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

Commission file number 001-16797

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

(540) 362-4911
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

         Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes [X] No [ ]

        As of August 12, 2004, the registrant had outstanding 74,867,441 shares of Common Stock, par value $0.0001 per share (the only class of common equity of the registrant outstanding).

ADVANCE AUTO PARTS, INC. AND SUBSIDIARIES

Twelve and Twenty-Eight Week Periods Ended July 17, 2004

TABLE OF CONTENTS

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PART I.   FINANCIAL INFORMATION

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
July 17, 2004 and January 3, 2004
(in thousands, except per share data)
(unaudited)

The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.

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Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Twelve and Twenty-Eight Week Periods Ended
July 17, 2004 and July 12, 2003
(in thousands, except per share data)
(unaudited)

The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.

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Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Twenty-Eight Week Periods Ended
July 17, 2004 and July 12, 2003
(in thousands)
(unaudited)

The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.

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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 17, 2004 and July 12, 2003
(in thousands, except per share data)
(unaudited)

1.     Basis of Presentation:

        The accompanying condensed consolidated financial statements include the accounts of Advance Auto Parts, Inc. and its wholly owned subsidiaries, or the Company. All significant intercompany balances and transactions have been eliminated in consolidation.

        The condensed consolidated balance sheet as of July 17, 2004, the condensed consolidated statements of operations for the twelve and twenty-eight week periods ended July 17, 2004 and July 12, 2003 and the condensed consolidated statements of cash flows for the twenty-eight week periods ended July 17, 2004 and July 12, 2003 have been prepared by the Company and have not been audited. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position of the Company, the results of its operations and cash flows have been made.

        Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s consolidated financial statements for the fiscal year ended January 3, 2004.

        The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full fiscal year.

         Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

         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. Diluted earnings per share of common stock reflects the increase in the weighted-average number of common shares outstanding from the assumed exercise of outstanding stock options, calculated using the treasury stock method, and all currently outstanding deferred stock units.

         Hedge Activities

        In March 2003 the Company entered into two interest rate swap agreements to limit its cash flow risk on an aggregate of $125,000 of its variable rate debt. The first swap allows the Company to fix its LIBOR rate at 2.269% on $75,000 of debt for a term of 36 months, expiring first quarter fiscal 2006. The second swap allows the Company to fix its LIBOR rate at 1.79% on an additional $50,000 of debt for a term of 24 months, expiring first quarter fiscal 2005.

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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 17, 2004 and July 12, 2003
(in thousands, except per share data)
(unaudited)

        In September 2002 the Company entered into a hedge agreement in the form of a zero-cost collar, which protects the Company from interest rate fluctuations in the LIBOR rate on $150,000 of its variable rate debt under its credit facility. The collar consists of an interest rate ceiling at 4.5% and an interest rate floor of 1.56% for a term of 24 months, expiring third quarter fiscal 2004. Under this hedge, the Company will continue to pay interest at prevailing rates plus any spread, as defined by the Company’s credit facility, but will be reimbursed for any amounts paid on the LIBOR rate in excess of the ceiling. Conversely, the Company will be required to pay the financial institution that originated the collar if the LIBOR rate is less than the floor.

        In accordance with Statement of Financial Accounting Standard, or SFAS, No. 133, “Accounting for Derivative Instruments and Hedging Activities,” the fair value of these hedge arrangements is recorded as an asset or liability in the accompanying condensed consolidated balance sheet at July 17, 2004. The Company has adopted the “matched terms” accounting method as provided by Derivative Implementation Group, or DIG, Issue No. G20, “Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge” for the zero-cost collar, and DIG Issue No. 9, “Assuming No Ineffectiveness When Critical Terms of the Hedging Instrument and the Hedge Transaction Match in a Cash Flow Hedge” for the interest rate swaps. Accordingly, the Company has matched the critical terms of each hedge instrument to the hedged debt and used the anticipated terminal value of zero to assume the hedges have no ineffectiveness. In addition, the Company will record all adjustments to the fair value of the hedge instruments in accumulated other comprehensive income (loss) through the maturity date of the applicable hedge arrangement. The fair value at July 17, 2004 was an unrecognized loss of $148 on the interest rate collar and an unrecognized gain of $403 on the swaps. Any amounts received or paid under these hedges will be recorded in the statement of operations as earned or incurred. Comprehensive income for the twelve and twenty-eight weeks ended July 17, 2004 and July 12, 2003 is as follows:

        Based on the estimated current and future fair values of the hedge arrangements at July 17, 2004, the Company estimates amounts currently included in accumulated other comprehensive income (loss) that will be reclassified to earnings in the next 12 months will consist of a loss of $148 under the interest rate collar and a loss of $136 associated with the interest rate swaps.

         Sales Returns and Allowances

        Our accounting policy for sales returns and allowances consists of establishing reserves for anticipated returns at the time of sale. We estimate anticipated returns based on current sales levels and our historical return experience on a specific product basis.

         Warranty Costs

        The Company’s vendors are primarily responsible for warranty claims. Warranty costs relating to merchandise and services 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.

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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 17, 2004 and July 12, 2003
(in thousands, except per share data)
(unaudited)

Employee Stock Options

        As permitted under SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company accounts for its stock options using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, or APB No. 25. Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the market price of the Company’s common stock at the measurement date over the exercise price. Accordingly, the Company has not recognized compensation expense on the issuance of its fixed stock options because the exercise price equaled the fair market value of the underlying stock on the grant date.

        As required by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure an amendment of FASB Statement No. 123,” the following table reflects the impact on net income and earnings per share as if the Company had adopted the fair value based method of recognizing compensation costs as prescribed by SFAS No. 123.

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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 17, 2004 and July 12, 2003
(in thousands, except per share data)
(unaudited)

        Financed Vendor Accounts Payable

        During the first quarter of fiscal 2004, the Company entered a short-term financing program with a bank allowing it to extend its payment terms on certain merchandise purchases. Under this program, the Company issues negotiable instruments to vendors in lieu of a cash payment. The vendor presents the instrument to the bank for payment at an agreed upon discount rate. The Company records this discount given by the vendor to the value of its inventory upon the Company’s issuance of the negotiable instrument and accretes this discount to the resulting short-term payable to the bank through interest expense over the extended term. At July 17, 2004, $40,236 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.

        Recent Accounting Pronouncements

        In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure an amendment of FASB Statement No. 123.” This statement amends SFAS 123, “Accounting for Stock-Based Compensation” to allow for alternative methods of transition for a voluntary change to the fair value based method of accounting for stock issued to employees, who the Company refers to as team members. This statement also amends FASB No. 123 to require disclosure of the accounting method used for valuation in both annual and interim financial statements. This statement permits an entity to recognize compensation expense under the prospective method, modified prospective method or the retroactive restatement method. If an entity elects to adopt this statement, fiscal years beginning after December 15, 2003 must include this change in accounting for employee stock-based compensation. The Company has adopted the enhanced disclosure requirements of SFAS No. 148 and accordingly included the related disclosures in these footnotes. The Company has concluded that it will continue to account for employee stock-based compensation in accordance with Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees” until further definitive guidance is issued.

        In May 2004, the FASB issued FASB Staff Position, or FSP, 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP 106-2 addresses the appropriate accounting and disclosure requirements for companies that sponsor a postretirement health care plan that provides prescription drug benefits. The new guidance was deemed necessary as a result of the 2003 Medicare prescription law which includes a federal subsidy for qualifying companies. The effective date of FSP 106-2 is the first interim or annual period beginning after June 15, 2004. The Company recently completed a negative plan amendment to eliminate outpatient prescription drug benefits from its postretirement plan; therefore, the adoption of FSP 106-2 will have no impact on its financial position, results of operations or related footnote disclosure.

        Reclassifications

        Certain 2003 amounts have been reclassified to conform with their 2004 presentation.

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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 17, 2004 and July 12, 2003
(in thousands, except per share data)
(unaudited)

2.     Inventories, net:

        Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method. 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 Company capitalizes certain purchasing and warehousing costs into inventory. Purchasing and warehousing costs included in inventory at July 17, 2004 and January 3, 2004 were $82,590 and $75,349, respectively.

        The following table sets forth inventories at July 17, 2004 and January 3, 2004:

        Replacement cost approximated FIFO cost at July 17, 2004 and January 3, 2004.

        Inventory quantities are tracked through a perpetual inventory system. The Company uses a cycle counting program in all distribution centers; Parts Delivered Quickly warehouses, or PDQs; Local Area Warehouses, or LAWs, and retail stores to ensure the accuracy 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 of discontinued product and the historical analysis of the liquidation of discontinued inventory below cost. The nature of the Company’s inventory is such that the risk of obsolescence is minimal and excess inventory has historically been returned to the Company’s vendors for credit. 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 $18,018 and $16,011 at July 17, 2004 and January 3, 2004, respectively.

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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 17, 2004 and July 12, 2003
(in thousands, except per share data)
(unaudited)

3.     Receivables, net:

        Receivables consist of the following:

4.     Closed Store and Restructuring Liabilities:

        The Company continually reviews the operating performance of its existing store locations and closes certain locations identified as under performing. Closing an under performing location has not resulted in the elimination of the operations and associated cash flows from the Company’s ongoing operations as the Company has transferred those operations to another location in the local market. The Company maintains closed store liabilities that include liabilities for these exit activities. The Company also maintains liabilities assumed through past acquisitions for closed store liabilities which are similar in nature but recorded by the acquired companies prior to the Company’s acquisition. In addition, the Company maintains restructuring liabilities recorded through purchase accounting that reflect costs of the plan to integrate the acquired operations into the Company’s business. These integration plans relate to the operations acquired in the fiscal 1998 merger with Western Auto Supply Company, or Western, and the fiscal 2001 acquisition of Discount Auto Parts, or Discount. The following table presents a summary of the activity for both of these liabilities:

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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 17, 2004 and July 12, 2003
(in thousands, except per share data)
(unaudited)

        New provisions established for closed store liabilities include the present value of the remaining lease obligations and management’s estimate of future costs of insurance, property tax and common area maintenance. These new provisions are reduced by the present value of estimated revenues from subleases and are established by a charge to selling, general and administrative costs in the accompanying condensed consolidated statements of operations at the time the facilities actually close. The Company currently uses discount rates ranging from 4.5% to 7.8% for estimating these liabilities.

        From time to time these estimates require revisions that affect the amount of the recorded liability. The above change in estimates relate primarily to changes in assumptions associated with the revenue from subleases. The effect of changes in estimates for the closed store liabilities is netted with new provisions and included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

        Changes in estimates associated with restructuring liabilities result in adjustments to the carrying value of property and equipment, net on the accompanying condensed consolidated balance sheets and do not affect the Company’s condensed consolidated statement of operations. The liabilities are recorded in accrued expenses (current portion) and other long-term liabilities (long-term portion) in the accompanying condensed consolidated balance sheets.

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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 17, 2004 and July 12, 2003
(in thousands, except per share data)
(unaudited)

5.     Long-term Debt:

        Long-term debt consists of the following:

        During the twelve and twenty-eight weeks ended July 17, 2004, the Company repaid $45,000 and $110,000, respectively, of debt under its credit facility. In conjunction with these repayments, the Company wrote-off deferred financing costs in the amounts of $168 and $412, which are classified as losses on extinguishment of debt in the accompanying condensed consolidated statements of operations for the twelve and twenty-eight weeks ended July 17, 2004, respectively. For the twenty-eight weeks ended July 12, 2003, the Company recorded a loss on extinguishment of debt of $47,141 primarily in connection with the redemption of its outstanding senior subordinated notes and senior discount debentures during the first quarter of fiscal 2003.

        At July 17, 2004, the credit facility provided for (1) $335,000 in term loans (as detailed above) and (2) $160,000 under a revolving credit facility (which provides for the issuance of letters of credit with a sub limit of $70,000). As of July 17, 2004, the Company had $37,643 in standby letters of credit, which reduced availability under the revolving credit facility to $122,357.

        The Company’s voluntary prepayment of its term loans during the second quarter resulted in the following amended amortization schedule:

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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 17, 2004 and July 12, 2003
(in thousands, except per share data)
(unaudited)

        Under the credit facility, the Company is required to comply with financial covenants with respect to limits on annual capital expenditures, a maximum leverage ratio, a minimum interest coverage ratio, a minimum current assets to funded senior debt ratio and a maximum senior leverage ratio. The Company was in compliance with the above covenants under the credit facility at July 17, 2004.

6.     Postretirement Plan:

        The Company provides certain health and life insurance benefits for eligible retired team members through a postretirement plan, or the Plan. The Plan has no assets and is funded on a cash basis as benefits are paid. The Company expects fiscal 2004 plan contributions to completely offset benefits paid, consistent with fiscal 2003. Effective for the second quarter, the Company amended the Plan to exclude outpatient prescription drug benefits to Medicare eligible retirees effective January 1, 2006. Due to this negative plan amendment, the Company’s accumulated postretirement benefit obligation was reduced by $7,557, resulting in an unrecognized negative prior service cost in the same amount. The unrecognized negative prior service cost will be amortized over the estimated remaining life expectancy of the plan participants of 13 years, as prescribed under SFAS No. 106, “Employers Accounting for Postretirement Benefits Other Than Pensions.” Accordingly, net periodic postretirement benefit cost will reflect a reduction of $778 for fiscal 2004, of which $260 was recognized during the second quarter. The expected reduction in net periodic postretirement benefit cost for fiscal 2004 includes a reduction in interest cost of $343 in addition to the amortization of negative prior service cost of $435. The components of net periodic postretirement benefit cost for the twelve week and twenty-eight weeks ended July 17, 2004 and July 12, 2003, respectively, are as follows:

7.     Property and Equipment, net:

        During the second quarter of fiscal 2004, the Company finalized the purchase of a new Northeast distribution center and capitalized $28,619 of the total anticipated cost of approximately $50,000 to complete the opening of this facility. This facility, located in Pennsylvania, is expected to open in the spring of 2005, and will serve the Company’s expanding store base in the Northeast region of the United States.

8.     Subsequent Event:

        Subsequent to July 17, 2004, the Company’s Board of Directors authorized a stock repurchase program. The program would allow the Company to repurchase up to $200,000 of its outstanding common shares.

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        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 Form 10-Q. Our first quarter consists of 16 weeks and our other three quarters consist of 12 weeks each.

        Certain statements in this Form 10-Q 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 Form 10-Q 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 elsewhere in our annual report on Form 10-K for the year ended January 3, 2004 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 Form 10-Q. These risks, uncertainties and contingencies include, but are not limited to, the following:

        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 reports and documents filed with the Securities and Exchange Commission, and you should not place undue reliance on those statements.

Introduction

        During the second quarter, we continued to focus on the execution of our core strategies: raising average sales per store; expanding operating margins; and generating strong cash flow. The following table presents a summary of our operating results and certain key metrics for the twelve and twenty-eight weeks ended July 17, 2004.

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         Total sales grew by 9.8% over the same quarter last year, while our operating margins improved to double-digit levels at 10.0% of total sales, a 66 basis point increase over the same quarter last year. Our sales growth reflects both our increase in comparable store sales of 5.0% and contributions from our new stores. Our operating margins benefited from an increase in our gross margin of 62 basis points over the same quarter last year, offset by an increase in selling, general and administrative expenses as a percent of sales.

Operating Overview

        We are the second largest retailer, based on store count, in the United States automotive aftermarket industry, which includes replacement parts (excluding tires), accessories, maintenance items, batteries and automotive chemicals for cars and light trucks (pick-ups, vans, minivans and sport utility vehicles). We serve both do-it-yourself, or DIY, customers and commercial customers, also referred to as do-it-for-me, or DIFM customers, from our 2,583 retail stores at July 17, 2004. We operated 2,548 stores throughout 39 states in the Northeastern, Southeastern and Midwestern regions of the United States. These stores operated primarily under the “Advance Auto Parts” trade name except for the state of Florida, which operated under “Advance Discount Auto Parts,” or “Discount Auto Parts” trade names. In addition, we operated 35 stores under the “Western Auto” trade name, located primarily in Puerto Rico and the Virgin Islands, which offer certain home and garden merchandise in addition to automotive parts, accessories and service. The following table sets forth information about our stores including the number of new, closed and relocated stores during the twelve and twenty-eight weeks ended July 17, 2004:

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Critical Accounting Policies

        The preparation of our financial statements includes the application of accounting policies generally accepted in the United States of America. The application of these policies often require estimates and judgements, which we base on currently available information, historical results and other assumptions we believe are reasonable. During the first and second quarters of fiscal 2004, we consistently applied the critical accounting policies discussed in our annual report on Form 10-K for fiscal year 2003. For a complete discussion regarding these critical accounting policies, refer to our annual report on Form 10-K.

Components of Statement of Operations

Net Sales

        Net sales consist primarily of comparable store sales, new store net sales, and finance charges on installment 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. We exclude net sales from the 35 Western Auto retail stores from our comparable store sales as a result of their unique product offerings, including specialty merchandise.

        Our fiscal year ends on the Saturday closest to December 31 and consists of 52 or 53 weeks. Our 2003 fiscal year began on December 29, 2002 and consisted of 53 weeks, while our 2004 fiscal year began on January 4, 2004 and will consist of 52 weeks. The extra week of operations in fiscal 2003 results in our second quarter of fiscal 2004 consisting of non-comparable calendar weeks to the second quarter of fiscal 2003. To create a meaningful comparable store sales measure, we have compared the calendar weeks of second quarter 2004 to the corresponding calendar weeks of fiscal 2003. Accordingly, our calculation of comparable stores sales for second quarter of fiscal 2004 excludes week one of operations from second quarter of fiscal 2003 and includes the first week of our third quarter of fiscal 2003.

Cost of Sales

        Our cost of sales consists of merchandise costs, net of incentives under vendor programs, 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 and vendor programs. We seek to avoid fluctuation in merchandise costs and instability of supply by entering into long-term purchasing agreements with vendors when we believe it is advantageous.

Selling, General and Administrative Expenses

        Selling, general and administrative expenses consist of store payroll, store occupancy (including rent), net advertising expenses, other store expenses and general and administrative expenses, including salaries and related benefits of corporate team members, administrative office expenses, data processing, professional expenses and other related expenses including the fiscal 2003 expenses associated with merger and integration. We lease a significant portion of our stores.

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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 Weeks Ended July 17, 2004 Compared to Twelve Weeks Ended July 12, 2003

        Net sales for the twelve weeks ended July 17, 2004 were $908.4 million, an increase of $81.1 million, or 9.8%, over net sales for the twelve weeks ended July 12, 2003. The net sales increase was due to an increase in the comparable store sales of 5.0% and contributions from new stores opened within the last year. The comparable store sales increase was driven primarily by an increase in average ticket and customer traffic in our DIFM business. Our DIY business positively contributed to the sales growth primarily through an increase in average ticket sales. We believe our 2010 store format, category management and enhanced nationwide advertising program drove our overall sales growth. In addition, we believe our DIFM business benefited from the execution of our commercial strategies including: better inventory available, the development of new programs in our existing markets and our continued focus on a high level of service to our DIFM customers.

        Gross profit for the twelve weeks ended July 17, 2004 was $422.3 million, or 46.5% of net sales, as compared to $379.5 million, or 45.9% of net sales, for the twelve weeks ended July 12, 2003. The increase in gross profit as a percentage of net sales reflects continued benefits realized from our category management initiatives and enhanced efficiencies in our supply chain. As we continue to refine our category management process, we believe we still have significant opportunities to drive gross margin through improving our merchandising initiatives and the leveraging our supply chain expenses.

        Selling, general and administrative expenses increased to $331.1 million, or 36.5% of net sales, for the twelve weeks ended July 17, 2004, from $301.9 million, or 36.5% of net sales, for the twelve weeks ended July 12, 2003. The selling, general and administrative expenses for the twelve weeks ended July 12, 2003 included $2.9 million in merger and integration expenses related to the integration of Discount. These integration expenses were related to, among other things, overlapping administrative functions and store conversion expenses. Excluding the merger and integration expenses from the twelve weeks ended July 12, 2003, selling, general and administrative expenses increased 30 basis points as a percentage of net sales for the twelve weeks ended July 17, 2004. This increase was primarily a result of the continued investment in our national advertising campaign and increased medical costs due to inflation in the health care sector.

        Interest expense for the twelve weeks ended July 17, 2004 was $4.5 million, or 0.4% of net sales, as

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compared to $7.0 million, or 0.9% of net sales, for the twelve weeks ended July 12, 2003. The decrease in interest expense is a result of lower debt levels as a result of paying down debt under our credit facility.

        Income tax expense for the twelve weeks ended July 17, 2004 was $33.3 million, as compared to $27.1 million for the twelve weeks ended July 12, 2003. The increase in income tax expense primarily reflects our higher earnings. Our effective income tax rate was 38.5% for both the twelve weeks ended July 17, 2004 and July 12, 2003.

        We recorded net income of $53.2 million, or $0.70 per diluted share, for the twelve weeks ended July 17, 2004, as compared to $43.5 million, or $0.58 per diluted share, for the twelve weeks ended July 12, 2003. As a percentage of net sales, net income for the twelve weeks ended July 17, 2004 was 5.9%, as compared to 5.2% for the twelve weeks ended July 12, 2003. Our net income for the twelve weeks ended July 12, 2003 included merger and integration expenses of $1.8 million, or $0.02 per diluted share.

Twenty-Eight Weeks Ended July 17, 2004 Compared to Twenty-Eight Weeks Ended July 12, 2003

        Net sales for the twenty-eight weeks ended July 17, 2004 were $2,031.3 million, an increase of $198.0 million, or 10.8%, over net sales for the twenty-eight weeks ended July 12, 2003. The net sales increase was due to an increase in the comparable store sales of 6.1% and contributions from new stores opened within the last year. The comparable store sales increase resulted from an increase in customer traffic and average ticket in both the DIY and DIFM market segments as we believe our 2010 store format, category management and an enhanced nationwide advertising program have continued to drive our sales growth.

        Gross profit for the twenty-eight weeks ended July 17, 2004 was $943.2 million, or 46.4% of net sales, as compared to $843.5 million, or 46.0% of net sales, for the twenty-eight weeks ended July 12, 2003. The increase in gross profit as a percentage of net sales reflects continued benefits realized from our category management initiatives and enhanced efficiencies in our supply chain. As we continue to refine our category management process, we believe we still have significant opportunities to drive gross margin through improved merchandising initiatives and the leveraging of our supply chain expenses.

        Selling, general and administrative expenses increased to $761.9 million, or 37.5% of net sales, for the twenty-eight weeks ended July 17, 2004, from $693.3 million, or 37.8% of net sales, for the twenty-eight weeks ended July 12, 2003. The selling, general and administrative expenses for the twenty-eight weeks ended July 12, 2003 included $6.3 million in merger and integration expenses related to the integration of Discount. These integration expenses were related to, among other things, overlapping administrative functions and store conversion expenses. Excluding the merger and integration expenses from the twenty-eight weeks ended July 12, 2003, selling, general and administrative expenses as a percentage of net sales were the same during the twenty-eight weeks ended July 17, 2004 and the twenty-eight weeks ended July 12, 2003.

        Interest expense for the twenty-eight weeks ended July 17, 2004 was $10.8 million, or 0.6% of net sales, as compared to $26.4 million, or 1.4% of net sales, for the twenty-eight weeks ended July 12, 2003. The decrease in interest expense is a result of both lower overall interest rates resulting primarily from our redemption of our outstanding senior subordinated notes and senior discount debentures in the first quarter 2003 and lower debt levels as a result of paying down debt under our credit facility.

        Income tax expense for the twenty-eight weeks ended July 17, 2004 was $65.5 million, as compared to $29.6 million for the twenty-eight weeks ended July 12, 2003. This increase in income tax expense was primarily reflective of our higher earnings. Our effective income tax rate was 38.5% for both the twenty-eight weeks ended July 17, 2004 and July 12, 2003.

        We recorded net income of $104.5 million, or $1.37 per diluted share, for the twenty-eight weeks ended July 17, 2004, as compared to $48.5 million, or $0.66 per diluted share, for the twenty-eight weeks ended July 12, 2003. As a percentage of net sales, net income for the twenty-eight weeks ended July 17, 2004 was 5.1%, as compared to 2.6% for the twenty-eight weeks ended July 12, 2003. Our net income for the twenty-eight weeks

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ended July 12, 2003 included expenses associated with merger and integration and loss on extinguishment of debt of $32.7 million, or $0.44 per diluted share.

Liquidity and Capital Resources

        At July 17, 2004, we had outstanding indebtedness consisting of borrowings of $335.0 million under our credit facility. Additionally, we had $37.6 million in standby letters of credit, which reduced our availability under the revolving credit facility to $122.4 million.

        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, inventory requirements, the construction and upgrading of distribution centers, the development and implementation of proprietary information systems and our strategic acquisitions. We have financed these capital requirements through a combination of cash generated from operations, borrowings under the credit facility and issuances of equity.

        Our future capital requirements will depend on the number of new stores we open or acquire and the timing of those openings or acquisitions within a given year. We anticipate adding approximately 125 to 135 new stores during 2004 primarily through new store openings, of which 51 had been added as of July 17, 2004. Additionally, our capital requirements for 2004 through first quarter of 2005 will include approximately $50.0 million in additional capital expenditures to ready our Northeastern distribution center for opening in the spring of 2005, of which $28.6 million has been spent as of July 17, 2004.

        Our capital expenditures were $87.1 million for the twenty-eight weeks ended July 17, 2004. These amounts related to the $28.6 million incurred to date for the Northeastern distribution center, new store openings, the upgrade of our information systems, remodels and relocations of existing stores, including our physical conversion of Discount stores, and capitalizable store improvements. In 2004, we anticipate that our capital expenditures will be approximately $180.0 million, up from 2003, reflecting the new Northeast distribution center and our intent to own rather than lease a portion of our new stores opened.

        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. During the first quarter of fiscal 2004, we entered a short-term financing program with a bank, allowing us to extend our payment terms on certain merchandise purchases. Under this program, we issue negotiable instruments to our vendors in lieu of a cash payment. Each vendor is able to present the instrument to the bank for payment at an agreed upon discount rate. At July 17, 2004, $40.2 million was payable to the bank by us under this program. This program will allow us to further reduce the working capital invested in current inventory levels and future inventory growth.

        In addition to the reserves established for the closure of under performing locations, the Western merger and Discount acquisition resulted in restructuring liabilities recorded in purchase accounting for the closure of certain stores, severance and relocation costs and other facility exit costs. Through these acquisitions, we also assumed certain closed store liabilities previously recorded by these companies. At July 17, 2004, the closed store and restructuring reserves collectively had a remaining balance of $5.8 million, of which $2.2 million is recorded as a current liability. These reserves are utilized through the settlement of the corresponding liabilities with cash provided by operations and therefore do not affect our condensed consolidated statement of operations.

        We maintain two deferred compensation plans. Our ongoing plan was established in 2003 as an unqualified deferred compensation plan established for certain of our key team members. This plan provides for a mimimum and maximum deferral percentage of the team member base salary and bonus, as determined by the Retirement Plan Committee. We fund the plan liability by remitting the team members’ deferral to a Rabbi Trust. All gains and losses are held in the Rabbi Trust to fund the deferred compensation liability. At July 17, 2004, the liability related to this plan was $1.4 million, all of which is current. We also maintain an unfunded deferred compensation plan established for certain key team members of Western prior to the 1998 Western merger. The plan was frozen at the date of the Western merger. At July 17, 2004, the total liability for the Western plan was $1.8 million, of which $0.4 million is recorded as a current liability. The classification for the Western deferred compensation plan is determined by

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payment terms elected by plan participants, which can be changed upon 12 months’ notice.

        We provide certain health care and life insurance benefits for eligible retired team members through our postretirement plan. The plan has no assets and is funded on a cash basis as benefits are paid. Effective for the second quarter, we amended our plan to exclude outpatient prescription drug benefits to Medicare eligible retirees effective January 1, 2006. As a result of this negative plan amendment, our accumulated postretirement benefit obligation was reduced by $7.6 million, resulting in an unrecognized negative prior service cost in the same amount. The unrecognized negative prior service cost will be amortized over the estimated remaining life expectancy of the plan participants of 13 years. The discount rate that we utilize for determining our postretirement benefit obligation is actuarially determined. The discount rate utilized at January 3, 2004 was 6.25%, and remained unchanged through the twenty-eight weeks ended July 17, 2004. Our accrued benefit cost related to this plan was $17.2 million and $17.4 million at July 17, 2004 and January 3, 2004, respectively. We reserve the right to change or terminate the benefits or contributions at any time; however, we expect fiscal 2004 contributions to our plan to remain consistent with fiscal 2003. We also continue to evaluate ways in which we can better manage these benefits and control costs. Any changes in the plan or revisions to assumptions that affect the amount of expected future benefits may have a significant impact on the amount of the reported obligation and annual expense.

        We expect that funds provided from operations and available borrowings under our revolving credit facility at July 17, 2004, will provide sufficient funds to operate our business, make expected capital expenditures, including the new distribution center, finance our closed store and restructuring activities, complete the physical conversion of the remaining Discount store locations and fund future debt service on our credit facility over the next three years.

        For the twenty-eight weeks ended July 17, 2004, net cash provided by operating activities was $163.8 million. Of this amount, $104.5 million was provided by net income and $16.3 million was used as a result of a net decrease in working capital and other long-term assets and liabilities. Significant items added back for operating cash flow purposes include depreciation and amortization of $55.4 million, provision for deferred income taxes of $9.2 million and tax benefit related to exercise of stock options of $11.0 million. Net cash used for investing activities was $81.6 million and was comprised primarily of capital expenditures, including $28.6 million incurred during the second quarter for our Northeast distribution center. Net cash used in financing activities was $73.8 million and was comprised primarily of a $110.0 million decrease in our net borrowings, offset by an increase in financed vendor accounts payable of $40.2 million.

        Our future contractual obligations at July 17, 2004 were as follows:

Long Term Debt

         Credit Facility. During the twelve and twenty-eight weeks ended July 17, 2004, we repaid $45 million and $110 million, respectively, of debt under our credit facility. In conjunction with these repayments, we wrote-off deferred financing costs in the amounts of $0.2 million and $0.4 million, which are classified as losses on extinguishment of debt in the accompanying condensed consolidated statements of operations for the twelve and twenty-eight weeks ended July 17, 2004, respectively.

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        At July 17, 2004, our credit facility consisted of (1) a tranche D term loan facility with a balance of $76.1 million and a tranche E term loan facility with a balance of $258.9 million, and (2) a $160 million revolving credit facility (including a letter of credit sub facility), of which $122.4 million was available. The credit facility is jointly and severally guaranteed by all of our domestic subsidiaries (including Discount and its subsidiaries) and is secured by all of our assets and the assets of our existing and future domestic subsidiaries (including Discount and its subsidiaries).

        The tranche D term loan facility currently provides for amortization of $17.0 million on May 31, 2005, $21.6 million in November 2005 and in May 2006 and $15.8 million at maturity on November 30, 2006. The tranche E term loan facility currently provides for amortization of $2.3 million in November 2005 and semi-annually thereafter, with a final payment of $249.7 million due at maturity on November 30, 2007.

        We are required to comply with financial covenants in the credit facility with respect to (a) limits on annual aggregate capital expenditures, (b) a maximum leverage ratio, (c) a minimum interest coverage ratio, (d) a ratio of current assets to funded senior debt and (e) a maximum senior leverage ratio. We were in compliance with the above covenants under the credit facility at July 17, 2004. For additional information regarding our credit facility, refer to our annual report on Form 10-K for the fiscal year ended January 3, 2004.

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 and cold weather tends to enhance sales by causing parts to fail.

New Accounting Pronouncements

        In December 2002 the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure an amendment of FASB Statement No. 123.” This statement amends SFAS 123, “Accounting for Stock-Based Compensation” to allow for alternative methods of transition for a voluntary change to the fair value based method of accounting for stock issued to employees, who we refer to as team members. This statement also amends FASB No. 123 to require disclosure of the accounting method used for valuation in both annual and interim financial statements. This statement permits an entity to recognize compensation expense under the prospective method, modified prospective method or the retroactive restatement method. If an entity elects to adopt this statement, fiscal years beginning after December 15, 2003 must include this change in accounting for employee stock-based compensation. We have adopted the enhanced disclosure requirements of SFAS No. 148 and accordingly included the related disclosures in these footnotes. We have concluded that we will continue to account for employee stock-based compensation in accordance with Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees” until further definitive guidance is issued.

        In May 2004, the FASB issued FASB Staff Position, or FSP, 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP 106-2 addresses the appropriate accounting and disclosure requirements for companies that sponsor a postretirement health care plan that provides prescription drug benefits. The new guidance was deemed necessary as a result of the 2003 Medicare prescription law which includes a federal subsidy for qualifying companies. The effective date of FSP 106-2 is the first interim or annual period beginning after June 15, 2004. We recently completed a negative plan amendment to eliminate outpatient prescription drug benefits from our postretirement plan; therefore, the adoption of FSP 106-2 will have no impact on our financial position, results of operations or related footnote disclosure.

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        We are exposed to cash flow risk due to changes in interest rates with respect to our long-term debt. While we cannot predict the impact interest rate movements will have on our debt, exposure to rate changes is managed through the use of fixed and variable rate debt and hedging activities. Our variable rate debt is primarily vulnerable to movements in the LIBOR rate. Our future exposure to interest rate risk decreased during the twenty-eight weeks ended July 17, 2004 primarily due to a reduction in our variable rate debt.

        In March 2003 we entered into two interest rate swap agreements on an aggregate of $125 million of our variable rate debt under our credit facility. The first swap allows us to fix our LIBOR rate at 2.269% on $75 million of variable rate debt for a term of 36 months, expiring first quarter fiscal 2006. The second swap allows us to fix our LIBOR rate at 1.79% on $50 million of variable rate debt for a term of 24 months, expiring first quarter fiscal 2005.

        In September 2002 we entered into a hedge agreement in the form of a zero-cost collar, which protects us against interest rate fluctuations in the LIBOR rate on $150 million of our variable rate debt under our credit facility. The collar consists of an interest rate ceiling of 4.5% and an interest floor of 1.56% for a term of 24 months, expiring third quarter fiscal 2004. Under this hedge, we will continue to pay interest at prevailing rates plus any spread, as defined by our credit facility, but will be reimbursed for any amounts paid on the LIBOR rate in excess of the ceiling. Conversely, we will be required to pay the financial institution that originated the collar if the LIBOR rate is less than the 1.56% floor.

        The table below presents principle cash flows and related weighted average interest rates on our long-term debt outstanding at July 17, 2004, by expected maturity dates. Additionally, the table includes the notional amounts of our debt hedged and the impact of the anticipated average pay and receive rates of our hedges through their maturity dates. Expected maturity dates approximate contract terms. Weighted average variable rates are based on implied forward rates in the yield curve at July 17, 2004. Implied forward rates should not be considered a predictor of actual future interest rates.

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        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. Disclosure controls and procedures mean 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.

         There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.   OTHER INFORMATION

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