Attached files
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EX-31.2 - EXHIBIT 31.2 - ADVANCE AUTO PARTS INC | ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - ADVANCE AUTO PARTS INC | ex31-1.htm |
EX-32.1 - EXHIBIT 32.1 - ADVANCE AUTO PARTS INC | ex32-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly period ended
October 10, 2009
OR
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the transition period from
________ to ________.
Commission file number
001-16797
ADVANCE AUTO PARTS,
INC.
(Exact name of registrant as
specified in its charter)
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
54-2049910
(I.R.S.
Employer
Identification No.)
|
5008 Airport Road, Roanoke, Virginia
24012
(Address
of Principal Executive Offices)
(Zip
Code)
(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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Registration S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes p No p
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See definition of “large accelerated filer,” "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer p |
Non-accelerated filer p (Do not check if a smaller reporting company) | Smaller reporting company p |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
p No
x
As of
November 16, 2009,
the registrant had outstanding 94,631,221 shares
of Common Stock, par value $0.0001 per share (the only class of common stock of
the registrant outstanding).
PART I. FINANCIAL INFORMATION
ITEM 1. |
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF
ADVANCE
AUTO PARTS, INC. AND SUBSIDIARIES
|
Advance Auto Parts, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
October
10, 2009 and January 3, 2009
(in
thousands, except per share data)
(unaudited)
October
10,
|
January
3,
|
|||||||
Assets
|
2009
|
2009
|
||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 216,215 | $ | 37,358 | ||||
Receivables,
net
|
92,993 | 97,203 | ||||||
Inventories,
net
|
1,657,067 | 1,623,088 | ||||||
Other
current assets
|
46,381 | 49,977 | ||||||
Total
current assets
|
2,012,656 | 1,807,626 | ||||||
Property
and equipment, net of accumulated depreciation of
|
||||||||
$884,027
and $817,428
|
1,070,217 | 1,071,405 | ||||||
Assets
held for sale
|
3,062 | 2,301 | ||||||
Goodwill
|
34,387 | 34,603 | ||||||
Intangible
assets, net
|
26,670 | 27,567 | ||||||
Other
assets, net
|
18,906 | 20,563 | ||||||
$ | 3,165,898 | $ | 2,964,065 | |||||
Liabilities and Stockholders'
Equity
|
||||||||
Current
liabilities:
|
||||||||
Bank
overdrafts
|
$ | - | $ | 20,588 | ||||
Current
portion of long-term debt
|
1,307 | 1,003 | ||||||
Financed
vendor accounts payable
|
51,953 | 136,386 | ||||||
Accounts
payable
|
959,692 | 791,330 | ||||||
Accrued
expenses
|
400,965 | 372,510 | ||||||
Other
current liabilities
|
59,041 | 43,177 | ||||||
Total
current liabilities
|
1,472,958 | 1,364,994 | ||||||
Long-term
debt
|
278,149 | 455,161 | ||||||
Other
long-term liabilities
|
122,235 | 68,744 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, nonvoting, $0.0001 par value,
|
||||||||
10,000
shares authorized; no shares issued or outstanding
|
- | - | ||||||
Common
stock, voting, $0.0001 par value, 200,000 shares
authorized;
|
||||||||
104,036
shares issued and 94,663 outstanding at October 10, 2009
|
||||||||
and
103,000 shares issued and 94,852 outstanding at January 3,
2009
|
10 | 10 | ||||||
Additional
paid-in capital
|
382,766 | 335,991 | ||||||
Treasury
stock, at cost, 9,373 and 8,148 shares
|
(340,681 | ) | (291,114 | ) | ||||
Accumulated
other comprehensive loss
|
(7,946 | ) | (9,349 | ) | ||||
Retained
earnings
|
1,258,407 | 1,039,628 | ||||||
Total
stockholders' equity
|
1,292,556 | 1,075,166 | ||||||
$ | 3,165,898 | $ | 2,964,065 | |||||
The accompanying notes to the condensed
consolidated financial statements
are an integral part of these statements.
Advance Auto Parts, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations
For
the Twelve and Forty Week Periods Ended
October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
Twelve
Week Periods Ended
|
Forty
Week Periods Ended
|
|||||||||||||||
October
10,
|
October
4,
|
October
10,
|
October
4,
|
|||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
sales
|
$ | 1,262,576 | $ | 1,187,952 | $ | 4,269,056 | $ | 3,949,867 | ||||||||
Cost of sales, including
purchasing and warehousing costs
|
641,117 | 625,777 | 2,172,959 | 2,076,555 | ||||||||||||
Gross
profit
|
621,459 | 562,175 | 2,096,097 | 1,873,312 | ||||||||||||
Selling,
general and administrative expenses
|
516,604 | 466,278 | 1,698,885 | 1,505,178 | ||||||||||||
Operating
income
|
104,855 | 95,897 | 397,212 | 368,134 | ||||||||||||
Other,
net:
|
||||||||||||||||
Interest
expense
|
(5,339 | ) | (6,672 | ) | (18,430 | ) | (26,247 | ) | ||||||||
Other
income (expense), net
|
487 | (223 | ) | 633 | (287 | ) | ||||||||||
Total
other, net
|
(4,852 | ) | (6,895 | ) | (17,797 | ) | (26,534 | ) | ||||||||
Income
before provision for income taxes
|
100,003 | 89,002 | 379,415 | 341,600 | ||||||||||||
Provision
for income taxes
|
38,024 | 32,847 | 143,521 | 127,973 | ||||||||||||
Net
income
|
$ | 61,979 | $ | 56,155 | $ | 235,894 | $ | 213,627 | ||||||||
Basic
earnings per share
|
$ | 0.65 | $ | 0.59 | $ | 2.48 | $ | 2.24 | ||||||||
Diluted
earnings per share
|
$ | 0.65 | $ | 0.58 | $ | 2.46 | $ | 2.23 | ||||||||
Average
common shares outstanding
|
94,656 | 95,019 | 94,647 | 95,003 | ||||||||||||
Average
common shares outstanding - assuming dilution
|
95,474 | 95,758 | 95,325 | 95,669 |
The accompanying notes to the condensed
consolidated financial statements
are an integral part of these
statements.
Advance Auto Parts, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
For
the Forty Week Periods Ended
October
10, 2009 and October 4, 2008
(in
thousands)
(unaudited)
Forty
Week Periods Ended
|
||||||||
October
10,
|
October
4,
|
|||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 235,894 | $ | 213,627 | ||||
Adjustments
to reconcile net income to net cash provided by
|
||||||||
operating
activities:
|
||||||||
Depreciation
and amortization
|
114,856 | 113,297 | ||||||
Amortization
of deferred debt issuance costs
|
277 | 277 | ||||||
Share-based
compensation
|
13,446 | 13,405 | ||||||
Loss
on property and equipment, net
|
7,979 | 1,272 | ||||||
Provision
(benefit) for deferred income taxes
|
56,013 | (1,465 | ) | |||||
Excess
tax benefit from share-based compensation
|
(2,531 | ) | (8,994 | ) | ||||
Net
decrease (increase) in:
|
||||||||
Receivables,
net
|
4,210 | (8,518 | ) | |||||
Inventories,
net
|
(33,979 | ) | (187,741 | ) | ||||
Other
assets
|
4,988 | 7,501 | ||||||
Net
increase in:
|
||||||||
Accounts
payable
|
168,362 | 164,869 | ||||||
Accrued
expenses
|
43,576 | 60,656 | ||||||
Other
liabilities
|
15,359 | 7,658 | ||||||
Net
cash provided by operating activities
|
628,450 | 375,844 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property and equipment
|
(132,622 | ) | (136,954 | ) | ||||
Proceeds
from sales of property and equipment
|
2,565 | 6,351 | ||||||
Other
|
- | (3,413 | ) | |||||
Net
cash used in investing activities
|
(130,057 | ) | (134,016 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Decrease
in bank overdrafts
|
(20,565 | ) | (30,000 | ) | ||||
(Decrease)
increase in financed vendor accounts payable
|
(84,433 | ) | 28,380 | |||||
Dividends
paid
|
(22,772 | ) | (23,155 | ) | ||||
Payments
on note payable
|
(512 | ) | (498 | ) | ||||
Borrowings
under credit facilities
|
173,400 | 301,700 | ||||||
Payments
on credit facilities
|
(349,900 | ) | (335,700 | ) | ||||
Proceeds
from the issuance of common stock, primarily exercise
|
||||||||
of
stock options
|
31,978 | 34,533 | ||||||
Excess
tax benefit from share-based compensation
|
2,531 | 8,994 | ||||||
Repurchase
of common stock
|
(49,567 | ) | (219,429 | ) | ||||
Other
|
304 | - | ||||||
Net
cash used in financing activities
|
(319,536 | ) | (235,175 | ) | ||||
Net
increase in cash and cash equivalents
|
178,857 | 6,653 | ||||||
Cash and cash
equivalents, beginning of period
|
37,358 | 14,654 | ||||||
Cash and cash
equivalents, end of period
|
$ | 216,215 | $ | 21,307 |
The
accompanying notes to the condensed consolidated financial
statements
are an integral
part of these statements.
Advance
Auto Parts, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows - (Continued)
For
the Forty Week Periods Ended
October
10, 2009 and October 4, 2008
(in
thousands)
(unaudited)
Forty
Week Periods Ended
|
||||||||
October
10,
|
October
4,
|
|||||||
2009
|
2008
|
|||||||
Supplemental
cash flow information:
|
|
|||||||
Interest
paid
|
$ | 17,868 | $ | 21,100 | ||||
Income
tax payments, net
|
98,551 | 106,418 | ||||||
Non-cash
transactions:
|
||||||||
Accrued
purchases of property and equipment
|
19,488 | 22,584 | ||||||
Changes
in other comprehensive income (loss)
|
1,403 | (2,550 | ) |
The
accompanying notes to the condensed consolidated financial
statements
are an integral
part of these statements.
Advance Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(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 sheets as of October 10, 2009 and January 3,
2009, the condensed consolidated statements of operations for the twelve and
forty week periods ended October 10, 2009 and October 4, 2008, and the condensed
consolidated statements of cash flows for the forty week periods ended October
10, 2009 and October 4, 2008, have been prepared by the Company. In the opinion
of management, all adjustments, consisting only of 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, or GAAP, 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, 2009.
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 GAAP 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 materially from those
estimates.
Vendor
Incentives
The
Company receives incentives in the form of reductions to amounts owed and/or
payments from vendors related to cooperative advertising allowances, volume
rebates and other promotional considerations. Many of these incentives are under
long-term agreements (terms in excess of one year), while others are negotiated
on an annual basis or less (short-term). Both cooperative advertising allowances
and volume rebates are earned based on inventory purchases and initially
recorded as a reduction to inventory. These deferred amounts are included as a
reduction to cost of sales as the inventory is sold since these payments do not
represent reimbursements for specific, incremental and identifiable costs. Total
deferred vendor incentives included in Inventory, net were $47,206 and $50,527
at October 10, 2009 and January 3, 2009, respectively.
Similarly,
the Company recognizes other promotional incentives earned under long-term
agreements as a reduction to cost of sales. However, these incentives are
recognized based on the cumulative net purchases as a percentage of total
estimated net purchases over the life of the agreement. The Company's margins
could be impacted positively or negatively if actual purchases or results from
any one year differ from its estimates; however, the impact over the life of the
agreement would be the same. Short-term incentives (terms less than one year)
are generally recognized as a reduction to cost of sales over the duration of
any short-term agreements.
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
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
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 related to the
opening of new stores, are expensed as incurred.
Warranty
Liabilities
The
warranty obligation on the majority of merchandise sold by the Company with a
manufacturer’s warranty is the responsibility of the Company’s
vendors. However, the Company has an obligation to provide customers free
replacement of merchandise or merchandise at a prorated cost if under a warranty
and not covered by the manufacturer. Merchandise sold with warranty coverage by
the Company primarily includes batteries but may also include other parts such
as brakes and shocks. The Company estimates its warranty obligation based on the
historical return experience of the product sold and records any change as
income or expense in the period the product is sold.
Sales
Returns and Allowances
The
Company’s accounting policy for sales returns and allowances consists of
establishing reserves for estimated returns at the time of sale. The Company
estimates 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 material at October 10, 2009 and January 3,
2009.
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 its inventory and accretes
this discount to the resulting short-term payable to the bank through interest
expense over the extended term. At October 10, 2009 and January 3, 2009, $51,953
and $136,386, 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.
The
balance in Financed vendor accounts payable continues to diminish as the Company
transitions its merchandise vendors to customer-managed services
arrangements.
Earnings
per Share
The
Company computes earnings per share in accordance with SFAS No. 128, “Earnings
per Share” and FASB Staff Position, or FSP, EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities” (collectively now under ASC Topic 260). The Company adopted FSP EITF
03-6-1 effective January 4, 2009 (the Company’s first quarter), which addresses
whether instruments granted in share-based payment awards are participating
securities prior to vesting, and therefore, need to be included in the earnings
allocation when computing earnings per share under the two-class method as
described in SFAS No. 128. In accordance with FSP EITF 03-6-1, unvested
share-based payment awards that contain non-forfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
Accordingly,
earnings per share is determined using the two-class method and is computed by
dividing net income attributable to the Company’s common shareholders by the
weighted-average common shares outstanding during the period. The
two-class method is an earnings allocation formula that determines income
per share for each class of common stock and participating security according to
dividends declared and participation rights in undistributed earnings. Diluted
income per common share reflects the more dilutive earnings per share amount
calculated using the treasury stock method or the
two-class method.
Cost
of Sales and Selling, General and Administrative (“SG&A”)
Expenses
The
following table illustrates the primary costs classified in each major expense
category:
Cost of
Sales
|
SG&A
|
||||||
●
|
Total
cost of merchandise sold including:
|
●
|
Payroll
and benefit costs for retail and corporate
|
||||
–
|
Freight
expenses associated with moving
|
team
members;
|
|||||
merchandise
inventories from our vendors to
|
●
|
Occupancy
costs of retail and corporate facilities;
|
|||||
our
distribution center,
|
●
|
Depreciation
related to retail and corporate assets;
|
|||||
–
|
Vendor
incentives, and
|
●
|
Advertising;
|
||||
–
|
Cash
discounts on payments to vendors;
|
●
|
Costs
associated with our commercial delivery
|
||||
●
|
Inventory
shrinkage;
|
program,
including payroll and benefit costs,
|
|||||
●
|
Defective
merchandise and warranty costs;
|
and
transportation expenses associated with moving
|
|||||
●
|
Costs
associated with operating our distribution
|
merchandise
inventories from our retail stores to
|
|||||
network, including payroll and benefit costs, | our customer locations; | ||||||
occupancy
costs and depreciation; and
|
●
|
Self-insurance
costs;
|
|||||
●
|
Freight
and other handling costs associated with
|
●
|
Professional
services; and
|
||||
moving
merchandise inventories through our
|
●
|
Other
administrative costs, such as credit card
|
|||||
supply chain | service fees, supplies, travel and lodging. | ||||||
–
|
From our distribution centers to our retail | ||||||
store locations, and |
|
|
|||||
–
|
From certain of our larger stores which stock a |
|
|
||||
wider variety and greater supply of inventory, or |
|
|
|||||
HUB stores, and Parts Delivered Quickly warehouses, | |||||||
or
PDQ®s,
to our retail stores after the customer
|
|
||||||
has special-ordered the merchandise. |
Please
see Note 2 for a discussion of a change in accounting principle for costs
included in inventory.
New
Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board, or FASB, approved the FASB
Accounting Standards Codification, or ASC, as the single source of authoritative
nongovernmental GAAP. All existing accounting standard guidance issued by the
FASB, American Institute of Certified Public Accountants, Emerging Issues Task
Force and related literature, excluding guidance from the Securities and
Exchange Commission, or SEC, has been superseded by the ASC. All other
non-grandfathered, non-SEC accounting literature not included in the ASC has
become non-authoritative. The ASC did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The ASC was effective for interim or annual
periods ending after September 15, 2009.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
Accordingly,
the Company adopted the ASC as of October 10, 2009 as provided by Accounting
Standards Update, or ASU, No. 2009-01, “Topic 105 – Generally Accepted
Accounting Principles – amendments based on Statement of Financial Accounting
Standards No. 168, The FASB
Accounting Standards Codification TM and the Hierarchy of Generally
Accepted Accounting Principles.” As a result of this adoption, previous
references to new accounting standards and literature are no longer applicable.
In the current quarter financial statements, the Company has provided references
to both new and old guidance to assist in understanding the impacts of recently
adopted accounting literature, particularly for guidance adopted since the
beginning of the current fiscal year but prior to the ASC.
Effective
October 10, 2009, the Company adopted ASU No. 2009-05, “Fair Value
Measurements and Disclosures (ASC Topic 820): Measuring Liabilities at Fair
Value.” This ASU provides amendments to ASC Topic 820-10, “Fair Value
Measurements and Disclosures – Overall,” for the fair value measurement of
liabilities. It provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using (a) a valuation
technique that uses the quoted price of the identical liability when traded as
an asset or quoted prices for similar liabilities and/or (b) an income
approach valuation technique or a market approach valuation technique,
consistent with the principles of ASC Topic 820. The adoption did not
have a significant impact on the Company’s consolidated financial
statements.
Effective
July 18, 2009 (the Company’s second quarter), the Company adopted FSP No.
FAS 157-4, “Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (currently included in ASC Topic
820-10-65-4). This FSP provides guidance for estimating the fair value of an
asset or liability when the volume and level of activity for the asset or
liability have significantly decreased, as well as guidance on identifying
circumstances that indicate a transaction is not orderly. It also requires
disclosure in interim and annual periods of the inputs and valuation techniques
used to measure fair value and a discussion of changes in valuation techniques
and related inputs, if any, during the period. The adoption had no significant
impact on the Company’s consolidated financial statements.
Effective
July 18, 2009 (the Company’s second quarter), the Company adopted FSP No.
FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of
Financial Instruments” (currently included in ASC Topic 825-10-65-1). This FSP
amends SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments,” to require disclosures about fair value of financial instruments
for interim reporting periods as well as in annual financial statements. This
FSP also requires disclosure about the methods and significant assumptions used
to estimate the fair value of financial instruments and changes in those methods
and significant assumptions, if any, during the period. The adoption had no
impact on the Company’s consolidated financial statements other than the
additional disclosures.
Effective
July 18, 2009 (the Company’s second quarter), the Company adopted SFAS No. 165,
“Subsequent Events” (currently ASC Topic 855-10). This statement sets
forth general standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are
issued. The Company evaluated all activity through November 19,
2009 (the issuance date of the financial statements) and concluded that no
subsequent events have occurred that would require recognition in the condensed
consolidated financial statements or disclosure in the related notes to the
condensed consolidated financial statements.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
2. |
Change
in Accounting
Principle:
|
Effective
January 4, 2009, the Company implemented a change in accounting principle for
costs included in inventory. Under the Company’s historical accounting policy,
freight and other handling costs (collectively “handling costs”) associated with
moving merchandise inventories from our distribution centers to our retail
stores and handling costs associated with moving our merchandise inventories
from our vendors to our distribution centers were capitalized as inventory and
expensed in cost of sales as inventory was sold. However, handling costs
associated with moving merchandise inventories from our HUB stores and PDQ®s
to our retail stores after a customer had special-ordered the merchandise were
expensed as incurred in SG&A.
The
change relates to capitalizing handling costs associated with moving merchandise
inventories from our HUB stores and PDQ®s
to our retail stores, which are now treated as inventory product costs. Such
costs are includable in inventory and expensed in cost of sales as inventory is
sold because they related to the acquisition of goods for resale by the Company.
The Company has determined that it is preferable to capitalize such handling
costs into inventory because it better represents the costs incurred to prepare
inventory for sale to the customer and it is consistent with the Company’s
treatment of other handling costs associated with moving merchandise inventories
from our distribution centers to our retail stores.
The
change in accounting principle has been retrospectively applied to all prior
periods presented herein related to cost of sales and SG&A. However, because
the inventory transferred is typically at the retail store for only one or two
days until customer pick-up, the current and historical impact of this change on
the consolidated balance sheets, consolidated net income, earnings per share,
and consolidated statements of cash flows is not material and, as a result,
Inventories, net was not adjusted. Accordingly, there is no impact on any
financial statement line items other than cost of sales and SG&A, and there
was no cumulative effect of the change in accounting principle on retained
earnings. The change in accounting principle was initially reported in the
Company’s first quarter Form 10-Q for fiscal
2009. The tables below represent the impact of the accounting change on the
current periods presented for the twelve
and forty weeks ended October 10, 2009 and previously reported amounts for the
comparable periods in fiscal 2008:
Twelve
week period ended October 10, 2009
|
Forty
week period ended October 10, 2009
|
|||||||||||||||||||||||
Prior
to Effect
of
Accounting
Change
|
Adjustments
|
As
Reported
|
Prior
to Effect
of
Accounting
Change
|
Adjustments
|
As
Reported
|
|||||||||||||||||||
Cost
of sales, including purchasing
|
||||||||||||||||||||||||
and
warehousing costs
|
$ | 623,963 | $ | 17,154 | $ | 641,117 | $ | 2,121,168 | $ | 51,791 | $ | 2,172,959 | ||||||||||||
Gross
profit
|
$ | 638,613 | $ | (17,154 | ) | $ | 621,459 | $ | 2,147,888 | $ | (51,791 | ) | $ | 2,096,097 | ||||||||||
Selling,
general and administrative expenses
|
$ | 533,758 | $ | (17,154 | ) | $ | 516,604 | $ | 1,750,676 | $ | (51,791 | ) | $ | 1,698,885 | ||||||||||
Twelve
week period ended October 4, 2008
|
Forty
week period ended October 4, 2008
|
|||||||||||||||||||||||
As
Previously
Reported
|
Adjustments
|
As
Adjusted
|
As
Previously
Reported
|
Adjustments
|
As
Adjusted
|
|||||||||||||||||||
Cost
of sales, including purchasing
|
||||||||||||||||||||||||
and
warehousing costs
|
$ | 610,833 | $ | 14,944 | $ | 625,777 | $ | 2,028,459 | $ | 48,096 | $ | 2,076,555 | ||||||||||||
Gross
profit
|
$ | 577,119 | $ | (14,944 | ) | $ | 562,175 | $ | 1,921,408 | $ | (48,096 | ) | $ | 1,873,312 | ||||||||||
Selling,
general and administrative expenses
|
$ | 481,222 | $ | (14,944 | ) | $ | 466,278 | $ | 1,553,274 | $ | (48,096 | ) | $ | 1,505,178 |
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
3. |
Store
Closures and
Impairment:
|
For
fiscal 2009, the Company currently expects to divest a total of approximately 40
to 50 stores as part of its store divestiture plan. These store closures will be
in addition to approximately 15 stores that will also be closed throughout 2009
as part of the Company’s routine review and closure of underperforming stores at
or near the end of their respective lease terms. The store divestiture plan
consisted of a review of operating stores to identify locations for potential
closing based on both financial and operating factors. These factors included
cash flow, profitability, strategic market importance, store full potential and
current lease rates.
As of
October 10, 2009, the Company had identified 45 stores to close as part of its
store divestiture plan. During the twelve weeks ended October 10, 2009, the
Company closed 13 stores, 12 of which were under the store divestiture plan.
During the forty weeks ended October 10, 2009, the Company closed 43 stores, 36
of which were closed under the store divestiture plan.
During
the twelve and forty weeks ended October 10, 2009, the Company recognized $7,129
and $22,235, respectively, of total expense associated with the 45 stores
identified to be closed, or divestiture expense. For the twelve and forty weeks
ended October 10, 2009, divestiture expense included closed store exit costs of
$6,655 and $17,502, respectively. The closed store exit costs primarily included
the establishment of the liability for future lease obligations as well as
severance. Closed store liabilities primarily include the present value of the
remaining lease obligations and management’s estimate of future costs of
insurance, property tax and common area maintenance (reduced by the present
value of estimated revenues from subleases and lease buyouts). New provisions
are established by a charge to SG&A in the accompanying consolidated
statement of operations at the time the facilities actually close.
A summary
of the Company’s closed store liabilities, which are recorded in accrued
expenses (current portion) and long-term liabilities (long-term portion) in the
accompanying condensed consolidated balance sheet, are presented in the
following table:
Lease
Obligations
|
Severance
and
Other
Exit
|
Total
|
||||||||||
For
the twelve weeks ended October 10, 2009:
|
||||||||||||
Closed
Store Liabilities, July 18, 2009:
|
$ | 12,242 | $ | - | $ | 12,242 | ||||||
Reserves
established
|
6,756 | 205 | 6,961 | |||||||||
Change
in estimates
|
(69 | ) | - | (69 | ) | |||||||
Reserves
utilized
|
(1,008 | ) | (205 | ) | (1,213 | ) | ||||||
Closed
Store Liabilities, October 10, 2009
|
$ | 17,921 | $ | - | $ | 17,921 | ||||||
For
the forty weeks ended October 10, 2009:
|
||||||||||||
Closed
Store Liabilities, January 3, 2009
|
$ | 5,067 | $ | - | $ | 5,067 | ||||||
Reserves
established
|
17,068 | 630 | 17,698 | |||||||||
Change
in estimates
|
(440 | ) | - | (440 | ) | |||||||
Reserves
utilized
|
(3,774 | ) | (630 | ) | (4,404 | ) | ||||||
Closed
Store Liabilities, October 10, 2009
|
$ | 17,921 | $ | - | $ | 17,921 |
The
Company’s ending closed store liabilities at October 10, 2009 included $15,555
related to the store divestiture plan.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
The
Company also included impairment charges of $474 and $4,733 in its total
divestiture expense during the twelve and forty weeks ended October 10, 2009,
respectively. The impairment charges, which primarily consisted of the
impairment of store assets contained in leased store locations where the
carrying amount of those assets is not recoverable, are included in SG&A in
the accompanying condensed consolidated statement of operations.
4. |
Inventories,
net:
|
Merchandise
Inventory
Inventories
are stated at the lower of cost or market. The Company used the LIFO method of
accounting for approximately 95% of inventories at both October 10, 2009 and
January 3, 2009. Under LIFO, the Company’s cost of sales reflects the costs of
the most recently purchased inventories, while the inventory carrying balance
represents the costs for inventories purchased in fiscal 2009 and prior years.
Historically, the Company’s overall costs to acquire inventory for the same or
similar products have been decreasing due to the Company’s significant growth.
As a result of utilizing LIFO, the Company recorded a reduction to cost of sales
of $16,577 and $6,118 for the forty weeks ended October 10, 2009 and October 4,
2008, respectively.
An actual
valuation of inventory under the LIFO method is performed by the Company at the
end of each fiscal year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must be based on management’s estimates
of expected fiscal year-end inventory levels and costs.
Product
Cores
The
remaining inventories are comprised of product cores, the non-consumable portion
of certain parts and batteries, which are valued under the first-in, first-out
("FIFO") method. Product cores are included as part of the Company’s merchandise
costs that are either passed on to the customer or returned to the vendor.
Because product cores are not subject to frequent cost changes like the
Company’s other merchandise inventory, there is no material difference when
applying either the LIFO or FIFO valuation method.
Inventory
Overhead Costs
The
Company capitalizes certain purchasing and warehousing costs into inventory.
Purchasing and warehousing costs included in inventory, at FIFO, at October 10,
2009 and January 3, 2009, were $104,836 and $104,594, respectively.
Inventory
Balances and Inventory Reserves
Inventory
balances at October 10, 2009 and January 3, 2009 were as follows:
October
10,
|
January
3,
|
|||||||
2009
|
2009
|
|||||||
Inventories
at FIFO, net
|
$ | 1,559,273 | $ | 1,541,871 | ||||
Adjustments
to state inventories at LIFO
|
97,794 | 81,217 | ||||||
Inventories
at LIFO, net
|
$ | 1,657,067 | $ | 1,623,088 |
Inventory
quantities are tracked through a perpetual inventory system. The Company uses a
cycle counting program in all distribution centers and PDQ®s to
ensure the accuracy of the perpetual inventory quantities of both
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
merchandise
and product core inventory. For our retail stores, the Company began completing
physical inventories during its third quarter of fiscal 2008 in addition to
cycle counting to ensure the accuracy of the perpetual inventory quantities of
both merchandise and core inventory in these locations. The Company establishes
reserves for estimated shrink based on results of completed physical
inventories, actual results from recent cycle counts and historical results from
the Company’s cycle counting program.
The
Company also establishes reserves for potentially excess and obsolete
inventories based on (i) current inventory levels, (ii) the historical analysis
of product sales and (iii) 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 $24,042 and $62,898
at October 10, 2009 and January 3, 2009, respectively. The reduction in the
Company’s inventory reserves during the forty weeks ended October 10, 2009 is
primarily related to the utilization of its reserve for slow moving inventory
primarily established during the fourth quarter of fiscal 2008 in connection
with a change in inventory management approach for slow moving
inventory.
5. |
Goodwill
and Intangible
Assets:
|
Goodwill
The
following table reflects the carrying amount of goodwill pertaining to the
Company’s two segments, and the changes in goodwill carrying amounts, for the
forty weeks ended October 10, 2009:
AAP
Segment
|
AI
Segment
|
Total
|
||||||||||
Balance
at January 3, 2009
|
$ | 16,093 | $ | 18,510 | $ | 34,603 | ||||||
Fiscal
2009 activity
|
- | (216 | ) | (216 | ) | |||||||
Balance
at October 10, 2009
|
$ | 16,093 | $ | 18,294 | $ | 34,387 |
Intangible
Assets Other Than Goodwill
The
carrying amount and accumulated amortization of acquired intangible assets as of
October 10, 2009 and January 3, 2009 are comprised of the
following:
Acquired
intangible assets
|
||||||||||||||||
Not
Subject
|
||||||||||||||||
Subject
to Amortization
|
to
Amortization
|
|||||||||||||||
Customer
|
Trademark
and
|
Intangible
|
||||||||||||||
Relationships
|
Other
|
Tradenames
|
Assets,
net
|
|||||||||||||
Gross
carrying amount at January 3, 2009
|
$ | 9,800 | $ | 885 | $ | 20,550 | $ | 31,235 | ||||||||
Accumulated
Amortization
|
3,234 | 434 | - | 3,668 | ||||||||||||
Net
book value at January 3, 2009
|
$ | 6,566 | $ | 451 | $ | 20,550 | $ | 27,567 | ||||||||
Gross
carrying amount at October 10, 2009
|
$ | 9,800 | $ | 885 | $ | 20,550 | $ | 31,235 | ||||||||
Accumulated
Amortization
|
4,035 | 530 | - | 4,565 | ||||||||||||
Net
book value at October 10, 2009
|
$ | 5,765 | $ | 355 | $ | 20,550 | $ | 26,670 |
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
October
10, 2009
|
October
4, 2008
|
October
10, 2009
|
October
4, 2008
|
|||||||||||||
Amortization
expense
|
$ | 252 | $ | 296 | $ | 897 | $ | 905 |
Future
Amortization Expense
The table
below shows expected amortization expense for the next five years for acquired
intangible assets recorded as of October 10, 2009:
Fiscal
Year
|
||||
Remainder
of 2009
|
$ | 250 | ||
2010
|
1,059 | |||
2011
|
967 | |||
2012
|
967 | |||
2013
|
967 |
6. |
Receivables,
net:
|
Receivables
consist of the following:
October
10,
2009
|
January
3,
2009
|
|||||||
Trade
|
$ | 18,732 | $ | 17,843 | ||||
Vendor
|
76,293 | 81,265 | ||||||
Other
|
3,175 | 3,125 | ||||||
Total
receivables
|
98,200 | 102,233 | ||||||
Less:
Allowance for doubtful accounts
|
(5,207 | ) | (5,030 | ) | ||||
Receivables,
net
|
$ | 92,993 | $ | 97,203 |
7. |
Derivative
Instruments and Hedging
Activities:
|
The
Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking hedge transactions. The Company’s derivatives that are designated as
hedging instruments currently consist solely of interest rate swaps. Interest
rate swaps are entered into to limit cash flow risk associated with the
Company’s floating-rate borrowings. The Company also utilizes forward commodity
contracts to manage the risk of fluctuating fuel prices. The Company has elected
to apply the normal purchase election allowed and therefore does not account for
these contracts at fair value.
All
derivative instruments designated as hedging are classified as fair value, cash
flow or net investment hedges. All derivatives (including those not designated
as hedging instruments) are recognized on the condensed consolidated balance
sheet at fair value and classified based on the instruments’ maturity dates.
Changes in the fair value measurements of the effective portion of the
derivative instruments designated as hedging instruments are reflected as
adjustments to other comprehensive income, or OCI, with the remaining changes
recorded through current earnings.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
The
Company seeks to manage and mitigate cash flow risk on its variable rate debt
via receive variable/pay fixed interest rate swaps. Current outstanding interest
rate swaps have fixed the Company’s interest rate on an aggregate of $275,000 of
hedged debt at rates ranging from 4.01% to 4.98%. The Company elects to receive
interest payments based on 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.
All of the Company’s interest rate swaps expire in October 2011.
The fair
value of these interest rate swaps are determined based on a forward yield curve
and the contracted interest rates stated in the interest rate swap agreements.
The fair value of the Company’s interest rate swaps at October 10, 2009 and
January 3, 2009, respectively, was an unrecognized loss of $19,151 and $21,979,
which is reflected in Accumulated other comprehensive income (loss). Any amounts
received or paid under these hedges are recorded in the statement of operations
during the accounting period the interest on the hedged debt is paid. Based on
the estimated current and future fair values of the hedge arrangements at
October 10, 2009, the Company estimates amounts currently included in
Accumulated other comprehensive income (loss) pertaining to the interest rate
swaps that will be reclassified and recorded in the statement of earnings in the
next 12 months will consist of a net loss of $11,410.
The table
below presents the fair value of the Company’s derivative financial instruments
as well as their classification on the balance sheet as of October 10, 2009 and
January 3, 2009:
Liability
Derivatives
|
|||||||||
Balance
Sheet
|
Fair
Value as of
|
Fair
Value as of
|
|||||||
Location
|
October
10, 2009
|
January
3, 2009
|
|||||||
Derivatives
designated as hedging
|
|||||||||
instruments:
|
|||||||||
Interest
rate swaps
|
Accrued
expenses
|
$ | 11,410 | $ | 9,222 | ||||
Interest
rate swaps
|
Other
long-term liabilities
|
7,741 | 12,757 | ||||||
$ | 19,151 | $ | 21,979 |
The table
below presents the effect of the Company’s derivative financial instruments on
the statement of operations for the twelve and forty weeks ended October 10,
2009 and October 4, 2008, respectively:
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
Derivatives
in SFAS 133
Cash
Flow Hedging
Relationships
|
Amount
of
Gain
or
(Loss)
Recognized
in
OCI on
Derivative,
net
of tax
(Effective
Portion)
|
Location
of Gain or
(Loss)
Reclassified
from
Accumulated
OCI
into Income
(Effective
Portion)
|
Amount
of
Gain
or (Loss)
Reclassified
from
Accumulated
OCI
into
Income
(Effective
Portion)
|
Location
of Gain or
(Loss)
Recognized in
Income
on Derivative
(Ineffective
Portion
and
Amount Excluded
from
Effectiveness
Testing)
|
Amount
of
Gain
or (Loss)
Recognized
in
Income
on
Derivative
(Ineffective
Portion
and
Amount
Excluded
from
Effectiveness
Testing)
|
|||||||||
For
the Twelve Weeks
Ended
October 10, 2009:
|
|
|||||||||||||
Interest
rate swaps
|
$ | 183 |
Interest
expense
|
$ | (183 | ) |
Interest
expense
|
$ | - | |||||
For
the Twelve Weeks
Ended
October 4, 2008:
|
|
|||||||||||||
Interest
rate swaps
|
$ | (1,730 | ) |
Interest
expense
|
$ | 1,730 |
Interest
expense
|
$ | - | |||||
For
the Forty Weeks Ended
October
10, 2009:
|
|
|||||||||||||
Interest
rate swaps
|
$ | 1,720 |
Interest
expense
|
$ | (1,720 | ) |
Interest
expense
|
$ | - | |||||
For
the Forty Weeks Ended
October
4, 2008:
|
|
|||||||||||||
Interest
rate swaps
|
$ | (2,271 | ) |
Interest
expense
|
$ | 2,271 |
Interest
expense
|
$ | - |
8. |
Fair
Value
Measurements:
|
The
Company’s financial assets and liabilities measured at fair value are grouped in
three levels. The levels prioritize the inputs used to measure the fair value of
these assets or liabilities. These levels are:
●
|
Level
1 – Unadjusted quoted prices that are available in active markets for
identical assets or liabilities at the measurement
date.
|
●
|
Level
2 – Inputs other than quoted prices that are observable for assets and
liabilities at the measurement date, either directly or indirectly. These
inputs include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in
markets that are less active, inputs other than quoted prices that are
observable for the asset or liability or corroborated by other observable
market data.
|
●
|
Level
3 – Unobservable inputs for assets or liabilities that are not able to be
corroborated by observable market data and reflect the use of a reporting
entity’s own assumptions. These values are
generally determined using pricing models for which the assumptions
utilize management’s estimates of market participant
assumptions.
|
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
The fair
value hierarchy requires the use of observable market data when available. In
instances where inputs used to measure fair value fall into different levels of
the fair value hierarchy, the fair value measurement has been determined based
on the lowest level input that is significant to the fair value measurement in
its entirety. Our assessment of the significance of a particular item to the
fair value measurement in its entirety requires judgment, including the
consideration of inputs specific to the asset or liability.
The
following table sets forth our financial liabilities that were measured at fair
value on a recurring basis as of October 10, 2009 and January 3,
2009:
|
Fair
Value Measurements at Reporting Date Using
|
|||||||||||||||
Level
1
|
Level
2
|
Level
3
|
||||||||||||||
Quoted
Prices in
|
Significant
|
|||||||||||||||
Active
Markets for
|
Significant
Other
|
Unobservable
|
||||||||||||||
Fair
Value
|
Identical
Assets
|
Observable
Inputs
|
Inputs
|
|||||||||||||
October 10, 2009:
|
||||||||||||||||
Interest
rate swaps
|
$ | 19,151 | $ | - | $ | 19,151 | $ | - | ||||||||
January 3, 2009:
|
||||||||||||||||
Interest
rate swaps
|
$ | 21,979 | $ | - | $ | 21,979 | $ | - |
The fair
value of these interest rate swaps as of October 10, 2009 and January 3, 2009,
was an unrecognized loss of $19,151 and $21,979, respectively. The fair value of
the Company’s interest rate swaps is mainly based on observable interest rate
yield curves for similar instruments.
The
carrying amount of the Company’s cash and cash equivalents, accounts receivable,
bank overdrafts, financed vendor accounts payable, accounts payable, accrued
expenses and current portion of long term debt approximate their fair values due
to the relatively short term nature of these instruments. As of October 10,
2009, the fair value of the Company’s long-term debt with a carrying value of
$278,149, was approximately $265,000, and was based on similar long-term debt
issues available to the Company as of that date. The fair value of the Company’s
fixed rate debt was determined by using an assumed market interest rate
commensurate with the Company’s credit risk.
Non-Financial
Assets and Liabilities Measured at Fair Value on a Non-Recurring
Basis
Certain
assets and liabilities are measured at fair value on a nonrecurring basis; that
is, the assets and liabilities are not measured at fair value on an ongoing
basis but are subject to fair value adjustments in certain circumstances (e.g.,
when there is evidence of impairment). At October 10, 2009, the Company had no
significant non-financial assets or liabilities that had been adjusted to fair
value subsequent to initial recognition. A majority of the Company’s store
assets that were subject to impairment in connection with its store divestiture
plan had no remaining value and, as a result, were not subject to the fair value
disclosure requirements.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
9. |
Long-term
Debt:
|
Long-term
debt consists of the following:
October
10,
2009
|
January
3,
2009
|
|||||||
Revolving
facility at variable interest rates
|
||||||||
(1.06%
and 4.81% at October 10, 2009 and January 3,
|
||||||||
2009,
respectively) due October 2011
|
$ | 75,000 | $ | 251,500 | ||||
Term
loan at variable interest rates
|
||||||||
(1.33%
and 3.02% at October 10, 2009 and January 3,
|
||||||||
2009,
respectively) due October 2011
|
200,000 | 200,000 | ||||||
Other
|
4,456 | 4,664 | ||||||
279,456 | 456,164 | |||||||
Less:
Current portion of long-term debt
|
(1,307 | ) | (1,003 | ) | ||||
Long-term
debt, excluding current portion
|
$ | 278,149 | $ | 455,161 |
Bank
Debt
The
Company has a $750,000 unsecured five-year revolving credit facility with the
Company’s wholly-owned subsidiary, Advance Stores Company, Incorporated, or
Stores, serving as the borrower. The revolving credit facility also provides for
the issuance of letters of credit with a sub limit of $300,000, and swingline
loans in an amount not to exceed $50,000. The Company may request, subject to
agreement by one or more lenders, that the total revolving commitment be
increased by an amount not exceeding $250,000 (up to a total commitment of
$1,000,000) during the term of the credit agreement. Voluntary prepayments and
voluntary reductions of the revolving balance are permitted in whole or in
part, at the Company’s option, in minimum principal amounts as specified in the
revolving credit facility. The revolving credit facility terminates on October
5, 2011.
As of
October 10, 2009, the Company had $75,000 outstanding under
its revolving credit facility, and letters of credit outstanding of $102,997,
which reduced the availability under the revolving credit facility to $572,003.
(The letters of credit generally have a term of one year or less.) A commitment
fee is charged on the unused portion of the revolver, payable in arrears. The
current commitment fee rate is 0.150% per annum.
In
addition to the revolving credit facility, the Company has borrowed $200,000
under its unsecured four-year term loan as of October 10, 2009. The Company
entered into the term loan with Stores serving as borrower. The proceeds from
the term loan were used to repurchase shares of the Company's common stock
under its stock repurchase program during fiscal 2008. The term
loan terminates on October 5, 2011.
The
interest rate on borrowings under the revolving credit facility is based, at the
Company’s option, on an adjusted LIBOR rate, plus a margin, or an alternate base
rate, plus a margin. The current margin is 0.75% and 0.0% per annum for the
adjusted LIBOR and alternate base rate borrowings, respectively. The Company has
elected to use the 90-day adjusted LIBOR rate and has the ability and intent to
continue to use this rate on its hedged borrowings. Under the terms of the
revolving credit facility, the interest rate and commitment fee are based on the
Company’s credit rating.
The
interest rate on the term loan is based, at the Company’s option, on
an adjusted LIBOR rate, plus a margin, or an alternate base rate, plus a
margin. The current margin is 1.0% 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
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
LIBOR
rate and has the ability and intent to continue to use this rate on its hedged
borrowings. Under the terms of the term loan, the interest rate is based on
the Company’s credit rating.
Other
As of
October 10, 2009, the Company had $4,456 outstanding under an economic
development note and other financing arrangements.
Guarantees
and Covenants
The term
loan and revolving credit facility are fully and unconditionally guaranteed by
Advance Auto Parts, Inc. The Company’s debt agreements collectively contain
covenants restricting its ability to, among other things: (1) create,
incur or assume additional debt (including hedging arrangements), (2) incur
liens or engage in sale-leaseback transactions, (3) make loans and investments,
(4) guarantee obligations, (5) engage in certain mergers, acquisitions and asset
sales, (6) change the nature of the Company’s business and the business
conducted by its subsidiaries and (7) change the Company’s status as a holding
company. The Company is also required to comply with financial covenants with
respect to a maximum leverage ratio and a minimum consolidated coverage ratio.
The Company was in compliance with these covenants at October 10, 2009 and
January 3, 2009. The Company’s term loan and revolving credit facility also
provide for customary events of default, covenant defaults and cross-defaults to
its other material indebtedness.
10. |
Warranty
Liabilities:
|
The
following table presents changes in the Company’s warranty
reserves:
October
10,
2009
|
January
3,
2009
|
|||||||
(40
weeks ended)
|
(53
weeks ended)
|
|||||||
Warranty
reserve, beginning of period
|
$ | 28,662 | $ | 17,757 | ||||
Additions
to warranty reserves
|
26,083 | 38,459 | ||||||
Reserves
utilized
|
(23,896 | ) | (27,554 | ) | ||||
Warranty
reserve, end of period
|
$ | 30,849 | $ | 28,662 |
11. |
Stock
Repurchase
Program:
|
During
the twelve weeks ended October 10, 2009, the Company repurchased 880 shares of
common stock at an aggregate cost of $35,198, or an average price of $40.00 per
share. During the forty weeks ended October 10, 2009, the Company repurchased
1,225 shares of common stock at an aggregate cost of $49,567, or an average
price of $40.48 per share. These shares were repurchased in accordance with the
Company’s $250,000 stock repurchase program authorized by its Board of Directors
in the second quarter of fiscal 2008.
During
the twelve weeks ended October 4, 2008, the Company repurchased 1,372 shares of
common stock at an aggregate cost of $53,623, or an average price of $39.09 per
share. These shares were repurchased in accordance with the Company’s $250,000
stock repurchase program authorized by its Board of Directors in the second
quarter of fiscal 2008. During the forty weeks ended October 4, 2008, the
Company repurchased 6,136 shares of common stock at an aggregate cost of
$216,471, or an average price of $35.28 per share, of which 4,564 shares of
common stock were repurchased under the previous $500,000 stock repurchase
program. Additionally, the Company settled $2,959 on shares repurchased prior to
the end of fiscal 2007.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
As of
October 10, 2009, the Company has $139,381 remaining under its $250,000 stock
repurchase program, excluding related expenses.
12. |
Earnings
per
Share:
|
Certain
of the Company’s shares granted to employees in the form of restricted stock are
considered participating securities which require the use of the two-class
method for the computation of basic and diluted earnings per share. For the
twelve week periods ended October 10, 2009 and October 4, 2008, earnings of $309
and $215, respectively, were allocated to the participating securities exclusive
of any cash dividends already reflected in net income. For the forty week
periods ended October 10, 2009 and October 4, 2008, earnings of $1,214 and $740,
respectively, were allocated to the participating securities exclusive of any
cash dividends already reflected in net income.
Diluted
earnings per share of common stock reflects the weighted-average number of
shares of common stock outstanding, outstanding deferred stock units and the
impact of outstanding stock options, and stock appreciation rights (collectively
“share-based awards”). Diluted earnings per share are calculated by including
the effect of dilutive securities. Share-based awards to purchase approximately
64 and 89 shares of common stock that had an exercise price in excess of the
average market price of the common stock during the twelve week periods ended
October 10, 2009 and October 4, 2008, respectively, were not included in the
calculation of diluted earnings per share because they are anti-dilutive.
Share-based awards to purchase approximately 1,097 and 2,036 shares of common
stock that had an exercise price in excess of the average market price of the
common stock during the forty week periods ended October 10, 2009 and October 4,
2008, respectively, were not included in the calculation of diluted earnings per
share because they are anti-dilutive.
The
following table illustrates the computation of basic and diluted earnings per
share for the twelve and forty week periods ended October 10, 2009 and October
4, 2008, respectively:
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
October
10,
|
October
4,
|
October
10,
|
October
4,
|
|||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Numerator
|
||||||||||||||||
Net
income applicable to common shares
|
$ | 61,979 | $ | 56,155 | $ | 235,894 | $ | 213,627 | ||||||||
Participating
securities' share in earnings
|
(309 | ) | (215 | ) | (1,214 | ) | (740 | ) | ||||||||
Net
income applicable to common shares
|
61,670 | 55,940 | 234,680 | 212,887 | ||||||||||||
Denominator
|
||||||||||||||||
Basic
weighted average common shares
|
94,656 | 95,019 | 94,647 | 95,003 | ||||||||||||
Dilutive
impact of share based awards
|
818 | 739 | 678 | 666 | ||||||||||||
Diluted
weighted average common shares
|
95,474 | 95,758 | 95,325 | 95,669 | ||||||||||||
Basic
earnings per common share
|
||||||||||||||||
Net
income applicable to common stockholders
|
$ | 0.65 | $ | 0.59 | $ | 2.48 | $ | 2.24 | ||||||||
Diluted
earnings per common share
|
||||||||||||||||
Net
income applicable to common stockholders
|
$ | 0.65 | $ | 0.58 | $ | 2.46 | $ | 2.23 |
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
Earnings
per share for the twelve weeks and forty weeks ended October 4, 2008 were
adjusted retrospectively due to the application of the two-class method rather
than the treasury method for the earnings per share calculation. As a result,
diluted earnings per share were decreased by $0.01 for the twelve week period
ended October 4, 2008 and basic earnings per share were decreased by $0.01 for
the forty week period ended October 4, 2008.
13. |
Postretirement
Plan:
|
The
Company provides certain health and life insurance benefits for eligible retired
Team Members through a postretirement plan, or Plan. These benefits are subject
to deductibles, co-payment provisions and other limitations. The Plan has no
assets and is funded on a cash basis as benefits are paid. The Company’s
postretirement liability is calculated annually by a third-party actuary. The
discount rate utilized at January 3, 2009 was 6.25%, and remained unchanged
through the forty weeks ended October 10, 2009. The Company expects fiscal 2009
plan contributions to completely offset benefits paid, consistent with fiscal
2008.
The
Company’s net periodic postretirement benefit cost includes the amortization of
a reduction in unrecognized prior service costs as a result of a plan amendment
in fiscal 2004. The components of net periodic postretirement benefit cost for
the twelve and forty weeks ended October 10, 2009, and October 4, 2008,
respectively, was as follows:
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
October
10,
|
October
4,
|
October
10,
|
October
4,
|
|||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Interest
cost
|
$ | 105 | $ | 115 | $ | 351 | $ | 383 | ||||||||
Amortization
of negative prior service cost
|
(134 | ) | (134 | ) | (447 | ) | (447 | ) | ||||||||
Amortization
of unrecognized net gain
|
(22 | ) | (3 | ) | (74 | ) | (10 | ) | ||||||||
Net
periodic postretirement benefit cost
|
$ | (51 | ) | $ | (22 | ) | $ | (170 | ) | $ | (74 | ) |
14. |
Comprehensive
Income:
|
The
Company includes in comprehensive income the changes in fair value of the
Company’s interest rate swaps and changes in net unrecognized other
postretirement benefit costs.
Comprehensive
income for the twelve and forty weeks ended October 10, 2009 and October 4, 2008
was as follows:
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
October
10,
2009
|
October
4,
2008
|
October
10,
2009
|
October
4,
2008
|
|||||||||||||
Net
income
|
$ | 61,979 | $ | 56,155 | $ | 235,894 | $ | 213,627 | ||||||||
Unrealized
gain (loss) on hedge
|
||||||||||||||||
arrangements,
net of tax
|
183 | (1,730 | ) | 1,720 | (2,271 | ) | ||||||||||
Changes
in net unrecognized other
|
||||||||||||||||
postretirement
benefit cost, net of tax
|
(95 | ) | (84 | ) | (317 | ) | (279 | ) | ||||||||
Comprehensive
income
|
$ | 62,067 | $ | 54,341 | $ | 237,297 | $ | 211,077 |
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
15. |
Segment
and Related
Information:
|
The
Company has the following two reportable segments: Advance Auto Parts, or AAP,
and Autopart International, or AI. The AAP segment is comprised of store
operations within the United States, Puerto Rico and the Virgin Islands which
operate under the trade names “Advance Auto Parts,” “Advance Discount Auto
Parts” and
“Western Auto.” These stores offer a broad selection of brand name and
proprietary automotive replacement parts, accessories and maintenance items for
domestic and imported cars and light
trucks.
The AI
segment consists solely of the operations of Autopart International, which
operates as an independent, wholly-owned subsidiary. AI’s business primarily
serves the Commercial market from its store locations throughout the Northeast
and recent expansion into the Southeast. In addition, its North American Sales
Division services warehouse distributors and jobbers throughout North
America.
The
Company evaluates each of its segment’s financial performance based on net sales
and operating profit for purposes of allocating resources and assessing
performance. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies in Note
1.
The
following table summarizes financial information for each of the Company's
business segments for the twelve and forty weeks ended October 10, 2009 and
October 4, 2008, respectively.
Twelve
Week Periods Ended
|
Forty
Week Periods Ended
|
|||||||||||||||
October
10,
|
October
4,
|
October
10,
|
October
4,
|
|||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
sales
|
||||||||||||||||
AAP
|
$ | 1,213,422 | $ | 1,146,516 | $ | 4,115,291 | $ | 3,822,585 | ||||||||
AI
|
51,332 | 41,436 | 159,929 | 127,282 | ||||||||||||
Eliminations
(1)
|
(2,178 | ) | - | (6,164 | ) | - | ||||||||||
Total
net sales
|
$ | 1,262,576 | $ | 1,187,952 | $ | 4,269,056 | $ | 3,949,867 | ||||||||
Income
before provision for
|
||||||||||||||||
income
taxes
|
||||||||||||||||
AAP
|
$ | 96,239 | $ | 87,143 | $ | 370,813 | $ | 337,667 | ||||||||
AI
|
3,764 | 1,859 | 8,602 | 3,933 | ||||||||||||
Total
income before provision for
|
||||||||||||||||
income
taxes
|
$ | 100,003 | $ | 89,002 | $ | 379,415 | $ | 341,600 | ||||||||
Provision
for income taxes
|
||||||||||||||||
AAP
|
$ | 36,627 | $ | 32,065 | $ | 140,277 | $ | 126,343 | ||||||||
AI
|
1,397 | 782 | 3,244 | 1,630 | ||||||||||||
Total
provision for income taxes
|
$ | 38,024 | $ | 32,847 | $ | 143,521 | $ | 127,973 | ||||||||
Segment
assets
|
||||||||||||||||
AAP
|
$ | 2,992,639 | $ | 2,850,789 | $ | 2,992,639 | $ | 2,850,789 | ||||||||
AI
|
173,259 | 157,470 | 173,259 | 157,470 | ||||||||||||
Total
segment assets
|
$ | 3,165,898 | $ | 3,008,259 | $ | 3,165,898 | $ | 3,008,259 |
(1)
|
For
the twelve weeks ended October 10, 2009, eliminations represent net sales
of $993 from AAP to AI and $1,185 from AI to AAP. For the forty weeks
ended October 10, 2009, eliminations represent net sales of $2,755 from
AAP to AI and $3,409 from AI to
AAP.
|
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and the notes to those statements that appear
elsewhere in this report. Our first quarter consists of 16 weeks divided into
four equal periods. Our remaining three quarters consist of 12 weeks with each
quarter divided into three equal periods. Fiscal 2008 was an exception to this
rule with the fourth quarter containing 13 weeks due to our 53-week fiscal
year.
Certain
statements in this report are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are usually identified by the
use of words such as "anticipate," "believe," "could," "estimate," "expect,"
"forecast," "intend," "likely," "may," "plan," "position," "possible,"
"potential," "probable," "project," "projection," "should," "strategy," "will,"
or similar expressions. We intend for any forward-looking statements to be
covered by, and we claim the protection under, the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
These
forward-looking statements are based upon assessments and assumptions of
management in light of historical results and trends, current conditions and
potential future developments that often involve judgment, estimates,
assumptions and projections. Forward-looking statements reflect current views
about our plans, strategies and prospects, which are based on information
currently available.
Although
we believe that our plans, intentions and expectations as reflected in or
suggested by any forward-looking statements are reasonable, we do not guarantee
or give assurance that such plans, intentions or expectations will be
achieved. Actual results may differ materially from our anticipated
results described or implied in our forward-looking statements, and such
differences may be due to a variety of factors. Our business could also be
affected by additional factors that are presently unknown to us or that we
currently believe to be immaterial to our business.
Listed
below and discussed in our Annual Report on Form 10-K for the year ended January
3, 2009 (filed with the Securities and Exchange Commission, or SEC, on March 4,
2009), or 2008 Form 10-K, are some important risks, uncertainties and
contingencies which could cause our actual results, performance or achievements
to be materially different from any forward-looking statements made or implied
in this report. These include, but are not limited to, the
following:
·
|
a
decrease in demand for our
products;
|
·
|
deterioration
in general economic conditions, including unemployment, inflation,
consumer debt levels, energy costs and unavailability of credit leading to
reduced consumer spending on discretionary
items;
|
·
|
our
ability to develop and implement business strategies and achieve desired
goals;
|
·
|
our
ability to expand our business, including locating available and suitable
real estate for new store locations and the integration of any acquired
businesses;
|
·
|
competitive
pricing and other competitive
pressures;
|
·
|
our
overall credit rating, which impacts our debt interest rate and our
ability to borrow additional funds to finance our
operations;
|
·
|
deteriorating
and uncertain credit markets could negatively impact our merchandise
vendors, as well as our ability to secure additional capital at favorable
(or at least feasible) terms in the
future;
|
·
|
bankruptcies
of auto manufacturers, which will likely have an impact on the operations
and cash flows of our auto parts
suppliers;
|
·
|
our
relationships with our vendors;
|
·
|
our
ability to attract and retain qualified Team
Members;
|
·
|
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 and other losses;
|
·
|
high
fuel costs, which impact our cost to operate and the consumer’s ability to
shop in our stores;
|
·
|
regulatory
and legal risks, such as environmental or OSHA risks, including being
named as a defendant in administrative investigations or litigation, and
the incurrence of legal fees and costs, the payment of fines or the
payment of sums to settle litigation cases or administrative
investigations or proceedings;
|
·
|
adherence
to the restrictions and covenants imposed under our revolving and term
loan facilities; and
|
·
|
acts
of terrorism.
|
We assume
no obligations to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. In evaluating
forward-looking statements, you should consider these risks and uncertainties,
together with the other risks described from time to time in our other reports
and documents filed with the SEC and you should not place undue reliance on
those statements.
Introduction
We
primarily operate within the United States automotive aftermarket industry,
which includes replacement parts (excluding tires), accessories, maintenance
items, batteries and automotive chemicals for cars and light trucks (pickup
trucks, vans, minivans and sport utility vehicles). We currently are the second
largest specialty retailer of automotive parts, accessories and maintenance
items to "do-it-yourself," or DIY, and Commercial customers in the United
States, based on sales. Our Commercial customers consist of both walk-in and
delivery customers. For delivery sales, we utilize our Commercial delivery fleet
to deliver product from our store locations to our Commercial customers’ places
of business, including independent garages, service stations and auto dealers.
At October 10, 2009, we operated a total of 3,418 stores.
We
operate in two reportable segments: Advance Auto Parts, or AAP, and Autopart
International, Inc., or AI. The AAP segment is comprised of our store operations
within the United States, Puerto Rico and the Virgin Islands which operate under
the trade names “Advance Auto Parts,” “Advance Discount Auto Parts” and “Western
Auto.” At October 10, 2009, we operated 3,267 stores in the AAP segment, of
which 3,239 stores operated under the trade names “Advance Auto Parts” and
“Advance Discount Auto Parts” throughout 39 states in the Northeastern,
Southeastern and Midwestern regions of the United States. These stores offer
automotive replacement parts, accessories and maintenance items. In addition, we
operated 28 stores under the “Western Auto” and “Advance Auto Parts” trade
names, located in Puerto Rico and the Virgin Islands.
The AI
segment consists solely of the operations of AI, which operates as an
independent, wholly-owned subsidiary. AI’s business primarily serves the
Commercial market from its store locations throughout the Northeast and recent
expansion into the Southeast. In addition, its North American Sales Division
services warehouse distributors and jobbers throughout North America. At October
10, 2009, we operated 151 stores in the AI segment under the “Autopart
International” trade name. For additional information regarding our segments,
see Note 15, Segments and
Related Information, of the Notes to Condensed Consolidated Financial
Statements in this Quarterly Report on Form 10-Q.
Management
Overview
During
our third quarter and year-to-date for fiscal 2009, we produced favorable
financial results primarily due to top-line sales growth and strong gross profit
improvement resulting in earnings per diluted share of $0.65 and $2.46,
respectively, compared to $0.58 and $2.23 for the third quarter and year-to-date
2008, respectively. Our earnings per diluted share for 2009 included
the impact of a $0.04 and $0.15 charge related to expenses associated with our
store divestiture plan for the third quarter and year-to-date, respectively. We
also continued to make strategic investments in our four key strategies and paid
down a significant portion of our bank debt.
Third
Quarter Highlights
Highlights
from our third quarter of fiscal 2009 include:
Financial
·
|
Total
sales during the third quarter of fiscal 2009 increased 6.3% to $1.26
billion as compared to the third quarter of fiscal 2008, primarily driven
by a comparable store sales increase of
4.7%.
|
·
|
Our
gross profit rate increased 190 basis points as compared to the third
quarter of fiscal 2008.
|
·
|
Our
SG&A rate increased 167 basis points as compared to the third quarter
of fiscal 2008 partially due to 56 basis points of store divestiture
expenses. Excluding store divestitures, this increase in SG&A is
primarily linked to the targeted investments we are making to support each
of our four key strategies which have already begun to yield short-term
benefits in our sales and gross profit
results.
|
·
|
We
generated operating cash flow of $628.5 million through the third quarter
of fiscal 2009, an increase of 67% over the comparable period in fiscal
2008, and used available operating cash to pay down $176.5 million of
outstanding bank debt and repurchase 1.2 million shares of our common
stock at a cost of $49.6 million.
|
General
·
|
Our
continuous improvements in customer satisfaction and Team Member
engagement scores, renewed focus on core values and ongoing initiatives
within each of our key strategies were equally important in driving our
favorable financial results for the
quarter.
|
·
|
We
launched our new e-commerce website which offers more than 100,000 parts
and accessories.
|
·
|
We
continued to make progress towards our goal of obtaining investment grade
ratings based on our increased profitability and cash flow and strength of
our balance sheet.
|
Store
Divestiture Plan
For
fiscal 2009, we expect to divest a total of approximately 40 to 50 stores that
are delivering strategically or financially unacceptable results. These closures
are in addition to an estimated 15 stores that we will close as part of our
routine review and closure of underperforming stores at or near the end of their
respective lease terms. During the twelve and forty weeks ended October 10,
2009, we recognized expense of $7.1 million and $22.2 million, respectively,
comprised primarily of closed store exit costs in connection with the
divestiture plan. During the third quarter of fiscal 2009, we closed 13 stores,
12 of which were closed under our store divestiture plan. We have closed 43
stores during the first three quarters of fiscal 2009, 36 of which were related
to our divestiture plan. We anticipate recognizing expenses of approximately
$0.15 to $0.22 per diluted share for the entire fiscal 2009 in connection with
the closure of stores under the store divestiture plan. The majority of this
expense is related to the estimated remaining lease obligations at the time of
the anticipated closures.
Key
Strategies
We
continue to make significant investments in each of our four key strategies with
the ultimate focus on the customer and growth in our business. The principal
focus of our turnaround plan has been on Commercial Acceleration and
Availability Excellence to accelerate our growth and profitability. We have made
strategic choices to fund investments in each of these strategies and will
balance our investments between Commercial and DIY over the long term as well as
the necessary support through our Superior Experience strategy. Updates from
each of our four key strategies are provided below.
Ø
|
Commercial
Acceleration
|
Our
Commercial comparable store sales increase was 11.8% during the third quarter of
fiscal 2009, our seventh consecutive quarter of double-digit comparable store
sales growth. Our Commercial sales, as a percentage of total sales, increased
214 basis points to 32.4% for the third quarter of fiscal 2009 as compared to
the third quarter of the prior year. We believe our consistent growth in
Commercial sales and market share is being driven in part by the investments we
have made over the last year and continue to make under our Commercial
Acceleration strategy. By the end of 2009, we will have made
investments in parts, key brands, and additional parts professionals, delivery
trucks and drivers in approximately one-third of our stores. We have also
increased our Commercial sales force by 50% from the beginning of 2009. We
continue to make progress in aligning our staffing model in preparation for a
50/50 Commercial and DIY sales mix as well as improving the overall delivery
experience.
Ø
|
DIY
Transformation
|
Our third
quarter DIY comparable store sales increase of 1.7% marks our third consecutive
positive increase despite lower DIY investments. The industry continues to
benefit from increased customer traffic as consumers are saving money by
maintaining their existing vehicles rather than replacing them and miles driven
have also started to increase again. Although industry data reported by The NPD
Group indicates the market grew slightly faster than we did during the third
quarter of fiscal 2009, we believe we will reverse the current trend based on
our recently revamped marketing programs and other initiatives underway in our
DIY Transformation.
We have
initiatives underway to address both the conversion rate of our existing
customers as well as the consideration rate of potential customers. Conversion
rate initiatives include the installation of traffic counters and updated phone
systems to provide valuable information about the customer experience, improved
staffing and targeting certain stores with specific research and sales
development efforts to better solve our customers’ problems and better leverage
the parts availability and merchandising improvements we are making in our
stores. Regarding consideration rate, we have made significant changes to our
marketing program during the quarter. Our spending on DIY advertising will
return to a higher level for the remainder of the year.
Ø
|
Availability
Excellence
|
Our
Availability Excellence strategy represents our commitment to enhance the
breadth and depth of our parts availability in our stores, and the speed of our parts
delivery, to better
serve both our Commercial and DIY customers. In
addition to our positive sales results, we believe our ongoing investments and
initiatives under this strategy are driving our strong gross profit results. Our
gross margin for the third quarter of fiscal 2009 increased 190 basis points
over the third quarter of last year. During the third quarter, we made
significant progress in capabilities to help drive our sales and gross profit
growth, including the continued improvement in parts availability, the
strengthening and development of a price optimization capability and
implementation of the first phase of our core merchandising system. We also
added two Parts Delivered Quickly warehouses, or PDQ®s,
and 25 larger stores which stock a wider selection and greater supply of
inventory, or HUB stores, to our supply chain network and completed the
implementation of engineered standards in all eight of our distribution centers
to improve productivity, increase efficiency and ultimately reduce distribution
expenses.
We remain
on track to completely dispose of the nonproductive inventory we identified in
2008 by the end of 2009. We continue to manage our inventory productivity by
removing unproductive inventory from our store assortments through utilizing
markdown strategies and our vendor return privileges. We expect to manage more
effectively the growth in our inventory as compared to our sales growth. As of
October 10, 2009, our inventory decreased 3.5% over the ending balance from
third quarter of last year as compared to our sales growth of 6.3% during the
third quarter of this year.
Ø
|
Superior
Experience
|
Superior
Experience is centered around our store operations and providing superior
customer service. The successful rollout and completion of Commercial and DIY
initiatives in our stores is greatly dependent on the Superior Experience
strategy. The feedback from our customer satisfaction surveys, coupled with our
Team Member
engagement
surveys, provides the evidence of our continued focus and commitment to
understand what our customers need and how to engage our team to fulfill that
goal. We have a dedicated team of field operations leaders who are leading the
rollout of initiatives over our entire store chain in a very disciplined and
focused way. These initiatives include improving staffing, structuring
operations to more effectively serve both Commercial and DIY customers,
providing sales development and coaching and driving gross profit improvements
through new battery warranty procedures, better pricing decisions and improved
shrink control.
Change
in Accounting Principle
We have
retrospectively adjusted all comparable periods related to cost of sales and
selling, general and administrative expenses, or SG&A, as a result of a
change in accounting principle effective January 4, 2009. We changed our
accounting for freight and other handling costs associated with transferring
merchandise from our HUB stores and PDQ®s
to our retail stores from recording such costs as SG&A to recording such
costs in cost of sales. This change, which had no impact to operating income or
cash flows, more accurately reflects the nature of the expense.
The net
adjustment increasing cost of sales and decreasing SG&A for the twelve and
forty weeks ended October 4, 2008 was $14.9 million and $48.1 million,
respectively. For additional information regarding this change, see Note 2,
Change in Accounting
Principle, of the Notes to Condensed Consolidated Financial Statements in
this Quarterly Report on Form 10-Q.
Industry
The
automotive aftermarket industry remains sound despite the ongoing challenging
macroeconomic conditions. Financial results from the leading
automotive aftermarket companies suggest that the entire industry is benefiting
from the economic downturn because consumers are keeping their vehicles longer,
which in turn increases the average age of vehicles and the need to repair and
complete routine maintenance on those vehicles. We believe we will continue to
hold market share in the less fragmented DIY market as well continuing to
significantly increase our market share in the Commercial market where our
current market share is less than 5% of the $40 billion Commercial
market.
We are
pleased with our financial results through the third quarter of fiscal
2009. We remain committed to making the necessary investments to help
ensure our long-term profitability and success through our transformation to
become the industry leader.
Consolidated
Operating Results and Key Statistics and Metrics
The
following table highlights certain consolidated operating results and key
statistics and metrics for the twelve and forty weeks ended October 10, 2009 and
October 4, 2008, respectively, and fiscal years ended January 3, 2009 and
December 29, 2007. We use these key statistics and metrics to measure the
financial progress of our four key strategies.
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||||||||||
October
10,
|
October
4,
|
October
10,
|
October
4,
|
|||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
FY
2008
(1)
|
FY
2007
|
|||||||||||||||||||
Operating Results:
|
||||||||||||||||||||||||
Total
net sales (in
000s)
|
$ | 1,262,576 | $ | 1,187,952 | $ | 4,269,056 | $ | 3,949,867 | $ | 5,142,255 | $ | 4,844,404 | ||||||||||||
Total
commercial net sales (in
000s)
|
$ | 409,039 | $ | 359,420 | $ | 1,358,065 | $ | 1,155,588 | $ | 1,515,371 | $ | 1,290,602 | ||||||||||||
Comparable
store net sales growth (2)
|
4.7% | (0.1%) | 6.1% | 1.1% | 1.5% | 0.7% | ||||||||||||||||||
DIY
comparable store net sales growth (2)
|
1.7% | (4.1%) | 2.4% | (2.6%) | (2.3%) | (1.1%) | ||||||||||||||||||
Commercial
comparable store net sales growth (2)
|
11.8% | 10.8% | 14.9% | 11.6% | 12.1% | 6.2% | ||||||||||||||||||
Gross
profit (3)(4)
|
49.2% | 47.3% | 49.1% | 47.4% | 46.7% | 46.6% | ||||||||||||||||||
SG&A
(3)
|
40.9% | 39.3% | 39.8% | 38.1% | 38.6% | 38.0% | ||||||||||||||||||
Operating
profit (5)
|
8.3% | 8.1% | 9.3% | 9.3% | 8.1% | 8.6% | ||||||||||||||||||
Diluted
earnings per share (6)
|
$ | 0.65 | $ | 0.58 | $ | 2.46 | $ | 2.23 | $ | 2.49 | $ | 2.28 | ||||||||||||
Key Statistics and Metrics:
|
||||||||||||||||||||||||
Number
of stores, end of period
|
3,418 | 3,352 | 3,418 | 3,352 | 3,368 | 3,261 | ||||||||||||||||||
Total
store square footage, end of period (in
000s)
|
24,952 | 24,627 | 24,952 | 24,627 | 24,711 | 23,982 | ||||||||||||||||||
Total
Team Members, end of period
|
49,341 | 47,886 | 49,341 | 47,886 | 47,582 | 44,141 | ||||||||||||||||||
Average
net sales per square foot (7)(8)
|
$ | 217 | $ | 207 | $ | 217 | $ | 207 | $ | 211 | $ | 207 | ||||||||||||
Operating
income per Team Member (in 000s) (7)(9)
|
$ | 9.13 | $ | 9.25 | $ | 9.13 | $ | 9.25 | $ | 9.02 | $ | 9.40 | ||||||||||||
SG&A
expenses per store (in
000s)
(3)(7)(10)
|
$ | 643 | $ | 584 | $ | 643 | $ | 584 | $ | 599 | $ | 581 | ||||||||||||
Gross
margin return on inventory (3)(7)(11)
|
$ | 3.95 | $ | 3.46 | $ | 3.95 | $ | 3.46 | $ | 3.47 | $ | 3.29 |
(1)
|
Our
fiscal year 2008 included 53 weeks.
|
(2)
|
Comparable
store sales is calculated based on the change in net sales starting once a
store has been open for 13 complete accounting periods (each period
represents four weeks). Relocations are included in comparable store sales
from the original date of opening. Fiscal 2008 comparable store sales
exclude sales from the 53rd
week.
|
(3)
|
Effective
first quarter 2009, the Company implemented a change in accounting
principle for costs included in inventory. Accordingly, the Company has
retrospectively applied the change in accounting principle to all prior
periods presented herein related to cost of sales and SG&A. SG&A
includes the impact of store divestitures for the twelve and forty week
periods ended October 10, 2009 of $7.1 million and $22.2 million,
respectively.
|
(4)
|
Excluding
the gross profit impact of the 53rd
week of fiscal 2008 of approximately $44.1 million and a $37.5 million
non-cash obsolete inventory write-down in the fourth quarter of fiscal
2008, gross profit was 47.3% for fiscal year
2008.
|
(5)
|
Excluding
the operating income impact of the 53rd
week of fiscal 2008 of approximately $15.8 million and a $37.5 million
non-cash obsolete inventory write-down in the fourth quarter of fiscal
2008, operating profit was 8.6% for fiscal year
2008.
|
(6)
|
Excluding
the net income impact of the 53rd
week of fiscal 2008 of approximately $9.6 million and a $23.7 million
non-cash obsolete inventory write-down in the fourth quarter of fiscal
2008, diluted earnings per share was $2.64 for fiscal year 2008. Our
diluted earnings per share reported for the twelve week period ended
October 4, 2008 and FY 2008 have been reduced by $0.01 as a result of the
adoption of the two-class method. Refer to Footnote 12 of our condensed
consolidated financial statements for further discussion of this
adoption.
|
(7)
|
These
financial metrics presented for each quarter are calculated on an annual
basis and accordingly reflect the last four fiscal quarters
completed.
|
(8)
|
Average
net sales per square foot is calculated as net sales divided by the
average of the beginning and ending total store square footage for the
respective period. Excluding the net sales impact of the 53rd
week of fiscal 2008 of approximately $89.0 million, average net sales per
square foot in the third quarter of fiscal 2009 and fourth
|
|
quarter
and fiscal year of 2008 were $217 and $208,
respectively.
|
(9)
|
Operating
income per Team Member is calculated as operating income divided by an
average of beginning and ending number of team members. Operating income
per team member in the third quarter of fiscal 2009 was $10.04 excluding
the impact of store divestitures for the forty week period ended October
10, 2009 of approximately $22.2 million, impact of the 53rd
week of fiscal 2008 and inventory write-down in fiscal 2008. Operating
income per Team Member for fiscal year of 2008 was $9.49 excluding the
impact of the 53rd
week of fiscal 2008 and inventory write-down in fiscal
2008.
|
(10)
|
SG&A
per store is calculated as total SG&A divided by the average of
beginning and ending store count. SG&A expenses per store in third
quarter fiscal 2009 were $629 excluding the impact of store divestitures
for the forty week period ended October 10, 2009 of approximately $22.2
million and impact of the 53rd
week of fiscal 2008 of approximately $28.4 million. SG&A expenses per
store for fiscal year 2008 were $590 excluding the impact of the 53rd
week of fiscal 2008 of approximately $28.4
million.
|
(11)
|
Gross
margin return on inventory is calculated as gross profit divided by an
average of beginning and ending inventory, net of accounts payable and
financed vendor accounts payable. Excluding the impact of the 53rd
week of fiscal 2008 and inventory write-down in the fourth quarter of
fiscal 2008, gross margin return on inventory in third quarter fiscal 2009
and fiscal year 2008 was $3.83 and $3.37,
respectively.
|
Store Development by Segment
UAAP
Segment
At
October 10, 2009, we operated 3,267 AAP stores within the United States, Puerto
Rico and the Virgin Islands. We operated 3,239 stores throughout 39 states in
the Northeastern, Southeastern and Midwestern regions of the United States.
These stores operated under the “Advance Auto Parts” trade name except for
certain stores in the state of Florida, which operated under the “Advance
Discount Auto Parts” trade name. These stores offer a broad selection of brand
name and proprietary automotive replacement parts, accessories and maintenance
items for domestic and imported cars and light trucks. In addition, we operated
28 stores under the “Western Auto” and “Advance Auto Parts” trade names, located
in Puerto Rico and the Virgin Islands.
The
following table sets forth information about our AAP stores during the twelve
and forty weeks ended October 10, 2009, including the number of new, closed and
relocated stores and stores with Commercial programs that deliver products to
our Commercial customers’ place of business. We lease approximately 81% of our
AAP stores.
Twelve
|
Forty
|
|||||||
Weeks
Ended
|
Weeks
Ended
|
|||||||
October
10, 2009
|
October
10, 2009
|
|||||||
Number
of stores, beginning of period
|
3,265 | 3,243 | ||||||
New
stores
|
15 | 66 | ||||||
Closed
stores
|
(13 | ) | (42 | ) | ||||
Number
of stores, end of period
|
3,267 | 3,267 | ||||||
Relocated
stores
|
- | 2 | ||||||
Stores
with commercial programs
|
2,858 | 2,858 |
AI
Segment
At
October 10, 2009, we operated 151 AI stores primarily in the Northeastern region
of the United States under the “Autopart International” trade name. These stores
offer a broad selection of brand name and proprietary automotive replacement
parts, accessories and maintenance items for domestic and imported cars and
light trucks, with a greater focus on imported parts. The AI segment primarily
serves the Commercial market from its store locations throughout the Northeast
and recent expansion into the Southeast. In addition, its North American Sales
Division services warehouse distributors and jobbers throughout North
America.
The
following table sets forth information about our AI stores, including the number
of new and closed stores, during the twelve and forty weeks ended October 10,
2009. We lease 100% of our AI stores.
Twelve
|
Forty
|
|||||||
Weeks
Ended
|
Weeks
Ended
|
|||||||
October
10, 2009
|
October
10, 2009
|
|||||||
Number
of stores, beginning of period
|
142 | 125 | ||||||
New
stores
|
9 | 27 | ||||||
Closed
stores
|
- | (1 | ) | |||||
Number
of stores, end of period
|
151 | 151 | ||||||
Relocated
stores
|
- | 4 | ||||||
Stores
with commercial programs
|
151 | 151 |
As
previously disclosed in our 2008 Form 10-K, we anticipate that we will add a
total of approximately 75 AAP and 30 AI stores during fiscal 2009 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 materially from these estimates. During
the twelve and forty weeks ended October 10, 2009, we consistently applied the
critical accounting policies discussed in our 2008 Form 10-K. For a complete
discussion regarding these critical accounting policies, refer to the 2008 Form
10-K.
Components
of Statement of Operations
Net
Sales
Net sales
consist primarily of merchandise sales from our retail store locations to both
our DIY and Commercial customers. Our total sales growth is comprised of both
comparable store sales and new store sales. We calculate comparable store sales
based on the change in store sales starting once a store has been open for 13
complete accounting periods (approximately one year). We include sales from
relocated stores in comparable store sales from the original date of opening.
The comparable periods have been adjusted accordingly. Fiscal 2008 comparable
store sales exclude the effect of the 53rd
week.
Cost
of Sales
Our cost
of sales consists of merchandise costs, net of incentives under vendor programs;
inventory shrinkage, defective merchandise and warranty costs; and warehouse and
distribution expenses. Gross profit as a percentage of net sales may be affected
by (i) variations in our product mix, (ii) price changes in response to
competitive factors and fluctuations in merchandise costs, (iii) vendor
programs, (iv) inventory shrinkage, (v) defective merchandise and warranty costs
and (v) warehouse and distribution costs. We seek to minimize fluctuations in
merchandise costs and instability of supply by entering into long-term
purchasing agreements, without minimum purchase volume requirements, when we
believe it is advantageous. Our gross profit may not be comparable to those of
our competitors due to differences in industry practice regarding the
classification of certain costs.
See Note
1 to our condensed consolidated financial statements elsewhere in this report
for additional discussion of these costs and Note 2 for additional discussion of
a change in accounting principle for freight and other handling costs associated
with transferring merchandise from HUB stores and PDQ®s
to our retail stores from recording such costs as SG&A to recording
such costs in cost of sales.
Selling, General and Administrative
Expenses
SG&A
consists of store payroll, store occupancy (including rent and depreciation),
advertising expenses, Commercial delivery expenses, other store expenses and
general and administrative expenses, including salaries and related benefits of
store support center Team Members, share-based compensation expense, store
support center administrative office expenses, data processing, professional
expenses, self-insurance costs and other related expenses. See Note 1 to our
consolidated financial statements for additional discussion of these costs and
Note 2 for additional discussion of a change in accounting
principle.
1BResults of
Operations
The
following table sets forth certain of our operating data expressed as a
percentage of net sales for the periods indicated.
Twelve
Week Periods Ended
|
Forty
Week Periods Ended
|
|||||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||
October
10,
|
October
4,
|
October
10,
|
October
4,
|
|||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost
of sales, including purchasing and
|
||||||||||||||||
warehousing
costs
|
50.8 | 52.7 | 50.9 | 52.6 | ||||||||||||
Gross
profit
|
49.2 | 47.3 | 49.1 | 47.4 | ||||||||||||
Selling,
general and administrative expenses
|
40.9 | 39.3 | 39.8 | 38.1 | ||||||||||||
Operating
income
|
8.3 | 8.1 | 9.3 | 9.3 | ||||||||||||
Interest
expense
|
(0.4 | ) | (0.6 | ) | (0.4 | ) | (0.7 | ) | ||||||||
Other
(loss) income, net
|
0.0 | (0.0 | ) | 0.0 | (0.0 | ) | ||||||||||
Provision
for income taxes
|
3.0 | 2.8 | 3.4 | 3.2 | ||||||||||||
Net
income
|
4.9 | % | 4.7 | % | 5.5 | % | 5.4 | % |
Twelve Weeks Ended October 10, 2009 Compared to Twelve Weeks Ended October 4, 2008
Net
Sales
Net sales
for the twelve weeks ended October 10, 2009 were $1,262.6 million, an increase
of $74.6 million, or 6.3%, as compared to net sales for the twelve weeks ended
October 4, 2008. The net sales increase was due to an increase in comparable
store sales of 4.7% and sales from the 66 net new AAP and AI stores opened
during the last four quarters.
AAP
produced net sales of $1,213.4 million, an increase of $66.9 million, or 5.8%,
as compared to net sales for the twelve weeks ended October 4, 2008. AAP’s net
sales increase was primarily driven by a 4.5% comparable store sales increase
and sales from the 40 net new stores opened during the last four quarters. The
AAP comparable store sales increase was driven by an increase in average ticket
sales and overall customer traffic. AI produced net sales of $51.3 million, an
increase of $9.9 million, or 23.9% as compared to net sales for the twelve weeks
ended October 4, 2008. AI’s sales increase was primarily driven by a 11.9%
comparable store sales increase and sales from 26 net new stores opened during
the last four fiscal quarters.
Gross
Profit
Gross
profit for the twelve weeks ended October 10, 2009 was $621.5 million, or 49.2%
of net sales, as compared to $562.2 million, or 47.3% of net sales, for the
twelve weeks ended October 4, 2008, or an increase of 190 basis points. The
increase in gross profit as a percentage of net sales was primarily due to
continued investments in pricing and merchandising capabilities, parts
availability, decreased inventory shrink and better store execution. These new
capabilities are allowing us to improve our product assortment, better execute
our pricing strategies and
better
position our business from a cost standpoint.
SG&A
SG&A
increased to $516.6 million, or 40.9% of net sales, for the twelve weeks ended
October 10, 2009, from $466.3 million, or 39.3% of net sales, for the twelve
weeks ended October 4, 2008, or an increase of 167 basis points. Store
divestiture expenses comprised 56 bps of the increase in SG&A as a
percentage of sales. The remaining increase was primarily due to:
·
|
higher
incentive compensation driven by a structural change we made to our
incentive compensation program for 2009 which is now based on growth
rather than a fixed budget;
|
·
|
increased
investments in store labor and Commercial sales
force;
|
·
|
higher
medical expenses; and
|
·
|
continued
investments to improve our gross profit rate and to launch our new
e-commerce website.
|
These
increases were partially offset by lower advertising expenses and occupancy
expense leverage as a result of the Company’s 4.7% comparable store sales
increase.
Operating
Income
Operating
income for the twelve weeks ended October 10, 2009 was $104.9 million, or 8.3%
of net sales, as compared to $95.9 million, or 8.1% of net sales, for the twelve
weeks ended October 4, 2008, or an increase of 23 basis points. This increase in
operating income, as a percentage of net sales, reflects an increase in gross
profit partially offset by higher SG&A. The increase in SG&A reflects
many of the investments we are making in our business with short-term benefits
already being realized in net sales and gross profit resulting in an overall net
increase in profitability.
AAP
produced operating income of $101.1 million, or 8.3% of net sales, for the
twelve weeks ended October 10, 2009 as compared to $94.0 million, or 8.2% of net
sales, for the twelve weeks ended October 4, 2008. AI generated operating income
of $3.8 million for the twelve weeks ended October 10, 2009 as compared to $1.9
million for the comparable period last year. AI’s operating income increased
primarily due to its 11.9% increase in comparable store sales during the
quarter, increase in gross profit rate and leverage of occupancy expense as a
result of the increase in sales.
Interest
Expense
Interest
expense for the twelve weeks ended October 10, 2009 was $5.3 million, or 0.4% of
net sales, as compared to $6.7 million, or 0.6% of net sales, for the twelve
weeks ended October 4, 2008. The decrease in interest expense as a percentage of
sales is primarily a result of lower outstanding borrowings and increased sales
during the twelve weeks ended October 10, 2009 compared to the same period ended
October 4, 2008.
Income
Taxes
Income
tax expense for the twelve weeks ended October 10, 2009 was $38.0 million, as
compared to $32.8 million for the twelve weeks ended October 4, 2008. Our
effective income tax rate was 38.0% for the twelve weeks ended October 10, 2009
compared to 36.9% for the same period ended October 4, 2008.
Net
Income
We
generated net income of $62.0 million, or $0.65 per diluted share, for the
twelve weeks ended October 10, 2009, as compared to $56.2 million, or $0.58 per
diluted share, for the twelve weeks ended October 4, 2008. As a percentage of
net sales, net income for the twelve weeks ended October 10, 2009 and October 4,
2008 was 4.9% and 4.7%, respectively. The increase in diluted earnings per share
was primarily due to growth in our operating income.
Forty
Weeks Ended October 10, 2009 Compared to Forty Weeks Ended October 4,
2008
Net
Sales
Net sales
for the forty weeks ended October 10, 2009 were $4,269.1 million, an
increase of $319.2 million, or 8.1%, as compared to net sales for the forty
weeks ended October 4, 2008. The net sales increase was due to an increase in
comparable store sales of 6.1% and sales from the 66 net new AAP and AI stores
opened during the last four quarters.
AAP
produced net sales of $4,115.3 million, an increase of $292.7 million, or 7.7%
as compared to net sales for the forty weeks ended October 4, 2008. AAP’s net
sales increase was primarily driven by a 5.9% comparable store sales increase
and sales from the 40 net new stores opened during the last four quarters. The
AAP comparable store sales increase was driven by an increase in average ticket
sales and overall customer traffic. AI produced net sales of $159.9 million, an
increase of $32.6 million, or 25.6%, as compared to net sales for the forty
weeks ended October 4, 2008. AI’s sales increase was primarily driven by an
11.6% comparable store sales increase and sales from 26 net new stores opened
during the last four fiscal quarters.
Gross
Profit
Gross
profit for the forty weeks ended October 10, 2009 was $2,096.1 million, or 49.1%
of net sales, as compared to $1,873.3 million, or 47.4% of net sales, for the
forty weeks ended October 4, 2008, or an increase of 167 basis points. The
increase in gross profit as a percentage of net sales was primarily due to
continued investments in pricing and merchandising capabilities, parts
availability, decreased inventory shrink and better store
execution.
SG&A
SG&A
increased to $1,698.9 million, or 39.8% of net sales, for the forty weeks ended
October 10, 2009, from $1,505.2 million, or 38.1% of net sales, for the forty
weeks ended October 4, 2008, or an increase of 169 basis points. Store
divestiture expenses drove 52 bps of the increase in SG&A as a percentage of
sales. The remaining increase was primarily due to:
·
|
higher
incentive compensation driven by a structural change we made to our
incentive compensation program for 2009 which is now based on growth
rather than a fixed budget;
|
·
|
increased
investments in store labor and Commercial sales force;
and
|
·
|
continued
investments to increase our sales and improve our gross profit
rate.
|
These
increases were partially offset by lower advertising expenses and occupancy
expense leverage as a result of the Company’s 6.1% comparable store sales
increase.
Operating
Income
Operating
income for the forty weeks ended October 10, 2009 was $397.2 million, or 9.3% of
net sales, as compared to $368.1 million, or 9.3% of net sales, for the forty
weeks ended October 4, 2008. Operating income, as a percentage of net sales,
reflects an increase in gross profit offset by higher SG&A. The increase in
SG&A reflects many of the investments we are making in our business to drive
an increase in net sales and gross profit as well as store divestiture
expenses.
AAP
produced operating income of $388.6 million, or 9.4% of net sales, for the forty
weeks ended October 10, 2009 as compared to $364.2 million, or 9.5% of net
sales, for the forty weeks ended October 4, 2008. AI generated operating income
of $8.6 million for the forty weeks ended October 10, 2009 as compared to $3.9
million operating income for the comparable period last year. AI’s operating
income increased primarily due to its 11.6% increase in comparable store sales
during the quarter, increase in gross profit rate and leverage of occupancy
expense as a result of the increase in sales.
Interest
Expense
Interest
expense for the forty weeks ended October 10, 2009 was $18.4 million, or 0.4% of
net sales, as compared to $26.2 million, or 0.7% of net sales, for the forty
weeks ended October 4, 2008. The decrease in interest expense as a percentage of
sales is primarily a result of lower outstanding borrowings and increased sales
during the forty weeks ended October 10, 2009 compared to the same period ended
October 4, 2008.
Income
Taxes
Income
tax expense for the forty weeks ended October 10, 2009 was $143.5 million, as
compared to $128.0 million for the forty weeks ended October 4, 2008. Our
effective income tax rate was 37.8% for the forty weeks ended October 10, 2009
compared to 37.5% for the same period ended October 4, 2008.
Net
Income
We
generated net income of $235.9 million, or $2.46 per diluted share, for the
forty weeks ended October 10, 2009, as compared to $213.6 million, or $2.23 per
diluted share, for the forty weeks ended October 4, 2008. As a percentage of net
sales, net income for the forty weeks ended October 10, 2009 and October 4, 2008
was 5.5% and 5.4%, respectively. The increase in diluted earnings per share was
primarily due to growth in our operating income.
Liquidity
and Capital Resources
Overview
Our
primary cash requirements to maintain our current operations include payroll and
benefits, the purchase of inventory, contractual obligations and capital
expenditures as well as the payment of quarterly cash dividends. In addition, we
have used available funds to repay borrowings under our revolving credit
facility and periodically repurchase shares of common stock under our stock
repurchase program. We have funded these requirements primarily through cash
generated from operations, supplemented by borrowings under our credit
facilities as needed. We believe funds generated from our expected results of operations, available cash
and cash equivalents, and available borrowings under our revolving credit
facility will be sufficient to fund our primary obligations for the next fiscal
year.
At
October 10, 2009, our cash and cash equivalents balance was $216.2 million, an
increase of $178.9 million compared to January 3, 2009. This increase resulted
from additional cash flow from operating activities (including higher earnings,
reduction in working capital and increase in deferred income taxes) and proceeds
from common stock, partially offset by capital expenditures, the repayment of
debt and the repurchase of common stock. Additional discussion of our cash flow
results is set forth in the Analysis of Cash Flows
section.
Our
outstanding indebtedness was $176.7 million lower at October 10, 2009 when
compared to January 3, 2009 and consisted of borrowings of $75.0 million under
our revolving credit facility, $200.0 million under our term loan, $3.5 million
outstanding on an economic development note and $1.0 million outstanding under
other financing arrangements. Additionally, we had $103.0 million in letters of
credit outstanding, which reduced our total availability under the revolving
credit facility to $572.0 million. The letters of credit serve as collateral for
our self-insurance policies and routine purchases of imported
merchandise.
We have
15 lenders participating in our revolving credit facility, each with a
commitment of not more than 15% of the total $750 million commitment. All of
these lenders have met their contractual funding commitments to us through
October 10, 2009. An inability to obtain sufficient financing at cost-effective
rates could have a materially adverse impact on our business, financial
condition, results of operations and cash flows.
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, maintenance of existing stores, the construction and upgrading of
distribution centers, and the development of proprietary information systems and
purchased information systems. Our capital expenditures were $132.6 million for
the forty weeks ended October 10, 2009, or $4.4 million less than the comparable
period of fiscal 2008. During the forty weeks ended October 10, 2009, we opened
93 stores, relocated 6 stores and remodeled 11 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 investments
we make in information technology and supply chain networks. As previously
disclosed in our 2008 Form 10-K, we anticipate adding 75 new AAP and 30 new
AI stores during fiscal 2009.
We also
plan to make continued investments in the maintenance of our existing stores and
supply chain network as well as investing in new information systems to support
our turnaround strategies, including the implementation of a merchandising
system over a multi-year timeframe. As previously disclosed in our 2008 Form
10-K, we anticipate that our capital expenditures will be approximately $180.0
million to $200.0 million during fiscal 2009.
Vendor
Financing Program
Historically,
we have negotiated extended payment terms from suppliers that help finance
inventory growth. 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
further reduce our working capital invested in current inventory levels and
finance future inventory growth. At October 10, 2009 and January 3, 2009, $52.0
million and $136.4 million, respectively, was payable to the bank by us under
this program.
We are
anticipating the balance in financed vendor accounts payable to diminish as we
transition our merchandise vendors to customer-managed services arrangements, or
vendor program. As of October 10, 2009, we had approximately $170 million in
outstanding payables under our vendor program. It is possible that any ongoing
or worsening deterioration in the credit markets could adversely impact funding
for the vendor program, which would reduce our anticipated savings, including
but not limited to, causing us to increase our borrowings under our revolving
credit facility.
Stock
Repurchase Program
During
the twelve weeks ended October 10, 2009, we repurchased 0.9 million shares of
common stock at an aggregate cost of $35.2 million, or an average price of
$40.00 per share. During the forty weeks ended October 10, 2009, we repurchased
1.2 million shares of common stock at an aggregate cost of $49.6 million, or an
average price of $40.48 per share. These shares were repurchased in accordance
with our $250 million stock repurchase program authorized by our Board of
Directors in the second quarter of fiscal 2008.
As of
October 10, 2009, we had $139.4 million remaining under the $250 million stock
repurchase program, excluding related expenses.
Dividend
During
the forty weeks ended October 10, 2009, we paid $22.8 million in quarterly cash
dividends, $5.7 million of which was declared during each of our first, second
and third quarters of fiscal 2009. Subsequent to October 10, 2009, our Board of
Directors declared a quarterly dividend of $0.06 per share to be paid on January
8, 2010 to all common stockholders of record on December 24, 2009.
Analysis
of Cash Flows
A summary
and analysis of our cash flows for the forty week period ended October 10, 2009
as compared to the forty week period ended October 4, 2008 is included
below.
Forty
Week Periods Ended
|
||||||||
October
10, 2009
|
October
4, 2008
|
|||||||
(in
millions)
|
||||||||
Cash
flows from operating activities
|
$ | 628.5 | $ | 375.8 | ||||
Cash
flows from investing activities
|
(130.1 | ) | (134.0 | ) | ||||
Cash
flows from financing activities
|
(319.5 | ) | (235.1 | ) | ||||
Net
increase in cash and
|
||||||||
cash
equivalents
|
$ | 178.9 | $ | 6.7 |
2BUOperating
Activities
For the
forty weeks ended October 10, 2009, net cash provided by operating activities
increased $252.6 million to $628.5 million, as compared to the forty weeks ended
October 4, 2008. This net increase in operating cash was driven primarily
by:
·
|
an
increase in net income of $22.3 million during the forty weeks ended
October 10, 2009 as compared to the comparable period in
2008;
|
·
|
a
$136.7 million increase in cash flows from inventory, net of accounts
payable, reflective of our slow down in inventory growth combined with the
addition of vendors to our new vendor program (this increase is offset by
the reduction of financed vendor account payable included under Financing
Activities as a result of our vendor program
transition);
|
·
|
a
$21.4 million reduction in other working capital;
and
|
·
|
a
$57.5 million increase in deferred income
taxes.
|
UInvesting
Activities
For the
forty weeks ended October 10, 2009, net cash used in investing activities
decreased by $4.0 million to $130.1 million, as compared to the forty weeks
ended October 4, 2008. The net decrease in cash used was primarily due to the
timing of store development expenditures and fewer stores opened and relocated
partially offset by an increase in routine spending on our existing stores and
information technology investments.
3BUFinancing
Activities
For the
forty weeks ended October 10, 2009, net cash used in financing activities
increased by $84.4 million to $319.5 million, as compared to the forty weeks
ended October 4, 2008.
Cash
flows from financing activities increased primarily as result of:
·
|
a
decrease of $169.9 million in repurchases of common stock under our stock
repurchase program; and
|
·
|
a
$9.4 million cash inflow resulting from the timing of bank
overdrafts.
|
Cash
flows from financing activities decreased primarily as result of:
·
|
a
$142.5 million reduction in net borrowings, primarily under our revolving
credit facility, reflective of our significant repayments made during
2009; and
|
·
|
a
$112.8 million decrease in financed vendor accounts payable driven by the
transition of our vendors from our vendor financing program to our new
vendor program.
|
4BOff-Balance-Sheet
Arrangements
As of
October 10, 2009, 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.
5BContractual
Obligations
As of
October 10, 2009, there were no material changes to our outstanding contractual
obligations other than the reduction in our long-term debt. For
information regarding our contractual obligations see “Contractual Obligations”
in our 2008 Form 10-K.
9BLong-Term Debt
We have a
$750 million unsecured five-year revolving credit facility with Advance Stores
Company, Incorporated, or Stores, serving as the borrower. The revolving credit
facility also provides for the issuance of letters of credit with a sub limit of
$300 million, and swingline loans in an amount not to exceed $50 million. We may
request, subject to agreement by one or more lenders, that the total revolving
commitment be increased by an amount not exceeding $250 million (up to a total
commitment of $1 billion) during the term of the credit agreement. Voluntary
prepayments and voluntary reductions of the revolving balance are permitted in
whole or in part, at our option, in minimum principal amounts as specified in
the revolving credit facility. The revolving credit facility terminates on
October 5, 2011.
In
addition to the revolving credit facility, we have outstanding a $200 million
unsecured four-year term loan with Stores serving as borrower. The proceeds
from this term loan were used to repurchase shares of our common stock
under our stock repurchase program during fiscal 2008. The term
loan terminates on October 5, 2011. Voluntary prepayments and voluntary
reductions of the term loan balance are permitted in whole or in part, at our
option, in minimum principal amounts as specified in the term loan.
The
interest rate on borrowings under the revolving credit facility is based, at our
option, on an adjusted LIBOR rate, plus a margin, or an alternate base rate,
plus a margin. The current margin is 0.75% and 0.0% per annum for the adjusted
LIBOR and alternate base rate borrowings, respectively. We have elected to
use the 90-day adjusted LIBOR rate and have the
ability and intent to continue to use this rate on our hedged borrowings. Under
the terms of the revolving credit facility, the interest rate and commitment fee
are based on our credit rating.
The
interest rate on the term loan is based, at our option, on an adjusted
LIBOR rate, plus a margin, or an alternate base rate, plus a margin. The
current margin is 1.00% and 0.0% per annum for the adjusted LIBOR and alternate
base rate borrowings, respectively. We have elected to use the 90-day adjusted
LIBOR rate and have the ability and intent to continue to use this rate on our
hedged borrowings. Under the terms of the term loan, the interest rate is
based on our credit rating.
At
October 10, 2009, we had interest rate swaps in place that effectively fixed our
interest rate on approximately 98% of our long-term debt as a result of
the reduction in the revolver balance.
Guarantees
and Covenants
The term
loan and revolving credit facility are fully and unconditionally guaranteed by
Advance Auto Parts, Inc. Our debt agreements collectively contain covenants
restricting our ability to, among other things: (1) create, incur or assume
additional debt (including hedging arrangements), (2) incur liens or engage in
sale-leaseback transactions, (3) make loans and investments, (4) guarantee
obligations, (5) engage in certain mergers, acquisitions and asset sales, (6)
change the nature of our business and the business conducted by our subsidiaries
and (7) change our status as a holding company. We are required to comply with
financial covenants with respect to a maximum leverage ratio and a minimum
consolidated coverage ratio. We were in compliance with these covenants at
October
10, 2009 and January 3, 2009. Our term loan and revolving credit facility also
provide for customary events of default, covenant defaults and cross-defaults to
our other material indebtedness.
Credit
Ratings
At
October 10, 2009, we had credit ratings from Standard & Poor’s of BB+ and
from Moody’s Investor Service of Ba1, both of which are unchanged from January
3, 2009. The current outlooks by Standard & Poor’s and Moody’s are stable
and positive, respectively. The current pricing grid used to determine our
borrowing rates under our term loan and revolving credit facility is based on
our credit ratings, irrespective of the rating agencies’ outlooks. If these
credit ratings decline, our interest expense may increase. Conversely, if these
credit ratings improve, our interest expense may decrease. In addition, if our
credit ratings decline, our access to financing may become more
limited.
Seasonality
Our
business is somewhat seasonal in nature, with the highest sales occurring in the
spring and summer months. In addition, our business can be affected by weather
conditions. While unusually heavy precipitation tends to soften sales as
elective maintenance is deferred during such periods, extremely hot or cold
weather tends to enhance sales by causing automotive parts to fail at an
accelerated rate.
Recent
Accounting Developments
We
adopted several new accounting pronouncements as of the beginning of fiscal 2009
which are discussed below.
Earnings
per Share
Earnings
per share is determined using the two-class method and is computed by dividing
net income attributable to the Company’s common shareholders by the
weighted-average common shares outstanding during the period. The
two-class method is an earnings allocation formula that determines income
per share for each class of common stock and participating security according to
dividends declared and participation rights in undistributed earnings. Diluted
income per common share reflects the more dilutive earnings per share amount
calculated using the treasury stock method or the two-class method. Upon
adoption of the two-class method, prior-period earnings per share data presented
are adjusted retrospectively if applicable. Our diluted earnings per share
decreased by $0.01 for the twelve week period ended October 4, 2008 and basic
earnings per share decreased by $0.01 for the forty week period ended October 4,
2008. For a complete discussion of our adoption of the two-class method, see
Note 12 of the Notes to Condensed Consolidated Financial Statements in this
Quarterly Report on Form 10-Q.
Other
Effective
first quarter of fiscal 2009, we added the expanded disclosures on fair value
and hedging activities as provided in Note 7, Derivative Instruments and Hedging
Activities, and Note 8, Fair Value Measurements,
respectively, of the Notes to Condensed Consolidated Financial Statements in
this Quarterly Report on Form 10-Q.
New
Accounting Pronouncements
For a
description of recent accounting standards, including the expected dates of
adoption and estimated effects, if any, on our condensed consolidated condensed
financial statements, see New
Accounting Pronouncements in Note 1 of the Notes to Condensed
Consolidated Financial Statements in this Quarterly Report on Form
10-Q.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
We are
exposed to cash flow risk due to changes in interest rates with respect to our
long-term bank debt as a result of the movements in LIBOR. Our long-term bank
debt consists of borrowings under a revolving credit facility and a term loan.
While we cannot predict the impact interest rate movements will have on our bank
debt, exposure to rate changes is managed through the use of hedging activities.
Our cash flow risk decreased during the forty weeks ended October 10, 2009 as a
result of paying down a significant portion of our revolving credit facility
balance.
For
additional information regarding market risk see “Item 7A. Quantitative and
Qualitative Disclosures About Market Risks” in our 2008 Form 10-K.
Fuel
Risk
We manage
the risk of fluctuating fuel prices through fixed price commodity contracts for
approximately 70% of our estimated diesel fuel consumption for fiscal 2009. We
have applied the normal purchase election under to exclude these contracts from
fair value accounting.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and
Procedures. Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in our reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in our reports that we file or submit
under the Securities Exchange Act of 1934 is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.
Our management evaluated, with the participation of our principal executive
officer and principal financial officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report in
accordance with Rule 13a-15(b) under the Exchange Act. 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 our internal control over financial reporting that occurred
during the quarter ended October 10, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
6BPART
II. OTHER INFORMATION
ITEM
2. UNREGISTERED
SALES OF EQUITY SECRURITIES AND USE OF PROCEEDS
The
following table sets forth the information with respect to repurchases of our
common stock for the quarter ended October 10, 2009 (amounts in thousands,
except per share amounts):
Period
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid
per
Share (1)
|
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans or
Programs
(2)
|
Maximum
Dollar
Value
that May Yet
Be
Purchased Under
the
Plans or
Programs
(2)(3)
|
||||||||||||
July
19, 2009, to August 15, 2009
|
5 | $ | 42.01 | 5 | $ | 174,354 | ||||||||||
August
16, 2009, to September 12, 2009
|
476 | 40.75 | 476 | 154,944 | ||||||||||||
September
13, 2009, to October 10, 2009
|
399 | 39.02 | 399 | 139,381 | ||||||||||||
Total
|
880 | $ | 39.97 | 880 | $ | 139,381 |
(1)
|
Average
price paid per share excludes related expenses paid on previous
repurchases.
|
(2)
|
All
of the above repurchases were made on the open market at prevailing market
rates plus related expenses under our stock repurchase program, which
authorized the repurchase of up to $250 million in common stock. Our stock
repurchase program was authorized by our Board of Directors and publicly
announced on May 15, 2008.
|
(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.
|
ITEM 6. EXHIBITS
3.1
(1)
|
|
Restated
Certificate of Incorporation of Advance Auto Parts, Inc. ("Advance
Auto")(as amended on May 19, 2004).
|
|
|
|||
3.2
(2)
|
|
Amended
and Restated Bylaws of Advance Auto (effective August 12,
2009).
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
||
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
||
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
||
(1) Filed on May 20, 2004 as an exhibit to Current
Report on Form 8-K of Advance Auto.
|
|||
(2) Filed on August 17, 2009 as an exhibit
to Current Report on Form 8-K of Advance
Auto.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ADVANCE AUTO PARTS, INC. | ||
|
|
|
November 19, 2009 | By: |
/s/
Michael A. Norona
|
Michael A. Norona Executive
Vice President, Chief Financial Officer
and
Assistant
Secretary
|
EXHIBIT INDEX
|
Exhibit
Description
|
|
3.1
|
(1)
|
Restated
Certificate of Incorporation of Advance Auto (as amended on May 19,
2004).
|
3.2
|
(2)
|
Amended
and Restated Bylaws of Advance Auto (effective August 12,
2009).
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
(1)
Filed on May 20, 2004 as an exhibit to Current Report on Form 8-K of
Advance Auto.
|
||
(2)
Filed on August 17, 2009 as an exhibit to Current Report on Form 8-K of
Advance Auto.
|