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PetSmart, Inc. (NASDAQ:PETM)

Analyst Day

October 13, 2011 11:00 ET

Executives

Bob Moran – President and Chief Executive Officer

John Alpaugh – Chief Marketing Officer

Joe O’Leary – Head, Merchandizing

David Lenhardt – Head, Store Operations

Chip Molloy – Chief Financial Officer

Susana Della Maddalena – PetSmart Charities

Analysts

Dan Hofkin – William Blair & Company

Mike Baker – Deutsche Bank

Dan Wewer – Raymond James

Matt Nemer – Wells Fargo

Vincent Sinisi – BofA

Aram Rubinson – Nomura

Chris Horvers – J.P. Morgan

Gary Walter – Credit Suisse

Alan Rifkin – Barclays

David Mann – Johnson Rice

Brian Nagel – Oppenheimer

Michael Lasser – UBS

Peter Benedict – Robert Baird

Dan Binder – Jefferies

Joe Feldman – Telsey Advisory Group

Matt Fassler – Goldman Sachs

Scot Ciccarelli – RBC

Peter Keith – Piper Jaffray

Mark Mandel – ThinkEquity

Bob Moran – President and Chief Executive Officer

[Inaudible] brief overview of the business and where we are focused and then we will have members of our management team take you through our strategic update. And finally, we’ll have time for questions at the end.

As you know, PetSmart is the leading specialty provider of products, services, and solutions for the lifetime needs of pets. For 2011, we expect annual net sales of over $6 billion, including services sales of around $660 million or 11% penetration of total net sales. And we are the only pet retailer that offers and provides service offerings that include professional grooming, training, boarding, day camp and veterinary care all under one roof. By the end of 2011, we will operate in more than 1230 stores in the United States, Canada, and Puerto Rico with Pet Hotel boarding facilities in more than 190 stores. Our competitive everyday low-price strategy coupled with our commitment to uniquely engage in-store experience has led to continued success and growth.

Even in today’s challenging economic environment, in addition, our commitment to fiscal discipline and focus on creating shareholder value continues to strengthen our business model. Since our decision in late 2007, the slow store growth and focused on store productivity, we have continued to produce significant sales and earnings growth. For fiscal year 2010, we reported total revenues of $5.7 billion and earnings per share of $2.01 and for 2011 we anticipate total revenues of more than $6 billion and an EPS of between $2.46 and $2.52.

Our goal of becoming a best-in-class specialty retailer is the journey that continues to evolve. Up until 2007, much of our focus was primarily centered around store growth. In late 2007, we began to focus our efforts on driving operational efficiencies. We also slowed store growth, reduced capital spend, and then created a culture of cost control throughout the organization.

We continue to build on the success of becoming an improved operating company by focusing on becoming a better merchandizing company through strengthening and refining our merchandizing capabilities. These efforts have strengthened our brand and created the foundation for us to continue to differentiate ourselves from the competition as we take another step forward on our journey becoming a best-in-class specialty retailer.

Our focus is on providing solutions for our pet parents to help them, help their pets with long, healthy, and happy lives. So, how we do this? We do it by providing the broadest assortment with an unmatched customer experience all at great value. It’s differentiation that ties it altogether and makes us a pet specialty leader. It all starts with a strong leadership team. Our seasoned management team is strategically aligned across the company and I am confident in their ability to execute on our strategic priorities.

We monitor customer behaviors and industry trends and use those customer insights to design our marketing strategy to tell compelling stories. Our merchandized assortment provides an unmatched selection of products, including innovative and exclusive offerings all at great value.

A key differentiator for us is our unique in-store experience, which includes our passion associates and suite of services offerings. Our financial framework sets the parameters of how we operate our business with the goal of achieving top quartile returns of between 13% and 18% total shareholder returns.

And finally, our commitment to saving the lives of homeless pets keeps us ever inspired as we partner with PetSmart charity to adopt more than 1000 pets per day in our stores. Today, you will have the opportunity to hear from our senior management team on how each piece of the puzzle fits together to clearly differentiate PetSmart as the leading pet specialty retailer.

First, you will hear from John Alpaugh, he is our Chief Marketing Officer as he will take us through the customer insights and our marketing strategy. And John has brought to the team the best of both worlds with his experience at P&G. He brings the best to CBG and retail marketing to our company. John has been with the company nearly 12 years in a number of leadership roles including marketing, merchandizing, and strategic planning and business development.

Next, you will hear from Joe O’Leary, Head of Merchandizing with an update on our merchandized assortment strategy. And as a merchant, he has provided fresh thinking and has acquired talented merchants to drive our pipeline of both innovative and differentiated products. Prior to joining us five years ago, Joe worked in supply chain strategy and logistics at the Gap. When he joined PetSmart in 2006, he ran the supply chain and over time he has taken on merchandising and marketing as well.

And then David Lenhardt, Head of Store Operations will hear some insights with you on our store experience and services. And I’ve know David Lenhardt for more than 16 years and I started to know him as a consultant with Bain & Company. And through that experience he has provided both strategic thinking and operating excellence inside our everyday business.

David joined us 11 years ago, originally in the service, strategic planning and business development area. David took over store operations and services five years ago and he also oversees human resources and information system.

Then you will hear from Chip Molloy, our CFO, who joined us four years ago. With a well rounded financial background, Chip has been (intricle) in defining our financial framework of consistently delivering tough quartile shareholder returns of between 13% and 18%. Chip also leads a real estate team and by the way Chip has provided a foundation of discipline inside our company, which enables us to do our most and best creative work and thinking towards our business model on an everyday basis.

And finally, you will hear from Susana Della Maddalena, who is with PetSmart Charities, who has successfully led the organization to over $40 million in contribution income on an annual basis. And I have to tell you the great work that Sue and her team does through PetSmart Charities, provides the company with a platform that clearly demonstrates our passion for pets, and it has made our culture even stronger. Sue has also spearheaded several multimillion dollar fund raising campaigns for non-profit organizations and before joining PetSmart Charities, Sue also held Senior Marketing in Advertisings positions with agencies across the company.

Following the presentation, I will return to wrap it up and then we will open up the floor for your questions. With that, I’d like to have John Alpaugh, to come up and share his customer insights with us. Thank you.

John Alpaugh – Chief Marketing Officer

Thanks Bob, good morning everyone. I am going to begin with an overview of the pet industry and an introduction to the PetSmart customer. Then I’m going to share our marketing strategy and some of the results we’ve been able to achieve thus far.

We are fortunate to compete in a very large and healthy industry. Pet is about a $47 billion year industry and we compete most directly in the $34 billion which consists of products, as well as services like grooming, chaining, hotel and day care. We also compete through our partnership with Banfield, the pet hospital in the $13 billion veterinary care segment. Now the pet industry is projected to grow at about 3% to 5% per year over the next three years.

Let’s turn to market share, on the product side, we have about 14% market share with Max being our largest competitor with 47% market share. When it comes to services we have a 15% market share and the remaining 85% is spread across a series of fragmented independent service providers.

Now let’s take a look at our customer. PetSmart attracts the best pet parent in the industry. PetSmart’s customers are predominantly female with a very strong emotional relationship with her pet, often treating her pet like a child. In fact PetSmart customers are significantly less likely than the average US household have children under the age of 18 living at home.

The PetSmart customer is also very good, earnings about 30% more than the average US household and it’s really the combination of that plus the desire to have the best for her pet that means that PetSmart customers spend about 78% more on their pets than the average pet owning household.

Now judging by the fact that there are lot of men in this room, I think it’s safe to say that most people in the audience probably don’t fit the typical PetSmart customer profile I just outlined. So what I’d like to do is give you a deeper understanding of our customer because I don’t think you can understand the PetSmart story without having a true appreciation for the PetSmart customer.

Now, earlier this year we had a social media contest, in which we asked our customers to share stories about how they and their pets had happy experiences in our store. We got over 7,000 submissions. One of the submissions I am going to share with you in a minute in the form of a video. Now, this is not a TV ad that our agency produced and scripted, this is Kelly’s personal story about her and her dog, Emma, the relationship they have as well as the relationship they have with their local PetSmart store.

Now, the video I’d like to share with you is very representative of the other submissions they were received. I think it’s also very representative of our overall PetSmart customer. So, let’s go ahead and watch the video of Kelly and Emma.

[Video Presentation]

I think we can all agree what comes through loud and clear in that video is the emotional relationship that Kelly has with Emma and the photograph that she shared and the way she speaks about the relationship. She is Emma’s new mommy with all the new mommy worries. And what I’d like to do now is to introduce and spend a little time at how we are using marketing to attract more customers like Kelly and Emma to our business model.

Now, on marketing, we are trying to change consumer behavior by answering two very fundamental questions. The first is how are we different from our competitors and the second is why is that better for consumers? Now, we are different in five very important ways for our pet parent. The first is our assortment which is broader and deeper and has more unique items than any competitor in our industry. Second is value, the value which we bring these products and services to our customers. Third is our pet-loving associates who are friendly and willing to help. Fourth is that we provide pet services that you can trust. Thanks for those pet loving associates. And lastly, we share the same values of their pet parents. The value of the pet welfare is saving the lives of homeless pets.

Now why is that better for the consumer? What pet parent told that we can do a great job delivering those five things? We can create happier lives for both pet and their parents. And at the end of the day who doesn’t want a happier life.

So, let me bring our marketing approach to life by using a specific example the integrated marketing campaign that we ran for natural pet foods. Now, throughout this presentation, you are going to see various TV ads through all part of our happiness and store campaign that we launched earlier this year. Joe will share with you the TV ad for naturals in his presentation.

There are really two critical elements to our marketing approach. The first is having very, very compelling stories. And in the case of naturals, it’s that more pet parents trust PetSmart for their natural foods than any other pet store. The second critical element is our ability to tell those stories to millions of pet parents by using our scales and around the consumer with a variety of media and it’s really the combination of those two things that causes the behavior change we are looking for to drive our business. In the case of this campaign, we were able to significantly increase our market share for natural pet foods.

Let me just walk you through the media approach here. We obviously use paid media like TV, circulars and increasingly more and more search, but we also use earned media. Earned media are things like public relation, social media, internet bloggers and for the naturals campaign we were able to generate about 10 million impressions for this campaign alone through earned media.

And then lastly, but very importantly, we use our own assets and we had a lot of them to tell these component stories, not the least of which our 40,000 associates, who literally have millions of interactions with pet parents these and every week. We use in-store signage and when it comes to our email database we do not have very larger database, but we know what types of pets those parent have and types of products they are buying. And then lastly, but very importantly as petsmart.com, which is really a phenomenal asset for us to engage consumers tell these compelling stories and introduce into our entire offerings.

I want to spend a little bit more time on our website. Petsmart.com is the number one traffic website in the industry. So, on top of being number one, we have also been able to continue to significantly grow traffic to our site in fact faster than our major competitors. Petsmart.com is content focus. We have a lot of information on petsmart.com. So, pet parents like Kelly can take even better care of their pets.

We also use petsmart.com to extend the isle, you know, 14,000 products we have on petsmart.com, about 25% of them are web only. When it comes to evaluating sales, we take a multi-channel view. So, petsmart.com in deed drives ecommerce sales for us and our ecommerce sales have been growing nicely, but petsmart.com perhaps more importantly drive significant in-store sales.

We are going to continue to invest to keep petsmart.com, the leader in the industry. We are going to invest in driving traffic to the site. We are going to invest, to continue to enhance the site experience with more content and continue to enhance our mobile experience. We are going to invest and continuing to build out the assortment to bring as many products as possible to our customers.

So, that’s the way we are telling the compelling stories. Let’s have a look at the impact it’s having on consumers. Most of the third-parity tracking companies, we ask pet parents to rate us and our competitors across the five attributes that I mentioned earlier. While this chart looks quite complicated, it’s actually fairly easy. The more green you see, the greater our advantage versus that competitor. I think the very key two things to takeaway from this chart.

The first is that you see a lot of green. Well, that means as we have a very, very strong brand. The second is we have been able to improve our brand versus the year ago against our pet specialty competitors along two key attributes, having helpful pet loving associates and having pet services that you can trust.

So, now as our brand strong, but we are strengthening it and David in his presentation, will share with you the TV ads that we have used to tell compelling stories about our associates and tell compelling stories about grooming. And Su Della Maddalena, as Bob mentioned we will have to talk about all the great work that PetSmart stories does to help save the lives of home as pets.

Now having a strong and increasingly strengthening brand is really a means to the end. As I mentioned earlier, we are really trying to change consumer behavior. So, let’s look at our consumer analytics to see what’s been changing. Now the headline in this chart is actually at the bottom and that is that across all three of our customer segments, we have been able to drive significant comp customer growth. Let me start with the chart a little bit and explain it for you. We segment our customers into three groups. Our smart with hard customers visit us 10 or more times per year and there about 13% of our customers that account for half of our sales.

Smart customers visit us two to nine times per year and there about 50% of our customers and about 40% of our sales. And Mart customers are about 40% of our customers they visit us one-time per year and they only comp for about 10% of our sales.

Now for those of you who remember the chart we presented two years ago, you will notice that we have shifted from segment our customers based on sales based aisles to transactions as I just kind of walk you through. And the reason for that is twofold. The first is that we have found the transactions are much better gauge or how loyal customers are to our brand.

But secondly and perhaps more importantly is that the transaction segmentation gives us the much better tool to manage the business on a day-to-day basis. What do I mean by that? I am showing you here top level customer metrics for the entire company, but we have these customer metrics plus many, many more for all the 600 categories that we sell, which means that for any given category a merchant, a marketing person can go in and understand what’s driving sales up or what’s driving sales down from a customer point of view.

Now, the other significant change from a year ago as we have increased our sales per customer, specifically with our smart with hard customers. Now, if you step back and think about it, there are really only two ways to grow revenue. You can grow more customers and/or you can grow sales per customer. And because we’ve been able to do both, we’ve been able to achieve revenue growth that has been outpaced in the industry for the past three years. And that’s frankly just where we want to be.

So, that concludes marketing, I’d like to turn over now to Joe O’Leary who will take you through merchandizing.

Joe O’Leary – Head, Merchandizing

Thanks John and good morning everyone. As John just shared with you, we are using customer insights to help better understand the needs of our pet parents. And then we use this information to improve our merchandizing assortment. As Bob said earlier, a few years ago, we embarked on the journey of improving our merchandizing capabilities. We slowed store growth and we put a real focus on leveraging our existing store base by improving the productivity in our stores from a merchandizing perspective that was focused on improving margin dollars per foot.

We bought in a really strong leadership team and we’ve been together now for over three years. We setup and made sure there was alignment between merchandizing, marketing, supply chain, and store operations. And all may seem strange is pretty rare in retail to get all of those functions aligned. And that’s one of the advantages we have right now. Therefore, all those functions are really focused on the key point, which is product differentiation and product innovation, which we’ve been delivering. And as a result, we are all focused on providing solutions and as John has already said a great value to our pet parents. And behind the scenes we have been working on improving our merchandizing capabilities, becoming a better merchandizing company by improving our promotions, our pricing, and our space and assortment planning capabilities.

At PetSmart, we are obsessive about the assortment, its absolute focus, all the work that we do and all the work we focus on is really creating the best assortment for that pet parent. And what I wanted to take you through is how we created the best selection talk about our proprietary brands, our vendor partnerships which we are very proud of, our value proposition, and how we are continuing to build our merchandizing capabilities into the future. So, starting with the selection, in terms of differentiated products, we have more than 10,000 items dog, cat, fish, bird, reptile, small animals, even down to crickets in our stores. These include many well-known national brands, but now some compelling exclusive brands as well as proprietary brands in our assortment, which really offers as John said the best possible selection for the pet parent.

The good example of where we’ve really improved our assortment over the past couple of years is in channel-exclusive foods. These are the foods that are only sold in the pet specialty channel. We have established ourself as the best destination for food and as leaders with expert recommended pet nutrition. We did all this. You may recall back in early 2010, when we did a major consumables reset, where we improved the assortment, removed under producing – under producing brands and products and allocated more space to the channel-exclusive and natural foods.

In terms of this chart here, you can see on the left hand side, we view this as five aisles of food in our store. You start in the bottom left hand box, we have grocery brands, which are opening price points and they are sold everywhere. Then, we have a deeper selection of what we called bridge brands, which again are sold everywhere. Then as you move up into premium, super premium, and natural, which is our fastest going category these are the brands that are only available in the pet specialty channel.

And especially when you move to the top of that column, you get to prescription Rx and we are able to sell prescription foods, because of our relationship with Banfield and we are the only retailer able to sell prescription foods. You can see also on the chart that over 70% of our consumable sales are in channel-exclusive foods, again product that can only be sold in the pet specialty stores. And then if you go to right side, the other important factor which is a really good thing for us is the channel-exclusive foods have a margin rate which is 1.7 to 2 times Grocery and Bridge. So, these foods not only differentiate us, but they are also very profitable for us and they are also the category that’s growing the quickest.

Moving on to proprietary brands, we are really pleased with the progress we have made with proprietary brands over the past three years. Initially, we had a penetration of around 16% of our sales – merchandizing sales with proprietary brands and account for penetration is now over 20% and continues to grow. And we are still focused on our goal to drive that something towards 25% over the next three to five years primarily by growing consumable brand foods. So, we will be accelerating the growth of our proprietary brand foods.

Again, we created the team from scratch three years ago and again that’s a very experienced and capable team. Let me sponsor this, we had 29 not very strong, not very recognizable brands. Whereas they know, we have 14 very relevant growing brands, which are exclusive to us. In terms of this chart, the thing we really have to focus on was to make sure we had a good presence across the store at an opening price point and what we have done is focusing on our great choice brand, which was already strong in consumables, but we have taken it across into hard goods and now we’re moving into specialty.

This gives the consumer a clear entry price points to come to PetSmart know the great choice were up a really good product at a very good price across the store. In the middle column, we worked to clean up our better category and done a lot of works to improve these brands. We’ve re-launched Authority cat and dog, Dentley's rawhide, ExquisiCat Litter, and currently we are updating our Top Fin and all living things brands with updated packaging, product, and marketing support. All of the re-launches are proven to be successful and profitable and continue to drive business growth and business profitability.

Moving to the right hand side, this column was empty two years ago. The best category we built on the strength of the Kong brand, with exclusive items outside of the toy aisle that we designed source and create. We couldn’t have been happier with the performance of the Kong brand across the store.

In 2010, as you are aware, we introduced Martha Stewart Pets as an exclusive line of products for dogs designed by Martha herself with her team. And last month, we expanded this assortment to introduce cat product into our stores and again we are very pleased with the initial sales.

About a year ago, we partnered with GNC to offer an exclusive line of vitamins and supplements for pet and this is a category, which continues to build for us. Then in the second quarter this year, we launched our own super premium dog and cat food brand, Simply Nourish, a natural brand and again that’s exceeding our initial expectations. So, proprietary brand continues to grow and represent significant sales and margin opportunity for us.

But another really important reason is exclusive for us. So, the PetSmart shopper who buys a proprietary brand at very sticky behavior comes back to our store and is very loyal to us. In terms of our assortment again emphasizing the point around differentiation between our channel-exclusive offerings and our proprietary brands if you look at the chart on the left hand side, we do not, I want to emphasize, we do not overlap with more than 90% of our SKUs. So, 90% of our SKUs do not overlap with mass and if you move to the right hand side on the sales basis, 83% of our sales do not overlap with mass retailers, so our assortment not only very broad is very differentiated from mass retailers.

Moving on to our vendor partnerships, this is an area where we are very pleased with our work and the relationships we have established with our larger vendors through a household names, Procter & Gamble, Nestle, Hill’s, Mars, Del Monte, Blue Buffalo, United Pet Group, and Central Garden & Pet are the key players in the top 30 vendors that we focus on. We really have narrowed in on our top 30 vendors to establish really in line strategies. The benefit of that is that both companies are focused on the same things, not just now into ‘12 and into ’13, but for several years out and that’s proving to be very compelling asset for us.

We teamed up with these vendors to build to really strong promotions and this year you have seen a lot of what we called stacked campaigns that John talked to where we are really aligning with the vendors instead of them doing something independent and us doing something independent, we do it together. We have an approach that one plus one really is equaling to three and the performance of those promotions is again outpacing what we would have anticipated.

We participate in top management meetings on a regular basis with these companies. CEO to CEO and it really make sure not only their resources aligned, but our resources are aligned and David and Chip would be at those meetings as well as the supply chain. So, the pair of the alignment of both their organizations and our organizations is giving us a competitive advantage. A real example of that is in our industry insights, we trust each other. So, we are quite happy to share industry insights with each other, which enable us to develop new products, new solutions, and as you can see continued to raise the bar on the merchandizing standards in the pets industry.

And it’s very important to us that we are driving innovation and differentiation as I have already said it number of times. So, these vendors really understand that the key to success is for us to grow the pet specialty channel with innovation and differentiation. And the result is as you saw from John, we are out probably seeing market growth in total, but we are also outpacing market share with many of these vendors. So, it’s really important they are winning with us.

Not only do we have a compelling and unmatched assortment, but it’s also very competitively priced. This is the example for traffic items. These are items that we promote to drive traffic into our store. Overall, on average, PetSmart is 8% to 10% less than the other pet specialty retailers as well as grocery and we are within 5% to 7% of max prices.

Over the past three years, we’d really build on the strength of the merchandizing capability in a merchandizing team that was established three years or so ago and we have really established the culture and a pipeline of innovation that will take us well into the future. We have introduced exclusive products along the top line, Martha Stewart Dog, GNC, Simply Nourish, Martha Stewart Cat, and then recently we announced that in 2012 we will launch exclusively toys or pet toys, that’s an exclusive arrangement for us which will be in our stores next year. We are excited about that.

And then a couple of weeks ago which caused much more excitement was Bret Michaels. We announced that we have an exclusive arrangement with Bret Michaels and the Pets Rock collection and there is much excitement on our office when Bret is going to visit. So, that’s great and quite a buzz for us. So, telling stories is really important, creating excitement. We have expanded our assortment, introduce some great new brands into us, Advantix Flea & Tick products, Wellness Food, Canyon Creek natural treats, and earlier this year and over and you will see us continue to add new brands in 2012 and beyond.

We have had a lot of innovation through major resets and we’ve really become good at this as a key way for us to differentiate ourselves and make it easier for the shopper. We started in 2009 with hard goods, then we moved on to consumables in 2010, and in mid 2010, we did a major reset as well, which has proved to be very successful. And most recently, we completed the treats reset and the cat hard-goods reset in the second quarter this year. And we’ll continue to do major resets into 2012 and beyond. The next big one will be a complete consumables reset in February next year, both dog and cat, where we will expand the natural space of dog by 20 feet and expand the natural space of cat by 8 feet. So, we’ll continue to accelerate in that space.

And in the bottom of this chart, in the background, we have made a significant number of process improvements, which is really making us the better merchandizing company. In 2009, we focused in on promotions management, which we do much better now. In 2010, we focused on pricing, space, and assortment process improvements and this year we have been focusing on pricing, space, and assortment systems enhancements.

We are already getting benefit from this. But as we look forward, these improved processes and systems will enable us to begin testing localized promotions, localized pricing, and localized assortment in 2012 and beyond. So, you can see we have created the culture of innovation and differentiation with the merchandizing and we will continue to build on this.

I am really proud of the strides that we made in the last three years in our merchandizing capabilities allowing us really to understand, anticipate, and meet the emerging needs of our customers. We’ve been very successful at driving new customers and repeat visits to our stores and you can see that coming through in our results. We are really focused on differentiating our product offerings from our competition and we really think there is a reason to come and shop at PetSmart and we have focused really strongly on our resets to improve shoppability for the customer and increased profitability in terms of margin dollars per firm.

All of this has established PetSmart we believe as the leader in the pet sector now and many years into the future. What I am going to do, as you can see, we are pleased with the achievements in merchandizing and one of the areas which is being particularly successful is in natural food. So, I want to conclude by showing you commercial that we ran a little while back for natural food, which pulls together everything I have talked about into a very compelling message for this consumer. And as I have said our natural food business is performing incredibly well. So with that I will run the video.

[Video Presentation]

So, thank you. With that, I will hand over to David Lenhardt who will talk about our unique in-store experience.

David Lenhardt – Head, Store Operations

Thanks Joe and good morning everybody. You heard Bob speak earlier about how important differentiation is for us at PetSmart, and a great deal of that differentiation goes on in our stores. Specifically we achieved that differentiation through the theatre in our stores, through our passionate associates, through the customer engagement that those associates are delivering, through our services, and then finally through our partnership with Banfield.

I want to go through each of these in a little bit more detail. Let me start with the theater in our store. At the end of the day we are very much more than a store that just sells product, not only are we selling product, we have adoptions going on, each and everyday. We have live pets, we have grooming, we have pet training, we have hotels and Doggie Day Camp, and then we have our partnership with our vet. And when you see those all come together in our stores on a weekend there is a magic going on that our customers very much relate to.

Now at the end of the day, all of that differentiation or foundation is really our associates. And we’re privileged to have the most passionate associates in the industry. At the end of the day, if you have a passion for pets we are a great place to come, work and what we know from talking to our customers is that they very much value that differentiation. So when they walk in and an associate gets underneath says hi to their pet Zoe, ask them how they are doing. They very much value that and they go tell to any other friend.

And by the way, if another weaken terrier owner comes in at the same time and meets them we’ve got a whole community going on in the store at that point. So those associates mean a lot to us and we build some programs over the last several years to really make sure we’re executing that consistently across the entire store base, specifically our customer engagement officer program, set some key standards on how we’re going to engage with the customers each and everyday.

Now, recently as John alluded to earlier, we’ve been promoting and focusing on that customer experience a lot more. I want to share with you a television commercial that we’ve been running around our happiness and store campaign that focuses on that associate and the associate experience with the pet parent.

[Video Presentation]

As we continue to focus on this customer engagement one of the things we track very closely is what our customers think of us. And as we look at those overall satisfaction metrics, I am very excited to tell you that those have continued to increase and in fact are continuing to surpass the all-time highs that we’ve had.

Let me now move on to vet services which are a very big piece of our differentiation. Let me start this by stepping back to give you an overview of the businesses that we’re in. Today we offer grooming in all of our stores, we offer pet training in all of our stores, we offer hotel and Doggie Day Camp in 185 stores, and through our partnership with Banfield we have full veterinary hospitals in about 65% of our stores. In each of those businesses we are the number player in America.

Now in looking at our services growth, this has proven to be a very consistent and a very resilient business, despite the economy. What we’ve seen over the last five years as these services has grown at an average rate of 12% and we anticipate this year we will end up at $660 million overall or about 11% penetration.

Now if you look at the opportunity that services provides for us, a couple of key things from a customer perspective, we know that services drive increased frequency, so it’s a very sticky part of our business. We also know when those customers are in our stores it drives an increase spend per visit, so there is a very nice halo effect to the entire store.

And then finally we know that it’s more profitable and that to illustrate that if you look at the chart on the right at the annual gross margin per customer, what you will see is as the customer moves beyond just purchasing dog product and starts to add services into their basket their profitability goes up exponentially.

Now, turning to grooming, which is our largest business, we’ve spent a lot of time over the last year really focusing on driving awareness in this business and driving trial. And we’ve done this through introducing the new program called our Look Great Guarantee, which basically guarantees you a quality groom or we will give you your money back. And we have been supporting that program with national television advertising for the first time in a decade. And I want to share that advertising with you.

[Video Presentation]

Now, we have been running this program for the last five months, very excited to tell you the early results. We’re seeing increased new customer growth, we’re seeing increased tension rates, and we’re seeing an increased satisfaction from our customers with our grooming offering.

Now, let me turn to our hotels. Now, over the last several years, we’ve been focused a lot on the profitability of our hotels and specifically we’ve been focusing on optimizing and rightsizing the labor model in our hotel. We’ve also been focused on optimizing the prototype of our hotels going forward. Now, more recently, we put a big focus on continuing to drive awareness and to drive sales.

And I am excited to let you know over the past year we have been testing a centralized call center that has been supporting 23 of our hotels. And as we have tested that and looked at the results what we have seen is increased revenue, we have also seen an improved customer experience, and then finally, we’ve seen improved operational efficiencies. So, based on that, we are going be deploying that call center to all 185 of our hotels starting next year. We will also towards the end of this year start to test that for salons as well. And at the same time, we are beginning to look at on online reservation system not only for our hotels, but also for grooming and also for training.

At the end of the today, when we look at our customer, we know that our customers used to transacting in a services business through a call center through online and we think that that’s a big future opportunity for growth for all of our services businesses. I want to end by talking about our partnership with Banfield, which is a critical differentiator for us. There are couple of reasons for that. First and foremost, we know that the vet is the single most trusted associate in our store. Our customers value their recommendations and their advice. Secondly, we know that Banfield drives a halo into our overall store and drives increased profitability.

And then finally, it’s another key piece of differentiation and another key piece of us being able to offer everything you need for the life of your pet and offer a complete suite of solutions for our customer. Now, Banfield has been doing very well. If you look at their three-year sales growth rate, it’s been 18% per year. And then if you look at profitability, that’s been up even higher 84% per year as they have been combining their focus on sales with improving operational efficiencies.

So, when you put it all together, as I mentioned at the beginning, we are very much more than just a product-based retailer, where everything from product to services, grooming, training, hotel, vets, to live pets, to adoption, to the most passion associates in the industry that are engaging with our customers each and everyday. And that’s very, very difficult for our competition to duplicate and we feel that, that is a big separator for us from the competition.

So, with that, let me pass it over to Chip Molloy to go through our financials.

Chip Molloy – Chief Financial Officer

Thanks David and good morning everyone. It’s great to see a lot of familiar faces out there today. I am about to speak of our financial framework here at PetSmart. And when I talk about our financial framework, I am not just talking about results, I am not just talking about guidance, I am talking about how we think each and everyday at PetSmart around how to drive shareholder value. Before I go into too many details, I am going to talk about our evolution. As you heard today, in 2008, we took a look at ourselves.

Prior to 2008, we were all about top-line growth and we were quite successful at it growing at more than 10% a year. But for several years leading into 2008, we had a declining operating margin, we had declining returns on invested capital, and our earnings were essentially flat. So, we took a hard look and said look, we can’t continue to do this. What do we want to do? So, we shifted our focus from just top-line growth to improving our returns at moderate growth and we started with three critical areas. Number one, we had to better manage our capital investments. Number two, we needed a laser focus on our EBT margin or what we consider our operating margin. How do we stabilize that and get it to expand again. And we needed a strategy to return cash back to our shareholders.

So, on the capital investment front, what do we do? As you can see, we were growing our capital quite nicely. In fact in 2007, we peaked at almost $300,000 million that year or 6.4% of sales. We were growing square footage more than 10% a year. We were accelerating our Pets Hotel business. We built 2 DCs and we had a lot of strategic initiatives. And in isolation, all of those initiatives seem to make sense, but when you (indiscernible) all on top of one another, we couldn’t afford the near-term dilution to our income statement or cash flow statement.

So, we shifted our mindset from how much can we do to how much can we afford to do. How do we define a 40? We took a look and said we want to have a stable to expanding operating margin in a relatively low comp environment. So it created consistency, call it a 2.5 comp and we came up with $120 million to $150 million a year previous slide. Roughly 2.25% of sales that was our sweet spot which still allowed us to build 40 to 50 new stores a year. It still allows us to do refresh work and remodels in our stores. It still allows us to keep our stores fresh and clean and we still have capital to do strategic initiatives. But the strategic initiatives were focused on the day are the ones that have the highest probability of success and we have also narrowed our human capital to fewer initiatives to ensure probability of success and it seems to be working.

On the operating margin front or EBT margin, we look at EBT margin as our operating margin, because we have our interest expense line is all capital lease, it’s essentially rent. With that as you can see from 2005 to 2009, we lost almost 200 basis points, at a time when we were growing top-line 10% a year. So in early ‘08, we started to get our capital on our control, we started to get our cost on our control, and then beginning in ‘09 we started to stabilize our merchandizing margins with a lot of the strategies that Joe spoke to good, better, best proprietary brands, and you can see that we have been quite successful the last two years in growing that again. In fact, there is a probability that we could meet or exceed our 7.7% peak next year.

Prior to 2009, we don’t really have a strategy for returning cash to you, the shareholders. We did have a very small dividend of $0.12 per share per year and our share buyback plan was sort of ad-hoc. So, in early 2009, we actually used the third-party to reach out to you the analysts community and you the investment community to determine the best use of that cash. And we came up with a plan to consistently buyback our shares and to raise our dividend to be a modest dividend.

In 2009, we raised our dividend from $0.12 a share to $0.40 a share per year. And we set out to buy 4% to 5% of our shares net of any LTIP dilution each and every year. We raised our dividend, we went from $0.40, we raised another 25% in 2010 and past June we raised another 12% to its current level of $0.56 per share per year and we’ve been buying back shares at a clip of netting out 4% to 5% of our share count.

In June, we announced the new share repurchase authorization of $450 million takes us through January of 2013. So, how we do on a returns front, but lot of ways to calculate return on investment capital, we are not suggesting this is the best way, but however, you calculated you are going to see the same kind of trend lines. We are going to see a melting ice cube for four straight years in a row and then you are going to see the shift and focus and you are going to see how it resulted. So, we are doing pretty well here we believe.

In 2009 in this room two years ago, we introduced our long-term guidance. And we introduced it in somewhat of a very unique way and we refer to this as our Fishbone. And I am going to through that again today. We are a company that is striving to consistently deliver two to four comps. We expect to build 40 to 50 new stores each year. We think the runway for North America is roughly 60 in 150 stores won the share of roughly 1230, so it still gives us 8 to 10 years of some runway assuming 45 a year.

We are a top-line grower of 4% to 6% a year. And if we can focus and keep our margins on merch and services sides to be flat and slightly expanding. And we combine cost control to ensure that we don’t grow our costs more than 4% to 5% assuming we put that square footage in the ground. It does two critical things for us. Number one, it delivers EBIT growth of 7% to 12% a year. And it produces a lot of cash flow, operating cash flow in north of $435 million.

And if we reinvest $130 to $150 million call it a 2.25% of our sales back into the business, we have $300 million plus of free cash flow and growing. You combine that with the share repurchase of 4% to 5% and the dividend yield of 1% to 2%, we believe we can be a top quartile shareholder return of 13% to 18%. And we don’t want to be a one year wonder or even a two year wonder we are driving to do this each and every year. This Fishbone has taken the life of its own on our company, and it wasn’t by design, but if you went back to Phoenix today and you spoke to almost every associate in our headquarters they could recite this Fishbone.

Matter of fact, the departments they work with, they know the boxes that they influence and they take great pride and actually meeting or beating the expectations within that box. And like I said, it wasn’t by design, it just took a shape and it’s been great for us.

How we do and against this Fishbone? Our long-term guidance, well, in 2010 on the comp side, there was 4.8% and this year, we are on track for something very similar. Last year we built 38 stores we are a little bit light, but this year we will be right around 45 stores. Last year, on top-line growth, it was 6.7%. So, it was ahead of the expectations. This year, very similar again and by the way we don’t have the help of flea and tick this year to really drive our productivity.

Last year on the margin side between merch and services we grew about 20 basis points and this year on track close to 30. Our cost grew roughly 4.6% last year and this year will be higher up around 5%, a little over 5% maybe because of incentive compensation with over performance.

Last year we did EBT growth of 19.6% so as you can see if you can just de-comp just a little bit and if you can just get a little more etcetera merch margin and you maintain your cost, you can actually exceed your growth target of 7% or 12% and this year we are on track for again a very similar number in 2011.

We did buy back 4.4% of our shares last year, expect to be roughly 4.5% this year and if you own the share at the beginning in last year, you would have earned 1.4% on the dividend and its going to look very similar again this year. So, we are delivering on our commitments and we are going to continue to focus to deliver each and every year here.

When you look at those boxes of our Fishbone pretty much every single one of those is within our total control. There are two critical elements that we myopically focus although and those variables are the two to four comp and the stable to expanding merchant services margins and hopefully to the comments you heard today from John, Joe and David, you are getting a sense that we can continue to do that, for not just this year, but for next year and beyond.

You are hearing things like a growing industry. We have very passionate and affluent customers. We are driving new awareness to our business, to our integrated marketing campaigns. We are growing our channels exclusively in a proprietary brand. We are on in infancy stage on pricing and space optimization. We got an incredibly differentiated in-store experience, one that we can continue to lever and we are continued to grow our services. These are just a few of the elements that we believe in. They are going to help us drive that comp and drive that margin.

So, now on to the short-term, I hope most of you know we did change our guidance this morning, so I will first speak to that briefly. For the third quarter, our previous guidance was 3% to 4%. We have a couple weeks left, but we are looking at 5.5% to 6% on the comp side for the quarter.

Our EPS previous was 41 to 45. We are now looking at 46 to 48. And for the full year, our previous guidance for comp is low to mid single-digits that’s been creeping up all year and we are now in a phase that it’s going to be more like mid single-digits. And EPS was 240 to 248 and we are now looking at 246 to 252.

So, what’s changed in the quarter? Our one traffic is better than we expected and that’s against the very tough compare. So, we are highly encouraged there and the units going into the basket, we are seeing a nice uptick there. So, we are seeing more units going on the basket, which is driving to tick it.

AUR is a little bit help generally from inflation as expected, so which changed and we are excited. So, that’s it for our financial framework and I’m about to introduce Su is going to talk about our social responsibility, but I encourage you to listen to this affiliation with PetSmart Charities, because it’s somewhat unique and it’s differentiated and it’s incredibly important to our customer base. And it’s actually part of the heart and soul of who we are as a company. So, without further ado, give it to Sue.

Susana Della Maddalena – PetSmart Charities

Thank you, Chip. Well, I am delighted to be here this morning to talk to you about PetSmart Charities and the work we do. PetSmart Charities was actually founded in 1994 in the United States and in 1999 in Canada. We are a 501(c)(3) non-profit organization here in the U.S. and a registered charity in Canada, which means that we actually raise our funds from the public. In 2009, we officially became the largest vendor in animal welfare. And this year, we are on track to raise more than $40 million in contribution income and since our inception we have actually granted out more than a $134 million to animal welfare organizations.

We’re very, very proud of the impact that we are able to have in this field, particularly because less than 2% still on traffic dollars were actually contributed to animal welfare organizations every year. We are also very proud of the fact that we are an extremely strong organization. And we see charity watchdogs like Guide Star and Charity Navigator rate us very highly. In fact this year for the eighth consecutive year in a row we’ve received a four-star rating from Charity Navigator putting us in a lead group of organizations less than 10% of non-profits in the countries that have received that rewards, awards annually.

So, we approach ending pet home listeners very holistically through our funding. We promote adoption to help get pets back into homes. We use spay and neuter funding to reduce the number of pets coming into shelters and to reduce the number of unwanted pets that are born. To our relationship with PetSmart, we are actually able to very efficiently and effectively deliver supplies to emergency situations either manmade or natural.

And lastly, as a leader in this field, we feel a real obligation to help professionalize the field through education. So, why don’t we do what we do? Well, in a nutshell, 4 million pets will be usinized this year in our shelters across the country. We’ve made a lot of progress since the 1970s when we were usinizing more than 20 million dogs and cats. So, with 8 million pets entering our shelters every year, we still have a huge opportunity, because still to about 50% of them are being usinized. So, we are working very hard as an organization to get to a point, where we can find a home for every healthy and adoptable pet.

So, today, I’m going to focus on a few of our programs. I am going to talk to you about how we are driving adoptions through our in-store adoption centers. I’ll talk to you a little bit about the events that we’re using to create awareness for pet home listeners and also to help find homes for pets. I’ll talk to you about our Rescue Waggin’ program, which is a really unique program that enables us to save dogs. And then I’ll talk about the partnerships that make us successful. And then lastly, I am going to give you a sneak preview into a cost campaign that we are launching nationally next year called People Saving Pets.

So, started with our in-store adoption program we do have adoption centers that are available in all PetSmart stores. And this is a really wonderful partnership between PetSmart, PetSmart Charities, and local animal welfare organizations. PetSmart donates the space which actually last year was valued at $13 million. PetSmart Charities provides the funding to local animal welfare organizations and we have the local animal welfare organizations coming in with the pet screening adopters and collecting the adoption fees. We use four events every year for national adoption event weekends to help create more awareness for adoption and to help save more than 70,000 pets. That combined with our day-to-day program enables us to find homes for more than 400,000 pets every year, which actually represents about 10% of the pets that are adopted every year in this country.

Since our inception, we found homes from more than 4.5 million pets and we are expecting to see our 5 millionth adoption happen early next year. We are now the largest facilitator of adoptions in the country. So, we are finding homes for more than 1000 pets a day or one pet every minute that are stores open. We also use events to drive awareness of pet home listeners and adoptions. I mentioned to you the national adoption events that we do four times a year.

We are also increasingly doing community adoption events, which are adoption events that happen between those big quarterly events usually outside of a PetSmart store and they are designed to really drive adoptions. A recent example of this was an event we did in Oklahoma City called Midnight Woofness, where we kept the store open overnight, we had the event in the parking lot and we were actually able to find homes for more than 600 pets in 48 hours, so is an amazing event.

We also have a PetWalk which were standing across the country. This is a very sun-filled day, where we can involve the community, engage some in finding out about pet homelessness and we have actually had as many as 7000 people and 10,000 pets walk in our Phoenix PetWalk and we have been named actually the best walk in the city. So, we’ve planned to expand that to other communities around the country.

Our Rescue Waggin’ program is designed specifically to help save the lives of dogs. It’s really a three-pronged program. We transport the dogs from communities, where they are sure to be usinized to shelters, where we can place them into adoptive homes. But because we want to address the need in those source communities as well, we provide capacity building grants to our source shelter partners and we give them spay and neuter dollars, so that they can actually reduce the number of unwanted dogs that are coming into their shelters from their community.

We are running the program currently in four geographic areas and actually just last week celebrated the transport of our 50,000th dog, so, very, very exciting. This is actually probably one of my favorite programs, because I think it really speaks to what we do as an organization. We actually work with some of the poorest and most under resource shelters in the country in this program and it’s really amazing, but not only we can do how save these dogs, but also the impact that we can have on the people that are involved in this program. And I want to very quickly tell you the story of Ken and Diana to kind of illustrate that point.

Ken and Diana run a shelter in Perry County, Tennessee. It’s the poorest county in the state and they were our first source shelter partner to sign into the program. Their shelter consisted of a couple of chain-link canals by the landfill with no electricity, no running water, and very poor shelter conditions for the dog. And when they came to us, they told us that they actually never named the dogs that came into their shelter, because they knew they were going to have to usinize probably almost all of them. So, this is an e-mail that Diana sent me on the morning that they sent their first group of dogs off on the Rescue Waggin’. 15 dogs left Perry County on their own forefeet rather than in black plastic bags bound for the landfill.

After the van pulled off, we couldn’t seem to move the magical moment as we felt a mantle of grace that was generally over us. I cried when the dogs left, but not from sadness. I am just so glad they are going to a better life. Thank you all for allowing Ringo, Treco, (indiscernible), grandma, Mickey and friends seemed to be saved.

We are able to do what we do, because we have wonderful partnerships. I mentioned earlier that PetSmart donates the space in all the stores for us to do our adoptions. But also we are able to raise 80% of our funding through PetSmart relationships and PetSmart channels. We have more than 45,000 passionate PetSmart associates who support our adoption programs in the stores everyday. They also support us financially through the P.A.U.S.E. payroll deduction campaign and P.A.U.S.E. actually stands for PetSmart Associates United to Stop Euthanasia.

PetSmart vendors provide sponsorships for our programs and also (in-kind) donations. And lastly, we work with more than 2,500 animal welfare organizations across the country, who work everyday to save the lives of the pets that society has left behind. But there is one group that’s not listed here, that’s absolutely critical for us to be able to get to a place, where we can help every healthy and adoptable pet and that’s the public. And that’s why we’re really excited to launch the People Saving Pets campaign next year.

The People Saving Pets campaign is designed to be a powerful social movement that educates the public about pet homelessness and engages them in helping us to solve the problem of 4 million pets being usinized every year.

In 2009, we conducted a national study and what we learned was that the public is largely unaware of the number of pets that enter shelters every year. 76% of the respondents told us that they thought it was less than 1 million pets. We also learned that only 24% of the pets in home should actually come from shelters. So, a huge opportunity to increase the share of pets in-home from shelters.

Lastly, we also learned that most people had kind of a negative perception of the shelter environment and of shelter pets. So we thought there was a huge opportunity to create a movement that could educate the public and engage them in a broader way in helping us in home listeners. We also have a huge advantage versus other non-profit organizations in that. Through our relationship with PetSmart we’re able to communicate this message to a huge number, millions of pet loving people.

So, the campaign empowered by such PetSmart Charities, it’s actually a multi-platform’s campaign, it’s going to have a website, social media, PR, advertising and you will see when you see the commercial that we’re really positioning shelter pets in a very different way than you typically see in animal welfare commercials. We’re really taking a very positive approach, we are positioning these animals as good valued members of your family and pets that you would want to adopt. So I’ll go ahead commercial.

[Video Presentation]

So, we are very proud to be able to play such a huge role in saving the lives of home lost pet. And now I want to turn the podium back over to Bob Moran. Thank you.

Bob Moran – President and Chief Executive Officer

Thanks. I think you can see from that presentation, what an integral part that PetSmart Charities plays in our culture and it’s about talking the talk and walking the talk, and our associates are very proud to be associated with us.

I’d like to take a few minutes to wrap up before we open it up for your questions. As you heard today, our value proposition is centered around providing solutions for pet parents to help them, help their pets live long, healthy and happy life, and by providing the broadest assortment with an unmatched customer experience, all that great value. You had the opportunity today to hear from our seasoned management team and what we’re doing in each of their respective areas of expertise to continue to drive the differentiations that makes us the pet specialty store leader for the life time needs of pet. I am very proud of its trends and the alignment of our team and what they have been able to accomplish.

And I know that by continuing to stay focused, they have the ability to execute on strategic priorities well into the future and to deliver on shareholder value creation. With that, I’d like to invite Chip, Joe, John and David up here, and then we’ll take your questions. Thank you very much.

Question-and-Answer Session

Bob Moran

We have a few microphones that are going to be walked around. So if you have a question please raise your hand. If you would also provide your name and your firm, just for the benefit of those listening on those webcast. And with that we’ll go and start.

Dan Hofkin – William Blair & Company

Thanks, Dan Hofkin, William Blair & Company. If you could just elaborate a little bit more on some of the categories that you’re seeing, some of the incremental upside on, it sounds like you’re seeing strength both in transaction count and items per basket, are there any particular parts of the store, that are outsized contributors relative to expectations, and any of the new merchandizing initiatives particularly Martha Stewart in cat, is that helping at the margin so far? Thank you.

Unidentified Company Speaker

It’s been pretty broad-based across the store, obviously in consumables. We continue to be very successful with natural food that continues to be strong and we did recently do a small reset of treats and rawhide and I would say in those categories if you look at them as a total continue to improve and they are pretty important holiday categories for us. As it relates to hard goods, we did a cat hard-goods reset earlier in the year and nobody really focuses in on cat. So, we seeing the benefit of that, but we are also seeing pretty good performance across what we call the big six (categories), which would include choice and colors and lays that are all pretty stable. And then the third division, which is specialty, which is live fish we don’t tend to talk too much about that separately, but we’re seeing that perform really well this year. So, across the piece the story is performing well. So, we are not relying on any particularly category right now. It will do well across the place.

Brian Nagel – Oppenheimer

Hi, it’s Brian Nagel from Oppenheimer. Kind of follow-up to that question, but anything in the competitive any ships recently in the competitive environment with respect to of your traditional competitors always been a lot of charter lately with some efforts by others online. So, you are seeing any impact on your business and maybe how you respond to that particular online? Thanks.

Unidentified Company Speaker

Our online business continues do very well. We are driving as I mentioned in the presentation significant year-over-year traffic growth. Our e-commerce sales are growing nicely. So, we monitor all of that very, very closely and so far we have major impact.

Michael Lasser – UBS

Michael Lasser with UBS. If you look at your customer segmentation and the fastest growth coming from Smart and Mart, can you describe where that growth is coming from on a product category perspective? And then along those lines, can you also describe within this three bucket, how do your customers interact with you from an online perspective?

Unidentified Company Speaker

Yes, so what I’d say is, I wouldn’t get too hung up and looking at very small differences between the three segments in terms of customer growth, you probably looking at the customer growth number is 484340.

And if there was 10% customer growth in one segment and 1% in the other I think then we could talk about. But I’d say is that’s pretty strong customer growth across the board and so to answer your question about individual categories it really is more across the board. I’m sorry what was the third part of your question?

Unidentified Analyst

[Question Inaudible]

Unidentified Company Speaker

Yeah. So, we obviously have very similar customer metrics like been other retailers, those customers that shop in both our online base as well as our stores base tend to be very good customers and we are again seeing on the online side, very strong customer growth like we’re seeing in the stores in fact it’s outpacing the store customer growth we’re seeing.

Bob Moran

I would add that the smart with hard and even the smart customers there is a disproportion amount of services in those customers. So, as you think about that versus online that’s been (element) of our business that you can replicate online.

Peter Benedict – Robert Baird

Thanks guys. Peter Benedict at Robert Baird. I think first for Joe on the natural food category, I think there is a subcategory in there fresh foods more particularly, but it’s been kind of an exciting growth on a niche area. What are you doing to take advantage of that, any plans to expand your presence there? And then as a follow-up maybe to David, space optimization you guys have done a lot of resets in the last couple of years. But I mean Chip had mentioned that due to the term in its infancy. So, just curious what opportunities still are out there in terms of space optimization?

Joe O’Leary

I’ll take both actually. Regarding the natural, what we call natural. Fresh is interesting I think we’re seeing still that the growth in dry natural and then wet. So, we’re working pretty hard on wet. So, if you look at on simply nourished product in the store is pretty much even great food it is made in plants or human graves. So, really working hard on the wet piece on top of the dry. We do sell daily fresh so if you look in our stores I think it’s going to about 250th stores. Daily fresh is process it’s not real fresh.

And that’s start to grow quite successfully this year and they have done a lot of marketing and tagged us so that it’s growing. And when we do the food research next February our intention is to expand that to couple of hundred more stores. And we are also going to introduce frozen roll into about 200 stores next February. So, again we look the way, where we think most stores would the dry traditional is still the growth vehicle.

If we cannot wet its very profitable. So, we’re doing that. The daily fresh is growing nicely and we will introduce in 200 stores frozen roll next year. And we will see how that goes. As it relates to optimization that report sent to me, behind the scene within quite nice we are building pricing and space optimization capabilities, which would enable us to become more local. Right now, we are a national retailer focused on delivering really good categories nationally.

What we intend to do next year is to begin to test more localization of that assortment, so as part of the food reset, for example, we are taking five groups of 25 stores, which are, for example, of good natural dog, a good small dog, a good grocery store. And we want to test our way into that, because you could – and we get it right, it can be very successful, but if you get it wrong that will be a problem. So, when we say in its infancy next year we’ll have the processes and the systems to begin testing our way into localized assortment using the existing total assortment, but tailoring it to a city, probably the best example, we’re sitting here in New York, but if you go downtown Atlanta is small dogs and cats. So, how do we get that assortment in there, Robert and (indiscernible), which is what we are testing next year, and it was largely being visible to David’s team, because the product will just flow through.

Mike Baker – Deutsche Bank

Hi, thanks. It’s Mike Baker from Deutsche Bank. So, I was going to ask about the online business as well, but a little bit more specifically wag.com is offering free shipping on dog food and I think Petco is as well at least for a limited time. I think for most of you guys charge for shipping on dog food online. So, have you thought about what that might mean going forward? You are going to have to match that free shipping if you start, it looks to me that you started to test some different shipping models. So, just curious how you react to that and if there is any long-term margin implications to that type of competition? Thank you.

Unidentified Company Speaker

Yeah, going to online, I would kind of circle back to what I said in the presentation. Our focus on the website is to maintain and continue to have the industry leading websites by driving traffic growth, by improving the site experience, continuing to enhance the assortment. We always are experimenting with different types of promotions, but that’s our focus right now is maintaining industry leadership on the site. And I don’t think we are really going to get into either commenting on individual competitors or trying to tell you guys what might happen in future possible scenarios. So, our focus is on kind of what I mentioned in the presentation.

Dan Wewer – Raymond James

Dan Wewer with Raymond James. Question for Chip, prior to 2008, there was a perception that PetSmart same-store sales were benefiting from the young store base, as I recalled, same-store sales in new stores were kind of double-digit rates during the first couple of years in the comp base. Now, with square footage growth running closer to 2.5% or 3% instead of 8% you are not getting that same inherent sales lift from the age of your store base. So, accordingly, what do you think the probability of reaching the high end of that comp sales target of 4% that you had talked about earlier?

Chip Molloy

Well, I’d start by saying that last year we exceeded it and we are going to exceed it this year. Last year, we built 38 stores, which was pretty small relative to historical trends and the year before we built less than 40 stores as well. So, the growth you are seeing in comps today and the growth we are very much focused on is driving productivity out of our existing box for all the things that you saw today. We were stuck at probably $208 a square foot for several, several years, and now you are actually starting to see that climb to something north of $220. And that’s what we have to do and we have to continue to work the day that retailers, at least retailers of our age and stage relying on same-store sales growth from just building a bunch of new stores as those days are relatively over for many retailers.

So, you have to drive it through compelling assortment, through compelling marketing campaigns, through compelling price. And that’s what we are doing. Even if you look back, we haven’t had that benefit probably for the last four years or so, because smaller square footage growth the last couple of years and a couple of years before that, if you look at vintages of new stores for most retailers, 2005, 2006, 2007, a vast majority of those vintages went to places where there was high retail growth, Florida, Las Vegas, Arizona, Southern California. So, the comps we’re all seeing today is not coming from the natural maturation of new store growth.

Matt Nemer – Wells Fargo

Hi, Matt Nemer with Wells Fargo. Two questions. One, could you talk to your SKU or sales overlap with Amazon, you mentioned the mass channel was about 10%? And then secondly, could you give us an update on the small stores, smaller market stores and small stores? Thanks.

Unidentified Company Speaker

I will do the small stores and if somebody wants to do the overlap. We haven’t publicly overlapped with them the online guys. So, I mean you guys can probably do what is just hard work on your part. As it relates to small stores, yeah, about 65% of our 45 units this year will be in the call to 12,000 to 13,000 square foot range. At that size, we can still come to market as a PetSmart store we can still offer all of the selection just we have less safety stock, we can still offer grooming and we still can come with the same value proposition to the consumer.

We are very excited about those stores. If you look at our average in TV and we are put in the ground today versus the ones we are put in the ground just three or four years ago with the average just probably 4 to 5x over time. And we are seeing with projected cash on cash returns and your 5 of be significantly higher going forward and what we see in the last couple of years. So, we are excited about that. I mean it offers new markets for us, we couldn’t get into before or just it wasn’t affordable to put a 20K box. So, we can put a 12 or 13 typically in markets, where the rents are lower.

In general, plus is lower total square footage and many times the competition is not as tough and so we are pretty excited about the new stores we put in the ground today. And I guess just look in that it probably 60% to 70% of our new stores going forward, we will probably be in that smaller 12 to 13K range.

Vincent Sinisi – BofA

Thank you very much. Vincent Sinisi from BofA. I wanted to ask about your adoptions obviously a great cause and also very good opportunity for selling. If you could talk a bit about the training that’s involved for associates the best capitalize on that initial purchase, when they adopt and also any measures you can share on in side of the basket and how it’s changed over time? Thanks.

Unidentified Company Speaker

Yeah, that’s a very big focus for us in the stores both the initial training that our associates get, but we also be able to create a number of different programs around that. So, what we call an adoption ambassador that works in our stores and that’s the store associates that would have the additional responsibility of making sure that when a customer adopts a pet we are following up with that customer.

We are going to take that customer around the store find out what they need, share with them a number of different offers that through our vendors as well as ourselves and band field that we give that customer, when they do adopt the pet and so we found that has been pretty effective for us.

Aram Rubinson – Nomura

Yes, Aram Rubinson of Nomura. I had two questions probably for Chip. One if you can just talk to us a little bit about the balance sheet, the leverage is still under one turn of debt. You have got competitors probably around five turns of debt. Your business is stable it really has not had negative comps over time. There are recognized that the board might have had whether it’s (indiscernible) or borders or U.S. they had some bad experience with debt. Can you talk about how that might evolve over time because it seems if you got more capacity for debt when you are using?

Chip Molloy

Yes, I’ll talk to that. Obviously we do have the capacity take one debt. So, (start bearing), I agree with you. We have looked at it in a couple of different ways and so we have taken a path it says, look we want to have the most optimum weighted average cost to capital, whether we can have over time and where we sit today a BB kind of push loan BB plus.

We think over the long run, we are optimizing our weighted average cost to capital, which ultimately drives better performance of our investments or better opportunities from an investment perspective. And yes, we are conservative company that’s not interested in taking a lot of debt.

I mean we can do it and what we would do it well, you know, obviously the natural answer would be the buyback shares, but what we are going to do in the next year? Once were all levered up and all the shares have bought back. So, we are conservative company and we are optimizing for weighted average cost to capital.

Aram Rubinson – Nomura

Just a quick second as well, can you just give us some insight into the economics of the hotels business and that was suppose to be breakeven towards the end of this year. When you are building new ones, what occupancy rates that you would breakeven versus occupancy rate you have been breakeven in the past. Just some dimensionalizing that would be helpful?

Chip Molloy

Yes, I will speak to the second part, we haven’t really disclosed. But yes, we want to pass the profitability because of the seasonality of business we actually return to profit in Q2 for the business and by the end of the year or beyond our run rate of profitability over the course of the year. We have taken cost out of the system and we have also seen double-digit growth. We are continuing to see double-digit comps in that business. So, we are very excited about that.

And the ones we are putting into the ground are much smaller, so they were 7000 square feet and the ones we put in the ground today are roughly 4000 and we are not building a whole bunch of them. But we are encouraged by the results from the current portfolio we are getting where we wanted to be and the ones we are putting in the ground today a much smaller with much better opportunity. We have learned a lot along the way. We have learned kind of where they work and where they don’t work. We have learned more about being a hotelier and about occupancy rates, we were building them for peaks before what we were trying to build in for more average occupancy rates and obviously with the smaller units or occupancy rates are expected to be hard.

Unidentified Company Speaker

Yeah.

Chris Horvers – J.P. Morgan

Chris Horvers, J.P. Morgan. First following up on the debt question when you say it’s optimal across the capital, is that a function of because you take on more capital leases and your lease structure requires that or is that more it’s optimal in terms of the risk tolerance of the board and Bob, I am not sure if you have any insight there as well?

Bob Moran

No, I think we did some work with some of the – actually I think we may have done some work with some of your own people there. On the other side that Chinese won’t. And we look at over the course of multiple years, if you look at a 10 year average and you look at debt you look at equity with where we are including the leases etcetera. How do you get to an optimal weighted average cost of capital and that’s we are never going to be an investment grade in order we – are we interested in being investment grade. But it’s kind of in that BB to BB+ range, that’s where we are today. If we took on a lot more debt and we are going to go BB- or we are going to go worse than that. That’s what we want and obviously we all understand we could take on debt buyback shares. We all understand that, we always that we are not a company that’s going to do that in a one-time big blowout of share buyback.

Chris Horvers – J.P. Morgan

Okay. And then as a follow-up question, you talked about in the third quarter traffic being better and expected and had actually in the basket, here is if you could track what’s being out of the basket and on the traffic side is that greater frequency of existing customers, is that a new customer, is that share of wallet, what’s the trend there?

Bob Moran

As it relates to traffic that’s being driven by customer growth, new customer growth as well as existing customer growth and that was really driving the transactions of greater than we had originally anticipated.

Unidentified Company Speaker

I’d say as it relates to items in the baskets, I said earlier, we’ve been pretty successful across the store, so that no one stand our category, the consumer is enjoying shopping the store in total and putting more units across the store in the basket.

Gary Walter – Credit Suisse

Gary Walter from Credit Suisse. Two years ago, you had a similar chart that you have on page 20, which was the smart with heart in the smart in the mart. And lot of that meeting was focused on your efforts to get a smart customer to become a smart with heart and when we look at the numbers you gone from 10% to 13% smart with heart and the rest is pretty much the same. You talk about are you satisfied with that small movement and what are the efforts going forward to try to move those customers with smart with heart.

Chip Molloy

Yeah, you are really talking about frequency versus customer growth. And we continue to have frequency as a major initiative for us. I think we’ve spent quite a bit of time in 2010 frankly trying to understand how we can drive frequency, what are the behaviors that we need to change as I mentioned earlier to drive frequency. We have got really good insights now and how to do that. We have got initiatives against those frequency driving behaviors, but its tough roadhouse. So, it’s a big opportunity for us. It’s still a major focus for us. But over the past 12 months that you saw on the presentation you are exactly right, we have been very successful driving customer – comp customer growth increases, but frequency has remained the same.

And frankly given the economic situation, I think last time we also shared the frequency was down on a comp basis, last time we came frequency has been flat with gas prices up 35% versus the year ago. And some of the issues to is you just kind of interestingly the way you drive comp customer growth, it does have a little bit of drain on frequency because those new customers tend not to frequent us as often as existing customers. So, we do have some headwinds on frequency, but we are very focused on trying to higher frequency we think we got a much better handle on how to do it. Now we need to be disciplined about the initiatives we have in place and actually start to drive it.

Alan Rifkin – Barclays

Hi, it’s Alan Rifkin with Barclays. As you centralized the call center to support your sales going forward, will there be any incremental associated with doing that and what longer-term do you think the benefits of centralizing the call center will be to the margin structure.

Chip Molloy

Yeah couple of things there. We actually see when we’re able to centralize the call center. We’re actually able to take labor out of the hotels. Today our associates have got front desk, spend a lot of time answering the calls. When you go to a centralized call center, that call volume reduces dramatically. So we have a lot offsetting savings in terms of labor savings in the actual hotels.

Now as you think of the call center going forward, as I said earlier, what we’ve seen from that is we’re seeing revenue impacts as customers now are able to call in, we’re much better in a very consistent way talking to those customers, and taking them through all the potential things they can add on to a basic boarding, reservation and adding on things like day camp, all of the other add-ons that we have. So we are seeing increased revenue, we’re also seeing some increased operational efficiencies. The customer experience at the end of the day becomes easier. Those of you who’ve used our hotel or day camp there are lot of forms that you got to fill out. So we check vaccine, we’re checking on your pet, the issues that your pet may have. All of that can now happen through the call center people. And then at the end of the day now when you check-in, it’s a very easy check-in and check-out process actually in the hotel.

Alan Rifkin – Barclays

Okay. And one follow-up if I may, obviously you guys have a very good relationship with Banfield. But year-in and year-out you guys are growing at a greater rate than the industry, the results is indicated on one of these slides, but Banfield obviously shows that their profitability continues to improve as well. Longer-term is there any opportunity for you to revisit and possibly improve the economics with your relationship with Banfield..

Chip Molloy

You mean from an ownership perspective or how we charge our rents or?

Alan Rifkin – Barclays

Yeah, charging higher rents, specifically, that’s really not an opportunity…

Chip Molloy

No, I don’t think it’s the higher rent. When you go into a new store we charge in the rents for the space and it’s pretty much fully loaded with a capital that goes into that space. So it’s negotiated upfront and it’s pretty clear cut, it’s a fair deal in both sides of the house because basically we wouldn’t build out otherwise if they want where. And then as far as the economics if we can, we own 21% of them. If they can continue to grow we can own piece of it. We’ll, Mars owns the other piece or two of it. As it relates to an acquisition we get that question a lot, would we like to own Banfield most likely. But Mars is not a seller of investment. They don’t typically divest, so that’s probably not a place whoever go. I think the best economics is just to continue to build the relationship and draw the differentiation and drive those customers into the box because the more we can be inline with Banfield and vice-versa there is a synergy there that we’re tapping into now that we think has more room to grow.

Bob Moran

I just, guys just add that, as it relates to economics, what Chip is basically saying is that as Banfield grows the customer base, it also dramatically increases our sales per customer as well, so there is an indirect benefit to our overall customer. Not just in the Banfield sales but for how much is generated through PetSmart.

Alan Rifkin – Barclays

Thank you.

David Mann – Johnson Rice

David Mann with Johnson Rice. My question relates to services and the efforts that you’re taking to try and increase the traction of your customers that actually use services. I think in the past I don’t know how many years ago I remember a 5% of your customer’s maybe that kind of number been thrown out. Today you are talking about 13% of the smart with hard customers out of your total base. So thinking about that what is the percentage of your customers that actually use services? Is that number trending up? And you have a target for where that would go just given on one of the slides you showed how profitable that would be?

Chip Molloy

Yes, I don’t know, 5%, I am not sure where that’s been. It’s dramatically higher than that. I don’t know that we want to say the exact number, but..

David Mann – Johnson Rice

If you know it?

Chip Molloy

Well, it’s a little bit complicated because you have to divide up who actually use the penetration looking at, what dog customers actually use services versus there are other customers that don’t use any services. But it has been growing as David mentioned as we continue to grow our services, customers faster than our overall customers, so we’re increasing if you will to your point, our penetration of total customers that are using services.

Bob Moran

The other thing I would say is, we’re doing a number of things in our services businesses to continue to drive those customers. I talked a little bit earlier about our look great guarantee. We know one of the biggest barriers to trial in grooming is the perception of quality. Once the customer uses our grooming service, we develop that relation, develop the quality offering, they stay with us. So, as a focus on driving the trial, that led to the Looks Great Guarantee and again we are seeing success with that. We also have focus through a lot of our CRM channels where we’re able to target those customers in our store that are likely customers, they’ll start with our customers that have never used a service before and we can directly send them offers to encourage them to come in, to try our service for the first time. And we’re having success with that.

Dan Binder – Jefferies

Hi Dan Binder, Jefferies. Just wondering if you can give us an update on inflation kind of what that’s contributing to ticket these days and if you start to hear more conversations with vendors about potential commodity cost coming down, we have prices that may go next year, that’s the first question. The second question is around merchandizing, we’ve had a lot of wins over the last couple of years, just kind of curious as you look out over the next couple of years. Do you think you can match things like more of still are there really intriguing offers. And if so, kind of what part of the story are you focused on?

Chip Molloy

I’ll speak to the inflation piece. You want to get the your merchandizing piece, Joe?

Joe O’Leary

Inflation as it relates to cost increases, most on the consumable side, we did have cost increases in the beginning actually new of them in the beginning of the year. They started to make their way into the system in the second quarter of the year. And a pretty much come to a stock, so right now, they are all in place, there will be some inflation benefit in the back half of the year, roughly 30% of our goods have seen on average maybe a 6% increase, so you are looking at somewhere in the 150 to 200 range for the back half of the year. Not hearing a lot of noise about price changes, obviously commodity prices are moving all over the places and we normally know maybe six months out. So for right now, I think it’s pretty stable. We’ll probably get a little bit of tailwind into the beginning of the year, next year, because of the cost increases that we put in, in the middle of the year, this year. And then more to come, but right now, it’s kind of back in a very stable, not a lot of movement in either direction.

Chip Molloy

Yeah, on the merch side, as I said during the presentation, we’ve really created a culture of differentiation and innovation. And we have several major resets next year. We have the introduction of the (indiscernible) brand, which we think will be a pretty compelling story for the consumer and we are going to introduce that as a part of a toy reset strengthening the Kong brand in there, for example, and the other brand not a brand that’s going strongly. Things like the Bret Michaels, she appeals to the 25 to 35 year old and some of the ideas we come up with get very far, but that one did. So, Martha has been really cool to appeal to the customer that’s kind of to 35 to 55, but John could talk to there is a generation of people getting pets or in the younger set. And we need a reason to talk to so we think the Bret Michaels thing could be disproportionately successful relative to the dollar ticket value that we might get next year.

I already talked about the food reset. We have another reset plan next year for small animal. So, they have categories that we didn’t never yet talk about or touch and it’s why wouldn’t we do small and furry better than anybody else. So we have some categories, a sizable that we can still improve. So, small animal, an example of that is that we kicked off the campaign, with pets in classroom recently. Then if the classroom has a furry animal in it, one in four children go get furry animal, well if they come and get it in PetSmart, that’s a good thing. So, there is categories that we haven’t particularly even brought to fore yet with small animal we want. So, I just try to give you examples that we are confident, not over confident that we had lot’s of innovations still to come, not just in ‘12, but ‘13 and ‘14 as well.

Now we’re getting much better systematizing it in terms of understanding how to determine what those compelling stories should be as Joe said, not everything that we dream off actually hits the floor, so we just got done placing a study, early this year about 50 or 60 different compelling stories, that we wanted to run to pick about a half a dozen for next years. And through that process we are able to kind of systematize how to bring those compelling stories forward and not all of them are going to be new brands. I mean, one of the things that went through that process was the Look Great Guarantee, and that’s not necessary introducing a new brand, introducing a new idea to an existing category and that turned out to be a very compelling story, and given that, its just working great for us this year.

So things like the small animal reset et cetera can be very compelling story to our customers without necessarily having to be some big exciting new brand.

Unidentified Company Speaker

And I would add in from a store perspective, there are number of small innovations that added up really mean a lot both to our associates in terms of being able to sell to the customer, but also make a difference to our customer. The merchants are going forefoot by four feet doing product resets and I’ll just give you a small example aquarium backers. So, this is a factor that you put on the aquarium that will have a different picture. The merchants just changed the way we display that, so makes it easier for us to execute. It’s also much more compelling. We are selling the heck out of them. So, there are lots of smaller things that are not as big. We are probably not going to talk as much about and that’s happening throughout the entire store. And it’s really making in a lot easier for our associates to both execute, but it gives them stories to talk to each individual customer about.

Unidentified Company Speaker

Just building that you can see we get excited, I mean we now talked about cat, one of the most profitable in cats in our store is (basis), tiny little fish in a little bowl all the way from China. We don’t particularly talk about that, but that’s compelling reasons for somebody to get into fish and start. So, if it’s not material that we would broadcast that, but as David says that’s four feet by four feet of profitability that we are starting to work through now long after the big resets.

Unidentified Company Speaker

If I could add one thing, finally got a chance to talk, but don’t underestimate these types of integration that we have driven across this management team. And what I mean by that is when you could ops, merchandizing, marketing, and supply chain all working together, you are building at incredible confidence, especially for the merchants to buy in to these events. And when I say buy in, the confidence of buying in more units that we ever sold before and great example is how will they season and even the concept of Black Friday, we had a concept of plush lucky and chance. And three years ago, we bought 300,000 and we thought we are living on the edge when we bought 300,000 and we sold out of them very quickly. And then we bought 750,000 and sold out of those very quickly. And this year, we are ordering more over a million. And that’s all the way through the merchandizing ops supply chain and marketing side of how we are actually telling new stories. It’s building up an incredible confidence all throughout the companies that when the decisions are made and what we are buying into also helps with that sales per square foot. Now, we are driving productivity inside our stores.

Joe Feldman – Telsey Advisory Group

Back here, Joe Feldman from Telsey Advisory Group. Can you talk about the mix, pre-recession you probably had almost 40% of your sales from hard goods and it’s come down a lot to kind of that low 30, it’s been bouncing back upwards, but where can I go, can I go back to the 40 and what’s the timeframe or are we in a new paradigm where the mix is what it is at this point?

Unidentified Company Speaker

Maybe I’ll take this one Joe (indiscernible) phenomena you saw in the chart that services has got like 8% penetration to 11%, so that has impacted some of the mix. Obviously, the recession, where they became more discretionary, hard goods became more of a discretionary, but with our drop one of our designs is how to keep that going on a continuing and constant basis year-over-year. It will never get back up to 40% again. However, we do believe that there is probably 200 to 300 basis opportunity and driving that mix for hard goods over time. And again, we also need a little bit above the window on our back on the economic recovery, but we think we can get back 200 or 300 basis points.

Matt Fassler – Goldman Sachs

It’s Matt Fassler of Goldman Sachs. Two questions if I could. At the last analyst meeting a couple of years back, you had a chart that showed the percentage of U.S. households only in pet, and if you can give us an update about where you think that number has gone? And then secondly on the services front, if you can give us some directional sense as to which of the services are showing the highest growth or rank them if you could? And then also which services tend to have the highest tax rate with product sales? Thanks.

Unidentified Company Speaker

You want to take the household?

Unidentified Company Speaker

Yes, as it relates to the percentage of households that had a pet, that’s stabilized, so it’s about 52%. Combine that with increasing population in the absolute number of households they have a pet is probably increasing slightly, so that kind of answers that.

Unidentified Company Speaker

Yeah, in terms of the services businesses, if you look at them, hotel is our highest grower and we have seen that actually both two components to the hotel, the doggy day camp business, which has actually been resilient throughout the last several years, has continued to grow very organically. We see that customers there come two to three times a week with us. That’s continued to grow nicely. The overnight business has also been growing. We know that’s very closely correlated to human travel and over the last 18 months as we have seen human travel uptick. We have seen double-digit comp transactions in the hotel business.

After that would be gloomy, which is actually our largest business overall. It’s growing not faster than the overall core business, followed by training, which has been a business that is historically very sensitive to the economy. We saw that business struggle over the last several years. Over the last several months, we have seen that business start to stabilize and start to move to a positive comp environment. In terms of attach rates, all of these businesses have a very nice halo effect across the business.

Scot Ciccarelli – RBC

Hi, Scot Ciccarelli, RBC. Obviously you guys have a lot of differentiate product relative to your Mass competitors. But at the sake of singling out one of your a specific competitor Wag.com seems to have access to a lot of the premium food brands that help differentiate during the past. I guess the question is, they have access to the same brands. How do you differentiate yourself against them? I understand the desire to be a leader in that marketplace, but how do you go about it?

Bob Moran

I think in terms of a lot what we talked about today is much more to our story than the private dog food and it’s about the experience in the store, what Su talked about and we continue to believe and lead as a retailer, multi-channel retailer, but it’s offering that overall experience to the consumer. We continue to work with our vendors innovating product, improving the product that I just said. So, our focus is multi-channel retailer is the PetSmart experience in total and that is really compelling proposition for the consumer. If you add anything about in line.

Unidentified Company Speaker

Nothing. As we have already said, everything we talked about today it’s not just about assortment although we have greatest assortment and we have a very, very unique customer experience in our stores. We have services in our stores and we want to continue to drive traffic in our stores and I think that’s we have associates that are there, that are knowledgeable. So, if you can profitably, if just about buying a bag of dog food and you can do it profitably it’s a different story, but that’s not who were about.

Unidentified Company Speaker

Any additional question?

Mike Baker – Deutsche Bank

Hi, thanks. Mike Baker, again. Not going to ask about Wag.com. My memories probably wrong, but I recall in the past you said 50% of your product overlapped with Mass. If that’s right now you are saying I guess only 10% is going down from 50% to 10%. If that’s the case, how much you think that is listed your COG over the last couple of years. That been the biggest driver you think your comp?

Bob Moran

I’d say that probably three years ago, we redid the math and when we redid the math and looked at every SKU, like SKUs as well as overlap and we came to a much lower number, when we did that. So, it hasn’t dramatically drop from 50 to X. It’s always been relatively low and it continues to get lower as we broaden our assortment especially on the best categories.

Unidentified Company Speaker

It seems simple from the retail, I don’t know that number would associate with it, but our strategy is really been when we spoke two years ago to really create compelling story because it different, the really cool is the consumers to get off for the couch and comes PetSmart.

As we have done that, we have done a much better job and really nice job, where John telling the consumer in his day and when she gets to the store right now David seem done a fantastic job making sure his day, is well presented and the social experience is very differentiate. I know that kind of sound a little bit, but probably with ample products from the retail perspective.

If we go back three years, maybe we didn’t have the best stories, maybe we didn’t tell them in the best way and maybe the product wasn’t really necessarily there. So, we have moved a lot as a retailer over the past three years and those story is a key much, much, much improved targeted marketing and so much better in store experience come together its really cause the results we are generating now.

Unidentified Company Speaker

We got a time for two more questions.

Peter Keith – Piper Jaffray

Hi there, it’s Peter Keith of Piper Jaffray. I want to follow-up on an issue for next year around localize assortment and pricing. I’m curious to know, if you can drive that capability with some in-house tools or if you are looking to bring in outside software. And then as a follow-up to that, when we think about localized pricing, should we think about that being a larger benefit to gross margin or the comp store sales next year.

Unidentified Company Speaker

None of the above, actually it’s a test. We are very focused as a company when testing products and the rolling out. So the testing would be completely material to our performance next year. What we want to do is test and learn that will be the answer to that question. It would have been material at home through 2012. We build pretty standard technology from JDA and people like that, so we brought the technology in-house, and we have it. It’s try and test technology, we just, I guess relatively like the doctors. But we have not just people across the leadership team but in the organization and work and other retailers and are very familiar with that. So we want to test way into it to make sure the integration of those things makes sense. So next year is very, very much a year, testing and learning, no materiality.

Mark Mandel – ThinkEquity

Mark Mandel, ThinkEquity, I wanted to ask you about your pets hotel business specifically your location strategy. Are these units within the stores in adjacent locations or in remote locations, and do you think about ways that you can improve the location to drive better synergies.

Unidentified Company Speaker

Yeah, the stores were all located within our existing stores or in new stores. And over the years as Chip had alluded to, I think we’ve got a really good sense of what demographic, what markets, psychographics are going to help make a Pets hotel successful. So we use those through the site selection process and chose the stores that we’re going put a hotel and that way.

Unidentified Company Speaker

We are nearing the end here, I’m going to turn it over one last time to Bob for closing thoughts.

Bob Moran – President and Chief Executive Officer

Well, I think it’s been a somewhat of a complete day and I think you can understand that we’re just not selling products, we’re basically selling solutions. And with that I just wanted to thank you for all coming and putting up with our presentations, but I think our focus is really consistent earnings, consistent performance and consistent results and I think you could see the platform for that. So thank you very much.

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