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This excerpt taken from the PETM 10-K filed Apr 10, 2006. Fiscal
2004 Compared to Fiscal 2003
Net
Sales
Net sales increased $370.3 million, or 12.4%, to
$3.4 billion for fiscal 2004, compared to net sales of
$3.0 billion for fiscal 2003. The sales increase was due to
83 net new stores and a 6.3% increase in comparable store
sales for fiscal 2004. Services sales, which are included in our
net sales and include grooming, pet training, pet boarding and
day camp operations, increased by 24.4%, or $47.2 million,
to $240.7 million.
Gross
Profit
Gross profit increased as a percentage of net sales to 30.9% for
fiscal 2004, from 30.1% for fiscal 2003. The increase primarily
reflected higher margins on product sales during fiscal 2004
compared with fiscal 2003 due to improved buying practices and
our ongoing pricing strategies. We also experienced lower
inventory shrinkage and other inventory related expenses as a
percentage of sales in fiscal 2004 compared to fiscal 2003. In
addition, occupancy costs recorded in cost of sales decreased as
a percentage of sales in fiscal 2004 compared to fiscal 2003.
These items were partially offset by higher freight costs as a
result of increased fuel prices.
Operating,
General and Administrative Expenses
Operating, general and administrative expenses increased as a
percentage of net sales to 23.2% for 2004, from 22.8% for 2003.
The increase was primarily due to increases in workers’
compensation, general liability and medical insurance costs as
well as higher repairs and maintenance costs in our stores. The
higher insurance costs were primarily due to increases in
actuarial estimates for workers’ compensation and general
liability claims. In addition, we recognized a $4.1 million
expense in the second quarter of fiscal 2004 primarily for the
retirement of
Table of Contents
assets and additional amortization related to store lighting
replacements. The increases were offset by lower advertising,
bonus and closed store expenses as a percentage of revenue in
fiscal 2004 compared to fiscal 2003. We also recognized a
$3.6 million gain from a legal settlement in the fourth
quarter of 2004.
Interest
Income
Interest income increased to $4.8 million during fiscal
2004 compared to $3.4 million during fiscal 2003 primarily
due to an increase in interest rates.
Interest
Expense
Interest expense increased to $21.3 million for fiscal
2004, from $19.3 million for fiscal 2003. The increase was
primarily due to an increase in capital lease obligations in
2004.
Income
Tax Expense
For fiscal 2004, income tax expense was $83.4 million
representing an effective rate of 34.6%. For fiscal 2003, income
tax expense of $78.0 million represents an effective rate
of 38.4%. The reduction in the effective tax rate from fiscal
2003 to 2004 is primarily due to an analysis of our net
operating loss carryovers related to our fiscal 2000 purchase of
PetSmart.com. We completed the analysis in the second quarter of
2004 and it was based on guidance issued from the Internal
Revenue Service. As a result, we expect to utilize an additional
$22.1 million of net operating losses previously considered
unavailable. We recorded a total tax benefit of
$7.7 million in the second quarter of fiscal 2004, related
to the additional net operating loss utilization. In addition,
we recognized a legal settlement of $3.6 million in the
fourth quarter of fiscal 2004, which allowed us to use a portion
of our capital loss carryforwards. We reversed a previously
established valuation allowance, and as a result, recorded a tax
benefit of $1.2 million.
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