<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED:
JULY 28, 1996
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 (I.R.S. Employer
incorporation or organization) Identification No.)
10000 N. 31ST AVENUE, SUITE C-100
PHOENIX, ARIZONA 85051
(Address of principal executive offices, including Zip Code)
(602) 944-7070
(Registrants telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
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.
(1) Yes (X) No ( )
(2) Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
COMMON STOCK, $.0001 PAR VALUE, 105,517,236 SHARES AT AUGUST 26, 1996
1
<PAGE>
PETsMART, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
July 28, 1996 and January 28, 1996 3
Consolidated Statements of Operations
for the thirteen and twenty-six weeks ended
July 28, 1996 and July 30, 1995 4
Consolidated Statements of Cash Flows
for the twenty-six weeks ended
July 28, 1996 and July 30, 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10
Part II. Other Information
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
2
<PAGE>
PETsMART, INC. AND SUBSIDIARIES
___________________________________________________________________________
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
July 28, January 28,
ASSETS 1996 1996
----------- ------------
(unaudited)
Cash and cash equivalents $ 54,837 $ 74,540
Receivables 37,954 31,236
Merchandise inventories 221,849 201,574
Prepaid expenses and other current assets 21,446 11,898
--------- ---------
Total current assets 336,086 319,248
Property held for sale and leaseback
Property and equipment, net 7,175 10,126
Other assets 179,750 163,067
36,953 36,250
-------- --------
Total assets $559,964 $528,691
-------- --------
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
Notes payable to bank $ 39,525 $22,248
Accounts payable 100,915 110,678
Accrued payroll and employee benefits 12,598 15,321
Accrued occupancy expense 9,232 7,546
Accrued merger and nonrecurring charges 12,521 3,962
Other accrued expenses 14,926 21,084
Current maturities of capital leases 7,836 8,953
-------- --------
Total current liabilities 197,553 189,792
Capital lease obligations 58,502 56,143
Deferred rents 11,852 11,316
Other liabilities 108 1,227
-------- --------
Total liabilities 268,015 258,478
-------- --------
Preferred stock, common stock and other
stockholders' equity:
Preferred stock (Note 7) - 6,510
Common stock; $.0001 par value; 250,000
shares authorized, 104,841 and 101,950
shares issued and outstanding 10 10
Additional paid-in capital 314,704 290,289
Cumulative foreign currency translation
adjustments (42) (42)
Accumulated deficit (22,723) (26,554)
-------- --------
Total preferred stock, common stock and
other stockholders' equity 291,949 270,213
-------- --------
Total liabilities, preferred stock, common
stock and other stockholders' equity $559,964 $528,691
-------- --------
The accompanying notes are an integral part of these unaudited
financial statements.
<PAGE>
PETsMART, INC. AND SUBSIDIARIES
_____________________________________________________________________________
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the 13 weeks ended For the 26 weeks ended
July 28, July 30, July 28, July 30,
1996 1995 1996 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $321,872 $259,002 $632,072 $510,591
Cost of sales 230,326 194,492 455,429 383,710
------- ------- ------- -------
Gross profit 91,546 64,510 176,643 126,881
.
Store operating expenses 59,984 47,867 122,441 98,719
Store preopening expenses 2,214 1,311 4,251 1,978
General and administrative
expenses 10,067 7,510 18,754 16,414
Merger and non-recurring costs 12,300 40,729 20,364 40,729
------- ------- ------- -------
Operating income 6,981 (32,907) 10,833 (30,959)
Interest income 29 451 187 833
Interest expense (2,332) (1,742) (4,171) (3,790)
------- ------- ------- -------
Income (loss) before income
taxes 4,678 (34,198) 6,849 (33,916)
Income tax expense (benefit) 1,780 (16,971) 3,026 (14,719)
------- ------- ------- -------
Net income (loss) 2,898 (17,227) 3,823 (19,197)
Accretion of redeemable preferred
stock - (498) - (996)
------- ------- ------- -------
Net income (loss) applicable to
holders of common stock $2,898 $(17,725) $3,823 $(20,193)
------- ------- ------- -------
Income (loss) per common share
and common share equivalent $0.03 $(0.18) $0.04 $(0.20)
------- ------- ------- -------
Weighted average number of
common and common equivalent
shares outstanding 109,447 101,068 108,699 100,893
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these unaudited
financial statements.
<PAGE>
PETsMART, INC. AND SUBSIDIARIES
____________________________________________________________________________
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the 26 weeks ended
July 28, July 30,
1996 1995
--------- ---------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) $3,823 $(19,197)
Adjustments to reconcile net income (loss)
to net cash from (used in) operating
activities:
Depreciation and amortization 12,550 11,053
Loss on disposal of assets 255 9,155
Changes in assets and liabilities:
Receivables (6,717) (2,346)
Merchandise inventories (20,276) 5,465
Prepaid expenses and other current assets (9,548) (3,813)
Other assets (703) (18,310)
Accounts payable (9,763) 11,687
Accrued payroll and employee benefits (2,723) (99)
Accrued occupancy expense 1,686 (1,757)
Accrued merger and nonrecurring charges 8,559 15,331
Other accrued expenses (6,158) (4,507)
Deferred rents 536 952
Other liabilities (1,119) (863)
------ ------
Net cash from (used in) operating activities (29,598) 2,751
------ ------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of leaseholds, fixtures and equipment (23,083) (8,348)
Purchases of property held for sale and leaseback (8,470) 451
Purchases of investments - 3,326
Proceeds from sale of property held for sale and
leaseback 11,421 -
------- -----
Net cash from (used in) investing activities (20,132) (4,571)
------- -----
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 11,739 3,553
Borrowings from bank credit facility 99,400 17,776
Payments on bank credit facility (82,123) (8,976)
Tax benefit resulting from exercise of stock options 6,174 832
Payment on capital lease obligations (5,163) (10,292)
------- ------
Net cash from (used in) financing activities 30,027 2,893
------- ------
FOREIGN CURRENCY TRANSLATION GAINS (LOSSES) - 61
------- ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (19,703) 1,134
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 74,540 84,746
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $54,837 $85,880
------- ------
The accompanying notes are an integral part of these unaudited
financial statements.
<PAGE>
PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS AND TWENTY-SIX WEEKS ENDED JULY 28, 1996 AND
JULY 30, 1995
____________________________________________________________________________
NOTE 1 - GENERAL
- ----------------
The accompanying unaudited consolidated financial statements of
PETsMART, Inc. and Subsidiaries ("PETsMART" or "Company") have
been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly,
they do not include all of the information and footnotes
required by generally accepted accounting principles for
financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have
been included.
Because of the seasonal nature of the Company's business, the
results of operations for the thirteen weeks and twenty-six
weeks ended July 28, 1996 and July 30, 1995 are not necessarily
indicative of the results to be expected for the full year.
For further information, refer to the financial statements and
footnotes thereto for the fiscal year ended January 28, 1996,
included in the Company's Annual Report on Form 10-K (File No.
0-21888) filed with the Securities and Exchange Commission on
April 12, 1996.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
- ------------------------------------
The accompanying consolidated financial statements include the
accounts of PETsMART and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Financial data for all periods presented reflect the
retroactive effects of the May 1995 merger with Sporting Dog
Specialties Inc., ("Sporting Dog"), the June 1995 merger with
Petstuff Inc., ("Petstuff"), the September 1995 merger with The
Pet Food Giant, Inc. ("Pet Food Giant") and the January 1996
merger with State Line Tack, Inc. ("State Line Tack"), all of
which have been accounted for as poolings of interest. The
consolidated financial statements have been prepared by
combining the historical financial statements of PETsMART,
Sporting Dog, Petstuff, Pet Food Giant and State Line Tack.
NOTE 3 - ACCOUNTING CHANGE
- --------------------------
During the quarter ended April 30, 1995, PETsMART adopted
Accounting Standards Executive Committee Statement of Position
93-7, "Reporting on Advertising Costs" ("SOP 93-7"). Under SOP
93-7 the Company is required to expense advertising costs for
other than direct-response advertising either as incurred or
the first time the advertising takes place. As a result of the
adoption of SOP 93-7, the Company charged to operations during
the quarter ended April 30, 1995 previously deferred
advertising costs of approximately $450,000.
NOTE 4 - STOCK SPLITS
- ---------------------
On July 19, 1996, the Company effected a 2-for-1 split of its
common stock in the form of a stock dividend to stockholders of
record on July 8, 1996. On May 1, 1995, the Company effected a
3-for-2 split of its common stock in the form of a stock
dividend to stockholders of record on April 17, 1995. All
share and per share data has been restated to reflect the stock
splits effected in the form of these stock dividends.
<PAGE>
PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS AND TWENTY-SIX WEEKS ENDED JULY 28, 1996 AND
JULY 30, 1995
____________________________________________________________________________
NOTE 5 - 1995 ACQUISITIONS
- --------------------------
SPORTING DOG SPECIALTIES, INC.
On May 16, 1995, the Company acquired all of the outstanding
equity securities of Sporting Dog Specialties, Inc. and its
affiliates ("Sporting Dog") for an aggregate consideration of
3,750,000 shares of PETsMART Common Stock. Sporting Dog, a
Rochester, New York-based company, is the leading world-wide
catalog retailer of pet and animal supplies and accessories.
The transaction was accounted for by the pooling of interests
method; therefore, prior financial statements have been
restated to reflect this merger.
As a result of the acquisition, the Company recorded a merger
and related non-recurring charge of $1.8 million in its fiscal
quarter ended July 30, 1995. This one-time charge included
investment banking, legal and accounting fees, a provision for
the closure of inadequate facilities and other costs of
consolidation.
PETSTUFF, INC.
On June 1, 1995, the Company acquired all of the outstanding
equity securities of Petstuff for an aggregate consideration of
8,032,178 shares of PETsMART Common Stock, plus an additional
317,538 shares of PETsMART Common Stock reserved for issuance
upon exercise of Petstuff stock options assumed in the merger.
Petstuff was an Atlanta, Georgia-based operator of pet food and
supply superstores in the Eastern United States and Canada. The
transaction was accounted for by the pooling of interests
method; therefore, prior financial statements have been
restated to reflect this merger.
As a result of the acquisition, the Company recorded a merger
and related non-recurring charge of $38.9 million in its fiscal
quarter ended July 30, 1995. This one-time charge included
investment banking, legal and accounting fees, costs associated
with reformatting, refixturing and remerchandising the acquired
superstores to the format consistent with that of a PETsMART
superstore, a provision for the closure of redundant and non-
productive superstores and other costs of integration.
During the second fiscal quarter ended July 28, 1996, the
Company recorded an additional $12.3 million charge ($7.6
million after its related tax benefit or $0.07 per share)
principally as a result of a change in its accounting estimate
of the lease termination costs anticipated to be incurred in
connection with the settlement of lease obligations for the 17
former Petstuff stores closed by the Company immediately
following the merger with Petstuff, along with seven lease
commitments for future Petstuff locations that were either
duplicate or inadequate facilities, and therefore, were not
opened. The Company now believes lease settlement costs
associated with the closed stores, and the leases related to
unopened locations, will require an additional $10.8 million of
expenditures. The remaining $1.5 million of the additional
charge is primarily related to Petstuff store conversion costs.
THE PET FOOD GIANT, INC.
On September 18, 1995, the Company acquired all of the
outstanding equity securities of Pet Food Giant for an
aggregate consideration of 1,879,342 shares of PETsMART Common
Stock, plus 94,032 shares of PETsMART Common Stock reserved for
issuance upon exercise of Pet Food Giant stock options assumed
in the merger. Pet Food Giant, based in New Jersey, was an
operator of pet food and supply superstores in the New Jersey,
Long Island and Philadelphia metropolitan areas. The
transaction was accounted for by the pooling of interests
method; therefore, prior financial statements have been
restated to reflect this merger.
<PAGE>
PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS AND TWENTY-SIX WEEKS ENDED JULY 28, 1996 AND
JULY 30, 1995
____________________________________________________________________________
As a result of the acquisition, the Company recorded a merger
and related non-recurring charge during its fiscal quarter
ended October 29, 1995 of $6.4 million. This one-time charge
included investment banking, legal and miscellaneous
transaction costs, costs associated with the integration of the
companies' operations, and termination benefits to be paid to
key employees of Pet Food Giant.
NOTE 6 - 1996 ACQUISITION
- -------------------------
STATE LINE TACK, INC.
On January 30, 1996, the Company acquired all of the equity
interests of State Line Tack, a New Hampshire-based catalog
retailer specializing in discount brand name tack, riding
apparel, and equine supplies, by issuing 1,200,000 shares,
including approximately 76,000 shares reserved for issuance of
State Line Tack stock options assumed in the merger, of the
Company's Common Stock in exchange for all of the outstanding
equity interests of State Line Tack. The transaction was
accounted for by the pooling of interests method; therefore,
prior financial statements have been restated to reflect this
merger.
As a result of the acquisition, the Company recorded a merger
and related non-recurring charge during its quarter ended April
28, 1996 of $8.1 million. This one-time charge included
investment banking, legal and miscellaneous transaction costs
($1.4 million), and costs associated with the consolidation of
the companies' operations ($6.7 million), including provision
for the closure of inadequate and duplicative facilities and
systems, severance and employee relocation costs, cancellation
of certain contractual obligations and other costs of
consolidation.
Net sales and net loss applicable to holders of common stock
for PETsMART and the 1996 acquisition for the thirteen week and
twenty-six week periods ended July 30, 1995 were as follows (in
thousands):
THIRTEEN WEEKS ENDED: PETsMART STATE LINE TACK COMBINED
-------------------- -------- --------------- --------
Net sales $244,912 $14,090 $259,002
Net loss applicable
to holders of common stock (1) $(17,360) $(365) $(17,725)
TWENTY-SIX WEEKS ENDED:
Net sales $486,796 $23,795 $510,591
Net loss applicable
to holders of common stock (2) $(19,323) $(870) $(20,193)
_________________________
(1) Includes accretion of redeemable convertible preferred
stock of PETsMART of $281,000 and accretion of preferred
stock to liquidation value of State Line Tack of $217,000,
respectively.
(2) Includes accretion of redeemable convertible preferred
stock of PETsMART of $562,000 and accretion of preferred
stock to liquidation value of State Line Tack of $434,000,
respectively.
<PAGE>
PETsMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS AND TWENTY-SIX WEEKS ENDED JULY 28, 1996 AND
JULY 30, 1995
____________________________________________________________________________
NOTE 7 - PREFERRED STOCK
- ------------------------
REDEEMABLE PREFERRED STOCK
At December 31, 1995, 3,099,172 shares of State Line Tack
Series A Preferred Stock and 375,000 shares of State Line Tack
Series B Preferred Stock were issued and outstanding. The
Series A Preferred Stock was subject to a 15% cumulative
dividend and had a liquidation preference of $0.91963 per share
and the Series B Preferred Stock was subject to a 8.55%
cumulative dividend and had a liquidation preference of $2 per
share. All series of preferred stock were redeemable at the
discretion of the State Line Tack Board of Directors. The
Series A and Series B Preferred Stock were being accreted to
their liquidation value through charges to retained earnings.
The carrying value of the Series A and Series B Preferred Stock
at January 28, 1996 was $6.5 million.
In connection with the merger with the Company (see Note 6),
all shares of State Line Tack Series A and Series B Preferred
Stock were included in the conversion into PETsMART equivalent
common shares.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's 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 PURCHASING AND DISTRIBUTION, COMPETITION,
and RISK FACTORS, in the Company's Form 10-K for the year ended January 28,
1996, and the RISK FACTORS section contained in the Company's Registration
Statement on Form S-3 (Commission File No. 333-03251) filed with the
Commission on May 7, 1996.
GENERAL
At July 28, 1996, PETsMART operated 299 superstores in 33 states. Net sales
grew 24.3% for the thirteen weeks ended July 28, 1996, compared to the same
period of 1995, due principally to the opening of new superstores and
comparable store sales increases of 11.9%. The Company believes that
comparable store sales increases have been largely due to increased customer
traffic and to improvements in its merchandising and marketing activities.
In view of the increasing maturity of its superstore base, as well as the
opening of additional superstores in existing markets, the Company
anticipates that its rate of comparable store sales growth may be lower in
future periods than previously reported. The Company also expects that
future increases in net sales and net income, if any, will be somewhat
dependent on the opening and profitability of new superstores. There can be
no assurance that the Company will be able to achieve its planned expansion
on a timely and profitable basis or that the combined operations and recent
mergers with Petstuff, Sporting Dog Specialties, Pet Food Giant and State
Line Tack will be successful or that there will be no material adverse
effects from the efforts of to integrate Petstuff, Sporting Dog, Pet Food
Giant and State Line Tack on the financial results of the Company.
As a result of its expansion plans, the Company anticipates certain costs,
such as preopening expenses and occupancy, may increase as a percentage of
sales in the near term. In addition, the timing of new superstore openings
and related preopening expenses and the amount of revenue contributed by new
and existing superstores may cause the Company's quarterly results of
operations to fluctuate. Since new superstores have higher payroll,
advertising and other store level expenses as a percentage of sales than
mature superstores, the level of recent new superstore openings will also
contribute to lower store operating margins. The Company anticipates opening
at least 18 stores over the remainder of fiscal 1996, including ten stores in
the third fiscal quarter, and eight stores in the fourth fiscal quarter,
including five stores in Canada. In addition, the Company charges preopening
costs associated with each new superstore to earnings when the superstore is
opened. Therefore, the Company expects that the opening of large numbers of
new superstores in a given quarter will adversely impact its quarterly
results of operations for that quarter.
10
<PAGE>
The Company's business also is subject to some seasonal fluctuation.
Historically, the Company has realized a higher portion of its net sales
during the month of December and a lower portion of its net sales during the
summer months. PETsMART's superstores typically draw from a large retail
area and can therefore be impacted by adverse weather and travel conditions.
In May 1995, PETsMART acquired Sporting Dog Specialties, Inc. and affiliates
(Sporting Dog), a catalog retailer of pet and animal supplies and
accessories. Although the results of Sporting Dog were not dilutive on
PETsMART's fiscal 1995 operating results, there can be no assurance that
Sporting Dog can maintain its profitability.
In June 1995, PETsMART acquired 52 superstores in the Eastern United States
and four superstores in Canada from Petstuff, Inc. (Petstuff). During the
second quarter 1995, 15 of the redundant and non-productive superstores,
including all of the Canadian stores, were closed. As of July 28, 1996, a
total of 17 redundant or nonproductive former Petstuff superstores had been
closed. The Company has completed the integration of the remaining Petstuff
superstores, including changing the merchandise mix and operating and
marketing philosophies. The Petstuff acquisition was dilutive to fiscal 1995
operating results, but PETsMART expects the acquisition to contribute to
earnings in fiscal 1996; however, there can be no assurance these superstores
can achieve their anticipated profitability.
In September 1995, PETsMART acquired The Pet Food Giant, Inc. (Pet Food
Giant), an operator of 10 pet food and supply superstores in the New Jersey,
Long Island and Philadelphia metropolitan areas. As of July 28, 1996, one
redundant superstore had been closed. The Company has completed the process
of integrating the Pet Food Giant stores into the PETsMART format, including
changing the merchandise mix and operating and marketing philosophies.
Although PETsMART does not expect the results of Pet Food Giant to be
dilutive to 1996 operating results, there can be no assurance that Pet Food
Giant can achieve its anticipated profitability.
11
<PAGE>
On January 30, 1996, PETsMART completed the acquisition of State Line Tack,
Inc. (State Line Tack), the leading worldwide catalog operator specializing
in discount brand name tack, riding apparel and equine supplies. PETsMART
does not believe the results of this acquisition will be dilutive to fiscal
1996 operating results.
The discussion below relates to the results of operations of PETsMART
reflecting the mergers with Petstuff, Sporting Dog, Pet Food Giant, and State
Line Tack as if they had taken place from the inception of PETsMART. All of
these acquisitions have been accounted for as poolings of interests.
Additionally, all share and per share data have been restated to reflect the
Company's 2-for-1 stock split effected in the form of a stock dividend paid
on July 19, 1996 to stockholders of record on July 8, 1996, and a 3-for-2
stock split effected in the form of a stock dividend paid on May 1, 1995 to
stockholders of record on April 17, 1995.
RESULTS OF OPERATIONS
SECOND QUARTER 1996 COMPARED TO SECOND QUARTER 1995
Net sales increased 24.3% to $321.9 million for the thirteen weeks ended July
28, 1996 ("second quarter 1996") from $259.0 million for the thirteen weeks
ended July 30, 1995 ("second quarter 1995"). However, sales increased 30.2%,
after excluding the effect of the closure of certain former Petstuff stores.
Comparable store sales increased 11.9% in second quarter 1996. During second
quarter 1996 the Company opened 16 new superstores and had 299 superstores in
operation at the end of second quarter 1996 compared to 243 superstores open
at the end of second quarter 1995, after giving effect to its recent mergers.
Gross profit, defined as net sales less cost of sales, including distribution
costs and store occupancy costs, increased as a percentage of net sales to
28.4% for second quarter 1996 as compared to 24.9% for second quarter 1995.
The increase in margin is principally due to a change in sales mix in retail
stores, including those stores along the Atlantic coast reflecting the impact
of the assimilation of the former Petstuff stores acquired in the second
quarter of last year, and improved margins in catalog operations.
Store operating expenses, which includes payroll and benefits, advertising
and other store level expenses, were 18.6% of net sales for second quarter
1996 versus 18.5% for second quarter 1995.
Store preopening expenses as a percentage of net sales increased to 0.7% for
second quarter 1996 compared to 0.5% for second quarter 1995. The average
preopening expenses for the 16 PETsMART superstores opened in second quarter
1996 increased to $138,000 from $95,000 for the twelve PETsMART-format
superstores opened during second quarter 1995. The increase in preopening
expenses on a per unit basis reflects the opening of five large-format
superstores in Southern California which required increased planning, store
setup, and training costs due to their larger size and several new
merchandising concepts.
12
<PAGE>
General and administrative expenses were 3.1% of net sales for second quarter
1996 versus 2.9% for second quarter 1995.
During the second quarter ended July 28, 1996, the Company recorded an
additional $12.3 million merger and non-recurring charge ($7.6 million after
its related tax benefit or $0.07 per share) principally as a result of a
change in its accounting estimate of the lease termination costs anticipated
to be incurred in connection with the settlement of lease obligations for the
17 former Petstuff stores closed by the Company immediately following the
merger with Petstuff in June 1995, along with seven lease commitments for
future Petstuff locations that were either duplicate or inadequate
facilities, and therefore, were not opened. The Company now believes lease
settlement costs associated with the closed stores, and the leases related to
unopened locations, will require an additional $10.8 million of expenditures.
The remaining $1.5 million of the current charge is primarily related to
Petstuff store conversion costs. No other acquired stores have been closed
since July 1995.
The Company generated operating income of $7.0 million for second quarter
1996 compared to an operating loss of $32.9 million in second quarter 1995.
However, excluding the merger and related non-recurring charge, operating
income increased $11.5 million to $19.3 million for second quarter 1996 from
$7.8 million for second quarter 1995. Excluding the merger and related
non-recurring charge, operating income as a percentage of sales increased to
6.0% for second quarter 1996 from 3.0% for second quarter 1995.
Interest income decreased to $29,000 for second quarter 1996 from $451,000
for second quarter 1995 principally due to the decrease in average cash
balances in second quarter 1996 compared to second quarter 1995. Interest
expense increased to $2.3 million for second quarter 1996 from $1.7 million
for second quarter 1995 principally due to higher average borrowings
outstanding during the period.
Income tax expense was $1.8 million for second quarter 1996 compared to a
benefit of $17.0 million for second quarter 1995. Excluding the effect of
permanent differences within the merger and non-recurring charges recorded in
both years, the Company's effective income tax rate for second quarter 1996
was 38% compared to 35% for second quarter 1995. This increase was primarily
due to an increased federal rate due to the absence of targeted job tax
credits, lower nontaxable interest income, and increased state income taxes.
13
<PAGE>
As a result of the foregoing, the Company reported net income of $2.9 million
(or $0.03 per share) for second quarter 1996 compared to a net loss, before
accretion of the Pet Food Giant and State Line Tack preferred stock, of $17.2
million (or $0.18 per share) for second quarter 1995. Excluding the merger
and related non-recurring charge and the related tax benefits recorded in
both periods, net income for second quarter 1996, on a comparable basis,
increased to $10.5 million (or $0.10 per share), a $6.3 million increase over
second quarter 1995.
TWENTY-SIX WEEKS ENDED JULY 28, 1996 COMPARED TO TWENTY-SIX WEEKS ENDED
JULY 30, 1995
Net sales increased 23.8% to $632.1 million for the twenty-six weeks ended
July 28, 1996 from $510.6 million for the twenty-six weeks ended July 30,
1995. However, sales increased 30.0%, after excluding the effect of the
closure of certain former Petstuff stores. Comparable store sales increased
12.0% for the twenty-six week period. During the period, the Company opened
39 new superstores and closed two relocated stores. The Company had 299
superstores in operation at the end of second quarter 1996 compared to 243
superstores open at the end of second quarter 1995, after giving effect to
its recent mergers.
Gross profit, defined as net sales less cost of sales, including distribution
costs and store occupancy costs, increased as a percentage of net sales to
27.9% for 1996 year to date as compared to 24.8% for the same period of 1995.
The increase in margin is principally due to a change in sales mix in retail
stores, including those stores along the Atlantic coast reflecting the impact
of the assimilation of the former Petstuff stores acquired in the second
quarter of last year, and improved margins in catalog operations.
Store operating expenses, which includes payroll and benefits, advertising
and other store level expenses, increased as a percentage of net sales to
19.4% for the period from 19.3% for the first half of last year.
Store preopening expenses as a percentage of net sales increased to 0.7% for
1996 compared to 0.4% for 1995, primarily as a result of the large number
(39) of superstores opened in 1996. The average preopening expenses for the
39 PETsMART format superstores opened in 1996 increased to $111,000 from
$104,000 for the 19 PETsMART-format and Pet Food Giant-format superstores
opened during 1995. The increase in preopening expenses on a per unit basis
reflects the opening of five large-format superstores in Southern California
which required increased planning, store setup, and training costs due to
their larger size and several new merchandising concepts.
14
<PAGE>
General and administrative expenses decreased as a percentage of sales to
3.0% for the year to date 1996 from 3.2% for the comparable period of 1995.
These expenses reflected continued expense management along with the
consolidation of the Petstuff and Pet Food Giant administrative activities
incurred last year.
Merger and non-recurring charges of $20.4 million related to the State Line
Tack acquisition and the Petstuff lease settlement costs were recorded during
the twenty-six weeks ended July 28, 1996. The State Line Tack one-time
charge included investment banking, legal and accounting fees ($1.4 million),
a provision for the closure of duplicate or inadequate facilities and systems
($5.5 million) and other costs of consolidation, including employee
severance, relocation costs and early termination fees on bank debt ($1.2
million). The Company recorded an additional $12.3 million charge primarily
related to lease termination costs anticipated to be incurred in connection
with the settlement of lease obligations for the 17 former Petstuff stores
closed by the Company immediately following the merger with Petstuff in June
1995, along with seven lease commitments for future Petstuff locations that
were either duplicate or inadequate facilities, and therefore, were not
opened. The Company now believes lease settlement costs associated with the
closed stores, and the leases related to unopened locations, will require an
additional $10.8 million of expenditures. The remaining $1.5 million of the
charge is primarily related to Petstuff store conversion costs. No other
acquired stores have been closed since July 1995.
Merger and related non-recurring charges recorded in the twenty-six week
period ended July 30, 1995 were $40.7 million. Approximately $38.9 million
of this one-time charge was related to the June 1, 1995 acquisition of
Petstuff, and included investment banking, legal and accounting fees, costs
associated with reformatting, refixturing and remerchandising the acquired
Petstuff superstores to the format consistent with that of a PETsMART
superstore, a provision for closure of redundant and inadequate Petstuff
superstores, and other costs of consolidation. In addition, $1.8 million of
this one-time charge was related to the May 16, 1995 acquisition of Sporting
Dog.
The Company generated operating income of $10.8 million for the twenty-six
weeks ended July 28, 1996 compared to an operating loss of $31.0 million in
the 1995 comparable period. However, excluding the merger and related
non-recurring charges recorded in both years, operating income increased
$21.4 million to $31.2 million for 1996 from $9.8 million for 1995.
Excluding the merger and related non-recurring charge, operating income as a
percentage of sales increased to 4.9% for 1996 from 1.9% for 1995.
Interest income decreased to $187,000 for 1996 from $833,000 for 1995
principally due to the decrease in average cash balances in 1996 compared to
1995. Interest expense increased to $4.2 million for 1996 from $3.8 million
for 1995 principally due to higher average borrowings during the twenty-six
weeks ended July 28, 1996.
15
<PAGE>
Income tax expense was $3.0 million for 1996 compared to an income tax
benefit of $14.7 million for 1995. Included in the 1996 year to date tax
provision is the effect of the nondeductibility of certain items included in
the State Line Tack merger and non-recurring charge. Excluding the effect of
permanent differences within the merger and non-recurring charge, the
Company's effective income tax rate for 1996 was 38% compared to 35% for
1995. This increase was primarily due to an increased federal rate due to
the absence of targeted job tax credits and increased state income taxes.
As a result of the foregoing, the Company reported net income of $3.8 million
(or $0.04 per share) for the twenty-six weeks ended July 28, 1996 compared to
a net loss, before accretion of the Pet Food Giant and State Line Tack
preferred stock, of $19.2 million (or $0.20 per share) for the 1995
comparable period. Excluding the 1996 merger and related non-recurring
charges and the related tax benefits, net income for the 1996 period, on a
comparable basis, increased to $16.9 million (or $0.16 per share), a $12.5
million increase over the first half of fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and expansion program to date
principally through the sale of equity securities, raising an aggregate of
approximately $275 million since the Company's inception, as well as from
cash flow from operations. Additional sources of financing include real and
personal property leases, bank lines of credit and vendor terms on inventory
purchases.
At July 28, 1996, total assets were $560.0 million, of which $336.1 million
were current assets. Cash and cash equivalents were $54.8 million. The
principal use of operating cash is the purchase of merchandise inventories.
This usage is reduced by vendor credit terms that allow the Company to
finance a portion of its inventory purchases. Since PETsMART's sales are on
a cash and carry basis, cash flow generated from operating superstores
provides a source of liquidity to the Company.
Net cash used in operations was $29.6 million for the twenty-six weeks ended
July 28, 1996, compared to cash provided of $2.8 million for the same period
of last year. Approximately $30.0 million of the cash used in operations
during the twenty-six weeks ended July 28, 1996 related to the timing of
inventory purchases and payments during the first half of fiscal 1996 for
inventory balances required for the stores opened in the same period.
Merchandise accounts payable leveraging (the percentage of merchandise
inventory financed by vendor credit terms, e.g. accounts payable divided by
merchandise inventory), decreased to 45.5% at July 28, 1996, compared to
54.9% at January 28, 1996. Inventory balances were approximately $221.8
million at July 28, 1996, and $201.6 million at January 29, 1995. Average
inventory per open store decreased 2.7% to $742,000 at July 28, 1996, from
$769,000 at January 28, 1996, due to management's efforts to improve
inventory turns.
16
<PAGE>
The Company has used cash in investing activities since inception to purchase
leaseholds, fixtures and equipment for new superstores and, to a lesser
extent, to purchase equipment and computer software in support of its
administrative functions. The Company has also used cash to purchase
superstores for sale and leaseback. Net cash used in investing activities
was $20.1 million for the twenty-six weeks ended July 28, 1996.
Net cash flow from financing activities, primarily borrowings and repayments
under the Company's bank credit facility, was $30.0 million for the
twenty-six weeks ended July 28, 1996.
The Company currently has a $100 million revolving bank credit arrangement
that expires July 6, 1999. Borrowings under the credit facility are
unsecured and bear interest, at PETsMART's option, at either the bank's prime
rate or LIBOR plus 0.875%. The credit facility contains certain restrictive
covenants relating to net worth, debt to equity ratios, capital expenditures
and minimum fixed charge coverage. The Company expects to meet all existing
covenants in its credit agreement for the remainder of fiscal 1996. At July
28, 1996, $39.5 million was outstanding under the credit facility.
The Company also has several lease arrangements with leasing companies that
the Company uses to finance certain store and warehouse fixtures and
equipment, point-of-sale equipment and management information systems.
The Company's primary long-term capital requirement is for opening new
superstores. All of the Company's superstores are leased facilities. The
Company currently expects to open at least 18 additional superstores in the
remainder of fiscal 1996, including five stores in Canada. The Company
estimates that its net cash requirements to open each superstore, including
store fixtures and equipment, leasehold improvements, preopening costs and
inventory will range from $680,000 to $1,240,000. This amount will include
from $50,000 to $600,000 for leasehold improvements, depending upon whether
the superstore site is a build-to-suit or a rehabilitated unit. Based upon
the Company's current plan to open at least 18 additional superstores by the
end of fiscal 1996, between $12.2 million and $22.3 million will be needed to
finance the Company's new superstore openings in the remainder of fiscal
1996, of which approximately $6.0 million to $14.0 million will be financed
through equipment leases. During the remainder of fiscal 1996, the Company
plans to remodel/retrofit approximately 15 older PETsMART stores and several
former Petstuff and Pet Food Giant stores to the current store prototype
which will require approximately $7.5 million of expenditure. The Company
also has a new 430,000 square foot distribution center under construction in
Phoenix, Arizona which will have required total expenditures of approximately
$17.0 million when complete in the third fiscal quarter of 1996. The Company
has obtained a commitment for the sale and leaseback of this distribution
facility. The Company may also expend additional funds to take advantage of
opportunities that arise from time to time for the acquisition of businesses
or lease rights from tenants occupying retail space that is suitable for a
PETsMART superstore.
17
<PAGE>
The United States Congress has passed legislation which increases the federal
minimum wage. The Company does not believe this legislation will have a
material adverse effect on its store operating expenses or results of
operations for the next twelve months.
The Company does not intend to own the land and buildings for its
superstores. However, to the extent the Company believes that it is
advantageous to purchase land for new superstores and to construct new
superstore buildings itself, it will use its existing financing sources or
cash to finance construction and, after the superstores are open, complete
sale/leaseback transactions or attempt to secure other permanent financing.
The Company believes that its current cash balances, together with funds
available from bank facilities, equipment lease arrangements and from
operations will be adequate to meet its anticipated working capital and
capital expenditure requirements for at least the next 12 months. However,
numerous factors, such as future acquisition opportunities or a change in
expansion plans, may cause the Company to change its current plans and seek
additional funds. The Company is continually evaluating financing
possibilities, and it may seek to raise additional funds through a debt or
equity financing if it believes it would be in the best interests of the
Company and its stockholders to do so.
The Company has historically had higher short-term cash requirements during
periods of high store opening activity and during the holiday inventory
build-up in its third fiscal quarter.
Although the Company cannot accurately anticipate the effect of inflation on
its operations, it does not believe inflation is likely to have a material
adverse effect on its net sales or results of operations.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1995, Petstuff Canada, LTD., a wholly-owned subsidiary of
Petstuff, Inc., was named as a defendant in a complaint filed by a Canadian
company alleging breach of the Competition Act, injurious falsehood, and
damages to the trademarks and reputation of the Canadian company, stemming
from alleged advertising practices. The suit seeks $20 million (Canadian) in
damages plus $500,000 (Canadian) for punitive damages plus costs and
interest. Petstuff Canada, LTD. has filed counterclaims in this action. The
case has not been actively pursued, and the Canadian company has made an
offer to settle all claims pursuant to the Rules of Civil Procedure for
$75,000 (Canadian).
In March 1996, and after an exchange of correspondence, the Company filed a
Statement of Claim in the Federal Court of Canada against Perry's Pet Mart
(Canada) Inc. ("Perry's") seeking a declaration of the Company's right to use
the PETsMART name and mark in Canada. Perry's responded with a Statement of
Defense and Counterclaim contesting the Company's right to use the name and
mark in Canada and seeking permanent and interlocutory injunctive relief and
damages, costs and interest. In August 1996, the parties entered into a
letter of intent with respect to settlement of the dispute and are currently
in the process of attempting to finalize a settlement agreement. Proceedings
on Perry's request for an interlocutory injunction have been suspended
pending the finalization of the settlement agreement. There can be no
assurance that a settlement of this matter can be expeditiously reached, and
the ultimate outcome of this matter cannot presently be determined.
19
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's Annual Meeting of Stockholders (Annual Meeting) was held on
June 21, 1996. At the Annual Meeting, the stockholders of the registrant (i)
elected each of the persons listed below to serve as a director of the
Registrant until the 1999 Annual Meeting of Stockholders or until his
successor is elected; (ii) approved an amendment to the Company's Restated
Certificate of Incorporation to increase the authorized number of shares of
Common Stock from 75,000,000 to 250,000,000; (iii) approved the amendment and
restatement of the Company's 1992 Non-Employee Directors' Stock Option Plan
in the form of the 1996 Non-Employee Directors' Stock Option Plan; and (iv)
ratified the selection of Price Waterhouse LLP as the Registrant's
Independent Accountants for the fiscal year ending February 2, 1997.
The registrant had 51,707,060 shares of Common Stock outstanding as of May 1,
1996, the record date for the Annual Meeting. At the Annual Meeting, holders
of a total of 44,416,599 shares of Common Stock were present in person or
represented by Proxy. The following sets forth information regarding the
results of the voting at the Annual Meeting:
PROPOSAL 1 - ELECTION OF DIRECTORS
Director
- --------
Denis L. Defforey
Lawrence S. Phillips
Mark S. Hansen
Votes in Favor 44,167,729
Votes Against 248,870
Abstentions 0
PROPOSAL 2 - APPROVAL OF AMENDMENT TO THE
COMPANY'S RESTATED CERTIFICATE OF INCORPORATION
TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF
COMMON STOCK TO 250,000,000
Votes in Favor 33,277,451
Votes Against 10,669,168
Abstentions 17,786
Broker no-vote 452,194
20
<PAGE>
PROPOSAL 3 - APPROVAL OF AMENDMENT AND
RESTATEMENT OF 1992 NON-EMPLOYEE DIRECTORS'
STOCK OPTION PLAN IN THE FORM OF THE
1996 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
Votes in Favor 35,419,223
Votes Against 7,313,980
Abstentions 1,171,022
Broker no-vote 512,374
PROPOSAL 4 - RATIFICATION OF SELECTION OF
INDEPENDENT ACCOUNTANTS
Votes in Favor 44,378,312
Votes Against 24,231
Abstentions 14,056
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits
Exhibit 11.1 Computation of Per Share Earnings
(b) Reports on Form 8-K
During the thirteen weeks ended July 28, 1996, the Company
filed no reports on Form 8-K or Form 8-K/A.
21
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
PETsMART, INC.
(Registrant)
Date: September 9, 1996 /s/ C. DONALD DORSEY
--------------------
C. Donald Dorsey
Executive Vice President and Chief
Financial Officer (Duly Authorized
Officer and Principal Financial and
Accounting Officer)
22
<PAGE>
PETsMART, INC.
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
11.1 Computation of Per Share Earnings.
23
<PAGE>
EXHIBIT 11.1
PETsMART, Inc. and Subsidiaries
Statement of Computation of Common
and Common Equivalent Shares and
Earnings per Share
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 26 Weeks Ended
July 28, July 30, July 28, July 30,
1996 1995 1996 1995
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
PRIMARY (1)
- -----------
Weighted average common shares outstanding 104,211 101,068 103,666 100,893
Incremental common equivalents from options and warrants 5,235 - 5,033
-------- -------- -------- --------
Weighted average shares outstanding 109,447 101,068 108,699 100,893
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) $ 2,898 $(17,227) $ 3,823 $(19,997)
Accretion of redeemable convertible preferred stock - (498) - (996)
-------- -------- -------- --------
Net income (loss) applicable to holders of common stock 2,898 (17,725) $ 3,823 $(20,993)
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share applicable to holders of
common stock $0.03 $(0.18) $0.04 $(0.20)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
_____________
(1) Primary and Fully Diluted earnings are the same for all periods presented.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-02-1997
<PERIOD-START> JAN-30-1996
<PERIOD-END> JUL-28-1996
<CASH> 54,837
<SECURITIES> 0
<RECEIVABLES> 37,954
<ALLOWANCES> 0
<INVENTORY> 221,849
<CURRENT-ASSETS> 336,086
<PP&E> 246,911
<DEPRECIATION> 67,161
<TOTAL-ASSETS> 559,964
<CURRENT-LIABILITIES> 197,553
<BONDS> 58,502
0
0
<COMMON> 5
<OTHER-SE> 291,944
<TOTAL-LIABILITY-AND-EQUITY> 559,964
<SALES> 632,072
<TOTAL-REVENUES> 632,072
<CGS> 455,429
<TOTAL-COSTS> 455,429
<OTHER-EXPENSES> 165,810<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,171
<INCOME-PRETAX> 6,849
<INCOME-TAX> 3,026
<INCOME-CONTINUING> 3,823
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,823
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
<FN>
<F1>Includes merger and nonrecurring charges of $20,364.
</FN>
</TABLE>
