UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
(Mark One)
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x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the fiscal year ended January 3,
2009
OR
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period from
________ to ________.
Commission file number
001-16797
ADVANCE AUTO PARTS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
(State
or other jurisdiction of
incorporation
or organization)
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54-2049910
(I.R.S.
Employer
Identification No.)
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5008 Airport
Road
Roanoke,
Virginia
(Address
of Principal Executive Offices)
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24012
(Zip
Code)
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(540) 362-4911
(Registrant’s
telephone number, including area code)
Securities Registered Pursuant to
Section 12(b) of the Act:
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Title of each
class
Common Stock
($0.0001 par value)
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Name of each exchange on which
registered
New York
Stock Exchange
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Securities Registered Pursuant to
Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No
o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer x | Accelerated filer o | |
| Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
x
As of
July 11, 2008, the last business day of the registrant’s most recently completed
second fiscal quarter, the aggregate market value of the 95,066,907 shares of
Common Stock held by non-affiliates of the registrant was $3,499,412,847, based
on the last sales price of the Common Stock on July 11, 2008, as reported by the
New York Stock Exchange.
As of
March 2, 2009, the registrant had outstanding 94,999,986 shares of Common Stock,
par value $0.0001 per share (the only class of common equity of the registrant
outstanding).
Documents Incorporated by
Reference:
Portions
of the definitive proxy statement of the registrant to be filed within 120 days
of January 3, 2009, pursuant to Regulation 14A under the Securities Exchange Act
of 1934, for the 2009 Annual Meeting of Stockholders to be held on May 20, 2009,
are incorporated by reference into Part III.
FORWARD-LOOKING
STATEMENTS
Certain
statements in this report are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are usually identified by the
use of words such as "anticipate," "believe," "could," "estimate," "expect,"
"forecast," "intend," "likely," "may," "plan," "position,"
"possible," "potential," "probable," "project," "projection,"
"should," "strategy," "will," or similar expressions. We intend
for any forward-looking statements to be covered by, and we claim the protection
under, the safe harbor provisions for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995.
These
forward-looking statements are based upon assessments and assumptions of
management in light of historical results and trends, current conditions and
potential future developments that often involve judgment, estimates,
assumptions and projections. Forward-looking statements reflect current views
about our plans, strategies and prospects, which are based on information
currently available.
Although
we believe that our plans, intentions and expectations as reflected in or
suggested by any forward-looking statements are reasonable, we do not guarantee
or give assurance that such plans, intentions or expectations will be
achieved. Actual results may differ materially from our anticipated
results described or implied in our forward-looking statements, and may be due
to a variety of factors. Our business could also be affected by additional
factors that are presently unknown to us or that we currently believe to be
immaterial to our business.
Listed
below and discussed elsewhere in this report are some important risks,
uncertainties and contingencies which could cause our actual results,
performance or achievements to be materially different from any forward-looking
statements made or implied in this report. These include, but are not limited
to, the following:
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a
decrease in demand for our products;
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deterioration
in general economic conditions, including unemployment, inflation,
consumer debt levels, energy costs and unavailability of credit leading to
reduced consumer spending on discretionary
items;
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our
ability to develop and implement business strategies and achieve desired
goals;
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our
ability to expand our business, including locating available and suitable
real estate for new store locations and the integration of any acquired
businesses;
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competitive
pricing and other competitive
pressures;
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our
overall credit rating, which impacts our debt interest rate and our
ability to borrow additional funds to finance our
operations;
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deteriorating
and uncertain credit markets could negatively impact our merchandise
vendors, as well as our ability to secure additional capital at favorable
(or at least feasible) terms in the future;
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our
relationships with our vendors;
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our
ability to attract and retain qualified team
members;
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the
occurrence of natural disasters and/or extended periods of unfavorable
weather;
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our
ability to obtain affordable insurance against the financial impacts of
natural disasters and other losses;
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high
fuel costs, which impacts our cost to operate and the consumer’s ability
to shop in our stores;
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regulatory
and legal risks, such as environmental or OSHA risks, including being
named as a defendant in administrative investigations or litigation, and
the incurrence of legal fees and costs, the payment of fines or the
payment of sums to settle litigation cases or administrative
investigations or proceedings;
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adherence
to the restrictions and covenants imposed under our revolving and term
loan facilities;
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acts
of terrorism; and
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other
statements that are not of historical fact made throughout this report,
including the sections entitled “Business,” "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Risk
Factors."
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We assume
no obligations to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. In evaluating
forward-looking statements, you should consider these risks and uncertainties,
together with the other risks described from time to time in our other reports
and documents filed with the Securities and Exchange Commission, or SEC, and you
should not place undue reliance on those statements.
1
Unless
the context otherwise requires, “Advance,” “we,” “us,” “our,” and similar terms
refer to Advance Auto Parts, Inc., its predecessor, its subsidiaries and their
respective operations. Our fiscal year consists of 52 or 53 weeks
ending on the Saturday closest to December 31st of each year. Fiscal 2008
included 53 weeks of operations. All other fiscal years presented include 52
weeks of operations.
Overview
We
operate primarily within the United States automotive aftermarket industry,
which includes replacement parts (excluding tires), accessories, maintenance
items, batteries and automotive chemicals for cars and light trucks (pickup
trucks, vans, minivans and sport utility vehicles). We currently are the second
largest specialty retailer of automotive parts, accessories and maintenance
items to "do-it-yourself," or DIY, and "do-it-for-me," or Commercial, customers
in the United States, based on store count and sales.
We were
founded in 1929 as Advance Stores Company, Incorporated and operated as a
retailer of general merchandise until the 1980s. During the 1980s, we sharpened
our focus to target sales of automotive parts and accessories to DIY customers.
From the 1980s to the present, we have grown significantly as a result
of comparable store sales growth, new store openings and strategic
acquisitions. Since 1996, we have aggressively expanded our sales to Commercial
customers through our commercial delivery program. Our parent company, Advance
Auto Parts, Inc., was incorporated in 2001 in conjunction with the acquisition
of Discount Auto Parts, Inc., or Discount. In 2005, we acquired Autopart
International, Inc., or AI.
Our
Internet address is www.AdvanceAutoParts.com.
We make available free of charge through our Internet website our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to the Securities
Exchange Act of 1934 as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the SEC. The SEC maintains a website
that contains reports, proxy statements and other information regarding issuers
that file electronically with the SEC. These materials may be obtained
electronically by accessing the SEC's website at www.sec.gov.
Operating
Segments
We
operate in two reportable segments: Advance Auto Parts, or AAP, and AI. The AAP
segment is comprised of our store operations within the United States, Puerto
Rico and the Virgin Islands which operate under the trade names “Advance Auto
Parts,” “Advance Discount Auto Parts” and “Western Auto.” The AI segment
consists solely of the operations of Autopart International, Inc., which
operates as an independent, wholly-owned subsidiary and primarily serves the
Commercial market.
Financial
information on our segments is included in Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations, of this Annual Report
on Form 10-K. In addition, selected financial data for our segments is
available in Note 18, Segment and Related Information, of the Notes to
Consolidated Financial Statements, included in Item 15. Exhibits, Financial Statement Schedules, of this Annual
Report on Form 10-K.
AAP
Segment
At
January 3, 2009, our 2008 fiscal year-end, we operated 3,243 AAP stores within
the United States, Puerto Rico and the Virgin Islands. 3,215 stores were located
throughout 40 states in the Northeastern, Southeastern and Midwestern regions of
the United States. These stores operated under the “Advance Auto Parts” trade
name except for certain stores in the state of Florida, which operated under the
“Advance Discount Auto Parts” trade name. These stores offer a broad selection
of brand name and proprietary automotive replacement parts, accessories and
maintenance items for domestic and imported cars and light trucks. In addition,
we operated 28 stores under the “Western Auto” and “Advance Auto Parts” trade
names, located outside the United States, or Offshore.
2
AAP
Stores
Store
Overview. Our stores generally are located in
freestanding buildings in areas with high vehicle traffic counts, good
visibility and easy access to major roadways. We believe that our stores exhibit
a customer-friendly format with the majority of our stores featuring an updated
exterior and interior, bright lighting, and a well-designed and easily navigated
floor plan. The average size of our stores is 7,400 square feet with the size of
our typical new stores approximating 6,000 to 7,000 square feet. Our stores
generally are open from 7:30 a.m. to 9:00 p.m. six days a week and 9:00 a.m. to
9:00 p.m. on Sundays and most holidays to meet the needs of our DIY and
Commercial customers. We offer extended hours in a limited number of our stores,
including 24 hours per day in certain stores.
Our
stores carry a standard product offering of approximately 16,000 stock
keeping units, or SKUs. Certain stores carry slightly more SKUs within
centralized market locations where there is demand for a more customized
assortment of merchandise. Additionally, some of our stores carry an additional
customized assortment of 10,000 SKUs for same-day or next-day delivery to other
select stores within the respective service area. The standard SKU offering
within each of our stores is replenished from one of our eight distribution
centers once per week on average.
We also
utilize a network of Parts Delivered Quickly, or PDQ®,
facilities and one Master PDQ® facility
to ensure our stores have the right product at the right time for our customers’
needs. Our PDQ® and
Master PDQ® network
of facilities provide our customers with an additional assortment of
approximately 64,000 less common SKUs on a same-day or overnight basis. Lastly,
our customers have access to over 280,000 SKUs by ordering directly from one of
our vendors for delivery to a particular store or other destination as chosen by
the customer.
Store
team members utilize our proprietary point-of-sale, or POS, system, including a
fully integrated electronic parts catalog to identify and suggest the
appropriate quality and price options for the SKUs we carry, as well as the
related products, tools or additional information that is required by our
customers to complete their automotive repair projects properly and
safely. We strive to be the leader in the automotive aftermarket
industry in serving our customers by providing quality products at the right
price and backed by a solid warranty and outstanding customer service. We offer
many of the products in our stores at a good, better or best recommendation
differentiated by price and quality.
The
products offered in our stores include the following:
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Filters
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Alternators
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Transmissions
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Windshield
Wipers
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Radiators
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Batteries
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Clutches
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Windshield
Washer Fluid
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Brake
Pads
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Shock
Absorbers
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Electronic
Ignition Components
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Floor
Mats
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Belts
and Hoses
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Struts
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Engines
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Steering
Wheel Covers
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Radiator
Hoses
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Suspension
Parts
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Oil
and Transmission Fluid
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Lighting
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Starters
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Spark
Plugs
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Antifreeze
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Wash
and Waxes
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We also provide a variety of services
free of charge to our customers including:
| Battery installation | “How-To” Project Brochures | Electrical system testing |
| Wiper installation | “How-To” Video Clinics | Oil and battery recycling |
Our
retail stores are 100% company operated and are divided into three geographic
areas. Each geographic area is managed by a senior vice president, who is
supported by seven regional vice presidents. District managers report to the
regional vice presidents and have direct responsibility for store operations in
a specific district, which typically consists on average of 14 stores. Depending
on store size and sales volume, each store is staffed by 8 to 16 team members
under the leadership of a general manager. We offer training to our employees,
who we refer to as Team Members. Team Member training includes formal classroom
workshops, online seminars and certification by the National Institute
for Automotive Service Excellence, or ASE, which is broadly recognized for
training certification in the automotive industry. We also continue to increase
the number of bilingual team members in our stores to better serve an
increasingly diverse customer base.
3
Commercial
Sales. Our commercial sales consist of sales to both our
walk-in and delivery Commercial customers, which represented approximately 27%
of our AAP sales in fiscal 2008. Since 1996, we have aggressively expanded our
sales to Commercial customers through our Commercial delivery program. For
delivered sales, we utilize our Commercial delivery fleet to deliver product
from our store locations to our Commercial customers’ place of business,
including independent garages, service stations and auto dealers. Our stores are
supported by a Commercial sales team who are dedicated to the development of our
Commercial customers, which include national and regional
accounts.
Under
our Commercial Acceleration strategy, we are focused on increasing our
Commercial sales at a faster pace in light of the favorable market dynamics. The
Commercial team is led by a senior vice president who is building a sales force
whose sole focus is on the Commercial customer. Initiatives include the addition
of key product brands in our stores that are well recognized by our Commercial
customers, as well as increasing the parts knowledge of our store Team Members.
We believe these initiatives will enable us to gain more Commercial customers as
well as increase our sales from existing customers who will use us as their
“first call” supplier. At January 3, 2009, we had 2,755 AAP stores, or 85% of
total AAP stores, with Commercial delivery programs, which was up slightly from
83% at December 29, 2007.
Store
Development. Our store development
program has historically focused on adding new stores within existing markets,
remodeling or relocating existing stores and entering new markets. The addition
of new stores, along with strategic acquisitions, has played a significant role
in our growth and success. We believe the opening of new stores, and their
strategic location in relation to our DIY and Commercial customers, will
continue to play a significant role in our future growth and
success. Additionally, we will continue to monitor existing stores
based on cash flow, market importance and occupancy cost rates.
Our 3,243 AAP stores
were located in the following states and territories at January 3,
2009:
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Number
of
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Number
of
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Number
of
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||||||||
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Location
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Stores
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Location
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Stores
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Location
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Stores
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|||||
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Alabama
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119
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Maryland
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72
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Oklahoma
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32
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Arkansas
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35
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Massachusetts
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54
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Pennsylvania
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158
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Colorado
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41
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Michigan
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91
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Puerto
Rico
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27
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Connecticut
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36
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Minnesota
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16
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Rhode
Island
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8
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Delaware
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7
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Mississippi
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58
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South
Carolina
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125
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Florida
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457
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Missouri
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41
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South
Dakota
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7
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Georgia
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229
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Nebraska
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20
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Tennessee
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142
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Illinois
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83
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New
Hampshire
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11
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Texas
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177
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Iowa
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26
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New
Mexico
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1
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Vermont
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7
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Indiana
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97
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New
Jersey
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50
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Virgin
Islands
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1
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Kansas
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24
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New
York
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120
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Virginia
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167
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Kentucky
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91
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North
Carolina
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234
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West
Virginia
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66
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Louisiana
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61
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North
Dakota
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4
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Wisconsin
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47
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Maine
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12
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Ohio
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186
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Wyoming
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3
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The
following table sets forth information concerning increases in the total number
of our AAP stores during the past five years:
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2008
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2007
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2006
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2005
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2004
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||||||||||||||||
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Beginning
Stores
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3,153 | 2,995 | 2,810 | 2,652 | 2,539 | |||||||||||||||
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New
Stores
(1)
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109 | 175 | 190 | 169 | 125 | |||||||||||||||
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Stores
Closed
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(19 | ) | (17 | ) | (5 | ) | (11 | ) | (12 | ) | ||||||||||
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Ending
Stores (2)
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3,243 | 3,153 | 2,995 | 2,810 | 2,652 | |||||||||||||||
4
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(1)
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Does
not include stores that opened as relocations of previously existing
stores within the same general market area or substantial renovations of
stores.
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(2)
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Includes
2 and 7 stores not operating at December 30, 2006 and December 31, 2005,
respectively, primarily due to hurricane
damage.
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Store Technology.
Our
store-based information systems, which are designed to improve the efficiency of
our operations and enhance customer service, are comprised of a proprietary POS
system and electronic parts catalog, or EPC, system. Information
maintained by our POS system is used to formulate pricing, marketing and
merchandising strategies and to replenish inventory accurately and rapidly. Our
POS system is fully integrated with our EPC system and enables our store Team
Members to assist our customers in their parts selection and ordering based on
year, make, model and engine type of their vehicles. Our centrally-based EPC
data management system enables us to reduce the time needed to (i) exchange data
with our vendors and (ii) catalog and deliver updated, accurate parts
information.
Our EPC
system also contains enhanced search engines and user-friendly navigation tools
that enhance our Team Members’ ability to look up any needed parts as well as
additional products the customer needs to complete their automotive repair
project. If a hard-to-find part or accessory is not available at one of our
stores, the EPC system can determine whether the part is carried and in-stock
through our PDQÒ
system. Available parts and accessories are then ordered electronically from
another store, PDQÒ
or Master PDQÒ
with immediate confirmation of price, availability and estimated delivery
time.
We also
support our store operations with additional proprietary systems. Our
store-level inventory management system provides real-time inventory tracking at
the store level. With the store-level system, store Team Members can check the
quantity of on-hand inventory for any SKU, adjust stock levels for select items
for store specific events, automatically process returns and defective
merchandise, designate SKUs for cycle counts and track merchandise transfers.
Our stores use radio frequency hand-held devices to help ensure the accuracy of
our inventory. Our standard operating procedure, or SOP, system is a web-based,
electronic data management system that provides our Team Members with instant
and quick access to any of our standard operating procedures through a
comprehensive on-line search function. Additionally, we utilize a
labor scheduling system known as management planning and training, or MPT. All
of these systems are tightly integrated and provide real-time,
comprehensive information to store personnel, resulting in improved customer
service levels, Team Member productivity and in-stock availability.
Store
Support Center
Merchandising.
Purchasing
for virtually all of the merchandise for our stores is handled by our
merchandise teams located in our store support center in Roanoke, Virginia and
in our regional office in Minneapolis, Minnesota. In fiscal
2008, we purchased merchandise from over 400 vendors, with no single vendor
accounting for more than 9% of purchases. Our purchasing strategy involves
negotiating agreements with certain vendors to purchase merchandise over a
specified period of time along with other terms, including pricing, payment
terms and volume.
Our
merchandising team is skilled in sourcing high quality products globally and
maintaining consistent inventory levels. The merchandising team has developed
strong vendor relationships in the industry and, in a collaborative effort with
our vendor partners, utilizes a category management process. We believe this
process, which develops a customer-focused business plan for each merchandise
category, has been highly effective and is critical to improving comparable
store sales, gross margin and inventory turns.
Our
merchandising strategy is to carry a broad selection of high quality brand name
automotive parts and accessories such as Bosch®,
Castrol®,
Sylvania®,
Prestone®,
Monroe®,
Wagner®,
Purolator®,
Dayco®, Trico® and
Federal-Mogul Moog®, or
Moog®, which
generates DIY customer traffic and also appeals to Commercial customers. In
addition to these branded products, we stock a wide selection of high quality
proprietary products that appeal to value conscious customers. These lines of
merchandise include everything from chemical and wash-and-wax products to tools,
batteries, parts and interior automotive accessories under various private label
names.
5
Supply
Chain. Our
supply chain consists of centralized inventory management and transportation
functions which support a logistics network of distribution centers, PDQ®
warehouses and stores. Our inventory management team utilizes a replenishment
system to monitor the distribution center, PDQ®
warehouse and store inventory levels and orders additional product when
appropriate while streamlining handling costs. Our replenishment system utilizes
the most up-to-date information from our POS system as well as inventory
movement forecasting based upon sales history, sales trends by SKU, seasonality
and demographic shifts in demand. Our replenishment system combines these
factors with service level goals, vendor lead times and cost of inventory
assumptions to determine the timing and size of purchase orders. A significant
portion of our purchase orders are sent via electronic data interchange, with
the remainder being sent by computer generated e-mail or facsimile.
Our
transportation team utilizes a transportation management system to efficiently
manage incoming shipments to our distribution centers and stores. Benefits from
this system include (i) reduced vendor to distribution center freight costs,
(ii) visibility of purchase orders and shipments for the entire supply chain,
(iii) a reduction in distribution center inventory, or safety stock, due to
consistent transit times, (iv) decreased third party freight and billing service
costs, (v) decreased distribution center to store freight costs and (vi) higher
store in-stock position. We recently announced our plan to outsource our private
fleet operations to two reputable dedicated carriers. We believe outsourcing our
private fleet operations will allow us to focus resources on achieving our key
strategies, improve our ability to manage transportation as we continue to grow
and reduce costs.
We
currently operate eight distribution centers. All of these distribution centers
are equipped with our distribution center management system, or DCMS. Our DCMS
provides real-time inventory tracking through the processes of receiving,
picking, shipping and replenishing inventory at our distribution centers. The
DCMS, integrated with technologically advanced material handling equipment,
significantly reduces warehouse and distribution costs, while improving
efficiency. This equipment includes carousels, “pick-to light” systems, radio
frequency technology, voice technology and automated sorting systems. Through
the continued implementation of our supply chain initiatives we expect to
further increase the efficient utilization of our distribution capacity. We
believe our current capacity will allow us to support in excess of 3,400 AAP
stores. We plan to open a new distribution center in Indiana in
2010.
We
currently offer approximately 60,000 SKUs to support all of our retail stores
via our 15 stand-alone PDQ®
warehouses and/or our eight distribution centers (all of which stock PDQ® items).
Stores have system visibility to inventory in their respective PDQÒ
warehouses and distribution centers and can place orders to these facilities, or
as an alternative, through an online ordering system to virtually any of the
other facilities. Ordered parts are delivered to substantially all
stores on a same day or next day basis through our dedicated PDQ® trucking
fleet and third party carriers. Store inventories are replenished from our eight
distribution centers. In addition, we operate a Master PDQ®
warehouse that stocks approximately 26,000 incremental SKUs of harder-to-find
automotive parts and accessories and utilizes our existing PDQ®
distribution infrastructure and/or third party arrangements to provide next day
service to substantially all of our stores.
Marketing &
Advertising. We have an extensive
marketing and advertising program designed to communicate our ability to meet
consumers’ needs through our merchandise offerings, parts assortment and
availability, competitive prices, free services and commitment to customer
service. Our marketing and advertising program is focused on establishing
Advance Auto Parts as the primary resource for a customer's automotive needs. We
reinforce our brand image through a mix of media that includes television,
radio, promotional signage, outdoor media, print and our Internet
site.
Our
marketing and advertising plan is a brand-building program primarily built
around television and radio advertising. The plan is supported by in-store
signage, online advertising and print. Our television advertising is a
combination of national and regional media in both sports and entertainment
programming. Radio advertising generally airs during peak drive times. We use
Spanish-language radio and television advertising to market to our Hispanic
customers. Our advertising program is also supported through sponsorships of
sporting events, racing teams and other grass-root level events intended to
positively impact individual communities, including Hispanic and other
ethnic communities, to create awareness and drive traffic for our stores. Since
2004, we have used an integrated consumer education program to build our image
as not only the best source for parts, but also the best resource for vehicle
information. Our goal with our consumer education initiative is to continue our
long-term brand building success, increase customer loyalty and expand our
customer base.
6
In
February 2008, we launched a new branding campaign, “Keep the wheels turning.”
This campaign was developed based on a strategic review of our business as well
as extensive research conducted with our customers and Team Members. We believe
this campaign, which targets core DIY and Commercial customers, is
differentiating Advance Auto Parts in our industry by positioning us as (i) the
brand that best understands customers’ needs, (ii) the source for brand name
parts and products and (iii) the resource for expert advice and knowledge to
help customers keep their vehicles running. The campaign includes creative and
compelling television and radio commercials designed to drive sales and build an
enduring, positive image of Advance Auto Parts with our targeted
customers.
AI
Segment
We
acquired AI in September 2005. The acquisition included 61 stores throughout New
England and New York, a distribution center and AI’s wholesale distribution
business. AI complements our growing presence in the Commercial market in the
Northeast.
AI’s
business primarily serves the Commercial market, with an emphasis on import
parts, from its store locations. In addition, its North American Sales Division
serves warehouse distributors and jobbers throughout North America. We believe
AI provides a high level of service to its Commercial customers by providing
quality parts, unsurpassed customer service and efficient parts delivery. As a
result of its extensive sourcing network, AI is able to serve its customers in
search of replacement parts for both domestic and imported cars and light trucks
with a greater focus on imported parts. The vast majority of AI’s product is
sold under its own proprietary brand. The AI stores offer approximately 11,000
SKUs with access to an additional 17,000 unique SKUs through its logistics
network.
At
January 3, 2009, we operated 125 stores under the “Autopart International” trade
name in the following states throughout the Northeast:
|
Number
of
|
Number
of
|
Number
of
|
||||||||
|
Location
|
Stores
|
Location
|
Stores
|
Location
|
Stores
|
|||||
|
Connecticut
|
17
|
New
Hampshire
|
8
|
Pennsylvania
|
20
|
|||||
|
Delaware
|
1
|
New
Jersey
|
14
|
Rhode
Island
|
4
|
|||||
|
Maine
|
4
|
New
York
|
23
|
Vermont
|
1
|
|||||
|
Massachusetts
|
33
|
The
following table sets forth information concerning increases in the total number
of our AI stores:
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Beginning
Stores
|
108 | 87 | 62 | - | ||||||||||||||
|
New
Stores
|
18 | 21 | 25 | 62 | (1) | |||||||||||||
|
Stores
Closed
|
(1 | ) | - | - | - | |||||||||||||
|
Ending
Stores
|
125 | 108 | 87 | 62 | ||||||||||||||
| (1) |
Of
the 62 new stores in 2005, 61 stores were acquired in September 2005 as a
result of our AI acquisition.
|
Seasonality
Our
business is somewhat seasonal in nature, with the highest sales occurring in the
spring and summer months. In addition, our business can be affected by weather
conditions. While unusually heavy precipitation tends to soften sales as
elective maintenance is deferred during such periods, extremely hot or cold
weather tends to enhance sales by causing automotive parts to fail at an
accelerated rate.
Team
Members
At March
2, 2009, we employed 27,396 full-time Team Members and 20,186 part-time Team
Members. Our
7
workforce consisted of 89%
of our Team Members employed in store-level operations, 8% employed in
distribution and 3% employed in our corporate offices. We have never experienced
any labor disruption and are not party to any collective bargaining agreements.
We believe that our Team Member relations are good.
Intellectual
Property
We own a
number of trade names and own and have federally registered several service
marks and trademarks, including “Advance Auto Parts,” “Western Auto,” “Parts
America,” “Autopart International” and “PDQ” for use in connection with the
automotive parts retailing business. In addition, we own and have registered a
number of trademarks for our proprietary products. We believe that these trade
names, service marks and trademarks are important to our merchandising strategy.
We do not know of any infringing uses that would materially affect the use of
these trade names and marks, and we actively defend and enforce
them.
Competition
We
operate in both the DIY and Commercial markets of the automotive aftermarket
industry. Our primary competitors are (i) both national and regional retail
chains of automotive parts stores, including AutoZone, Inc., O'Reilly
Automotive, Inc. and The Pep Boys–Manny, Moe & Jack, (ii) discount stores
and mass merchandisers that carry automotive products, (iii) wholesalers or
jobber stores, including those associated with national parts distributors or
associations, such as NAPA and Carquest, (iv) independent operators and (v)
automobile dealers that supply parts. We believe that chains of automotive parts
stores that, like us, have multiple locations in one or more markets, have
competitive advantages in customer service, marketing, inventory selection,
purchasing and distribution as compared to independent retailers and jobbers
that are not part of a chain or associated with other retailers or jobbers. The
principal methods of competition in our business include store location, product
offerings, availability, quality, price and customer service.
Environmental
Matters
We are
subject to various federal, state and local laws and governmental regulations
relating to the operation of our business, including those governing recycling
of automotive lead-acid batteries and used automotive oil, and ownership and
operation of real property. We sell consumer products containing hazardous
materials as part of our business. In addition, our customers may bring
automotive lead-acid batteries or used automotive oil onto our properties. We
currently provide collection and recycling programs for used lead-acid batteries
and used oil at all of our stores as a service to our customers. Pursuant to
agreements with third party vendors, lead-acid batteries and used oil are
collected by our Team Members, deposited onto pallets or into vendor supplied
containers and stored by us until collected by the third party vendors for
recycling or proper disposal. The terms of our contracts with third party
vendors provide that they are in compliance with all applicable laws and
regulations. Persons who arrange for the removal, disposal, treatment or other
handling of hazardous or toxic substances may be liable for the costs of removal
or remediation at any affected disposal, treatment or other site affected by
such substances. Based on our experience, we do not believe that there are any
material environmental costs associated with the current business practice of
accepting lead-acid batteries and used oil as these costs are borne by the
respective third parties.
We own
and lease real property. Under various environmental laws and regulations, a
current or previous owner or operator of real property may be liable for the
cost of removal or remediation of hazardous or toxic substances on, under or in
such property. These laws often impose joint and several liability and may be
imposed without regard to whether the owner or operator knew of, or was
responsible for, the release of such hazardous or toxic substances. Other
environmental laws and common law principles also could be used to impose
liability for releases of hazardous materials into the environment or work
place, and third parties may seek recovery from owners or operators of real
properties for personal injury or property damage associated with exposure to
released hazardous substances. From time to time, we receive notices from the
Environmental Protection Agency and state environmental authorities indicating
that there may be contamination on properties we own, lease or operate or may
have owned, leased or operated in the past or on adjacent properties for which
we may be responsible. Compliance with these laws and regulations has
not had a material impact on our operations to date.
8
|
Risk
Factors.
|
Risks
Relating to Our Business
If
overall demand for products sold by our stores slows or declines, our business,
financial condition, results of operations and cash flows will
suffer. Decreased demand could also negatively impact our stock
price.
Overall
demand for products sold by our stores depends on many factors and may slow or
decrease due to any number of reasons, including:
|
●
|
the economy, because
during periods of declining economic conditions (including higher
unemployment, lower wages, higher credit costs or unavailability of
credit, and higher fuel or energy prices), both DIY and Commercial
customers may defer vehicle maintenance or repair; conversely, during
periods of favorable economic conditions, more of our DIY customers may
pay others to repair and maintain their cars or they may purchase new
cars;
|
|
●
|
the weather, as vehicle
maintenance may be deferred during periods of unfavorable
weather;
|
|
●
|
the average duration of
manufacturer warranties and the decrease in the number of annual miles
driven, because newer cars typically require fewer repairs and will
be repaired by the manufacturer’s dealer network using dealer parts; and
lower vehicle mileage decreases the need for maintenance and repair (while
higher miles driven increases the
need);
|
|
●
|
the quality of vehicles
manufactured, because vehicles that have high part failure rates
will require more frequent repairs using aftermarket parts;
and
|
|
●
|
the refusal of vehicle
manufacturers to make available diagnostic, repair and maintenance
information to the automotive aftermarket industry that our DIY and
Commercial customers require to diagnose, repair and maintain their
vehicles may force consumers to have all diagnostic work, repairs and
maintenance performed by the vehicle manufacturers’ dealer
network.
|
If any of
these factors cause overall demand for the products we sell to decline, our
business, financial condition, results of operations and cash flows will
suffer.
Deterioration
in general economic conditions, including unemployment, inflation or deflation,
consumer debt levels or unavailability of credit and high energy costs will
likely have a negative impact on our customers’ ability to purchase our products
and our business, financial condition, results of operations and cash flows will
suffer.
The deterioration in general
macro-economic conditions that occurred during the fourth quarter of 2008 led
many U.S. companies to announce plant closings and employee layoffs, which
resulted in higher unemployment that may continue for a prolonged period of
time. Unemployment of our customers or any decrease in the market
value of their homes would have a negative impact on our customers’ net worth
and financial resources, and could reduce their willingness or ability to pay
for accessories, maintenance or repair of their vehicles. Although
the price of gasoline decreased substantially in November and December of 2008,
the price of fuel or other energy resources may increase substantially in the
future. Higher fuel and energy costs may reduce the amount of
customers’ disposable income available to purchase our products, as well as
reduce the number of miles driven. Rising energy prices may impact demand for
the products we sell, overall transaction count and our
profitability. In addition, higher energy prices impact our
merchandise distribution, commercial delivery, utility and product costs, and
inflation or deflation could also result in a potentially material negative
impact on our business, financial condition, profitability and cash
flows.
If
we are unable to compete successfully against other companies in the automotive
aftermarket industry we may lose customers, our revenues may decline, and we may
be less profitable or potentially unprofitable.
The sale
of automotive parts, accessories and maintenance items is highly competitive in
many ways, including name recognition, location, price, quality, product
availability and customer service. We compete in both the DIY and
Commercial categories of the automotive aftermarket industry, primarily with:
(i) national and regional retail
9
automotive
parts chains, (ii) discount stores and mass merchandisers that carry automotive
products, (iii) wholesalers or jobber stores, (iv) independent operators and (v)
automobile dealers that supply parts. These competitors and the level of
competition vary by market. Some of our competitors may possess advantages over
us in certain markets we share, including a greater amount of marketing
activities, a larger number of stores, store locations, store layouts, longer
operating histories, greater name recognition, larger and more established
customer bases, lower prices, and better product warranties. Our response to
these competitive disadvantages may require us to reduce our prices below our
normal selling prices or increase our promotional spending, which would lower
revenue and profitability. Competitive disadvantages may also prevent us from
introducing new product lines, require us to discontinue current product
offerings, or change some of our current operating strategies. If we do not have
the resources or expertise, or otherwise fail to develop successful strategies
to address these competitive disadvantages, we may lose customers, our revenues
and profit margins may decline and we may be less profitable or potentially
unprofitable.
Disruptions
in our relationships with vendors, or disruptions in or changes in our vendors'
operations, could increase our cost of goods sold and/or affect the supply of
automotive parts and supplies we sell.
Our
business depends on developing and maintaining close relationships with our
vendors and on our vendors' ability or willingness to sell quality products to
us at favorable prices and terms. Many factors outside of our control may harm
these relationships and the ability or willingness of these vendors to sell us
products on favorable terms. For example, financial or operational difficulties
that some of our vendors may face could increase the cost of the products we
purchase from them or our ability to source product from them. In addition, the
trend towards consolidation among automotive parts suppliers as well as the
off-shoring of manufacturing capacity to foreign countries may disrupt or end
our relationship with some vendors, and could lead to less competition and
result in higher prices. We could also be negatively impacted by
suppliers who might experience work stoppages, labor strikes or other
interruptions to or difficulties in the manufacture or supply of the products we
purchase from them.
Deteriorating
and uncertain credit markets could negatively impact our vendors, as well as our
liquidity and ability to secure additional capital at favorable cost-effective
terms in the future.
Impact
on the Company’s Suppliers
During
the fourth quarter of 2008, the Company, our suppliers (also referred to as
vendors) and our customers were exposed to deteriorating and uncertain credit
markets. The general decline in the economy and economic conditions
could negatively affect our suppliers by making it difficult for them to obtain
the credit lines or loans necessary to finance their operations in the
short-term, or long-term.
Additionally,
if any of the major U. S. automobile manufacturers files a petition in
bankruptcy, or if other factors result in a substantial reduction in the number
of new cars manufactured, or in a company-wide shut-down, it would likely have a
material negative short-term (as well as potentially long-term) impact on the
operations and cash flows of some of our suppliers. Any such negative
impacts to our suppliers will likely result in the loss of certain suppliers
and/or in higher product costs.
Impact
on the Company
Supplier
bankruptcies would likely decrease the production output and supply of domestic
(and possibly foreign) automobile parts and accessories, thereby decreasing the
availability and increasing the cost of our parts and accessories. We
might not be able to pass our increased costs onto our customers. Any increased
per unit costs of our suppliers, would likely result in the Company paying a
higher per unit price for parts and accessories, potentially resulting in higher
cost of goods sold, lower gross profit margins and reduced operating profits if
such increased costs could not be passed onto our customers.
Our
overall credit rating may be negatively impacted by the deteriorating and
uncertain credit markets. (See Item 7., Management’s Discussion and Analysis
of Financial Condition and Results of Operations -- Credit
Ratings.) The interest rates on our credit facilities are linked
directly to our credit ratings. Accordingly, any negative impact on our credit
rating would likely result in higher interest rates and interest expense we pay
on borrowed funds. Additionally, we may be limited in our ability to borrow
additional funds to finance our operations. In light of
10
the
uncertainty in the credit markets, it is possible that one or more of the banks
that provides us with financing under our credit facilities may fail to honor
the terms of our existing credit facilities or be financially unable to provide
the unused credit. An inability to obtain sufficient financing at cost-effective
rates could have a materially adverse affect on our business, financial
condition, results of operations and cash flows.
We depend on the services of many
qualified Team Members, whom we may not be able to attract and
retain.
Our
success depends to a significant extent on the continued services and experience
of our Team Members. At March 2, 2009, we employed 47,582 Team Members. We may
not be able to retain our current qualified Team Members, or attract and retain
additional qualified Team Members that may be needed in the future. Our ability
to maintain an adequate number of qualified Team Members is highly dependent on
an attractive and competitive compensation and benefits package. If we fail or
are unable to maintain such a package, our customer service and execution levels
could suffer by reason of a declining quality of our workforce, which could
adversely affect our business, financial condition, results of operations and
cash flows.
We
may not be able to successfully implement our business strategy, including
increasing comparable store sales, enhancing our margins and increasing our
return on invested capital, which could adversely affect our business, financial
condition, results of operations and cash flows.
We have
implemented numerous initiatives as part of our business strategy, including
four key turnaround strategies introduced in 2008, to increase comparable store
sales, enhance our margins and increase our return on invested capital in order
to increase our earnings and cash flow. If we are unable to implement these
initiatives efficiently and effectively, or if these initiatives are
unsuccessful, our business, financial condition, results of operations and cash
flows could be adversely affected.
Successful
implementation of our business strategy also depends on factors specific to the
retail automotive parts industry and numerous other factors that may be beyond
our control. Adverse changes in the following factors could undermine our
business strategy and have a material adverse affect on our business, financial
condition, results of operations and cash flow:
|
●
|
general
economic conditions, including the current U.S. recession which could
continue into the future, and unfavorable conditions in our local markets,
which could reduce our sales;
|
|
●
|
the
competitive environment in the automotive aftermarket parts and
accessories retail sector that may force us to reduce prices below our
desired pricing level or increase promotional
spending;
|
|
●
|
changes
in the automotive aftermarket parts manufacturing industry, such as
manufacturer consolidation or closures, which may disrupt or sever one or
more of our supplier relationships and increase the cost of the parts and
accessories we sell;
|
|
●
|
our
ability to anticipate changes in consumer preferences and to meet
customers’ needs for automotive products (particularly parts availability)
in a timely manner;
|
|
●
|
our
ability to stimulate DIY customer traffic as well as grow our Commercial
business; and
|
|
●
|
our
continued ability to hire and retain qualified personnel, which depends in
part on the types of recruiting, training, compensation and benefit
programs we adopt or
maintain.
|
We
will not be able to expand our business if our growth strategy is not
successful, including the availability of suitable locations for new store
openings or the successful integration of any acquired businesses, which could
adversely affect our business, financial condition, results of operations and
cash flows.
New Store
Openings
We have
increased our store count significantly from 814 stores at the end of fiscal
1997 to 3,368 stores at January 3, 2009. We intend to continue to increase the
number of our stores and expand the markets we serve as part of our growth
strategy, primarily by opening new stores. We may also grow our business through
strategic acquisitions. We do not know whether the implementation of our growth
strategy will be successful. The actual number of new stores to be opened and
their success will depend on a number of factors, including, among other
11
things:
|
●
|
the
availability of potential store
locations;
|
|
●
|
the
negotiation of acceptable lease or purchase terms for new
locations;
|
|
●
|
the
availability of financial resources, including access to capital at
cost-effective interest rates;
and
|
|
●
|
our
ability to manage the expansion and hire, train and retain qualified sales
associates.
|
We are
unsure whether we will be able to open and operate new stores on a timely or
sufficiently profitable basis, or that opening new stores in markets we already
serve will not harm existing store profitability or comparable store sales. The
newly opened and existing stores' profitability will depend on the competition
we face as well as our ability to properly merchandise, market and price the
products desired by customers in these markets.
Acquisitions,
Investments or Strategic Alliances
We may
acquire stores or businesses from, make investments in, or enter into strategic
alliances with companies that have stores or distribution networks in our
current markets or in areas into which we intend to expand our presence. Any
future acquisitions, investments, strategic alliances or related efforts will be
accompanied by risks, including but not limited to:
|
●
|
the
difficulty of identifying appropriate strategic partners or acquisition
candidates;
|
|
●
|
securing
adequate financing on cost-effective terms for acquisition or
post-acquisition
expenditures;
|
|
●
|
the
potential disruption to our ongoing business and diversion of our
management's attention;
|
|
●
|
inability
or failure to discover liabilities prior to completion of an acquisition,
including the assumption of legal liabilities;
|
|
●
|
the
difficulty of assimilating and integrating the operations of the
respective entities to realize anticipated economic, operational or other
favorable benefits;
|
|
●
|
the
inability to maintain uniform standards, controls, procedures and
policies;
|
|
●
|
inability
or failure to retain key personnel from the acquired business;
and
|
|
●
|
the
impairment of relationships with team members and customers as a result of
changes in management.
|
We are
unsure whether we will be successful in overcoming these risks or any other
problems encountered with any acquisitions, investments, strategic alliances or
related efforts. If we fail to successfully open and operate new stores or make
strategic acquisitions or alliances, then our business, financial condition,
results of operations and cash flows may be negatively impacted.
Because
we are involved in litigation from time to time, and are subject to numerous
laws and governmental regulations, we could incur substantial judgments, fines,
legal fees and other costs.
We are
sometimes the subject of complaints or litigation from customers, employees or
other third parties for various actions. From time to time, we are involved in
litigation involving claims related to, among other things, breach of contract,
tortious conduct, employment discrimination, payment of wages, asbestos
exposure, real estate, and product defects. The damages sought against us in
some of these litigation proceedings are substantial. Although we maintain
liability insurance for some litigation claims, if one or more of the claims
were to greatly exceed our insurance coverage limits or if our insurance
policies do not cover a claim, this could have a material adverse affect on our
business, financial condition, results of operations and cash
flows.
Additionally,
we are subject to numerous federal, state and local laws and governmental
regulations relating to environmental protection, product quality standards,
building and zoning requirements, as well as employment law matters. If we fail
to comply with existing or future laws or regulations, we may be subject to
governmental or judicial fines or sanctions, while incurring substantial legal
fees and costs. In addition, our capital expenses could increase due to
remediation measures that may be required if we are found to be noncompliant
with any existing or future laws or regulations.
12
War
or acts of terrorism, or the threat of either, may negatively impact the
availability and cost of merchandise and our customers and adversely impact our
sales and profitability.
War or
acts of terrorism, or the threat of either, may have a negative impact on our
ability to obtain merchandise available for sale in our stores. Some of our
merchandise is imported from other countries. If imported goods become difficult
or impossible to import into the United States, and if we cannot obtain such
merchandise from other sources at similar costs, our sales and profit margins
may be negatively affected.
In the
event that commercial transportation is curtailed or substantially delayed, our
business may be adversely impacted, as we may have difficulty shipping
merchandise to our distribution centers and stores.
Furthermore,
terrorist attacks, war in the Middle East, or war within or between any oil
producing country would likely result in an abrupt increase in the price of
crude oil, gasoline, diesel fuel and energy costs. Such price increases would
increase the cost of doing business for us and our suppliers, and also would
negatively impact our customers' disposable income and have an adverse impact on
our business, sales, profit margins and results of operations.
Risks
Relating to Our Financial Condition
The
covenants governing our revolving and term loan facilities impose restrictions
on us.
The terms
of our revolving and term loan facilities include covenants that impose
operating and financial restrictions on us and our subsidiaries and require us
to meet certain financial ratios and conditions. These restrictions may also
have a negative impact on our business, financial condition, results of
operations and cash flows by significantly limiting or prohibiting us from
engaging in certain transactions, including:
|
●
|
incurring
or guaranteeing additional
indebtedness;
|
|
●
|
making
capital expenditures and other
investments;
|
|
●
|
incurring
liens on our assets and engaging in sale-leaseback
transactions;
|
|
●
|
issuing
or selling capital stock of our subsidiaries;
|
|
●
|
transferring
or selling assets currently held by us; and
|
|
●
|
engaging
in mergers or acquisitions.
|
The
failure to comply with any of these covenants would cause a default under our
credit facilities. Furthermore, our credit facilities contain certain financial
covenants, including a maximum leverage ratio and a minimum coverage ratio,
which, if not maintained by us, will cause us to be in default under our credit
facilities. Any of these defaults, if not waived, could result in the
acceleration of all of our debt, in which case the debt would become immediately
due and payable. If this occurs, we may not be able to repay our debt or borrow
sufficient funds to refinance it. Even if new financing were available, it may
be on terms that are less favorable or otherwise not acceptable to
us.
13
|
Properties.
|
The
following table sets forth certain information relating to our distribution and
other principal facilities:
|
Opening
|
Size
|
Nature
of
|
|||||||
|
Facility
|
Date
|
Area
Served
|
(Sq.
ft.)(1)
|
Occupancy
|
|||||
|
Main
Distribution Centers:
|
|||||||||
|
Roanoke,
Virginia
|
1988
|
Mid-Atlantic
|
433,681
|
Leased
|
|||||
|
Lehigh,
Pennsylvania
|
2004
|
Northeast
|
635,487
|
Owned
|
|||||
|
Lakeland,
Florida
|
1982
|
Florida
|
552,796
|
Owned
|
|||||
|
Gastonia,
North Carolina
|
1969
|
South,
Offshore
|
634,472
|
Owned
|
|||||
|
Gallman,
Mississippi
|
2001
|
South
|
388,168
|
Owned
|
|||||
|
Salina,
Kansas
|
1971
|
West,
Midwest
|
413,500
|
Owned
|
|||||
|
Delaware,
Ohio
|
1972
|
Northeast
|
480,100
|
Owned
|
|||||
|
Thomson,
Georgia
|
1999
|
Southeast
|
374,400
|
Owned
|
|||||
|
Master
PDQ® Warehouse:
|
|||||||||
|
Andersonville,
Tennessee
|
1998
|
All
|
115,019
|
Leased
|
|||||
|
PDQ®
Warehouses:
|
|||||||||
|
Youngwood,
Pennsylvania
|
1999
|
East
|
39,878
|
Leased
|
|||||
|
Riverside,
Missouri
|
1999
|
West
|
43,912
|
Leased
|
|||||
|
Guilderland
Center, New York
|
1999
|
Northeast
|
40,950
|
Leased
|
|||||
|
Temple,
Texas
|
1999
|
Southwest
|
61,343
|
Leased
|
|||||
|
Altamonte
Springs, Florida
|
1996
|
Central
Florida
|
10,000
|
Owned
|
|||||
|
Jacksonville,
Florida
|
1997
|
Northern
Florida and Southern
|
12,712
|
Owned
|
|||||
|
Georgia
|
|||||||||
|
Tampa,
Florida
|
1997
|
West
Central Florida
|
10,000
|
Owned
|
|||||
|
Hialeah,
Florida
|
1997
|
South
Florida
|
12,500
|
Owned
|
|||||
|
West
Palm Beach, Florida
|
1998
|
Southeast
Florida
|
13,300
|
Leased
|
|||||
|
Mobile,
Alabama
|
1998
|
Alabama
and Mississippi
|
10,000
|
Owned
|
|||||
|
Atlanta,
Georgia
|
1999
|
Georgia
and South Carolina
|
16,786
|
Leased
|
|||||
|
Tallahassee,
Florida
|
1999
|
South
Georgia and Northwest
|
10,000
|
Owned
|
|||||
|
Florida
|
|||||||||
|
Fort
Myers, Florida
|
1999
|
Southwest
Florida
|
14,330
|
Owned
|
|||||
|
Cleveland,
Ohio
|
2008
|
Northeast
Ohio
|
22,000
|
Leased
|
|||||
|
Chicago,
Illinois(2)
|
2009
|
Northern
Illinois, Wisconsin
|
45,485
|
Leased
|
|||||
|
and
Northern Indiana
|
|||||||||
|
Corporate/Administrative
Offices:
|
|||||||||
|
Roanoke,
Virginia
|
1995
|
All
|
49,000
|
Leased
|
|||||
|
Roanoke,
Virginia
|
2002
|
All
|
144,000
|
Leased
|
|||||
|
Minneapolis,
Minnesota
|
2008
|
All
|
51,674
|
Leased
|
|||||
|
AI
Properties:
|
|||||||||
|
Norton,
Massachusetts
|
2006
|
AI
corporate office
|
30,000
|
Leased
|
|||||
|
Norton,
Massachusetts
|
2006
|
New
England, New York - AI
|
317,500
|
Leased
|
|||||
|
(1)
|
Square
footage amounts exclude adjacent office
space.
|
|
(2)
|
This
facility opened in January 2009.
|
14
At
January 3, 2009, we owned 633 of our stores and leased 2,735 stores. The
expiration dates, including the exercise of renewal options, of the store leases
are summarized as follows:
|
Years
|
AAP
Stores
|
AI
Stores
|
Total
|
|||
|
2008-2009
|
24
|
1
|
25
|
|||
|
2010-2014
|
235
|
62
|
297
|
|||
|
2015-2019
|
616
|
32
|
648
|
|||
|
2020-2029
|
815
|
30
|
845
|
|||
|
2030-2039
|
790
|
-
|
790
|
|||
|
2040-2056
|
130
|
-
|
130
|
|||
|
2,610
|
125
|
2,735
|
|
Legal
Proceedings.
|
We
currently and from time to time are involved in litigation incidental to the
conduct of our business, including litigation arising from claims of employment
discrimination or other types of employment matters as a result of claims by
current and former employees. Although we diligently defend against these
claims, we may enter into discussions regarding settlement of these and other
lawsuits, and may enter into settlement agreements, if we believe settlement is
in the best interests of our shareholders. The damages claimed against us in
some of these proceedings are substantial. Although the amount of liability that
may result from these matters cannot be ascertained, we do not currently believe
that, in the aggregate, they will result in liabilities material to our
consolidated financial condition, future results of operations or cash
flow.
Our
Western Auto subsidiary, together with other defendants including automobile
manufacturers, automotive parts manufacturers and other retailers, has been
named as a defendant in lawsuits alleging injury as a result of exposure to
asbestos-containing products. We and some of our other subsidiaries also have
been named as defendants in many of these lawsuits. The plaintiffs have alleged
that these products were manufactured, distributed and/or sold by the various
defendants. To date, these products have included brake and clutch parts and
roofing materials. Many of the cases pending against us or our subsidiaries are
in the early stages of litigation. The damages claimed against the defendants in
some of these proceedings are substantial. Additionally, some of the automotive
parts manufacturers named as defendants in these lawsuits have declared
bankruptcy, which will limit plaintiffs’ ability to recover monetary damages
from those defendants. Although we diligently defend against these claims, we
may enter into discussions regarding settlement of these and other lawsuits, and
may enter into settlement agreements, if we believe settlement is in the best
interests of our shareholders. We also believe that most of these claims are at
least partially covered by insurance. Based on discovery to date, we do not
believe the cases currently pending will have a material adverse effect on us.
However, if we were to incur an adverse verdict in one or more of these claims
and were ordered to pay damages that were not covered by insurance, these claims
could have a material adverse effect on our operating results, financial
position and liquidity. If the number of claims filed against us or any of our
subsidiaries alleging injury as a result of exposure to asbestos-containing
products increases substantially, the costs associated with concluding these
claims, including damages resulting from any adverse verdicts, could have a
material adverse effect on our operating results, financial position and
liquidity in future periods.
|
Submission
of Matters to a Vote of Security
Holders.
|
None.
15
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities.
|
Our
common stock is listed on the New York Stock Exchange, or NYSE, under the symbol
"AAP." The table below sets forth, for the fiscal periods indicated, the high
and low sale prices per share for our common stock, as reported by the
NYSE.
|
High
|
Low
|
|||||||
|
Fiscal
Year Ended January 3, 2009
|
||||||||
|
Fourth
Quarter
|
$ | 37.37 | $ | 24.17 | ||||
|
Third
Quarter
|
$ | 44.61 | $ | 36.75 | ||||
|
Second
Quarter
|
$ | 41.74 | $ | 33.57 | ||||
|
First
Quarter
|
$ | 37.99 | $ | 31.20 | ||||
|
Fiscal
Year Ended December 29, 2007
|
||||||||
|
Fourth
Quarter
|
$ | 40.73 | $ | 31.53 | ||||
|
Third
Quarter
|
$ | 40.15 | $ | 29.51 | ||||
|
Second
Quarter
|
$ | 43.62 | $ | 39.22 | ||||
|
First
Quarter
|
$ | 40.80 | $ | 34.90 | ||||
The
closing price of our common stock on March 2, 2009 was $36.31. At March 2, 2009,
there were 384 holders of record of our common stock (which does not include the
number of individual beneficial owners whose shares were held on their behalf by
brokerage firms in street name).
On
February 15, 2006, our Board of Directors declared a quarterly cash dividend,
the first in our history. The $0.06 per share quarterly cash dividend has been
declared in each quarter since its inception in fiscal 2006. Any payments of
dividends in the future will be at the discretion of our Board of Directors and
will depend upon our results of operations, earnings, capital requirements and
other factors deemed relevant by our Board of Directors.
Stock
Price Performance
The
following graph shows a comparison of our cumulative total return on our common
stock, the Standard & Poor’s 500 Index and the Standard & Poor’s 500
Specialty Retail Index. The graph assumes that the value of an investment in our
common stock and in each such index was $100 on January 3, 2004, and that any
dividends have been reinvested. The comparison in the graph below is based
solely on historical data and is not intended to forecast the possible future
performance of our common stock.
16
COMPARISON
OF CUMULATIVE TOTAL RETURN AMONG
ADVANCE
AUTO PARTS, INC., S&P 500 INDEX
AND
S&P 500 SPECIALTY RETAIL INDEX
|
Company
/ Index
|
Jan
3, 2004
|
Jan
1, 2005
|
Dec
31, 2005
|
Dec
30, 2006
|
Dec
29, 2007
|
Jan
3, 2009
|
|
Advance
Auto Parts
|
100
|
107.30
|
160.13
|
131.88
|
142.46
|
128.29
|
|
S&P
500 Index
|
100
|
111.23
|
116.69
|
135.12
|
143.53
|
92.64
|
|
S&P
500 Specialty Retail Index
|
100
|
114.63
|
117.91
|
125.73
|
99.82
|
79.42
|
|
Selected
Consolidated Financial Data.
|
The
following table sets forth our selected historical consolidated statement of
operations, balance sheet and other operating data. Included in this table are
key metrics and operating results used to measure our financial progress. The
selected historical consolidated financial and other data at January 3, 2009 and
December 29, 2007 and for the three years ended January 3, 2009 have been
derived from our audited consolidated financial statements and the related notes
included elsewhere in this report. The historical consolidated financial and
other data at December 30, 2006, December 31, 2005 and January 1, 2005 and for
the years ended December 31, 2005 and January 1, 2005 have been derived from our
audited consolidated financial statements and the related notes that have not
been included in this report. You should read this data along with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
our consolidated financial statements and the related notes included elsewhere
in this report.
17
|
Fiscal
Year (1)(2)
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 5,142,255 | $ | 4,844,404 | $ | 4,616,503 | $ | 4,264,971 | $ | 3,770,297 | ||||||||||
|
Cost
of sales
(3)
|
2,679,191 | 2,523,435 | 2,415,339 | 2,250,493 | 2,016,926 | |||||||||||||||
|
Gross
profit
|
2,463,064 | 2,320,969 | 2,201,164 | 2,014,478 | 1,753,371 | |||||||||||||||
|
Selling,
general and administrative expenses
|
2,048,137 | 1,904,540 | 1,797,814 | 1,605,986 | 1,424,613 | |||||||||||||||
|
Operating
income
|
414,927 | 416,429 | 403,350 | 408,492 | 328,758 | |||||||||||||||
|
Interest
expense
|
(33,729 | ) | (34,809 | ) | (35,992 | ) | (32,384 | ) | (20,069 | ) | ||||||||||
|
Gain
(loss) on extinguishment of debt
|
- | - | 986 | - | (3,230 | ) | ||||||||||||||
|
Other
income, net
|
(506 | ) | 1,014 | 1,571 | 2,815 | 289 | ||||||||||||||
|
Income
from continuing operations before income taxes and loss on
discontinued operations
|
380,692 | 382,634 | 369,915 | 378,923 | 305,748 | |||||||||||||||
|
Income
tax expense
|
142,654 | 144,317 | 138,597 | 144,198 | 117,721 | |||||||||||||||
|
Income
from continuing operations before loss on discontinued
operations
|
238,038 | 238,317 | 231,318 | 234,725 | 188,027 | |||||||||||||||
|
Discontinued
operations:
|
||||||||||||||||||||
|
Loss
from operations of discontinued
|
||||||||||||||||||||
|
Wholesale
Distribution Network
|
- | - | - | - | (63 | ) | ||||||||||||||
|
Benefit
for income taxes
|
- | - | - | - | (24 | ) | ||||||||||||||
|
Loss
on discontinued operations
|
- | - | - | - | (39 | ) | ||||||||||||||
|
Net
income
|
$ | 238,038 | $ | 238,317 | $ | 231,318 | $ | 234,725 | $ | 187,988 | ||||||||||
|
Per
Share Data:(4)
|
||||||||||||||||||||
|
Income
from continuing operations before loss on discontinued
operations per basic share
|
$ | 2.51 | $ | 2.30 | $ | 2.18 | $ | 2.17 | $ | 1.70 | ||||||||||
|
Income
from continuing operations before loss on discontinued
operations per diluted share
|
$ | 2.50 | $ | 2.28 | $ | 2.16 | $ | 2.13 | $ | 1.66 | ||||||||||
|
Net
income per basic share
|
$ | 2.51 | $ | 2.30 | $ | 2.18 | $ | 2.17 | $ | 1.70 | ||||||||||
|
Net
income per diluted share
|
$ | 2.50 | $ | 2.28 | $ | 2.16 | $ | 2.13 | $ | 1.66 | ||||||||||
|
Cash
dividends declared per basic share
|
$ | 0.24 | $ | 0.24 | $ | 0.24 | $ | - | $ | - | ||||||||||
|
Weighted
average basic shares outstanding
|
94,655 | 103,826 | 106,129 | 108,318 | 110,846 | |||||||||||||||
|
Weighted
average diluted shares outstanding
|
95,305 | 104,654 | 107,124 | 109,987 | 113,222 | |||||||||||||||
|
Cash
flows provided by (used in):
|
||||||||||||||||||||
|
Operating
activities
|
$ | 478,739 | $ | 410,542 | $ | 333,604 | $ | 321,632 | $ | 260,397 | ||||||||||
|
Investing
activities
|
(181,609 | ) | (202,143 | ) | (258,642 | ) | (302,780 | ) | (166,822 | ) | ||||||||||
|
Financing
activities
|
(274,426 | ) | (204,873 | ) | (104,617 | ) | (34,390 | ) | (48,741 | ) | ||||||||||
18
|
Fiscal
Year (1)(2)
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands, except per share data and ratios)
|
||||||||||||||||||||
|
Balance
Sheet and Other Financial Data:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 37,358 | $ | 14,654 | $ | 11,128 | $ | 40,783 | $ | 56,321 | ||||||||||
|
Inventory
|
$ | 1,623,088 | $ | 1,529,469 | $ | 1,463,340 | $ | 1,367,099 | $ | 1,201,450 | ||||||||||
|
Inventory
turnover(5)
|
1.70 | 1.69 | 1.71 | 1.75 | 1.74 | |||||||||||||||
|
Inventory
per store(6)
|
$ | 482 | $ | 469 | $ | 475 | $ | 476 | $ | 453 | ||||||||||
|
Accounts
payable to inventory ratio(7)
|
57.2 | % | 55.1 | % | 53.2 | % | 54.8 | % | 53.7 | % | ||||||||||
|
Net
working capital(8)
|
$ | 442,632 | $ | 456,897 | $ | 498,553 | $ | 406,476 | $ | 416,302 | ||||||||||
|
Capital
expenditures
|
$ | 184,986 | $ | 210,600 | $ | 258,586 | $ | 216,214 | $ | 179,766 | ||||||||||
|
Total
assets
|
$ | 2,964,065 | $ | 2,805,566 | $ | 2,682,681 | $ | 2,542,149 | $ | 2,201,962 | ||||||||||
|
Total
debt
|
$ | 456,164 | $ | 505,672 | $ | 477,240 | $ | 438,800 | $ | 470,000 | ||||||||||
|
Total
net debt(9)
|
$ | 439,394 | $ | 521,018 | $ | 500,318 | $ | 448,187 | $ | 433,863 | ||||||||||
|
Total
stockholders' equity
|
$ | 1,075,166 | $ | 1,023,795 | $ | 1,030,854 | $ | 919,771 | $ | 722,315 | ||||||||||
|
Selected
Store Data:
|
||||||||||||||||||||
|
Comparable
store sales growth (10)
|
1.5 | % | 0.7 | % | 1.6 | % | 8.2 | % | 6.0 | % | ||||||||||
|
Number
of stores at beginning of year
|
3,261 | 3,082 | 2,872 | 2,652 | 2,539 | |||||||||||||||
|
New
stores
|
127 | 196 | 215 | 231 | 125 | |||||||||||||||
|
Closed
stores
|
(20 | ) | (17 | ) | (5 | ) | (11 | ) | (12 | ) | ||||||||||
|
Number
of stores, end of period
|
3,368 | 3,261 | 3,082 | 2,872 | 2,652 | |||||||||||||||
|
Relocated
stores
|
10 | 29 | 47 | 54 | 34 | |||||||||||||||
|
Stores
with commercial delivery program, end of period
|
2,880 | 2,712 | 2,526 | 2,254 | 1,945 | |||||||||||||||
|
Total
commercial sales, as a percentage of total sales
|
29.5 | % | 26.6 | % | 25.0 | % | 21.8 | % | 18.4 | % | ||||||||||
|
SG&A
expenses per store (in
000s)(11)(12)
|
$ | 618 | $ | 601 | $ | 604 | $ | 586 | $ | 549 | ||||||||||
|
Operating
income per team member (in 000s)(13)
|
$ | 9.02 | $ | 9.40 | $ | 9.29 | $ | 10.30 | $ | 9.01 | ||||||||||
|
Total
store square footage, end of period
|
24,711 | 23,982 | 22,753 | 21,246 | 19,734 | |||||||||||||||
|
Average
net sales per store (in
000s)(12)(14)
|
$ | 1,551 | $ | 1,527 | $ | 1,551 | $ | 1,555 | $ | 1,453 | ||||||||||
|
Average
net sales per square foot(12)(15)
|
$ | 211 | $ | 207 | $ | 210 | $ | 209 | $ | 195 | ||||||||||
|
Gross
margin return on inventory(16)
|
$ | 3.56 | $ | 3.39 | $ | 3.38 | $ | 3.43 | $ | 3.18 | ||||||||||
|
(1)
|
Our
fiscal year consists of 52 or 53 weeks ending on the Saturday nearest to
December 31st.
All fiscal years presented are 52 weeks, with the exception of fiscal
2008, which consisted of 53
weeks.
|
|
(2)
|
The
statement of operations data for each of the years presented reflects the
operating results of the wholesale distribution segment as discontinued
operations.
|
|
(3)
|
Cost
of sales includes a non-cash obsolete inventory write-down of $37.5
million recorded in fiscal 2008 due to a change in our inventory
management approach for slow moving
inventory.
|
|
(4)
|
Basic
and diluted shares outstanding for each of the years presented gives
effect to a 3-for-2 stock split effectuated by us in the form of a 50%
stock dividend distributed on September 23,
2005.
|
|
(5)
|
Inventory
turnover is calculated as cost of sales divided by the average of
beginning and ending
inventories.
|
|
(6)
|
Inventory
per store is calculated as ending inventory divided by ending store
count.
|
|
(7)
|
Accounts
payable to inventory ratio is calculated as ending accounts payable
divided by ending inventory. Beginning in fiscal 2004, as a result of our
new vendor financing program, we aggregate financed vendor accounts
payable with accounts payable to calculate our accounts payable to
inventory ratio.
|
|
(8)
|
Net
working capital is calculated by subtracting current liabilities from
current assets.
|
|
(9)
|
Net
debt includes total debt and bank overdrafts, less cash and cash
equivalents.
|
|
(10)
|
Comparable
store sales is calculated based on the change in net sales starting once a
store has been open for 13 complete accounting periods (each period
represents four weeks). Relocations are included in comparable store sales
from the original date of opening. Beginning in fiscal 2008, we include in
comparable store sales the net sales from stores operated in Puerto Rico
and the Virgin Islands, or Offshore, and AI stores. The comparable periods
have been adjusted accordingly. Fiscal 2008 comparable store sales exclude
sales from the 53rd
week.
|
|
(11)
|
Selling,
general and administrative, or SG&A, expense per store is calculated
as total SG&A expenses divided by the average of beginning and ending
store count. Excluding the SG&A impact of the 53rd
week of fiscal 2008 of approximately $28.0 million, SG&A expenses per
store in fiscal 2008 was $609.
|
|
(12)
|
The
ending store count and/or store square footage used in the calculation of
the 2005 ratios has been weighted
|
19
| for the period of the AI acquisition. | |
|
(13)
|
Operating
income per team member is calculated as operating income divided by an
average of beginning and ending number of team members. Excluding the
operating income impact of the 53rd
week of fiscal 2008 of approximately $16.0 million and a $37.5 million
non-cash obsolete inventory write-down, operating income per team member
in fiscal 2008 was
$9.49.
|
|
(14)
|
Average
net sales per store is calculated as net sales divided by the average of
the beginning and the ending number of stores for the respective period.
Excluding the net sales impact of the 53rd
week of fiscal 2008 of approximately $89.0 million, average net sales per
store in fiscal 2008 was
$1,524.
|
|
(15)
|
Average
net sales per square foot is calculated as net sales divided by the
average of the beginning and ending total store square footage for the
respective period. Excluding the net sales impact of the 53rd
week of fiscal 2008 of approximately $89.0 million, average net sales per
square foot in fiscal 2008 was $208.
|
|
(16)
|
Gross
margin return on inventory is calculated as gross profit divided by an
average of beginning and ending inventory, net of accounts payable and
financed vendor accounts payable. Excluding the gross profit impact of the
53rd
week of fiscal 2008 of approximately $44.0 million and a $37.5 million
non-cash obsolete inventory write-down, gross margin return on inventory
in fiscal 2008 was
$3.46.
|
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with "Selected Consolidated Financial
Data," our consolidated historical financial statements and the notes to those
statements that appear elsewhere in this report. Our discussion contains
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under “Forward-Looking Statements” and "Risk
Factors" elsewhere in this report.
Our
fiscal year ends on the Saturday nearest December 31st of each year, which
results in an extra week every several years (fiscal 2008 contained 53 weeks).
Our first quarter consists of 16 weeks, and the other three quarters consist of
12 weeks, with the exception of the fourth quarter fiscal 2008 which contained
13 weeks due to our 53-week fiscal year in 2008.
Introduction
We
operate primarily within the United States automotive aftermarket industry,
which includes replacement parts (excluding tires), accessories, maintenance
items, batteries and automotive chemicals for cars and light trucks (pickup
trucks, vans, minivans and sport utility vehicles). We currently are the second
largest specialty retailer of automotive parts, accessories and maintenance
items to “do-it-yourself,” or DIY, and "do-it-for-me," or Commercial, customers
in the United States, based on store count and sales. At January 3, 2009, we
operated 3,368 stores throughout 40 states.
We
operate in two reportable segments: Advance Auto Parts, or AAP, and Autopart
International, or AI. The AAP segment is comprised of our store
operations within the United States, Puerto Rico and the Virgin Islands which
operate under the trade names “Advance Auto Parts,” “Advance Discount Auto
Parts” and “Western Auto.” At January 3, 2009, we operated 3,243 stores in the
AAP segment, of which 3,215 stores operated under the trade names “Advance Auto
Parts” and “Advance Discount Auto Parts” throughout 40 states in the
Northeastern, Southeastern and Midwestern regions of the United States. These
stores offer automotive replacement parts, accessories and maintenance
items. In addition, we operated 28 stores under the “Western Auto”
and “Advance Auto Parts” trade names, located in Puerto Rico and the Virgin
Islands, or Offshore.
At
January 3, 2009, we operated 125 stores in the AI segment under the “Autopart
International” trade name. We acquired AI in September 2005. AI operates as
an independent, wholly-owned subsidiary. AI’s business primarily serves the
Commercial market from its store locations. In addition, its North American
Sales Division services warehouse distributors and jobbers throughout North
America.
Management
Overview
During
fiscal 2008, in a challenging year of deteriorating macroeconomic conditions, we
accelerated top-line sales growth by 6.1% and recorded earnings per diluted
share of $2.50 compared to $2.28 in fiscal 2007. Our fiscal 2008
financial results included an extra
week of operations (53rd week)
as well as a non-cash obsolete inventory
20
write-down of $37.5
million due to a change in inventory management approach for slow moving
inventory. We continued to generate significant operating cash flow that
allowed us to invest in business initiatives and return capital to shareholders
through cash dividends and share repurchases.
Fiscal
2008 was a transitional year for Advance, which included several executive
management changes and the introduction of key strategies and initiatives, as we
embarked on a concentrated effort to drive changes in response to diminished
sales and earnings growth during fiscal 2006 and 2007. In January 2008, Darren
Jackson was appointed to the position of President and Chief Executive Officer.
Mr. Jackson, who had previously served on our Board of Directors, Audit
Committee and Finance Committee, had already been involved with management on
the completion of certain strategic business assessments during fiscal 2007 and
the formulation of key initiatives discussed below. In addition to our CEO,
other new management leaders joined Advance in fiscal 2008 to work with existing
leaders on developing and executing a turnaround plan.
Fiscal
2008 Highlights
Highlights
from our fiscal 2008 include:
Financial
|
●
|
We
recorded earnings per diluted share of $2.50 compared to $2.28 for fiscal
2007. These results included approximately $0.10 of
diluted earnings per share from the 53rd
week as well as a reduction in diluted earnings per share of $0.25 from
the non-cash obsolete inventory write-down. In addition to these items,
our increase in earnings per share was driven by increased operating
income, reduced interest expense and a lower outstanding share count as a
result of 6.1 million shares having been repurchased during fiscal
2008.
|
|
|
●
|
Total
sales for fiscal 2008 increased 6.1% over fiscal 2007 to $5.14 billion,
primarily driven by new store growth, the 1.7% impact of the 53rd
week’s sales ($88.8 million) on total sales and a comparable store sales
increase of 1.5%. Our fourth quarter comparable sales increase of 3% was
the highest in 11 quarters.
|
|
|
●
|
We
generated operating cash flow of $478.7 million for the year, an increase
of $68.2 million over the comparable period in fiscal 2007, which was
primarily driven by higher earnings and the impact of the 53rd
week.
|
|
|
●
|
During
fiscal 2008, we repurchased 6.1 million shares of common stock for $216.5
million at an average price of $35.28 per share, of which 4.6 million
shares were repurchased under our previous $500 million stock repurchase
program.
|
|
Operational
|
●
|
Executive
management introduced four key turnaround strategies as the primary
catalyst for our transformation and turnaround. These four strategies
are:
|
|
| 1. |
Commercial
Acceleration
|
|
|
|
||
| 2. |
DIY
Transformation
|
|
|
|
||
| 3. |
Availability
Excellence
|
|
| 4. |
Superior
Experience
|
|
|
A
majority of the initiatives we began and/or completed during fiscal 2008
are centered around these four strategies, some of which are discussed in
the following section.
|
||
|
●
|
We
retired the 2010 store format and related remodel program. In
early fiscal 2009, we began an assessment of our store occupancy costs and
a potential divestiture of approximately 40 to 55 stores in addition to
our normal annual store closings that are strategically or financially
delivering unacceptable
|
|
21
|
|
results. These stores
were assessed for impairment as of January 3, 2009 and no impairment was
considered necessary at that
time.
|
|
Update on Turnaround
Strategies
Our
favorable results during fiscal 2008 were in part being driven by progress on
our key turnaround strategies. Each of the four strategies is at a different
stage of implementation.
|
Ø
|
Commercial
Acceleration
|
The
effectiveness of our Commercial Acceleration strategy is evident as we
experienced double digit comparable sales increases over the last four quarters
in Commercial sales. For fiscal 2008, we experienced a 12.1% Commercial
comparable store sales increase. We continue to gain market share in a business
that is very fragmented and still growing overall. We have added more parts to
our stores with Commercial programs, including key brands which are highly
respected and preferred by our Commercial customers. We are developing a sales
force to drive our Commercial business, another key component of the Commercial
Acceleration strategy. We are increasing the number of Commercial account
managers and equipping them with tools to acquire new customers and increase the
volume of existing customers’ purchases. We are also testing other initiatives
to roll out on a larger scale that meet the needs of our Commercial customers
and drive shareholder value.
|
Ø
|
DIY
Transformation
|
The
initial focus of the DIY Transformation strategy is to turnaround our current
DIY sales trends utilizing targeted initiatives. Our DIY comparable store sales
decrease was 2.3% in fiscal 2008 with our fourth quarter improving to a decrease
of 1.1%. During fiscal 2008, we completed a 100-day assessment of our DIY
business where a representative group of management and field team members
worked together and concluded that we must continue to focus on initiatives such
as parts availability, attachment selling, superior customer service, and the
proper scheduling of team members. Additionally, we have identified certain
operating areas where we are experiencing positive DIY sales results which
provide us with an opportunity to utilize those best practices across the entire
DIY business.
Our
ability to achieve successful results in our Commercial Acceleration and DIY
Transformation strategies is dependent on our Availability Excellence and
Superior Experience strategies.
|
Ø
|
Availability
Excellence
|
The
Availability Excellence strategy represents our commitment to enhance the
breadth and depth of our parts availability in our stores, and the speed of our parts
delivery, to better
serve both our Commercial and DIY customers. This
strategy incorporates our supply chain and logistics network capabilities, space
management and merchandising initiatives. We are making progress on the parts
availability initiative as the merchandising and inventory management teams
partner with the Commercial and DIY teams to accelerate sales growth. As
discussed in Commercial Acceleration, key brands of parts such as Moog®
and Wagner®
were added during fiscal 2008. We began the rollout of a custom mix inventory
process chain-wide. In addition, we reviewed our inventory productivity and
changed our inventory management approach for slow moving inventory. We intend
to increase our inventory productivity by reducing the amount of slow moving
inventory and utilizing vendor return privileges earlier in the life-cycle of
our inventory which will allow us to add faster moving custom mix inventory. We
believe this change in inventory management approach will accelerate sales,
improve margins and increase inventory turnover.
Progress
in other initiatives included the restructuring of our merchandising department
into an integrated operating model, the completion of an initial phase of a new
category management process and the roll-out of a new price optimization tool.
As previously announced, we are also implementing an Oracle merchandising system
over a multi-year period which will serve as a key upgrade to our current
merchandising systems. We recently launched the Company’s global sourcing
capability and private brand strategy. In February 2009, we announced the
outsourcing of our private vehicle fleet, which will allow more scheduling
flexibility and reduce costs to help fund the expansion of our PDQ® network.
We will continue to measure progress in our Availability Excellence strategy,
using productivity metrics such as sales per square foot and gross margin return
on inventory. See Item 6, Selected Consolidated Financial
Data, for a presentation of these and other key metrics.
22
|
Ø
|
Superior
Experience
|
Superior
Experience is centered around our store operations and providing superior
customer service. We have begun to evaluate our customer service through the
measurement of Team Member engagement and customer satisfaction. We believe we
will gain valuable information from these results which will drive improvement
in our results in future quarters. In the fourth quarter, we tested a
new integrated operating model that demonstrated efficiencies in our Commercial
delivery business and related acceleration in Commercial sales. This new
staffing model will begin a phased-in rollout in the first quarter of 2009. The
leaders of Superior Experience will be re-engineering the store experience and
store operations as well as gaining a better understanding of what the customer
ultimately wants.
Industry
The steep
decline in consumer confidence, rapidly rising unemployment, the credit crisis
and the single largest decline in annual miles driven presented challenges to
retailers throughout fiscal 2008. More recently, retail industry comparable
store sales represented the worst retail environment in 40 years. However, the
automotive aftermarket industry will likely have an opportunity to benefit from
the economic downturn because consumers are keeping their vehicles longer which
increases the average age of vehicles and the need to repair and complete
routine maintenance on those vehicles.
Although
our fiscal 2008 results were positive, our outlook is cautious for fiscal 2009
given the current economic environment. We are still in the early stages of
implementing our four key turnaround strategies. We are committed to making the
necessary investments to help ensure our long-term success.
Store
Development by Segment
The
following table sets forth the total number of new, closed and relocated stores
and stores with Commercial delivery programs during fiscal 2008, 2007 and 2006.
We lease approximately 81% of our stores.
|
AAP
|
||||||||||||
|
Fiscal
Year
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Number
of stores at beginning of year
|
3,153 | 2,995 | 2,810 | |||||||||
|
New
stores
|
109 | 175 | 190 | |||||||||
|
Closed
stores
|
(19 | ) | (17 | ) | (5 | ) | ||||||
|
Number
of stores, end of period(a)
|
3,243 | 3,153 | 2,995 | |||||||||
|
Relocated
stores
|
10 | 29 | 47 | |||||||||
|
Stores
with commercial delivery programs
|
2,755 | 2,604 | 2,439 | |||||||||
|
AI
|
||||||||||||
|
Fiscal
Year
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Number
of stores at beginning of year
|
108 | 87 | 62 | |||||||||
|
New
stores
|
18 | 21 | 25 | |||||||||
|
Closed
stores
|
(1 | ) | - | - | ||||||||
|
Number
of stores, end of period
|
125 | 108 | 87 | |||||||||
|
Stores
with commercial delivery programs
|
125 | 108 | 87 | |||||||||
|
(a)
|
Includes
2 stores not operating at December 30, 2006, primarily due to
hurricane damage.
|
During
fiscal 2009, we anticipate adding approximately 75 AAP and 30 AI stores and
closing 10 to 15 stores, excluding the stores that may be closed in connection
with our
store divestiture plan.
23
Critical
Accounting Policies
Our
financial statements have been prepared in accordance with accounting policies
generally accepted in the United States of America. Our discussion and analysis
of the financial condition and results of operations are based on these
financial statements. The preparation of these financial statements requires the
application of accounting policies in addition to certain estimates and
judgments by our management. Our estimates and judgments are based on currently
available information, historical results and other assumptions we believe are
reasonable. Actual results could differ materially from these
estimates.
The
preparation of our financial statements included the following significant
estimates and exercise of judgment.
Vendor
Incentives
We
receive incentives from vendors as a result of purchasing and promoting their
products through a variety of programs, including cooperative advertising
allowances, volume rebates and other promotional incentives. We
account for vendor incentives in accordance with Emerging Issues Task Force, or
EITF, No. 02-16, “Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor.” Many of the incentives
are under long-term agreements (terms in excess of one year), while others are
negotiated on an annual basis. Cooperative advertising allowances and
volume rebates are earned based on inventory purchases and are initially
recorded as a reduction to inventory. The deferred amounts are
included as a reduction to cost of sales as the inventory is sold.
We
recognize other promotional incentives earned under long-term agreements as a
reduction to cost of sales. These incentives are recognized based on the
cumulative net purchases as a percentage of total estimated net purchases over
the life of the agreement. Our margins could be impacted positively or
negatively if actual purchases or results from any one year differ from our
estimates; however, the impact over the life of the agreement would be the
same. Short-term incentives (terms less than one year) are generally
recognized as a reduction to cost of sales over the course of the
agreements.
Amounts
received or receivable from vendors that are not yet earned are reflected as
deferred revenue. Management's estimate of the portion of deferred revenue that
will be realized within one year of the balance sheet date is included in
Other current liabilities. Earned amounts that are receivable from vendors are
included in receivables except for that portion expected to be received
after one year, which is included in Other assets, net.
Inventory
Reserves
We
establish reserves for inventory shrink for our distribution centers based on
historical results from our cycle counting program and actual results from our
most recent cycle counts. For our store locations, we establish reserves for
estimated shrink based on historical results from our cycle counting program and
results of physical inventories, as adjusted for current economic conditions if
necessary. Beginning in the third quarter of fiscal 2008, we began transitioning
to a physical inventory process and had completed physical inventories in
approximately one-third of our retail stores as of January 3, 2009.
An
increase (or decrease) to our inventory reserves is recorded as an increase (or
decrease) to our cost of sales. Our estimates of these shrink reserves depend on
the results of the independent physical inventory counts and the accuracy of the
cycle count program, which is dependent on compliance rates of our facilities
and the execution of the required procedures. We evaluate the accuracy of our
cycle program on an ongoing basis and believe it provides reasonable assurance
for the established inventory shrink reserves. If estimates of our
shrink reserves are inaccurate based on the inventory counts, we may be exposed
to losses or gains that could be material.
We also
have recorded reserves for potentially excess and obsolete inventories based on
(i) current inventory levels, (ii) historical analysis of product sales and
(iii) current market conditions. We provide reserves where less than full credit
is expected from a vendor or where we anticipate that items will be sold at
retail prices that are less than recorded cost. We have historically developed
these estimates based on the determination of return privileges with vendors,
the level of credit provided by the vendor and management’s estimate of the
discounts to be recorded,
24
if any,
required by market conditions. At the end of fiscal 2008,
we reviewed our inventory productivity and changed our inventory management
approach for slow moving inventory. As a result, we increased our reserve for
excess and obsolete inventories by $34.1 million, excluding a LIFO and
warehousing cost impact of $3.4 million.
Our total
inventory reserves increased by $27.3 million in fiscal 2008 compared to fiscal
2007 primarily as a result of the increase to our excess and obsolete inventory
reserve. Future changes by vendors in their policies or willingness to accept
returns of excess inventory or changes in our inventory management approach for
excess and obsolete inventory could require us to revise our estimates of
required reserves and result in a negative impact on our consolidated statement
of operations. A 10% difference in actual inventory reserves at January 3, 2009
would have affected net income by approximately $3.9 million for the fiscal year
ended January 3, 2009.
Warranty
Reserves
We offer
limited warranties on certain products that range from 30 days to lifetime
warranties; the warranty obligation on the majority of merchandise sold by us
with a manufacturer’s warranty is borne by our vendors. However, we have
an obligation to provide customers free replacement of merchandise or
merchandise at a prorated cost if under a warranty and not covered by the
manufacturer. Merchandise sold with warranty coverage by us primarily
includes batteries but may also include other parts such as brakes and
shocks. We estimate and record a reserve for future warranty
claims based on the historical return experience of the products sold and
record any change as income or expense in the period the product is sold. If
claims experience differs from historical levels, revisions in our estimates may
be required, which could have an impact on our consolidated statement of
operations.
Our
warranty reserves increased by $10.9 million in fiscal 2008 compared to fiscal
2007. A portion of this obligation is funded by incentives from our vendors. The
overall increase in our warranty reserves was primarily attributable to an
increase in the quantity and cost of batteries sold during fiscal 2008 as well
as an increase in related warranty claims. Effective December 30, 2007, the
Company also began including in its warranty reserves the warranty obligation on
certain other products sold in addition to batteries. A 10% change in
the warranty reserves at January 3, 2009 would have affected net income by
approximately $1.8 million for the fiscal year ended January 3,
2009.
Self-Insurance
Reserves
We are
self-insured for general and automobile liability, workers' compensation and the
health care claims of our Team Members, although we maintain stop-loss coverage
with third-party insurers to limit our total liability exposure. Our
self-insurance program, started in 2001, has not reached full maturity. A
reserve for liabilities associated with these losses is established for claims
filed, claims incurred but not yet reported, projected future claims using
actuarial methods followed in the insurance industry and our historical claims
experience. Each year, our reserve for self-insurance increases over
the prior year because each year adds an additional layer of reserves without an
equal amount of prior year reserves being fully relieved. Generally, claims have
historically taken several years to settle and thus are not relieved at the same
rate as additional reserves are added each year. Our self-insurance reserves
increased by $5.0 million in fiscal 2008 compared to fiscal 2007. This increase
was primarily the result of the increase in the number of workers’ compensation
claims and automobile accident claims as well as an increase in the total cost
to settle workers’ compensation claims as compared to the prior
year. Although the increase in self-insured reserves in fiscal 2008
is less than in fiscal 2007, the increase in the number of claims continues to
be driven by overall growth, including an increase in total number of stores,
employees and Commercial delivery vehicles.
While we
do not expect the amounts ultimately paid to differ significantly from our
estimates, our self-insurance reserves and corresponding selling, general and
administrative expenses could be affected if future claim experience differs
significantly from historical trends and actuarial assumptions. A 10% change in
our self-insurance liabilities at January 3, 2009 would have affected net income
by approximately $5.7 million for the fiscal year ended January 3,
2009.
25
Tax
Reserves
The
determination of our income tax liabilities is based upon the tax codes,
regulations and pronouncements of the taxing jurisdictions in which we do
business. Our income tax returns are periodically examined by those
jurisdictions. These examinations include, among other things, auditing our
filing positions, the timing of deductions and allocation of income among the
various jurisdictions. At any particular time, multiple years are subject to
examination by various taxing authorities.
In
evaluating our income tax positions, we record reserves for potential exposures.
These tax reserves are adjusted in the period actual developments give rise to
such change. Those developments could be, but are not limited to: settlement of
tax audits, expiration of the statute of limitations, the evolution of tax
codes and regulations, along with varying applications of tax policy and
administration within those jurisdictions.
These tax
reserves contain uncertainties because management is required to make
assumptions and apply judgment to estimate exposures associated with our various
filing positions. Although management believes that the judgments and
estimates are reasonable, actual results could differ and the company may be
exposed to gains or losses that could be material. To the extent that actual
results differ from our estimates, the effective tax rate in any particular
period could be materially affected. Favorable tax developments would be
recognized as a reduction in our effective tax rate in the period of resolution.
Unfavorable tax developments would require an increase in our effective tax rate
and a possible use of cash in the period of resolution. A 10% change
in the tax reserves at January 3, 2009 would have affected net income by
approximately $1.4 million for the fiscal year ended January 3,
2009.
Components
of Statement of Operations
Net
Sales
Net sales
consist primarily of merchandise sales from our retail store locations to both
our DIY and Commercial customers. Our total sales growth is comprised of both
comparable store sales and new store sales. We calculate comparable store sales
based on the change in store sales starting once a store has been opened for 13
complete accounting periods (approximately one year). We include sales from
relocated stores in comparable store sales from the original date of
opening. Beginning in fiscal 2008, we also include in comparable store sales the
net sales from the Offshore and AI stores. The comparable periods have been
adjusted accordingly. Fiscal 2008 comparable store sales exclude the effect of
the 53rd
week.
Cost
of Sales
Our cost
of sales consists of merchandise costs, net of incentives under vendor programs;
inventory shrinkage, defective merchandise and warranty costs; and warehouse and
distribution expenses. Gross profit as a percentage of net sales may be
affected by (i) variations in our product mix, (ii) price changes in response to
competitive factors and fluctuations in merchandise costs, (iii) vendor
programs, (iv) inventory shrinkage, (v) defective merchandise and warranty costs
and (v) warehouse and distribution costs. We seek to minimize fluctuations in
merchandise costs and instability of supply by entering into long-term
purchasing agreements, without minimum purchase volume requirements, when we
believe it is advantageous. Our gross profit may not be comparable to those of
our competitors due to differences in industry practice regarding the
classification of certain costs. See Note 2 to our consolidated financial
statements elsewhere in this report for additional discussion of these
costs.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses consist of store payroll, store
occupancy (including rent and depreciation), advertising expenses, Commercial
delivery expenses, other store expenses and general and administrative expenses,
including salaries and related benefits of store support center team members,
share-based compensation expense, store support center administrative office
expenses, data processing, professional expenses, self-insurance costs and other
related expenses. See Note 2 to our consolidated financial statements for
additional discussion of these costs.
26
Consolidated
Results of Operations
The
following table sets forth certain of our operating data expressed as a
percentage of net sales for the periods indicated.
|
Fiscal
Year Ended
|
||||||||||||
|
January
3,
|
December
29,
|
December
30,
|
||||||||||
|
2009
|
2007
|
2006
|
||||||||||