This excerpt taken from the PETM 10-K filed Apr 10, 2006.
Fiscal 2004 Compared to Fiscal 2003
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 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
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 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 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.