PetSmart Reports Second Quarter 2006 Results and Stock Purchase Program

-- Comp Sales Growth of 4.9 Percent

-- Services Sales Grow 28 Percent

-- Total Revenues Up 13.5 Percent

-- Board Authorizes $250 Million Stock Purchase Plan

PetSmart, Inc. today reported net income of $34.6 million, or$0.25 per diluted share, for the second fiscal quarter of 2006. Thatcompares with net income of $35.7 million, or $0.24 per diluted share,for the second quarter of fiscal 2005.

Included in the company's second quarter 2006 results wasapproximately $2.9 million, or $0.01 per share, in expenses related tothe review of a potential acquisition the company ultimately chose notto pursue. In addition, the company recorded approximately $1.8million, or $0.01 per share, of distribution expense related to aproject to replace racking in the company's Phoenix distributioncenter. The re-racking project also created out-of-stocks in thecompany's higher margin hard goods products, resulting in a decreasein gross margins for the quarter.

During the second quarter of 2006, the company also recorded apre-tax charge of approximately $3.9 million, or $0.02 per share, fora change in accounting treatment for early pay discounts and recordedan unrelated, one-time net tax benefit of approximately $2.5 millionor $0.02 per share.

"The second quarter was a challenging period, but I'm pleased toreport that throughout the period, we saw continued evidence of thestrength and differentiation of our business model and its ability tocontinue to draw the pet parent customer," said Phil Francis, chairmanand CEO. "We continue to feel very good about our ongoing ability togain share and generate long-term value for our shareholders."

Sales

Net sales for the second quarter of 2006 were $1.0 billion,compared to $899.1 million for the same period in 2005, and comparablestore sales - or sales in stores open at least a year - grew 4.9percent in the second quarter, on top of 4.2 percent in the secondquarter of 2005.

Pet services sales were $98.1 million, up 28 percent from the sameperiod last year.

PetSmart opened 22 new stores and closed one location during thesecond quarter of 2006, which compares with 20 new stores and threeclosures during the second quarter of 2005.

Gross margins and expense

Gross margins were 29.9 percent in the second quarter of 2006,compared with 31.3 percent in the same period in 2005. Included insecond quarter gross margins was the $3.9 million charge related tothe change in accounting for early pay discounts. The remainder of thedecrease was the result of increased occupancy costs, the $1.8 millionin additional expenses related to the project to replace racking inthe Phoenix distribution center, related distribution issues andout-of-stock, and incremental shrink expense.

Operating, general and administrative expenses were 23.8 percentof net sales in the second quarter of 2006, compared with 24.5 percentof net sales in the same period last year. Excluding the expensesrelated to the review of a potential acquisition the company chose notto pursue, operating, general and administrative expenses were 23.5percent of sales.

Pre-tax income

PetSmart generated pre-tax income of 5.2 percent of sales in thesecond quarter. That compares with 6.3 percent in the second quarterof last year. Excluding the expenses related to the potentialacquisition the company chose not to pursue, the expenses related tothe rack replacement in the distribution center and the margin impactfor the change in accounting treatment for early pay discounts,pre-tax income was 6.0 percent of sales in the second quarter of 2006.

Investments

PetSmart also announced a plan to accelerate certain investmentsscheduled for 2007 and 2008 into fiscal 2006.

"We think it makes sense to invest now in making our business evenstronger and more capable of delivering long-term value to ourshareholders," said Francis. "The investments we're making are focusedon building a strong infrastructure and enhancing the company'sability to grow and gain additional market share."

Francis said the investments will result in approximately $7million, or $0.03 a share, of additional expense, over the second halfof fiscal 2006.

Dividend payments

As previously announced, the company paid a dividend of $0.03 pershare on August 11, 2006, to shareholders of record at the close ofbusiness on July 7, 2006.

Stock Purchase Program

The PetSmart board has authorized a $142 million increase to thecurrent Stock Purchase Program to bring the remaining repurchasecapacity up to $250 million. The term will be extended to August 9,2007.

"With our strong fundamental business and the investments we'remaking, we remain confident in our business model, our futureprospects, and our ability to generate long-term shareholder value,"Francis said. "In addition, we believe in providing our shareholderswith a tangible return in the form of dividends and sharerepurchases."

Outlook

PetSmart projects comparable store sales in the mid-single digitsfor the third quarter of 2006 and for the full year. It estimatesearnings of $0.20 to $0.22 per share in the third quarter and projectsearnings of $1.30 to $1.33 per share for the full year.

Conference call information

PetSmart management has scheduled a teleconference for 5:00 p.m.(EST) today to discuss results for the second quarter of 2006 as wellas the current outlook. This teleconference will be Web-cast live forall investors at www.petm.com or www.streetevents.com. The Web-castwill be available until the company announces results for the thirdquarter of 2006. In addition, you can listen to the call live bydialing 800-709-7416 (within the United States and Canada) or706-679-5320 (for international callers), code 1227645. A phone replaywill also be available through August 30, 2006, at 800-642-1687 in theUnited States and Canada, or at 706-645-9291 for internationalcallers, code 1227645.

About PetSmart

PetSmart, Inc. (NASDAQ: PETM) is the largest specialty petretailer of services and solutions for the lifetime needs of pets. Thecompany operates more than 860 pet stores in the United States andCanada, a growing number of in-store PetsHotel cat and dog boardingfacilities, and is a leading online provider of pet supplies and petcare information (www.petsmart.com). PetSmart provides a broad rangeof competitively priced pet food and pet products; offers complete pettraining, pet grooming, pet boarding, doggie day camp and pet adoptionservices; and provides a full line of horse supplies, includingequestrian apparel and tack, through State Line Tack. Since 1994,PetSmart Charities, an independent 501(c)(3) non-profit animal welfareorganization, has donated more than $42 million to animal welfareprograms and, through its in-store pet adoption programs, has savedthe lives of more than 2.6 million pets.

Forward-looking statements

This news release contains forward-looking statements includingstatements relating to future revenue growth and goals and futurebusiness opportunities that involve substantial risks anduncertainties. Such risks and uncertainties include, but are notlimited to, general economic conditions, competitive forces and ourability to manage our operations and growth. Actual results anddevelopments may therefore differ materially from those described inthis release. For more information about PetSmart, Inc., and risksarising when investing in PetSmart, Inc., you are directed to thecompany's most recent Annual Report on Form 10-K filed with theSecurities and Exchange Commission.

Statement of utility

PetSmart continues to provide all information required inaccordance with Generally Accepted Accounting Principles (GAAP), butit believes that evaluating its ongoing operating results may bedifficult if an investor is limited to reviewing only GAAP financialmeasures. Accordingly, PetSmart uses non-GAAP financial measures ofits performance internally to evaluate its ongoing operations and toallocate resources within the organization.

PetSmart's management does not itself, nor does it suggest thatinvestors should, consider such non-GAAP financial measures inisolation from, or as a substitute for, financial information preparedin accordance with GAAP. The non-GAAP financial measures used byPetSmart may not be consistent with the presentation of similarcompanies in PetSmart's industry. However, PetSmart presents suchnon-GAAP financial measures in reporting its financial results toprovide investors with an additional tool to evaluate PetSmart'soperating results in a manner that focuses on what it believes to beits ongoing business operations.

PetSmart's management believes it is useful for itself andinvestors to review both GAAP information and non-GAAP measures ofearnings per share, as adjusted to exclude the change in accountingtreatment for early pay discounts, costs related to the rackreplacement in the distribution center, expenses related to the reviewof a potential acquisition the company ultimately chose not to pursueand a one time tax benefit; operating, general and administrativeexpenses, as adjusted to exclude expenses related to the review of apotential acquisition the company ultimately chose not to pursue; andpre-tax income, as adjusted to exclude the change in accountingtreatment for early pay discounts, costs related to the rackreplacement in the distribution center, and expenses related to thereview of a potential acquisition the company ultimately chose not topursue, to have a better understanding of the overall performance ofPetSmart's business and its ability to perform in subsequent periods.

Management believes the inclusion of these non-GAAP financialmeasures provides consistency and comparability of financial resultsand better enables investors to evaluate the ongoing operations andprospects of PetSmart by providing better comparisons. WheneverPetSmart uses such a non-GAAP financial measure, it strives wherepossible to provide a reconciliation of non-GAAP financial measures tothe most closely applicable GAAP financial measure. Investors areencouraged to review the related GAAP financial measures and thereconciliation of these non-GAAP financial measures to their mostdirectly comparable GAAP financial measure.
PetSmart, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share and store data)
(Unaudited)

Thirteen Weeks Thirteen Weeks
Ended Ended
------------------- -------------------
July 30, % of July 31, % of
2006 Sales 2005 Sales
------------------- -------------------

Net sales $1,020,609 100.00% $ 899,097 100.00%
Cost of sales 715,761 70.13% 617,360 68.66%
------------------- -------------------

Gross profit 304,848 29.87% 281,737 31.34%

Operating, general and
administrative expenses 242,868 23.80% 220,604 24.54%
------------------- -------------------

Operating income 61,980 6.07% 61,133 6.80%

Interest expense, net 9,320 0.91% 4,596 0.51%
------------------- -------------------

Income before income tax
expense 52,660 5.16% 56,537 6.29%

Income tax expense 18,030 1.77% 20,792 2.31%
------------------- -------------------

Net income $ 34,630 3.39% $ 35,745 3.98%
=================== ===================

Basic earnings per share $ 0.25 $ 0.25
=========== ===========
Diluted earnings per share $ 0.25 $ 0.24
=========== ===========

Weighted average shares
outstanding - basic 137,667 141,917
Weighted average shares
outstanding - diluted 141,237 147,099

----------------------------------------------------------------------
Stores open at beginning of
each period 842 740
Stores opened during each
period 22 20
Stores closed during each
period (1) (3)
Stores open at end of each
period 863 757
----------------------------------------------------------------------


PetSmart, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share and store data)
(Unaudited)

Twenty-Six Weeks Twenty-Six Weeks
Ended Ended
------------------- -------------------
July 30, % of July 31, % of
2006 Sales 2005 Sales
------------------- -------------------

Net sales $2,032,138 100.00% $1,802,247 100.00%
Cost of sales 1,417,211 69.74% 1,241,131 68.87%
------------------- -------------------

Gross profit 614,927 30.26% 561,116 31.13%

Operating, general and
administrative expenses 478,268 23.54% 422,184 23.43%
------------------- -------------------

Operating income 136,659 6.72% 138,932 7.71%

Interest expense, net 16,053 0.79% 10,095 0.56%
------------------- -------------------

Income before income tax
expense 120,606 5.93% 128,837 7.15%

Income tax expense 44,212 2.18% 48,383 2.68%
------------------- -------------------

Net income $ 76,394 3.76% $ 80,454 4.46%
=================== ===================

Basic earnings per share $ 0.56 $ 0.57
=========== ===========
Diluted earnings per share $ 0.54 $ 0.54
=========== ===========

Weighted average shares
outstanding - basic 137,558 142,304
Weighted average shares
outstanding - diluted 141,163 147,639

----------------------------------------------------------------------
Stores open at beginning of
each period 826 726
Stores opened during each
period 42 36
Stores closed during each
period (5) (5)
Stores open at end of each
period 863 757
----------------------------------------------------------------------
PetSmart, Inc. and Subsidiaries
Reconciliation of non-GAAP to GAAP Measures
(In thousands, except per share data)
(Unaudited)

Thirteen Weeks Ended July 30, 2006
----------------------------------------

Reconciling Items
-------------------
Early pay
discount Tax
As Reported (GAAP) change benefit
-------------------- -------------------

Net sales $ 1,020,609 100.00% $ - $ -
Cost of sales 715,761 70.13% (3,922) -
-------------------- --------- ---------

Gross profit 304,848 29.87% 3,922 -

Operating, general and
administrative expenses 242,868 23.80% - -
-------------------- --------- ---------

Operating income 61,980 6.07% 3,922 -

Interest expense, net 9,320 0.91% - -
-------------------- --------- ---------

Income before income tax
expense 52,660 5.16% 3,922 -

Income tax expense 18,030 1.77% 1,506 2,518
-------------------- --------- ---------

Net income $ 34,630 3.39% $ 2,416 $ (2,518)
==================== ========= =========

Basic earnings per share $ 0.25
Diluted earnings per share $ 0.25

Weighted average shares
outstanding - basic 137,667
Weighted average shares
outstanding - diluted 141,237


PetSmart, Inc. and Subsidiaries
Reconciliation of non-GAAP to GAAP Measures
(In thousands, except per share data)
(Unaudited)

Thirteen Weeks Ended July 30, 2006
---------------------------------------------

Reconciling Items
-------------------------
Costs related
to
Acquisition distribution
review center
expenses re-racking Non-GAAP
--------------------------------------------

Net sales $ - $ - $1,020,609 100.00%
Cost of sales - (1,792) 710,047 69.57%
---------- ------------- -------------------

Gross profit - 1,792 310,562 30.43%

Operating, general and
administrative expenses (2,939) - 239,929 23.51%
---------- ------------- -------------------

Operating income 2,939 1,792 70,633 6.92%

Interest expense, net - - 9,320 0.91%
---------- ------------- -------------------

Income before income tax
expense 2,939 1,792 61,313 6.01%

Income tax expense 1,129 688 23,871 2.34%
---------- ------------- -------------------

Net income $ 1,810 $ 1,104 $ 37,442 3.67%
========== ============= ===================

Basic earnings per share $ 0.27
Diluted earnings per
share $ 0.27

Weighted average shares
outstanding - basic 137,667
Weighted average shares
outstanding - diluted 141,237
Twenty-Six Weeks Ended July 30, 2006
----------------------------------------

Reconciling Items
-------------------
Early pay
discount Tax
As Reported (GAAP) change benefit
-------------------- -------------------

Net sales $ 2,032,138 100.00% $ - $ -
Cost of sales 1,417,211 69.74% (3,922) -
-------------------- --------- ---------

Gross profit 614,927 30.26% 3,922 -

Operating, general and
administrative expenses 478,268 23.54% - -
-------------------- --------- ---------

Operating income 136,659 6.72% 3,922 -

Interest expense, net 16,053 0.79% - -
-------------------- --------- ---------

Income before income tax
expense 120,606 5.93% 3,922 -

Income tax expense 44,212 2.18% 1,506 2,518
-------------------- --------- ---------

Net income $ 76,394 3.76% $ 2,416 $ (2,518)
==================== ========= =========

Basic earnings per share $ 0.56
Diluted earnings per share $ 0.54

Weighted average shares
outstanding - basic 137,558
Weighted average shares
outstanding - diluted 141,163


Twenty-Six Weeks Ended July 30, 2006
---------------------------------------------

Reconciling Items
-------------------------
Costs related
to
Acquisition distribution
review center
expenses re-racking Non-GAAP
--------------------------------------------

Net sales $ - $ - $2,032,138 100.00%
Cost of sales - (1,792) 1,411,497 69.46%
---------- ------------- -------------------

Gross profit - 1,792 620,641 30.54%

Operating, general and
administrative expenses (2,939) - 475,329 23.39%
---------- ------------- -------------------

Operating income 2,939 1,792 145,312 7.15%

Interest expense, net - - 16,053 0.79%
---------- ------------- -------------------

Income before income tax
expense 2,939 1,792 129,259 6.36%

Income tax expense 1,129 688 50,053 2.46%
---------- ------------- -------------------

Net income $ 1,810 $ 1,104 $ 79,206 3.90%
========== ============= ===================

Basic earnings per share $ 0.58
Diluted earnings per
share $ 0.56

Weighted average shares
outstanding - basic 137,558
Weighted average shares
outstanding - diluted 141,163
PetSmart, Inc. and Subsidiaries
Reconciliation of non-GAAP to GAAP Measures
(In thousands, except per share data)
(Unaudited)

Twenty-Six Weeks Ended July 31, 2005
-----------------------------------------------------

Reconciling
Items
-----------
Legal
As Reported (GAAP) settlement Non-GAAP
-------------------- ----------- --------------------

Net sales $ 1,802,247 100.00% $ - $ 1,802,247 100.00%
Cost of sales 1,241,131 68.87% - 1,241,131 68.87%
-------------------- ----------- --------------------

Gross profit 561,116 31.13% - 561,116 31.13%

Operating,
general and
administrative
expenses 422,184 23.43% 8,500 430,684 23.90%
-------------------- ----------- --------------------

Operating income 138,932 7.71% (8,500) 130,432 7.24%

Interest
expense, net 10,095 0.56% - 10,095 0.56%
-------------------- ----------- --------------------

Income before
income tax
expense 128,837 7.15% (8,500) 120,337 6.68%

Income tax
expense 48,383 2.68% (3,273) 45,110 2.50%
-------------------- ----------- --------------------

Net income $ 80,454 4.46% $ (5,227) $ 75,227 4.17%
==================== =========== ====================

Basic earnings
per share $ 0.57 $ 0.53
Diluted earnings
per share $ 0.54 $ 0.51

Weighted average
shares
outstanding -
basic 142,304 142,304
Weighted average
shares
outstanding -
diluted 147,639 147,639
PetSmart, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)


July 30, January 29,
2006 2006
------------ ------------

Assets
Cash and cash equivalents $ 144,316 $ 110,415
Short term investments 246,150 219,900
Receivables, net 24,172 36,902
Merchandise inventories 415,645 399,413
Other current assets 81,067 73,866
------------ ------------

Total current assets 911,350 840,496

Property and equipment, net 936,316 857,658
Deferred income taxes 89,692 92,092
Other noncurrent assets 74,341 73,445
------------ ------------

Total assets $ 2,011,699 $ 1,863,691
============ ============

Liabilities and Stockholders' Equity
Accounts payable $ 177,096 $ 155,424
Other current liabilities 283,986 294,747
Current portion capital lease obligations 15,356 12,559
------------ ------------

Total current liabilities 476,438 462,730

Capital lease obligations 401,246 351,564
Other noncurrent liabilities 106,492 108,647
------------ ------------

Total liabilities 984,176 922,941

Stockholders' equity 1,027,523 940,750
------------ ------------

Total liabilities and stockholders'
equity $ 2,011,699 $ 1,863,691
============ ============