AAP_10K_12 28 2013
Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.

Commission file number 001-16797
________________________


ADVANCE AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
________________________

 Delaware
(State or other jurisdiction of
incorporation or organization)
    54-2049910
(I.R.S. Employer
Identification No.)
 5008 Airport Road
Roanoke, VA
(Address of Principal Executive Offices)
    24012
(Zip Code)


(540) 362-4911
(Registrant’s telephone number, including area code)
 
Securities Registered Pursuant to Section 12(b) of the Act
Title of each class
Common Stock
($0.0001 par value)
Name of each exchange on which registered
New York
Stock Exchange

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration 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 the 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 definition 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 12, 2013, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the 72,442,669 shares of Common Stock held by non-affiliates of the registrant was $5,984,488,886, based on the last sales price of the Common Stock on July 12, 2013, as reported by the New York Stock Exchange.

As of February 20, 2014, the registrant had outstanding 72,926,574 shares of Common Stock, par value $0.0001 per share (the only class of common stock of the registrant outstanding).

Documents Incorporated by Reference:

Portions of the definitive proxy statement of the registrant to be filed within 120 days of December 28, 2013, pursuant to Regulation 14A under the Securities Exchange Act of 1934, for the 2014 Annual Meeting of Stockholders to be held on May 14, 2014, are incorporated by reference into Part III.
 


Table of Contents

TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

FORWARD-LOOKING STATEMENTS

Certain statements in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). 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 such differences 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 further detail 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:

•
a decrease in demand for our products;
•
competitive pricing and other competitive pressures;
•
the risk that the anticipated benefits of the acquisition of General Parts International, Inc. (“GPI”), including synergies, may not be fully realized or may take longer to realize than expected, that we may experience difficulty integrating GPI’s operations into our operations, or that management's attention may be diverted from our other businesses in association with the acquisition of GPI;
•
the possibility that the acquisition of GPI may not advance our business strategy or prove to be an accretive investment or may impact third-party relationships, including customers, wholesalers, independently-owned and jobber stores and suppliers;
•
the risk that the additional indebtedness from the new financing agreements in association with the acquisition of GPI may limit our operating flexibility or otherwise strain our liquidity and financial condition;
•
the risk that we may experience difficulty retaining key GPI employees;
•
our ability to implement our business strategy;
•
our ability to expand our business, including the location of available and suitable real estate for new store locations, the integration of any acquired businesses and the continued increase in supply chain capacity and efficiency;
•
our dependence on our suppliers to provide us with products that comply with safety and quality standards;
•
our ability to attract and retain qualified employees, or Team Members;
•
the potential for fluctuations in the market price of our common stock and the resulting exposure to securities class action litigation;
•
deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, higher tax rates or uncertain credit markets;
•
regulatory and legal 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;
•
a security breach or other cyber security incident;
•
business interruptions due to the occurrence of natural disasters, extended periods of unfavorable weather, computer system malfunction, wars or acts of terrorism;
•
the impact of global climate change or legal and regulatory responses to such change; and
•
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.


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PART I

Item 1.    Business.

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. All fiscal years presented include 52 weeks of operations (the next 53 week fiscal year is 2014).

References to the acquisition of GPI refer to our January 2, 2014 acquisition of General Parts International, Inc. The discussion in this report relates to a period prior to our acquisition of GPI and, except as otherwise noted, does not give effect to the GPI acquisition.

Overview

We are a leading specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States. Our stores carry an extensive product line for cars, vans, sport utility vehicles and light trucks. We serve both “do-it-yourself,” or DIY, and “do-it-for-me,” or Commercial, customers. Our Commercial customers consist primarily of delivery customers for whom we deliver product from our store locations to our Commercial customers’ places of business, including independent garages, service stations and auto dealers.

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. We began our Commercial delivery program in 1996 and have significantly increased our sales to Commercial customers since 2000. Our parent company, Advance Auto Parts, Inc., a Delaware corporation, was incorporated in 2001 in conjunction with the acquisition of Discount Auto Parts, Inc. As of December 28, 2013, the end of our 2013 fiscal year, or Fiscal 2013, we operated 4,049 total stores.

Subsequent to the end of Fiscal 2013, we acquired GPI on January 2, 2014. GPI, formerly a privately held company, is a leading distributor and supplier of original equipment and aftermarket automotive replacement products for commercial markets operating under the Carquest and Worldpac brands. As of the acquisition date, GPI operated 1,248 Carquest stores and 105 Worldpac branches located in 45 states and Canada and serviced approximately 1,400 independently owned Carquest stores. We believe the acquisition will allow us to expand our geographic presence, Commercial capabilities and overall scale to better serve our customers.

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 Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish them 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

As of December 28, 2013, we operated in two reportable segments: Advance Auto Parts, or AAP, and Autopart International, or AI. The AAP segment is comprised of our store operations, which operate under the trade names “Advance Auto Parts” and “Advance Discount Auto Parts”. The AI segment consists solely of the operations of Autopart International, Inc. which operates under the “Autopart International” trade name.

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 21, 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.


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AAP Segment

As of December 28, 2013, we operated 3,832 AAP stores throughout 39 states in the Northeastern, Southeastern and Midwestern (inclusive of South Central) regions of the United States, Puerto Rico and the Virgin Islands. 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 private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars and light trucks. Through our integrated operating approach, we serve our DIY and Commercial customers from our store locations and online at www.AdvanceAutoParts.com. Our online website allows our DIY customers to pick up merchandise at a conveniently located store or have their purchases shipped directly to their home or business. Our Commercial customers can conveniently place their orders online.

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 and to our Commercial customers. 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 7,300 square feet with the size of our typical new stores ranging from approximately 6,000 to 8,000 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 8:00 p.m. on Sundays and most holidays to meet the needs of our DIY and Commercial customers.

Our stores carry a product offering of approximately 20,000 stock keeping units, or SKUs, generally consisting of a custom mix of product based on each store's respective market. Supplementing the inventory on-hand at our stores, we have 374 larger stores, known as HUB stores, which stock an additional 15,000 less common SKUs which are available to our stores within the HUB store's service areas on a same-day or next-day basis. Our stores also have access to a total assortment of 93,000 SKUs for same-day or next-day delivery from our network of 19 Parts Delivered Quickly, or PDQ®, facilities. Additionally, our customers have access to over 522,000 SKUs by ordering directly from one of our vendors for delivery to a particular store or other destination as chosen by the customer.

We strive to be the leader in the automotive aftermarket industry by fulfilling our promise, 'Service is our best part®' through our Superior Availability and Service Leadership strategies. We offer our customers quality products which are covered by a solid warranty. Many of our products are offered at a good, better or best recommendation differentiated by price and quality. 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.

The primary categories of products we offer in our stores include:
 
•
Parts, including alternators, batteries, belts and hoses, brakes and brake pads, chassis parts, clutches, driveshafts, engines and engine parts, ignition parts, lighting, radiators, starters, spark plugs and wires, steering and alignment parts, transmissions, water pumps and windshield wiper blades;
•
Accessories, including air fresheners, anti-theft devices, emergency road kits, floor mats, ice scrapers, mirrors, vent shades, MP3 and cell phone accessories, and seat and steering wheel covers;
•
Chemicals, including antifreeze, brake and power steering fluid, freon, fuel additives, windshield washer fluid and car washes and waxes;
•
Oil, transmission fluid and other automotive petroleum products; and
•
Other miscellaneous offerings, including certain eServices.

The product in our stores is generally arranged in a uniform and consistent manner based on standard store formats and merchandise presentation. The parts inventory is generally located on shelves behind the customer service counter with the remaining product, or front room merchandise, arranged on the sales floor to provide easy customer access, maximum selling space and to prominently display high-turnover products and accessories to customers. We utilize aisle displays to feature high-demand or seasonal merchandise, new items and advertised specials, including bilingual signage based on the demographics in each store's geographic area.



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Except where prohibited, we also provide a variety of services free of charge to our customers including:

•
Battery & wiper installation;
•
Battery charging;
•
Check engine light reading;
•
Electrical system testing, including batteries, starters, alternators and sensors;
•
“How-To” video clinics;
•
Oil and battery recycling; and
•
Loaner tool programs.

Our 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 regional and district management. District Leaders have direct responsibility for store operations in a specific district, which typically consists of 12 stores. Depending on store size and sales volume, each store is staffed by approximately 8 to 16 Team Members, under the leadership of a General Manager. Store Team Members are comprised of full and part-time Team Members. A majority of our stores include at least two parts professionals, or parts pros, who have an extensive technical knowledge of automotive replacement parts and other related applications to better serve our Commercial and DIY customers. Many of our stores include bilingual Team Members to better serve our diverse customer base. We offer training to all of our Team Members, including formal classroom workshops, e-learning and certification by the National Institute for Automotive Service Excellence, or ASE. ASE is broadly recognized for training certification in the automotive industry.

Commercial Sales. Our Commercial sales consist of sales to both our walk-in and delivery customers, which represented approximately 37.2% of our AAP sales in Fiscal 2013. Since 2000, 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 customer's places of business, including independent garages, service stations and auto dealers. Our stores are supported by a Commercial sales team which is dedicated to the development of our national, regional and local Commercial customers. Our Commercial sales management is closely aligned with our store management as part of our overall integrated store operation.

Since 2008, we have concentrated a significant amount of our investments on increasing our Commercial sales at a faster rate in light of the favorable market dynamics. We have added key product brands in our stores that are well recognized by our Commercial customers and have increased the number of parts professionals, delivery trucks and other support services to serve those customers. In 2012, we added eService offerings to our Commercial customers, including online training solutions, fully searchable, diagnostic and repair resources and online marketing services which are available on a subscription basis. We believe these investments and the commitment to consistent delivery times and order accuracy will enable us to gain more Commercial customers as well as increase our sales to existing customers who will use us as their “first call” supplier. As of December 28, 2013, 3,485 AAP stores, or 90.9% of total AAP stores, had Commercial delivery programs.

Store Development. Our store development program has historically focused on adding new stores within existing markets where we can achieve a larger presence, 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.

We open and operate stores in both large, densely populated markets and small, less densely populated areas. We complete substantial research prior to entering a new market. Key factors in selecting new site and market locations include population, demographics, vehicle profile, number and strength of competitors' stores and the cost of real estate.



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Our 3,832 AAP stores were located in the following states and territories as of December 28, 2013:

Location
 
Number of
Stores
 
Location
 
Number of
Stores
 
Location
 
Number of
Stores
Alabama
 
122

 
Maryland
 
90

 
Pennsylvania
 
210

Arkansas
 
28

 
Massachusetts
 
96

 
Puerto Rico
 
25

Colorado
 
58

 
Michigan
 
119

 
Rhode Island
 
22

Connecticut
 
59

 
Minnesota
 
19

 
South Carolina
 
137

Delaware
 
13

 
Mississippi
 
57

 
South Dakota
 
7

Florida
 
479

 
Missouri
 
48

 
Tennessee
 
141

Georgia
 
246

 
Nebraska
 
24

 
Texas
 
179

Illinois
 
127

 
New Hampshire
 
22

 
Vermont
 
18

Indiana
 
110

 
New Jersey
 
95

 
Virgin Islands
 
1

Iowa
 
28

 
New Mexico
 
1

 
Virginia
 
192

Kansas
 
28

 
New York
 
194

 
West Virginia
 
73

Kentucky
 
104

 
North Carolina
 
256

 
Wisconsin
 
64

Louisiana
 
62

 
Ohio
 
227

 
Wyoming
 
4

Maine
 
16

 
Oklahoma
 
31

 
 
 
 

The following table sets forth information concerning increases in the total number of our AAP stores during the past five years:
 
2013
 
2012
 
2011
 
2010
 
2009
Beginning Stores
3,576

 
3,460

 
3,369

 
3,264

 
3,243

New Stores (1)
284

(2) 
116

 
95

 
110

 
75

Stores Closed
(28
)
(3) 
—

 
(4
)
 
(5
)
 
(54
)
Ending Stores
3,832

 
3,576

 
3,460

 
3,369

 
3,264


(1) 
Does not include stores that opened as relocations of previously existing stores within the same general market area or substantial renovations of stores.
(2) 
Includes 124 stores resulting from our acquisition of B.W.P. Distributors, Inc. ("BWP") on December 31, 2012.
(3) 
The number of store closures in 2013 includes the planned consolidations of 20 BWP stores.

Store Technology. Our store-based information systems are comprised of a proprietary and integrated Point of Sale, electronic parts catalog, or EPC, and store-level inventory management system (collectively “store system”). Information maintained by our store system is used to formulate pricing, marketing and merchandising strategies and to replenish inventory accurately and rapidly. Our fully integrated system enables our store Team Members to assist our customers in their parts selection and ordering based on the year, make, model and engine type of their vehicles. Our store system provides real-time inventory tracking at the store level allowing store Team Members to 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. If a hard-to-find part or accessory is not available at one of our stores, the store system can determine whether the part is carried and in-stock through our HUB or PDQ® networks or can be ordered directly from one of our vendors. Available parts and accessories are then ordered electronically from another store, HUB, PDQ® or directly from the vendor with immediate confirmation of price, availability and estimated delivery time.

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. We also support our store operations with additional proprietary systems and customer driven labor scheduling capabilities. 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. In Fiscal 2013, we began rolling out a new and enhanced EPC to a limited number of stores which is expected to simplify and improve the customer experience. Among the improvements is a more efficient way to systematically identify add-on sales to ensure our customers have what they need to complete their automotive repair project.



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Store Support Center

Merchandising. Purchasing for virtually all of the merchandise for our stores is handled by our merchandise teams located in three primary locations:

•
Store support center in Roanoke, Virginia;
•
Regional office in Minneapolis, Minnesota; and
•
Global sourcing office in Taipei, Taiwan.

Our Roanoke team is primarily responsible for the parts categories and our Minnesota team is primarily responsible for accessories, oil and chemicals. Our global sourcing team works closely with both teams.

In Fiscal 2013, we purchased merchandise from approximately 490 vendors, with no single vendor accounting for more than 9% of purchases. Our purchasing strategy involves negotiating agreements with most of our vendors to purchase merchandise over a specified period of time along with other terms, including pricing, payment terms and volume.

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 where we manage the mix of our product offerings to meet customer demand. We believe this process, which develops a customer-focused business plan for each merchandise category, and our global sourcing operation are critical to improving comparable store sales, gross margin and inventory productivity.

Our merchandising strategy is to carry a broad selection of high quality and reputable brand name automotive parts and accessories which we believe will generate DIY customer traffic and also appeal to our Commercial customers. Some of these brands include Bosch®, Castrol®, Dayco®, Moog®, Monroe®, Prestone®, Purolator®, Trico® and Wagner®. In addition to these branded products, we stock a wide selection of high quality private label products that appeal to value-conscious customers. These lines of merchandise include chemicals, interior automotive accessories, batteries and parts under various private label names such as Autocraft®, Driveworks®, Tough One® and Wearever®.

Supply Chain. Our supply chain consists of centralized inventory management and transportation functions which support a supply chain network of distribution centers, PDQ® warehouses, HUBs and stores. Our inventory management team utilizes a replenishment system to monitor the distribution center, PDQ® warehouse, HUB 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 weather patterns) 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. The vast majority of our purchase orders are sent to our merchandise vendors via electronic data interchange.

We operate nine AAP distribution centers. All of these distribution centers are equipped with a warehouse management system, or WMS, which provides real-time inventory tracking through the processes of receiving, picking, shipping and replenishing inventory at our distribution centers. The WMS, integrated with material handling equipment, 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. We opened our newest distribution center in Remington, Indiana in late 2012. It incorporates our more advanced warehouse management system which has enabled us to roll out daily replenishment to many of the stores serviced by Remington. We have ongoing supply chain initiatives to further increase the efficient utilization of our distribution capacity including planning for the roll-out of the advanced technology used at the Remington facility to other facilities in our supply chain network.

Store inventories are replenished from our nine distribution centers. We utilize reputable dedicated carriers to ship product from our distribution centers to our stores. In addition to a store's normal inventory assortment, our stock PDQ® warehouses (nine of which are included in our distribution centers) offer approximately 93,000 SKUs to support all of our retail stores. Stores have visibility, through our EPC system, to inventory in their respective PDQ® warehouses and distribution centers as well as facilities throughout the Company and can place orders to these facilities through an online ordering system. 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.
 
Marketing & Advertising. Our marketing and advertising program is designed to drive brand awareness and store traffic by positioning the Advance Auto Parts brand as the service leader in the aftermarket auto parts category. We strive to exceed our customers' expectations through our value-added services, extensive parts assortment and quality merchandise.


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The ‘Service is our best part®’ campaign was developed based on extensive research with our customers and Team Members. It has become the Company’s promise which has been embraced by each of our 71,867 Team Members. The campaign targets core DIY and Commercial customers and emphasizes our commitment to provide market-leading service to our customers. The campaign is built around a multi-channel communications plan which brings together radio, outdoor, direct marketing and digital media. The plan is supported by in-store and event signage as well as mobile and social media.

A final component of our marketing plan is event marketing. Previously, Advance was the title sponsor of the Advance Auto Parts Monster Jam, a live family-oriented monster truck event tour. Our sponsorship programs have shifted to local, grass-roots level events intended to positively impact the individual communities we serve, including Latino and other ethnic communities, and to drive awareness and repeated store visits.
 
AI Segment

AI’s business primarily serves the Commercial market, with an emphasis on parts for imported cars, from its store locations located primarily throughout the Northeastern, Mid-Atlantic and Southeastern regions of the United States. 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 premium parts, expert 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 30,000 SKUs through routine replenishment from its supply chain with access to over 200,000 SKUs through local sourcing networks.

AI has significantly increased its store count since our acquisition of AI in September 2005. As of December 28, 2013, we operated 217 stores under the “Autopart International” trade name in the following states:
Location
 
Number of
Stores
 
Location
 
Number of
Stores
 
Location
 
Number of
Stores
Alabama
 
1

 
Maine
 
4

 
New York
 
33

Connecticut
 
16

 
Maryland
 
11

 
Ohio
 
5

Delaware
 
1

 
Massachusetts
 
31

 
Pennsylvania
 
22

DC
 
1

 
North Carolina
 
5

 
Rhode Island
 
4

Florida
 
40

 
New Hampshire
 
8

 
South Carolina
 
2

Georgia
 
6

 
New Jersey
 
18

 
Virginia
 
9


The following table sets forth information concerning increases in the total number of our AI stores:
 
2013
 
2012
 
2011
 
2010
 
2009
Beginning Stores
218

 
202

 
194

 
156

 
125

New Stores
12

 
21

 
9

 
38

 
32

Stores Closed
(13
)
 
(5
)
 
(1
)
 
—

 
(1
)
Ending Stores
217

 
218

 
202

 
194

 
156


Seasonality

Our business is somewhat seasonal in nature, with the highest sales usually 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

As of February 20, 2014, we employed 41,238 full-time Team Members and approximately 30,629 part-time Team Members. Our workforce consisted of 87% of our Team Members employed in store-level operations, 9% employed in distribution and 4% employed in our corporate offices. Our team member counts reflect the GPI acquisition. As of February 20, 2014, less than 1% of our Team Members were represented by labor unions. We have never experienced any labor disruption. We believe that our Team Member relations are solid.


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Intellectual Property

We own a number of trade names and own and have federally registered several service marks and trademarks, including “Advance Auto Parts”, “Autopart International”, “DriverSide”, “MotoLogic” and “Service is our best part”, for use in connection with the automotive parts retailing business. In addition, we own and have registered a number of trademarks for our private label brands. 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, (iv) independent operators, (v) automobile dealers that supply parts and (vi) internet-based parts providers. 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 customer service, product offerings, availability, quality, price and store location.

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 collection, transportation and recycling of automotive lead-acid batteries, used automotive oil and other recyclable items, 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, used automotive oil or other recyclable items onto our properties. We currently provide collection and recycling programs for used lead-acid batteries, used oil and other recyclable items at substantially all of our stores as a service to our customers. Pursuant to agreements with third party vendors, lead-acid batteries, used oil and other recyclable items 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. Our third party vendors 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, used oil and other recyclable items as these costs are borne by the respective third party vendors.

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 and clean up of released hazardous substances have not had a material impact on our operations to date.




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Item 1A. Risk Factors.

Our business is subject to a variety of risks, both known and unknown. Our business, financial condition, results of operations and cash flows could be negatively impacted by the following risk factors. These risks are not the only risks that may impact 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 number and average age of vehicles being driven, because the majority of vehicles that are seven years old and older are generally no longer covered under the manufacturers' warranties and tend to need maintenance and repair. If the number and average age of vehicles being driven were to decrease it would negatively impact demand for our products;
•
the economy, because during periods of declining economic conditions, 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, because milder weather conditions may lower the failure rates of automobile parts while extended periods of rain and winter precipitation may cause our customers to defer elective maintenance and repair of their vehicles;
•
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, which may be affected by gas prices and other factors, decreases the need for maintenance and repair (while higher miles driven increases the need);
•
technological advances and the increase in quality of vehicles manufactured, because vehicles that need less frequent maintenance and have low part failure rates will require less frequent repairs using aftermarket parts;
•
our vendors, because if any of our key vendors do not supply us with products on terms that are favorable to us or fail to develop new products we may not be able to meet the demands of our customers and our results of operations could be negatively affected;
•
our reputation and our brands, because our reputation is critical to our continued success. If we fail to maintain high standards for, or receive negative publicity whether through social media or normal media channels relating to, product safety, quality or integrity, it could reduce demand for our products. The product we sell is branded both in brands of our vendors and in our own private label brands. If the perceived quality or value of the brands we sell declines in the eyes of our customers, our results of operations could be negatively affected; 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, because this may force consumers to have a majority of 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 could be negatively impacted.

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 automotive parts chains, (ii) discount stores and mass merchandisers that carry automotive products, (iii) wholesalers or jobber stores, (iv) independent operators, (v) automobile dealers that supply parts and (vi) internet-based parts providers. 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, more lucrative store locations, better store layouts, longer operating histories, greater name recognition, larger and more established customer bases, more favorable vendor relationships, 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 our 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


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current operating strategies. If we do not have the resources, expertise, consistent execution 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.

We may not be able to successfully integrate GPI’s operations with ours; the GPI business may not achieve the expected business results and could cause us to incur unexpected liabilities; the GPI acquisition has caused and may continue to cause us to incur significant transaction and integration costs; our level of indebtedness could limit the cash flow available for operations and could adversely affect our ability to service our debt or obtain additional financing; and we may not be able to retain key GPI personnel.

Integration Issues and Business Expectations

We cannot be certain whether, and to what extent, any strategic, operational, financial or other anticipated benefits resulting from the acquisition of GPI will be achieved. In order to obtain the anticipated benefits of the transaction, we must integrate GPI’s operations with ours. This integration may be complex and failure to do so quickly and effectively may negatively affect our earnings. The market price of our common stock may decline as a result of the acquisition if our integration of GPI is unsuccessful, takes longer than expected or fails to achieve financial benefits to the extent anticipated by financial analysts or investors, or the effect of the acquisition on our financial results is otherwise not consistent with the expectations of financial analysts or investors.

The acquisition of GPI could cause disruptions in and create uncertainty surrounding GPI’s and our businesses, including affecting GPI’s and our relationships with existing and future customers, wholesalers, independently-owned and jobber stores, suppliers and employees, which could have an adverse effect on GPI’s and our business, financial results and operations. In particular, GPI and Advance could lose customers or suppliers, and new customer or supplier contracts could be delayed or decreased or otherwise adversely affected in economic value. In addition, we have diverted, and will continue to divert, significant management resources towards the integration efforts, which could adversely affect our business and results of operations.

In connection with our acquisition of GPI, we assumed all of the liabilities of GPI, including any actual or contingent liabilities to which GPI is or may become subject. GPI may be or may become subject to loss contingencies, known or unknown, which could relate to past, present, or future facts, events, circumstances and occurrences. Although the agreement pursuant to which we acquired GPI provides us with certain indemnification provisions, potential costs relating to any such liabilities could exceed the amount of any such indemnification.

Additional Transaction and Integration Costs

In connection with the GPI acquisition, we have incurred significant one-time transaction costs and entered into new financing agreements and issued new debt instruments. We expect to incur additional transaction and integration costs in connection with the acquisition. Although efficiencies related to the integration of the businesses may allow us to offset incremental transaction and integration costs over time, this net benefit may not be achieved in the near term, or at all.

Level of Indebtedness

In connection with our acquisition of GPI our level of indebtedness increased significantly. Our indebtedness could restrict our operations and make it more difficult for us to satisfy our debt obligations. For example, our level of indebtedness could, among other things:

•
affect our liquidity by limiting our ability to obtain additional financing for working capital, or limit our ability to obtain financing for capital expenditures and acquisitions or make any available financing more costly;
•
require us to dedicate all or a substantial portion of our cash flow to service our debt, which would reduce funds available for other business purposes, such as capital expenditures, dividends or acquisitions;
•
limit our flexibility in planning for or reacting to changes in the markets in which we compete;
•
place us at a competitive disadvantage relative to our competitors who may have less indebtedness;
•
render us more vulnerable to general adverse economic and industry conditions; and
•
make it more difficult for us to satisfy our financial obligations, including those relating to the notes associated with the acquisition of GPI.



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In addition, the indenture governing the notes related to the GPI acquisition and the credit agreement governing the new credit facilities contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt, including such notes.

Retention of Key GPI Personnel

The success of the integration with GPI will depend in part on the ability to retain key GPI employees who are expected to continue employment with the combined company. If any of these employees decide not to remain with the combined company, it is possible we may be unable to locate suitable replacements for such key employees or to secure employment of suitable replacements on reasonable terms. In addition, if key employees terminate their employment, management’s attention might be diverted from successfully integrating GPI’s operations to hiring suitable replacements and the combined company's business might suffer.
    
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, cash flows and liquidity.

We have implemented numerous initiatives as part of our business strategy 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, cash flows and liquidity could be adversely affected.

Successful implementation of our business strategy also depends on factors specific to the automotive aftermarket industry and numerous other factors that may be beyond our control. In addition to the aforementioned risk factors, adverse changes in the following factors could undermine our business strategy and have a material adverse effect on our business, financial condition, results of operations and cash flow:

•
the competitive environment in the automotive aftermarket retail sector that may force us to reduce prices below our desired pricing level or increase promotional spending;
•
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 maintain and eventually grow DIY market share; and
•
our ability to continue our Commercial sales growth.

For that portion of our inventory manufactured and/or sourced outside the United States, geopolitical changes, changes in trade regulations, currency fluctuations, shipping related issues, natural disasters, pandemics and other factors beyond our control may increase the cost of items we purchase or create shortages which could have a material adverse effect on our sales and profitability.

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 continued increase in supply chain capacity and efficiency, which could adversely affect our business, financial condition, results of operations and cash flows.

New Store Openings

We have increased our store count significantly in the last ten years from 2,539 stores at the end of our 2003 fiscal year to 4,049 stores as of December 28, 2013. 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. As we open more stores it becomes more critical that we have consistent execution across our entire store chain. The actual number of new stores to be opened and their success will depend on a number of factors, including, among other things:

•the availability of desirable 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 to hire, train and retain qualified sales associates.



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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.

Supply Chain

Our store inventories are primarily replenished by shipments from our network of distribution centers, PDQ® warehouses and HUB stores. As we service our growing store base, we will need to increase the capacity of our supply chain network in order to provide the added parts availability under our Superior Availability strategy while maintaining productivity and profitability expectations. We cannot be assured of the availability of potential locations on lease or purchase terms that would be acceptable to us, of our ability to integrate those new locations into our existing supply chain network or of our ability to increase the productivity and efficiency of our overall supply chain network to desired levels.

We are dependent on our suppliers to supply us with products that comply with safety and quality standards.

If our merchandise offerings do not meet our customers’ expectations regarding safety and quality, we could experience lost sales, increased costs and exposure to legal and reputational risk. All of our suppliers must comply with applicable product safety laws, and we are dependent on them to ensure that the products we buy comply with all safety and quality standards. Events that give rise to actual, potential or perceived product safety concerns could expose us to government enforcement action and/or private litigation and result in costly product recalls and other liabilities. To the extent our suppliers are subject to added government regulation of their product design and/or manufacturing processes, the cost of the merchandise we purchase may rise. In addition, negative customer perceptions regarding the safety or quality of the products we sell could cause our customers to seek alternative sources for their needs, resulting in lost sales. In those circumstances, it may be difficult and costly for us to regain the confidence of our customers.

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. As of February 20, 2014, we employed 71,867 Team Members. We may not be able to retain our current qualified Team Members or attract and retain additional qualified Team Members who 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.

The market price of our common stock may be volatile and could expose us to securities class action litigation.

The stock market and the price of our common stock may be subject to wide fluctuations based upon general economic and market conditions. Downturns in the stock market may cause the price of our common stock to decline. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against such companies. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources, which could have an adverse effect on our business.

Deterioration in global credit markets and changes in our credit ratings and deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, and higher tax rates could have a negative impact on our business, financial condition, results of operations and cash flows.

Deterioration in general macro-economic conditions impacts us through (i) potential adverse effects from deteriorating and uncertain credit markets (ii) the negative impact on our suppliers and customers and (iii) an increase in operating costs from higher energy prices.

Impact of Credit Market Uncertainty and Changes in Credit Ratings

Significant deterioration in the financial condition of large financial institutions in 2008 and 2009 resulted in a severe loss of liquidity and available credit in global credit markets and in more stringent borrowing terms. We can provide no assurance that the credit market events during 2008 and 2009 will not occur again in the foreseeable future. Conditions and events in the global credit market could have a material adverse effect on our access to short and long-term borrowings to finance our operations and the terms and cost of that debt. It is possible that one or more of the banks that provide us with financing under


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our revolving credit facility may fail to honor the terms of our existing credit facility or be financially unable to provide the unused credit.

Our overall credit rating may be negatively impacted by deteriorating and uncertain credit markets or other factors which may or may not be within our control. The interest rates on our publicly issued debt, term loan and revolving credit facility 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 on any borrowings under our revolving credit facility, term loan or from future issuances of public debt and less favorable terms on other operating and financing arrangements. In addition, it could reduce the attractiveness of our vendor payment program, where certain of our vendors finance payment obligations from us with designated third party financial institutions, which could result in increased working capital requirements. An inability to obtain sufficient financing at cost-effective rates could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Impact on our Suppliers

Our business depends on developing and maintaining close relationships with our suppliers and on our suppliers’ ability and/or willingness to sell quality products to us at favorable prices and terms. Many factors outside our control may harm these relationships and the ability or willingness of these suppliers to sell us products on favorable terms. One such factor is a general decline in the economy and economic conditions and prolonged recessionary conditions. These events could negatively affect our suppliers’ operations and make it difficult for them to obtain the credit lines or loans necessary to finance their operations in the short-term or long-term and meet our product requirements. Financial or operational difficulties that some of our suppliers may face could also increase the cost of the products we purchase from them or our ability to source product from them. We might not be able to pass our increased costs onto our customers. 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 suppliers, and could lead to less competition and result in higher prices. We could also be negatively impacted by suppliers who might experience bankruptcies, work stoppages, labor strikes or other interruptions to or difficulties in the manufacture or supply of the products we purchase from them.

Impact on our Customers

Deterioration in macro-economic conditions may have a negative impact on our customers’ net worth, financial resources and disposable income. While macro-economic conditions have improved since 2008 and 2009, unemployment rates have remained at relatively high levels, consumer confidence continues to fluctuate, payroll taxes increased for most U.S. workers as a result of the changes in tax legislation effective for 2013 and many consumers are now facing increased healthcare costs as a result of the recently enacted Affordable Care Act. This impact could reduce our customers' willingness or ability to pay for accessories, maintenance or repair of their vehicles, which results in lower sales in our stores. Higher fuel costs may also reduce the overall number of miles driven by our customers resulting in fewer parts failures and elective maintenance required to be completed.

Impact on Operating Costs

Rising energy prices could directly impact our operating and product costs, including our merchandise distribution, commercial delivery, utility and product acquisition costs.

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, Team Members or others 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 law matters, 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 effect on our business, financial condition, results of operations and cash flows.

We are subject to numerous federal, state and local laws and governmental regulations relating to, among other things, environmental protection, product quality standards, building and zoning requirements, and employment law matters. The implementation of and compliance with existing and future laws and regulations could increase the cost of doing business and


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adversely affect our results of operations. 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 and operating 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.

We work diligently to maintain the privacy and security of our customer and business information and the functioning of our computer systems, website and other on-line offerings. In the event of a security breach or other cyber security incident, we could experience certain operational problems or interruptions, incur substantial additional costs, or become subject to legal or regulatory proceedings, any of which could lead to damage to our reputation in the marketplace.

The nature of our business requires us to receive, retain and transmit certain personally identifiable information that our customers provide to purchase products or services, register on our websites, or otherwise communicate and interact with us.  While we have taken and continue to undertake significant steps to protect our customer and confidential information and the functioning of our computer systems, website and other online offerings, a compromise of our data security systems or those of businesses we interact with could result in information related to our customers or business being obtained by unauthorized persons or other operational problems or interruptions. We develop and update processes and maintain systems in an effort to try to prevent this from occurring, but the development and maintenance of these processes and systems are costly and requires ongoing monitoring and updating as technologies change, privacy and information security regulations change, and efforts to overcome security measures become more sophisticated.

Consequently, despite our efforts, our security measures have been breached in the past and may be breached in the future due to cyber attack, team member error, malfeasance, fraudulent inducement or other acts; and unauthorized parties have in the past obtained, and may in the future, obtain access to our data or our customers’ data. While costs associated with past security breaches have not been significant, any breach or unauthorized access in the future could result in significant legal and financial exposure and damage to our reputation that could potentially have an adverse effect on our business. While we also seek to obtain assurances that others we interact with will protect confidential information, there is a risk the confidentiality of data held or accessed by others may be compromised. If a compromise of our data security or function of our computer systems or website were to occur, it could have a material adverse effect on our operating results and financial condition and, possibly, subject us to additional legal, regulatory and operating costs and damage our reputation in the marketplace.

Business interruptions may negatively impact our store hours, operability of our computer systems and the availability and cost of merchandise which may adversely impact our sales and profitability.

War or acts of terrorism, hurricanes, tornadoes, earthquakes or other natural disasters, or the threat of any of these calamities or others, may have a negative impact on our ability to obtain merchandise to sell in our stores, result in certain of our stores being closed for an extended period of time, negatively affect the lives of our customers or Team Members, or otherwise negatively impact our operations. 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 receiving merchandise from our suppliers and shipping it to our stores.

Terrorist attacks, war in the Middle East, or insurrection involving any oil producing country would likely result in an abrupt increase in the price of crude oil, gasoline, diesel fuel and other types of energy. 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.

We rely extensively on our computer systems and the systems of our business partners to manage inventory, process transactions and report results. Any such systems are subject to damage or interruption from power outages, telecommunication failures, computer viruses, security breaches and catastrophic events. If our computer systems or those of our business partners fail we may experience loss of critical data and interruptions or delays in our ability to process transactions and manage inventory. Any such loss, if widespread or extended, could adversely affect the operation of our business and our results of operations.



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We may be affected by global climate change or by legal, regulatory, or market responses to such change.

The growing political and scientific sentiment is that global weather patterns are being influenced by increased levels of greenhouse gases in the earth’s atmosphere. This growing sentiment and the concern over climate change have led to legislative and regulatory initiatives aimed at reducing greenhouse gas emissions. For example, proposals that would impose mandatory requirements on greenhouse gas emissions continue to be considered by policy makers in the United States. Laws enacted that directly or indirectly affect our suppliers (through an increase in the cost of production or their ability to produce satisfactory products) or our business (through an impact on our inventory availability, cost of sales, operations or demand for the products we sell) could adversely affect our business, financial condition, results of operations and cash flows. Significant increases in fuel economy requirements or new federal or state restrictions on emissions of carbon dioxide that may be imposed on vehicles and automobile fuels could adversely affect demand for vehicles, annual miles driven or the products we sell or lead to changes in automotive technology. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by us or our suppliers. Our inability to respond to changes in automotive technology could adversely impact the demand for our products and our business, financial condition, results of operations or cash flows.

Item 1B. Unresolved Staff Comments.

None.



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Item 2. Properties.

The following table sets forth certain information relating to our distribution and other principal facilities:
Facility(1)
 
Opening
Date
 
Area Served
 
Size
(Sq ft.)(2)
 
Nature of
Occupancy
 
 
 
 
 
 
 
 
 
Main Distribution Centers:
 
 
 
 
 
 
 
 
Gastonia, North Carolina
 
1969
 
North Carolina, South Carolina
 
634,472

 
Owned
Salina, Kansas
 
1971
 
West, Midwest
 
413,500

 
Owned
Delaware, Ohio
 
1972
 
Midwest
 
480,100

 
Owned
Lakeland, Florida
 
1982
 
South, Offshore
 
552,796

 
Owned
Roanoke, Virginia
 
1988
 
Mid-Atlantic
 
433,681

 
Leased
Gallman, Mississippi
 
1999
 
Southwest, Midwest
 
388,168

 
Owned
Thomson, Georgia
 
1999
 
Southeast
 
374,400

 
Owned
Lehigh, Pennsylvania
 
2005
 
Northeast
 
655,991

 
Owned
Norton, Massachusetts
 
2006
 
All AI Stores
 
317,500

 
Leased
Remington, Indiana
 
2012
 
Midwest
 
542,064

 
Owned
 
 
 
 
 
 
 
 
 
PDQ® Warehouses:
 
 
 
 
 
 
 
 
Altamonte Springs, Florida
 
1996
 
Central and Northeast Florida
 
10,000

 
Owned
Jacksonville, Florida
 
1997
 
Southeastern Georgia
 
12,712

 
Owned
Tampa, Florida
 
1997
 
West Central Florida
 
10,000

 
Owned
Hialeah, Florida
 
1997
 
South Florida
 
12,500

 
Owned
Andersonville, Tennessee
 
1998
 
All
 
113,300

 
Leased
Youngwood, Pennsylvania
 
1998
 
East
 
48,320

 
Leased
Mobile, Alabama
 
1998
 
Florida Panhandle
 
10,000

 
Owned
Riverside, Missouri
 
1999
 
West
 
43,912

 
Leased
Atlanta, Georgia
 
1999
 
Georgia
 
16,786

 
Leased
Tallahassee, Florida
 
1999
 
Northwest Florida
 
10,000

 
Owned
Fort Myers, Florida
 
1999
 
Southwest Florida
 
14,330

 
Owned
Chicago, Illinois
 
2009
 
Mid-West
 
42,600

 
Leased
Rochester, New York
 
2009
 
Northeast
 
40,000

 
Leased
Leicester, Massachusetts
 
2009
 
Northeast
 
34,200

 
Leased
Washington, DC
 
2009
 
East
 
33,124

 
Leased
Houston, Texas
 
2009
 
Southwest
 
36,340

 
Leased
Denver, Colorado
 
2009
 
West
 
25,400

 
Leased
West Deptford, New Jersey
 
2009
 
East
 
33,029

 
Leased
Durham, North Carolina
 
2010
 
East
 
41,652

 
Leased
 
 
 
 
 
 
 
 
 
Corporate/Administrative Offices:
 
 
 
 
 
 
 
 
Roanoke, Virginia
 
2002
 
All
 
270,247

 
Leased
Norton, Massachusetts
 
2006
 
AI corporate office
 
30,000

 
Leased
Minneapolis, Minnesota
 
2008
 
All
 
51,674

 
Leased
(1) 
Excluded from our list of principal facilities are two distribution centers operated by BWP. These two distribution centers are expected to remain in operation during our integration of the BWP stores.
(2) 
Square footage amounts reported for the distribution centers exclude adjacent office space.





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As of December 28, 2013, we owned 792 of our stores and leased 3,257 stores. The expiration dates, including the exercise of renewal options, of the store leases are summarized as follows:

Years
 
AAP Stores
 
AI Stores
 
Total
2014
 
37

 
44

 
81

2015-2019
 
297

 
165

 
462

2020-2024
 
535

 
8

 
543

2025-2034
 
1,006

 
—

 
1,006

2035-2044
 
1,102

 
—

 
1,102

2045-2069
 
63

 
—

 
63

 
 
3,040

 
217

 
3,257


Item 3. 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 Team Members. 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 the Company and 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 their material suppliers 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. The products in the lawsuits naming us or our subsidiaries as defendants have primarily included brake parts. The pending cases against us and our subsidiaries are in various 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 the Company and our shareholders. We also believe that many 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 cash flows. Historically, our asbestos claims have been inconsistent in type and number and have been immaterial. As a result, we are unable to estimate a possible range of loss with respect to unasserted asbestos claims that may be filed against the Company in the future. 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 cash flows in future periods.

Item 4. Mine Safety Disclosures.

Not applicable.



18
Table of Contents

PART II

Item 5.
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 the high and low sale prices per share for our common stock, as reported by the NYSE, for the fiscal periods indicated.

 
 
High
 
Low
Fiscal Year Ended December 28, 2013
 
 
 
 
Fourth Quarter
 
$
111.94

 
$
80.28

Third Quarter
 
$
84.93

 
$
78.91

Second Quarter
 
$
88.74

 
$
78.75

First Quarter
 
$
83.52

 
$
71.30

 
 
 
 
 
Fiscal Year Ended December 29, 2012
 
 
 
 
Fourth Quarter
 
$
84.00

 
$
64.36

Third Quarter
 
$
74.39

 
$
66.31

Second Quarter
 
$
93.08

 
$
60.87

First Quarter
 
$
91.60

 
$
68.79


The closing price of our common stock on February 20, 2014 was $127.56. At February 20, 2014, there were 1,787 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).

Our Board of Directors has declared a $0.06 per share quarterly cash dividend since 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, cash flows, capital requirements and other factors deemed relevant by our Board of Directors.

The following table sets forth information with respect to repurchases of our common stock for the fourth quarter ended December 28, 2013 (amounts in thousands, except per share amounts):
Period
 
Total Number
of Shares
Purchased (1)
 
Average
Price Paid
per Share (1)
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (2)
 
Maximum Dollar
Value that May Yet
Be Purchased
Under the Plans or
Programs (2)
October 6, 2013 to November 2, 2013
 
—

 
$
—

 
—

 
$
415,092

November 3, 2013 to November 30, 2013
 
—

 
—

 
—

 
415,092

December 1, 2013 to December 28, 2013
 
21

 
103.35

 
—

 
415,092

 
 
 
 
 
 
 
 
 
Total
 
21

 
$
103.35

 
—

 
$
415,092

 
(1) 
We repurchased 21,000 shares of our common stock at an aggregate cost of $2.2 million, or an average purchase price of $103.35 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock during the fourth quarter ended December 28, 2013. We did not repurchase any shares under our $500.0 million stock repurchase program during our fourth quarter ended December 28, 2013.
(2) 
Our stock repurchase program authorizing the repurchase of up to $500.0 million in common stock was authorized by our Board of Directors and publicly announced on May 14, 2012.



19
Table of Contents

Stock Price Performance

The following graph shows a comparison of the cumulative total return on our common stock, the Standard & Poor’s 500 Index and the Standard & Poor’s 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, 2009, 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.

COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
ADVANCE AUTO PARTS, INC., S&P 500 INDEX
AND S&P RETAIL INDEX
   
Company/Index
 
January 3, 2009
 
January 2, 2010
 
January 1, 2011
 
December 31, 2011
 
December 29, 2012
 
December 28, 2013
Advance Auto Parts
 
$
100.00

 
$
119.28

 
$
195.80

 
$
206.86

 
$
213.14

 
$
327.63

S&P 500 Index
 
100.00

 
119.67

 
134.97

 
134.96

 
150.51

 
197.62

S&P Retail Index
 
100.00

 
141.28

 
174.70

 
179.79

 
219.77

 
321.02




20
Table of Contents

Item 6.    Selected Consolidated Financial Data.
  
The following table sets forth our selected historical consolidated statement of operations, balance sheet, cash flows 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 (excluding the Selected Store Data and Performance Measures) as of December 28, 2013 and December 29, 2012 and for the three years ended December 28, 2013 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 as of December 31, 2011, January 1, 2011 and January 2, 2010 and for the years ended January 1, 2011 and January 2, 2010 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.
 
 
Fiscal Year (1)
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
(in thousands, except per share data, store data and ratios)
 
 
 
 
 
 
 
 
 
 
 
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
Net Sales
 
$
6,493,814

 
$
6,205,003

 
$
6,170,462

 
$
5,925,203

 
$
5,412,623

Cost of sales
 
3,241,668

 
3,106,967

 
3,101,172

 
2,963,888

 
2,768,397

Gross Profit
 
3,252,146

 
3,098,036

 
3,069,290

 
2,961,315

 
2,644,226

Selling, general and administrative expenses (2)
 
2,591,828

 
2,440,721

 
2,404,648

 
2,376,382

 
2,189,841

Operating income
 
660,318

 
657,315

 
664,642

 
584,933

 
454,385

Interest expense (3)
 
(36,618
)
 
(33,841
)
 
(30,949
)
 
(26,861
)
 
(23,337
)
Other income (expense), net
 
2,698

 
600

 
(457
)
 
(1,017
)
 
607

Income before provision for income taxes
 
626,398

 
624,074

 
633,236

 
557,055

 
431,655

Income tax expense
 
234,640

 
236,404

 
238,554

 
211,002

 
161,282

Net income
 
$
391,758

 
$
387,670

 
$
394,682

 
$
346,053

 
$
270,373

 
 
 
 
 
 
 
 
 
 
 
Per Share Data:
 
 
 
 
 
 
 
 
 
 
Net income per basic share
 
$
5.36

 
$
5.29

 
$
5.21

 
$
4.00

 
$
2.85

Net income per diluted share
 
5.32

 
5.22

 
5.11

 
3.95

 
2.83

Cash dividends declared per basic share
 
0.24

 
0.24

 
0.24

 
0.24

 
0.24

Weighted average basic shares outstanding
 
72,930

 
73,091

 
75,620

 
86,082

 
94,459

Weighted average diluted shares outstanding
 
73,414

 
74,062

 
77,071

 
87,155

 
95,113

 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by (used in):
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
545,250

 
$
685,281

 
$
828,849

 
$
666,159

 
$
699,690

Investing activities
 
(362,107
)
 
(272,978
)
 
(289,974
)
 
(199,350
)
 
(185,539
)
Financing activities
 
331,217

 
127,907

 
(540,183
)
 
(507,618
)
 
(451,491
)
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet and Other Financial Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,112,471

 
$
598,111

 
$
57,901

 
$
59,209

 
$
100,018

Inventory
 
2,556,557

 
2,308,609

 
2,043,158

 
1,863,870

 
1,631,867

Inventory turnover (4)
 
1.33

 
1.43

 
1.59

 
1.70

 
1.70

Inventory per store (5)
 
631

 
609

 
558

 
523

 
477

Accounts payable to Inventory ratio (6)
 
85.3
%
 
87.9
%
 
80.9
%
 
71.0
%
 
61.2
%
Net working capital (7)
 
$
1,224,599

 
$
624,562

 
$
105,945

 
$
276,222

 
$
421,591

Capital expenditures
 
195,757

 
271,182

 
268,129

 
199,585

 
192,934

Total assets
 
5,564,774

 
4,613,814

 
3,655,754

 
3,354,217

 
3,072,963

Total debt
 
1,053,584

 
605,088

 
415,984

 
301,824

 
204,271

Total net debt (8)
 
(58,887
)
 
6,977

 
358,083

 
252,171

 
113,781

Total stockholders' equity
 
1,516,205

 
1,210,694

 
847,914

 
1,039,374

 
1,282,365



21
Table of Contents

 
 
Fiscal Year (1)
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
(in thousands, except per share data, store data and ratios)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selected Store Data and Performance Measures:
 
 
 
 
 
 
 
 
 
 
Comparable store sales growth (9)
 
(1.5
%)
 
(0.8
%)
 
2.2
%
 
8.0
%
 
5.3
%
Number of stores at beginning of year
 
3,794

 
3,662

 
3,563

 
3,420

 
3,368

New stores
 
296

 
137

 
104

 
148

 
107

Closed stores
 
(41
)
 
(5
)
 
(5
)
 
(5
)
 
(55
)
Number of stores, end of period
 
4,049

 
3,794

 
3,662

 
3,563

 
3,420

Stores with commercial delivery program, end of period
 
3,702

 
3,484

 
3,326

 
3,212

 
3,024

Total commercial sales, as a percentage of total sales (in 000s)
 
40.4
%
 
38.1
%
 
37.0
%
 
34.2
%
 
32.0
%
Sales per store (in 000s) (10)
 
$
1,656

 
$
1,664

 
$
1,708

 
$
1,697

 
$
1,595

Operating income per store (in 000s) (11)
 
168

 
176

 
184

 
168

 
134

Gross margin return on inventory (12)
 
9.9

 
9.3

 
6.6

 
5.1

 
4.0

Total store square footage, end of period (in 000s)
 
29,701

 
27,806

 
26,663

 
25,950

 
24,973


(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 (the next 53 week fiscal year is 2014).
(2) 
Selling, general and administrative expense includes the impact of acquisition costs associated with our acquisition of GPI on January 2, 2014 of $24,983 for Fiscal 2013 and integration costs associated with our integration of BWP of $8,004 for Fiscal 2013.
(3) 
Interest includes the impact of acquisition costs associated with our acquisition of GPI on January 2, 2014 of $1,987 for Fiscal 2013.
(4) 
Inventory turnover is calculated as cost of sales divided by the average of beginning and ending inventories.
(5) 
Inventory per store is calculated as ending inventory divided by ending store count.
(6) 
Accounts payable to inventory ratio is calculated as ending accounts payable divided by ending inventory. We aggregate financed vendor accounts payable with accounts payable to calculate our accounts payable to inventory ratio.
(7) 
Net working capital is calculated by subtracting current liabilities from current assets.
(8) 
Net debt includes total debt and bank overdrafts, less cash and cash equivalents.
(9) 
Comparable store sales include net sales from our stores and e-commerce website. The change in 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. Acquired stores are included in our comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date (approximately one year).
(10) 
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.
(11) 
Operating income per store is calculated as operating income divided by the average of beginning and ending total store count for the respective period. Operating income per store for Fiscal 2013 was $177 excluding the impact of acquisition costs associated with our acquisition of GPI on January 2, 2014 of $24,983 and integration costs associated with our integration of BWP of $8,004. Operating income per store for Fiscal 2009 was $142 excluding the $26,100 impact of store divestitures.
(12) 
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.


22
Table of Contents

Item 7. 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 the sections entitled “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 (the next 53 week fiscal year is 2014). Our first quarter consists of 16 weeks, and the other three quarters consist of 12 weeks.

Introduction

We are a leading specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States. Our stores carry an extensive product line for cars, vans, sport utility vehicles and light trucks. We serve both DIY and Commercial customers. Our Commercial customers consist primarily of delivery customers for whom we deliver products from our store locations to our Commercial customers’ places of business, including independent garages, service stations and auto dealers. As of December 28, 2013, we operated 4,049 stores throughout 39 states, Puerto Rico and the Virgin Islands.

As of December 28, 2013, we operated 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 Northeastern, Southeastern and Midwestern (inclusive of South Central) regions of the United States, Puerto Rico and the Virgin Islands. These stores operate under the trade name “Advance Auto Parts” except for certain stores in the state of Florida, which operate under the “Advance Discount Auto Parts” trade name. As of December 28, 2013, we operated 3,832 stores in the AAP segment. Our AAP 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. Through our integrated operating approach, we serve our DIY and Commercial customers from our store locations and online at www.AdvanceAutoParts.com. Our online website allows our DIY customers to pick up merchandise at a conveniently located store or have their purchases shipped directly to their home or business. Our Commercial customers can conveniently place their orders online.

As of December 28, 2013, we operated 217 stores in the AI segment under the “Autopart International” trade name. AI’s business serves the Commercial market from its store locations primarily in the Northeastern, Mid-Atlantic and Southeastern regions of the United States.

Management Overview

We generated earnings per diluted share, or diluted EPS, of $5.32 during Fiscal 2013 compared to $5.22 for Fiscal 2012. Negatively impacting our diluted EPS in Fiscal 2013 were $27.0 million of transaction related expenses related to our acquisition of GPI on January 2, 2014 and $8.0 million of expenses associated with our integration of BWP. Excluding these impacts, our operating income accelerated in the second half of our fiscal year primarily due to improving sales and more disciplined cost control. Throughout much of Fiscal 2013, our sales remained constrained in many of our markets in part due to the ongoing uncertainty in the macroeconomic environment and increased competition in our operating area. We believe consumer spending was suppressed as consumers faced higher payroll taxes, the uncertainty regarding the federal government shutdown and the apprehension regarding the impact of health care reform. We believe that our core consumers are performing only the repairs that are absolutely necessary to keep their vehicles on the road which has resulted in a significant level of deferred maintenance. During the fourth quarter of Fiscal 2013, our sales accelerated particularly in some of our colder weather markets, driven by the extraordinary cold weather which has increased the demand for failure and maintenance parts. We continue to generate a significant amount of cash on-hand to invest in capital improvements and initiatives to support our key strategies, Superior Availability and Service Leadership, which are discussed later in the “Business Update.”








23
Table of Contents

Fiscal 2013 Highlights

A high-level summary of our financial results and other highlights from our Fiscal 2013 include:

Financial

•
Total sales during Fiscal 2013 increased 4.7% to $6,493.8 million as compared to Fiscal 2012, primarily driven by the addition of the 124 acquired BWP stores and 151 other net new stores partially offset by a 1.5% decrease in comparable store sales.
•
Our operating income for Fiscal 2013 was $660.3 million, an increase of $3.0 million from the comparable period in Fiscal 2012. As a percentage of total sales, operating income was 10.2%, a decrease of 42 basis points, due to higher SG&A partially offset by a higher gross profit rate. Included in the higher SG&A was $25.0 million of expenses associated with our acquisition of GPI on January 2, 2014 and $8.0 million of expenses associated with our integration of BWP.
•
Our inventory balance as of December 28, 2013 increased $247.9 million, or 10.7%, over the prior year driven primarily by our new store growth, acquisition of BWP and support of inventory availability initiatives.
•
We generated operating cash flow of $545.3 million during Fiscal 2013, a decrease of 20.4% compared to Fiscal 2012, primarily due to an increase in inventory, net of accounts payable.

Other

•
On December 31, 2012, we completed the acquisition of BWP, a leading Commercial provider in the Northeast.
•
In December 2013, we issued $450 million of principal amount of 4.50% senior unsecured notes, due in 2023, and entered into a new credit agreement, in anticipation of our acquisition of GPI.

Subsequent to Fiscal 2013, we completed the acquisition of GPI, a leading privately-held distributor and supplier of original equipment and aftermarket automotive replacement products for commercial markets operating under the Carquest and Worldpac brands.

Refer to the “Results of Operations” and “Liquidity” sections for further details of our income statement and cash flow results, respectively.

Business Update

Our two key strategies are Superior Availability and Service Leadership. Superior Availability is aimed at product availability and maximizing the speed, reliability and efficiency of our supply chain. Service Leadership leverages our product availability in addition to more consistent execution of customer-facing initiatives to strengthen our integrated operating approach of serving our DIY and Commercial customers in our stores and on-line. Through these two key strategies, we believe we can continue to build on the initiatives discussed below and produce favorable financial results over the long term. Sales to Commercial customers remain the biggest opportunity for us to increase our overall market share in the automotive aftermarket industry. Our Commercial sales, as a percentage of total sales, increased to 40.4% in Fiscal 2013 compared to 38.1% in Fiscal 2012. This increase has been more pronounced in Fiscal 2013 due to the contribution of the acquired BWP stores which are more weighted in Commercial sales than our Advance stores.

Our strategic priorities include:

•
Growing our Commercial business through improved delivery speed and reliability, increased customer retention, increased volume with national and regional accounts, and the integrations of BWP and GPI, respectively;
•
Improving localized parts availability through the continued increase in the number of our larger HUB stores, strengthened focus on in-store availability and leveraging the advancement of our supply chain infrastructure beginning with our new Remington distribution center;
•
Accelerating our new store growth rate; and
•
Continuing our focus on store execution through more effective scheduling, increased productivity and simplification, improved product on-hand accuracy, expanded sales training and continued measurement of customer engagement.

Acquisitions

On December 31, 2012, we acquired B.W.P. Distributors, Inc., a privately-held company that supplied, marketed and distributed automotive aftermarket parts and products principally to Commercial customers. Prior to the acquisition, BWP


24
Table of Contents

operated or supplied 216 locations in the Northeastern United States. Concurrent with the closing of the acquisition, we transferred one distribution center and BWP’s rights to distribute to 92 independently owned locations to an affiliate of GPI. We believe this acquisition will enable us to continue our expansion in the competitive Northeast, which is a strategic growth area for us due to the large population and overall size of the market, and to gain valuable information to apply to our existing operations as a result of BWP’s expertise in Commercial. During the second quarter of Fiscal 2013, we began integrating the 124 BWP company-owned stores and two distribution centers into our Advance Auto Parts operations and plan to finish the integration by mid-2014. The integration of BWP stores consists of converting or consolidating those locations into Advance Auto Parts locations.

After the 2013 fiscal year, we acquired General Parts International, Inc. on January 2, 2014 for a purchase price of $2.08 billion. GPI, formerly a privately held company, is a leading distributor and supplier of original equipment and automotive aftermarket replacement products for commercial markets operating under the Carquest and Worldpac brands. As of the acquisition date, GPI operated 1,248 Carquest stores and 105 Worldpac branches located in 45 states and Canada and serviced approximately 1,400 independently-owned Carquest stores. We believe the acquisition of GPI will allow us to expand our geographic presence, commercial capabilities and overall scale to better serve customers. For additional information on the GPI acquisition, refer to Note 23, Subsequent Event, in the Notes to our Consolidated Financial Statements, included in Item 15. Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K.
 
Automotive Aftermarket Industry

Operating within the automotive aftermarket industry, we are influenced by a number of general macroeconomic factors similar to those affecting the overall retail industry. These factors include, but are not limited to, fuel costs, unemployment rates, consumer confidence and competition. The ongoing uncertainty in the macroeconomic environment continues to impact us and the retail industry in general. While we believe that the current macroeconomic environment continues to constrain consumer spending, we remain confident that the long-term dynamics of the automotive aftermarket industry are positive. Furthermore, we continue to believe we are well positioned to serve our customers by meeting their needs in a challenging macroeconomic environment.
We believe that two key drivers of demand within the automotive aftermarket are (i) the number of miles driven in the U.S. and (ii) the number and average age of vehicles on the road.
Miles Driven
We believe that the number of total miles driven in the U.S. influences the demand for the repair and maintenance of vehicles. As the number of miles driven increases, consumers’ vehicles are more likely to need repair and maintenance, resulting in an increase in the need for automotive parts and maintenance items. While miles driven in the U.S. remained relatively flat during 2012, miles driven began to increase beginning in the second calendar quarter of 2013 and continuing through the end of the year. Historically, rapid increases in fuel prices have negatively impacted total miles driven as consumers react to the increased expense by reducing travel. In 2012 and 2013, gas prices were relatively flat and have become somewhat less volatile when compared to prior years. Another factor impacting miles driven is the average daily commute, which corresponds to the unemployment rate. As the unemployment rate improves as it has over the past two years, the number of employees commuting increases and in turn the number of miles driven increases. While we believe there are ongoing macroeconomic pressures on our consumers, the return of increases in miles driven and stabilization in gasoline prices and improvements in the unemployment rate will continue to drive demand in the automotive aftermarket industry.
Number of Registered Vehicles and Increase in Average Vehicle Age
We believe that the total number of vehicles (excluding medium and heavy duty trucks) on the road and the average age of vehicles on the road also heavily influence the demand for products sold within the automotive aftermarket industry. There were 248 million vehicles on the road in 2013 which is 6% higher than in 2003. While recent industry data reported by the Automotive Aftermarket Industry Association (“AAIA”) indicates that the growth in number of vehicles on the road has decelerated and new vehicle registrations are increasing, the average age of vehicle continues to increase. The average age of vehicles has gradually increased over the last five years from 10.3 years in 2009 to 11.3 years in 2013. We believe that the average age of vehicles continues to increase due to relatively constant scrappage rates, a rate of new car sales well under the 10-year trend and an increase in overall quality of vehicles. As the average age of a vehicle increases, a larger percentage of the miles driven are outside of the manufacturer warranty period. These out-of-warranty, older vehicles generate a stronger demand for automotive aftermarket products due to routine maintenance cycles and more frequent mechanical failures. We believe that despite an improving economy consumers will continue to keep their vehicles even longer contributing to the trend of an aging vehicle population.



25
Table of Contents

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 2013, 2012 and 2011 by segment. We lease 79% of our AAP stores. We lease 100% of our AI stores. All of our AI stores have Commercial delivery programs.
AAP
 
 
Fiscal Year
 
 
2013
 
2012
 
2011
Number of stores, beginning of year
 
3,576

 
3,460

 
3,369

New stores
 
160

 
116

 
95

Acquired BWP stores
 
124

 
—

 
—

Closed stores
 
(28
)
 
—

 
(4
)
Number of stores, end of year
 
3,832

 
3,576

 
3,460

Relocated stores
 
6

 
12

 
7

Stores with commercial delivery programs
 
3,485

 
3,266

 
3,124

 
 
 
 
 
 
 
AI
 
 
Fiscal Year
 
 
2013
 
2012
 
2011
Number of stores, beginning of year
 
218

 
202

 
194

New stores
 
12

 
21

 
9

Closed stores
 
(13
)
 
(5
)
 
(1
)
Number of stores, end of year
 
217

 
218

 
202

Relocated stores
 
11

 
7

 
3

Stores with commercial delivery programs
 
217

 
218

 
202

 
The number of AAP and AI store closures includes the previously planned consolidations of 20 BWP stores and 13 AI stores, respectively. Subsequent to the end of our Fiscal 2013, we added 1,248 Carquest stores and 105 Worldpac branches as a result of the GPI acquisition. During Fiscal 2014, we anticipate opening 120 to 140 AAP and AI stores and Worldpac branches. We have not yet finalized the allocation of openings between AAP, AI and Worldpac.

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 and sales from our e-commerce website. 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 open for 13 complete accounting periods (approximately one year) and by including e-commerce sales. We include sales from relocated stores in comparable store sales from the original date of opening. Acquired stores are included in our comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date (approximately one year).

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 (vi) 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 commitments, 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, Summary of Significant Accounting Policies, to our Consolidated Financial Statements elsewhere in this report for additional discussion of these costs.



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Selling, General and Administrative Expenses

SG&A expenses consist of store payroll, store occupancy (including rent and depreciation), advertising expenses, acquisition and integration related 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 expenses, store support center administrative office expenses, data processing, professional expenses, self-insurance costs, closed store expense, impairment charges and acquisition-related and integration costs, if any, and other related expenses. See Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements for additional discussion of these costs.

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
 
 
December 28,
2013
 
December 29,
2012
 
December 31,
2011
Net sales
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales, including purchasing and warehousing costs
 
49.9

 
50.1

 
50.3

Gross profit
 
50.1

 
49.9

 
49.7

Selling, general and administrative expenses
 
39.9

 
39.3

 
39.0

Operating income
 
10.2

 
10.6

 
10.8

Interest expense
 
(0.6
)
 
(0.5
)
 
(0.5
)
Other, net
 
0.0

 
0.0

 
0.0

Provision for income taxes
 
3.6

 
3.8

 
3.9

Net income
 
6.0
 %
 
6.2
 %
 
6.4
 %

Fiscal 2013 Compared to Fiscal 2012

Net Sales

Net sales for Fiscal 2013 were $6,493.8 million, an increase of $288.8 million, or 4.7%, over net sales for Fiscal 2012. This growth was primarily due to sales from the acquired BWP stores and sales from the new AAP and AI stores opened during Fiscal 2013 partially offset by a 1.5% decrease in comparable store sales.

AAP segment sales were $6,171.3 million, an increase of $256.4 million, or 4.3%, over Fiscal 2012. This growth was primarily a result of sales from the acquired BWP stores and sales from the net addition of 152 new stores opened during Fiscal 2013 partially offset by a comparable store sales decrease of 1.7%. The comparable store sales decrease was driven by a decrease in transaction count partially offset by an increase in transaction value, which is reflective of higher priced products sold and a higher mix of Commercial sales. AI segment sales were $337.2 million, an increase of $31.1 million, or 10.2%, over Fiscal 2012.
 
 
2013
 
2012
 
AAP
 
AI
 
Total
 
AAP
 
AI
 
Total
Comparable Store Sales %
(1.7
)%
 
0.9
%
 
(1.5
)%
 
(0.9
)%
 
0.8
%
 
(0.8
)%
Net Stores Added (excluding BWP stores)
152

 
(1
)
 
151

 
116

 
16

 
132

 


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Gross Profit

Gross profit for Fiscal 2013 was $3,252.1 million, or 50.1% of net sales, as compared to $3,098.0 million, or 49.9% of net sales, in Fiscal 2012, an increase of 15 basis points. The increase in gross profit as a percentage of net sales was driven by increased merchandise margins, due to lower acquisition costs and a favorable product mix, and improvement in shrink partially offset by planned inefficiencies in supply chain costs associated with the ramp-up in shipments of inventory from our new distribution center and the impact from a higher mix of Commercial sales which have a lower gross profit rate. The increase in our Commercial mix of sales was primarily due to the sales from the acquired BWP stores.

SG&A Expenses

SG&A expenses for Fiscal 2013 were $2,591.8 million, or 39.9% of net sales, as compared to $2,440.7 million, or 39.3% of net sales, for Fiscal 2012, an increase of 58 basis points. Included in SG&A expenses in Fiscal 2013 were $25.0 million, or 38 basis points, of transaction expenses associated with our acquisition of GPI and $8.0 million, or 12 basis points, of expenses associated with our integration of BWP. Other primary drivers of the net increase in SG&A expenses, as a percentage of net sales, include costs associated with increased new store openings and higher incentive compensation, partially offset by lower marketing expense and a decrease in overall administrative and support costs.

Operating Income

Operating income for Fiscal 2013 was $660.3 million, representing 10.2% of net sales, as compared to $657.3 million, or 10.6% of net sales, for Fiscal 2012, a decrease of 42 basis points. This decrease was due to a higher SG&A rate partially offset by a higher gross profit rate.

AAP generated operating income of $647.8 million, or 10.5% of net sales, for Fiscal 2013 as compared to $648.5 million, or 11.0% of net sales, for Fiscal 2012. This decrease on a rate basis was due to the gross profit and SG&A drivers previously discussed. AI generated operating income for Fiscal 2013 of $12.5 million as compared to $8.8 million for Fiscal 2012. The increase in AI’s operating income was primarily due to improvements in store labor productivity and SG&A leverage driven by lower administrative and support costs.

Interest Expense

Interest expense for Fiscal 2013 was $36.6 million, or 0.6% of net sales, as compared to $33.8 million, or 0.5% of net sales, in Fiscal 2012.

Income Taxes

Income tax expense for Fiscal 2013 was $234.6 million, as compared to $236.4 million for Fiscal 2012. Our effective income tax rate was 37.5% and 37.9% for Fiscal 2013 and Fiscal 2012, respectively.

Net Income

Net income was $391.8 million, or $5.32 per diluted share, for Fiscal 2013 as compared to $387.7 million, or $5.22 per diluted share, for Fiscal 2012. As a percentage of net sales, net income for Fiscal 2013 was 6.0%, as compared to 6.2% for Fiscal 2012. The increase in diluted EPS was driven primarily by the increase in net income.

Fiscal 2012 Compared to Fiscal 2011

Net Sales

Net sales for Fiscal 2012 were $6,205.0 million, an increase of $34.5 million, or 0.6%, over net sales for Fiscal 2011. This growth was primarily due to sales from AAP and AI stores added within Fiscal 2012 partially offset by a decrease in comparable store sales.

AAP segment sales were $5,914.9 million, an increase of $30.0 million, or 0.5%, over Fiscal 2011. This growth was primarily a result of sales from the net addition of 116 new stores over Fiscal 2012 partially offset by a comparable store sales decrease of (0.9)%. The comparable store sales decrease was driven by a decrease in transaction count partially offset by an increase in transaction value despite more promotional activity in response to lower customer demand. The increase in transaction value is primarily due to (i) the gradual increase in cost and complexity of automotive parts and commodity prices


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and (ii) the positive impact from a higher mix of Commercial sales. AI segment sales were $306.1 million, an increase of $5.1 million, or 1.7%, over Fiscal 2011.

 
 
2012
 
2011
 
AAP
 
AI
 
Total
 
AAP
 
AI
 
Total
Comparable Store Sales %
(0.9
)%
 
0.8
%
 
(0.8
)%
 
1.9
%
 
8.6
%
 
2.2
%
Net Stores Added
116

 
16

 
132

 
91

 
8

 
99

 
Gross Profit

Gross profit for Fiscal 2012 was $3,098.0 million, or 49.9% of net sales, as compared to $3,069.3 million, or 49.7% of net sales, in Fiscal 2011, an increase of 19 basis points. The increase in gross profit as a percentage of net sales was primarily due to improved shrink and reduced product acquisition costs partially offset by increased promotional activity.

SG&A Expenses

SG&A expenses for Fiscal 2012 were $2,440.7 million, or 39.3% of net sales, as compared to $2,404.6 million, or 39.0% of net sales, for Fiscal 2011, an increase of 36 basis points. This increase as a percentage of net sales was primarily due to expense deleverage as a result of the Company’s lower sales volume and increased new store openings in the second half of Fiscal 2012, partially offset by lower incentive compensation.

Operating Income

Operating income for Fiscal 2012 was $657.3 million, representing 10.6% of net sales, as compared to $664.6 million, or 10.8% of net sales, for Fiscal 2011, a decrease of 18 basis points. This decrease was due to a higher SG&A rate partially offset by a slightly higher gross profit rate.

AAP produced operating income of $648.5 million, or 11.0% of net sales, for Fiscal 2012 as compared to $653.1 million, or 11.1% of net sales, for Fiscal 2011. AI generated operating income for Fiscal 2012 of $8.8 million as compared to $11.5 million for Fiscal 2011. AI’s operating income decreased during Fiscal 2012 primarily due to increased promotional activity and increased percentage of newer stores outside of the Northeastern market which operate at a lower gross profit rate, partially offset by lower incentive compensation.

Interest Expense

Interest expense for Fiscal 2012 was $33.8 million, or 0.5% of net sales, as compared to $30.9 million, or 0.5% of net sales, in Fiscal 2011. The increase in interest expense is primarily a result of the higher average borrowings outstanding during Fiscal 2012 compared to Fiscal 2011.

Income Taxes

Income tax expense for Fiscal 2012 was $236.4 million, as compared to $238.6 million for Fiscal 2011. Our effective income tax rate was 37.9% and 37.7% for Fiscal 2012 and Fiscal 2011, respectively.

Net Income

Net income was $387.7 million, or $5.22 per diluted share, for Fiscal 2012 as compared to $394.7 million, or $5.11 per diluted share, for Fiscal 2011. As a percentage of net sales, net income for Fiscal 2012 was 6.2%, as compared to 6.4% for Fiscal 2011. The increase in diluted EPS was driven primarily by a lower average share count outstanding during Fiscal 2012 partially offset by a slight decrease in net income.



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Quarterly Consolidated Financial Results (in thousands, except per share data)
 
 
16-Weeks
Ended
4/21/2012
 
12-Weeks
Ended
7/14/2012
 
12-Weeks
Ended
10/6/2012
 
12-Weeks
Ended
12/29/2012
 
16-Weeks
Ended
4/20/2013
 
12-Weeks
Ended
7/13/2013
 
12-Weeks
Ended
10/5/2013
 
12-Weeks
Ended
12/28/2013
Net Sales
 
$
1,957,292

 
$
1,460,983

 
$
1,457,527

 
$
1,329,201

 
$
2,015,304

 
$
1,549,553

 
$
1,520,144

 
$
1,408,813

Gross profit
 
980,673

 
728,858

 
725,350

 
663,155

 
1,008,206

 
779,223

 
762,940

 
701,777

Net income
 
133,506

 
99,606

 
89,503

 
65,055

 
121,790

 
116,871

 
103,830

 
49,267

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
1.83

 
$
1.36

 
$
1.22

 
$
0.89

 
$
1.66

 
$
1.60

 
$
1.42

 
$
0.68

Diluted
 
$
1.79

 
$
1.34

 
$
1.21

 
$
0.88

 
$
1.65

 
$
1.59

 
$
1.42

 
$
0.67


Liquidity and Capital Resources

Overview

Our primary cash requirements to maintain our current operations include payroll and benefits, the purchase of inventory, contractual obligations, capital expenditures and the payment of income taxes. In addition, we have used available funds for acquisitions, to repay borrowings under our revolving credit facility, to periodically repurchase shares of our common stock under our stock repurchase programs and for the payment of quarterly cash dividends. We have funded these requirements primarily through cash generated from operations, supplemented by borrowings under our credit facilities and notes offerings as needed. We believe funds generated from our expected results of operations, available cash and cash equivalents, and available borrowing under our new credit facility will be sufficient to fund our primary obligations for the next fiscal year, including our acquisition of GPI on January 2, 2014 and its ongoing operation.

As of December 28, 2013, our cash and cash equivalents balance was $1,112.5 million, an increase of $514.4 million compared to December 29, 2012 (the end of Fiscal 2012). This increase in cash was primarily a result of cash generated from operations and the issuance of senior unsecured notes partially offset by investments in property and equipment and cash used in the acquisition of BWP. Additional discussion of our cash flow results, including the comparison of Fiscal 2013 activity to Fiscal 2012, is set forth in the Analysis of Cash Flows section.

As of December 28, 2013, our outstanding indebtedness was $1,053.6 million, or $448.5 million higher when compared to December 29, 2012, as a result of additional borrowings of $448.6 million under our senior unsecured notes issued on December 3, 2013. Additionally, we had $87.3 million in letters of credit outstanding. The letters of credit generally have a term of one year or less and primarily serve as collateral for our self-insurance policies. Our debt availability as of December 28, 2013 was $545.4 million based on the maximum amount of additional borrowings allowed under our leverage ratio. Subsequent to December 28, 2013, our debt availability was updated in accordance with our new credit facility to reflect the additional borrowings related to the GPI acquisition.

GPI Acquisition

Subsequent to December 28, 2013, we borrowed $1,006.0 million, which we used along with cash on-hand to fund the $2.08 billion acquisition of GPI on January 2, 2014 as discussed elsewhere in this Annual Report on Form 10-K. In addition to the normal operations of GPI, we will incur a significant amount of integration costs over the next three years in conjunction with the integration of GPI.

Capital Expenditures

Our primary capital requirements have been the funding of our new store development (leased and owned locations), maintenance of existing stores and investments under our Superior Availability and Service Leadership strategies, including supply chain and information technology. Our capital expenditures were $195.8 million in Fiscal 2013, a decrease of $75.4 million from Fiscal 2012. In addition to routine capital expenditures, our capital investments during Fiscal 2013 included the acquisition of BWP for $186.1 million.

Our future capital requirements will depend in large part on the number of and timing of new stores we open within a given year and the investments we make in our existing stores, information technology and our supply chain network. In Fiscal


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2014, we anticipate that our capital expenditures will be approximately $325 million - $350 million. These investments will be primarily driven by new store development (leased and owned locations), investments in our existing stores and investments under our Superior Availability and Service Leadership strategies, including continued investments in our supply chain network and new systems. We anticipate opening between 120 to 140 AAP stores and AI stores and Worldpac branches during Fiscal 2014. We have not yet finalized the allocation of openings between AAP, AI and Worldpac.

Stock Repurchase Program

Our stock repurchase program allows us to repurchase our common stock on the open market or in privately negotiated transactions from time to time in accordance with the requirements of the SEC.

During Fiscal 2013, we repurchased 1.0 million shares of our common stock at an aggregate cost of $77.3 million, or an average price of $77.47 per share. As of December 28, 2013, we had $415.1 million remaining under our $500 million stock repurchase program authorized by our Board of Directors on May 14, 2012. Additionally, during Fiscal 2013, we repurchased 38,000 shares of our common stock at an aggregate cost of $3.5 million, or an average price of $91.78 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock.

Dividend

Since Fiscal 2006, our Board of Directors has declared quarterly dividends of $0.06 per share to stockholders of record. On February 5, 2014, our Board of Directors declared a quarterly dividend of $0.06 per share to be paid on April 4, 2014 to all common stockholders of record as of March 21, 2014.

Analysis of Cash Flows

A summary and analysis of our cash flows for Fiscal 2013, 2012 and 2011 is reflected in the table and following discussion.
 
Fiscal Year
 
2013
 
2012
 
2011
 
(in millions)
Cash flows from operating activities
$
545.3

 
$
685.3

 
$
828.8

Cash flows from investing activities
(362.1
)
 
(273.0
)
 
(290.0
)
Cash flows from financing activities
331.2

 
127.9

 
(540.2
)
Net increase (decrease) in cash and
 

 
 

 
 
cash equivalents
$
514.4

 
$
540.2

 
$
(1.3
)

Operating Activities

For Fiscal 2013, net cash provided by operating activities decreased $140.0 million to $545.3 million. This net decrease in operating cash flow was primarily driven by a $206.3 million increase in inventory, net of accounts payable, primarily due to an increase in inventory related to new stores and other inventory availability initiatives combined with the deceleration in our accounts payable ratio. Partially offsetting these decreases in operating cash flow was a $57.1 million decrease in the outflow of cash related to receivables resulting from the transition of our in-house Commercial credit program last year and a $22.4 million increase in accrued expenses related to the timing of payments to vendors.

For Fiscal 2012, net cash provided by operating activities decreased $143.6 million to $685.3 million. This net decrease in operating cash flow was primarily due to:

•
a $74.1 million decrease in cash flows from receivables primarily related to the transition of our in-house Commercial credit program;
•
a $65.1 million decrease in cash flows from inventory, net of accounts payable, due to a 13% increase in inventory over the prior year driven by our inventory availability initiatives, including store upgrades to a greater coverage of parts, the opening of our new distribution center, continued expansion of our HUB network and new store growth, coupled with a smaller increase in our accounts payable ratio versus the prior year;
•
a $26.1 million decrease in provision for deferred income taxes due to the lapse of certain corporate tax legislation;
•
a $14.9 million decrease in cash flow from other assets primarily related to timing of refundable income taxes and other working capital;


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•
a $13.4 million decrease in cash flow from the excess tax benefit from share-based compensation; and
•
a $7.0 million decrease in net income.

Partially offsetting the decrease in operating cash flow was:

•
a $56.8 million increase in cash flows provided by an increase in accrued expenses related to timing of the payment of certain expenses.

Investing Activities

For Fiscal 2013, net cash used in investing activities increased by $89.1 million to $362.1 million. The increase in cash used in investing activities was primarily driven by cash used in the acquisition of BWP, partially offset by a reduction in investments in property and equipment as a result of less spending on existing stores, new store development, information technology, and investments in supply chain.

For Fiscal 2012, net cash used in investing activities decreased by $17.0 million to $273.0 million. The decrease in cash used was primarily driven by the decrease in cash used for business acquisitions.

Financing Activities

For Fiscal 2013, net cash provided by financing activities increased by $203.3 million to $331.2 million. This increase was primarily a result of a net change in borrowings under our senior unsecured notes and credit facilities, partially offset by a $53.7 million increase in the repurchase of common stock under our stock repurchase program.

For Fiscal 2012, net cash used in financing activities increased by $668.1 million to $127.9 million. This increase was primarily a result of:

•
a $604.0 million decrease in cash used for the repurchase of common stock under our stock repurchase program; and
•
$299.9 million provided by the issuance of senior unsecured notes.

Partially offsetting these increases was a $230.0 million decrease in net borrowings on credit facilities.

Long-Term Debt

Bank Debt

On December 5, 2013, we entered into a new credit agreement which provides a $700.0 million unsecured term loan and a $1.0 billion unsecured revolving credit facility (the “2013 Credit Agreement”) with Advance Stores, as Borrower, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent. This new revolving credit facility replaced the revolver under our former Credit Agreement dated as of May 27, 2011 with Advance Stores, as Borrower, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent (the “2011 Credit Agreement”). Upon execution of the 2013 Credit Agreement, the lenders’ commitments under the 2011 Credit Agreement were terminated and the liabilities of us and our subsidiaries with respect to their obligations under the 2011 Credit Agreement were discharged. The new revolving credit facility also provides for the issuance of letters of credit with a sub-limit of $300.0 million and swingline loans in an amount not to exceed $50.0 million. We may request, subject to agreement by one or more lenders, that the total revolving commitment be increased by an amount not to exceed $250.0 million (up to a total commitment of $1.25 billion) during the term of the credit agreement. Voluntary prepayments and voluntary reductions of the revolving balance are permitted in whole or in part, at our option, in minimum principal amounts as specified in the revolving credit facility. The revolving credit facility terminates in December 2018 and the term loan matures in January 2019.

As of December 28, 2013, we had not borrowed any amounts under the 2013 Credit Agreement but subsequently borrowed $700.0 million under the term loan and $306.0 million under the revolver in conjunction with our acquisition of GPI on January 2, 2014. As of December 28, 2013, we had letters of credit outstanding of $87.3 million. The letters of credit generally have a term of one year or less and primarily serve as collateral for our self-insurance policies. Our debt availability as of December 28, 2013 was $545.4 million based on the maximum amount of additional borrowings allowed under our leverage ratio.

The interest rate on borrowings under the revolving credit facility is based, at our option, on adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. The current margin is 1.30% and 0.30% per annum for the adjusted LIBOR and


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alternate base rate borrowings, respectively. A facility fee is charged on the total amount of the revolving credit facility, payable in arrears. The current facility fee rate is 0.20% per annum and subject to change based on our credit ratings. Under the terms of the 2013 Credit Agreement, the interest rate and facility fee are based on our credit rating.

The interest rate on the term loan is based, at our option, on adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. The current margin is 1.50% and 0.50% per annum for the adjusted LIBOR and alternate base rate borrowings, respectively. Under the terms of the term loan, the interest rate is based on our credit rating and subject to change based on our credit rating.

The 2013 Credit Agreement contains customary covenants restricting the ability of (a) subsidiaries of Advance Stores to, among other things, create, incur or assume additional debt, (b) Advance Stores and its subsidiaries to, among other things ,(i) incur liens, (ii) make loans and investments, (iii) guarantee obligations, and (iv) change the nature of its business conducted by itself and its subsidiaries; (c) us, Advance Stores and their subsidiaries to, among other things (i) engage in certain mergers, acquisitions, asset sales and liquidations, (ii) enter into certain hedging arrangements, (iii) enter into restrictive agreements limiting its ability to incur liens on any of its property or assets, pay distributions, repay loans, or guarantee indebtedness of its subsidiaries, (iv) engage in sale-leaseback transactions; and (d) us, among other things, to change our holding company status. Advance Stores is required to comply with financial covenants with respect to a maximum leverage ratio and a minimum coverage ratio. The 2013 Credit Agreement also provides for customary events of default, including non-payment defaults, covenant defaults and cross-defaults to Advance Stores’ other material indebtedness. We are also required to comply with financial covenants with respect to a maximum leverage ratio and a minimum consolidated coverage ratio. We were in compliance with our covenants at December 28, 2013 with respect to the 2013 Credit Agreement and December 29, 2012 with respect to the 2011 Credit Agreement, respectively.

Senior Unsecured Notes

We issued 4.50% senior unsecured notes on December 3, 2013 at 99.69% of the principal amount of $450 million which are due December 1, 2023 (the “2023 Notes”). The 2023 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on June 1 and December 1 of each year, beginning June 1, 2014. The net proceeds from the offering of these notes were approximately $445.2 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The net proceeds from the 2023 Notes were used in aggregate with borrowings under our revolving credit facility and term loan and cash on-hand to fund our acquisition of GPI on January 2, 2014.

We previously issued its 4.50% senior unsecured notes in January 2012 at 99.968% of the principal amount of $300 million and are due January 15, 2022 (the “2022 Notes”). The 2022 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on January 15 and July 15 of each year. Our 5.75% senior unsecured notes were issued in April 2010 at 99.587% of the principal amount of $300 million and are due May 1, 2020 (the “2020 Notes” or collectively with the 2023 Notes and the 2022 Notes, “the Notes”). The 2020 Notes bear interest at a rate of 5.75% per year payable semi-annually in arrears on May 1 and November 1 of each year. Advance served as the issuer of the Notes with certain of Advance’s domestic subsidiaries currently serving as subsidiary guarantors. The terms of the Notes are governed by an indenture (as amended, supplemented, waived or otherwise modified, the “Indenture”) among us, the subsidiary guarantors from time to time party thereto and Wells Fargo Bank, National Association, as Trustee.

We may redeem some or all of the Notes at any time or from time to time, at the redemption price described in the Indenture. In addition, in the event of a Change of Control Triggering Event (as defined in each of the Indentures for the Notes), we will be required to offer to repurchase the Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. The Notes are currently fully and unconditionally guaranteed, jointly and severally, on an unsubordinated and unsecured basis by each of the subsidiary guarantors party thereto. We will be permitted to release guarantees without the consent of holders of the Notes under the circumstances described in the Indenture: (i) upon the release of the guarantee of our other debt that resulted in the affected subsidiary becoming a guarantor of this debt; (ii) upon the sale or other disposition of all or substantially all of the stock or assets of the subsidiary guarantor; or (iii) upon our exercise of its legal or covenant defeasance option.

The Indenture contains customary provisions for events of default including for: (i) failure to pay principal or interest when due and payable; (ii) failure to comply with covenants or agreements in the Indenture or the Notes and failure to cure or obtain a waiver of such default upon notice; (iii) a default under any debt for money borrowed by us or any of our subsidiaries that results in acceleration of the maturity of such debt, or failure to pay any such debt within any applicable grace period after final stated maturity, in an aggregate amount greater than $25.0 million without such debt having been discharged or acceleration having been rescinded or annulled within 10 days after receipt by us of notice of the default by the Trustee or holders of not less than 25% in aggregate principal amount of the Notes then outstanding; and (iv) events of bankruptcy, insolvency or


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reorganization affecting us and certain of our subsidiaries. In the case of an event of default, the principal amount of the Notes plus accrued and unpaid interest may be accelerated. The Indenture also contains covenants limiting the ability of us and our subsidiaries to incur debt secured by liens and to enter into sale and lease-back transactions.

As of December 28, 2013, we had a credit rating from Standard & Poor’s of BBB- and from Moody’s Investor Service of Baa3. The current outlooks by Standard & Poor’s and Moody’s are both stable. The current pricing grid used to determine our borrowing rate under our revolving credit facility is based on our credit ratings. If these credit ratings decline, our interest rate on outstanding balances may increase and our access to additional financing on favorable terms may become more limited. In addition, it could reduce the attractiveness of our vendor payment program, where certain of our vendors finance payment obligations from us with designated third party financial institutions, which could result in increased working capital requirements. Conversely, if these credit ratings improve, our interest rate may decrease.

Off-Balance-Sheet Arrangements

As of December 28, 2013, we had no off-balance-sheet arrangements as defined in Regulation S-K Item 303 of the SEC regulations. We include other off-balance-sheet arrangements in our contractual obligations table including operating lease payments, interest payments on our notes and revolving credit facility and letters of credit outstanding.

Contractual Obligations

In addition to our Notes and revolving credit facility, we utilize operating leases as another source of financing. The amounts payable under these operating leases are included in our schedule of contractual obligations. Our future contractual obligations related to long-term debt, operating leases and other contractual obligations as of December 28, 2013 were as follows:
 
 
 
 
Payments Due by Period
Contractual Obligations
 
Total
 
Less than
1 Year
 
1 - 3 Years
 
3 - 5 Years
 
More Than
5 Years
 
 
(in thousands)
Long-term debt (1)
 
$
1,053,584

 
$
916

 
$
1,049

 
$
—

 
$
1,051,619

 Interest payments
 
432,740

 
51,161

 
102,221

 
102,200

 
177,158

Operating leases (2)
 
2,441,925

 
353,508

 
616,447

 
546,495

 
925,475

Other long-term liabilities (3)
 
231,116

 
—

 
—

 
—

 
—

Purchase obligations (4)
 
61,699

 
34,220

 
17,517

 
9,961

 
—

 
 
$
4,221,064

 
$
439,805

 
$
737,234

 
$
658,656

 
$
2,154,252