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PETM > SEC Filings for PETM > Form 10-Q on 27-Nov-2013All Recent SEC Filings

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Form 10-Q for PETSMART INC


27-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for historical information, the following discussion contains forward-looking statements that involve risks and uncertainties. In the normal course of business, our financial position is routinely subjected to a variety of risks, including market risks associated with store expansion, investments in information systems, international expansion, vendor reliability, competitive forces, and government regulatory actions. Our actual results could differ materially from projected results due to some or all of the factors discussed below. You should carefully consider the risks and uncertainties described below:

A decline in consumer spending or a change in consumer preferences could reduce our sales or profitability and harm our business.

The pet products and services retail industry is very competitive and continued competitive forces may adversely impact our business and financial results.

Comparable store sales growth may decrease. If we are unable to increase sales at our existing stores, our results of operations could be harmed.

We may be unable to continue to open new stores and enter new markets successfully. If we are unable to successfully reformat existing stores and open new stores, our results of operations could be harmed. Also, store development may place increasing demands on management and operating systems and may erode sales at existing stores.

Our quarterly operating results may fluctuate due to seasonal changes associated with the pet products and services retail industry and the timing of expenses, new store openings, and store closures.

Failure to successfully manage and execute our marketing initiatives could have a negative impact on our business.

A disruption, malfunction, or increased costs in the operation, expansion, or replenishment of our distribution centers, or our supply chain, would impact our ability to deliver to our stores or increase our expenses, which could harm our sales and results of operations.

Failure to successfully manage our inventory could harm our business.

If our information systems fail to perform as designed, or are interrupted for a significant period of time, our business could be harmed.

If we fail to protect the integrity and security of customer and associate information, our business could be adversely impacted.

The disruption of the relationship with or the loss of any of our key vendors, including our vendors with whom we have exclusive relationships, a decision by our vendors to make their products available in supermarkets or through warehouse clubs and other mass and retail merchandisers, the inability of our vendors to provide quality products in a timely or cost-effective manner, the availability of generic products, or risks associated with the suppliers from whom products are sourced, all could harm our business.

Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to product liability claims.

Food safety, quality, and health concerns could affect our business.

We depend on key executives, store managers, and other personnel and may not be able to retain or replace these employees or recruit additional qualified personnel, which could harm our business.

Our international operations may result in additional market risks, which may harm our business.

Our business may be harmed if the operation of veterinary hospitals at our stores is limited or fails to continue.

We face various risks as an e-commerce retailer.

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

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

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

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


Table of Contents
PetSmart, Inc. and Subsidiaries

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

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

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

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

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

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

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

We have implemented some anti-takeover provisions that may prevent or delay an acquisition of us that may not be beneficial to our shareholders.

For more information about these risks, see the discussion under the heading "Risk Factors" in our Form 10-K for the year ended February 3, 2013, filed with the Securities and Exchange Commission on March 28, 2013, which is incorporated herein by reference.


Table of Contents
PetSmart, Inc. and Subsidiaries

Overview
Based on our 2012 net sales of $6.8 billion, we are North America's leading specialty provider of products, services, and solutions for the lifetime needs of pets. As of November 3, 2013, we operated 1,314 stores, and we plan to continue our store growth during the remainder of 2013. Our stores carry a broad assortment of high-quality pet supplies at everyday low prices. We offer approximately 11,000 distinct items in our stores and 10,000 additional items on our website, PetSmart.com, including nationally recognized brand names, as well as an extensive selection of proprietary brands across a range of product categories.

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

We make full-service veterinary care available through our strategic relationship with certain third-party operators. As of November 3, 2013, full-service veterinary hospitals were in 839 of our stores. We have a 21.0% investment in MMI Holdings, Inc., which is accounted for under the equity method of accounting. MMI Holdings, Inc., through a wholly owned subsidiary, Medical Management International, Inc., collectively referred to as "Banfield," operated 832 of the veterinary hospitals under the registered trade name of "Banfield, The Pet Hospital." The remaining 7 hospitals are operated by other third parties in Canada.

The principal challenges we face as a business are the highly competitive market in which we operate and the volatility in the macro-economy. However, we believe we have a competitive advantage in our solutions for the Total Lifetime CareSM of pets, including pet services and proprietary brands, which we think cannot be easily duplicated. Additionally, we consider our consolidated cash flow from operations and consolidated cash on hand to be adequate to meet our operating, investing, and financing needs in the foreseeable future, and we continue to have access to our revolving credit facility. We continuously assess the economic environment and market conditions to guide our decisions regarding our uses of cash, including capital expenditures, investments, dividends, and the purchase of treasury stock.

Executive Summary
Diluted earnings per common share increased 17.3% to $0.88 on net income of $92.2 million, for the thirteen weeks ended November 3, 2013, compared to diluted earnings per common share of $0.75 on net income of $82.3 million for the thirteen weeks ended October 28, 2012. Diluted earnings per common share were $2.75 and $2.32 for the thirty-nine weeks ended November 3, 2013, and October 28, 2012, respectively.

Net sales increased 4.0% to $1.7 billion for the thirteen weeks ended November 3, 2013, compared to $1.6 billion for the thirteen weeks ended October 28, 2012. The increase in net sales for the thirteen weeks ended November 3, 2013, included an unfavorable impact from foreign currency fluctuations of $4.9 million. Net sales increased 4.8% to $5.1 billion for the thirty-nine weeks ended November 3, 2013, compared to $4.9 billion for the thirty-nine weeks ended October 28, 2012. The increase in net sales for the thirty-nine weeks ended November 3, 2013, included an unfavorable impact from foreign currency fluctuations of $8.2 million.

Comparable store sales, or sales in stores open at least one year, increased 2.7% and 3.2% for the thirteen and thirty-nine weeks ended November 3, 2013. Internet sales are included in comparable store sales.

Services sales increased 5.2% to $184.2 million for the thirteen weeks ended November 3, 2013, compared to $175.0 million for the thirteen weeks ended October 28, 2012. Services sales increased 6.1% to $580.5 million for the thirty-nine weeks ended November 3, 2013, compared to $546.9 million for the thirty-nine weeks ended October 28, 2012.

As of November 3, 2013, we had $295.9 million in cash and cash equivalents and $71.2 million in restricted cash. We did not borrow against our revolving credit facility during the thirty-nine weeks ended November 3, 2013.

We purchased 0.4 million shares of our common stock for $30.0 million during the thirteen weeks ended November 3, 2013, and 3.5 million shares of our common stock for $234.1 million during the thirty-nine weeks ended November 3, 2013.


Table of Contents
PetSmart, Inc. and Subsidiaries

Critical Accounting Policies and Estimates We discuss our critical accounting policies and estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the year ended February 3, 2013. We have made no significant change in our critical accounting policies since February 3, 2013.

Recently Issued Accounting Pronouncements In July 2013, the Financial Accounting Standards Board, or "FASB," issued an accounting standards update on the presentation of unrecognized tax benefits. The update clarifies that unrecognized tax benefits related to a net operating loss carryforward, or similar tax loss, or tax credit carryforward, should generally be presented in the financial statements as a reduction to a deferred tax asset. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The update allows for early adoption. We have accordingly presented applicable uncertain tax positions as reductions to deferred income tax assets in the Condensed Consolidated Balance Sheet as of November 3, 2013. These amounts are presented in other current liabilities and other noncurrent liabilities in the Condensed Consolidated Balance Sheets as of February 3, 2013, and October 28, 2012. The adoption of the new guidance did not have a material impact on our condensed consolidated financial statements.

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