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PETSMART, INC. (PETM)

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PETSMART : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

03/27/2014 | 12:35pm US/Eastern
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The following discussion contains forward-looking statements that involve risks
and uncertainties. Our 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 "Competition," "Our Stores," "Distribution," and
"Government Regulation" included in Item 1, Part I and Risk Factors included in
Item 1A, Part I of this Annual Report on Form 10-K.

Overview

Based on our 2013 net sales of $6.9 billion, we are North America's leading
specialty provider of products, services, and solutions for the lifetime needs
of pets. As of February 2, 2014, we operated 1,333 stores, and we plan to
continue our store growth in 2014. Our stores carry a broad assortment of
high-quality pet supplies at everyday low prices. We offer approximately 11,000
distinct items in our stores and 9,000 additional items on PetSmart.com,
including nationally recognized brand names, as well as an extensive selection
of proprietary brands across a range of product categories.

We complement our extensive product assortment with a wide selection of
services, including professional grooming and boarding, as well as training and
day camp for dogs. All our stores feature pet styling salons that provide
high-quality grooming services and most of our stores offer comprehensive dog
training services. Our PetsHotels provide boarding for dogs and cats, which
includes 24-hour supervision by caregivers who are PetSmart trained to provide
personalized pet care, temperature-controlled rooms and suites, daily specialty
treats and play time, as well as day camp for dogs. As of February 2, 2014, we
operated 199 PetsHotels.

We make full-service veterinary care available through our strategic
relationship with certain third-party operators. As of February 2, 2014, we had
full-service veterinary hospitals in 844 of our stores. We have a 21.0%
investment in MMI Holdings, Inc., which is accounted for under the equity method
of accounting. MMI Holdings, Inc., through a wholly owned subsidiary, Medical
Management International, Inc., collectively referred to as "Banfield," operated
837 of the veterinary hospitals under the registered trade name of "Banfield,
The Pet Hospital." The remaining 7 hospitals are operated by other third parties
in Canada.

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


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Executive Summary
The 2013 fiscal year ended on February 2, 2014, and was a 52-week year. Fiscal
years 2012 and 2011 consisted of 53 weeks and 52 weeks, respectively. As a
result, all comparisons to the fiscal year 2012, other than comparable store
sales, reflect the impact of the additional week in 2012. Comparable store sales
growth was calculated on a 52-week equivalent basis for 2013, and an equivalent
53-week basis for 2012.
•    Diluted earnings per common share for 2013 increased 13.2% to $4.02 on net

income of $419.5 million compared to diluted earnings per common share of

$3.55 on net income of $389.5 million in 2012. The additional week increased

     diluted earnings per common share by $0.17 in 2012.


• Net sales increased 2.3% to $6.9 billion in 2013, compared to $6.8 billion

in 2012. During 2013, net sales included an unfavorable impact from foreign

currency fluctuations of $15.3 million, as compared to 2012 net sales, which

included sales from the extra week of $126.0 million and an unfavorable

     impact from foreign currency fluctuations of $1.9 million.


• Comparable store sales, or sales in stores open at least one year, including

     internet sales, increased 2.7% during 2013 compared to a 6.3% increase
     during 2012.


• Services sales increased 3.4% to $766.0 million, or 11.1% of net sales, for

     2013 compared to $740.5 million, or 11.0% of net sales, during 2012. The
     impact of the additional week in 2012 was $12.8 million.


• As of February 2, 2014, we had $285.6 million in cash and cash equivalents

     and $71.2 million in restricted cash. We did not borrow against our
     revolving credit facility during 2013.


• We purchased 6.6 million shares of our common stock for $464.1 million

during 2013, and 7.2 million shares of our common stock for $456.6 million

     during 2012.



• We added 55 net new stores during 2013, and operated 1,333 stores at the end

     of the year.



Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with GAAP. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses. On an ongoing basis, we evaluate
our estimates for inventory valuation reserves, asset impairments, reserves for
closed stores, insurance liabilities and reserves, and income tax reserves. We
base our estimates on historical experience and on various other assumptions we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Although we believe that the
judgments and estimates discussed herein are reasonable, actual results may
deviate from our expectations under different assumptions or conditions, which
could expose us to material gains or losses.

Unless specifically indicated below, we have not significantly changed
accounting methodologies or assumptions applied in calculating our estimates
during the last three years. We do not believe there are any specific
sensitivities of our estimates and assumptions that are reasonably likely to
cause a material difference between expected results and actual results.

We determined that the following accounting policies and estimates require significant judgment, and are critical in preparing our consolidated financial statements.


Inventory Valuation Reserves
Merchandise inventories represent finished goods and are recorded at the lower
of cost or market. Cost is determined by the moving average cost method and
includes inbound freight, as well as certain procurement and distribution costs
related to the processing of merchandise.

We have established reserves for estimated inventory shrinkage between physical
inventories. Physical inventory counts are taken on a regular basis, and
inventory is adjusted accordingly. Distribution centers perform cycle counts
using a velocity based system that determines whether the inventory should be
counted every 30, 90, 180, or 365 days. Stores generally perform physical
inventories at least once per year, and count certain inventory items between
physical inventories. For each reporting period presented, we estimate the
inventory shrinkage based on a two-year historical trend analysis. Changes in
shrink results or market conditions could cause actual results to vary from
estimates used to establish the reserves.


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We also have reserves for estimated obsolescence and to reduce merchandise
inventory to the lower of cost or market. We evaluate inventory for excess,
obsolescence, or other factors that may render inventories unmarketable at
historical cost. Factors used in determining obsolescence reserves, which are
recorded to reflect approximate net realizable value of our inventories, include
current and anticipated demand, customer preferences, age of merchandise,
seasonal trends, and decisions to discontinue certain products. If assumptions
about future demand change, or actual market conditions are less favorable than
those projected by management, we may require additional reserves.

As of February 2, 2014, and February 3, 2013, our inventory valuation reserves were $12.7 million and $11.8 million, respectively.


Asset Impairments
We review long-lived assets for impairment based on undiscounted cash flows on a
quarterly basis, and whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. No material asset
impairments were identified during 2013, 2012, or 2011.

Reserve for Closed Stores
We continuously evaluate the performance of our stores and periodically close
those that are under-performing. Closed stores are generally replaced by a new
store in a nearby location. We establish reserves for future occupancy payments
on closed stores in the period the store closes, based on the fair value of the
remaining contractual obligations, net of expected subtenant income, using a
credit-adjusted risk-free interest rate over the remaining life of the lease.
Key estimates that we use in calculating the required reserve include cash flow
projections and sublease assumptions. The costs for future occupancy payments
are reported in operating, general, and administrative expenses in the
Consolidated Statements of Income and Comprehensive Income. As of February 2,
2014, and February 3, 2013, our reserve for closed stores was $3.9 million and
$8.7 million, respectively.

Insurance Liabilities and Reserves
We maintain workers' compensation, general liability, product liability, and
property and casualty insurance. We utilize high deductible plans for each of
these areas, as well as a self-insured health plan for our eligible associates.
Workers' compensation deductibles generally carry a $1.0 million per occurrence
risk of claim liability. Our general liability plan specifies a $0.5 million per
occurrence risk of claim liability. We establish reserves for claims under
workers' compensation and general liability plans based on periodic actuarial
estimates of the amount of loss for all pending claims, including estimates for
claims that have been incurred but not reported. The loss estimates rely on
actuarial observations of ultimate loss experience for similar historical
events. Our insurance reserves may be sensitive to changes in historical claims
experience, demographic factors, severity factors, and other valuations, which
could result in a material adjustment to our reserves if actual results are
inconsistent with our expectations.

As of February 2, 2014, and February 3, 2013, we had approximately $102.1 million and $107.2 million, respectively, in reserves related to workers' compensation, general liability, and self-insured health plans. A 10% change in our insurance reserves would have affected net income by approximately $6.4 million in 2013.


Income Tax Reserves
We establish deferred income tax assets and liabilities for temporary
differences between the financial reporting bases and the income tax bases of
our assets and liabilities at enacted tax rates expected to be in effect when
such assets or liabilities are realized or settled. We generally do not
materially adjust deferred income taxes at interim periods. We record a
valuation allowance on the deferred income tax assets to reduce the total to an
amount we believe is more likely than not to be realized. Valuation allowances
at February 2, 2014, and February 3, 2013, were principally to offset certain
deferred income tax assets for net operating loss carryforwards.

We operate in multiple tax jurisdictions and could be subject to audit in any of
these jurisdictions. These audits can involve complex issues that may require an
extended period of time to resolve and may cover multiple years. To the extent
we prevail in matters for which reserves have been established, or are required
to pay amounts in excess of our reserves, our effective income tax rate in a
given fiscal period could be materially affected. An unfavorable tax settlement
would require use of our cash and could result in an increase in our effective
income tax rate in the period of resolution. A favorable tax settlement could
result in a reduction in our effective income tax rate in the period of
resolution.

As of February 2, 2014, and February 3, 2013, our net income tax reserves were approximately $11.8 million and $10.4 million, respectively.

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Recently Issued Accounting Pronouncements
See Note 2, Recently Issued Accounting Pronouncements, in the Notes to the
Consolidated Financial Statements included in this Annual Report on Form 10-K
for a description of recently issued accounting pronouncements, including the
impact to our consolidated financial statements.

Results of Operations
The following table presents the percent to net sales of certain items included
in our Consolidated Statements of Income and Comprehensive Income:
                                                                         Year Ended
                                                 February 2, 2014     February 3, 2013     January 29, 2012
                                                    (52 weeks)           (53 weeks)           (52 weeks)
Net sales                                              100.0  %             100.0  %             100.0  %
Total cost of sales                                     69.4                 69.5                 70.5
Gross profit                                            30.6                 30.5                 29.5
Operating, general, and administrative expenses         20.6                 20.9                 21.3
Operating income                                        10.0                  9.6                  8.2
Interest expense, net                                   (0.7 )               (0.8 )               (0.9 )
Income before income tax expense and equity
income from Banfield                                     9.3                  8.8                  7.3
Income tax expense                                      (3.5 )               (3.3 )               (2.7 )
Equity income from Banfield                              0.3                  0.2                  0.2
Net income                                               6.1  %               5.7  %               4.7  %



2013 (52 weeks) Compared to 2012 (53 weeks)
Net Sales
Net sales increased 2.3% to $6.9 billion in 2013, compared to $6.8 billion in
2012. During 2013, net sales included an unfavorable impact from foreign
currency fluctuations of $15.3 million, as compared to 2012 net sales, which
included sales from the extra week of $126.0 million and an unfavorable impact
from foreign currency fluctuations of $1.9 million. Comparable store sales
growth for 2013 was 2.7% and was the primary driver of the increase in net
sales. Internet sales, which are included in comparable store sales, were not
material to net sales or comparable store sales in 2013 or 2012. We also added
55 net new stores and 3 new PetsHotels since February 3, 2013.

Comparable store sales are comprised of average sales per comparable transaction
and comparable transactions. Average sales per comparable transaction grew 2.7%
for 2013, and grew 3.9% for 2012, including the impact of the extra week.
Comparable transactions remained flat for 2013, and grew 2.4% for 2012,
including the impact of the extra week.

During 2013, we implemented initiatives to drive traffic and average sales per
transaction. We expanded the space dedicated to certain brands of natural foods,
including our proprietary brand Simply Nourish. We also introduced new
formulations in both dog and cat foods across our top channel-exclusive brands,
which further expanded the grain-free and high protein offerings. Additionally,
we expanded the assortment of natural chews and treats, as well as
channel-exclusive treats. We continued to see strength in our natural foods, and
stabilization in the science category in both dog and cat foods across top
channel-exclusive brands, as a result of these initiatives.

In hardgoods, we introduced new brands of pet apparel and toys available
exclusively at PetSmart, and refreshed the assortments of existing brands. We
focused on innovation and newness in hardgoods, and continued to build our
portfolio of exclusive and proprietary brands across key categories. We also
reset the space dedicated to reptiles, our fastest growing species in specialty.
We focused on solutions in this space by improving adjacencies and layouts and
educational signage to provide an easier shopping experience for our customers.

Services sales, which include professional grooming and boarding, as well as
training and day camp for dogs, increased 3.4%, or $25.5 million, to $766.0
million for 2013, compared to $740.5 million for 2012. Services sales
represented 11.1% and 11.0% of net sales for 2013 and 2012, respectively. The
increase in services sales was primarily due to continued strong demand for our
grooming services and PetsHotels, and the addition of new stores since
February 3, 2013. This was offset by the impact of the additional week in 2012,
which increased services sales by $12.8 million. We rolled out several new
services offerings in the

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grooming salon in 2013, such as new puppy bath packages and application of flea
and tick solution. We also continued to develop our pipeline of innovative
services and exclusive offerings that are integrated with our merchandise brands
and supported by marketing.

Other revenue included in net sales, which represents license fees and
reimbursements for specific operating expenses charged to Banfield under the
master operating agreement, comprised 0.6% of net sales, or $38.9 million in
2013, compared to 0.6% of net sales, or $38.2 million in 2012. There was no
impact of the additional week in 2012 on other revenue.

Gross Profit
Gross profit increased 10 basis points to 30.6% of net sales for 2013, from
30.5% for 2012. Services margin increased by 20 basis points, while merchandise
margin decreased by 15 basis points. Supply chain costs included in margin
provided 5 basis points of leverage, while store occupancy costs remained flat.

Operating, General, and Administrative Expenses
Operating, general, and administrative expenses as a percentage of net sales
decreased to 20.6% of net sales for 2013, from 20.9% of net sales for 2012. The
improvement was driven by a decrease in payroll and payroll-related benefit
costs. This was partially offset by increased advertising spend for product
launches, television commercials, and other sales and marketing initiatives.

Interest Expense, net
Interest expense, which is primarily related to capital lease obligations, was
$52.5 million in 2013, compared to $55.6 million in 2012. The decrease in
interest expense was due to more store capital leases entering the latter part
of their lease lives. Included in interest expense, net was interest income of
$0.7 million in 2013 and $1.3 million in 2012.

Income Tax Expense
Income tax expense was $239.4 million in 2013, representing an effective tax
rate of 37.3%, compared with 2012, when we had income tax expense of $223.3
million, representing an effective tax rate of 37.4%. The effective tax rate is
calculated by dividing our income tax expense, which includes the income tax
expense related to our equity income from Banfield, by income before income tax
expense and equity income from Banfield.

Equity Income from Banfield
Our equity income from our investment in Banfield was $17.4 million and $16.0
million for 2013 and 2012, respectively, based on our 21.0% ownership in
Banfield.

2012 (53 weeks) Compared to 2011 (52 weeks)


Net Sales
Net sales increased 10.5% to $6.8 billion in 2012, compared to net sales of $6.1
billion in 2011. The increase in net sales included an estimated impact of the
additional week of $126.0 million and an unfavorable impact from foreign
currency fluctuations of $1.9 million. Approximately 60% of the sales increase
was due to a 6.3% increase in comparable store sales for 2012, 20% of the sales
increase was due to the addition of 46 net new stores and 4 new PetsHotels since
January 29, 2012, and 20% of the sales increase was due to the extra week in
2012. Internet sales, which are included in comparable store sales, were not
material to net sales or comparable store sales in 2012 or 2011.

Comparable store sales are comprised of average sales per comparable transaction
and comparable transactions. Average sales per comparable transaction grew by
3.9% for 2012, including the impact of the additional week, and 2.9% for 2011.
Comparable transactions grew 2.4% for 2012, including the impact of the
additional week, and 2.5% for 2011.

During 2012, we implemented several initiatives to increase traffic and continue
to improve average sales per transaction. We continued to see strength in our
natural food category and sales of our channel-exclusive foods represented more
than 75% of our food sales. We expanded the space in these categories with a
consumables reset during the thirteen weeks ended April 29, 2012, adding
innovative new formulations and expanded grain-free and limited ingredient
assortments in dog and cat.

In hardgoods, we refreshed and rebranded the dog toy aisle with the PetSmart Toy
Chest reset. We also reset the aquatics and small animal categories to support
the growing trends, added hundreds of new items, improved the category
adjacencies and flow, and added solutions-based signage designed to inspire and
educate in order to drive continued momentum in this category. In the

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latter half of 2012, we began expanding our offerings of exclusive and proprietary brands. Finally, we made more than twenty website enhancements in 2012 and launched our Canada site on PetSmart.com.


Services sales, which include professional grooming and boarding, as well as
training and day camp for dogs, increased 9.7%, or $65.6 million, to $740.5
million for 2012, compared to $674.9 million for 2011. Services sales
represented 11.0% of net sales for 2012 and 2011. The increase in services sales
was primarily due to continued strong demand for our grooming services, the
addition of new stores and new PetsHotels since January 29, 2012, and the
additional week, which increased services sales by $12.8 million.

Other revenue included in net sales, which represents license fees and
reimbursements for specific operating expenses charged to Banfield under the
master operating agreement, comprised 0.6% of net sales, or $38.2 million in
2012, compared to 0.6% of net sales, or $36.7 million in 2011. There was no
impact of the additional week on other revenue.

Gross Profit
Gross profit increased 100 basis points to 30.5% of net sales for 2012, from
29.5% for 2011. Overall merchandise margin increased 15 basis points primarily
due to rate improvement. Services margin increased 5 basis points. Store
occupancy and supply chain costs included in margin provided 55 and 10 basis
points of leverage, respectively. The additional week increased margin by 15
basis points.

Operating, General, and Administrative Expenses
Operating, general, and administrative expenses decreased 40 basis points to
20.9% of net sales for 2012, from 21.3% of net sales for 2011. Operating,
general, and administrative expenses increased on a dollar basis by $109.6
million. The primary reasons for the year over year increase include store
growth, planned incremental advertising spend focused on our differentiated
offerings, and the additional week, which increased operating, general, and
administrative costs by $18.3 million.

Interest Expense, net
Interest expense, which is primarily related to capital lease obligations,
decreased to $55.6 million for 2012, compared to $58.1 million for 2011 due to a
decrease in capital lease obligations. Included in interest expense, net was
interest income of $1.3 million for 2012 and for 2011.

Income Tax Expense
Income tax expense for 2012 and 2011 was $223.3 million and $167.0 million,
respectively. Both 2012 and 2011 had an effective tax rate of 37.4%. The
effective tax rate is calculated by dividing our income tax expense, which
includes the income tax expense related to our equity income from Banfield, by
income before income tax expense and equity income from Banfield.

Equity Income from Banfield
Our equity income from our investment in Banfield was $16.0 million and $10.9
million for 2012 and 2011, respectively, based on our 21.0% ownership in
Banfield.

Liquidity and Capital Resources
Cash Flow
We believe that our operating cash flow and cash on hand will be adequate to
meet our operating, investing, and financing needs in the foreseeable future. In
addition, we have access to our $100.0 million revolving credit facility, which
expires on March 23, 2017. However, there can be no assurance of our ability to
access credit markets on commercially acceptable terms in the future. We
continuously assess the economic environment and market conditions to guide our
decisions regarding our uses of cash, including capital expenditures,
investments, dividends, and the purchase of treasury stock.

We finance our operations, new store and PetsHotel growth, store remodels, and
other expenditures to support our growth initiatives primarily through cash
generated by operating activities. Receipts from our sales come from cash,
checks, and third-party debit and credit cards, and therefore provide a
significant source of liquidity. Cash is used in operating activities primarily
to fund procurement of merchandise inventories and other assets, net of accounts
payable and other accrued liabilities. Net cash provided by operating activities
was $615.2 million for 2013, $653.0 million for 2012, and $575.4 million for
2011. The difference between 2013 and 2012 was primarily due to a change of
$33.6 million in accrued bonus, deferred compensation withholding, and accrued
payroll. The primary differences between 2012 and 2011 included increased net
income of $99.3 million and an increase in trade accounts payable resulting from
the extension of vendor payment terms of $51.3 million. This was partially
offset

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by incremental increases in merchant receivables of $20.2 million and deferred income tax assets of $17.3 million in 2012 as compared to 2011.


Net cash used in investing activities consisted primarily of expenditures
associated with opening new stores, reformatting existing stores, expenditures
associated with equipment and computer software in support of our system
initiatives, and other expenditures to support our growth plans and initiatives.
Net cash used in investing activities was $138.2 million for 2013, $114.6
million in 2012, and $155.4 million in 2011. The primary differences between
2013 and 2012 included a $10.4 million increase in purchases of investments, a
$10.4 million decrease in maturities of investments, and an $8.4 million
increase in cash paid for property and equipment. The primary differences
between 2012 and 2011 were a decrease in purchases of investments of $34.7
million, an increase in maturities of investments of $13.0 million, offset by an
increase in cash paid for property and equipment of $17.8 million.

Net cash used in financing activities was $520.2 million for 2013, $545.9
million for 2012, and $369.4 million for 2011. Cash used in 2013 consisted
primarily of cash paid for treasury stock, payments on capital lease
obligations, and cash dividends paid to stockholders, offset by net proceeds
from common stock issued under equity incentive plans. The primary differences
contributing to the decrease between 2013 and 2012 were a $61.6 million change
in bank overdraft and other financing activities, and a $29.3 million decrease
in cash dividends paid to stockholders, as the dividend from the fourth quarter
of 2012 was paid in December of 2012, rather than February of 2013. This was
offset by a $50.1 million increase in cash paid for treasury stock. The primary
differences between 2012 and 2011 were an increase in cash paid for treasury
stock of $98.5 million and a decrease in bank overdraft of $59.0 million.

Free Cash Flow
Free cash flow is considered a non-GAAP financial measure under the SEC's rules.
Management believes that free cash flow is an important financial measure for
use in evaluating our financial performance and our ability to generate future
cash from our business operations. Free cash flow should be considered in
addition to, rather than as a substitute for, net income as a measure of our
performance and net cash provided by operating activities as a measure of our
liquidity.

Although other companies report free cash flow, numerous methods exist for
calculating free cash flow. As a result, the method used by our management to
calculate free cash flow may differ from the methods used by other companies. We
urge you to understand the methods used by another company to calculate free
cash flow before comparing our free cash flow to that of another company. We
define free cash flow as net cash provided by operating activities minus cash
paid for property and equipment.

The following table reconciles net cash provided by operating activities, a GAAP measure, to free cash flow, a non-GAAP measure (in thousands):

                                                                          Year Ended
                                                  February 2, 2014     February 3, 2013     January 29, 2012
                                                     (52 weeks)           (53 weeks)           (52 weeks)

Net cash provided by operating activities $ 615,180 $

    653,007     $        575,420
Cash paid for property and equipment                     (146,822 )           (138,467 )           (120,720 )
Free cash flow, a non-GAAP measure               $        468,358     $     

514,540 $ 454,700




For 2013, our free cash flow decreased primarily due to a change in accrued
bonus, deferred compensation withholding, and accrued payroll. For 2012, our
free cash flow increased primarily due to an increase in net income and an
increase in trade accounts payable resulting from the extension of vendor
payment terms. This was partially offset by incremental increases in merchant
receivables, deferred income tax assets, and capital spending as compared to
2011.

Share Purchase Programs
In September 2013, the Board of Directors approved a share purchase program
authorizing the purchase of up to $535.0
million through January 31, 2015. The $535.0 million program commenced on
October 1, 2013, and was in addition to any unused amount remaining under the
previous $525.0 million program. We completed the $525.0 million program during
the thirteen weeks ended February 2, 2014. As of February 2, 2014, $417.9
million remained available under the $535.0 million program.

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The following table presents our purchases of our common stock under the respective share purchase programs (in thousands):

                                                                                                Year Ended
           Share Purchase Program                         February 2, 2014                   February 3, 2013                   January 29, 2012
                                                             (52 weeks)                         (53 weeks)                         (52 weeks)
                      Date         Program
  Authorized      Approved by    Termination                            Purchase                           Purchase                           Purchase
    Amount           Board           Date         Shares Purchased       Value       Shares Purchased       Value       Shares Purchased       Value
                                     July 31,
$     400,000      June 2010             2011                -        $        -                -        $        -            3,909        $  165,383
                                  January 31,
$     450,000      June 2011             2013                -                 -            4,594           278,553            3,683           171,447
                                  January 31,
$     525,000      June 2012             2014            5,025           346,942            2,599           178,058                -                 -
                   September      January 31,
$     535,000         2013               2015            1,616           117,134                -                 -                -                 -
                                                         6,641        $  464,076            7,193        $  456,611            7,592        $  336,830



Common Stock Dividends
We believe our ability to generate cash allows us to invest in the growth of the
business and, at the same time, distribute a quarterly dividend. Our revolving
credit facility and stand-alone letter of credit facility permit us to pay
dividends, as long as we are not in default and the payment of dividends would
not result in default. During 2013, 2012, and 2011, we paid aggregate dividends
of $0.525, per share,$0.775 per share, and $0.53 per share, respectively. The
decrease in dividends paid during 2013 was the result of the dividend declared
in the fourth quarter of 2012, which was paid in December of 2012, rather than
in February of 2013.

Operating Capital and Capital Expenditure Requirements
All our stores are leased facilities. We opened 60 new stores and closed 5
stores in 2013. Generally, each new store requires capital expenditures of
approximately $0.7 million for fixtures, equipment, and leasehold improvements,
approximately $0.3 million for inventory, and approximately $0.1 million for
preopening costs. We expect total capital spending to be $150 million to $160
million for 2014, based on our plan to continue our store growth, remodel or
replace certain store assets, enhance our supply chain, continue our investment
in the development of our information systems, and improve our infrastructure.

Our ability to fund our operations and make planned capital expenditures depends
on our future operating performance and cash flow, which are subject to
prevailing economic conditions and to financial, business, and other factors,
some of which are beyond our control.

Lease and Other Commitments
Operating and Capital Lease Commitments and Other Obligations
The following table summarizes our contractual obligations, net of estimated
sublease income, at February 2, 2014, and the effect that such obligations are
expected to have on our liquidity and cash flows in future periods (in
thousands):
                                                   2015 &        2017 &       2019 and
Contractual Obligation                2014          2016          2018         Beyond        Other          Total
Operating lease obligations (1)    $ 325,830$ 635,918$ 475,116$ 491,633     $      -     $ 1,928,497
Capital lease obligations (1)(2)     115,340       227,670       178,403       204,548            -         725,961
Purchase obligations (3)              67,210        65,900        37,600             -            -         170,710
Uncertain tax positions (4)                -             -             -             -       17,827          17,827
Insurance obligations (5)             33,919             -             -             -       68,198         102,117
Total                              $ 542,299$ 929,488$ 691,119$ 696,181$ 86,025$ 2,945,112
Less: Sublease income                  3,248         5,719         2,567         1,367            -          12,901
Net Total                          $ 539,051$ 923,769$ 688,552$ 694,814$ 86,025$ 2,932,211



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__________

(1) In addition to the commitments scheduled above, we have executed operating

and capital lease agreements with total minimum lease payments of $157.4

million. The typical lease term for these agreements is 10 years. We do not

have the right to control the use of the property under these leases as of

February 2, 2014, because we have not taken physical possession of the

property.

(2) Includes $207.5 million in interest.

(3) Represents purchase obligations for product and advertising commitments.

(4) Unrecognized tax benefits, as shown in "Other," have been recorded as

liabilities, and we are uncertain as to if or when such amounts may be

settled.

(5) Insurance obligations included in "Other," have been classified as noncurrent

    liabilities. We are unable to estimate the specific year to which the
    obligations will relate beyond 2014.



Letters of Credit
We issue letters of credit for guarantees provided for insurance programs. As of
February 2, 2014, we had $83.5 million outstanding under our letters of credit.

Off-Balance Sheet Arrangements
Other than executed operating leases, we do not have any off-balance sheet
financing that has, or is reasonably likely to have, a material current or
future impact on our financial condition, cash flows, results of operations,
liquidity, capital expenditures, or capital resources.

Related Party Transactions
We have an investment in Banfield, who through a wholly owned subsidiary,
Medical Management International, Inc., operates full-service veterinary
hospitals in 837 of our stores. As of February 2, 2014, and February 3, 2013,
our investment represented 21.4% of the voting common stock and 21.0% of the
combined voting and non-voting stock of Banfield. Two members of our management
team are members of the Banfield Board of Directors. Our equity income from our
investment in Banfield, which is recorded one month in arrears under the equity
method of accounting, was $17.4 million, $16.0 million, and $10.9 million for
2013, 2012, and 2011, respectively.

We recognized license fees and reimbursements for specific operating expenses
from Banfield of $38.9 million, $38.2 million, and $36.7 million during 2013,
2012, and 2011, respectively, in other revenue in the Consolidated Statements of
Income and Comprehensive Income. The related costs are included in cost of other
revenue in the Consolidated Statements of Income and Comprehensive Income.
Receivables from Banfield totaled $3.3 million and $3.2 million at February 2,
2014, and February 3, 2013, respectively, and were included in receivables, net
in the Consolidated Balance Sheets.

Our master operating agreement with Banfield also includes a provision for the
sharing of profits on the sale of therapeutic pet foods sold in all stores with
an operating Banfield hospital. The net sales and gross profit on the sale of
therapeutic pet food are not material to our consolidated financial statements.

Credit Facilities
We have a $100.0 million revolving credit facility agreement, or "Revolving
Credit Facility," which expires on March 23, 2017. Borrowings under this
Revolving Credit Facility are subject to a borrowing base and bear interest, at
our option, at LIBOR plus 1.25% or Base Rate plus 0.25%. The Base Rate is
defined as the highest of the following rates: the Federal Funds Rate plus 0.5%,
the Adjusted LIBOR plus 1.0%, or the Prime Rate.

We are subject to fees payable each month at an annual rate of 0.20% of the
unused amount of the Revolving Credit Facility. The Revolving Credit Facility
also gives us the ability to issue letters of credit, which reduce the amount
available under the Revolving Credit Facility. Letter of credit issuances under
the Revolving Credit Facility are subject to interest payable and bear interest
of 0.625% for standby letters of credit and commercial letters of credit.

We had no borrowings under our Revolving Credit Facility at February 2, 2014,
and February 3, 2013. We had $14.3 million and $17.9 million in stand-by letter
of credit issuances under our Revolving Credit Facility as of February 2, 2014,
and February 3, 2013, respectively.


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We also have a $100.0 million stand-alone letter of credit facility agreement,
or "Stand-alone Letter of Credit Facility," which expires on March 23, 2017. We
are subject to fees payable each month at an annual rate of 0.175% of the
average daily face amount of the letters of credit outstanding during the
preceding month. In addition, we are required to maintain a cash deposit with
the lender equal to 103% of the amount of outstanding letters of credit.

We had $69.2 million and $69.8 million in outstanding letters of credit, issued
for guarantees provided for insurance programs, under our Stand-alone Letter of
Credit Facility as of February 2, 2014, and February 3, 2013, respectively. We
had $71.2 million and $71.9 million in restricted cash on deposit as of
February 2, 2014, and February 3, 2013, respectively.

Our Revolving Credit Facility and Stand-alone Letter of Credit Facility permit
the payment of dividends if we are not in default and payment conditions as
defined in the agreement are satisfied. As of February 2, 2014, we were in
compliance with the terms and covenants of our Revolving Credit Facility and
Stand-alone Letter of Credit Facility. The Revolving Credit Facility and
Stand-alone Letter of Credit Facility are secured by substantially all our
financial assets.

Seasonality and Inflation
Our business is subject to seasonal fluctuation. We typically realize a higher
portion of net sales and operating profits during our fourth quarter, as
compared to our other quarters, due to increased holiday traffic. 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. Because our stores
typically draw customers from a large trade area, sales also may be impacted by
adverse weather or travel conditions, which are more prevalent during certain
seasons of the year. As a result of our expansion plans, the timing of new store
and PetsHotel openings and related preopening costs, the amount of revenue
contributed by new and existing stores and PetsHotels, and the timing and
estimated obligations of store closures, our quarterly results of operations may
fluctuate. Controllable expenses could fluctuate from quarter-to-quarter in a
year. Finally, because new stores tend to experience higher payroll,
advertising, and other store-level expenses as a percentage of net sales than
mature stores, new store openings also contribute to lower store operating
margins until these stores become established.

While we have experienced inflationary pressure in recent years, we have been
able to largely mitigate the effect by increasing retail prices accordingly.
Although neither inflation nor deflation has had a material impact on net
operating results, we can make no assurance that our business will not be
affected by inflation or deflation in the future.

Impact of Federal Health Care Reform Legislation
In March 2010, the President of the United States signed into law the Patient
Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2010, or "the Act." We expect to be in compliance with the
law in 2014 and intend to be in compliance with the employer mandate portion of
the Act, which is effective in 2015. We do not expect the impact on our
consolidated financial statements to be material.

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