are an integral part of these statements.
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 in the accompanying condensed consolidated balance
sheets. 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 on the accompanying condensed
consolidated balance sheets.
Preopening
Expenses
Preopening
expenses, which consist primarily of payroll and occupancy costs, are expensed
as incurred.
Warranty
Costs
The
Company's vendors are primarily responsible for warranty claims. 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. The following
table presents changes in the Company’s warranty reserves.
|
|
April
19,
2008
|
|
|
December
29,
2007
|
|
|
|
(16
weeks ended)
|
|
|
(52
weeks ended)
|
|
|
|
|
|
|
|
|
Warranty
reserve, beginning of period
|
|
$ |
17,757 |
|
|
$ |
13,069 |
|
Reserves
established
|
|
|
14,089 |
|
|
|
24,722 |
|
Reserves
utilized and other adjustments, net
|
|
|
(8,171 |
) |
|
|
(20,034 |
) |
|
|
|
|
|
|
|
|
|
Warranty
reserve, end of period
|
|
$ |
23,675 |
|
|
$ |
17,757 |
|
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 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 April 19, 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, less stock held in
treasury and shares of non-vested restricted stock, during the
period. Diluted earnings per share of common stock reflects the
increase in 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 unvested 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.”
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
19, 2008 and April 21, 2007
(in
thousands, except per share data)
(unaudited)
Hedge
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 April 19, 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” and has recorded all adjustments to the fair
value of the hedge instruments in accumulated other comprehensive income through
the maturity date of the applicable hedge arrangements.
The fair
value at April 19, 2008 and December 29, 2007 was an unrecognized loss of
$12,523 and $7,645, respectively. Any amounts received or paid under these
hedges will be recorded in the statement of operations as earned or
incurred.
Based on
the estimated current and future fair values of the hedge arrangements at April
19, 2008, the Company estimates amounts currently included in accumulated other
comprehensive income that will be reclassified to earnings in the next 12 months
will consist of a loss of $4,165 associated with the interest rate
swaps.
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 to the value
of its inventory and accretes this discount to the resulting short-term payable
to the bank through interest expense over the extended term. At April 19, 2008
and December 29, 2007, $146,924 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.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
19, 2008 and April 21, 2007
(in
thousands, except per share data)
(unaudited)
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
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 March
2008, the Financial Accounting Standards Board, or 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. The Company is currently
evaluating the impact, if any, of adopting SFAS No. 161.
Effective
December 30, 2007, the Company adopted FASB Staff Position (“FSP”)
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 permit 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 39-1
also amends FIN 39 for certain terminology modifications. Upon adoption of
FSP 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 39-1 did not have an impact on
the Company’s financial position, results of operations or cash
flows.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
19, 2008 and April 21, 2007
(in
thousands, except per share data)
(unaudited)
In
February 2007, the Financial Accounting Standards Board, or FASB, issued 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. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. The Company adopted SFAS No. 159 on
December 30, 2007 and elected not to apply fair value on its existing financial
assets and liabilities. Therefore, this adoption did not have a material effect
on the Company’s financial position, results of operations or cash
flows.
On
December 30, 2007, the Company adopted the provisions of SFAS No. 157, “Fair
Value Measurements” on its financial assets and liabilities. 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.
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 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.
2. |
Goodwill
and Intangible Assets:
|
The
carrying amount and accumulated amortization of acquired intangible assets as of
April 19, 2008 and December 29, 2007 include:
|
|
Acquired
intangible assets
|
|
|
|
|
|
|
Subject
to Amortization
|
|
|
Not
Subject
to
Amortization
|
|
|
|
|
|
|
Customer
Relationships
|
|
|
Other
|
|
|
Trademark
and
Tradenames
|
|
|
Intangible
Assets,
net
|
|
Gross
carrying amount
|
|
$ |
9,600 |
|
|
$ |
885 |
|
|
$ |
18,800 |
|
|
$ |
29,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
book value at December 29, 2007
|
|
$ |
7,464 |
|
|
$ |
580 |
|
|
$ |
18,800 |
|
|
$ |
26,844 |
|
Addition
|
|
|
- |
|
|
|
- |
|
|
|
1,750 |
|
|
|
1,750 |
|
2008
amortization
|
|
|
(295 |
) |
|
|
(40 |
) |
|
|
- |
|
|
|
(335 |
) |
Net
book value at April 19, 2008
|
|
$ |
7,169 |
|
|
$ |
540 |
|
|
$ |
20,550 |
|
|
$ |
28,259 |
|
During
the sixteen weeks ended April 19, 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, KY market. This improves the Company’s trademark rights, increases
traffic to the Company’s website and opens a new metropolitan market for the
Company.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
19, 2008 and April 21, 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 April 19, 2008:
2008
|
|
$ |
752 |
|
|
2009
|
|
|
1,087 |
|
|
2010
|
|
|
1,059 |
|
|
2011
|
|
|
967 |
|
|
2012
|
|
|
967 |
|
|
The
changes in the carrying amount of goodwill for the sixteen weeks ended April 19,
2008 are as follows:
|
|
AAP
Segment
|
|
|
AI
Segment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 29, 2007
|
|
$ |
16,093 |
|
|
$ |
17,625 |
|
|
$ |
33,718 |
|
Fiscal
2008 activity
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance
at April 19, 2008
|
|
$ |
16,093 |
|
|
$ |
17,625 |
|
|
$ |
33,718 |
|
Receivables
consist of the following:
|
|
April
19,
2008
|
|
|
December
29,
2007
|
|
|
|
|
|
|
|
|
Trade
|
$ |
19,099
|
|
$ |
14,782
|
|
Vendor
|
|
66,832
|
|
|
71,403
|
|
Other
|
|
2,710
|
|
|
2,785
|
|
Total
receivables
|
|
88,641
|
|
|
88,970
|
|
Less:
Allowance for doubtful accounts
|
|
(4,558
|
)
|
|
(3,987
|
) |
Receivables,
net
|
$ |
84,083
|
|
$ |
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
April 19, 2008 and December 29, 2007. Under the LIFO method, the Company’s cost
of sales reflects the costs of the most currently 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. As a result of the LIFO method and the ability to
obtain lower product costs, the Company recorded reductions to cost of sales of
$7,409 and $10,319 for the sixteen weeks ended April 19, 2008 and April 21,
2007, respectively.
An actual
valuation of inventory under the LIFO method can be made only 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.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
19, 2008 and April 21, 2007
(in
thousands, except per share data)
(unaudited)
Additionally,
these products are not subject to the 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.
The
Company capitalizes certain purchasing and warehousing costs into inventory.
Purchasing and warehousing costs included in inventory, at FIFO, at April 19,
2008 and December 29, 2007, were $104,855 and $107,068, respectively.
Inventories consist of the following:
|
|
April
19,
2008
|
|
|
December
29,
2007
|
|
Inventories
at FIFO, net
|
|
$ |
1,517,139 |
|
|
$ |
1,435,697 |
|
Adjustments
to state inventories at LIFO
|
|
|
101,181 |
|
|
|
93,772 |
|
Inventories
at LIFO, net
|
|
$ |
1,618,320 |
|
|
$ |
1,529,469 |
|
Replacement
cost approximated FIFO cost at April 19, 2008, and December 29,
2007.
Inventory
quantities are tracked through a perpetual inventory system. The Company uses a
cycle counting program in all distribution centers, PDQs, LAWs and retail stores
to ensure the accuracy of the perpetual inventory quantities of both merchandise
and core inventory.
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
$36,174 and $35,565 at April 19, 2008 and December 29, 2007,
respectively.
Long-term
debt consists of the following:
|
|
April
19,
2008
|
|
|
December
29,
2007
|
|
Senior
Debt:
|
|
|
|
|
|
|
Revolving
facility at variable interest rates
|
|
|
|
|
|
|
(3.50%
and 5.93% at April 19, 2008 and December 29,
|
|
|
|
|
|
|
2007,
respectively) due October 2011
|
|
$ |
350,000 |
|
|
$ |
451,000 |
|
Term
loan at variable interest rates
|
|
|
|
|
|
|
|
|
(3.92%
and 6.19% at April 19, 2008 and December 29,
|
|
|
|
|
|
|
|
|
2007,
respectively) due October 2011
|
|
|
200,000 |
|
|
|
50,000 |
|
Other
|
|
|
4,507 |
|
|
|
4,672 |
|
|
|
|
554,507 |
|
|
|
505,672 |
|
Less:
Current portion of long-term debt
|
|
|
(671 |
) |
|
|
(610 |
) |
Long-term
debt, excluding current portion
|
|
$ |
553,836 |
|
|
$ |
505,062 |
|
On
December 4, 2007, the Company entered into a new $200,000
unsecured four-year term loan with the Company’s subsidiary, Advance Stores
Company, Incorporated, or Stores, serving as borrower. Proceeds from this
term loan were used to repurchase shares of the Company's common stock
under its stock repurchase program. As of
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
19, 2008 and April 21, 2007
(in
thousands, except per share data)
(unaudited)
December
29, 2007, the Company had borrowed $50,000 under the term loan. As of April 19,
2008, the Company had borrowed the remaining availability under the term
loan.
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 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.
As of
April 19, 2008, the Company had outstanding $350,000 under its revolving credit
facility, $200,000 under its term loan, $4,507 under an economic development
note and $74,742 in letters of credit outstanding, which reduced availability
under the revolving credit facility to $325,258. In addition to the letters of
credit, the Company maintains approximately $2,861 in surety bonds issued by its
insurance provider primarily to utility providers and the departments of revenue
for certain states. These letters of credit and surety bonds generally have a
term of one year or less.
The
interest rate on the term loan will be 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. A commitment fee will be charged on
the unused portion of the term loan, payable in arrears. The current commitment
fee rate is 0.200% per annum. Under the terms of the term loan, the
interest rate spread and commitment fee will be based on the Company’s credit
rating. The term loan terminates on October 5, 2011.
The
interest rates on borrowings under the revolving credit facility will be 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. A
commitment fee will be charged on the unused portion of the revolver, payable in
arrears. The current commitment fee rate is 0.150% per annum. Under the terms of
the revolving credit facility, the interest rate spread and commitment fee will
be based on the Company’s credit rating. The revolving facility terminates on
October 5, 2011.
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 the ability of the Company and its subsidiaries
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
holding company status of the Company. The Company is required to comply with
financial covenants with respect to a maximum leverage ratio and a minimum
consolidated coverage ratio. The revolving credit facility also provides for
customary events of default, including non-payment defaults, covenant defaults
and cross-defaults to the Company’s other material indebtedness. The
Company was in compliance with these covenants at April 19, 2008.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
19, 2008 and April 21, 2007
(in
thousands, except per share data)
(unaudited)
6. |
Stock
Repurchase Program:
|
During
the sixteen weeks ended April 19, 2008, the Company repurchased 4,563 shares of
common stock at an aggregate cost of $155,350, or an average price of
$34.04 per share. Additionally, the Company settled $2,959 on shares repurchased
prior to the end of fiscal 2007. These shares were repurchased in accordance
with the Company’s $500,000 stock repurchase program authorized by its Board of
Directors in 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. At
April 19, 2008, the Company had $105,354 remaining under the current stock
repurchase program.
Subsequent to April 19,
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 its previous $500,000 stock repurchase program.
The
Company provides certain health and life insurance benefits for eligible retired
team members through a postretirement plan, or the 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 sixteen weeks ended April 19, 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 sixteen weeks
ended April 19, 2008, and April 21, 2007 respectively, are as
follows:
|
|
Sixteen
Weeks Ended
|
|
|
|
April
19,
2008
|
|
|
April
21,
2007
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$ |
153
|
|
|
$ |
169
|
|
Amortization
of negative prior service cost
|
|
|
(179
|
)
|
|
|
(179
|
) |
Amortization
of unrecognized net gain
|
|
|
(4
|
)
|
|
|
-
|
|
Net
periodic postretirement benefit cost
|
|
$
|
(30
|
)
|
|
$ |
(10
|
) |
8. |
Share-Based
Compensation Plans:
|
During
the first quarter 2008, the Company made a series of share-based award grants to
employees, including recently hired executives and its annual grant to employees
eligible to receive share-based awards under the Company’s long-term incentive
plan. Accordingly, the Company granted 1,363 stock appreciation
rights, or SARS, to be settled in the Company’s common stock at a weighted
average conversion price of $34.37. Based on the Black-Scholes option
pricing model, the weighted average fair value for the SARS awarded was $9.08
per share. Additionally, the Company granted 283 shares of restricted stock, or
unvested shares, which had a weighted average fair value grant price of $35.13
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
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 newly hired 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. The unvested shares
are restricted until they vest and cannot be sold until the restriction has
lapsed. During this period, holders of
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
19, 2008 and April 21, 2007
(in
thousands, except per share data)
(unaudited)
the
unvested shares are entitled to dividend and voting rights. Beginning in 2008,
all new unvested share awards granted vest over a three-year period in equal
annual installments beginning on the first anniversary of the grant date. Prior
grants vested at the end of the three-year period following the grant
date.
As of
April 19, 2008, there was $27,928 of unrecognized compensation expense related
to all share based awards that is expected to be recognized over a weighted
average of 2.5 years. Unrecognized compensation expense includes
adjustments made for award forfeitures from departing executives and other
employees. The Company recognized $5,715 and $5,398 of share based
compensation expense for the first quarters ended April 19, 2008 and April 21,
2007, respectively.
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 the
assets or liabilities. These levels are:
·
|
Level
1 – Quoted prices (unadjusted) in active markets for identical assets or
liabilities.
|
·
|
Level
2 – Inputs other than quoted prices that are observable for assets and
liabilities, either directly or indirectly. These inputs include quoted
prices for similar assets or liabilities in active markets and quoted
prices for identical or similar assets or liabilities in market that are
less active.
|
·
|
Level
3 – Unobservable inputs for assets or liabilities reflecting the reporting
entity’s own assumptions.
|
The
following financial liabilities were measured at fair value on a recurring basis
during the sixteen weeks ended April 19, 2008:
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
April
19, 2008
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
Interest
rate swaps
|
$ |
12,523
|
|
$ |
-
|
|
$ |
12,523
|
|
$ |
-
|
|
The fair
value of the Company’s interest rate swaps is mainly based on observable
interest rate yield curves for similar instruments.
As of
April 19, 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 April 19, 2008 and December 29, 2007, the fair value of
the Company’s long-term debt with a carrying value of $553,836 and 505,062,
respectively, was approximately $535,000 and $502,000, respectively, and was
based on similar 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.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
19, 2008 and April 21, 2007
(in
thousands, except per share data)
(unaudited)
Comprehensive
income for the sixteen weeks ended April 19, 2008 and April 21, 2007 is as
follows:
|
|
Sixteen
Weeks Ended
|
|
|
|
April
19,
2008
|
|
|
April
21,
2007
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
82,086 |
|
|
$ |
76,101 |
|
Unrealized
loss on hedge
|
|
|
|
|
|
|
|
|
arrangements,
net of tax
|
|
|
(2,971 |
) |
|
|
(516 |
) |
Changes
in net unrecognized other
|
|
|
|
|
|
|
|
|
postretirment
benefit costs, net of tax
|
|
|
(111 |
) |
|
|
(110 |
) |
Comprehensive
income
|
|
$ |
79,004 |
|
|
$ |
75,475 |
|
11. |
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, with no significant
concentration in any specific product area.
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 sixteen weeks ended April 19, 2008 and April 21, 2007,
respectively.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
19, 2008 and April 21, 2007
(in
thousands, except per share data)
(unaudited)
|
|
2008
|
|
|
2007
|
|
Net
Sales
|
|
|
|
|
|
|
AAP
|
|
$ |
1,481,053 |
|
|
$ |
1,432,113 |
|
AI
|
|
|
45,079 |
|
|
|
36,007 |
|
Total
Net Sales
|
|
$ |
1,526,132 |
|
|
$ |
1,468,120 |
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision (benefit) for
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
|
|
|
|
|
|
AAP
|
|
$ |
132,246 |
|
|
$ |
125,432 |
|
AI
|
|
|
(265 |
) |
|
|
(1,671 |
) |
Total
income (loss) before provision (benefit) for
|
|
|
|
|
|
|
|
|
income
taxes
|
|
$ |
131,981 |
|
|
$ |
123,761 |
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes
|
|
|
|
|
|
|
|
|
AAP
|
|
$ |
50,007 |
|
|
$ |
48,611 |
|
AI
|
|
|
(112 |
) |
|
|
(951 |
) |
Total
provision (benefit) for income taxes
|
|
$ |
49,895 |
|
|
$ |
47,660 |
|
|
|
|
|
|
|
|
|
|
Segment
assets
|
|
|
|
|
|
|
|
|
AAP
|
|
$ |
2,717,154 |
|
|
$ |
2,646,860 |
|
AI
|
|
|
155,973 |
|
|
|
134,454 |
|
Total
segment assets
|
|
$ |
2,873,127 |
|
|
$ |
2,781,314 |
|
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 and our other three quarters
consist of 12 weeks each.
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;
· 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;
· deterioration
in general economic conditions;
· our
ability to attract and retain qualified team members;
· our
relationship with our vendors;
· 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
During
the first quarter of fiscal 2008, we recorded earnings per diluted share of
$0.86 compared to $0.71 for the same quarter of fiscal 2007. This 21% increase
was primarily driven by a 7% increase in operating income and approximately 13
million shares repurchased over the past four fiscal quarters. Despite a
continued challenging economic environment, we generated sales growth of 4%
through a combination of new stores opened over the last year and a 0.6%
comparable store sales increase. This comparable sales increase was driven
by a 10.6% comparable sales increase in our commercial business which was
partially offset by a 3.0% decline in the DIY, or do-it-yourself, business. The
return of a double-digit commercial comparable sales increase reflects our
increased focus on this
business. We
also continue to generate significant operating cash flow to allow us to invest
in strategic initiatives and return capital to shareholders through cash
dividends and share repurchases.
Although
we experienced favorable financial results for the first quarter, we remain
cautiously optimistic about results for the remainder of 2008 given the current
economic instability as a result of the continued increase in fuel prices.
Furthermore, we are still in the early stages of implementing certain strategies
as discussed below and are committed to making the necessary investments for the
long-term success of the Company.
Turnaround
Strategy
As
previously disclosed, certain initiatives were introduced during 2007 as the
Company embarked on a concentrated effort to drive changes in its business in
response to diminished sales and earnings growth throughout 2006 and 2007. Our
new CEO and President, who was appointed in January 2008, had been involved with
management on the completion of certain strategic studies during 2007 as a
member of our Board of Directors. In addition to the CEO, other new
management leaders were added in 2008 to work with existing leaders on executing
the turnaround plan. The turnaround plan is focused on the following four key
turnaround strategies:
Ø
Commercial
Acceleration
Ø DIY
Transformation
Ø Availability
Excellence
Each of
these strategies is aligned with the areas of responsibility of an executive
officer or combination of executive officers.
Commercial
Acceleration – We have reorganized the Company to have a fully dedicated
commercial team with representation from all functional areas. This team will
oversee the initiatives specifically designed for growth in our commercial
business (previously referred to as DIFM business) in light of the favorable
market dynamics. Certain initiatives had already begun in 2007, including
enhanced parts availability, improved store staffing and redesign of incentive
structures. We believe our parts availability initiative has already begun to
yield results as evidenced by the positive commercial sales results experienced
during the first quarter. We have also recently announced the addition of key
product brands which are highly respected by our commercial customers.
Additional strategies are in the process of being developed in 2008, including a
heightened focus on parts knowledge by our store team members, enhanced customer
relationships and the development of metrics and overall reporting.
DIY
Transformation – DIY Transformation complements the Commercial
Acceleration and consists of reinvigorating the DIY business from the complete
assessment of the sales floor to better understand the customer. The DIY
industry has become an increasingly difficult environment in which to operate
because it is growing at approximately 1% per year with a small number of
retailers making up the majority of the market. This is evident by the
decreasing store traffic and the resulting decline in comparative sales trends
over the past several years.
Certain
initiatives will benefit both the commercial and DIY strategies. For example,
the parts availability initiative, including the introduction of new product
brands, and increased parts knowledge are also expected to benefit the DIY
business based on feedback received back from customer surveys. Other
initiatives will be focused solely on the DIY business, some of which began in
2007. We terminated the Advance TV network and have reallocated resources to
more effective advertising, including a more focused effort on marketing to
Hispanic customers and the introduction of a new brand in February 2008, “Keep
the wheels turning.” Lastly, we will remain focused on our store team members
and customers by developing engagement and satisfaction metrics to ensure we
have proper alignment between our team members and the customer service they are
expected to provide.
Availability
Excellence – Availability excellence represents our commitment to enhance
the availability of parts in our stores to better serve our commercial and DIY
customers. This strategy incorporates our supply chain and logistics
network capabilities, space management and increased leverage of our e-commerce
platform. Certain of
these
changes began in 2007 as we started adding incremental parts availability
partially funded by the removal of slower moving inventory on the sales floor.
We will utilize additional key metrics for measuring our inventory productivity,
including sales per square foot and gross margin return on inventory
(GMROI).
Superior
Experience – Superior experience is centered around our store operations
and customer service. The leaders of this area will be re-engineering the store
experience and overall operation of the store as well as better understanding
what the customer ultimately wants. Key initiatives within this strategy
include:
§
|
Development
and rollout of customer satisfaction and team member engagement
surveys;
|
§
|
Examination
of all standard operating
procedures;
|
§
|
Improved
team member recruitment, training and retention;
and
|
§
|
Enhancement
of our labor management system.
|
Stock
Repurchase Program
During
the first quarter 2008, we repurchased 4.6 million shares of common stock for
$155 million under our $500 million stock repurchase program. Subsequent to the
end of the first quarter, our Board of Directors authorized a new stock
repurchase program of up to $250 million of our common stock plus related
expenses. The program, which became effective May 15, 2008, replaced the
remaining $105 million portion of the previous $500 million stock repurchase
program. For further discussion of this program see the Liquidity section of this
management’s discussion and analysis.
Consolidated
Operating Results and Key Metrics
The
following table highlights certain consolidated operating results and key
metrics for the sixteen weeks ended April 19, 2008, and April 21, 2007. We will
use these key metrics to measure the financial progress of our turnaround
strategies.
|
|
|
Q1
2008
|
|
|
|
Q4
2007
|
|
|
Q3
2007
|
|
|
Q2
2007
|
|
|
Q1
2007
|
|
|
FY
2007
|
|
FY
2006
|
|
Operating
Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales (in
000s)
|
|
|
$ |
1,526,132 |
|
|
$ |
1,048,382 |
|
$ |
1,158,043 |
|
$ |
1,169,859 |
|
|
$ |
1,468,120 |
|
|
$ |
4,844,404 |
|
$ |
4,616,503 |
|
Total
commercial net sales (in
000s)
|
|
|
$ |
438,672 |
|
|
$ |
288,104 |
|
$ |
314,052 |
|
$ |
305,153 |
|
|
$ |
383,293 |
|
|
$ |
1,290,602 |
|
$ |
1,155,953 |
|
Comparable
store net sales growth (1)
|
|
|
|
0.6% |
|
|
|
(0.3%) |
|
|
1.0% |
|
|
1.2% |
|
|
|
0.7% |
|
|
|
0.7% |
|
|
1.6% |
|
DIY
comparable store net sales growth (1)
|
|
|
|
(3.0%) |
|
|
|
(3.2%) |
|
|
(1.2%) |
|
|
(0.2%) |
|
|
|
(0.5%) |
|
|
|
(1.1%) |
|
|
(0.8%) |
|
Commercial
comparable store net sales growth (1)
|
|
|
|
10.6% |
|
|
|
8.1% |
|
|
7.5% |
|
|
5.4% |
|
|
|
4.2% |
|
|
|
6.2% |
|
|
10.7% |
|
Gross
profit
|
|
|
|
48.7% |
|
|
|
47.1% |
|
|
47.9% |
|
|
48.1% |
|
|
|
48.3% |
|
|
|
47.9% |
|
|
47.7% |
|
Selling,
general & administrative expenses (SG&A)
|
|
|
|
39.3% |
|
|
|
41.0% |
|
|
39.3% |
|
|
38.0% |
|
|
|
39.1% |
|
|
|
39.3% |
|
|
39.0% |
|
Operating
margin
|
|
|
|
9.5% |
|
|
|
6.1% |
|
|
8.7% |
|
|
10.1% |
|
|
|
9.2% |
|
|
|
8.6% |
|
|
8.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Statistics and
Metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of stores, end of period
|
|
|
|
3,291 |
|
|
|
3,261 |
|
|
3,228 |
|
|
3,187 |
|
|
|
3,150 |
|
|
|
3,261 |
|
|
3,082 |
|
Total
store square footage, end of period (in
000s)
|
|
|
|
24,212 |
|
|
|
23,982 |
|
|
23,771 |
|
|
23,480 |
|
|
|
23,204 |
|
|
|
23,982 |
|
|
22,753 |
|
Total
team members, end of period
|
|
|
|
45,174 |
|
|
|
44,141 |
|
|
45,476 |
|
|
45,505 |
|
|
|
44,969 |
|
|
|
44,141 |
|
|
44,421 |
|
Average
net sales per store (in
000s)(2)
|
|
|
$ |
1,522 |
|
|
$ |
1,527 |
|
$ |
1,538 |
|
$ |
1,544 |
|
|
$ |
1,544 |
|
|
$ |
1,527 |
|
$ |
1,551 |
|
Average
net sales per square foot (2)(3)
|
|
|
$ |
207 |
|
|
$ |
207 |
|
$ |
209 |
|
$ |
209 |
|
|
$ |
209 |
|
|
$ |
207 |
|
$ |
210 |
|
Operating
income per team member (in
000s)(2)(4)
|
|
|
$ |
9.5 |
|
|
$ |
9.4 |
|
$ |
9.2 |
|
$ |
9.4 |
|
|
$ |
9.3 |
|
|
$ |
9.4 |
|
$ |
9.3 |
|
SG&A
expenses per store (in
000s)
(2)
|
|
|
$ |
599 |
|
|
$ |
601 |
|
$ |
604 |
|
$ |
605 |
|
|
$ |
603 |
|
|
$ |
601 |
|
$ |
604 |
|
Gross
margin return on inventory (2)(5)
|
|
|
$ |
3.52 |
|
|
$ |
3.39 |
|
$ |
3.47 |
|
$ |
3.55 |
|
|
$ |
3.54 |
|
|
$ |
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 Offshore and AI stores. The comparable periods have been
adjusted accordingly.
|
(2)
|
These
financial metrics presented for each quarter are calculated on an annual
basis and accordingly reflect the last four fiscal quarters
completed.
|
(3)
|
Average
net sales per square foot is calculated as net sales divided by an average
of beginning and ending store square footage. The ending square footage
for each of the comparable periods in 2006 is as follows: Q1 – 21,625,000;
Q2 – 21,940,000; Q3 – 22,284,000; and Q4 –
22,753,000.
|
(4)
|
Operating
income per team member is calculated as operating income divided by an
average of beginning and ending number of team members. The ending number
of team members for each of the comparable periods in 2006 is as follows:
Q1 – 43,524; Q2 – 44,115; Q3 – 44,910; and Q4 –
44,421.
|
(5)
|
Gross margin
return on inventory is calculated as gross margin divided by an average of
beginning and ending inventory, net of accounts payable and financed
vendor accounts payable.
|
Operating
Segments
We
conduct our operations 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, which operates as an independent,
wholly-owned subsidiary.
AAP
Segment
At April
19, 2008, we operated 3,179 stores within the United States, Puerto Rico and the
Virgin Islands. We operated 3,149 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 in Puerto
Rico and the Virgin Islands, or Offshore.
The
following table sets forth information about our stores during the sixteen weeks
ended April 19, 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
stores.
|
|
Sixteen
Weeks Ended April 19, 2008
|
|
Number
of stores at beginning of period
|
|
|
3,153 |
|
New
stores
|
|
|
30 |
|
Closed
stores
|
|
|
(4 |
) |
Number
of stores, end of period
|
|
|
3,179 |
|
Relocated
stores
|
|
|
3 |
|
Stores
with commercial programs
|
|
|
2,614 |
|
AI
Segment
At April
19, 2008, we operated 112 stores throughout New England and New York. These
stores operated 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 stores, including the number of
new and closed stores, during the sixteen weeks ended April 19,
2008.
|
|
Sixteen
Weeks Ended April 19, 2008
|
|
Number
of stores at beginning of period
|
|
|
108 |
|
New
stores
|
|
|
4 |
|
Closed
stores
|
|
|
- |
|
Number
of stores, end of period
|
|
|
112 |
|
Stores
with commercial programs
|
|
|
112 |
|
As
previously disclosed in our Form 10-K, 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 sixteen
weeks ended April 19, 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 this annual report on Form 10-K.
Components
of Statement of Operations
Net
Sales
Net sales
consist primarily of comparable store sales and new store net sales. We
calculate comparable store sales based on the change in net sales starting once
a store has been open for 13 complete accounting periods. We include relocations
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 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 and warranty costs and warehouse and distribution costs. We
seek to avoid fluctuation in merchandise costs and instability of supply by
entering into long-term purchase agreements, without minimum purchase volume
requirements, with vendors 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, other store expenses
and general and administrative expenses, including salaries and related benefits
of store support center team members, share-based compensation expense, store
support center administrative office expenses, data processing, professional
expenses and other related expenses.
Results
of Operations
The
following table sets forth certain of our operating data expressed as a
percentage of net sales for the periods indicated.
|
|
Sixteen
Week Periods Ended
|
|
|
|
(unaudited)
|
|
|
|
April
19,
|
|
|
April
21,
|
|
|
|
2008
|
|
|
2007
|
|
Net
sales
|
|
|
100.0
|
% |
|
|
100.0
|
% |
Cost
of sales, including purchasing and
|
|
|
|
|
|
|
|
|
warehousing
costs
|
|
|
51.3 |
|
|
|
51.7 |
|
Gross
profit
|
|
|
48.7 |
|
|
|
48.3 |
|
Selling,
general and administrative expenses
|
|
|
39.3 |
|
|
|
39.1 |
|
Operating
income
|
|
|
9.5 |
|
|
|
9.2 |
|
Interest
expense
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
Other
income, net
|
|
|
0.0 |
|
|
|
0.0 |
|
Provision
for income taxes
|
|
|
3.3 |
|
|
|
3.2 |
|
Net
income
|
|
|
5.4
|
% |
|
|
5.2
|
% |
Sixteen
Weeks Ended April 19, 2008 Compared to Sixteen Weeks Ended April 21,
2007
Net sales
for the sixteen weeks ended April 19, 2008 were $1,526.1 million, an
increase of $58.0 million, or 4.0%, as compared to net sales for the
sixteen weeks ended April 21, 2007. The net sales increase was due to an
increase in comparable store sales of 0.6% and contributions from the 141 net
new AAP and AI stores opened within the last year. AAP produced sales of
$1,481.1 million, an increase of $48.9 million, or 3.4%. AAP’s sales increase
was primarily driven by a 0.3% comparable store sales increase and sales from
the 124 net new stores opened within the last year. 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 $45.1 million, an increase of $9.1 million, or 25.2%. AI’s
sales increase was primarily driven by a 14.2% comparable store sales increase
and sales from 17 stores opened within the last year.
Gross
profit for the sixteen weeks ended April 19, 2008 was $743.5 million, or 48.7%
of net sales, as compared to $709.4 million, or 48.3% of net sales, for the
sixteen weeks ended April 21, 2007, an increase of 39 basis points. The increase
in gross profit as a percentage of net sales is driven by lower supply chain and
logistics costs combined with more effective pricing.
Selling,
general and administrative expenses increased to $599.2 million, or 39.3% of net
sales, for the sixteen weeks ended April 19, 2008, from $574.7 million, or 39.1%
of net sales, for the sixteen weeks ended April 21, 2007, an increase of 11
basis points. The increase in selling, general and administrative expenses as a
percentage of sales was driven by the increase in certain fixed expenses due to
modest comparable store sales and increased incentive compensation reflective of
the positive financial results for the quarter. These increases were partially
offset by savings achieved from the cost reduction initiatives that occurred in
fiscal 2007.
Operating
income for the sixteen weeks ended April 19, 2008 was $144.3 million, or 9.5% of
net sales, as compared to $134.7 million, or 9.2% of net sales, for the sixteen
weeks ended April 21, 2007, an increase of 7.1%. This increase in operating
income, as a percentage of net sales, was reflective of an increase in gross
profit partially offset by slightly higher selling, general and administrative
expenses as previously discussed. AAP produced operating income of $144.6
million, or 9.8% of net sales, for the sixteen weeks ended April 19, 2008 as
compared to $136.4 million, or 9.5% of net sales, for the sixteen weeks ended
April 21, 2007. AI generated an operating loss of $0.3 million for the sixteen
weeks ended April 19, 2008 as compared to an operating loss of $1.7 million for
the same period last year. Operating
income increased primarily due to AI’s positive sales results during the quarter
and resulting leverage of payroll.
Interest
expense for the sixteen weeks ended April 19, 2008 was $12.3 million, or 0.8% of
net sales, as compared to $11.3 million, or 0.8% of net sales, for the sixteen
weeks ended April 21, 2007. The increase in interest expense is a result of
higher average outstanding borrowings offset by lower average borrowing rates
during the sixteen weeks ended April 19, 2008 compared to the same period ended
April 21, 2007.
Income
tax expense for the sixteen weeks ended April 19, 2008 was $49.9 million, as
compared to $47.7 million for the sixteen weeks ended April 21, 2007. Our
effective income tax rate was 37.8% for the sixteen weeks ended April 19, 2008
compared to 38.5% for the same period ended April 21, 2007.
We
generated net income of $82.1 million, or $0.86 per diluted share, for the
sixteen weeks ended April 19, 2008, as compared to $76.1 million, or $0.71 per
diluted share, for the sixteen weeks ended April 21, 2007. As a percentage of
net sales, net income for the sixteen weeks ended April 19, 2008 was 5.4%, as
compared to 5.2% for the sixteen weeks ended April 21, 2007.
Liquidity
and Capital Resources
Our
primary cash requirements include the purchase of inventory, capital
expenditures, payment of quarterly cash dividends and contractual obligations.
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 term loan
and revolving credit facilities will be sufficient to fund our primary
obligations for the next year.
At April
19, 2008, our cash and cash equivalents balance was $19.1 million,
an increase of $4.5 million compared to December 29, 2007. This increase
resulted from an increase in cash flow from operations and decreased investment
in property and equipment, partially offset by the return of capital to our
shareholders through the payment of dividends and repurchase of common stock
during the sixteen weeks ended April 19, 2008. At April 19, 2008, our
outstanding indebtedness was $48.8 million higher when compared to December 29,
2007 and consisted of borrowings of $350.0 million under our revolving credit
facility, $200.0 million under our term loan, and $4.5 million outstanding on an
economic development note. Additionally, we had $74.7 million in letters of
credit outstanding, which reduced our total availability under the revolving
credit facility to $325.3 million.
During
the sixteen weeks ended April 19, 2008, we paid $11.7 million in quarterly cash
dividends. Subsequent to April 19, 2008, our Board of Directors declared a
quarterly dividend of $0.06 per share to be paid on July 3, 2008 to all common
stockholders of record as of June 20, 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 and remodels, maintenance of existing stores, the construction and
upgrading of distribution centers, the development of proprietary information
systems and purchased information systems and our acquisitions. Our capital
expenditures were $58.9 million for the sixteen weeks ended April 19, 2008.
During the sixteen weeks ended April 19, 2008, we opened 30 AAP and four AI
stores and relocated three AAP stores.
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 remodel. As previously disclosed in our Form 10-K, we anticipate
adding 100 new AAP and 15 AI stores, relocating 10 to 20 AAP stores and spending
$170 million to $190.0 million on capital expenditures in fiscal 2008. We do not
plan to remodel any stores 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 further our working
capital invested in current inventory levels and finance future inventory
growth. Our revolving credit facility does not restrict availability under
this program. At April 19, 2008, $146.9 million was payable to the bank by us
under this program.
Stock
Repurchase Program
During
the sixteen weeks ended April 19, 2008, we repurchased 4.6 million shares of
common stock at an aggregate cost of $155.3 million, or an average price of
$34.04 per share. Additionally, we settled $3.0 million on shares repurchased
prior to the end of fiscal 2007. These shares were repurchased in accordance
with our $500 million stock repurchase program authorized by our Board of
Directors in 2007. 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.
Subsequent
to April 19, 2008, our Board of Directors authorized a new $250 million stock
repurchase program. The new program cancelled and replaced the remaining $105
million portion of our previous $500 million stock repurchase
program.
Analysis
of Cash Flows
An
analysis of our cash flows for the sixteen-week period ended April 19, 2008 as
compared to the sixteen- week period ended April 21, 2007 is included
below.
|
|
Sixteen
Week Periods Ended
|
|
|
|
April
19, 2008
|
|
|
April
21, 2007
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
$ |
213.6 |
|
|
$ |
186.9 |
|
Cash
flows from investing activities
|
|
|
(56.5 |
) |
|
|
(72.4 |
) |
Cash
flows from financing activities
|
|
|
(152.6 |
) |
|
|
(108.6 |
) |
Net
increase in cash and
|
|
|
|
|
|
|
|
|
cash
equivalents
|
|
$ |
4.5 |
|
|
$ |
5.9 |
|
Operating
Activities
For the
sixteen weeks ended April 19, 2008, net cash provided by operating activities
increased $26.7 million to $213.6 million, as compared to the sixteen weeks
ended April 21, 2007. This increase in operating cash was driven primarily
by:
·
|
an
increase in net income of $6.0 million during the sixteen weeks ended
April 19, 2008 as compared to the comparable period in 2007;
and
|
·
|
a
$12.9 million decrease in prepaid and other assets, primarily the timing
in payment of certain prepaid operating
expenses.
|
Investing
Activities
For the
sixteen weeks ended April 19, 2008, net cash used in investing activities
decreased by $16.0 million to $56.5 million, as compared to the sixteen weeks
ended April 21, 2007. Significant components of this decrease consisted
of:
·
|
a
decrease in capital expenditures of $17.1 million resulting primarily from
a reduction in store development as well as the timing associated with the
construction of a new distribution
center;
|
·
|
an
increase in proceeds on the sale of property and equipment and assets held
for sale of $3.9 million; and
|
·
|
a
decrease of $3.3 million of insurance proceeds received during the prior
year.
|
Financing
Activities
For the
sixteen weeks ended April 19, 2008, net cash used in financing activities
increased by $44.1 million to $152.6 million, as compared to the sixteen weeks
ended April 21, 2007.
Cash
flows from financing activities increased as result of:
·
|
an
increase in net borrowings under our term loan and credit facilities of
$122.0 million used primarily to fund stock
repurchases.
|
Cash
flows from financing activities decreased as result of:
·
|
an
additional $158.3 million of common stock repurchases under our stock
repurchase program; and
|
·
|
a
decrease of $8.3 million from the issuance of common stock, primarily
resulting from the decrease in exercise of stock
options.
|
Off-Balance-Sheet
Arrangements
As of April 19, 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 April 19, 2008, our outstanding
contractual obligations remained consistent with those as of 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
On
December 4, 2007, we entered into a new $200 million unsecured four-year
term loan with our subsidiary, Advance Stores Company, Incorporated, or Stores,
serving as borrower. Proceeds from this term loan were used to repurchase
shares of common stock under our stock repurchase program. As of
December 29, 2007, we had borrowed $50.0 million under the term loan. As of
April 19, 2008, we had borrowed the remaining availability under the term
loan.
In
addition to the term loan, we have a $750 million unsecured five-year revolving
credit facility with Stores serving as the borrower. Additionally, the facility
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 also
request, subject to agreement by one or more lenders, that the total
revolving commitment be increased by an amount not exceeding $250 million 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.
As of
April 19, 2008, we had outstanding $350.0 million under our revolving credit
facility, $200.0 million under our term loan, $4.5 million under an economic
development note and $74.7 million in letters of credit outstanding, which
reduced availability under the revolving credit facility to $325.3 million. At
April 19, 2008, we also have interest rate swaps in place that effectively fix
our interest rate exposure on approximately 50% of our bank debt.
The
interest rate on the term loan will be 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. A commitment fee will be charged on the
unused portion of the term loan, payable in arrears. The current commitment fee
rate is 0.200% per annum. Under the terms of the term loan, the interest
rate spread and commitment fee will be based on our credit rating. The term
loan terminates on October 5, 2011.
The
interest rates on borrowings under the revolving credit facility will be 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 its hedged borrowings. A commitment fee will be
charged on the unused portion of the revolver, payable in arrears. The current
commitment fee rate is 0.150% per annum. Under the terms of the revolving credit
facility, the interest rate spread and commitment fee will be based on our
credit rating. The revolving facility terminates on October 5,
2011.
The term
loan and revolving credit facility are fully and unconditionally guaranteed by
Advance Auto Parts, Inc. The debt agreements collectively contain covenants
restricting the ability of us and our subsidiaries 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 holding company
status. We are required to comply with financial covenants with respect to a
maximum leverage ratio and a minimum consolidated coverage ratio. The revolving
credit facility also provides for customary events of default, including
non-payment defaults, covenant defaults and cross-defaults to our other material
indebtedness. We were in compliance with these covenants at April 19,
2008.
Credit
Ratings
At April
19, 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 pricing grid used to
determine our borrowing rates under our revolving credit facility is based on
such credit ratings. If these credit ratings decline, our interest expense may
increase. Conversely, if these credit ratings improve, our interest expense may
decrease.
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 March
2008, the Financial Accounting Standards Board, or 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 currently evaluating the impact, if any, of
adopting SFAS No. 161.
Effective
December 30, 2007, we adopted FASB Staff Position (“FSP”)
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 permit 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 39-1
also amends FIN 39 for certain terminology modifications. Upon adoption of
FSP 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 39-1 did not have an impact on
our financial position, results of operations or cash flows.
In
February 2007, the Financial Accounting Standards Board, or FASB, issued 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. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. We adopted SFAS No. 159 on December 30,
2007 and elected not to apply fair value on our existing financial assets and
liabilities. Therefore, this adoption did not have a material effect on our
financial position, results of operations or cash flows.
On
December 30, 2007, we adopted the provisions of SFAS No. 157, “Fair Value
Measurements” on our financial assts and liabilities. 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.
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.
For
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 April 19, 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.
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 April 19, 2008 that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
|
|
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 April 19, 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)
|
|
|
|
|
|
|
|
|
|
|
|
December
30, 2007, to January 26, 2008
|
|
4,563 |
|
$ |
34.01 |
|
|
4,563 |
|
$ |
105,354 |
|
January
27, 2008, to February 23, 2008
|
|
- |
|
|
- |
|
|
- |
|
|
105,354 |
|
February
24, 2008, to March 22, 2008
|
|
- |
|
|
- |
|
|
- |
|
|
105,354 |
|
March
23, 2008, to April 19, 2008
|
|
- |
|
|
- |
|
|
- |
|
|
105,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
4,563 |
|
$ |
34.01 |
|
|
4,563 |
|
$ |
105,354 |
|
(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 $500 million in common stock. Our stock
repurchase program was 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.
|