million in favorable foreign currency fluctuations during 2011. Approximately 75% of the sales increase is due to a 5.4% increase in comparable store sales for 2011, and 25% of the sales increase is due to the addition of 45 net new stores and 12 new PetsHotels since January 30, 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 2.5% for 2011 and 2.1% for 2010.

Services sales, which include grooming, training, day camp for dogs and boarding, increased 9.1%, or $56.1 million, to $674.9 million for 2011, compared to $618.8 million for 2010. Services sales represented 11.0% and 10.9% of net sales for 2011 and 2010, respectively. The increase in services sales is primarily due to continued strong demand for our grooming services, and the addition of 45 net new stores and 12 new PetsHotels since January 30, 2011.

Other revenue included in net sales during 2011, 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 $36.7 million, in 2011, compared to 0.6% of net sales, or $34.2 million, during 2010.

Gross Profit
Gross profit increased 40 basis points to 29.5% of net sales for 2011, from 29.1% for 2010.

Overall merchandise margin increased 5 basis points due to a 20 basis point improvement in rate, which was offset by a 15 basis point decline in mix. The rate improvement is the result of increased sales of higher margin goods within the product categories and improvement in shrink during 2011, relative to 2010. Mix was negatively impacted as the sales growth in our consumables continued to outpace the sales growth of our higher margin hardgoods category. Hardgoods merchandise includes pet supplies

27


such as collars, leashes, health care supplies, grooming and beauty aids, toys and apparel, as well as pet beds and carriers. Consumables merchandise sales, which include pet food, treats, and litter, generate lower gross margins on average compared to hardgoods merchandise.

Services margin increased 5 basis points primarily due to increased sales as well as a shift to higher margin offerings in our grooming services. Services sales typically generate lower gross margins than merchandise sales as service-related labor is included in cost of sales; however, services generate higher operating margins than merchandise sales.

Store occupancy costs included in margin provided 30 basis points due to leverage associated with the increase in net sales.

Operating, General and Administrative Expenses
Operating, general and administrative expenses decreased 20 basis points to 21.3% of net sales for 2011, from 21.5% of net sales for 2010. Operating, general and administrative expenses increased on a dollar basis by $75.5 million. The primary reasons for the year over year increase include store growth, planned incremental advertising spend focused on our differentiated offerings and higher incentive compensation.

Interest Expense, net
Interest expense, which is primarily related to capital lease obligations, decreased to $58.1 million for 2011, compared to $59.6 million for 2010 due to a decrease in capital lease obligations. Included in interest expense, net was interest income of $1.3 million and $0.8 million for 2011 and 2010, respectively.

Income Tax Expense
For 2011, the $167.0 million income tax expense represents an effective tax rate of 37.4% compared with 2010, when we had income tax expense of $140.4 million, which represented an effective tax rate of 38.0%. The decrease in the effective tax rate was primarily due to a tax deductible dividend received from Banfield, partially offset by an increase in certain state tax liabilities. The effective tax rate is calculated by dividing our income tax expense, which includes the income tax expense related to our equity income from Banfield, by income before income tax expense and equity income from Banfield.

Equity Income from Banfield
Our equity income from our investment in Banfield was $10.9 million and $10.4 million for 2011 and 2010, respectively, based on our 21.0% ownership in Banfield.

Liquidity and Capital Resources
Cash Flow
We believe that our operating cash flow and cash on hand will be adequate to meet our operating, investing and financing needs in the foreseeable future. In addition, we have access to our $100.0 million revolving credit facility, which expires on March 23, 2017. However, there can be no assurance of our ability to access credit markets on commercially acceptable terms in the future. We 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 $653.0 million for 2012, $575.4 million for 2011, and $457.6 million for 2010. The primary differences between 2012 and 2011 include increased net income of $99.3 million and an increase in trade accounts payable resulting from the extension of vendor payment terms of $51.3 million. This was partially offset by incremental increases in merchant receivables of $20.2 million and deferred income tax assets of $17.3 million in 2012 as compared to 2011. The primary differences between 2011 and 2010 include increased net income of $50.4 million, an increase in non-trade accounts payable resulting from the extension of vendor terms of $29.6 million, a reduction in growth of merchandise inventories of $21.8 million and the $16.0 million dividend received from Banfield in 2011, as no dividends were received in 2010.

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 $114.6 million for 2012, $155.4 million in 2011 and $147.9 million in 2010. The primary difference between 2012 and 2011 was

28


a decrease in purchases of investments of $34.7 million, and an increase in maturities of investments of $13.0 million, offset by an increase in cash paid for property and equipment of $17.8 million. The primary difference between 2011 and 2010 was purchases of investments.

Net cash used in financing activities was $545.9 million for 2012, $369.4 million for 2011 and $328.1 million for 2010. Cash used in 2012 consisted primarily of cash paid for treasury stock, payments of cash dividends, payments on capital lease obligations, and a decrease in our bank overdraft, offset by net proceeds from common stock issued under equity incentive plans and excess tax benefits from stock-based compensation. The primary difference between 2012 and 2011 was an increase in cash paid for treasury stock of $98.5 million and a decrease in bank overdraft of $59.0 million. The primary differences between 2011 and 2010 were an increase in cash paid for treasury stock of $73.5 million and an increase in our bank overdraft of $31.2 million.

Free Cash Flow
Free cash flow is considered a non-GAAP financial measure under the SEC's rules. Management believes that free cash flow is an important financial measure for use in evaluating our financial performance and our ability to generate future cash from our business operations. Free cash flow should be considered in addition to, rather than as a substitute for, net income as a measure of our performance and net cash provided by operating activities as a measure of our liquidity.

Although other companies report free cash flow, numerous methods exist for calculating free cash flow. As a result, the method used by our management to calculate free cash flow may differ from the methods used by other companies. We urge you to understand the methods used by another company to calculate free cash flow before comparing our free cash flow to that of another company. We define free cash flow as net cash provided by operating activities minus cash paid for property and equipment, and payments of capital lease obligations.

The following table reconciles net cash provided by operating activities, a GAAP measure, to free cash flow, a non-GAAP measure (in thousands):
 
Year Ended
 
February 3, 2013
 
January 29, 2012
 
January 30, 2011
 
(53 weeks)
 
(52 weeks)
 
(52 weeks)
Net cash provided by operating activities
$
653,007

 
$
575,420

 
$
457,645

Cash paid for property and equipment
(138,467
)
 
(120,720
)
 
(125,074
)
Payments of capital lease obligations
(64,462
)
 
(54,437
)
 
(51,668
)
Free cash flow, a non-GAAP measure
$
450,078

 
$
400,263

 
$
280,903


For 2012, our free cash flow increased primarily due to an increase in net income and an increase in trade accounts payable resulting from the extension of vendor payment terms. This was partially offset by incremental increases in merchant receivables, deferred income tax assets and capital spending as compared to 2011. For 2011, our free cash flow increased primarily due to an increase in net income, an increase in non-trade accounts payable resulting from the extension of vendor payment terms, a reduction in growth of merchandise inventory, receipt of a dividend from Banfield, and a decrease in capital spending during 2011.


29


Share Purchase Program
The following table presents purchases of our common stock under the respective share purchase programs (in thousands):
 
 
 
 
 
 
Year Ended
Share Purchase Program
 
February 3, 2013
 
January 29, 2012
 
January 30, 2011
 
(53 weeks)
 
(52 weeks)
 
(52 weeks)
Authorized Amount
 
Date Approved by Board
 
Program Termination Date
 
Shares Purchased
 
Purchase Value
 
Shares Purchased
 
Purchase Value
 
Shares Purchased
 
Purchase Value
$
350,000

 
June 2009
 
July 31, 2011
 

 
$

 

 
$

 
3,412

 
$
107,069

$
400,000

 
June 2010
 
July 31, 2011
 

 

 
3,909

 
165,383

 
4,165

 
156,222

$
450,000

 
June 2011
 
January 31, 2013
 
4,594

 
278,553

 
3,683

 
171,447

 

 

$
525,000

 
June 2012
 
January 31, 2014
 
2,599

 
178,058

 

 

 

 

 
 
 
 
 
 
7,193

 
$
456,611

 
7,592

 
$
336,830

 
7,577

 
$
263,291


The $450.0 million program was completed during the thirteen weeks ended October 28, 2012. As of February 3, 2013, $346.9 million remained available under the $525.0 million program.

Common Stock Dividends
We believe our ability to generate cash allows us to invest in the growth of the business and, at the same time, distribute a quarterly dividend. Our revolving credit facility and letter of credit facility permit us to pay dividends, as long as we are not in default and the payment of dividends would not result in default. During 2012, 2011 and 2010, we paid aggregate dividends of $0.775 per share, $0.53 per share, and $0.45 per share, respectively.

Operating Capital and Capital Expenditure Requirements
Substantially all our stores are leased facilities. We opened 60 new stores and closed 14 stores in 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 $140 million to $150 million for 2013, based on our plan to continue our store growth, remodel or replace certain store assets, enhance our supply chain, continue our investment in the development of our information systems, and improve our infrastructure.

Our ability to fund our operations and make planned capital expenditures depends on our future operating performance and cash flow, which are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.

The following table presents our capital expenditures (in thousands):
 
Year Ended
 
February 3, 2013
 
January 29, 2012
 
January 30, 2011
Capital Expenditures:
(53 weeks)
 
(52 weeks)
 
(52 weeks)
New stores
$
40,313

 
$
44,737

 
$
38,715

Store-related projects(1)
57,139

 
32,623

 
49,989

PetsHotels(2)
983

 
3,758

 
9,980

Information technology
32,032

 
36,035

 
20,222

Supply chain
7,056

 
3,080

 
5,484

Other
944

 
487

 
684

  Total capital expenditures
$
138,467

 
$
120,720

 
$
125,074

____________
(1)
Includes store and grooming salon remodels, equipment replacement, relocations, and various merchandising projects.
(2)
For new and existing stores.

30



Lease and Other Commitments
Operating and Capital Lease Commitments and Other Obligations
The following table summarizes our contractual obligations, net of estimated sublease income, at February 3, 2013, and the effect that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
Contractual Obligation
 
2013
 
2014 &
2015
 
2016 &
2017
 
2018 and
Beyond
 
Other
 
Total
Operating lease obligations (1)
 
$
316,216

 
$
610,506

 
$
456,792

 
$
459,864

 
$

 
$
1,843,378

Capital lease obligations (1)(2)
 
112,089

 
229,494

 
188,802

 
232,064

 

 
762,449

Purchase obligations (3)
 
89,305

 
25,000

 

 

 

 
114,305

Uncertain tax positions (4)
 

 

 

 

 
15,679

 
15,679

Insurance obligations (5)
 
33,138

 

 

 

 
74,045

 
107,183

Total
 
$
550,748

 
$
865,000

 
$
645,594

 
$
691,928

 
$
89,724

 
$
2,842,994

Less: Sublease income
 
3,367

 
6,170

 
3,772

 
2,256

 

 
15,565

Net Total
 
$
547,381

 
$
858,830

 
$
641,822

 
$
689,672

 
$
89,724

 
$
2,827,429

__________
(1)
In addition to the commitments scheduled above, we have executed operating and capital lease agreements with total minimum lease payments of $167.1 million, which includes $66.9 million related to the new distribution center in Bethel, Pennsylvania. The lease term for the new distribution center in Bethel, Pennsylvania is 15 years, otherwise, the typical lease term for these agreements is 10 years. We do not have the right to control the use of the property under these leases as of February 3, 2013, because we have not taken physical possession of the property.
(2)
Includes $236.3 million in interest.
(3)
Represents purchase obligations for product and advertising commitments.
(4)
Unrecognized tax benefits, as shown in “Other,” have been recorded as liabilities, and we are uncertain as to if or when such amounts may be settled.
(5)
Insurance obligations included in “Other,” have been classified as noncurrent liabilities. We are unable to estimate the specific year to which the obligations will relate beyond 2013.

Letters of Credit
We issue letters of credit for guarantees provided for insurance programs. As of February 3, 2013, we had $87.7 million outstanding under our letters of credit.

Off-Balance Sheet Arrangements
Other than executed operating leases, we do not have any off-balance sheet financing that has, or is reasonably likely to have, a material current or future impact on our financial condition, cash flows, results of operations, liquidity, capital expenditures or capital resources.

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 809 of our stores. Our investment consists of common and preferred stock. As of February 3, 2013, and January 29, 2012, we owned 21.4% of the voting stock and 21.0% of the combined voting and non-voting stock of Banfield. Two members of our management team are members of the Banfield Board of Directors. Our equity income from our investment in Banfield, which is recorded one month in arrears under the equity method of accounting, was $16.0 million, $10.9 million, and $10.4 million for 2012, 2011 and 2010, respectively.

We recognized license fees and reimbursements for specific operating expenses from Banfield of $38.2 million, $36.7 million and $34.2 million during 2012, 2011 and 2010, respectively, in other revenue in the Consolidated Statements of Income and Comprehensive Income. The related costs are included in cost of other revenue in the Consolidated Statements of Income and Comprehensive Income. Receivables from Banfield totaled $3.2 million and $3.1 million at February 3, 2013, and January 29, 2012, respectively, and were included in receivables, net in the Consolidated Balance Sheets.


31


Our master operating agreement with Banfield 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 consolidated financial statements.

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 February 3, 2013, we had no borrowings and $17.9 million in stand-by letter of credit issuances under our Revolving Credit Facility. As of January 29, 2012, we had no borrowings under our Former Revolving Credit Facility and $24.4 million in stand-by letter of credit issuances.

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 February 3, 2013, we had $69.8 million in outstanding letters of credit, issued for guarantees provided for insurance programs, 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, we had $70.2 million in outstanding letters of credit, issued for guarantees provided for insurance programs, under our Former Stand-alone Letter of Credit Facility and $70.2 million in restricted cash on deposit with the Former Stand-alone Letter of Credit Facility lender.

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 February 3, 2013, we were in compliance with the terms and covenants of our Revolving Credit Facility and Stand-alone Letter of Credit Facility. The Revolving Credit Facility and Stand-alone Letter of Credit Facility are secured by substantially all our financial assets.

Seasonality and Inflation
Our business is subject to seasonal fluctuations. We typically realize a higher portion of our net sales and operating profits during the fourth quarter due to increased holiday traffic. As a result of this seasonality, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. Because our stores typically draw customers from a large trade area, sales also may be impacted by adverse weather or travel conditions, which are more prevalent during certain seasons of the year. As a result of our expansion plans, the timing of new store and PetsHotel openings and related preopening costs, the amount of revenue contributed by new and existing stores and PetsHotels and the timing and estimated obligations of store closures, our quarterly results of operations may fluctuate. Controllable expenses could fluctuate from quarter-to-quarter in a year. Finally, because new stores tend to experience higher payroll, advertising and other store level expenses as a percentage of sales than mature stores, new store openings will also contribute to lower store operating margins until these stores become established.

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

Impact of Federal Health Care Reform Legislation
In March 2010, the President of the United States signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or "the Acts." Uncertainty still exists regarding the magnitude of the impact of the Acts on our consolidated financial statements. The extent of the impact will not be known until we make final

32


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 7A.  Quantitative and Qualitative Disclosures About Market Risk
We are subject to certain market risks arising from transactions in the normal course of our business. Such risk is principally associated with foreign exchange fluctuations.

Foreign Currency Risk
Our Canadian subsidiary operates 80 stores and uses the Canadian dollar as the functional currency and the United States dollar as the reporting currency. We have certain exposures to foreign currency risk. Net sales in Canada, denominated in United States dollars, were $0.4 billion, or 5.5% of our consolidated net sales for 2012. Transaction gains and losses denominated in the United States dollar are recorded in cost of sales or operating, general and administrative expenses in the Consolidated Statements of Income and Comprehensive Income depending on the nature of the underlying transaction.

The transaction loss (gain) included in net income was $0.5 million, $0.8 million and $(0.7) million for 2012, 2011 and 2010, respectively.

We maintain a natural hedge through management of the cash accounts denominated in United States Dollars held in Canada in an effort to reduce the impact of foreign currency exchange rate fluctuations. From time to time, we have also entered into foreign currency exchange forward contracts, or “Foreign Exchange Contracts,” in Canada to manage the impact of foreign currency exchange rate fluctuations related to certain balance sheet accounts. We do not designate these Foreign Exchange Contracts as hedges and, accordingly, they are recorded at fair value using quoted prices for similar assets or liabilities in active markets. The changes in the fair value are recognized in operating, general and administrative expenses in the Consolidated Statements of Income and Comprehensive Income. The recorded gains and losses were immaterial for 2011 and 2010. We did not enter into Foreign Exchange Contracts during 2012.

Item 8.  Financial Statements and Supplementary Data
The information required by this Item is attached as Appendix F.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.


33





Item 9A.  Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the "Exchange Act," is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or “CEO,” and Chief Financial Officer, or “CFO,” as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(b) under the Exchange Act, our management conducted an evaluation (under the supervision and with the participation of our CEO and our CFO) as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. In performing this evaluation, our CEO and CFO concluded that, as of February 3, 2013, our disclosure controls and procedures were designed to meet the objective at the reasonable assurance level and were effective at the reasonable assurance level.

Management's Report on Internal Control Over Financial Reporting
We are responsible for the preparation and integrity of the consolidated financial statements appearing in our Annual Report on Form 10-K. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and, accordingly, include certain amounts based on our best judgments and estimates. Financial information in this Annual Report on Form 10-K is consistent with that in the consolidated financial statements.

We are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. Our internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements. Our internal control over financial reporting is supported by a program of internal audits and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel and a written code of business conduct adopted by our Board of Directors, applicable to all our Directors, officers, employees and subsidiaries. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As required by Rule 13a - 15(c) under the Exchange Act, our management conducted an assessment (under the supervision and with the participation of our CEO and CFO) of the effectiveness of our internal control over financial reporting as of February 3, 2013. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on our assessment, we maintained effective internal control over financial reporting as of February 3, 2013.

The effectiveness of our internal control over financial reporting as of February 3, 2013, has been audited by Deloitte & Touche LLP, an independent registered accounting firm, as stated in their attestation report, which is included herein.

Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act during the fourteen weeks ended February 3, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


34


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
PetSmart, Inc.
Phoenix, Arizona

We have audited the internal control over financial reporting of PetSmart, Inc. and subsidiaries (the "Company") as of February 3, 2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2013, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended February 3, 2013 of the Company and our reports dated March 28, 2013 expressed unqualified opinions on those financial statements and the financial statement schedule.

/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 28, 2013





35


Item 9B.  Other Information
None.

PART III

Item 10.  Directors, Executive Officers and Corporate Governance
The required information concerning our executive officers is contained in Item 1, Part I of this Annual Report on Form 10-K.

The remaining information required by this item is incorporated by reference from the information under the captions “Corporate Governance and the Board of Directors,” “Audit Committee,” “Report of the Audit Committee of the Board of Directors,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our proxy statement for our Annual Meeting of Stockholders to be held on June 14, 2013.

Our associates must act ethically at all times and in accordance with the policies in PetSmart's Code of Ethics and Business Conduct. We require full compliance with this policy and all designated associates including our CEO, CFO and other individuals performing similar positions, to sign a certificate acknowledging that they have read, understand and will continue to comply with the policy. We publish the policy and any amendments or waivers to the policy in the Corporate Governance section of our Internet Website located at www.petm.com.

Item 11.  Executive Compensation
The information required by this item is incorporated by reference from the information under the captions “Compensation Discussion and Analysis,” “Executive Compensation,” “Stock Award Grants, Exercises and Plans,” “Employment and Severance Agreements,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Report of the Compensation Committee” in our proxy statement.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference from the information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our proxy statement.

Item 13.  Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference from the information under the captions “Certain Relationships and Transactions” and “Corporate Governance and the Board of Directors” in our proxy statement.

Item 14.  Principal Accounting Fees and Services
The information required by this item is incorporated by reference from the information under caption “Fees to Independent Registered Public Accounting Firm for Fiscal Years 2012 and 2011” in our proxy statement.


36


PART IV

Item 15.  Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K.

1.
Consolidated Financial Statements:  Our consolidated financial statements are included as Appendix F of this Annual Report. See Index to Consolidated Financial Statements and Financial Statement Schedule on page F-1.

2.
Consolidated Financial Statement Schedule:  The financial statement schedule required under the related instructions is included within Appendix F of this Annual Report. See Index to Consolidated Financial Statements and Financial Statement Schedule on page F-1.

3.
Exhibits:  The exhibits which are filed with this Annual Report or which are incorporated herein by reference are set forth in the Exhibit Index on page E-1.

37



SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 28, 2013. 
 
 
PetSmart, Inc.
 
 
 
 
 
 
By:
/s/ Robert F. Moran


 
Robert F. Moran
 
 
 
Chairman and Chief Executive Officer

POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert F. Moran and Lawrence P. Molloy, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
 
Title
 
Date
 
 
 
 
 
/s/ ROBERT F. MORAN
 
Chairman and Chief Executive Officer
 
March 28, 2013
Robert F. Moran
 
 (Principal Executive Officer)
 
 
 
 
 
 
 
/s/ LAWRENCE P. MOLLOY
 
Executive Vice President and Chief Financial Officer
 
March 28, 2013
Lawrence P. Molloy
 
 (Principal Financial Officer and Principal Accounting Officer)
 
 
 
 
 
 
 
/s/ ANGEL CABRERA
 
Director
 
March 28, 2013
Angel Cabrera
 
 
 
 
 
 
 
 
 
/s/ RITA V. FOLEY
 
Director
 
March 28, 2013
Rita V. Foley
 
 
 
 
 
 
 
 
 
/s/ PHILIP L. FRANCIS
 
Director
 
March 28, 2013
Philip L. Francis
 
 
 
 
 
 
 
 
 
/s/ RAKESH GANGWAL
 
Director
 
March 28, 2013
Rakesh Gangwal
 
 
 
 
 
 
 
 
 
/s/ JOSEPH S. HARDIN, JR.
 
Director
 
March 28, 2013
Joseph S. Hardin, Jr.
 
 
 
 
 
 
 
 
 
/s/ GREGORY P. JOSEFOWICZ
 
Director
 
March 28, 2013
Gregory P. Josefowicz
 
 
 
 
 
 
 
 
 
/s/ AMIN I. KHALIFA
 
Director
 
March 28, 2013
Amin I. Khalifa
 
 
 
 
 
 
 
 
 
/s/ RICHARD K. LOCHRIDGE
 
Director
 
March 28, 2013
Richard K. Lochridge
 
 
 
 
 
 
 
 
 
/s/ BARBARA MUNDER
 
Director
 
March 28, 2013
Barbara Munder
 
 
 
 
 
 
 
 
 
/s/ THOMAS G. STEMBERG
 
Director
 
March 28, 2013
Thomas G. Stemberg
 
 
 
 

38


APPENDIX F

PetSmart, Inc. and Subsidiaries

Index to the Consolidated Financial Statements and
Financial Statement Schedule

F-1



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
PetSmart, Inc.
Phoenix, Arizona

We have audited the accompanying consolidated balance sheets of PetSmart, Inc. and subsidiaries (the "Company") as of February 3, 2013 and January 29, 2012, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended February 3, 2013.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PetSmart, Inc. and subsidiaries as of February 3, 2013 and January 29, 2012, and the results of their operations and their cash flows for each of the three years in the period ended February 3, 2013, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of February 3, 2013, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 28, 2013 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 28, 2013


F-2


PetSmart, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except par value)
 
February 3,
2013
 
January 29,
2012
ASSETS
 
 
 
Cash and cash equivalents
$
335,155

 
$
342,892

Short-term investments
9,150

 
20,311

Restricted cash
71,916

 
70,189

Receivables, net
72,198

 
53,899

Merchandise inventories
679,090

 
644,864

Deferred income taxes
62,859

 
51,381

Prepaid expenses and other current assets
86,768

 
80,352

Total current assets
1,317,136

 
1,263,888

Property and equipment, net
985,707

 
1,067,028

Equity investment in Banfield
39,934

 
37,824

Deferred income taxes
102,992

 
93,485

Goodwill
44,242

 
44,084

Other noncurrent assets
46,970

 
37,775

Total assets
$
2,536,981

 
$
2,544,084

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Accounts payable and bank overdraft
$
202,122

 
$
199,177

Accrued payroll, bonus and employee benefits
176,082

 
158,079

Accrued occupancy expenses and deferred rents
70,671

 
68,584

Current maturities of capital lease obligations
61,581

 
54,219

Other current liabilities
244,436

 
201,247

Total current liabilities
754,892

 
681,306

Capital lease obligations
464,578

 
505,273

Deferred rents
73,855

 
81,403

Other noncurrent liabilities
120,064

 
122,273

Total liabilities
1,413,389

 
1,390,255

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, 167,209 and 164,801 shares issued
17

 
16

Additional paid-in capital
1,418,411

 
1,312,996

Retained earnings
1,827,996

 
1,507,054

Accumulated other comprehensive income
5,506

 
5,490

Less: Treasury stock, at cost, 61,879 and 54,686 shares
(2,128,338
)
 
(1,671,727
)
Total stockholders’ equity
1,123,592

 
1,153,829

Total liabilities and stockholders’ equity
$
2,536,981

 
$
2,544,084

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

F-3


PetSmart, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share data)
 
Year Ended
 
February 3, 2013
 
January 29, 2012
 
January 30, 2011
 
(53 weeks)
 
(52 weeks)
 
(52 weeks)
Merchandise sales
$
5,979,604

 
$
5,401,731

 
$
5,040,807

Services sales
740,471

 
674,859

 
618,755

Other revenue
38,162

 
36,714

 
34,235

Net sales
6,758,237

 
6,113,304

 
5,693,797

Cost of merchandise sales
4,124,432

 
3,783,951

 
3,554,387

Cost of services sales
533,504

 
488,216

 
450,644

Cost of other revenue
38,162

 
36,714

 
34,235

Total cost of sales
4,696,098

 
4,308,881

 
4,039,266

Gross profit
2,062,139

 
1,804,423

 
1,654,531

Operating, general and administrative expenses
1,410,922

 
1,301,304

 
1,225,803

Operating income
651,217

 
503,119

 
428,728

Interest expense, net
(54,329
)
 
(56,842
)
 
(58,837
)
Income before income tax expense and equity income from Banfield
596,888

 
446,277

 
369,891

Income tax expense
(223,329
)
 
(166,960
)
 
(140,396
)
Equity income from Banfield
15,970

 
10,926

 
10,372

Net income
389,529

 
290,243

 
239,867

Other comprehensive income, net of income tax:
 
 
 
 
 
Foreign currency translation adjustments
36

 
77

 
3,011

Other
(20
)
 
33

 

Comprehensive income
$
389,545

 
$
290,353

 
$
242,878

Earnings per common share:
 
 
 
 
 
Basic
$
3.61

 
$
2.59

 
$
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