| PETSMART INC 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 reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements |
| Our expectations are as of the date this Annual Report on Form 10-K is filed, and we do not intend to update any of the forward-looking statements after the date this Annual Report on Form 10-K is filed to conform these statements to actual results, 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 |
| Unless otherwise specified, all references in this Annual Report on Form 10-K to years are to fiscal years |
| Business General In fiscal 2005, we generated sales of dlra3dtta8 billion, making PetSmart the leading specialty provider of products, services and solutions for the lifetime needs of pets in North America |
| We have identified a large group of pet owners we call “pet parents,” who are passionately committed to their pets and consider their pets family members |
| Our strategy is to attract and keep these customers by becoming the preferred provider of Total Lifetime Care^sm for pets |
| As part of this strategy, we focus on driving efficiencies in our stores, on our processes and our systems, on growing our pet services business and on delighting our customers by providing a superior store environment, a superior shopping experience and superior service |
| We are focused on improving and expanding our distribution capabilities, implementing new management information systems, reformatting our stores around the needs of our customers, developing our pet services business and creating a culture of customer service |
| Our stores typically range in size from 19cmam000 to 27cmam000 square feet, and carry a broad and deep selection of high quality pet supplies at everyday low prices |
| We offer more than 12cmam800 distinct items, including nationally recognized brand names, as well as an extensive selection of private brands across a range of product categories |
| We complement our strong product assortment with a selection of value-added pet services, including grooming, pet training, boarding and day camp |
| Virtually all our stores offer complete pet training services and feature pet styling salons that provide high-quality grooming services |
| Through our strategic relationship with Banfield, The Pet Hospital, operating under the registered trademark of Banfield, and other third-party operators, we made full-service veterinary care available in 525 of our stores as of January 29, 2006 |
| We also reach customers through our direct marketing channels, including PetSmart |
| com, one of the Internet’s most popular pet e-commerce sites, as well as an e-commerce site dedicated to equine products and an equine catalog |
| Our PetPerks loyalty campaign allows us to understand the needs of our customers and target offers directly to them |
| The Pet Food and Pet Supply Industry The pet product industry serves a large and growing market |
| Based on the 2005/2006 APPMA National Pet Owners Survey, more than 69 million households in the 1 _________________________________________________________________ [53]Table of Contents United States own a pet |
| The APPMA also estimates 63prca of United States households own a pet and 45prca of those households own more than one pet |
| The pet product industry can be divided into the following categories: food, supplies/medicines, veterinary care, pet services (such as grooming or boarding) and purchases of pets |
| The APPMA estimates that dog food, cat food and treats are the largest volume categories of pet-related products and, in 2005, approximated dlra14dtta5 billion, or 40prca of the market |
| Many premium pet food brands, which offer higher levels of nutrition than non-premium brands, are not currently sold through supermarkets, warehouse clubs and other mass and retail merchandisers due to manufacturer’s restrictions, but are sold primarily through superstores, specialty pet stores, veterinarians and farm and feed stores |
| 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 purchases of pets represent approximately 24prca, 7prca and 4prca, respectively, of the market |
| Competition Based on total sales, we are the largest specialty retailer of pet food, supplies and services in North America |
| The pet food and pet supply retail industry is highly competitive and can be organized into five different categories: • Supermarkets, warehouse clubs and other mass and retail merchandisers; • Specialty pet supply chains and pet supply stores; • Independent pet stores; • Catalog retailers; and • Internet retailers |
| We believe the principal competitive factors influencing our business are product selection and quality, convenience of store locations, store environment, customer service, price and availability of pet services |
| We believe we compete effectively within our various markets; however, some of our supermarket, warehouse club and mass and retail merchandise competitors are larger in terms of overall sales volume and have access to greater capital |
| We are currently the only major specialty pet retailer that markets to customers through stores, a catalog and the internet, and we believe this gives us a competitive advantage |
| In addition, we believe our pet services business is a competitive advantage which can not be easily duplicated |
| Our Strategy Our strategy is to be the preferred provider for the lifetime needs of pets |
| Our primary initiatives include: Add stores in existing multi-store, new multi-store and new single-store markets |
| Our expansion strategy includes increasing our share in the top 60 existing multi-store markets, penetrating new multi-store and single-store markets and achieving operating efficiencies and economies of scale in distribution, procurement, marketing and store operations |
| During fiscal 2005, we opened 100 net new stores, and in fiscal 2006, we expect to open approximately 90 net new stores, primarily in multi-store markets |
| We completed the conversion of our store base to our new specialty store format in fiscal 2003 |
| We believe our reformatted stores, combined with our other strategic initiatives, contribute to higher comparable store sales growth, profitability and return on investment |
| 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 shareholders |
| In fiscal 2004, we completed the roll out of an upgraded in-store sign package to better serve the needs of our customers |
| In fiscal 2005, we tested a new store refresh 2 _________________________________________________________________ [54]Table of Contents program that builds on the initial reformat and emphasizes our highly differentiated training and adoption services |
| We will refresh our existing stores with this new format in fiscal 2006, 2007 and 2008 |
| Expand our pet services business |
| Based on sales, we are the leading provider of pet services, which include professional grooming, pet training, boarding and day camp |
| Pet services are an integral part of our strategy, and we are focused on driving profitable growth in our services business |
| We believe services 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 |
| At the end of the fiscal year, we operated 32 PetsHotels in our stores in addition to one stand-alone location and seven additional in-store Doggie Day Camps that are not part of a full hotel, on our way to an ultimate build out of 300 hotels and 40 additional Doggie Day Camps |
| Pet services revenue, which includes grooming, pet training, PetSmart PetsHotel and Doggie Day Camp, grew by 24prca, 24prca and 25prca in fiscal 2005, 2004 and 2003, respectively |
| Through our strategic relationship with Banfield, The Pet Hospital, operating under the registered trademark of Banfield, and with other third-party operators, we made full-service veterinary care available in 525 of our stores as of January 29, 2006 |
| Offer superior customer service |
| Our emphasis on the customer is designed to provide our customers with an unparalleled shopping experience every time they visit our stores |
| Using a detailed curriculum and role-playing techniques, we educate store associates to identify customer needs and provide appropriate solutions |
| We measure their success in every store, and a portion of the annual incentive program for managers, from the store level to the executive team, is linked to key customer service and in-stock metrics |
| 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 |
| Differentiate ourselves through effective brand management |
| We are focused on developing and strengthening our brand identity |
| In August 2005, we announced a new marketing campaign that repositions the PetSmart brand from its current reputation as a “Mart” to “Smart” which emphasizes our capabilities as a resource of information, services and solutions |
| As part of the campaign, we changed our logo to highlight the “Smart” piece of the PetSmart name and rolled out new advertising that emphasizes our unique offerings for customers |
| We are creating tools to effectively communicate our unique value proposition and vision of providing Total Lifetime Care^sm for pets, and we continue to build enduring relationships with our customers |
| We continue to roll out our customer loyalty program, the PetPerks^® savings card |
| As of January 29, 2006, PetPerks was available in all PetSmart stores capturing more than two-thirds of transactions and more than three-fourths of sales |
| We will continue using a centralized customer database that allows us to track and analyze customer shopping patterns |
| We intend to use this information to customize direct marketing and promotional materials and to more effectively communicate with customers across all channels |
| We believe these strategic initiatives will continue to drive enhanced comparable store sales growth, profitability and return on investment |
| Our Stores Our stores are generally located in sites co-anchored by strong destination superstores and typically 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 for fiscal 2005, 2004 and 2003 is as follows: 2005 2004 2003 Store count at beginning of fiscal year 726 643 583 New and relocated stores opened 107 92 67 Closed stores (7 ) (9 ) (7 ) Store count at end of fiscal year 826 726 643 3 _________________________________________________________________ [55]Table of Contents In its first full year, we expect a new store to generate approximately dlra3dtta0 million in sales |
| We expect new stores to generate comparable store sales growth in the range of 19prca to 21prca in year two, 11prca to 13prca in year three, 8prca to 9prca in year four and 6prca to 7prca in year five |
| Distribution Our improved distribution network, combined with improved and integrated information systems, can optimize store inventory, and drives more efficient use of store labor, improved in-stock positions and better distribution center productivity |
| We currently employ a hybrid distribution system including full truckload shipments to individual stores and the splitting of full truckloads among several closely located stores and distribution centers |
| Our forward distribution centers handle products that require rapid replenishment |
| Our suppliers generally ship our merchandise to one of our distribution centers or forward 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, and we do not own any trailers |
| We operate the following distribution centers: Square Location Footage Date Opened Distribution Type Brockport, New York 392cmam000 February 1990 Catalog, internet, store and equine distribution center Phoenix, Arizona 447cmam000 May 1996 Distribution center Ennis, Texas 230cmam000 November 1999 Forward distribution center Columbus, Ohio 613cmam000 September 2000 Distribution center Gahanna, Ohio 276cmam000 October 2000 Forward distribution center Hagerstown, Maryland 252cmam000 October 2000 Forward distribution center Newnan, Georgia 200cmam000 April 2001 Forward distribution center Phoenix, Arizona 173cmam000 September 2001 Forward distribution center Reno, Nevada 199cmam000 June 2002 Forward distribution center Ottawa, Illinois 1cmam000cmam000 August 2005 Distribution center In January 2006, we entered into an agreement to lease approximately 877cmam500 square feet in Newnan, Georgia to be used as a distribution center |
| We expect this facility to open in fiscal 2007, and it will replace the current 200cmam000 square foot forward distribution center we currently lease in Newnan, Georgia |
| Information Systems During fiscal 2005, we continued to enhance our information systems including, but not limited to, the following: • Implemented a new inventory planning platform to ensure a strong in-stock position; • Implemented supply chain systems at our new distribution center in Ottawa, Illinois; and • Implemented web based tools to enhance communications with and improve the productivity of our associates and to provide the business with easy-to-access, actionable data |
| Merchandise Merchandise, which has been decreasing as a percentage of net sales due to the higher growth rate in services, represented approximately 92prca of our net sales in fiscal 2005, 93prca in fiscal 2004, and 94prca in fiscal 2003, and generally falls into three main categories: • Pet Food, Treats and Litter |
| We emphasize premium dog and cat foods, many of which are not available in supermarkets, warehouse clubs or other mass and retail merchandisers |
| We also offer quality national brands traditionally found in supermarkets and pet stores |
| Our broad assortment of pet supplies includes collars, leashes, health and beauty aids, shampoos, medication, toys, pet carriers, pet houses and equestrian supplies |
| We also offer a complete line of supplies for fish, birds, reptiles and small pets |
| These products include aquariums and habitats, filters and birdcages |
| In certain stores, we have an equine department that serves trade areas with high rates of horse ownership |
| The sale of pet supplies and other non-pet supply goods comprised 50prca, 51prca and 51prca of our net sales in fiscal 2005, 2004 and 2003, respectively |
| Our stores feature fresh-water tropical fish, birds, reptiles and small pets |
| Pet Services Pet services, which include grooming, pet training, boarding and day camp, represented 8prca, 7prca and 6prca of our net sales in fiscal 2005, 2004 and 2003, respectively |
| We offer full-service grooming and pet training services in virtually all our stores |
| We typically allocate an average of 800 square feet per store for high-quality, full-service grooming, including precision cuts, baths, toenail trimming and toothbrushing |
| Depending on their experience, our pet stylists are educated as part of a 15-week program that teaches exceptional grooming skills using safe and gentle techniques |
| Pet training services range from puppy classes to advanced and private courses |
| PetsHotel provides boarding for dogs and cats, 24-hour supervision, an on-call veterinarian, temperature controlled rooms and suites, daily specialty treats and play time as well as day camp for dogs |
| In fiscal 2005, we began a national rollout of PetsHotel at selected locations |
| As of January 29, 2006, we operated 32 PetsHotels within our retail stores in addition to one stand-alone location |
| In October 2004, we launched our test of the Doggie Day Camp concept, which is also available at our PetsHotel locations |
| During fiscal 2005, we expanded our test of Doggie Day Camps without a full hotel to six additional retail stores, for a total of seven Doggie Day Camps |
| Total revenues from pet grooming, pet training, boarding and day camp services grew 24prca from dlra240dtta7 million in fiscal 2004 to dlra298dtta9 million in fiscal 2005 |
| Veterinary Services The availability of comprehensive veterinary care in our stores further differentiates us, drives sales in our stores and reflects our overall commitment to pet care |
| Full-service veterinary hospitals in 525 of our stores offer routine examinations and vaccinations, dental care, a pharmacy and routine and complex surgical procedures |
| As of January 29, 2006, 513 of these hospitals were operated by Medical Management International, Inc, or MMI, a third-party operator of veterinary hospitals, operating under the registered trade name of Banfield, The Pet Hospital |
| See Note 3 to the Notes to Consolidated Financial Statements for a discussion of our ownership interest in MMI The remaining 12 hospitals are located in Canada and are operated by other third-parties |
| PetSmart Charities and Adoptions Through PetSmart Charities, Inc, an independent 501(c)(3) organization, we support the activities of animal welfare organizations in North America |
| PetSmart Charities creates and supports programs to help find a lifelong loving home for every pet, by: • Raising awareness of companion animal welfare issues; • Funding programs to further individual animal welfare organizations’ missions; and • Facilitating adoptions through in-store programs, kiosks and pet transport programs |
| Since 1994, PetSmart Charities has raised and donated more than dlra41 million to animal welfare programs and, through our in-store adoption programs, has saved the lives of more than 2dtta4 million pets |
| 5 _________________________________________________________________ [57]Table of Contents 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 veterinary hospitals in certain facilities; the transportation, handling and sale of small pets; environmental regulations with respect to generation, handling, storage, transportation and disposal of waste and biohazardous materials; the distribution, import/export and sale of products; the handling, security, protection and use of customer information; 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 the fact that the laws and regulations are enforced by the courts and by regulatory authorities with broad discretion, there can be 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, these laws and regulations |
| Intellectual Property We believe our intellectual property has significant value and is an important component in our merchandising and marketing strategies |
| We have several service marks and trademarks registered with the United States Patent and Trademark Office, or USPTO, including PetSmart^®, PetSmart |
| We also own several service mark and trademark applications that are pending with the USPTO and anticipate filing additional applications in the future |
| We also own numerous registered service marks, trademarks and pending applications in other countries, including Canada, as well as several trade names, domain names and copyrights for use in our business |
| We continue to invest in education for our full and part-time associates as part of our emphasis on customer service and providing pet care solutions |
| We are subject to no collective bargaining agreements and have experienced no work stoppages |
| We consider our relationship with our associates to be good |
| Increases in the federal minimum wage in recent years have not had a material effect on our business |
| Financial Information by Business Segment and Geographic Data As of January 29, 2006, we had two operating segments, PetSmart North America, which included all retail locations, and PetSmart Direct, which included our internet operations and equine catalog |
| We evaluated our segment reporting requirements under Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, or SFAS, Nodtta 131, “Disclosures about Segments of an Enterprise and Related Information,” and determined the PetSmart Direct operating segment does not meet the quantitative thresholds for disclosure as a reportable operating segment |
| Net sales in the United States were dlra3dtta7 billion, dlra3dtta3 billion and dlra2dtta9 billion for fiscal 2005, 2004 and 2003, respectively |
| Net Canadian sales, denominated in United States dollars, were dlra107dtta7 million, dlra87dtta7 million and dlra75dtta7 million for fiscal 2005, 2004 and 2003, respectively |
| Substantially all our long-lived assets are located in the United States |
| Available Information We make available, free of charge through our internet web-site (www |
| com), our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file such material, or furnish it to the Securities and Exchange Commission |
| 6 _________________________________________________________________ [58]Table of Contents PetSmart associates must act ethically at all times and in accordance with PetSmart’s Code of Business Ethics and Policies |
| We require full compliance with this policy, and all designated associates including our Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer and such other individuals performing similar positions, have signed a certificate acknowledging that they have read, understand and will continue to comply with the policy |
| The policy is published and we will publish any amendments or waivers to the policy in the Corporate Governance section of the PetSmart internet web-site located at www |
| Management Our executive officers and their ages and positions on April 1, 2006, are as follows: Name Age Position Philip L Francis 59 Chairman and Chief Executive Officer Robert F Moran 55 President and Chief Operating Officer Timothy E Kullman 50 Senior Vice President, Chief Financial Officer Scott A Crozier 55 Senior Vice President, General Counsel, Secretary and Chief Compliance Officer Donald Beaver 47 Senior Vice President, Chief Information Officer Barbara A Fitzgerald 54 Senior Vice President, Store Operations Kenneth T Hall 38 Senior Vice President, Merchandising, Chief Marketing Officer David K Lenhardt 36 Senior Vice President, Services, Strategic Planning and Business Development Francesca M Spinelli 52 Senior Vice President, People Raymond L Storck 45 Vice President of Finance, Chief Accounting Officer and Controller Philip L Francis has been a director of PetSmart since 1989, and Chief Executive Officer since March 1998 |
| He was President from 1998 to 2001 and was named Chairman of the Board in 1999 |
| From 1991 to 1998, he held various positions with Shaw’s Supermarkets, Inc, a subsidiary of J Sainsbury plc, including Chief Executive Officer, Chief Operating Officer and President |
| Prior to that, he held several senior management positions for Roundy’s Inc, Cardinal Health and the Jewel Companies |
| Robert F Moran was appointed President and Chief Operating Officer in December 2001 |
| He joined PetSmart as President of North American Stores in July 1999 |
| From 1998 to 1999, he was President of Toys ‘R’ Us, Ltd, Canada |
| Prior to 1991, 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 |
| Kullman also leads our real estate and construction group |
| Kullman was the Executive Vice President and Chief Financial Officer for Hagemeyer North America Holdings, Inc, part of a global distribution company based in the Netherlands |
| From 1997 to 2001, Mr |
| Kullman served as Senior Vice President, Chief Financial Officer, Treasurer and Secretary for Delchamps, Inc, a grocery retailer in the southeastern United States |
| Prior to that, he held various positions with Farm Fresh, Inc, Blue Cross Blue Shield of Michigan, and Deloitte Haskins & Sells, the predecessor to Deloitte & Touche LLP Scott A Crozier joined PetSmart as Senior Vice President and General Counsel in June 1999, and was appointed Secretary in June 2000 and Chief Compliance Officer in March 2005 |
| Crozier served as Vice President and General Counsel for Phelps Dodge Corporation, a global mining and manufacturing company |
| Prior to that, he was Counsel for Talley Industries, Inc, and served as an 7 _________________________________________________________________ [59]Table of Contents enforcement attorney with the Securities Division of the Arizona Corporation Commission and during that time, was also appointed as Special Assistant Attorney General with the Arizona Attorney General’s Office |
| Donald Beaver joined PetSmart as Senior Vice President and Chief Information Officer in May 2005 |
| Prior to joining PetSmart, Mr |
| Beaver was employed by H-E-B Grocery company where he held the position of Senior Vice President and CIO since 1999 |
| Beaver started his career at Eastman Kodak, where he was a programmer analyst |
| Barbara A Fitzgerald joined PetSmart as Senior Vice President of Store Operations in September 2000 |
| Prior to joining PetSmart, Ms |
| Fitzgerald was President of Harmon AutoGlass, a leading provider of auto glass replacement and repair |
| Fitzgerald served in various positions at Toys ‘R’ Us, Inc, including, Vice President, General Manager of New York/New Jersey and Vice President of People Development |
| Fitzgerald spent 24 years with Sears, Roebuck and Company in various capacities, including Vice President and General Manager of Sears Hardware Stores |
| Kenneth T Hall was appointed Senior Vice President, Merchandising in January 2006 and has been Chief Marketing Officer since January 2003 |
| He joined PetSmart as Vice President, Strategic Planning and Customer Relationships in October 2000 and was appointed Senior Vice President and Chief Marketing Officer in January 2003 |
| Hall worked as a consultant for Bain & Company, Inc, a global management consulting firm |
| Hall held various operational and financial positions at EXXON Company, USA David K Lenhardt joined PetSmart as Senior Vice President of Services, Strategic Planning and Business Development in October 2000 |
| Lenhardt 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 |
| ’s investment banking division |
| Francesca M Spinelli joined PetSmart as Senior Vice President of People in September 2003 |
| She served as Vice President of People for Radio Shack Corporation from 1998 to 1999, and Senior Vice President of People from 1999 to 2003 |
| Previously, Ms |
| Spinelli was with Wal-Mart Stores, Inc, where she held the positions of Corporate Vice President, Organizational Development and Vice President, Human Resources — McLane Company, Inc, a former division of Wal-Mart |
| Spinelli held human resources positions with Dillashaw, Hawthorn and Company, PC, and APS, Inc |
| Spinelli serves on the board of directors of Advance Auto Parts, Inc |
| Raymond L Storck was appointed Vice President of Finance, Chief Accounting Officer and Controller in March 2006 |
| He joined PetSmart in May 2004 as Vice President and Controller |
| Storck served as Chief Financial Officer and Treasurer of MicroAge, Inc, an information technology products and services company, and from 1986 to 2000 he held various other executive positions at MicroAge, including Vice President and Controller |
| In April 2000, MicroAge, Inc |
| filed for protection under Chapter 11 of the United States Bankruptcy Code |
| Prior to MicroAge, he was with Grant Thornton in Minneapolis |
| Item 1A Risk Factors 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, as well as those discussed in Our Stores, Distribution, Information Systems, Competition and Government Regulation sections of this Annual Report on Form 10-K If we are unable to increase sales at our existing stores or successfully open new stores, our results of operations could be harmed |
| Our continued revenue growth depends on our ability to increase sales at our stores |
| There can be no assurance that our stores will meet forecasted levels of sales and profitability |
| In addition, we expect to open approximately 90 net new stores in fiscal 2006 |
| Our ability to open additional stores is dependent on various factors including: • Identifying store sites that offer attractive returns on our investment; 8 _________________________________________________________________ [60]Table of Contents • Competition for those sites; • Successfully negotiating with landlords and obtaining any necessary governmental, regulatory or private approval; • Timely construction of stores; and • Our ability to attract and retain qualified store personnel |
| To the extent we are unable to accomplish any of the above, our ability to open new stores may be harmed |
| In addition, there can be no assurance that we will be able to meet the forecasted level of sales or operate our new stores profitably |
| New stores may place increasing demands on management and operating systems, may erode sales at existing stores and comparable store sales growth may decrease as stores grow older |
| We currently operate stores in most of the major market areas of the United States and Canada |
| Our plans for fiscal 2006 include opening approximately 90 net new stores, primarily in existing multi-store markets |
| The increased demands placed on management by opening new stores could result in operational inefficiencies and less effective management of the business and associates, which could in turn adversely affect our financial performance |
| Opening new stores may attract some customers away from other stores already operated by us in those markets and diminish their sales |
| Our comparable store sales increases were 4dtta2prca and 6dtta3prca for fiscal 2005 and 2004, respectively |
| Our operating margins at new stores may be lower than those of existing stores |
| Preopening expenses and lower sales volumes associated with newly opened stores can impact operating margins |
| In some geographic regions, we expect certain new store operating costs, particularly those related to occupancy, to be higher than in the past |
| As a result of our increasing number of net new stores and the impact of these rising costs, our total store contribution and operating margins may be lower in future periods than they have been in the past |
| A disruption, malfunction, or increased costs in the operation or expansion of our distribution centers or our supply chain would impact our ability to deliver merchandise to our stores or increase our expenses, which could harm our sales and results of operations |
| Our vendors generally ship our merchandise to one of our distribution centers, which receive and allocate merchandise to our stores |
| Any interruption or malfunction in our distribution operations, including, but not limited to, the loss of a key vendor that provides transportation of merchandise from our distribution centers to stores, could harm our sales and the results of our operations |
| We operate one fish distribution center and have two fish distribution centers that are operated by a third-party vendor, and an interruption or malfunction to their business could harm our sales and results of operations |
| In such an event, there can be no assurance that we could contract with another third party to operate the fish distribution centers on favorable terms, if at all, or that we could successfully operate the fish distribution centers ourselves |
| In addition, if we are unable to successfully expand our distribution centers, our sales or results of operations could be harmed |
| If our information systems fail to perform as designed or are interrupted for any reason 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 sales, financial data, warehousing, distribution, merchandise planning and replenishment functions and to maintain our in-stock positions |
| We possess offsite recovery capabilities for our key information systems |
| The failure of our information systems to perform as designed, or 9 _________________________________________________________________ [61]Table of Contents any interruption of our information systems for any reason for a significant period of time could disrupt our business and harm our sales and profitability |
| There can be no assurance that the costs of investments in our information systems will not exceed estimates or that they will be as beneficial as predicted |
| If we are unable to realize the benefits of improved systems, our results of operations could be harmed |
| If we accidentally disclose sensitive customer information, our business could be harmed |
| We routinely possess sensitive customer information such as credit card numbers, and a failure in our security procedures and operational controls could result in a release of that information |
| We could experience losses from lawsuits and negative publicity that may affect our business |
| A decline in consumers’ discretionary spending could reduce our sales 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, weather, consumer confidence and unemployment levels |
| We may experience declines in sales during economic downturns |
| Any material decline in the amount of discretionary spending could reduce our sales and harm our business |
| Our results may fluctuate due to seasonal changes associated with the pet food and pet supply retailing 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 |
| 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 |
| Controllable expenses, such as advertising, could fluctuate from quarter-to-quarter within a fiscal year |
| Because our stores typically draw customers from a large trade area, sales may also be impacted by adverse weather or travel conditions, which are more prevalent during certain seasons of the year |
| Finally, 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 |
| The pet food and pet supply retail industry is very competitive, and continued competitive forces may reduce our sales and profitability |
| The pet food and pet supply retail industry is very competitive |
| We compete with supermarkets, warehouse clubs and other mass and retail merchandisers, many of which are larger and have significantly greater resources than we have |
| We also compete with a number of pet supply warehouse or specialty stores, smaller pet store chains, catalog retailers, Internet retailers and pet stores |
| The industry has become increasingly competitive due to the expansion of pet-related product offerings by certain supermarkets, warehouse clubs or 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 |
| There can be no assurance we will not face greater competition from these or other retailers in the future |
| In particular, if our supermarket, warehouse club or other mass and retail competitors seek to gain or retain market share by reducing prices, we would likely reduce our prices in order to remain competitive, which may result in a decrease in our sales and profitability and require a change in our operating strategies |
| The loss of any of our key vendors, a decision by our vendors to make their products available in supermarkets or through warehouse clubs and other mass and retail merchandisers, or the inability of our vendors to provide products in a timely or cost-effective manner, could harm our business |
| We buy from several hundred vendors worldwide and, together, our two largest vendors accounted for approximately 15dtta1prca of our total sales for fiscal 2005 |
| Sales of premium pet food for dogs and cats comprise a significant portion of our revenues |
| Currently, most major vendors of premium pet foods do not permit their 10 _________________________________________________________________ [62]Table of Contents products to be sold in supermarkets, warehouse clubs or through other mass and retail merchandisers |
| If any premium pet food or pet supply vendors were to make their products available in supermarkets or through warehouse clubs and other mass and 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 |
| There can be no assurance 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 |
| There can be no assurance our overseas vendors will be able to satisfy our requirements including, but not limited to, timeliness of delivery, acceptable product quality, packaging and labeling requirements |
| Any inability of our existing vendors to provide products in a timely or cost-effective manner could harm our business |
| While we believe our vendor relationships are satisfactory we have no long-term supply commitments from our vendors, and any vendor could discontinue selling to us at any time |
| We depend on key 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, or the increased demands placed on our key executives and personnel by our continued growth, could adversely impact our financial performance and our ability to execute our strategies |
| In addition, our future success will depend on our ability to attract 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 |
| In addition, there historically has been a shortage of qualified veterinarians |
| If Banfield cannot attract and retain a sufficient number of veterinarians, Banfield’s ability to provide veterinary services in our stores and increase the number of stores in which Banfield provides veterinary services, may be impacted |
| Our international operations may result in additional market risks, which may harm our business |
| We entered the Canadian market in 1996 and operated 30 stores in Canada as of January 29, 2006 |
| 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 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; • The burden of complying with foreign laws, including tax laws; 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 MMI Holdings, Inc (MMIH), the third party operator of Banfield, The Pet Hospital, 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 and MMI’s ability to operate veterinary hospitals within our facilities |
| A determination that we or MMI are in violation of any of these applicable statutes and regulations could require us or MMI to restructure our operations to comply or render us or MMI unable to operate veterinary hospitals in a given location |
| If MMIH or MMI were to experience financial or other operating difficulties that would force it to limit its operations, or if MMIH were to cease operating the veterinary hospitals in 11 _________________________________________________________________ [63]Table of Contents our stores, our business may be harmed, both directly and due to a decrease in customer traffic |
| There can be no assurance that we could contract with another third party to operate the veterinary hospitals on favorable terms, if at all, or that we could successfully operate the veterinary hospitals ourselves |
| For a further discussion of our relationship with MMI, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Related Party Transactions |
| ” Our business would be harmed if we were unable to raise any needed additional capital on acceptable terms |
| We believe our capital resources and cash flows from operations will enable us to maintain our currently planned operations for the foreseeable future |
| If, however, we are unable to 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 is 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 more costly |
| If additional capital were needed, an inability to raise capital on favorable terms would 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 to our stockholders |
| A determination of a violation of any contractual obligations or government regulations could result in a disruption to our operations and could harm our business |
| 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; environmental regulations with respect to 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; services contracted for with various third party providers; the handling, security, protection and use of customer information; and the licensing and certification of services |
| 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 |
| A 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 position |
| We operate in multiple tax jurisdictions and believe an adequate provision for income and other taxes has been made |
| If, however, tax regulators in these jurisdictions determine that a position that we have taken on an issue is inappropriate, this may result in a material impact to our financial position |
| The Internal Revenue Service is currently examining our tax returns for fiscal 2002, 2003 and 2004 |
| While the examination has not been finalized, no issues have been identified that would have a material impact on our financial position or results of operations |
| Our business exposes us to claims that could result in adverse publicity, harm to our brand and a reduction in our sales |
| We are occasionally subject to claims due to the injury or death of a pet in our stores or while under our care in connection with the pet services we provide |
| In addition, we sell certain small pets including fish, birds, reptiles and small rodents in our stores |
| Given the large number of small pets we sell, deaths or injuries of these small pets 12 _________________________________________________________________ [64]Table of Contents sometimes occur while they are within our care |
| We may also be subject to claims resulting from the transfer of diseases from pets in our stores to other animals, associates and customers |
| From time to time, we have been subject to product liability claims for some of the products we sell |
| Any negative publicity or claims relating to any of the foregoing could harm our reputation and business, as well as expose us to litigation expenses and damages |
| Pending legislation, weather, disease or other factors could disrupt the supply of the 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 diseases that can quickly decrease or destroy the supply of these pets |
| In addition, our supply of products may be negatively impacted by weather, disease, contamination or trade barriers |
| Any disruption in the supply of products to our stores, due to legislation, weather, disease or any other factor, could harm our reputation and decrease our sales |
| Fluctuations in the stock market, as well as general economic and market conditions, including but not limited to fuel costs, may harm the 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 operating results and other factors including, but not limited to: • Announcements by analysts regarding their assessment of PetSmart and our prospects; • Announcements of our financial results, particularly if they differ from investors’ expectations; • General economic changes, including increased fuel costs; • 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 and consolidations; • The prospects of our industry; and • Natural disasters, hostilities and acts of terrorism |
| 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 fuel costs, may harm the market price of our common stock |
| We have implemented some anti-takeover provisions, including a stockholder rights plan that may prevent or delay an acquisition of us that may not be beneficial to our stockholders |
| Our restated certificate of incorporation and bylaws include provisions that may delay, defer or prevent a change in management or control that our stockholders may not believe is in their best interests |
| These provisions include: • A classified board of directors consisting of three classes; • The ability of our board of directors to issue, without stockholder approval, up to 10cmam000cmam000 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; 13 _________________________________________________________________ [65]Table of Contents • 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 662/3prca 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 |
| In August 1997, our Board of Directors adopted a Stockholder Rights Plan, commonly referred to as a poison pill, under which one preferred share purchase right was distributed on August 29, 1997, for each share of common stock held on that date |
| 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 have the effect of delaying or preventing an acquisition of PetSmart |