Amounts
received or receivable from vendors that are not yet earned are reflected as
deferred revenue in the accompanying condensed consolidated balance sheets.
Management's estimate of the portion of deferred revenue that will be realized
within one year of the balance sheet date has been included in Other current
liabilities. Earned amounts that are receivable from vendors are included in
Receivables, net except for that portion expected to be received after one year,
which is included in Other assets, net.
Preopening
Expenses
Preopening
expenses, which consist primarily of payroll and occupancy costs related to the
opening of new stores, are expensed as incurred.
Warranty
Liabilities
The
Company's vendors are primarily responsible for warranty claims. However,
warranty costs relating to merchandise (primarily batteries) sold under
warranty, which are not covered by vendors' warranties, are estimated based on
the Company's historical experience and are recorded in the period the product
is sold.
Sales
Returns and Allowances
The
Company’s accounting policy for sales returns and allowances consists of
establishing reserves for estimated returns at the time of sale. The Company
anticipates sales returns based on current sales levels and the Company’s
historical return experience on a specific product basis. The Company’s reserve
for sales returns and allowances was not significant at October 4, 2008 and
December 29, 2007.
Earnings
per Share of Common Stock
Basic
earnings per share of common stock has been computed based on the
weighted-average number of common shares outstanding during the period, which is
reduced by stock held in treasury and shares of nonvested restricted stock.
Diluted earnings per share of common stock reflects the weighted-average number
of shares of common stock outstanding, outstanding deferred stock units and the
impact of outstanding stock options, stock appreciation rights and shares of
nonvested restricted stock (collectively “share-based awards”), calculated on
the treasury stock method as modified by the adoption of Statement of Financial
Accounting Standards, or SFAS, No. 123R, “Share-Based Payment.”
Hedging
Activities
The
Company utilizes interest rate swaps to limit its cash flow risk on its variable
rate debt. In accordance with SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” the fair value of the Company’s outstanding
hedges is recorded as an asset or liability in the accompanying condensed
consolidated balance sheets at October 4, 2008 and December 29, 2007,
respectively. The Company uses the 90-day adjusted LIBOR interest rate and has
the intent and ability to continue to use this rate on its hedged borrowings.
Accordingly, the Company does not recognize any ineffectiveness on the swaps as
allowed under Derivative Implementation Group Issue No. G7, “Cash Flow Hedges:
Measuring the Ineffectiveness of a Cash Flow Hedge under Paragraph 30(b) When
the Shortcut Method Is Not Applied.” The Company has recorded all adjustments to
the fair value of the hedge instruments in Accumulated other comprehensive
income (loss) through the maturity date of the applicable hedge
arrangements.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Weeks Ended October
4, 2008 and October 6, 2007
(in
thousands, except per share data)
(unaudited)
Financed
Vendor Accounts Payable
The
Company is party to a short-term financing program with a bank allowing it to
extend its payment terms on certain merchandise purchases. The substance of the
program is for the Company to borrow money from the bank to finance purchases
from vendors. The Company records any discount given by the vendor as a
reduction to the cost of its inventory and accretes this discount to the
resulting short-term payable to the bank through interest expense over the
extended term. At October 4, 2008 and December 29, 2007, $181,929 and $153,549,
respectively, was payable to the bank by the Company under this program and is
included in the accompanying condensed consolidated balance sheets as Financed
vendor accounts payable.
Cost
of Sales and Selling, General and Administrative Expenses
The
following table illustrates the primary costs classified in each major expense
category:
Cost of
Sales
|
|
SG&A
|
|
|
|
|
|
|
|
|
●
|
Total
cost of merchandise sold including:
|
|
●
|
Payroll
and benefit costs for retail and corporate
|
|
–
|
Freight
expenses associated with moving
|
|
|
team
members;
|
|
|
merchandise
inventories from our vendors to
|
|
●
|
Occupancy
costs of retail and corporate facilities;
|
|
|
our
distribution center,
|
|
●
|
Depreciation
related to retail and corporate assets;
|
|
–
|
Vendor
incentives, and
|
|
●
|
Advertising;
|
|
–
|
Cash
discounts on payments to vendors;
|
|
●
|
Costs
associated with our commercial delivery
|
●
|
Inventory
shrinkage;
|
|
|
program,
including payroll and benefit costs,
|
●
|
Defective
merchandise and warranty costs;
|
|
|
and
transportation expenses associated with moving
|
●
|
Costs
associated with operating our distribution
|
|
|
merchandise
inventories from our retail stores to
|
|
network,
including payroll and benefit costs,
|
|
|
our
customer locations;
|
|
occupancy
costs and depreciation; and
|
|
●
|
Freight
expenses associated with moving
|
●
|
Freight
expenses associated with moving
|
|
|
merchandise
inventories from our Local Area
|
|
merchandise
inventories from our distribution
|
|
Warehouses,
or LAWs, and Parts Delivered Quickly
|
|
center
to our retail stores. |
|
|
warehouses,
or PDQs, to our retail stores after the
|
|
|
|
|
|
|
customer
has special-ordered the merchandise;
|
|
|
|
|
|
●
|
Self-insurance
costs;
|
|
|
|
|
|
●
|
Professional
services; and
|
|
|
|
|
|
●
|
Other
administrative costs, such as credit card
|
|
|
|
|
|
|
service
fees, supplies, travel and
lodging.
|
New
Accounting Pronouncements
In
June 2008, the Financial Accounting Standards Board, or FASB, issued FASB
Staff Position, or FSP, EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities.” FSP
EITF 03-6-1 addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting, and therefore need
to be included in the earnings allocation in computing earnings per share under
the two-class method as described in SFAS No. 128, “Earnings per Share.”
Under the guidance
of FSP EITF 03-6-1, nonvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings-per-share pursuant to the two-class method. FSP EITF 03-6-1
is effective for financial statements issued for fiscal years beginning after
December 15, 2008 and all prior-period earnings per share data
presented shall be adjusted retrospectively. Early application is not
permitted. The Company is currently evaluating the impact of
adopting FSP EITF 03-6-1.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Weeks Ended October
4, 2008 and October 6, 2007
(in
thousands, except per share data)
(unaudited)
In June
2008, the FASB Issued EITF No. 08-3, “Accounting by Lessees for
Nonrefundable Maintenance Deposits.” EITF 08-3 requires that nonrefundable
maintenance deposits paid by a lessee under an arrangement accounted for as a
lease be accounted for as a deposit asset until the underlying maintenance is
performed. When the underlying maintenance is performed, the deposit may be
expensed or capitalized in accordance with the lessee’s maintenance accounting
policy. Upon adoption, entities must recognize the effect of the change as a
change in accounting principle. EITF 08-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The Company does not
expect the adoption of EITF 08-3 to have a material impact on its financial
condition, results of operations or cash flows.
In
April 2008, the FASB issued FASB Staff Position No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets,” which amends the
factors that must be considered in developing renewal or extension assumptions
used to determine the useful life over which to amortize the cost of a
recognized intangible asset under SFAS 142, “Goodwill and Other Intangible
Assets.” The FSP requires an entity to consider its own assumptions about
renewal or extension of the term of the arrangement, consistent with its
expected use of the asset, and is an attempt to improve consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS 141,
“Business Combinations.” The FSP is effective for fiscal years beginning after
December 15, 2008, and the guidance for determining the useful life of a
recognized intangible asset must be applied prospectively to intangible assets
acquired after the effective date. The FSP is not expected to have a material
impact on the Company’s financial condition, results of operations or cash
flow.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities - an amendment of SFAS No. 133.” SFAS
No. 161 is intended to improve financial standards for derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity's financial position,
financial performance and cash flows. Entities are required to provide enhanced
disclosures about: how and why an entity uses derivative instruments; how
derivative instruments and related hedged items are accounted for under SFAS
No. 133 and its related interpretations; and how derivative instruments and
related hedged items affect an entity's financial position, financial
performance and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008. We are evaluating the impact the adoption of SFAS No.
161 will have on our consolidated financial statements.
In
February 2008, the FASB issued FASB Staff Position No. FAS 157-1, “Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13.” FSP No. FAS 157-1 amends SFAS
No. 157, “Fair Value Measurements,” to exclude SFAS No. 13, “Accounting for
Leases,” and other accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement under SFAS No.
13. However, this scope exception does not apply to assets acquired and
liabilities assumed in a business combination that are required to be measured
at fair value under SFAS No. 141 or No. 141(R), Business Combinations (revised
2007), regardless of whether those assets and liabilities are related to leases.
The FSP will be effective upon the full adoption of SFAS 157 during the first
quarter of fiscal 2009 and will not have a material impact on the Company’s
financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS No. 160,
among other things, provides guidance and establishes amended accounting and
reporting standards for a parent company’s noncontrolling interest in a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or
after December 15, 2008. The Company does not expect the adoption of SFAS No.
160 to have a material impact on its financial condition, results of operations
or cash flows.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Weeks Ended October
4, 2008 and October 6, 2007
(in
thousands, except per share data)
(unaudited)
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which
replaces SFAS No. 141, “Business Combinations.” SFAS No. 141R, among other
things, establishes principles and requirements for how an acquirer entity
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any controlling interests in the acquired
entity; recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and determines what information
to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. Costs of the
acquisition will be recognized separately from the business combination. SFAS
No. 141R applies to business combinations for fiscal years beginning after
December 15, 2008.
Effective
December 30, 2007, the Company adopted FASB Staff Position
No. FIN 39-1, “Amendment of FASB Interpretation No. 39,” or
FSP 39-1. FSP 39-1 amends FASB Interpretation No. 39,
Offsetting of Amounts Related to Certain Contracts, to require a reporting
entity to offset fair value amounts recognized for the right to reclaim cash
collateral (a receivable) or the obligation to return cash collateral (a
payable) against fair value amounts recognized for derivative instruments
executed with the same counterparty under the same master netting arrangement
that have been offset in accordance with FIN 39. FSP No. 39-1 also
amends FIN 39 for certain terminology modifications. Upon adoption of
FSP No. 39-1, the Company did not change its accounting policy of not
offsetting fair value amounts recognized for derivative instruments under master
netting arrangements. The adoption of FSP No. 39-1 did not have an impact
on the Company’s financial position, results of operations or cash
flows.
Effective
December 30, 2007, the Company adopted the initial provisions of SFAS No. 157,
“Fair Value Measurements” on its financial assets and liabilities subject to the
deferral provisions of FSP 157-2. SFAS No. 157 clarifies the definition of fair
value, establishes a framework for defining fair value as it relates to other
accounting pronouncements that require or permit fair value measurements, and
expands the disclosures of fair value measurements. The adoption of SFAS 157 did
not have any impact on the Company’s financial condition, results of operations
or cash flows. The Company did not apply the provisions of SFAS No. 157 for its
nonfinancial assets and liabilities except for those recognized or disclosed on
a recurring basis (at least annually) as allowed by the issuance of FSP 157-2.
The Company will fully adopt the provisions of SFAS 157 effective during its
first quarter of fiscal 2009.
The
deferral provided by FSP No. 157-2 applies to such items as nonfinancial
assets and liabilities initially measured at fair value in a business
combination (but not measured at fair value in subsequent periods) and
nonfinancial long-lived asset groups measured at fair value for an impairment
assessment. We are evaluating the impact FSP No. 157-2 will have on
our nonfinancial assets and liabilities that are measured at fair value, but are
recognized or disclosed at fair value on a nonrecurring basis.
Effective
December 30, 2007, the Company adopted the provisions of SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. The Company elected not to apply fair value on its
existing financial assets and liabilities upon adoption. Therefore, this
adoption did not have a material effect on the Company’s financial position,
results of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R).” SFAS No. 158
requires
recognition of the overfunded or underfunded status of defined benefit
postretirement plans as an asset or liability in the statement of financial
position and to recognize changes in that funded status in comprehensive income
in the year in which the changes occur. SFAS No. 158 also requires measurement
of the funded status of a plan as of the date of the statement of financial
position. The Company adopted the recognition provisions of SFAS No. 158 on
December 30, 2006. The Company adopted the measurement date provisions of SFAS
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Weeks Ended October
4, 2008 and October 6, 2007
(in
thousands, except per share data)
(unaudited)
No. 158
on December 30, 2007. The Company has elected to apply the alternate transition
method under which a 14-month measurement will cover the period from November 1,
2007 through January 3, 2009. The change in the measurement date will not have a
material impact on the Company’s financial condition, results of operations or
cash flows.
In
February 2008, the FASB issued FASB Staff Position No. FAS 158-1, “Conforming
Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No. 106
and to the Related Staff Implementation Guides.” FSP No. FAS 158-1 updates the
illustrations in Appendix B of FASB Statement No. 87, Appendix B of FASB
Statement No. 88 and Appendix C of FASB Statement No. 106 to reflect the
provisions of SFAS No. 158. FSP No. FAS 158-1 also amends the questions and
answers contained in FASB Special Reports, which pertains to the implementation
of Statements 87, 88 and 106. Finally, this FSP makes conforming changes
to other guidance and technical corrections to SFAS No. 158. The
conforming amendments made by this FSP are effective as of the effective dates
of SFAS No. 158 and will not have a material impact on the Company’s financial
position, results of operations or cash flows.
2. |
Goodwill
and Intangible Assets:
|
The
carrying amount, additions, current period amortization and net intangible
assets as of October 4, 2008 and December 29, 2007 include:
|
|
Acquired
intangible assets
|
|
|
|
|
|
|
Subject
to Amortization
|
|
|
Not
Subject to Amortization
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$ |
9,800 |
|
|
$ |
885 |
|
|
$ |
20,550 |
|
|
$ |
31,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
book value at December 29, 2007
|
|
$ |
7,464 |
|
|
$ |
580 |
|
|
$ |
18,800 |
|
|
$ |
26,844 |
|
Addition
|
|
|
200 |
|
|
|
- |
|
|
|
1,750 |
|
|
|
1,950 |
|
2008
amortization
|
|
|
(808 |
) |
|
|
(98 |
) |
|
|
- |
|
|
|
(906 |
) |
Net
book value at October 4, 2008
|
|
$ |
6,856 |
|
|
$ |
482 |
|
|
$ |
20,550 |
|
|
$ |
27,888 |
|
During
the second quarter of fiscal 2008, the Company acquired certain customer
relationships for $200 in connection with an acquisition of a small retail
chain.
During
the first quarter of fiscal 2008, the Company acquired from a Kentucky entity
for $1,750 the limited territorial rights the Kentucky entity had in the
“Advance Auto Parts” trademark, ownership of certain websites and access to the
Louisville, Kentucky market. This improved the Company’s trademark rights,
opened a new metropolitan market for the Company and is expected to increase
traffic to the Company’s website.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Weeks Ended October
4, 2008 and October 6, 2007
(in
thousands, except per share data)
(unaudited)
The table
below shows the expected amortization expense for the next five years for
acquired intangible assets recorded as of October 4, 2008:
Fiscal
Year
|
|
|
|
Remainder
of 2008
|
|
$ |
296 |
|
2009
|
|
|
1,173 |
|
2010
|
|
|
1,059 |
|
2011
|
|
|
967 |
|
2012
|
|
|
967 |
|
The
changes in the carrying amount of goodwill for the forty weeks ended October 4,
2008 are as follows:
|
|
AAP
Segment
|
|
|
AI
Segment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 29, 2007
|
|
$ |
16,093 |
|
|
$ |
17,625 |
|
|
$ |
33,718 |
|
Fiscal
2008 activity
|
|
|
- |
|
|
|
885 |
|
|
|
885 |
|
Balance
at October 4, 2008
|
|
$ |
16,093 |
|
|
$ |
18,510 |
|
|
$ |
34,603 |
|
During
the second quarter of fiscal 2008, the Company recorded goodwill in the amount
of $885 in connection with an acquisition of a small retail chain.
Receivables
consist of the following:
|
|
October
4,
|
|
|
December
29,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
$ |
19,329
|
|
$ |
14,782
|
|
Vendor |
|
75,907
|
|
|
71,403
|
|
Other |
|
2,949
|
|
|
2,785
|
|
Total receivables
|
|
98,185
|
|
|
88,970
|
|
Less:
Allowance for doubtful accounts |
|
(4,407
|
) |
|
(3,987
|
) |
Receivables,
net |
|
93,778
|
|
|
84,983
|
|
Inventories
are stated at the lower of cost or market, cost being determined using the
last-in, first-out ("LIFO") method for approximately 93% of inventories at both
October 4, 2008 and December 29, 2007. Under the LIFO method, the Company’s cost
of sales reflects the costs of the most recently purchased inventories, while
the inventory carrying balance represents the costs relating to prices paid in
prior years. The Company’s costs to acquire inventory have been generally
decreasing in recent years as a result of the Company’s significant growth.
Accordingly, the cost to replace inventory is less than the LIFO balances
carried for similar products. For the forty weeks ended October 4, 2008 and
October 6, 2007, the Company recorded reductions to cost of sales of $6,118 and
$13,254, respectively.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Weeks Ended October
4, 2008 and October 6, 2007
(in
thousands, except per share data)
(unaudited)
An actual
valuation of inventory under the LIFO method is performed by the Company at the
end of each fiscal year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must be based on management’s estimates
of expected fiscal year-end inventory levels and costs.
The
remaining inventories are comprised of product cores, which consist of the
non-consumable portion of certain parts and batteries and are valued under the
first-in, first-out ("FIFO") method. Core values are included as part of the
Company’s merchandise costs and are either passed on to the customer or returned
to the vendor. Additionally, these products are not subject to
frequent cost changes like the Company’s other merchandise inventory, thus there
is no material difference from applying either the LIFO or FIFO valuation
methods.
Inventory
Overhead Costs
The
Company capitalizes certain purchasing and warehousing costs into inventory.
Purchasing and warehousing costs included in inventory, at FIFO, at October 4,
2008 and December 29, 2007, were $102,125 and $107,068, respectively.
Inventories consist of the following:
|
|
October
4,
|
|
|
December
29,
|
|
|
|
2008
|
|
|
2007
|
|
Inventories
at FIFO, net
|
|
$ |
1,617,766 |
|
|
$ |
1,435,697 |
|
Adjustments
to state inventories at LIFO
|
|
|
99,890 |
|
|
|
93,772 |
|
Inventories
at LIFO, net
|
|
$ |
1,717,656 |
|
|
$ |
1,529,469 |
|
Replacement
cost approximated FIFO cost at October 4, 2008, and December 29,
2007.
Inventory
Reserves
Inventory
quantities are tracked through a perpetual inventory system. The Company uses a
cycle counting program in all distribution centers, PDQs and LAWs to ensure the
accuracy of the perpetual inventory quantities of both merchandise and core
inventory. In addition, the Company uses a combination of cycle
counting and physical inventory counts in all retail stores to ensure the
accuracy of the perpetual inventory quantities of both merchandise and core
inventory in these locations.
The
Company establishes reserves for estimated shrink based on historical accuracy
and effectiveness of the cycle counting program. The Company also establishes
reserves for potentially excess and obsolete inventories based on current
inventory levels and the historical analysis of product sales and current market
conditions. The Company provides reserves when less than full credit is expected
from a vendor or when liquidating product will result in retail prices below
recorded costs. The Company’s reserves against inventory for these matters were
$36,938 and $35,565 at October 4, 2008 and December 29, 2007,
respectively.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Weeks Ended October
4, 2008 and October 6, 2007
(in
thousands, except per share data)
(unaudited)
The
following table presents changes in the Company’s warranty
reserves:
|
|
October
4,
2008
|
|
|
December
29,
2007
|
|
|
|
(40
weeks ended)
|
|
|
(52
weeks ended)
|
|
|
|
|
|
|
|
|
Warranty
reserve, beginning of period
|
|
$ |
17,757 |
|
|
$ |
13,069 |
|
Additions
to warranty reserves
|
|
|
38,672 |
|
|
|
24,722 |
|
Reserves
utilized and other adjustments, net
|
|
|
(29,773 |
) |
|
|
(20,034 |
) |
|
|
|
|
|
|
|
|
|
Warranty
reserve, end of period
|
|
$ |
26,656 |
|
|
$ |
17,757 |
|
Long-term
debt consists of the following:
|
|
October
4,
2008
|
|
|
December
29,
2007
|
|
Revolving
facility at variable interest rates
|
|
|
|
|
|
|
(3.71%
and 5.93% at October 4, 2008 and December 29,
|
|
|
|
|
|
|
2007,
respectively) due October 2011
|
|
$ |
267,000 |
|
|
$ |
451,000 |
|
Term
loan at variable interest rates
|
|
|
|
|
|
|
|
|
(3.73%
and 6.19% at October 4, 2008 and December 29,
|
|
|
|
|
|
|
|
|
2007,
respectively) due October 2011
|
|
|
200,000 |
|
|
|
50,000 |
|
Other
|
|
|
4,174 |
|
|
|
4,672 |
|
|
|
|
471,174 |
|
|
|
505,672 |
|
Less:
Current portion of long-term debt
|
|
|
(680 |
) |
|
|
(610 |
) |
Long-term
debt, excluding current portion
|
|
$ |
470,494 |
|
|
$ |
505,062 |
|
Term
Loan
As of
October 4, 2008, the Company had borrowed $200,000 under its
unsecured four-year term loan. The Company entered into the term loan on
December 4, 2007, with the Company’s wholly-owned subsidiary, Advance Stores
Company, Incorporated, or Stores, serving as borrower. As of December 29, 2007,
the Company had borrowed $50,000 under the term loan. The entire $200,000
proceeds from this term loan were used to repurchase shares of the
Company's common stock under its stock repurchase program. The term
loan terminates on October 5, 2011.
The
interest rate on the term loan is based, at the Company’s option, on
an adjusted LIBOR rate, plus a margin, or an alternate base rate, plus a
margin. The current margin is 1.00% and 0.0% per annum for the adjusted
LIBOR and alternate base rate borrowings, respectively. The Company has elected
to use the 90-day adjusted LIBOR rate and has the ability and intent to continue
to use this rate on its hedged borrowings. Under the terms of the term
loan, the interest rate spread is based on the Company’s credit
rating.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Weeks Ended October
4, 2008 and October 6, 2007
(in
thousands, except per share data)
(unaudited)
Revolving
Credit Facility
In
addition to the term loan, the Company has a $750,000 unsecured five-year
revolving credit facility with Stores serving as the borrower. The
revolving credit facility also provides for the issuance of letters of credit
with a sub limit of $300,000, and swingline loans in an amount not to exceed
$50,000. The Company may request, subject to agreement by one or more lenders,
that the total revolving commitment be increased by an amount not exceeding
$250,000 (up to a total commitment of $1,000,000) during the term of the credit
agreement. Voluntary prepayments and voluntary reductions of the revolving
balance are permitted in whole or in part, at the Company’s option, in minimum
principal amounts as specified in the revolving credit facility. The
revolving credit facility terminates on October 5, 2011.
As of
October 4, 2008, the Company had $267,000 outstanding under
its revolving credit facility, and letters of credit outstanding of
$79,754, which reduced the availability under the revolving credit facility to
$403,246. (The letters of credit generally have a term of one year or
less.) A commitment fee is charged on the unused portion of the
revolver, payable in arrears. The current commitment fee rate is 0.150% per
annum.
The
interest rate on borrowings under the revolving credit facility is based, at the
Company’s option, on an adjusted LIBOR rate, plus a margin, or an alternate base
rate, plus a margin. The current margin is 0.75% and 0.0% per annum for the
adjusted LIBOR and alternate base rate borrowings, respectively. The Company has
elected to use the 90-day adjusted LIBOR rate and has the ability and intent to
continue to use this rate on its hedged borrowings. Under the terms of the
revolving credit facility, the interest rate spread (and commitment fee) is
based on the Company’s credit rating.
Other
As of
October 4, 2008, the Company also had $4,174 outstanding under an economic
development note.
Guarantees
and Covenants
The term
loan and revolving credit facility are fully and unconditionally guaranteed by
Advance Auto Parts, Inc. The Company’s debt agreements collectively contain
covenants restricting its ability to, among other things: (1) create, incur or
assume additional debt (including hedging arrangements), (2) incur liens or
engage in sale-leaseback transactions, (3) make loans and investments, (4)
guarantee obligations, (5) engage in certain mergers, acquisitions and asset
sales, (6) change the nature of the Company’s business and the business
conducted by its subsidiaries and (7) change the Company’s status as a holding
company. The Company is required to comply with financial covenants with respect
to a maximum leverage ratio and a minimum consolidated coverage ratio. The
Company was in compliance with these covenants at October 4, 2008. The
Company’s term loan and revolving credit facility also provide for
customary events of default, covenant defaults and cross-defaults to its other
material indebtedness.
The
Company seeks to manage and mitigate cash flow risk on its variable rate debt
via interest rate swaps. The fair value of the Company’s interest rate swaps at
October 4, 2008 and December 29, 2007 reflected an unrecognized loss of $11,376
and $7,645, respectively. Any amounts received or paid under these hedges are
recorded in the statement of operations during the accounting period the
interest on the hedged debt is paid.
Based on
the estimated current and future fair values of the hedge arrangements at
October 4, 2008, the Company estimates amounts currently included in Accumulated
other comprehensive income (loss) that will be
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Weeks Ended October
4, 2008 and October 6, 2007
(in
thousands, except per share data)
(unaudited)
reclassified
to earnings in the next 12 months will consist of a loss of $4,188 associated
with the interest rate swaps.
The
Company has executed interest rate swaps with certain counterparties. As a
result of the deterioration and uncertainty in the credit markets, the Company
may experience losses on these interest rate swaps in the event of a default by
the counterparties.
8. |
Stock
Repurchase
Program:
|
On May
15, 2008, the Company’s Board of Directors authorized a new $250,000 stock
repurchase program. The new program cancelled and replaced the remaining portion
of the Company’s previous $500,000 stock repurchase program (authorized on
August 8, 2007). The program allows the Company to repurchase its common stock
on the open market or in privately negotiated transactions from time to time in
accordance with the requirements of the Securities and Exchange
Commission.
During
the twelve weeks ended October 4, 2008, the Company repurchased 1,372 shares of
common stock at an aggregate cost of $53,623, or an average price of $39.09 per
share. These shares were repurchased in accordance with the Company’s $250,000
stock repurchase program authorized by its Board of Directors in the second
quarter of fiscal 2008. During the forty weeks ended October 4, 2008, the
Company repurchased 6,136 shares of common stock at an aggregate cost of
$216,471, or an average price of $35.28 per share, of which 4,564 shares of
common stock were repurchased under the previous $500,000 stock repurchase
program. Additionally, the Company settled $2,959 on shares repurchased prior to
the end of fiscal 2007.
As of
October 4, 2008, the Company had repurchased 1,573 shares of common stock at an
aggregate cost of $61,089 under its $250,000 stock repurchase program resulting
in $188,911 remaining under this program, excluding related
expenses.
The
Company provides certain health and life insurance benefits for eligible retired
team members through a postretirement plan, or Plan. These benefits are subject
to deductibles, co-payment provisions and other limitations. The Plan has no
assets and is funded on a cash basis as benefits are paid. The Company’s
postretirement liability is calculated annually by a third-party actuary. The
discount rate utilized at December 29, 2007 was 6.0%, and remained unchanged
through the forty weeks ended October 4, 2008. The Company expects fiscal 2008
plan contributions to completely offset benefits paid, consistent with fiscal
2007.
The
components of net periodic postretirement benefit cost for the twelve and forty
weeks ended October 4, 2008, and October 6, 2007 respectively, are as
follows:
|
|
Twelve
Weeks Ended
|
|
|
Forty
Weeks Ended
|
|
|
|
October
4,
|
|
|
October
6,
|
|
|
October
4,
|
|
|
October
6,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$ |
115 |
|
|
$ |
127 |
|
|
$ |
383 |
|
|
$ |
423 |
|
Amortization
of negative prior service cost
|
|
|
(134 |
) |
|
|
(134 |
) |
|
|
(447 |
) |
|
|
(447 |
) |
Amortization
of unrecognized net gain
|
|
|
(3 |
) |
|
|
- |
|
|
|
(10 |
) |
|
|
- |
|
Net
periodic postretirement benefit cost
|
|
$ |
(22 |
) |
|
$ |
(7 |
) |
|
$ |
(74 |
) |
|
$ |
(24 |
) |
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Weeks Ended October
4, 2008 and October 6, 2007
(in
thousands, except per share data)
(unaudited)
10. |
Share-Based
Compensation
Plans:
|
During
the forty weeks ended October 4, 2008, the Company made a series of share-based
award grants to employees under the Company’s long-term incentive plan, as well
as to executives hired earlier in 2008. The share based-award grants were
comprised of stock appreciation rights, or SARs, and shares of restricted stock
(nonvested shares). The Company granted 1,486 SARs, to be settled in
the Company’s common stock at a weighted average conversion price of $34.90 per
share. Based on the Black-Scholes option pricing model, the weighted average
grant date fair value for the SARs awarded was $9.23 per share. Additionally,
the Company granted 295 shares of restricted stock, which had a weighted average
grant date fair value of $35.30 per share. This value was determined based on
the ending market price of the Company’s common stock on the date of the
grant.
The SARs
granted during the forty weeks ended October 4, 2008 vest over a three-year
period in equal installments beginning on the first anniversary of the grant
date, with the exception of certain SARs awards granted to certain executives.
Those grants provide for 25% of the SARs award granted to vest immediately with
exercise restrictions during the first year, and the remainder of the award to
vest in equal installments over the three-year period consistent with all other
SARs granted.
Beginning
in 2008, all new restricted stock awards granted vest over a three-year period
in equal annual installments beginning on the first anniversary of the grant
date with the exception of certain shares of restricted stock granted to certain
executives. Those shares vest at the end of a three-year period following the
grant date. Shares of restricted stock granted during the prior year also vest
at the end of the three-year period following the grant date. During this
period, holders of restricted stock are entitled to dividend and voting rights.
Shares of restricted stock are restricted until they vest and cannot be sold
until the restriction has lapsed.
As of
October 4, 2008, there was $22,563 of unrecognized compensation expense related
to all share-based awards that is expected to be recognized over a weighted
average of 1.9 years. Unrecognized compensation expense includes adjustments
made for award forfeitures from departing executives and other employees. The
Company recognized $13,405 and $14,318 of share-based compensation expense for
the forty weeks ended October 4, 2008 and October 6, 2007,
respectively.
As
previously discussed, the Company adopted SFAS No. 157, which defines fair
value, establishes a framework for measuring fair value and expands disclosure
requirements. SFAS No. 157 defines fair value as the price that would be
received to sell an asset, or paid to transfer a liability (an exit price), in
the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date (with no
compulsion to buy or sell).
Our
financial assets and liabilities measured at fair value are grouped in three
levels. The levels prioritize the inputs used to measure the fair value of these
assets or liabilities. These levels are:
·
|
Level
1 – Unadjusted quoted prices that are available in active markets for
identical assets or liabilities at the measurement
date.
|
·
|
Level
2 – Inputs other than quoted prices that are observable for assets and
liabilities at the measurement date, either directly or indirectly. These
inputs include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities
in
|
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Weeks Ended October
4, 2008 and October 6, 2007
(in
thousands, except per share data)
(unaudited)
|
markets
that are less active, inputs other than quoted prices that are observable
for the asset or liability or corroborated by other observable market
data.
|
·
|
Level
3 – Unobservable inputs for assets or liabilities that are not able to be
corroborated by observable market data and reflect the use of a reporting
entity’s own assumptions. These values are
generally determined using pricing models for which the assumptions
utilize management’s estimates of market participant
assumptions.
|
The
following financial liabilities were measured at fair value on a recurring basis
during the forty weeks ended October 4, 2008:
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
October
4, 2008
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
Interest
rate swaps
|
|
$ |
11,376 |
|
|
$ |
- |
|
|
$ |
11,376 |
|
|
$ |
- |
|
The fair
value of the Company’s interest rate swaps is mainly based on observable
interest rate yield curves for similar instruments.
As of
October 4, 2008 and December 29, 2007, the Company also reported additional
financial assets and liabilities at their respective carrying amounts which
included cash and cash equivalents, receivables, bank overdrafts, accounts
payable, financed vendor accounts payable and current portion of long-term debt.
The carrying amount approximates fair value because of the short maturity of
those instruments. As of October 4, 2008 and December 29, 2007, the fair value
of the Company’s long-term debt with a carrying value of $470,494 and $505,062,
respectively, was approximately $389,500 and $502,000, respectively, and was
based on similar long-term debt issues available to the Company as of that
date.
The
Company includes in comprehensive income the changes in fair value of the
Company’s interest rate swaps and changes in net unrecognized other
postretirement benefit costs.
Comprehensive
income for the twelve and forty weeks ended October 4, 2008 and October 6, 2007
is as follows:
|
|
Twelve
Weeks Ended
|
|
|
Forty
Weeks Ended
|
|
|
|
October
4,
2008
|
|
|
October
6,
2007
|
|
|
October
4,
2008
|
|
|
October
6,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
56,155 |
|
|
$ |
59,040 |
|
|
$ |
213,627 |
|
|
$ |
203,565 |
|
Unrealized
loss on hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
arrangements,
net of tax
|
|
|
(1,730 |
) |
|
|
(3,044 |
) |
|
|
(2,271 |
) |
|
|
(889 |
) |
Changes
in net unrecognized other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
postretirement
benefit cost, net of tax
|
|
|
(84 |
) |
|
|
(83 |
) |
|
|
(279 |
) |
|
|
(275 |
) |
Comprehensive
income
|
|
$ |
54,341 |
|
|
$ |
55,913 |
|
|
$ |
211,077 |
|
|
$ |
202,401 |
|
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Weeks Ended October
4, 2008 and October 6, 2007
(in
thousands, except per share data)
(unaudited)
13. |
Segment
and Related
Information:
|
The
Company has the following two reportable segments: Advance Auto Parts, or AAP,
and Autopart International, or AI. The AAP segment is comprised of store
operations within the United States, Puerto Rico and the Virgin Islands which
operate under the trade names “Advance Auto Parts,” “Advance Discount Auto
Parts” and “Western Auto.” These stores offer a broad selection of brand name
and proprietary automotive replacement parts, accessories
and maintenance items for domestic and imported cars and light
trucks.
The AI
segment consists solely of the operations of Autopart International, which
operates as an independent, wholly-owned subsidiary. AI’s business serves the
commercial market in addition to warehouse distributors and jobbers located
throughout the Northeastern region of the United States.
The
Company evaluates each of its segment’s financial performance based on net sales
and operating profit for purposes of making decisions and allocating resources.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies in Note
1.
The
following table summarizes financial information for each of the Company's
business segments for the twelve and forty weeks ended October 4, 2008 and
October 6, 2007, respectively.
|
|
Twelve
Week Periods Ended
|
|
|
Forty
Week Periods Ended
|
|
|
|
October
4,
|
|
|
October
6,
|
|
|
October
4,
|
|
|
October
6,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
AAP
|
|
$ |
1,146,516 |
|
|
$ |
1,124,110 |
|
|
$ |
3,822,585 |
|
|
$ |
3,692,208 |
|
AI
|
|
|
41,436 |
|
|
|
33,933 |
|
|
|
127,282 |
|
|
|
103,814 |
|
Total
net sales
|
|
$ |
1,187,952 |
|
|
$ |
1,158,043 |
|
|
$ |
3,949,867 |
|
|
$ |
3,796,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision (benefit) for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAP
|
|
$ |
87,143 |
|
|
$ |
92,186 |
|
|
$ |
337,667 |
|
|
$ |
327,475 |
|
AI
|
|
|
1,859 |
|
|
|
578 |
|
|
|
3,933 |
|
|
|
(24 |
) |
Total
income (loss) before provision (benefit) for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
$ |
89,002 |
|
|
$ |
92,764 |
|
|
$ |
341,600 |
|
|
$ |
327,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAP
|
|
$ |
32,065 |
|
|
$ |
33,483 |
|
|
$ |
126,343 |
|
|
$ |
123,897 |
|
AI
|
|
|
782 |
|
|
|
241 |
|
|
|
1,630 |
|
|
|
(11 |
) |
Total
provision (benefit) for income taxes
|
|
$ |
32,847 |
|
|
$ |
33,724 |
|
|
$ |
127,973 |
|
|
$ |
123,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAP
|
|
$ |
2,850,789 |
|
|
$ |
2,623,256 |
|
|
$ |
2,850,789 |
|
|
$ |
2,623,256 |
|
AI
|
|
|
157,470 |
|
|
|
143,310 |
|
|
|
157,470 |
|
|
|
143,310 |
|
Total
segment assets
|
|
$ |
3,008,259 |
|
|
$ |
2,766,566 |
|
|
$ |
3,008,259 |
|
|
$ |
2,766,566 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion of our consolidated historical results of operations and
financial condition should be read in conjunction with our unaudited condensed
consolidated financial statements and the notes thereto included elsewhere in
this report. Our first quarter consists of 16 weeks divided into four equal
periods. Our remaining three quarters consist of 12 weeks with each quarter
divided into three equal periods. Fiscal 2008 is an exception to this rule with
the fourth quarter containing 13 weeks due to our 53-week fiscal
year.
Certain
statements in this report are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are usually identified by the use of
words such as "will," "anticipates," "believes," "estimates," "expects,"
"projects," "forecasts," "plans," "intends," "should" or similar expressions. We
intend those forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995 and are included in this statement for purposes of
complying with these safe harbor provisions.
These
forward-looking statements reflect current views about our plans, strategies and
prospects, which are based on the information currently available and on current
assumptions.
Although
we believe that our plans, intentions and expectations as reflected in or
suggested by those forward-looking statements are reasonable, we can give no
assurance that the plans, intentions or expectations will be achieved. Listed
below and discussed in our Annual Report on Form 10-K for the year ended
December 29, 2007 are some important risks, uncertainties and contingencies
which could cause our actual results, performances or achievements to be
materially different from the forward-looking statements made in this report.
These risks, uncertainties and contingencies include, but are not limited to,
the following:
· the
implementation of our business strategies and goals;
· our
ability to expand our business;
· competitive
pricing and other competitive pressures;
· a
decrease in demand for our products;
· reduced
consumer spending on discretionary items due to current deteriorating economic
conditions;
· the
occurrence of natural disasters and/or extended periods of unfavorable
weather;
· our
ability to obtain affordable insurance against the financial impacts of natural
disasters;
· the
availability of suitable real estate locations;
· our
overall credit rating which impacts our debt interest rate and ability to obtain
additional debt;
· increase
in fuel costs as it impacts our cost to operate and the consumer’s ability to
shop in our stores;
· deterioration
in general economic conditions;
· deteriorating
and uncertain credit markets could negatively impact our merchandise vendors, as
well as our ability to secure additional capital in the
future;
· our
relationship with our vendors;
· our
ability to attract and retain qualified team members;
· our
involvement as a defendant in litigation or incurrence of judgments, fines or
legal costs;
· adherence
to the restrictions and covenants imposed under our revolving and term loan
facilities; and
· acts of
terrorism.
We assume
no obligation 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, and you should
not place undue reliance on those statements.
Management
Overview
We
primarily operate within the United States automotive aftermarket industry,
which includes replacement parts (excluding tires), accessories, maintenance
items, batteries and automotive chemicals for cars and light trucks (pickup
trucks, vans, minivans and sport utility vehicles). We currently are the second
largest specialty retailer of automotive parts, accessories and maintenance
items to "do-it-yourself," or DIY, and commercial customers in the United
States, based on store count and sales.
We
operate in two reportable segments: Advance Auto Parts, or AAP, and Autopart
International, or AI. The AAP segment is comprised of our store
operations within the United States, Puerto Rico and the Virgin Islands which
operate under the trade names “Advance Auto Parts,” “Advance Discount Auto
Parts” and “Western Auto.” The AI segment consists solely of the operations of
Autopart International, Inc., which operates as an independent, wholly-owned
subsidiary. As of October 4, 2008, we operated a total of 3,352 stores. For
additional information regarding our segments, see Note 13, Segments and Related
Information, of the Notes to Condensed Consolidated Financial Statements
in this Quarterly Report on Form 10-Q.
Third Quarter
Highlights
Our third
quarter financial results were adversely impacted by a challenging economic
environment, volatility in the financial and credit markets, disruptions from
hurricanes and the resulting gas shortages in the Southeast. Highlights from our
third quarter include:
·
|
We
recorded earnings per diluted share of $0.59 compared to $0.57 for the
same quarter of fiscal 2007. This 3.5% increase was driven by a reduced
share count as a result of 8.1 million shares repurchased over the past
four quarters.
|
·
|
Our
sales increased 2.6% during the third quarter which was primarily due to
contributions from the 124 net new AAP and AI stores opened within the
last four quarters partially offset by a comparable store sales decrease
of 0.1%.
|
·
|
We
generated operating cash flow of $375.8 million for the forty weeks ended
October 4, 2008, a decrease of $1.9 million over the comparable period the
last four quarters.
|
·
|
We
repurchased 1.4 million shares of common stock for $53.6 million under our
$250 million stock repurchase program. During the forty weeks ended
October 4, 2008, we repurchased 6.1 million shares for $216.5 million at
an average price of $35.28 per share, of which 4.6 million shares were
repurchased under our previous $500 million stock repurchase
program.
|
Update on Turnaround
Strategies
Although
our third quarter financial results were below our expectations, we believe we
are making progress on our key turnaround strategies. As announced earlier in
2008, our key turnaround strategies are:
Ø
|
Commercial
Acceleration
|
Ø
|
Availability
Excellence
|
Each of
the four strategies is at a different stage of progress. We believe these
strategies will enable us to grow top-line sales per square foot, a key driver
to help us to ultimately meet our previously announced goal of $10 billion in
sales in the next five years.
Our
progress in the Commercial Acceleration strategy is evident as we have
experienced double digit comparable sales increases over the last three
quarters. For the third quarter, we experienced a 10.8% comparable store sales
increase in our commercial sales. We have already added more parts to our stores
with commercial
programs,
including key brands which are highly respected and preferred by our commercial
customers. Another key component of the Commercial Acceleration strategy is
developing a sales force to drive our commercial business. We are also testing
other initiatives which will be rolled out on a larger scale that meet the needs
of our commercial customers while driving shareholder value.
The
initial focus of the DIY Transformation strategy is to turnaround our current
DIY sales trends utilizing targeted initiatives. Our third quarter
DIY comparable sales decrease of 4.1% was more representative of the DIY sales
trend prior to our second quarter, which was favorably impacted by the tax
stimulus checks. During the third quarter, we completed a 100-day assessment of
our DIY business where a representative group of management and field team
members worked closely together and concluded that we must continue to focus on
initiatives such as attachment selling, parts availability and proper scheduling
of our store team members. Additionally, we have identified certain areas where
we are experiencing positive DIY sales results which provide us an opportunity
to utilize those best practices across the entire DIY business.
Our
ability to achieve successful results in our Commercial Acceleration and DIY
Transformation strategies is dependent upon our Availability Excellence and
Superior Experience strategies.
The
Availability Excellence strategy represents our commitment to enhance the parts
availability in our stores to better serve both our commercial and DIY
customers. This strategy incorporates our supply chain and logistics network
capabilities, space management and merchandising initiatives. We are making
progress on the parts availability initiative as the merchandising and inventory
management teams partner with the commercial and DIY teams to accelerate sales
growth. We have also made progress in other initiatives, including the
restructuring of our merchandising department into an integrated operating
model, the completion of an initial phase of a new category management process
and the roll-out of a new price optimization tool. As previously announced, we
are also implementing an Oracle merchandising system over a multi-year timeframe
which will serve as a key upgrade to our current merchandising systems. We will
continue to measure progress in our Availability Excellence strategy, using
productivity metrics such as sales per square foot and gross margin return on
inventory.
Superior
Experience is centered around our store operations and customer service. The
leaders of this area will be re-engineering the store experience and store
operations as well as better understanding what the customer ultimately wants.
We have begun to evaluate our customer service through the measurement of team
member engagement and customer satisfaction. We believe we will gain valuable
information from these results which will drive improvement in our results in
future quarters.
Our
financial results have been up and down over the forty week period ended October
4, 2008 as sales decelerated sharply during the first part our third quarter.
Our outlook is cautious for the remainder of 2008 given the current economic
environment. We are still in the early stages of implementing our four key
turnaround strategies. We are committed to making the necessary investments for
the long-term success of the Company.
Consolidated
Operating Results and Key Statistics and Metrics
The
following table highlights certain consolidated operating results and key
statistics and metrics for the twelve and forty weeks ended October 4, 2008 and
October 6, 2007, respectively, and fiscal years ended December 29, 2007 and
December 30, 2006. We will use these key statistics and metrics to
measure the financial progress of our turnaround strategies.
|
|
Twelve
Weeks Ended
|
|
|
Forty
Weeks Ended
|
|
|
Fiscal
Years Ended
|
|
|
|
October
4,
|
|
|
October
6,
|
|
|
October
4,
|
|
|
October
6,
|
|
|
December
29,
|
|
|
December
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
Operating
Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales (in
000s)
|
|
$ |
1,187,952 |
|
|
$ |
1,158,043 |
|
|
$ |
3,949,867 |
|
|
$ |
3,796,022 |
|
|
$ |
4,844,404 |
|
|
$ |
4,616,503 |
|
Total
commercial net sales (in
000s)
|
|
$ |
359,420 |
|
|
$ |
314,052 |
|
|
$ |
1,155,588 |
|
|
$ |
1,002,498 |
|
|
$ |
1,290,602 |
|
|
$ |
1,155,953 |
|
Comparable
store net sales growth (1)
|
|
|
(0.1%) |
|
|
|
1.0% |
|
|
|
1.1% |
|
|
|
1.0% |
|
|
|
0.7% |
|
|
|
1.6% |
|
DIY
comparable store net sales growth (1)
|
|
|
(4.1%) |
|
|
|
(1.2%) |
|
|
|
(2.6%) |
|
|
|
(0.6%) |
|
|
|
(1.1%) |
|
|
|
(0.8%) |
|
Commercial
comparable store net sales growth (1)
|
|
|
10.8% |
|
|
|
7.5% |
|
|
|
11.6% |
|
|
|
5.6% |
|
|
|
6.2% |
|
|
|
10.7% |
|
Gross
profit
|
|
|
48.6% |
|
|
|
47.9% |
|
|
|
48.6% |
|
|
|
48.1% |
|
|
|
47.9% |
|
|
|
47.7% |
|
Selling,
general & administrative expenses (SG&A)
|
|
|
40.5% |
|
|
|
39.3% |
|
|
|
39.3% |
|
|
|
38.8% |
|
|
|
39.3% |
|
|
|
39.0% |
|
Operating
margin
|
|
|
8.1% |
|
|
|
8.7% |
|
|
|
9.3% |
|
|
|
9.3% |
|
|
|
8.6% |
|
|
|
8.7% |
|
Diluted
earnings per share
|
|
$ |
0.59 |
|
|
$ |
0.57 |
|
|
$ |
2.23 |
|
|
$ |
1.92 |
|
|
$ |
2.28 |
|
|
$ |
2.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Statistics and
Metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of stores, end of period
|
|
|
3,352 |
|
|
|
3,228 |
|
|
|
3,352 |
|
|
|
3,228 |
|
|
|
3,261 |
|
|
|
3,082 |
|
Total
store square footage, end of period (in
000s)
|
|
|
24,627 |
|
|
|
23,771 |
|
|
|
24,627 |
|
|
|
23,771 |
|
|
|
23,982 |
|
|
|
22,753 |
|
Total
team members, end of period
|
|
|
47,886 |
|
|
|
45,476 |
|
|
|
47,886 |
|
|
|
45,476 |
|
|
|
44,141 |
|
|
|
44,421 |
|
Average
net sales per store (in
000s)(2)
|
|
$ |
1,519 |
|
|
$ |
1,538 |
|
|
$ |
1,519 |
|
|
$ |
1,538 |
|
|
$ |
1,527 |
|
|
$ |
1,551 |
|
Average
net sales per square foot (2)
|
|
$ |
207 |
|
|
$ |
209 |
|
|
$ |
207 |
|
|
$ |
209 |
|
|
$ |
207 |
|
|
$ |
210 |
|
Operating
income per team member (in 000s)(2)(3)
|
|
$ |
9.25 |
|
|
$ |
9.22 |
|
|
$ |
9.25 |
|
|
$ |
9.22 |
|
|
$ |
9.40 |
|
|
$ |
9.29 |
|
SG&A
expenses per store (in
000s)
(2)
|
|
$ |
603 |
|
|
$ |
604 |
|
|
$ |
603 |
|
|
$ |
604 |
|
|
$ |
601 |
|
|
$ |
604 |
|
Gross
margin return on inventory (2)(4)
|
|
$ |
3.55 |
|
|
$ |
3.47 |
|
|
$ |
3.55 |
|
|
$ |
3.47 |
|
|
$ |
3.39 |
|
|
$ |
3.38 |
|
Note: These
metrics should be reviewed along with the footnotes to the table setting forth
our selected store data in Item 6. "Selected Consolidated Financial Data" in our
Annual Report on Form 10-K for the fiscal year ended December 29, 2007, which
was filed with the SEC on February 27, 2008, except for additional footnotes
below. The footnotes contain
descriptions regarding the calculation of these metrics.
(1)
|
Beginning
in fiscal 2008, the Company includes in its comparable store sales the net
sales from stores operated in Puerto Rico and Virgin Islands, or Offshore,
and AI stores. The comparable periods have been adjusted
accordingly.
|
(2)
|
These
financial metrics presented for each quarter and year-to-date period are
calculated on an annual basis and accordingly reflect the last four fiscal
quarters completed.
|
(3)
|
Operating
income per team member is calculated as operating income divided by an
average of beginning and ending number of team
members.
|
(4)
|
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.
|
Store
Development by Segment
AAP
Segment
At
October 4, 2008, we operated 3,227 AAP stores within the United States, Puerto
Rico and the Virgin Islands. We operated 3,197 stores throughout 40 states in
the Northeastern, Southeastern and Midwestern regions of the United States.
These stores operated under the “Advance Auto Parts” trade name except for
certain stores in the state of Florida, which operated under the “Advance
Discount Auto Parts” trade name. These stores offer a broad selection of brand
name and proprietary automotive replacement parts, accessories and maintenance
items for domestic and imported cars and light trucks. In addition, we operated
30 stores under the “Western Auto” and “Advance Auto Parts” trade names, located
Offshore.
The
following table sets forth information about our AAP stores during the twelve
and forty weeks ended October 4, 2008, including the number of new, closed and
relocated stores and stores with commercial programs that deliver products to
our commercial customers’ place of business. We lease approximately 81% of our
AAP stores.
|
|
Twelve
|
|
|
Forty
|
|
|
|
Weeks
Ended
|
|
|
Weeks
Ended
|
|
|
|
October
4,
|
|
|
October
4,
|
|
|
|
2008
|
|
|
2008
|
|
Number
of stores at beginning of period
|
|
|
3,203 |
|
|
|
3,153 |
|
New
stores
|
|
|
27 |
|
|
|
83 |
|
Closed
stores
|
|
|
(3 |
) |
|
|
(9 |
) |
Number
of stores, end of period
|
|
|
3,227 |
|
|
|
3,227 |
|
Relocated
stores
|
|
|
1 |
|
|
|
8 |
|
Stores
with commercial programs
|
|
|
2,710 |
|
|
|
2,710 |
|
AI
Segment
At
October 4, 2008, we operated 125 AI stores in the Northeastern region of the
United States under the “Autopart International” trade name. These stores offer
a broad selection of brand name and proprietary automotive replacement parts,
accessories and maintenance items for domestic and imported cars and light
trucks, with a greater focus on imported parts. AI primarily serves the
commercial market from its retail locations and additionally through a wholesale
distribution network.
The
following table sets forth information about our AI stores, including the number
of new and closed stores, during the twelve and forty weeks ended October 4,
2008. We lease 100% of our AI stores.
|
|
Twelve
|
|
|
Forty
|
|
|
|
Weeks
Ended
|
|
|
Weeks
Ended
|
|
|
|
October
4,
|
|
|
October
4,
|
|
|
|
2008
|
|
|
2008
|
|
Number
of stores at beginning of period
|
|
|
122 |
|
|
|
108 |
|
New
stores
|
|
|
3 |
|
|
|
17 |
|
Closed
stores
|
|
|
- |
|
|
|
- |
|
Number
of stores, end of period
|
|
|
125 |
|
|
|
125 |
|
Stores
with commercial programs
|
|
|
125 |
|
|
|
125 |
|
As
previously disclosed in our Form 10-K for the year ended December 29, 2007, we
anticipate that we will add a total of approximately 115 new AAP and AI stores
during 2008 primarily through new store openings.
Critical
Accounting Policies
Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. Our discussion and analysis
of the financial condition and results of operations are based on these
financial statements. The preparation of these financial statements requires the
application of accounting policies in addition to certain estimates and
judgments by our management. Our estimates and judgments are based on currently
available information, historical results and other assumptions we believe are
reasonable. Actual results could differ from these estimates. During the twelve
and forty weeks ended October 4, 2008, we consistently applied the critical
accounting policies discussed in our Annual Report on Form 10-K for the year
ended December 29, 2007. For a complete discussion regarding these critical
accounting policies, refer to the 2007 Annual Report on Form 10-K.
Components
of Statement of Operations
Net
Sales
Net sales
consist primarily of merchandise sales from our retail store locations to our
DIY and commercial customers. Our total sales growth is comprised of both
comparable store sales and new store sales. We calculate comparable store sales
growth based on the change in store sales starting once a store has been open
for 13 complete accounting periods (approximately one year). We include sales
from relocated stores in comparable store sales from the original date of
opening. Beginning in 2008, we also include in comparable store sales the net
sales from the Offshore and AI stores. The comparable periods have been adjusted
accordingly.
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 variations in our product mix, price changes in response to competitive
factors and fluctuations in merchandise costs, vendor programs, inventory
shrinkage, defective merchandise and warranty costs and warehouse and
distribution costs. We seek to avoid fluctuations in merchandise costs and the
instability of supply by entering into long-term purchase agreements with
vendors, without minimum purchase volume requirements, when we believe it is
advantageous. Our gross profit may not be comparable to those of our competitors
due to differences in industry practice regarding the classification of certain
costs. See Note 1 in our condensed consolidated financial statements for
additional discussion of these costs.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses consist of store payroll, store occupancy
(including rent and depreciation), advertising expenses, commercial delivery
expenses, other store expenses and general and administrative expenses,
including salaries and related benefits of store support center team members,
share-based compensation expense, store support center administrative office
expenses, data processing, professional services, self-insurance costs and other
related expenses. See Note 1 in our condensed consolidated financial statements
for additional discussion of these costs.
Results
of Operations
The
following table sets forth certain of our operating data expressed as a
percentage of net sales for the periods indicated.
|
|
Twelve
Week Periods Ended
|
|
|
Forty
Week Periods Ended
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
October
4,
|
|
|
October
6,
|
|
|
October
4,
|
|
|
October
6,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
sales
|
|
|
100.0
|
% |
|
|
100.0
|
% |
|
|
100.0
|
% |
|
|
100.0
|
% |
Cost
of sales, including purchasing and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warehousing
costs
|
|
|
51.4 |
|
|
|
52.1 |
|
|
|
51.4 |
|
|
|
51.9 |
|
Gross
profit
|
|
|
48.6 |
|
|
|
47.9 |
|
|
|
48.6 |
|
|
|
48.1 |
|
Selling,
general and administrative expenses
|
|
|
40.5 |
|
|
|
39.3 |
|
|
|
39.3 |
|
|
|
38.8 |
|
Operating
income
|
|
|
8.1 |
|
|
|
8.7 |
|
|
|
9.3 |
|
|
|
9.3 |
|
Interest
expense
|
|
|
(0.6 |
) |
|
|
(0.7 |
) |
|
|
(0.7 |
) |
|
|
(0.6 |
) |
Other
(loss) income, net
|
|
|
(0.0 |
) |
|
|
0.0 |
|
|
|
(0.0 |
) |
|
|
0.0 |
|
Provision
for income taxes
|
|
|
2.8 |
|
|
|
2.9 |
|
|
|
3.2 |
|
|
|
3.3 |
|
Net
income
|
|
|
4.7
|
% |
|
|
5.1
|
% |
|
|
5.4
|
% |
|
|
5.4
|
% |
Twelve
Weeks Ended October 4, 2008 Compared to Twelve Weeks Ended October 6,
2007
Net sales
for the twelve weeks ended October 4, 2008 were $1,188.0 million, an
increase of $29.9 million, or 2.6%, as compared to net sales for the twelve
weeks ended October 6, 2007. The net sales increase was due to contributions
from the 124 net new AAP and AI stores opened within the last four quarters
partially offset by a comparable store sales decrease of 0.1%. AAP produced
sales of $1,146.6 million, an increase of $22.4 million, or 2.0%. AAP’s sales
increase was primarily driven by sales from the 103 net new stores opened within
the last four quarters partially offset by a 0.3% comparable store sales
decrease. The AAP comparable store sales decrease was driven by a decrease in
DIY customer count partially offset by (i) an increase in average ticket sales
by our DIY customers and (ii) an increase in average ticket sales and customer
traffic in our commercial business. AI produced sales of $41.4 million, an
increase of $7.5 million, or 22.1%. AI’s sales increase was primarily driven by
an 8.6% comparable store sales increase and sales from 21 net new stores opened
within the last four quarters.
Gross
profit for the twelve weeks ended October 4, 2008 was $577.1 million, or 48.6%
of net sales, as compared to $555.1 million, or 47.9% of net sales, for the
twelve weeks ended October 6, 2007, or an increase of 65 basis points. The
increase in gross profit as a percentage of net sales was primarily due to more
effective pricing, improved shrinkage rates and higher sales from AI, which
generated a higher gross profit rate.
Selling,
general and administrative expenses increased to $481.2 million, or 40.5% of net
sales, for the twelve weeks ended October 4, 2008, from $454.7 million, or 39.3%
of net sales, for the twelve weeks ended October 6, 2007, or an increase of 124
basis points. The increase in selling, general and administrative expenses as a
percentage of sales was primarily driven by higher investments in strategic
initiatives, flat comparable store sales and the inability to quickly adjust
variable expenses to decelerating sales trends from the second quarter.
Partially offsetting these increases were lower medical expenses, reduced
advertising and the absence of expenses incurred during the prior year third
quarter related to asset impairments and severance.
Operating
income for the twelve weeks ended October 4, 2008 was $95.9 million, or 8.1% of
net sales, as compared to $100.4 million, or 8.7% of net sales, for the twelve
weeks ended October 6, 2007, representing a decrease of 4.5%. This decrease in
operating income, as a percentage of net sales, reflected higher selling,
general and administrative expenses as previously discussed partially offset by
an increase in gross profit. AAP produced operating income of $94.0 million, or
8.2% of net sales, for the twelve weeks ended October 4, 2008 as compared to
$99.8 million, or 8.9% of net sales, for the twelve weeks ended October 6, 2007.
AI generated operating income of
$1.9
million for the twelve weeks ended October 4, 2008 as compared to $0.6 million
for the comparable period last year. AI’s operating income increased primarily
due to the positive sales results during the quarter and a decrease in payroll
expense as a percentage of sales.
Interest
expense for the twelve weeks ended October 4, 2008 was $6.7 million, or 0.6% of
net sales, as compared to $8.0 million, or 0.7% of net sales, for the twelve
weeks ended October 6, 2007. The decrease in interest expense as a percentage of
sales is a result of lower average borrowing rates partially offset by our
higher average outstanding borrowings during the twelve weeks ended October 4,
2008 compared to the same period ended October 6, 2007.
Income
tax expense for the twelve weeks ended October 4, 2008 was $32.8 million, as
compared to $33.7 million for the twelve weeks ended October 6, 2007. Our
effective income tax rate was 36.9% for the twelve weeks ended October 4, 2008
compared to 36.4% for the same period ended October 6, 2007.
We
generated net income of $56.2 million, or $0.59 per diluted share, for the
twelve weeks ended October 4, 2008, as compared to $59.0 million, or $0.57 per
diluted share, for the twelve weeks ended October 6, 2007. As a percentage of
net sales, net income for the twelve weeks ended October 4, 2008 was 4.7%, as
compared to 5.1% for the twelve weeks ended October 6, 2007. The increase in
diluted earnings per share was due to a reduced share count as a result of the
shares repurchased during the last year.
Forty
Weeks Ended October 4, 2008 Compared to Forty Weeks Ended October 6,
2007
Net sales
for the forty weeks ended October 4, 2008 were $3,949.9 million, an
increase of $153.8 million, or 4.1%, as compared to net sales for the forty
weeks ended October 6, 2007. The net sales increase was due to an increase in
comparable store sales of 1.1% and contributions from the 124 net new AAP and AI
stores opened within the last four quarters. AAP produced sales of $3,822.6
million, an increase of $130.4 million, or 3.5%. AAP’s sales increase was
primarily driven by a 0.9% comparable store sales increase and sales from the
103 net new stores opened within the last four quarters. The AAP comparable
store sales increase was driven by (i) an increase in average ticket sales and
customer traffic in our commercial business and (ii) an increase in average
ticket sales by our DIY customers offset by a decrease in DIY customer count. AI
produced sales of $127.3 million, an increase of $23.5 million, or 22.6%. AI’s
sales increase was primarily driven by a 10.1% comparable store sales increase
and sales from 21 net new stores opened within the last four
quarters.
Gross
profit for the forty weeks ended October 4, 2008 was $1,921.4 million, or 48.6%
of net sales, as compared to $1,827.4 million, or 48.1% of net sales, for the
forty weeks ended October 6, 2007, or an increase of 51 basis points. The
increase in gross profit as a percentage of net sales was driven by lower supply
chain and logistics costs gained primarily through efficiencies of handling more
inventory in our distribution centers and more effective pricing.
Selling,
general and administrative expenses increased to $1,553.3 million, or 39.3% of
net sales, for the forty weeks ended October 6, 2008, from $1,474.5 million, or
38.8% of net sales, for the forty weeks ended October 6, 2007, or an increase of
48 basis points. The increase in selling, general and administrative expenses as
a percentage of sales was driven by higher investments in strategic initiatives,
increased incentive compensation and higher gasoline costs. Partially offsetting
these items were costs savings realized from cost reduction initiatives we
completed in fiscal 2007.
Operating
income for the forty weeks ended October 4, 2008 was $368.1 million, or 9.3% of
net sales, as compared to $352.9 million, or 9.3% of net sales, for the forty
weeks ended October 6, 2007, remaining flat. AAP produced operating income of
$364.2 million, or 9.5% of net sales, for the forty weeks ended October 4, 2008
as compared to $352.9 million, or 9.6% of net sales, for the forty weeks ended
October 6, 2007. AI generated operating income of $3.9 million for the forty
weeks ended October 4, 2008 as compared to no operating income for the
comparable period last year. Operating income increased primarily due to AI’s
positive sales results and a decrease in payroll expense as a percentage of
sales.
Interest
expense for the forty weeks ended October 4, 2008 was $26.2 million, or 0.7% of
net sales, as compared to $26.6 million, or 0.6% of net sales, for the forty
weeks ended October 6, 2007. The increase in interest expense as a percentage of
net sales is a result of higher average outstanding borrowings partially offset
by our lower average borrowing rates during the forty weeks ended October 4,
2008 compared to the same period ended October 6, 2007.
Income
tax expense for the forty weeks ended October 4, 2008 was $128.0 million, as
compared to $123.9 million for the forty weeks ended October 6, 2007. Our
effective income tax rate was 37.5% for the forty weeks ended October 4, 2008
compared to 37.8% for the same period ended October 6, 2007.
We
generated net income of $213.6 million, or $2.23 per diluted share, for the
forty weeks ended October 4, 2008, as compared to $203.6 million, or $1.92 per
diluted share, for the forty weeks ended October 6, 2007. As a percentage of net
sales, net income was 5.4% for both the forty weeks ended October 4, 2008 and
October 6, 2007. The increase in diluted earnings per share was primarily due to
a reduced share count as a result of the shares repurchased during the last year
as well as an increase in operating income.
Liquidity
and Capital Resources
Our
primary cash requirements include the purchase of inventory, contractual
obligations, and capital expenditures as well as the payment of quarterly cash
dividends. In addition, we have used available funds to repurchase shares of
common stock under our stock repurchase program and to repay borrowings under
our credit facility. We have funded these requirements primarily through cash
generated from operations supplemented by borrowings under our credit facilities
as needed. We believe funds generated from our expected results of operations,
available cash and cash equivalents and available borrowings under our revolving
credit facility will be sufficient to fund our primary obligations for the next
year.
At
October 4, 2008, our cash and cash equivalents balance was $21.3 million, an
increase of $6.7 million compared to December 29, 2007. This increase resulted
from additional cash flow from lower capital expenditures, partially offset by
the return of capital to our shareholders through the repurchase of common stock
during the forty weeks ended October 4, 2008. Additional discussion of our cash
flow results is set forth in the Analysis of Cash Flows
section.
At
October 4, 2008, our outstanding indebtedness was $34.5 million lower when
compared to December 29, 2007 and consisted of borrowings of $267.0 million
under our revolving credit facility, $200.0 million under our term loan, and
$4.2 million outstanding on an economic development note. Additionally, we had
$79.8 million in letters of credit outstanding, which reduced our total
availability under the revolving credit facility to $403.2 million.
During
the forty weeks ended October 4, 2008, we paid $23.2 million in quarterly cash
dividends. Subsequent to October 4, 2008, our Board of Directors declared a
quarterly dividend of $0.06 per share to be paid on January 9, 2009 to all
common stockholders of record as of December 26, 2008.
Capital
Expenditures
Our
primary capital requirements have been the funding of our continued store
expansion program, including new store openings and store acquisitions, store
relocations, store remodels prior to 2008, maintenance of existing stores,
the construction and upgrading of distribution centers, the development of
proprietary information systems and purchased information systems. During the
forty weeks ended October 4, 2008, we opened 83 AAP and 17 AI stores and
relocated eight AAP stores. Our capital expenditures were $137.0 million
for the forty weeks ended October 4, 2008.
Our
future capital requirements will depend in large part on the number of and
timing for new stores we open or acquire within a given year and the number of
stores we relocate and remodel. As previously disclosed in our Form 10-K for the
year ended December 29, 2007, we anticipate adding 100 new AAP and 15 AI stores,
relocating 10 to 20 AAP stores and spending $170 million to $190 million on
capital expenditures in fiscal 2008. We
do not
plan to remodel any stores under the 2010 remodel program in fiscal 2008. We
also plan to make continued investments in the maintenance of our existing
stores and logistics network as well as investing in new information
systems to support our turnaround strategies, including our parts availability
initiative.
Vendor
Financing Program
Historically,
we have negotiated extended payment terms from suppliers that help finance
inventory growth, and we believe that we will be able to continue financing much
of our inventory growth through such extended payment terms. We have a
short-term financing program with a bank for certain merchandise purchases. In
substance, the program allows us to borrow money from the bank to finance
purchases from our vendors. This program allows us to reduce our working capital
invested in current inventory levels and finance future inventory growth. Our
revolving credit facility and term loan do not restrict availability under
this program. At October 4, 2008, $181.9 million was payable to the bank by us
under this program.
Subsequent
to October 4, 2008, we entered into a customer-managed services agreement with a
third party to provide an accounts payable tracking system which facilitates
participating suppliers’ ability to finance payment obligations from us with
designated third-party financial institutions. Participating suppliers may, at
their sole discretion, make offers to finance one or more payment obligations of
the Company prior to their scheduled due dates at a discounted price to
participating financial institutions. Our goal in entering into this arrangement
is to capture overall supply chain savings, in the form of pricing, payment
terms or vendor funding, created by facilitating suppliers’ ability to finance
payment obligations at more favorable discount rates, while providing them with
greater working capital flexibility.
The
recent deterioration in the credit markets may adversely impact our ability to
secure funding for any these programs which would reduce our anticipated savings
from these programs.
Stock
Repurchase Program
On May
15, 2008, our Board of Directors authorized a new $250 million stock repurchase
program. The new program cancelled and replaced the remaining portion of our
previous $500 million stock repurchase program. The 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
Securities and Exchange Commission.
During
the twelve weeks ended October 4, 2008, we repurchased 1.4 million shares of
common stock at an aggregate cost of $53.6 million, or an average price of
$39.09 per share, in accordance with our $250 million stock repurchase program.
During the forty weeks ended October 4, 2008, we repurchased 6.1 million shares
of common stock at an aggregate cost of $216.5 million, or an average price of
$35.28 per share, of which 4.6 million shares of common stock were repurchased
under the previous $500 million stock repurchase program. Additionally, we
settled $3.0 million on shares repurchased prior to the end of fiscal
2007.
As of
October 4, 2008, we had repurchased 1.6 million shares of common stock at an
aggregate cost of $61.1 million under our $250 million stock repurchase program
resulting in $188.9 million remaining under this program, excluding related
expenses.
Analysis
of Cash Flows
An
analysis of our cash flows for the forty week period ended October 4, 2008 as
compared to the forty week period ended October 6, 2007 is included
below.
|
|
Forty
Week Periods Ended
|
|
|
|
October
4, 2008
|
|
|
October
6, 2007
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
$ |
375.8 |
|
|
$ |
377.8 |
|
Cash
flows from investing activities
|
|
|
(134.0 |
) |
|
|
(138.1 |
) |
Cash
flows from financing activities
|
|
|
(235.1 |
) |
|
|
(236.0 |
) |
Net
increase in cash and
|
|
|
|
|
|
|
|
|
cash
equivalents
|
|
$ |
6.7 |
|
|
$ |
3.7 |
|
Operating
Activities
For the
forty weeks ended October 4, 2008, net cash provided by operating activities
decreased $1.9 million to $375.8 million, as compared to the forty weeks ended
October 6, 2007. This net decrease in operating cash was driven primarily
by:
·
|
an
increase in net income of $10.1 million during the forty weeks ended
October 4, 2008 as compared to the comparable period in
2007;
|
·
|
a
$19.7 million decrease in benefit for deferred income
taxes;
|
·
|
a
$7.8 million decrease in net losses on disposals of property and
equipment, net;
|
·
|
a
$110.4 million increase in inventory driven by our parts availability
initiative and initial build-up in certain premium branded products offset
almost entirely by an increase in accounts payable of $108.4 million as a
result of partnering with our suppliers and extending accounts payable
terms; and
|
·
|
an
overall decrease in other working
capital.
|
Investing
Activities
For the
forty weeks ended October 4, 2008, net cash used in investing activities
decreased by $4.1 million to $134.0 million, as compared to the forty weeks
ended October 6, 2007. The decrease in cash used was primarily from a reduction
in store development.
Financing
Activities
For the
forty weeks ended October 4, 2008, net cash used in financing activities
decreased by $0.8 million to $235.1 million, as compared to the forty weeks
ended October 6, 2007.
Cash
flows from financing activities increased primarily as result of:
·
|
an
increase in net borrowings under our term loan and revolving credit
facility of $13.2 million.
|
Cash
flows from financing activities decreased primarily as result of:
·
|
an
additional $8.2 million of common stock repurchases under our stock
repurchase program; and
|
·
|
a
decrease of $5.2 million from the issuance of common stock, primarily
resulting from the decrease in exercise of stock
options.
|
Off-Balance-Sheet
Arrangements
As of October 4, 2008, 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
obligation table including operating lease payments, interest payments on our
credit facility and letters of credit outstanding.
Contractual
Obligations
As of
October 4, 2008, there were no material changes to our outstanding contractual
obligations as described in our Annual Report on Form 10-K for the year ended
December 29, 2007. For information regarding our contractual obligations see
“Contractual Obligations” in the Company’s Annual Report on Form 10-K for the
year ended December 29, 2007.
Long
Term Debt
Term
Loan
As of
October 4, 2008, we had borrowed $200 million under our unsecured four-year
term loan. We entered into the term loan on December 4, 2007, with our
wholly-owned subsidiary, Advance Stores Company, Incorporated, or Stores,
serving as borrower. As of December 29, 2007, we had borrowed $50 million under
the term loan. The entire $200 million of proceeds from this term loan were used
to repurchase shares of our common stock under our stock repurchase
program. The term loan terminates on October 5, 2011.
The
interest rate on the term loan is based, at our option, on an adjusted
LIBOR rate, plus a margin, or an alternate base rate, plus a margin. The
current margin is 1.00% and 0.0% per annum for the adjusted LIBOR and alternate
base rate borrowings, respectively. We have elected to use the 90-day adjusted
LIBOR rate and have the ability and intent to continue to use this rate on our
hedged borrowings. Under the terms of the term loan, the interest rate
spread is based on our credit rating.
Revolving
Credit Facility
In
addition to the term loan, we have a $750 million unsecured five-year revolving
credit facility with Stores serving as the borrower. The revolving credit
facility also provides for the issuance of letters of credit with a sub limit of
$300 million, and swingline loans in an amount not to exceed $50 million. We may
request, subject to agreement by one or more lenders, that the total revolving
commitment be increased by an amount not exceeding $250 million (up to a total
commitment of $1 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 on
October 5, 2011.
As of
October 4, 2008, we had $267.0 million
outstanding under our revolving credit facility, and letters of credit
outstanding of $79.8 million, which reduced the availability under the revolving
credit facility to $403.2 million. (The letters of credit generally have a term
of one year or less.) A commitment fee is charged on the unused portion of
the revolver, payable in arrears. The current commitment fee rate is 0.150% per
annum.
The
interest rate on borrowings under the revolving credit facility is based, at our
option, on an adjusted LIBOR rate, plus a margin, or an alternate base rate,
plus a margin. The current margin is 0.75% and 0.0% per annum for the adjusted
LIBOR and alternate base rate borrowings, respectively. We have elected to use
the 90-day adjusted LIBOR rate and have the ability and intent to continue to
use this rate on our hedged borrowings. Under the terms of the revolving credit
facility, the interest rate spread (and commitment fee) is based on our credit
rating.
Other
As of
October 4, 2008, we also had $4.2 million outstanding under an economic
development note. At October 4, 2008, we also had interest rate swaps in place
that effectively fixed our interest rate on approximately 60% of our long-term
debt.
Guarantees
and Covenants
The term
loan and revolving credit facility are fully and unconditionally guaranteed by
Advance Auto Parts, Inc. Our debt agreements collectively contain covenants
restricting our ability to, among other things: (1) create, incur or assume
additional debt (including hedging arrangements), (2) incur liens or engage in
sale-leaseback transactions, (3) make loans and investments, (4) guarantee
obligations, (5) engage in certain mergers, acquisitions and asset sales, (6)
change the nature of our business and the business conducted by our subsidiaries
and (7) change our status as a holding company. We are required to comply with
financial covenants with respect to a maximum leverage ratio and a minimum
consolidated coverage ratio. We were in compliance with these covenants at
October 4, 2008. Our term loan and revolving credit facility also
provide for customary events of default, covenant defaults and cross-defaults to
our other material indebtedness.
Credit
Ratings
At
October 4, 2008, we had a credit rating from Standard & Poor’s of BB+ and a
credit rating of Ba1 from Moody’s Investor Service. The current outlook by
Standard & Poor’s and Moody’s is negative and stable, respectively, but does
not affect our current credit ratings. The current pricing grid used to
determine our borrowing rates under our term loan and revolving credit facility
is based on our credit ratings. If these credit ratings decline, our interest
expense may increase. Conversely, if these credit ratings improve, our interest
expense may decrease. If our credit ratings decline, our access to financing may
become more limited.
Seasonality
Our
business is somewhat seasonal in nature, with the highest sales occurring in the
spring and summer months. In addition, our business can be affected by weather
conditions. While unusually heavy precipitation tends to soften sales as
elective maintenance is deferred during such periods, extremely hot or cold
weather tends to enhance sales by causing automotive parts to fail at an
accelerated rate.
New
Accounting Pronouncements
In
June 2008, the Financial Accounting Standards Board, or FASB, issued FASB
Staff Position, or FSP, EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities.” FSP
EITF 03-6-1 addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting, and therefore need
to be included in the earnings allocation in computing earnings per share under
the two-class method as described in Statement of Financial Accounting
Standards, or SFAS, No. 128, “Earnings per Share.” Under the guidance of FSP
EITF 03-6-1, nonvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings-per-share pursuant to the two-class method. FSP EITF 03-6-1
is effective for financial statements issued for fiscal years beginning after
December 15, 2008 and all prior-period earnings per share data
presented shall be adjusted retrospectively. Early application is not
permitted. We are currently evaluating the impact of
adopting FSP EITF 03-6-1.
In June
2008, the FASB Issued EITF No. 08-3, “Accounting by Lessees for
Nonrefundable Maintenance Deposits.” EITF 08-3 requires that nonrefundable
maintenance deposits paid by a lessee under an arrangement accounted for as a
lease be accounted for as a deposit asset until the underlying maintenance is
performed. When the underlying maintenance is performed, the deposit may be
expensed or capitalized in accordance with the lessee’s maintenance accounting
policy. Upon adoption entities must recognize the effect of the change as a
change in
accounting
principle. EITF 08-3 is effective for financial statements issued for fiscal
years beginning after December 15, 2008. We do not expect the adoption of EITF
08-3 to have a material impact on our financial condition, results of operations
or cash flows.
In
April 2008, the FASB issued FASB Staff Position No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets”, which amends the
factors that must be considered in developing renewal or extension assumptions
used to determine the useful life over which to amortize the cost of a
recognized intangible asset under SFAS 142, “Goodwill and Other Intangible
Assets.” The FSP requires an entity to consider its own assumptions about
renewal or extension of the term of the arrangement, consistent with its
expected use of the asset, and is an attempt to improve consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS 141,
“Business Combinations.” The FSP is effective for fiscal years beginning after
December 15, 2008, and the guidance for determining the useful life of a
recognized intangible asset must be applied prospectively to intangible assets
acquired after the effective date. The FSP is not expected to have a significant
impact on our financial condition, results of operations or cash
flow.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities - an amendment of SFAS
No. 133.” SFAS No. 161 is intended to improve financial
standards for derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance and cash flows. Entities
are required to provide enhanced disclosures about: how and why an entity uses
derivative instruments; how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations; and how
derivative instruments and related hedged items affect an entity's financial
position, financial performance and cash flows. SFAS No. 161 is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008. We are evaluating the impact the adoption of SFAS
No. 161 will have on our consolidated financial statements.
In
February 2008, the FASB issued FASB Staff Position No. FAS 157-1, “Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13.” FSP No. FAS 157-1 amends SFAS
No. 157, “Fair Value Measurements,” to exclude SFAS No. 13, “Accounting for
Leases,” and other accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement under SFAS No.
13. However, this scope exception does not apply to assets acquired and
liabilities assumed in a business combination that are required to be measured
at fair value under SFAS No. 141 or No. 141(R), Business Combinations (revised
2007), regardless of whether those assets and liabilities are related to leases.
The FSP will be effective upon the full adoption of SFAS 157 during the first
quarter of fiscal 2009 and will not have a material impact on our financial
position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS No. 160,
among other things, provides guidance and establishes amended accounting and
reporting standards for a parent company’s noncontrolling interest in a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or
after December 15, 2008. We do not expect the adoption of SFAS No. 160 to have a
material impact on our financial condition, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which
replaces SFAS No. 141, “Business Combinations.” SFAS No. 141R, among other
things, establishes principles and requirements for how an acquirer entity
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any controlling interests in the acquired
entity; recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. Costs of the acquisition
will be recognized separately from the business combination. SFAS No. 141R
applies to business combinations for fiscal years beginning after December 15,
2008.
Effective
December 30, 2007, we adopted FASB Staff Position No. FIN 39-1,
“Amendment of FASB Interpretation No. 39,” or FSP 39-1. FSP 39-1
amends FASB Interpretation No. 39, Offsetting of Amounts
Related
to Certain Contracts (“FIN 39”), to require a reporting entity to offset
fair value amounts recognized for the right to reclaim cash collateral (a
receivable) or the obligation to return cash collateral (a payable) against fair
value amounts recognized for derivative instruments executed with the same
counterparty under the same master netting arrangement that have been offset in
accordance with FIN 39. FSP No. 39-1 also amends FIN 39 for
certain terminology modifications. Upon adoption of FSP No. 39-1, we did
not change our accounting policy of not offsetting fair value amounts recognized
for derivative instruments under master netting arrangements. The adoption of
FSP No. 39-1 did not have an impact on our financial position, results of
operations or cash flows.
Effective
December 30, 2007, we adopted the provisions of SFAS No. 157, “Fair Value
Measurements” on our financial assets and liabilities subject to the deferral
provisions of FSP 157-2. SFAS No. 157 clarifies the definition of fair value,
establishes a framework for defining fair value as it relates to other
accounting pronouncements that require or permit fair value measurements, and
expands the disclosures of fair value measurements. The adoption of SFAS 157 did
not have any impact on our financial condition, results of operations or cash
flows. We did not apply the provisions of SFAS No. 157 for nonfinancial assets
and liabilities except for those recognized or disclosed on a recurring basis
(at least annually) as allowed by the issuance of FSP 157-2. We will fully adopt
the provisions of SFAS 157 effective during our first quarter of fiscal
2009.
The
deferral provided by FSP No. 157-2 applies to such items as nonfinancial
assets and liabilities initially measured at fair value in a business
combination (but not measured at fair value in subsequent periods) and
nonfinancial long-lived asset groups measured at fair value for an impairment
assessment. We are evaluating the impact FSP No. 157-2 will have on
our nonfinancial assets and liabilities that are measured at fair value, but are
recognized or disclosed at fair value on a nonrecurring basis.
Effective
December 30, 2007, we adopted the provisions of SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. We elected not to apply fair value on our existing
financial assets and liabilities upon adoption. Therefore, this adoption did not
have a material effect on our financial position, results of operations or cash
flows.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires recognition of
the overfunded or underfunded status of defined benefit postretirement plans as
an asset or liability in the statement of financial position and to recognize
changes in that funded status in comprehensive income in the year in which the
changes occur. SFAS No. 158 also requires measurement of the funded status of a
plan as of the date of the statement of financial position. We adopted the
recognition provisions of SFAS No. 158 on December 30, 2006. We adopted the
measurement date provisions of SFAS No. 158 on December 30, 2007. We have
elected to apply the alternate transition method under which a 14-month
measurement will cover the period from November 1, 2007 through January 3, 2009.
The change in the measurement date will not have a material impact on our
financial condition, results of operations or cash flows.
In
February 2008, the FASB issued FASB Staff Position No. FAS 158-1, “Conforming
Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No. 106
and to the Related Staff Implementation Guides.” FSP No. FAS 158-1 updates the
illustrations in Appendix B of FASB Statement No. 87, Appendix B of FASB
Statement No. 88 and Appendix C of FASB Statement No. 106 to reflect the
provisions of SFAS No. 158. FSP No. FAS 158-1 also amends the questions and
answers contained in FASB Special Reports, which pertains to the implementation
of Statements 87, 88 and 106. Finally, this FSP makes conforming changes
to other guidance and technical corrections to SFAS No. 158. The
conforming amendments made by this FSP are effective as of the effective dates
of SFAS No. 158 and will not have a material impact on our financial position,
results of operations or cash flows.
ITEM
3. |
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK |
Interest
Rate Risk
We are
exposed to cash flow risk due to changes in interest rates with respect to our
long-term debt as a result of the movements in LIBOR. Our long-term debt
primarily consists of borrowings under a revolving credit facility and a term
loan. While we cannot predict the impact interest rate movements will have on
our debt, exposure to rate changes is managed through the use of hedging
activities. At October 4, 2008, we had interest rate swaps in place that
effectively fixed our interest rate on approximately 60% of our long-term
debt.
For
additional information regarding market risk see “Item 7A. Quantitative and
Qualitative Disclosures About Market Risks” in the Company’s Annual Report on
Form 10-K for the year ended December 29, 2007. At October 4, 2008, there had
not been a material change to the information regarding market risk disclosed in
the Company’s Annual Report on Form 10-K for the year ended December 29,
2007.
Fuel
Risk
We manage
the risk of fluctuating fuel prices through fixed price commodity contracts for
approximately 70% of our estimated diesel fuel consumption. We have applied the
normal purchase election under SFAS 133, “Accounting for Derivative Instruments
and Hedging Activities,” to exclude these contracts from fair value
accounting.
ITEM
4. |
CONTROLS
AND PROCEDURES
|
Disclosure
controls and procedures are our controls and other procedures that are designed
to ensure that information required to be disclosed by us in our reports that we
file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in our reports that we file or submit under the Securities Exchange Act of
1934 is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure. Our management evaluated, with
the participation of our principal executive officer and principal financial
officer, the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report. Based on this evaluation, our
principal executive officer and our principal financial officer have concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective.
There
were no changes in the Company’s internal control over financial reporting that
occurred during the quarter ended October 4, 2008 that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
ITEM
2. |
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS |
The
following table sets forth the information with respect to repurchases of our
common stock for the quarter ended October 4, 2008 (amounts in thousands, except
per share amounts):
Period
|
|
Total
Number of Shares Purchased
|
|
|
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)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
13, 2008, to August 9, 2008
|
|
|
99 |
|
|
$ |
36.49 |
|
|
|
99 |
|
|
$ |
238,885 |
|
August
10, 2008, to September 6, 2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
238,885 |
|
September
7, 2008, to October 4, 2008
|
|
|
1,273 |
|
|
|
39.27 |
|
|
|
1,273 |
|
|
|
188,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,372 |
|
|
$ |
39.07 |
|
|
|
1,372 |
|
|
$ |
188,911 |
|
(1)
|
Average
price paid per share excludes related expenses paid on previous
repurchases.
|
(2)
|
All
of the above repurchases were made on the open market at prevailing market
rates plus related expenses under our stock repurchase program, which
authorized the repurchase of up to $250 million in common stock. Our stock
repurchase program was authorized by our Board of Directors and publicly
announced on May 15, 2008 which replaced the remaining portion of the $500
million stock repurchase program authorized by our Board of Directors and
publicly announced on August 8,
2007.
|
(3)
|
The
maximum dollar value yet to be purchased under our stock repurchase
program excludes related expenses paid on previous purchases or
anticipated expenses on future
purchases.
|