aap10k.htm

 

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

(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2011
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
(Address of Principal Executive Offices)
 
24012
(Zip Code)
 
(540) 362-4911
(Registrant’s telephone number, including area code)
 
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
($0.0001 par value)
Name of each exchange on which registered
New York
Stock Exchange
 
Securities Registered Pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation 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).     x Yes ¨ No
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x   Accelerated filer o
     
Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

As of July 16, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the 83,856,893 shares of Common Stock held by non-affiliates of the registrant was $4,296,827,197, based on the last sales price of the Common Stock on July 16, 2010, as reported by the New York Stock Exchange.

As of February 26, 2011, the registrant had outstanding 80,060,288 shares of Common Stock, par value $0.0001 per share (the only class of common equity of the registrant outstanding).

Documents Incorporated by Reference:

Portions of the definitive proxy statement of the registrant to be filed within 120 days of January 1, 2011, pursuant to Regulation 14A under the Securities Exchange Act of 1934, for the 2011 Annual Meeting of Stockholders to be held on May 17, 2011, are incorporated by reference into Part III.

 
 
 
TABLE OF CONTENTS
     
Page
       
Part I.    
       
  Business
2
       
  Risk Factors
10
       
  Unresolved Staff Comments
14
       
  Properties
15
       
  Legal Proceedings
16
       
  Reserved
16
       
Part II.    
       
  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
17
       
  Selected Consolidated Financial Data
18
       
  Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
       
  Item 7A. Quantitative and Qualitative Disclosures About Market Risks
36
       
  Item 8. Financial Statements and Supplementary Data
36
       
  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
36
       
  Item 9A. Controls and Procedures
37
       
  Other Information
37
       
Part III.     
       
  Item 10. Directors, Executive Officers and Corporate Governance
38
       
  Executive Compensation
38
       
 
38
       
  Item 13. Certain Relationships and Related Transactions, and Director Independence
38
       
  Item 14. Principal Accountant Fees and Services
38
       
 
 
       
  Exhibits, Financial Statement Schedules
39
 
 
 
FORWARD-LOOKING STATEMENTS

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 elsewhere in further detail in this report are some important risks, uncertainties and contingencies which could cause our actual results, performance or achievements to be materially different from any forward-looking statements made or implied in this report. These include, but are not limited to, the following:

 
·  
a decrease in demand for our products;
·  
competitive pricing and other competitive pressures;
·  
our ability to implement our business strategy;
·  
our ability to expand our business, including the location of available and suitable real estate for new store locations, the integration of any acquired businesses and the continued increase in supply chain capacity and efficiency;
·  
our ability to attract and retain qualified employees, or Team Members;
·  
deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, uncertain credit markets or other recessionary type conditions could have a negative impact on our business, financial condition, results of operations and cash flows;
·  
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;
·  
business interruptions due to the occurrence of natural disasters, extended periods of unfavorable weather, computer system malfunction, wars or acts of terrorism;
·  
the impact of global climate change or legal and regulatory responses to such change; and
·  
other statements that are not of historical fact made throughout this report, including the sections entitled “Business,” "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors."
 
We assume no obligations to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time to time in our other reports and documents filed with the Securities and Exchange Commission, or SEC, and you should not place undue reliance on those statements.
 

PART I

Item 1.                      Business.

Unless the context otherwise requires, “Advance,” “we,” “us,” “our,” and similar terms refer to Advance Auto Parts, Inc., its predecessor, its subsidiaries and their respective operations. Our fiscal year consists of 52 or 53 weeks ending on the Saturday closest to December 31st of each year. Fiscal 2008 included 53 weeks of operations. All other fiscal years presented include 52 weeks of operations.

Overview

We are a leading specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States. Our stores carry an extensive product line for cars, vans, sport utility vehicles and light trucks. We serve both "do-it-yourself," or DIY, and “do-it-for-me,” or Commercial, customers.

We were founded in 1929 as Advance Stores Company, Incorporated and operated as a retailer of general merchandise until the 1980s. During the 1980s, we sharpened our focus to target sales of automotive parts and accessories to DIY customers. From the 1980s to the present, we have grown significantly as a result of comparable store sales growth, new store openings and strategic acquisitions. We began our Commercial delivery program in 1996 and have significantly increased our sales to Commercial customers since 2000. Our parent company, Advance Auto Parts, Inc., a Delaware corporation, was incorporated in 2001 in conjunction with the acquisition of Discount Auto Parts, Inc., or Discount. At January 1, 2011, our 2010 fiscal year-end, we operated 3,563 total stores.

Our Internet address is www.AdvanceAutoParts.com. We make available free of charge through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish them to, the SEC. The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC's website at www.sec.gov.

Operating Segments

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 Northeastern, Southeastern and Midwestern regions of the United States, Puerto Rico and the Virgin Islands which operate under the trade names “Advance Auto Parts,” “Advance Discount Auto Parts” and “Western Auto.” The AI segment consists solely of the operations of AI. AI’s business operates under the “Autopart International” trade name and primarily serves the Commercial market from its store locations in the Northeastern and Mid-Atlantic regions of the United States and Florida. We acquired AI in September 2005.

Financial information on our segments is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report on Form 10-K. In addition, selected financial data for our segments is available in Note 21, Segment and Related Information, of the Notes to Consolidated Financial Statements, included in Item 15. Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K.

AAP Segment

At January 1, 2011, we operated 3,369 AAP stores within the United States, Puerto Rico and the Virgin Islands. We operated 3,343 AAP 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 private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars and light trucks. In addition, we operated 26 AAP stores under the “Advance Auto Parts” and “Western Auto” trade names, located in Puerto Rico and the Virgin Islands, or Offshore. Through
 
 
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an integrated operating approach to our store operations, we are focused on both the acceleration of Commercial sales and more stable growth of DIY sales based on market dynamics.

We also provide our customers online shopping at www.AdvanceAutoParts.com and access to over 100,000 stock keeping units, or SKUs, of the same product carried in our stores as well as other product offerings and services. Our current website was launched in October 2009 as part of our e-commerce strategy to provide an online shopping capability to both our DIY and Commercial customers. Our online website allows our DIY customers to pick up merchandise at a conveniently located store or have their purchases shipped directly to their home or business. Our online website provides our Commercial customers an opportunity to conveniently place their orders online.

AAP Stores

Store Overview.   Our stores generally are located in freestanding buildings in areas with high vehicle traffic counts, good visibility and easy access to major roadways and to our Commercial customers. We believe that our stores exhibit a customer-friendly format with the majority of our stores featuring an updated exterior and interior, bright lighting, and a well-designed and easily navigated floor plan. The average size of our stores is 7,300 square feet with the size of our typical new stores ranging from approximately 6,000 to 7,000 square feet. Our stores generally are open from 7:30 a.m. to 9:00 p.m. six days a week and 9:00 a.m. to 9:00 p.m. on Sundays and most holidays to meet the needs of our DIY and Commercial customers.

Our stores carry a product offering of approximately 17,500 SKUs, generally consisting of a custom mix of product by store based on the respective market. Additionally, a majority of our stores carry an additional customized assortment of 12,000 SKUs for same-day or next-day delivery to other select stores within the respective service area. We refer to these stores as HUB stores. Our stores are replenished from one of our eight distribution centers once per week on average.

We also utilize a network of Parts Delivered Quickly, or PDQ®, facilities and one Master PDQ® facility to ensure our stores have the right product at the right time to meet our customers’ needs. Our PDQ® and Master PDQ® network of facilities provide our customers with an additional assortment of approximately 96,000 less common SKUs on a same-day or overnight basis. Lastly, our customers have access to over 300,000 SKUs by ordering directly from one of our vendors for delivery to a particular store or other destination as chosen by the customer.

We strive to be the leader in the automotive aftermarket industry by fulfilling our promise, ‘Service is our best partSM,’ through our Service Leadership and Superior Availability strategies.  We offer our customers quality products which are backed by a solid warranty. Many of our products are offered at a good, better or best recommendation differentiated by price and quality. Store Team Members utilize our proprietary point-of-sale, or POS, system, including a fully integrated electronic parts catalog to identify and suggest the appropriate quality and price options for the SKUs we carry, as well as the related products, tools or additional information that is required by our customers to complete their automotive repair projects properly and safely.

The primary categories of product we offer in our stores include:

·  
Parts, including alternators, batteries, chassis parts, clutches, engines and engine parts, radiators, starters, transmissions and water pumps;
·  
Accessories, including floor mats, mirrors, vent shades, MP3 and cell phone accessories, and seat and steering wheel covers;
·  
Chemicals, including antifreeze, freon, fuel additives and car washes and waxes;
·  
Oil and other automotive petroleum products; and
·  
Other miscellaneous offerings.
 
The product in our stores is generally arranged in a uniform and consistent manner based on standard store formats and merchandise presentation.  The parts inventory is generally located on shelves behind the customer service counter with the remaining product, or front room merchandise, arranged on the sales floor to provide easy customer access, maximum selling space and to prominently display high-turnover products and accessories to customers. We utilize aisle displays to feature high-demand or seasonal merchandise, new items and advertised specials, including bilingual signage
 
 
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based on the demographics in each store’s geographic area.

We also provide a variety of services free of charge to our customers including:
 
·  
Battery & wiper installation
·  
Battery charging
·  
Check engine light reading where allowed by law
·  
Electrical system testing, including batteries, starters, alternators and sensors
·  
“How-To” Video Clinics & Project Brochures
·  
Oil and battery recycling
·  
Loaner tool program
 
Our stores are 100% company operated and are divided into three geographic areas. Each geographic area is managed by a senior vice president, who is supported by regional and district management. District Leaders have direct responsibility for store operations in a specific district, which typically consists on average of 12 stores. Depending on store size and sales volume, each store is staffed by approximately 8 to 16 Team Members, under the leadership of a General Manager. Store Team Members are comprised of full and part-time Team Members. A majority of our stores include at least two parts professionals, or parts pros, who have an extensive technical knowledge of automotive replacement parts and other related applications to better serve our Commercial and DIY customers. Many of our stores include bilingual Team Members to better serve our diverse customer base. We offer training to all of our Team Members, including formal classroom workshops, e-learning and certification by the National Institute for Automotive Service Excellence, or ASE. ASE is broadly recognized for training certification in the automotive industry.

Commercial Sales. Our Commercial sales consist of sales to both our walk-in and delivery customers, which represented approximately 31% of our AAP sales in Fiscal 2010. Since 2000, we have aggressively expanded our sales to Commercial customers through our Commercial delivery program. For delivered sales, we utilize our Commercial delivery fleet to deliver product from our store locations to our Commercial customers’ place of business, including independent garages, service stations and auto dealers. Our stores are supported by a Commercial sales team who are dedicated to the development of our national, regional and local Commercial customers. Our Commercial sales management is closely aligned with our store management as part of our overall integrated store operation.

We have concentrated a significant amount of our investments over the past three years on increasing our Commercial sales at a faster rate in light of the favorable market dynamics.  We have added key product brands in our stores that are well recognized by our Commercial customers, as well as increased the parts knowledge of our store Team Members. We have increased the size of our sales force by approximately 45% for a greater emphasis on acquiring new Commercial customers and increasing our share of existing commercial customers’ purchases. In 2010, we continued our incremental investments in additional parts professionals, delivery trucks and drivers for approximately half of our AAP stores with Commercial programs, and added a business-to-business platform to our e-commerce capability. We believe these investments and the commitment to consistent delivery times and order accuracy will enable us to gain more Commercial customers as well as increase our sales to existing customers who will use us as their “first call” supplier. At January 1, 2011, 3,018 AAP stores, or 90% of total AAP stores, had Commercial delivery programs, a slight increase from 88% at January 2, 2010.

Store Development. Our store development program has historically focused on adding new stores within existing markets where we can achieve a larger presence, remodeling or relocating existing stores and entering new markets. The addition of new stores, along with strategic acquisitions, has played a significant role in our growth and success. We believe the opening of new stores, and their strategic location in relation to our DIY and Commercial customers, will continue to play a significant role in our future growth and success.

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

 
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Our 3,369 AAP stores were located in the following states and territories at January 1, 2011:

   
Number of
     
Number of
     
Number of
Location
 
Stores
 
Location
 
Stores
 
Location
 
Stores
                     
Alabama
 
120
 
Maryland
 
77
 
Pennsylvania
 
173
Arkansas
 
28
 
Massachusetts
 
65
 
Puerto Rico
 
25
Colorado
 
49
 
Michigan
 
106
 
Rhode Island
 
10
Connecticut
 
39
 
Minnesota
 
14
 
South Carolina
 
128
Delaware
 
7
 
Mississippi
 
56
 
South Dakota
 
7
Florida
 
460
 
Missouri
 
43
 
Tennessee
 
138
Georgia
 
232
 
Nebraska
 
21
 
Texas
 
172
Illinois
 
96
 
New Hampshire
 
13
 
Vermont
 
8
Indiana
 
104
 
New Jersey
 
58
 
Virgin Islands
 
1
Iowa
 
27
 
New Mexico
 
1
 
Virginia
 
172
Kansas
 
25
 
New York
 
129
 
West Virginia
 
66
Kentucky
 
99
 
North Carolina
 
241
 
Wisconsin
 
49
Louisiana
 
61
 
Ohio
 
201
 
Wyoming
 
3
Maine
 
14
 
Oklahoma
 
31
       
 
The following table sets forth information concerning increases in the total number of our AAP stores during the past five years:
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Beginning Stores
    3,264       3,243       3,153       2,995       2,810  
New Stores (1)
    110       75       109       175       190  
Stores Closed
    (5 )     (54 )     (19 )     (17 )     (5 )
Ending Stores (2)
    3,369       3,264       3,243       3,153       2,995  
 
(1)  
Does not include stores that opened as relocations of previously existing stores within the same general market area or substantial renovations of stores.
(2)  
Includes 2 stores not operating at December 30, 2006, primarily due to hurricane damage.
 
Store Technology.  Our store-based information systems, which are designed to improve the efficiency of our operations and enhance customer service, are comprised of a proprietary POS system and electronic parts catalog, or EPC, system.  Information maintained by our POS system is used to formulate pricing, marketing and merchandising strategies and to replenish inventory accurately and rapidly. Our POS system is fully integrated with our EPC system and enables our store Team Members to assist our customers in their parts selection and ordering based on the year, make, model and engine type of their vehicles. Our centrally-based EPC data management system enables us to reduce the time needed to (i) exchange data with our vendors and (ii) catalog and deliver updated, accurate parts information.

Our EPC system also contains enhanced search engines and user-friendly navigation tools that enhance our Team Members’ ability to look up any needed parts as well as additional products the customer needs to complete an automotive repair project. If a hard-to-find part or accessory is not available at one of our stores, the EPC system can determine whether the part is carried and in-stock through our PDQÒ system. Available parts and accessories are then ordered electronically from another store, PDQÒ or Master PDQÒ with immediate confirmation of price, availability and estimated delivery time.

We also support our store operations with additional proprietary systems and customer driven labor scheduling capabilities. Our store-level inventory management system provides real-time inventory tracking at the store level.
 
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With the store-level system, store Team Members can check the quantity of on-hand inventory for any SKU, adjust stock levels for select items for store specific events, automatically process returns and defective merchandise, designate SKUs for cycle counts and track merchandise transfers. Our stores use radio frequency hand-held devices to help ensure the accuracy of our inventory. Our standard operating procedure, or SOP, system is a web-based, electronic data management system that provides our Team Members with instant access to any of our standard operating procedures through a comprehensive on-line search function.  All of these systems are tightly integrated and provide real-time, comprehensive information to store personnel, resulting in improved customer service levels, Team Member productivity and in-stock availability.

Store Support Center

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

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

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

In Fiscal 2010, we purchased merchandise from approximately 450 vendors, with no single vendor accounting for more than 8% of purchases. Our purchasing strategy involves negotiating agreements with most of our vendors to purchase merchandise over a specified period of time along with other terms, including pricing, payment terms and volume.

The merchandising team has developed strong vendor relationships in the industry and, in a collaborative effort with our vendor partners, utilizes a category management process. The merchandising team continues to refine its category management process, including the ongoing multi-phase implementation of a best-in-class category management system. We believe this process, which develops a customer-focused business plan for each merchandise category, and our global sourcing operation are critical to improving comparable store sales, gross margin and inventory turns.
 
Our merchandising strategy is to carry a broad selection of high quality and reputable brand name automotive parts and accessories which we believe will generate DIY customer traffic and also appeal to our Commercial customers. Some of these brands include Bosch®, Castrol®, Dayco®, Federal-Mogul Moog®, or Moog®, Monroe®, Prestone®, Purolator®, Trico® and Wagner®. In addition to these branded products, we stock a wide selection of high quality private label products that appeal to value-conscious customers. These lines of merchandise include chemicals, interior automotive accessories, batteries and parts under various private label names such as Autocraft®, Driveworks®, Tough One® and Wearever®.

Supply Chain. Our supply chain consists of centralized inventory management and transportation functions which support a supply chain network of distribution centers, PDQ® warehouses, HUB’s and stores. Our inventory management team utilizes a replenishment system to monitor the distribution center, PDQ® warehouse, HUB and store inventory levels and orders additional product when appropriate while streamlining handling costs. Our replenishment system utilizes the most up-to-date information from our POS system as well as inventory movement forecasting based upon sales history, sales trends by SKU, seasonality (and weather patterns) and demographic shifts in demand. Our replenishment system combines these factors with service level goals, vendor lead times and cost of inventory assumptions to determine the timing and size of purchase orders. The vast majority of our purchase orders are sent to our merchandise vendors via electronic data interchange.

Our transportation team utilizes a transportation management system to efficiently manage incoming shipments to our distribution centers and from our distribution centers to our stores. Benefits from this system include (i) reduced vendor to distribution center freight costs, (ii) visibility of purchase orders and shipments for the entire supply chain, (iii) a reduction in distribution center inventory, or safety stock, due to consistent transit times, (iv) decreased third party freight and billing service costs, (v)

 

decreased distribution center to store freight costs and (vi) higher store in-stock position. We utilize two reputable dedicated carriers to ship product from our distribution centers to our stores.

We currently operate eight distribution centers. All of these distribution centers are equipped with our distribution center management system, or DCMS. Our DCMS provides real-time inventory tracking through the processes of receiving, picking, shipping and replenishing inventory at our distribution centers. The DCMS, integrated with technologically advanced material handling equipment, significantly reduces warehouse and distribution costs, while improving efficiency. This equipment includes carousels, “pick-to-light” systems, radio frequency technology, voice technology and automated sorting systems. We have ongoing supply chain initiatives in our distribution centers to further increase the efficient utilization of our distribution capacity. We believe our current supply chain network, including a new distribution center projected to open in Indiana in late 2011, provides ample capacity for our projected growth in the foreseeable future.

Store inventories are replenished from our eight distribution centers. We currently offer approximately 59,000 SKUs to support all of our retail stores via our 22 stand-alone PDQ® warehouses and/or our eight distribution centers (all of which stock PDQ® items). Stores have system visibility to inventory in their respective PDQÒ warehouses and distribution centers and can place orders to these facilities, or as an alternative, through an online ordering system to virtually any of the other facilities. Ordered parts are delivered to substantially all stores on a same day or next day basis through our dedicated PDQ® trucking fleet and third-party carriers. Supplementing the inventory on-hand at our stores, our HUB stores stock an additional 12,000 less common SKUs which are available to our stores within the HUB stores’ respective service area on a same day or next day basis.  In addition, we operate a Master PDQ® warehouse that stocks approximately 29,000 incremental SKUs of harder-to-find automotive parts and accessories and utilizes our existing PDQ® distribution infrastructure and/or third party arrangements to provide next day service to substantially all of our stores.

Marketing & Advertising.  We have a marketing and advertising program designed to drive awareness and consideration of the Advance Auto Parts brand by positioning AAP as the service leader in the aftermarket auto parts category.  We strive to exceed consumers’ expectations through our free and value-added services, extensive parts assortment and quality merchandise offerings.   We market our brand through a mix of media including television, direct mail, promotional event signage, outdoor billboards, online advertising, social media and AdvanceAutoParts.com.

In early 2011, we launched our ‘Service is our best partSM’ campaign.   The campaign was developed based on extensive research with our customers and Team Members and brings to life a new brand promise for Advance.  This campaign was successfully tested in certain markets during 2010 before being rolled out nationwide in 2011.  The campaign targets core DIY and Commercial customers and emphasizes our commitment to provide market-leading service to our customers.

Our multi-channel marketing communication plan is built around television, direct marketing, online, radio, and local marketing.  The plan is supported by public relations, in-store and event signage as well as mobile and social media through Facebook.   The television advertising is a combination of national and regional media in sports, entertainment and DIY-themed programming.  Radio advertising airs primarily during peak drive times and on weekends.  We also use Spanish-language television, radio and outdoor advertising to reach our Hispanic customers.

A final and key component of our advertising is our local marketing program highlighted by our title sponsorship of the Advance Auto Parts Monster Jam, a live family-oriented monster truck event tour and television show.  Our brand is affixed to the show, is present throughout each host arena and comes alive through the Advance Auto Parts Grinder monster trucks.  We are able to capitalize on the sponsorship at a store level through Grinder and other monster truck appearances and through store-based customer events in conjunction with the show.  In addition, AAP also sponsors various other grass-root level events intended to positively impact the individual communities we serve, including Hispanic and other ethnic communities, and to drive awareness and repeated store visits.

 
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AI Segment

AI’s business primarily serves the Commercial market, with an emphasis on parts for imported cars, from its store locations located throughout the Northeastern and Mid-Atlantic regions of the United States and Florida. In addition, its North American Sales Division serves warehouse distributors and jobbers throughout North America. We believe AI provides a high level of service to its Commercial customers by providing quality parts, unsurpassed customer service and efficient parts delivery. As a result of its extensive sourcing network, AI is able to serve its customers in search of replacement parts for both domestic and imported cars and light trucks with a greater focus on imported parts. The vast majority of AI’s product is sold under its own proprietary brand. The AI stores offer approximately 24,000 SKUs with access to an additional 100,000 SKUs through its supply chain and local sourcing networks.

AI has significantly increased its store count since our acquisition of AI in September 2005. At January 1, 2011, we operated 194 stores under the “Autopart International” trade name in the following states:
 
   
Number of
     
Number of
     
Number of
Location
 
Stores
 
Location
 
Stores
 
Location
 
Stores
                     
Connecticut
 
17
 
Massachusetts
 
32
 
Pennsylvania
 
23
Delaware
 
1
 
New Hampshire
 
8
 
Rhode Island
 
4
Florida
 
38
 
New Jersey
 
16
 
Vermont
 
1
Maine
 
4
 
New York
 
25
 
Virginia
 
12
Maryland
 
13
               
 
The following table sets forth information concerning increases in the total number of our AI stores:

   
2010
   
2009
   
2008
   
2007
   
2006
 
Beginning Stores
    156       125       108       87       62  
New Stores
    38       32       18       21       25  
Stores Closed
    -       (1 )     (1 )     -       -  
Ending Stores
    194       156       125       108       87  
                                         

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.

Team Members

At February 26, 2011, we employed approximately 29,000 full-time Team Members and approximately 22,000 part-time Team Members. Our workforce consisted of 90% of our Team Members employed in store-level operations, 7% employed in distribution and 3% employed in our corporate offices. We have never experienced any labor disruption and are not party to any collective bargaining agreements. We believe that our Team Member relations are good.



Intellectual Property

We own a number of trade names and own and have federally registered several service marks and trademarks, including “Advance Auto Parts,” “Advance Discount Auto Parts,” “Western Auto,” “Parts America,” “Autopart International” and “PDQ®” for use in connection with the automotive parts retailing business. In addition, we own and have registered a number of trademarks for our private label brands. We believe that these trade names, service marks and trademarks are important to our merchandising strategy. We do not know of any infringing uses that would materially affect the use of these trade names and marks, and we actively defend and enforce them.

Competition

We operate in both the DIY and Commercial markets of the automotive aftermarket industry. Our primary competitors are (i) both national and regional retail chains of automotive parts stores, including AutoZone, Inc., O'Reilly Automotive, Inc. and The Pep Boys–Manny, Moe & Jack, (ii) discount stores and mass merchandisers that carry automotive products, (iii) wholesalers or jobber stores, including those associated with national parts distributors or associations, such as NAPA and Carquest, (iv) independent operators and (v) automobile dealers that supply parts. We believe that chains of automotive parts stores that, like us, have multiple locations in one or more markets, have competitive advantages in customer service, marketing, inventory selection, purchasing and distribution as compared to independent retailers and jobbers that are not part of a chain or associated with other retailers or jobbers. The principal methods of competition in our business include customer service, product offerings, availability, quality, price and store location.

Environmental Matters

We are subject to various federal, state and local laws and governmental regulations relating to the operation of our business, including those governing recycling of automotive lead-acid batteries and used automotive oil, and ownership and operation of real property. We sell consumer products containing hazardous materials as part of our business. In addition, our customers may bring automotive lead-acid batteries or used automotive oil onto our properties. We currently provide collection and recycling programs for used lead-acid batteries and used oil at substantially all of our stores as a service to our customers. Pursuant to agreements with third party vendors, lead-acid batteries and used oil are collected by our Team Members, deposited onto pallets or into vendor supplied containers and stored by us until collected by the third party vendors for recycling or proper disposal. The terms of our contracts with third party vendors provide that they are in compliance with all applicable laws and regulations. Persons who arrange for the removal, disposal, treatment or other handling of hazardous or toxic substances may be liable for the costs of removal or remediation at any affected disposal, treatment or other site affected by such substances. Based on our experience, we do not believe that there are any material environmental costs associated with the current business practice of accepting lead-acid batteries and used oil as these costs are borne by the respective third party vendors.

We own and lease real property. Under various environmental laws and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. These laws often impose joint and several liability and may be imposed without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous or toxic substances. Other environmental laws and common law principles also could be used to impose liability for releases of hazardous materials into the environment or work place, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. From time to time, we receive notices from the Environmental Protection Agency and state environmental authorities indicating that there may be contamination on properties we own, lease or operate or may have owned, leased or operated in the past or on adjacent properties for which we may be responsible.  Compliance with these laws and regulations has not had a material impact on our operations to date.



Item 1A. Risk Factors.

Our business is subject to a variety of risks, both known and unknown. Our business, financial condition, results of operations and cash flows could be negatively impacted by the following risk factors. These risks are not the only risks that may impact our business.

If overall demand for products sold by our stores slows or declines, our business, financial condition, results of operations and cash flows will suffer. Decreased demand could also negatively impact our stock price.

Overall demand for products sold by our stores depends on many factors and may slow or decrease due to any number of reasons, including:

·  
the economy, because during periods of declining economic conditions, as mentioned above, both DIY and Commercial customers may defer vehicle maintenance or repair; conversely, during periods of favorable economic conditions, more of our DIY customers may pay others to repair and maintain their cars or they may purchase new cars;
·  
changing weather patterns along with increased frequency or duration of extreme weather conditions, as elective vehicle maintenance may be deferred during periods of unfavorable weather;
·  
our vendors, because if any of our key vendors do not supply us with products on terms that are favorable to us or fail to develop new products we may not be able to meet the demands of our customers and our results of operations could be negatively affected;
·  
our reputation and our brands, because our reputation is critical to our continued success.  If we fail to maintain high standards for, or receive negative publicity whether through social media or normal media channels relating to, product safety, quality or integrity, it could reduce demand for our products.  The product we sell is branded both in brands of our vendors and in our own private label brands.  If the perceived quality or value of the brands we sell declines, in the eyes of our customers, our results of operations could be negatively affected;
·  
the average duration of manufacturer warranties and the decrease in the number of annual miles driven, because newer cars typically require fewer repairs and will be repaired by the manufacturer’s dealer network using dealer parts; and lower vehicle mileage decreases the need for maintenance and repair (while higher miles driven increases the need);
·  
the quality of vehicles manufactured, because vehicles that have low part failure rates will require less frequent repairs using aftermarket parts; and
·  
the refusal of vehicle manufacturers to make available diagnostic, repair and maintenance information to the automotive aftermarket industry that our DIY and Commercial customers require to diagnose, repair and maintain their vehicles, because this may force consumers to have all diagnostic work, repairs and maintenance performed by the vehicle manufacturers’ dealer network.

If any of these factors cause overall demand for the products we sell to decline, our business, financial condition, results of operations and cash flows could be negatively impacted.

If we are unable to compete successfully against other companies in the automotive aftermarket industry we may lose customers, our revenues may decline, and we may be less profitable or potentially unprofitable.

The sale of automotive parts, accessories and maintenance items is highly competitive in many ways, including name recognition, location, price, quality, product availability and customer service. We compete in both the DIY and Commercial categories of the automotive aftermarket industry, primarily with: (i) national and regional retail automotive parts chains, (ii) discount stores and mass merchandisers that carry automotive products, (iii) wholesalers or jobber stores, (iv) independent operators and (v) automobile dealers that supply parts. These competitors and the level of competition vary by market. Some of our competitors may possess advantages over us in certain markets we share, including a greater amount of marketing activities, a larger number of stores, store locations, store layouts, longer operating histories, greater name recognition, larger and more established customer bases, lower prices, and better product warranties. Our response to these competitive disadvantages may require us to reduce our prices below our normal selling prices or increase our promotional spending, which would lower our
 
 
10

 
revenue and profitability. Competitive disadvantages may also prevent us from introducing new product lines, require us to discontinue current product offerings, or change some of our current operating strategies. If we do not have the resources or expertise, or otherwise fail to develop successful strategies to address these competitive disadvantages, we may lose customers, our revenues and profit margins may decline and we may be less profitable or potentially unprofitable.
 
We may not be able to successfully implement our business strategy, including increasing comparable store sales, enhancing our margins and increasing our return on invested capital, which could adversely affect our business, financial condition, results of operations and cash flows.

We have implemented numerous initiatives as part of our business strategy to increase comparable store sales, enhance our margins and increase our return on invested capital in order to increase our earnings and cash flow. If we are unable to implement these initiatives efficiently and effectively, or if these initiatives are unsuccessful, our business, financial condition, results of operations and cash flows could be adversely affected.

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

·  
the competitive environment in the automotive aftermarket parts and accessories retail sector that may force us to reduce prices below our desired pricing level or increase promotional spending;
·  
our ability to anticipate changes in consumer preferences and to meet customers’ needs for automotive products (particularly parts availability) in a timely manner;
·  
our ability to maintain and eventually grow DIY market share; and
·  
our ability to continue our Commercial sales growth.

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

We will not be able to expand our business if our growth strategy is not successful, including the availability of suitable locations for new store openings, the successful integration of any acquired businesses or the continued increase in supply chain capacity and efficiency, which could adversely affect our business, financial condition, results of operations and cash flows.
 
New Store Openings
 
We have increased our store count significantly from 1,729 stores at the end of Fiscal 2000 to 3,563 stores at January 1, 2011. We intend to continue to increase the number of our stores and expand the markets we serve as part of our growth strategy, primarily by opening new stores. We may also grow our business through strategic acquisitions. We do not know whether the implementation of our growth strategy will be successful. The actual number of new stores to be opened and their success will depend on a number of factors, including, among other things:

· the availability of potential store locations;
· the negotiation of acceptable lease or purchase terms for new locations;
· the availability of financial resources, including access to capital at cost-effective interest rates; and
· our ability to manage the expansion and hire, train and retain qualified sales associates.

We are unsure whether we will be able to open and operate new stores on a timely or sufficiently profitable basis, or that opening new stores in markets we already serve will not harm existing store profitability or comparable store sales. The newly opened and existing stores' profitability will depend on the competition we face as well as our ability to properly merchandise, market and price the products desired by customers in these markets.


 
Supply Chain

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

Our success depends to a significant extent on the continued services and experience of our Team Members. At February 26, 2011, we employed approximately 51,000 Team Members. We may not be able to retain our current qualified Team Members or attract and retain additional qualified Team Members that may be needed in the future. Our ability to maintain an adequate number of qualified Team Members is highly dependent on an attractive and competitive compensation and benefits package. If we fail or are unable to maintain such a package, our customer service and execution levels could suffer by reason of a declining quality of our workforce, which could adversely affect our business, financial condition, results of operations and cash flows.

Deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, uncertain credit markets or other recessionary type conditions could have a negative impact on our business, financial condition, results of operations and cash flows.

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

Impact of Credit Market Uncertainty
 
Significant deterioration in the financial condition of large financial institutions in 2008 and 2009 resulted in a severe loss of liquidity and available credit in global credit markets and in more stringent borrowing terms.  Our overall credit rating may be negatively impacted by deteriorating and uncertain credit markets. The interest rates on our revolving credit facility are linked directly to our credit ratings. Accordingly, any negative impact on our credit rating would likely result in higher interest rates and interest expense on borrowed funds and less favorable terms on other operating and financing arrangements. Additionally, we may be limited in our ability to borrow additional funds to finance our operations. It is possible that one or more of the banks that provide us with financing under our revolving credit facility may fail to honor the terms of our existing credit facility or be financially unable to provide the unused credit. An inability to obtain sufficient financing at cost-effective rates could have a materially adverse affect on our business, financial condition, results of operations and cash flows.
 
Impact on our Suppliers

Our business depends on developing and maintaining close relationships with our suppliers and on our suppliers' ability and/or willingness to sell quality products to us at favorable prices and terms. Many factors outside of our control may harm these relationships and the ability or willingness of these suppliers to sell us products on favorable terms.  One such factor is a general decline in the economy and economic conditions and prolonged recessionary conditions.  These events could negatively affect our suppliers’ operations and make it difficult for them to obtain the credit lines or loans necessary to finance their operations in the short-term or long-term and meet our product requirements.  Financial or operational difficulties that some of our suppliers may face could also increase the cost of the products we purchase from them or our ability to source product from them. We might not be able to pass our increased costs onto our customers. In addition, the trend towards consolidation among automotive parts suppliers as well as the off-shoring of manufacturing capacity to foreign countries may disrupt or end our relationship with some suppliers, and could lead to less competition and result in higher prices.  We could also be negatively impacted by suppliers who might experience bankruptcies, work stoppages, labor strikes or other
 
 
12

 
interruptions to or difficulties in the manufacture or supply of the products we purchase from them.

Impact on our Customers

Deterioration in macro-economic conditions may have a negative impact on our customers’ net worth, financial resources and disposable income. This impact could reduce their willingness or ability to pay for accessories, maintenance or repair of their vehicles, which results in lower sales in our stores. Higher fuel costs may also reduce the overall number of miles driven by our customers resulting in less parts failures and elective maintenance required to be completed.

Impact on Operating Expenses

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

Because we are involved in litigation from time to time, and are subject to numerous laws and governmental regulations, we could incur substantial judgments, fines, legal fees and other costs.

We are sometimes the subject of complaints or litigation from customers, employees or other third parties for various actions. From time to time, we are involved in litigation involving claims related to, among other things, breach of contract, tortious conduct, employment law matters, payment of wages, asbestos exposure, real estate, and product defects. The damages sought against us in some of these litigation proceedings are substantial. Although we maintain liability insurance for some litigation claims, if one or more of the claims were to greatly exceed our insurance coverage limits or if our insurance policies do not cover a claim, this could have a material adverse affect on our business, financial condition, results of operations and cash flows.

Additionally, we are subject to numerous federal, state and local laws and governmental regulations relating to environmental protection, product quality standards, building and zoning requirements, as well as employment law matters. If we fail to comply with existing or future laws or regulations, we may be subject to governmental or judicial fines or sanctions, while incurring substantial legal fees and costs. In addition, our capital expenses could increase due to remediation measures that may be required if we are found to be noncompliant with any existing or future laws or regulations.

Business interruptions may negatively impact our store hours, operability of our computer systems and the availability and cost of merchandise which may adversely impact our sales and profitability.
 
War or acts of terrorism, hurricanes, tornados, earthquakes or other natural disasters, or the threat of any of these calamities or others, may have a negative impact on our ability to obtain merchandise available for sale in our stores, result in certain of our stores being closed for an extended period of time, negatively affect the lives of our customers or team members, or otherwise negatively impact our operations. Some of our merchandise is imported from other countries. If imported goods become difficult or impossible to import into the United States, and if we cannot obtain such merchandise from other sources at similar costs, our sales and profit margins may be negatively affected.

In the event that commercial transportation is curtailed or substantially delayed, our business may be adversely impacted, as we may have difficulty receiving merchandise from our suppliers and shipping it to our stores.

Terrorist attacks, war in the Middle East, or war within or between any oil producing country would likely result in an abrupt increase in the price of crude oil, gasoline, diesel fuel and energy costs. Such price increases would increase the cost of doing business for us and our suppliers, and also would negatively impact our customers' disposable income and have an adverse impact on our business, sales, profit margins and results of operations.

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

 
13

 
process transactions and manage inventory.  Any such loss, if widespread or extended, could adversely affect the operation of our business and our results of operations.

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

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

Item 1B. Unresolved Staff Comments.

None.


Item 2. Properties.

The following table sets forth certain information relating to our distribution and other principal facilities:

Facility
 
Opening
Date
 
Area Served
 
Size
(Sq. ft.)(1)
 
Nature of
Occupancy
                   
Main Distribution Centers:
               
 
Roanoke, Virginia
 
1988
 
Mid-Atlantic
 
     433,681
 
Leased
 
Lehigh, Pennsylvania
 
2005
 
Northeast
 
     655,991
 
Owned
 
Lakeland, Florida
 
1982
 
South, Offshore
 
     552,796
 
Owned
 
Gastonia, North Carolina
 
1969
 
North Carolina, South Carolina
 
     634,472
 
Owned
 
Gallman, Mississippi
 
1999
 
Southwest, Midwest
 
     388,168
 
Owned
 
Salina, Kansas
 
1971
 
West, Midwest
 
     413,500
 
Owned
 
Delaware, Ohio
 
1972
 
Midwest
 
     480,100
 
Owned
 
Thomson, Georgia
 
1999
 
Southeast
 
     374,400
 
Owned
                   
Master PDQ® Warehouse:
               
 
Andersonville, Tennessee
 
1998
 
All
 
     113,300
 
Leased
                   
PDQ® Warehouses:
               
 
Youngwood, Pennsylvania
 
1998
 
East
 
       48,320
 
Leased
 
Riverside, Missouri
 
1999
 
West
 
       43,912
 
Leased
 
Temple, Texas
 
1999
 
Southwest
 
       61,343
 
Leased
 
Altamonte Springs, Florida
 
1996
 
Central and Northeast Florida
 
       10,000
 
Owned
 
Jacksonville, Florida
 
1997
 
Southeastern Georgia
 
       12,712
 
Owned
 
Tampa, Florida
 
1997
 
West Central Florida
 
       10,000
 
Owned
 
Hialeah, Florida
 
1997
 
South Florida
 
       12,500
 
Owned
 
West Palm Beach, Florida
 
1998
 
Southeastern  Florida, South
 
       13,300
 
Leased
         
Alabama and Southeastern Mississippi
   
 
Mobile, Alabama
 
1998
 
Florida Panhandle
 
       10,000
 
Owned
 
Atlanta, Georgia
 
1999
 
Georgia
 
       16,786
 
Leased
 
Tallahassee, Florida
 
1999
 
Northwest Florida
 
       10,000
 
Owned
 
Fort Myers, Florida
 
1999
 
Southwest Florida
 
       14,330
 
Owned
 
Brooklyn Heights, Ohio
 
2008
 
Cleveland, Ohio
 
       22,000
 
Leased
 
Chicago, Illinois
 
2009
 
Mid-West
 
       42,600
 
Leased
 
Rochester, New York
 
2009
 
Northeast
 
       40,000
 
Leased
 
Leicester, Massachussetts
 
2009
 
Northeast
 
       34,200
 
Leased
 
Washington, DC
 
2009
 
East
 
       33,124
 
Leased
 
Houston, Texas
 
2009
 
Southwest
 
       36,340
 
Leased
 
Denver, Colorado
 
2009
 
West
 
       25,400
 
Leased
 
West Deptford, New Jersey
 
2009
 
East
 
       33,029
 
Leased
 
Indianapolis, Indiana
 
2010
 
Mid-West
 
       37,850
 
Leased
 
Durham, North Carolina
 
2010
 
East
 
       41,652
 
Leased
                   
Corporate/Administrative Offices:
               
 
Roanoke, Virginia
 
2002
 
All
 
     256,391
 
Leased
 
Minneapolis, Minnesota
 
2008
 
All
 
       51,674
 
Leased
                   
AI Properties:
               
 
Norton, Massachusetts
 
2006
 
AI corporate office
 
       30,000
 
Leased
 
Norton, Massachusetts
 
2006
 
Primarily Northeast and
 
     317,500
 
Leased
         
Mid-Atlantic
       
 
(1)  
Square footage amounts exclude adjacent office space.


 
15

 
At January 1, 2011, we owned 696 of our stores and leased 2,867 stores. The expiration dates, including the exercise of renewal options, of the store leases are summarized as follows:

Years
 
AAP Stores
 
AI Stores
 
Total
2010-2011
 
                      21
 
                     7
 
                28
2012-2016
 
                    223
 
                   72
 
              295
2017-2021
 
                    634
 
                   68
 
              702
2022-2031
 
                    745
 
                   47
 
              792
2032-2041
 
                    925
 
                      -
 
              925
2042-2069
 
                    125
 
                      -
 
              125
   
                 2,673
 
                 194
 
           2,867

Item 3. Legal Proceedings.

We currently and from time to time are involved in litigation incidental to the conduct of our business, including litigation arising from claims of employment discrimination or other types of employment matters as a result of claims by current and former employees. Although we diligently defend against these claims, we may enter into discussions regarding settlement of these and other lawsuits, and may enter into settlement agreements, if we believe settlement is in the best interests of the Company and our shareholders. The damages claimed against us in some of these proceedings are substantial. Although the amount of liability that may result from these matters cannot be ascertained, we do not currently believe that, in the aggregate, they will result in liabilities material to our consolidated financial condition, future results of operations or cash flow.

Our Western Auto subsidiary, together with other defendants including automobile manufacturers, automotive parts manufacturers and other retailers, has been named as a defendant in lawsuits alleging injury as a result of exposure to asbestos-containing products. We and some of our other subsidiaries also have been named as defendants in many of these lawsuits. The plaintiffs have alleged that these products were manufactured, distributed and/or sold by the various defendants. These products have primarily included brake parts. Many of the cases pending against us or our subsidiaries are in the early stages of litigation. The damages claimed against the defendants in some of these proceedings are substantial. Additionally, some of the automotive parts manufacturers named as defendants in these lawsuits have declared bankruptcy, which will limit plaintiffs’ ability to recover monetary damages from those defendants. Although we diligently defend against these claims, we may enter into discussions regarding settlement of these and other lawsuits, and may enter into settlement agreements, if we believe settlement is in the best interests of the Company and our shareholders. We also believe that many of these claims are at least partially covered by insurance. Based on discovery to date, we do not believe the cases currently pending will have a material adverse effect on us. However, if we were to incur an adverse verdict in one or more of these claims and were ordered to pay damages that were not covered by insurance, these claims could have a material adverse effect on our operating results, financial position and liquidity. If the number of claims filed against us or any of our subsidiaries alleging injury as a result of exposure to asbestos-containing products increases substantially, the costs associated with concluding these claims, including damages resulting from any adverse verdicts, could have a material adverse effect on our operating results, financial position and liquidity in future periods.

Item 4. Reserved.

None.


PART II

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed on the New York Stock Exchange, or NYSE, under the symbol "AAP." The table below sets forth the high and low sale prices per share for our common stock, as reported by the NYSE, for the fiscal periods indicated.

   
High
   
Low
 
Fiscal Year Ended January 1, 2011
           
Fourth Quarter
  $ 69.51     $ 58.28  
Third Quarter
  $ 60.21     $ 51.30  
Second Quarter
  $ 53.21     $ 42.19  
First Quarter
  $ 46.34     $ 38.38  
Fiscal Year Ended January 2, 2010
               
Fourth Quarter
  $ 41.77     $ 36.11  
Third Quarter
  $ 47.41     $ 37.31  
Second Quarter
  $ 45.59     $ 40.50  
First Quarter
  $ 44.64     $ 29.50  
 
The closing price of our common stock on February 26, 2011 was $62.63. At February 26, 2011, there were 321 holders of record of our common stock (which does not include the number of individual beneficial owners whose shares were held on their behalf by brokerage firms in street name).

Our Board of Directors has declared a $0.06 per share quarterly cash dividend since its inception in Fiscal 2006. Any payments of dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors.

The following table sets forth information with respect to repurchases of our common stock for the quarter ended January 1, 2011 (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)
 
                         
October 10, 2010, to November 6, 2010
    1     $ 64.94       -     $ 279,336  
November 7, 2010, to December 4, 2010
    1,398       66.44       1,375       187,938  
December 5, 2010, to January 1, 2011
    990       67.07       990       121,564  
                                 
Total
    2,389     $ 66.70       2,365     $ 121,564  
 
(1)  
In addition to the shares of common stock we repurchased under our $300 million stock repurchase program, we repurchased 24,000 shares of our common stock at an aggregate cost of $1.6 million in connection with the net settlement of shares issued as a result of the vesting of restricted stock during the twelve weeks ended January 1, 2011.
(2)  
Except as noted in footnote 1 above, 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 $300 million in common stock. Our stock repurchase program was authorized by our Board of Directors and publicly announced on August 10, 2010. Our $300 million stock repurchase program replaced our prior $500 million stock repurchase program.



Stock Price Performance

The following graph shows a comparison of the cumulative total return on our common stock, the Standard & Poor’s 500 Index and the Standard & Poor’s 500 Specialty Retail Index. The graph assumes that the value of an investment in our common stock and in each such index was $100 on December 31, 2005, and that any dividends have been reinvested. The comparison in the graph below is based solely on historical data and is not intended to forecast the possible future performance of our common stock.

COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
ADVANCE AUTO PARTS, INC., S&P 500 INDEX
AND S&P 500 SPECIALTY RETAIL INDEX
snpcharg2010
 
Company / Index
 
     Dec 31, 2005
   
     Dec 30, 2006
   
     Dec 29, 2007
   
       Jan 3, 2009
   
       Jan 2, 2010
   
      Jan 1, 2011
 
Advance Auto Parts
  $ 100     $ 82.36     $ 88.96     $ 80.11     $ 95.56     $ 156.86  
S&P 500 Index
    100       115.79       123.00       79.39       97.34       112.00  
S&P 500 Specialty Retail Index
    100       106.64       84.66       67.36       86.26       104.75  

Item 6.                      Selected Consolidated Financial Data.

The following table sets forth our selected historical consolidated statement of operations, balance sheet and other operating data. Included in this table are key metrics and operating results used to measure our financial progress. The selected historical consolidated financial and other data at January 1, 2011 and January 2, 2010 and for the three years ended January 1, 2011 have been derived from our audited consolidated financial statements and the related notes included elsewhere in this report. The historical consolidated financial and other data at January 3, 2009, December 29, 2007 and December 30, 2006 and for the years ended December 29, 2007 and December 30, 2006 have been derived from our audited consolidated financial statements and the related notes that have not been included in this report. You should read this data along with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and the related notes included elsewhere in this report.
 
 
 
18

 
 
   
Fiscal Year (1)
 
                               
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(in thousands, except per share data, store data and ratios)
 
                               
Statement of Operations Data:
                             
Net sales
  $ 5,925,203     $ 5,412,623     $ 5,142,255     $ 4,844,404     $ 4,616,503  
Cost of sales (2)
    2,963,888       2,768,397       2,743,131       2,585,665       2,472,203  
Gross profit
    2,961,315       2,644,226       2,399,124       2,258,739       2,144,300  
Selling, general and administrative expenses
    2,376,382       2,189,841       1,984,197       1,842,310       1,740,950  
Operating income
    584,933       454,385       414,927       416,429       403,350  
Interest expense
    (26,861 )     (23,337 )     (33,729 )     (34,809 )     (35,992 )
Gain on extinguishment of debt
    -       -       -       -       986  
Other income (expense), net
    (1,017 )     607       (506 )     1,014       1,571  
Income before provision
                                       
     for income taxes
    557,055       431,655       380,692       382,634       369,915  
Income tax expense
    211,002       161,282       142,654       144,317       138,597  
Net income
    346,053       270,373       238,038       238,317       231,318  
                                         
Per Share Data:
                                       
Net income per basic share
  $ 4.00     $ 2.85     $ 2.51     $ 2.29     $ 2.18  
Net income per diluted share
  $ 3.95     $ 2.83     $ 2.49     $ 2.28     $ 2.16  
Cash dividends declared per basic share
  $ 0.24     $ 0.24     $ 0.24     $ 0.24     $ 0.24  
Weighted average basic shares outstanding
    86,082       94,459       94,655       103,826       106,129  
Weighted average diluted shares outstanding
    87,155       95,113       95,205       104,637       107,124  
                                         
Cash flows provided by (used in):
                                       
Operating activities
  $ 666,159     $ 699,690     $ 478,739     $ 410,542     $ 333,604  
Investing activities
    (199,350 )     (185,539 )     (181,609 )     (202,143 )     (258,642 )
Financing activities
    (507,618 )     (451,491 )     (274,426 )     (204,873 )     (104,617 )
                                         
Balance Sheet and Other Financial Data:
                                       
Cash and cash equivalents
  $ 59,209     $ 100,018     $ 37,358     $ 14,654     $ 11,128  
Inventory
  $ 1,863,870     $ 1,631,867     $ 1,623,088     $ 1,529,469     $ 1,463,340  
Inventory turnover(3)
    1.70       1.70       1.74       1.73       1.75  
Inventory per store(4)
  $ 523     $ 477     $ 482     $ 469     $ 475  
Accounts payable to inventory ratio(5)
    71.0 %     61.2 %     57.2 %     55.1 %     53.2 %
Net working capital(6)
  $ 276,222     $ 421,591     $ 442,632     $ 456,897     $ 498,553  
Capital expenditures
  $ 199,585     $ 192,934     $ 184,986     $ 210,600     $ 258,586  
Total assets
  $ 3,354,217     $ 3,072,963     $ 2,964,065     $ 2,805,566     $ 2,682,681  
Total debt
  $ 301,824     $ 204,271     $ 456,164     $ 505,672     $ 477,240  
Total net debt(7)
  $ 252,171     $ 113,781     $ 439,394     $ 521,018     $ 500,318  
Total stockholders' equity
  $ 1,039,374     $ 1,282,365     $ 1,075,166     $ 1,023,795     $ 1,030,854  
                                         
Selected Store Data and Performance Measures:
                                       
Comparable store sales growth (8)
    8.0 %     5.3 %     1.5 %     0.7 %     1.6 %
Number of stores at beginning of year
    3,420       3,368       3,261       3,082       2,872  
   New stores
    148       107       127       196       215  
   Closed stores
    (5 )     (55 )     (20 )     (17 )     (5 )
Number of stores, end of period
    3,563       3,420       3,368       3,261       3,082  
Relocated stores
    12       10       10       29       47  
Stores with commercial delivery program, end of period
    3,212       3,024       2,880       2,712       2,526  
Total commercial sales, as a percentage of total sales (in 000s)
    34.2 %     32.0 %     29.5 %     26.6 %     25.0 %
Average net sales per store (in 000s)(9)
  $ 1,697     $ 1,595     $ 1,551     $ 1,527     $ 1,551  
Operating income per store (in 000s)(10)
  $ 168     $ 134     $ 125     $ 131     $ 135  
Gross margin return on inventory(11)
  $ 5.05     $ 3.98     $ 3.47     $ 3.29     $ 3.29  
Total store square footage, end of period (in 000s)
    25,950       24,973       24,711       23,982       22,753  
 
(1)  
Our fiscal year consists of 52 or 53 weeks ending on the Saturday nearest to December 31st. All fiscal years presented are 52 weeks, with the exception of Fiscal 2008 which consisted of 53 weeks.
(2)  
Cost of sales includes a non-cash inventory adjustment of $37,500 recorded in Fiscal 2008 due to a change in our inventory management approach for slow moving inventory.
(3)  
Inventory turnover is calculated as cost of sales divided by the average of beginning and ending inventories.

 
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(4)  
Inventory per store is calculated as ending inventory divided by ending store count.
(5)  
Accounts payable to inventory ratio is calculated as ending accounts payable divided by ending inventory. We aggregate financed vendor accounts payable with accounts payable to calculate our accounts payable to inventory ratio.
(6)  
Net working capital is calculated by subtracting current liabilities from current assets.
(7)  
Net debt includes total debt and bank overdrafts, less cash and cash equivalents.
(8)  
Comparable store sales growth 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 growth from the original date of opening. Beginning in Fiscal 2008, we include in comparable store sales growth the net sales from stores operated Offshore and AI stores. The comparable periods have been adjusted accordingly. Fiscal 2008 comparable store sales growth excludes sales from the 53rd week.
(9)  
Average net sales per store is calculated as net sales divided by the average of the beginning and the ending number of stores for the respective period. Excluding the net sales impact of the 53rd week of Fiscal 2008 of approximately $88,800, average net sales per store in Fiscal 2008 was $1,524.
(10)  
Operating income per store is calculated as operating income divided by the average of beginning and ending total store count for the respective period. Operating income per store for Fiscal 2009 was $142 excluding the $26,100 impact of store divestitures. Excluding the operating income impact of the 53rd week of Fiscal 2008 of approximately $15,800 and a $37,500 non-cash inventory adjustment, operating income per store in Fiscal 2008 was $132.
(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 gross profit impact of the 53rd week of Fiscal 2008 of approximately $44,000 and a $37,500 non-cash inventory adjustment, gross margin return on inventory in Fiscal 2008 was $3.37.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with "Selected Consolidated Financial Data," our consolidated historical financial statements and the notes to those statements that appear elsewhere in this report. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the sections entitled “Forward-Looking Statements” and "Risk Factors" elsewhere in this report.

Our fiscal year ends on the Saturday nearest December 31st of each year, which results in an extra week every several years (Fiscal 2008 contained 53 weeks). Our first quarter consists of 16 weeks, and the other three quarters consist of 12 weeks, with the exception of the fourth quarter of Fiscal 2008 which contained 13 weeks due to our 53-week Fiscal 2008.


Introduction

We are a leading specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States. Our stores carry an extensive product line for cars, vans, sport utility vehicles and light trucks. We serve both DIY and Commercial customers. At January 1, 2011, we operated 3,563 stores throughout 39 states, Puerto Rico and the Virgin Islands.

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 January 1, 2011, we operated 3,369 stores in the AAP segment, of which 3,343 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 26 stores under the “Advance Auto Parts” and “Western Auto” trade names, located in Puerto Rico and the Virgin Islands, or Offshore.
 

 
 
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At January 1, 2011, we operated 194 stores in the AI segment under the “Autopart International” trade name. We acquired AI in September 2005. AI’s business primarily serves the Commercial market from its store locations in the Northeastern and Mid-Atlantic regions of the United States and Florida. In addition, its North American Sales Division services warehouse distributors and jobbers throughout North America.

Management Overview

During Fiscal 2010, we produced favorable financial results primarily due to strong comparable store sales growth, an increase in our gross profit rate and the repurchase of shares of our common stock resulting in earnings per diluted share, or diluted EPS, of $3.95 compared to $2.83 in Fiscal 2009. Our strong earnings and favorable management of working capital during Fiscal 2010 have generated significant operating cash flow that allowed us to invest in business initiatives related to our key strategies and repurchase shares of our common stock.

Although we have presented our financial results in this Form 10-K in conformity with accounting principles generally accepted in the United States (GAAP), our financial results for Fiscal 2009 and Fiscal 2008 include the impact of the following significant items. Our Fiscal 2009 results were reduced by an EPS impact of $0.17 resulting from the closure of 45 stores in connection with our store divestiture plan. Our Fiscal 2008 financial results included an extra week of operations (53rd week) as well as a non-cash obsolete inventory write-down of $37.5 million due to a change in inventory management approach for slow moving inventory, or non-cash inventory adjustment. The impact of the Fiscal 2008 items was a net reduction in EPS of $0.15.

Fiscal 2010 Highlights

Highlights from our Fiscal 2010 include:

Financial
 
·  
Total sales during Fiscal 2010 increased 9.5% to $5,925.2 million as compared to Fiscal 2009, primarily driven by an 8.0% increase in comparable store sales.

·  
Our gross profit rate increased 113 basis points as compared to Fiscal 2009.

·  
Our selling, general and administrative, or SG&A, expense rate decreased 35 basis points as compared to Fiscal 2009, and increased 13 basis points when excluding the impact of store divestiture expenses in Fiscal 2009.

·  
We generated operating cash flow of $666.2 million during Fiscal 2010, and used available cash to repurchase 13.0 million shares of our common stock under our stock repurchase plans at a cost of $633.9 million, or an average price of $48.67 per share.

Other

·  
We issued $300 million of senior unsecured notes in April 2010 with an interest of 5.75% due in 2020.
 
·  
Subsequent to the end of Fiscal 2010, we repurchased 1.9 million shares of our common stock, which completed the availability under our $300 million stock repurchase program.  On February 8, 2011 our Board of Directors authorized a new $500 million stock repurchase program.
 
Business Update

Our positive financial results in Fiscal 2010 are a result of the investments we have made in each of our four key strategies over the past three years, the successful execution of the initiatives supporting each of our strategies and favorable conditions in the automotive aftermarket. Our initial focus on our Commercial Acceleration and Availability Excellence strategies has resulted in consistent double-digit increases in our Commercial comparable store sales and strong overall gross profit improvement over this timeframe. Through our DIY Transformation and
 
 
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Superior Experience strategies, our DIY sales have also improved throughout Fiscal 2010 as a result of a renewed focus on customer service. In Fiscal 2010, we narrowed our focus on fewer customer facing initiatives to ensure we consistently execute these initiatives in an effort to provide better customer service while decelerating our pace of incremental spending. In Fiscal 2011, we have begun to focus on differentiating Advance from our competition through our commitment to exceptional service which is reflected in our new promise, ‘Service is our best partSM’ and the convergence of our four key strategies into two strategies – Service Leadership and Superior Availability. Through these two strategies, we believe we can continue to build on the initiatives discussed below and produce favorable financial results.

Our comparable store sales results for Fiscal 2010 were comprised of favorable Commercial and DIY sales results. Our Commercial sales, as a percentage of total sales, increased to 34% for Fiscal 2010 as compared to 32% for Fiscal 2009. Over the past three years we have completed incremental investments in additional parts professionals, delivery trucks and drivers in approximately half of our AAP stores with Commercial programs. We decelerated our pace of completing these investments during the second half of Fiscal 2010 and will continue to roll out these investments to the entire store chain at a more moderate rate over the next two years. Our growth in Commercial is dependent on the previous investments we have made and plan on making in the future and maintaining successful relationships with our existing customers and attracting new customers. If we succeed in these strategies, we anticipate the pace of our growth in Commercial to continue to exceed the pace of DIY growth. Our e-commerce website is also expected to contribute to our Commercial sales due to the completion of the roll out of our business-to-business platform during the fourth quarter of Fiscal 2010. The continued growth in our Commercial sales emphasizes our focus on an integrated service model and our goal of achieving a 50/50 mix of Commercial and DIY sales.
 
Our DIY initiatives include the ongoing improvement of our customer driven staffing model, rollout of more effective training programs and a number of marketing strategies. We are utilizing a more focused marketing approach to better target our highest potential customers and our underserved customers, which has resulted in a more effective use of our advertising spending.  Our re-launched e-commerce website has been operational for five complete fiscal quarters and is beginning to contribute favorably to our DIY sales results. On an ongoing basis, we closely monitor independent customer satisfaction scores for both Commercial and DIY customers, as a measure of customer service and product availability, and have experienced improvement since the program’s inception.

Both our Commercial and DIY sales have benefitted from our added parts availability and merchandising initiatives. We added many new brands to our parts offering in Fiscal 2009 and we continued to rollout custom assortments of product in our stores in Fiscal 2010. We continue to complete additions to our supply chain network to increase our ability to get the right product to our customers. As of January 1, 2011, we were supporting multiple daily deliveries to a majority of our stores from our 176 HUB stores and 31 Parts Delivered Quickly, or PDQ®, facilities. Our HUB stores are larger stores that stock a wider selection and greater supply of inventory. In addition to driving sales, we believe these initiatives are responsible for the continued improvement in our gross profit rate.  Our gross profit rate for Fiscal 2010 increased 113 basis points compared to Fiscal 2009.  We experienced gross profit rate improvements in both parts and non-parts categories resulting from the custom mix availability, price optimization and other merchandising capabilities and the impact of our growing global sourcing operation. We plan to continue increasing the amount of product we source globally which is expected to provide us significant gross profit improvement and allow us to more quickly source the products our customers need.

Automotive Aftermarket Industry

The automotive aftermarket industry benefitted in 2010 from the economic environment as people kept their vehicles longer. Other favorable industry dynamics which existed throughout most of 2010 included:

·  
modest increase in miles driven;
·  
increase in number and average age of vehicles; and
·  
relatively stable gas prices.

Many of these favorable industry dynamics are continuing into 2011. We anticipate miles driven will continue to increase over the long-term future based on historical trends and the increasing number of vehicles on the road; however, there is the potential of market pressure from the recent increase in gas prices and the rebound of new car
 
 
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sales. We believe that our focus on differentiating through our strategies of Service Leadership and Superior Availability will allow us to continue to increase our share of the total automotive aftermarket with a higher growth potential driven by the more fragmented Commercial market.

Store Development by Segment

The following table sets forth the total number of new, closed and relocated stores and stores with Commercial delivery programs during Fiscal 2010, 2009 and 2008. We lease approximately 80% of our stores.
 
AAP
 
   
Fiscal Year
 
   
2010
   
2009
   
2008
 
Number of stores at beginning of year
    3,264       3,243       3,153  
   New stores
    110       75       109  
   Closed stores
    (5 )     (54 )     (19 )
Number of stores, end of period
    3,369       3,264       3,243  
Relocated stores
    9       6       10  
Stores with commercial delivery programs
    3,018       2,868       2,755  
                         
AI
 
   
Fiscal Year
 
      2010       2009       2008  
Number of stores at beginning of year
    156       125       108  
   New stores
    38       32       18  
   Closed stores
    -       (1 )     (1 )
Number of stores, end of period
    194       156       125  
Relocated stores
    3       4       -  
Stores with commercial delivery programs
    194       156       125  
 
During Fiscal 2011, we anticipate adding 110 to 120 AAP and 10 to 20 AI stores and closing approximately 10 total stores.

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 opened for 13 complete accounting periods (approximately one year). We include sales from relocated stores in comparable store sales from the original date of opening. Beginning in Fiscal 2008, we began including in comparable store sales the net sales from the Offshore and AI stores. 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 2 to our consolidated financial statements elsewhere in this report for additional discussion of these costs.

Selling, General and Administrative Expenses

SG&A expenses consist of store payroll, store occupancy (including rent and depreciation), advertising expenses, Commercial delivery expenses, other store expenses and general and administrative expenses, including salaries and related benefits of store support center Team Members, share-based compensation expense, store support center administrative office expenses, data processing, professional expenses, self-insurance costs, closed store expense, impairment charges, if any, and other related expenses. See Note 2 to our consolidated financial statements for additional discussion of these costs.

Consolidated Results of Operations

The following table sets forth certain of our operating data expressed as a percentage of net sales for the periods indicated.

   
Fiscal Year Ended
 
   
January 1,
   
January 2,
   
January 3,
 
   
2011
   
2010
   
2009
 
                   
Net sales
    100.0 %     100.0 %     100.0 %
Cost of sales
    50.0       51.1       53.3  
Gross profit
    50.0       48.9       46.7  
Selling, general and administrative expenses
    40.1       40.5       38.6  
Operating income
    9.9       8.4       8.1  
Interest expense
    (0.5 )     (0.4 )     (0.7 )
Other income, net
    (0.0 )     0.0       (0.0 )
Income tax expense
    3.6       3.0       2.8  
Net income
    5.8       5.0       4.6  
 
Fiscal 2010 Compared to Fiscal 2009

Net Sales

Net sales for Fiscal 2010 were $5,925.2 million, an increase of $512.6 million, or 9.5%, over net sales for Fiscal 2009. This growth was primarily due to an increase in comparable store sales and sales from new AAP and AI stores opened within the last year.

AAP produced sales of $5,691.1 million, an increase of $472.8 million, or 9.1%, over Fiscal 2009. The AAP comparable store sales increase was driven by an increase in average ticket sales as well as an increase in overall customer traffic. AI produced sales of $249.5 million, an increase of $46.9 million, or 23.2%, over Fiscal 2009.

   
2010
   
2009
 
   
AAP
   
AI
   
Total
   
AAP
   
AI
   
Total
 
Comp Store Sales %
    8.1%       7.0%       8.0%       5.1%       9.9%       5.3%  
Net Stores Opened
    105       38       143       21       31       52  

Gross Profit

Gross profit for Fiscal 2010 was $2,961.3 million, or 50.0% of net sales, as compared to $2,644.2 million, or 48.9% of net sales, in Fiscal 2009, or an increase of 113 basis points. This increase in gross profit as a percentage of net sales was driven by improved merchandising and pricing capabilities (such as price optimization), improved parts availability and supply chain efficiencies. We believe the added parts availability has been a primary driver of our increase in parts sales, which generally contribute a higher gross profit. Favorable product costs from global
 
 
 
24

 
sourcing are beginning to drive improvements in our gross profit on accessories.

SG&A Expenses

SG&A expenses for Fiscal 2010 were $2,376.4 million, or 40.1% of net sales, as compared to $2,189.8 million, or 40.5% of net sales, for Fiscal 2009, representing a decrease of 35 basis points. This overall decrease in SG&A expenses was primarily due to the absence of store divestiture costs in Fiscal 2010, leverage in occupancy and other fixed costs driven by our 8.0% comparable store sales increase in Fiscal 2010 and a planned decrease in incremental spending on our strategic capabilities, partially offset by increased incentive compensation and advertising.

Operating Income

Operating income for Fiscal 2010 was $584.9 million, representing 9.9% of net sales, as compared to $454.4 million, or 8.4% of net sales, for Fiscal 2009, or an increase of 148 basis points. This increase in operating income, as a percentage of net sales, reflects a significant increase in sales and gross profit rate combined with a slightly lower SG&A expense rate.

AAP produced operating income of $580.4 million, or 10.2% of net sales, for Fiscal 2010 as compared to $446.8 million, or 8.6% of net sales, for Fiscal 2009. AI generated operating income for Fiscal 2010 of $4.5 million as compared to $7.6 million for Fiscal 2009. AI’s operating income decreased during Fiscal 2010 primarily due to a lower gross profit rate as well as higher SG&A expenses associated with the acceleration of new store openings.

Interest Expense

Interest expense for Fiscal 2010 was $26.9 million, or 0.5% of net sales, as compared to $23.3 million, or 0.4% of net sales, in Fiscal 2009. The increase in interest expense as a percentage of sales is primarily a result of the amortization of previously recorded unrecognized losses in accumulated other comprehensive loss over the remaining life of interest rate swaps. The swaps are associated with bank debt which we repaid near the beginning of the second quarter.

Income Taxes

Income tax expense for Fiscal 2010 was $211.0 million, as compared to $161.3 million for Fiscal 2009. Our effective income tax rate was 37.9% and 37.4% for Fiscal 2010 and Fiscal 2009, respectively.

Net Income

Net income was $346.1 million, or $3.95 per diluted share, for Fiscal 2010 as compared to $270.4 million, or $2.83 per diluted share, for Fiscal 2009. As a percentage of net sales, net income for Fiscal 2010 was 5.8%, as compared to 5.0% for Fiscal 2009. The increase in diluted earnings per share was primarily due to growth in our operating income and the decrease in our average share count as a result of our repurchase of 13.0 million shares of our common stock over the last year.

Fiscal 2009 Compared to Fiscal 2008

Net Sales

Net sales for Fiscal 2009 were $5,412.6 million, an increase of $270.4 million, or 5.3%, over net sales for Fiscal 2008. Excluding the $88.8 million impact of the 53rd week in Fiscal 2008, our sales increase was 7.1%. This growth was primarily due to an increase in comparable store sales of 5.3% and sales from the net addition of 52 new AAP and AI stores opened within the last year.

AAP produced sales of $5,218.3 million, an increase of $241.7 million, or 4.9%, over Fiscal 2008. Excluding the $86.5 million impact of the 53rd week in Fiscal 2008, AAP’s sales increase was 6.7%. This growth was primarily due to a 5.1% comparable store sales increase and sales from the net addition of 21 new stores opened within the last year. The AAP comparable store sales increase was driven by an increase in average ticket sales and overall customer traffic.
 
 
25

 
 
AI produced sales of $202.6 million, an increase of $36.9 million, or 22.3%, over Fiscal 2008. Excluding the $2.3 million impact of the 53rd week in Fiscal 2008, AI’s sales increase was 24.0%.  This growth was primarily reflective of a 9.9% comparable store sales increase and sales from the net addition of 31 new stores opened within the last year.

Gross Profit

Gross profit for Fiscal 2009 was $2,644.2 million, or 48.9% of net sales, as compared to $2,399.1 million, or 46.7% of net sales, in Fiscal 2008, or an increase of 220 basis points. Excluding the impacts of the $37.5 million non-cash inventory adjustment and the 53rd week in Fiscal 2008, the increase in gross profit rate was 149 basis points. This increase in gross profit as a percentage of net sales was primarily due to continued investments in pricing and merchandising capabilities (including global sourcing), increased parts availability resulting in the sale of more parts which generally contribute a higher gross profit and improved store execution partially offset by decreased inventory shrink.

SG&A Expenses

SG&A expenses for Fiscal 2009 were $2,189.8 million, or 40.5% of net sales, as compared to $1,984.2 million, or 38.6% of net sales, for Fiscal 2008, or an increase of 187 basis points. Store divestiture expenses comprised 48 basis points of the increase in SG&A expenses as a percentage of net sales. The remaining increase was primarily due to:

·  
increased investments in store labor and Commercial sales force;
·  
higher incentive compensation driven by the favorable financial results in fiscal 2009; and
·  
continued investments to improve our gross profit rate and to operate our new e-commerce operation.

These increases were partially offset by lower advertising expenses and occupancy expense leverage. Excluding store divestitures, this increase in SG&A expenses is primarily linked to the targeted investments we are making to support each of our four key strategies which have already begun to yield benefits in our sales and gross profit results. While our transformation will require continued investments in areas such as Commercial, e-commerce and global sourcing, management plans to balance increases in fixed and variable SG&A expenses relative to our sales growth.

Operating Income

Operating income for Fiscal 2009 was $454.4 million, or 8.4% of net sales, as compared to $414.9 million, or 8.1% of net sales, in Fiscal 2008, or an increase of 33 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 expenses. The increase in SG&A expenses 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. The Fiscal 2009 increase in our operating income also benefited from the $37.5 million non-cash inventory adjustment, partially offset by the approximately $15.8 million impact from the 53rd week, in Fiscal 2008.

AAP produced operating income of $446.8 million, or 8.6% of net sales, for Fiscal 2009 as compared to $410.7 million, or 8.3% of net sales, in Fiscal 2008. AI generated operating income for Fiscal 2009 of $7.6 million as compared to $4.2 million in Fiscal 2008. AI’s operating income increased primarily due to its positive sales results for the year and leverage of supply chain costs as a percentage of net sales.

Interest Expense

Interest expense for Fiscal 2009 was $23.3 million, or 0.4% of net sales, as compared to $33.7 million, or 0.7% of net sales, in Fiscal 2008. The decrease in interest expense as a percentage of sales is primarily a result of lower outstanding borrowings and increased sales during Fiscal 2009.



Income Taxes

Income tax expense for Fiscal 2009 was $161.3 million, as compared to $142.7 million for Fiscal 2008. Our effective income tax rate was 37.4% and 37.5% for Fiscal 2009 and Fiscal 2008, respectively.

Net Income

Net income was $270.4 million, or $2.83 per diluted share, for Fiscal 2009, as compared to $238.0 million, or $2.49 per diluted share, for Fiscal 2008. As a percentage of net sales, net income for Fiscal 2009 was 5.0%, as compared to 4.6% for Fiscal 2008. The increase in diluted earnings per share was primarily due to growth in our operating income.


Quarterly Consolidated Financial Results (in thousands, except per share data)

   
16-Weeks
   
12-Weeks
   
12-Weeks
   
12-Weeks
   
16-Weeks
   
12-Weeks
   
12-Weeks
   
12-Weeks
 
   
Ended
   
Ended
   
Ended
   
Ended
   
Ended
   
Ended
   
Ended
   
Ended
 
   
4/25/2009
   
7/18/2009
   
10/10/2009
   
1/2/2010
   
4/24/2010
   
7/17/2010
   
10/9/2010
   
1/1/2011
 
Net sales
  $ 1,683,636     $ 1,322,844     $ 1,262,576     $ 1,143,567     $ 1,830,606     $ 1,417,956     $ 1,406,511     $ 1,270,130  
Gross profit
    821,988       652,650       621,459       548,129       910,777       715,268       707,785       627,485  
Net income
    93,585       80,330       61,979       34,479       109,431       100,911       87,598       48,113  
                                                                 
Net income per share:
                                                               
        Basic
  $ 0.99     $ 0.84     $ 0.65     $ 0.37     $ 1.20     $ 1.18     $ 1.04     $ 0.58  
        Diluted
  $ 0.98     $ 0.83     $ 0.65     $ 0.36     $ 1.19     $ 1.16     $ 1.03     $ 0.57  

Liquidity and Capital Resources

Overview of Liquidity

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 and income tax payments. In addition, we have used available funds to repay borrowings under our revolving credit facility and periodically repurchase shares of our 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 January 1, 2011, our cash and cash equivalents balance was $59.2 million, a decrease of $40.8 million compared to January 2, 2010 (the end of Fiscal 2009). This decrease in cash primarily resulted from the use of our available cash from operations and long-term borrowings to purchase property and equipment and repurchase shares of our common stock. Additional discussion of our cash flow results, including the comparison of Fiscal 2010 activity to Fiscal 2009, is set forth in the Analysis of Cash Flows section.

At January 1, 2011, our outstanding indebtedness was $301.8 million, or $97.6 million higher when compared to January 2, 2010, and consisted of borrowings of $298.8 million under our senior unsecured notes, $2.6 million outstanding on an economic development note and $0.4 million outstanding under other financing arrangements. Additionally, we had $92.6 million in letters of credit outstanding, which reduced our total availability under our revolving credit facility to $657.4 million. The letters of credit serve as collateral for our self-insurance policies and our routine purchases of imported merchandise.



Capital Expenditures

Our primary capital requirements have been the funding of our continued new store openings, store relocations, maintenance of existing stores, the construction and upgrading of distribution centers, and the development of both proprietary and purchased information systems. Our capital expenditures were $199.6 million in Fiscal 2010, or $6.7 million more than Fiscal 2009. During Fiscal 2010, we opened 110 AAP stores and 38 AI stores, remodeled 9 AAP stores and relocated 9 AAP and 3 AI stores.

Our future capital requirements will depend in large part on the number of and timing for new stores we open within a given year and the investments we make in information technology and supply chain networks. We anticipate adding approximately 110 to 120 AAP and 10 to 20 AI stores and closing approximately 10 total stores during Fiscal 2011. We expect to relocate and remodel existing stores only in the normal course of business.

We also plan to make continued investments in the maintenance of our existing stores and supply chain network and to invest in new information systems to support our key strategies. In Fiscal 2011, we anticipate that our capital expenditures will be approximately $275.0 million to $300.0 million. The increase in capital expenditures over Fiscal 2010 will be primarily driven by supply chain investments as part of our Superior Availability strategy. These expenditures include a new warehouse management system and costs associated with the completion of our Remington, IN distribution center scheduled to open in late 2011.

Stock Repurchase Program

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

During Fiscal 2010, we repurchased an aggregate of 13.0 million shares of our common stock at a cost of $633.9 million, or an average price of $48.67 per share. Of these, we repurchased 2.7 million shares at a cost of $178.4 million under our $300 million stock repurchase program authorized by our Board of Directors on August 10, 2010, and 10.3 million shares at a cost of $455.5 million under our $500 million stock repurchase program authorized by our Board of Directors on February 16, 2010. At January 1, 2011, we had $121.6 million remaining under the $300 million stock repurchase program.

At January 1, 2011, 0.2 million shares repurchased during Fiscal 2010 at a cost of $15.0 million had not settled.  These shares settled subsequent to January 1, 2011.

Additionally, we repurchased 0.1 million shares of our common stock at an aggregate cost of $3.5 million in connection with the net settlement of shares issued as a result of the vesting of restricted stock.

Subsequent to January 1, 2011, we repurchased 1.9 million shares of our common stock at an aggregate cost of $121.6 million, or an average price of $62.72 per share, which completed the availability under our $300 million stock repurchase program. On February 8, 2011 our Board of Directors authorized a new $500 million stock repurchase program.

Dividend

Our Board of Directors has approved the payment of quarterly dividends of $0.06 per share to stockholders of record since Fiscal 2006. Subsequent to January 1, 2011, our Board of Directors declared a quarterly dividend of $0.06 per share to be paid on April 8, 2011 to all common stockholders of record as of March 25, 2011.

Other Liquidity

During the last two years, we have transitioned certain of our merchandise vendors from a vendor financing program to a customer-managed services arrangement, or vendor program. Under this vendor program, a third party provides an accounts payable tracking system which facilitates the participating suppliers’ ability to finance our payment obligations with designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to participating financial institutions to finance one or more of our payment obligations prior
 
 
28

 
to their scheduled due dates at a discounted price. Our obligations to suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to finance our accounts payable due to them under this arrangement. Our goal in entering into this arrangement is to capture overall supply chain savings in the form of pricing, payment terms or vendor funding, created by facilitating our suppliers’ ability to finance payment obligations at more favorable discount rates, while providing them with greater working capital flexibility.

Any deterioration in the credit markets could adversely impact our ability to secure funding for any of these programs, which would reduce our anticipated savings, including but not limited to, causing us to increase our borrowings under our revolving credit facility.

Analysis of Cash Flows

A summary and analysis of our cash flows for Fiscal 2010, 2009 and 2008 is reflected in the table and following discussion.

   
Fiscal Year
 
   
2010
   
2009
   
2008
 
   
(in millions)
 
Cash flows from operating activities
  $ 666.2     $ 699.7     $ 478.7  
Cash flows from investing activities
    (199.4 )     (185.5 )     (181.6 )
Cash flows from financing activities
    (507.6 )     (451.5 )     (274.4 )
Net (decrease) increase in cash and
                       
   cash equivalents
  $ (40.8 )   $ 62.7     $ 22.7  

Operating Activities

For Fiscal 2010, net cash provided by operating activities decreased $33.5 million to $666.2 million. This net decrease in operating cash flow was driven primarily by:

·  
a $72.3 million decrease in cash flows from inventory, net of accounts payable, primarily due to the Fiscal 2009 addition of certain vendors to our vendor program partially offset by an increase in our accounts payable ratio in Fiscal 2010;
·  
a $26.1 million decrease in deferred income taxes; and
·  
a $21.2 million decrease in cash flows resulting from routine fluctuations in other working capital.
 
Partially offsetting the decrease in cash flows was an increase in net income of $75.7 million.

For Fiscal 2009, net cash provided by operating activities increased $221.0 million over the prior year to $699.7 million. This net increase in operating cash was driven primarily by:

·  
a $32.3 million increase in net income, $23.6 million of which represented a non-cash inventory adjustment in Fiscal 2008 (net of tax);
·  
a $69.3 million increase in deferred income taxes;
·  
a $194.5 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 partially offset by the reduction of financed vendor accounts payable included under Financing Activities as a result of our vendor program transition); and
·  
a $56.6 million decrease in cash flows resulting from an increase in other working capital, including a $64.0 million decrease in cash flows resulting from the timing of the payment of accrued operating expenses.



Investing Activities

For Fiscal 2010, net cash used in investing activities increased by $13.8 million to $199.4 million. The increase in cash used was primarily due to an increase in new store development expenditures, information technology investments, and a decrease in proceeds from sales of property and equipment.

For Fiscal 2009, net cash used in investing activities increased by $3.9 million over the prior year to $185.5 million. The increase in cash used was primarily due to an increase in routine spending on our existing stores and information technology investments, partially offset by fewer stores opened and the timing of store development expenditures.

Financing Activities

For Fiscal 2010, net cash used in financing activities increased by $56.1 million to $507.6 million. Cash used in financing activities increased as result of a $522.4 million increase in the repurchase of common stock under our stock repurchase programs. This was partially offset by a decrease in cash provided by financing activities as a result of:

·  
a decrease of $345.7 million in net debt payments, comprised of $251.5 million of net debt repayments made in Fiscal 2009 and payoff of our $200.0 million term loan in Fiscal 2010 partially offset by proceeds from the issuance of $294.2 million in senior unsecured notes in Fiscal 2010, net of debt related costs; and
·  
a $103.9 million decrease in cash flow from financed vendor accounts payable (is primarily offset in operating activities above as a result of the our vendor program transition in Fiscal 2009).

For Fiscal 2009, net cash used in financing activities increased by $177.1 million over the prior year to $451.5 million. Cash used in financing activities increased as result of:

·  
a $202.0 million increase in net debt repayments, primarily under our revolving credit facility; and
·  
a $87.1 million decrease in financed vendor accounts payable driven by the transition of our vendors from our vendor financing program to our vendor program.

This increase was partially offset by a decrease in cash used in financing activities as a result of a decrease of $119.4 million in repurchases of common stock under our stock repurchase program.

Long Term Debt

Senior Unsecured Notes

On April 29, 2010, we sold $300 million aggregate principal amount of 5.75% senior unsecured notes due May 1, 2020, or the Notes, at a public offering price of 99.587% of the principal amount per note. We served as the issuer of the Notes with each of our domestic subsidiaries serving as subsidiary guarantors. The terms of the Notes are governed by an indenture and supplemental indenture (which we refer to collectively as the Indenture), dated as of April 29, 2010, among us, the subsidiary guarantors and Wells Fargo Bank, National Association, as Trustee.

The net proceeds from the offering of the Notes were approximately $294.2 million, after deducting underwriting discounts and commissions and offering expenses of $4.6 million payable by us.  We used the net proceeds from this offering to repay indebtedness outstanding under our revolving credit facility and term loan. Amounts repaid under our revolving credit facility may be reborrowed from time to time for operational purposes, working capital needs, capital expenditures and other general corporate purposes. As of January 1, 2011, we had $298.8 million outstanding under our Notes.

The Notes bear interest at a rate of 5.75% per year payable semi-annually in arrears on May 1 and November 1 of each year, commencing on November 1, 2010. We may redeem some or all of the Notes at any time or from time to time, at the redemption price described in the Indenture. In addition, in the event of a Change of Control Triggering Event (as defined in the Indenture), we will be required to offer to repurchase the Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. The Notes are currently fully and unconditionally guaranteed, jointly and severally, on an unsubordinated and unsecured basis by
 
 
30

 
each of the subsidiary guarantors. We will be permitted to release guarantees without the consent of holders of the Notes under the circumstances described in the Indenture.

The Indenture contains customary provisions for events of default including for (i) failure to pay principal or interest when due and payable, (ii) failure to comply with covenants or agreements in the Indenture or the Notes and failure to cure or obtain a waiver of such default upon notice, (iii) a default under any debt for money borrowed by us or any of our subsidiaries that results in acceleration of the maturity of such debt, or failure to pay any such debt within any applicable grace period after final stated maturity, in an aggregate amount greater than $25.0 million without such debt having been discharged or acceleration having been rescinded or annulled within 10 days after receipt by us of notice of the default by the Trustee or holders of not less than 25% in aggregate principal amount of the Notes then outstanding, and (iv) events of bankruptcy, insolvency or reorganization affecting us and certain of our subsidiaries. In the case of an event of default, the principal amount of the Notes plus accrued and unpaid interest may be accelerated. The Indenture also contains covenants limiting the ability of us and our subsidiaries to incur debt secured by liens and to enter into sale and lease back transactions.

Bank Debt

We have a $750 million unsecured five-year revolving credit facility with our wholly-owned subsidiary, Advance Stores Company, Incorporated, or Stores, serving as the borrower. In connection with the offering of the Notes, we also amended our revolving credit facility to add all of our domestic subsidiaries as guarantors. The subsidiary guarantees related to our revolving credit facility and Notes are full and unconditional and joint and several. 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 matures on October 5, 2011.

As of January 1, 2011, we had no amount outstanding under our revolving credit facility. We had letters of credit outstanding of $92.6 million, which reduced the availability under the revolving credit facility to $657.4 million. (The letters of credit generally have a term of one year or less.) A commitment fee is charged on the unused portion of the revolving credit facility, payable in arrears. The current commitment fee rate is 0.125% per annum.

Subsequent to January 1, 2011, we borrowed against our revolving credit facility due to the repurchases of our common stock and seasonality of our business. As of February 26, 2011 we had $145.0 million outstanding under our revolving credit facility. Our remaining availability under our revolving credit facility was $512.4 million.

Our revolving credit facility contains 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 also required to comply with financial covenants with respect to a maximum leverage ratio and a minimum consolidated coverage ratio. We were in compliance with these covenants at January 1, 2011 and January 2, 2010. Our revolving credit facility also provides for customary events of default, covenant defaults and cross-defaults to our other material indebtedness.

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 0.625% and 0.0% per annum for the adjusted LIBOR and alternate base rate borrowings, respectively. Under the terms of the revolving credit facility, the interest rate and commitment fee are based on our credit rating.

As of January 1, 2011, we had fully repaid all amounts which had been outstanding under our unsecured four-year term loan with proceeds from the above mentioned Notes offering.



Other

As of January 1, 2011, we had $3.0 million outstanding under an economic development note and other financing arrangements.

As of January 1, 2011, we had a credit rating from Standard & Poor’s of BBB- and from Moody’s Investor Service of Baa3. The current outlooks by Standard & Poor’s and Moody’s are both stable. The current pricing grid used to determine our borrowing rate under our revolving credit facility is based on our credit ratings. If these credit ratings decline, our interest rate on outstanding balances may increase. Conversely, if these credit ratings improve, our interest rate may decrease. In addition, if our credit ratings decline, our access to financing may become more limited.

Off-Balance-Sheet Arrangements

As of January 1, 2011, we had no off-balance-sheet arrangements as defined in Regulation S-K Item 303 of the SEC regulations. We include other off-balance-sheet arrangements in our contractual obligations table including operating lease payments, interest payments on our credit facility and letters of credit outstanding.

Contractual Obligations

In addition to our Notes and revolving credit facility, we utilize operating leases as another source of financing. The amounts payable under these operating leases are included in our schedule of contractual obligations. Our future contractual obligations related to long-term debt, operating leases and other contractual obligations at January 1, 2011 were as follows:

         
Payments Due by Period
 
         
Less than
               
More Than
 
Contractual Obligations
 
Total
   
1 Year
   
1 - 3 Years
   
3 - 5 Years
   
5 Years
 
    (in thousands)  
Long-term debt (1)
  $ 301,824     $ 973     $ 1,502     $ 525     $ 298,824  
Interest payments (2)
    182,028       26,689       34,577       34,512       86,250  
Operating leases(3)
    2,089,874       297,315       505,253       399,598       887,708  
Other long-term liabilities(4)
    165,943       -       -       -       -  
    $ 2,739,669     $ 324,977     $ 541,332     $ 434,635     $ 1,272,782  

Note: For additional information refer to Note 6, Long-term Debt; Note 14, Income Taxes; Note 15, Lease Commitments; Note 16, Store Closures and Impairment; Note 17, Contingencies; and Note 18, Benefit Plans, in the Notes to Consolidated Financial Statements, included in Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K.

(1)  
Long-term debt represents primarily the principal amount due under our 5.75% Notes, which become due in Fiscal 2020.
(2)  
Interest payments in Fiscal 2011 include $9,357 in net payments related to our interest rate swaps which mature in October 2011.
(3)  
We lease certain store locations, distribution centers, office space, equipment and vehicles. Our property leases generally contain renewal and escalation clauses and other concessions. These provisions are considered in our calculation of our minimum lease payments which are recognized as expense on a straight-line basis over the applicable lease term. Any lease payments that are based upon an existing index or rate are included in our minimum lease payment calculations.
(4)  
Primarily includes deferred income taxes,  self-insurance liabilities, unrecognized income tax benefits, closed store liabilities and obligations for employee benefit plans for which no contractual payment schedule exists and we expect the payments to occur beyond 12 months from January 1, 2011. Accordingly, the related balances have not been reflected in the "Payments Due by Period" section of the table.


 
32


Critical Accounting Policies
 
 
Our financial statements have been prepared in accordance with accounting policies 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.

The preparation of our financial statements included the following significant estimates and exercise of judgment.

Vendor Incentives

We receive 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 was $72.0 million and $46.3 million at January 1, 2011 and January 2, 2010, respectively.

Similarly, we recognize 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. Our margins could be impacted positively or negatively if actual purchases or results from any one year differ from our 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. Management's estimate of the portion of deferred revenue that will be realized within one year of the balance sheet
date is included in Other current liabilities. Earned amounts that are receivable from vendors are included in Receivables, net except for that portion expected to be received after one year, which is included in Other assets, net.

Inventory Reserves

Our inventory reserves consist of reserves for projected losses related to shrink and for potentially excess and obsolete inventory. An increase (or decrease) to our inventory reserves is recorded as an increase (or decrease) to our cost of sales. Our inventory reserves for Fiscal 2010, 2009 and 2008 were $18.2 million, $28.5 million and $62.9 million, respectively.

Shrink may occur due to theft, loss or inaccurate records for the receipt of merchandise, among other things.
We establish reserves for estimated store shrink based on results of completed independent physical inventories, results from other targeted inventory counts and historical and current loss trends. We perform cycle counts in the distribution facilities throughout the year to measure actual shrink and to estimate reserve requirements.  If estimates of our shrink reserves are inaccurate based on the inventory counts, we may be exposed to losses or gains that could be material.
 
We establish 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. We also provide reserves when less than full credit is expected from a vendor or when liquidating product will result in retail prices below recorded costs. At the end of Fiscal 2008, we reviewed our inventory productivity and changed our inventory management approach for slow moving inventory. As a result, we increased our reserve for excess and obsolete inventories by $34.1
 
 
33

 
million, and a related LIFO and warehousing cost impact of $3.4 million. This non-cash expense was presented as an increase to cost of goods sold in our Fiscal 2008 consolidated statement of operations. Following this change in inventory management approach, we have been more effectively managing slow moving inventory, and we intend to continue to utilize vendor return privileges when necessary.

Our total inventory reserves decreased by $10.3 million in Fiscal 2010 primarily due to the continued development of our physical inventory program combined with the increased emphasis on counting specific product categories to drive improved on-hand accuracy. The decrease in our inventory reserves in Fiscal 2009 was primarily related to the entire utilization of our reserve for slow moving inventory established in Fiscal 2008 in connection with the change in approach for slow moving inventory. Future changes by vendors in their policies or willingness to accept returns of excess inventory, changes in our inventory management approach for excess and obsolete inventory or failure by us to effectively manage the lifecycle of our inventory could require us to revise our estimates of required reserves and result in a negative impact on our consolidated statement of operations. A 10% difference in actual inventory reserves at January 1, 2011 would have affected net income by approximately $1.1 million for the fiscal year ended January 1, 2011.

Warranty Reserves

We offer limited warranties on certain products that range from 30 days to lifetime warranties; the warranty obligation on the majority of merchandise sold by us with a manufacturer’s warranty is borne by our vendors.  However, we have 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 us primarily includes batteries but may also include other parts such as brakes and shocks.  We estimate and record a reserve for future warranty claims at the time of sale based on the historical return experience of the respective product sold. If claims experience differs from historical levels, revisions in our estimates may be required, which could have an impact on our consolidated statement of operations. To the extent vendors provide upfront allowances in lieu of accepting the obligation for warranty claims and the allowance is in excess of the related warranty expense, the excess is recorded as a reduction to cost of sales.

A 10% change in the warranty reserves at January 1, 2011 would have affected net income by approximately $2.3 million for the fiscal year ended January 1, 2011.

Self-Insurance Reserves

We are self-insured for general and automobile liability, workers' compensation and the health care claims of our Team Members, although we maintain stop-loss coverage with third-party insurers to limit our total liability exposure. Our self-insurance program started in 2001. Our self-insurance reserves for Fiscal 2010, 2009 and 2008 were $97.3 million, $93.7 million and $90.6 million, respectively. Generally, claims for automobile and general liability and workers’ compensation take several years to settle. The increase in our total self-insurance reserves has remained consistent over the last two years and is reflective of our continued growth, including an increase in total stores, team members and Commercial delivery vehicles.

Our self-insurance reserves consist of the estimated exposure for claims filed, claims incurred but not yet reported and projected future claims and is established using actuarial methods followed in the insurance industry and our historical claims experience. Specific factors include, but are not limited to, assumptions about health care costs, the severity of accidents and the incidence of illness and the average size of claims.

Effective January 1, 2011, we classified $50.3 million of our self-insurance liability as long-term because the timing of future payments is now more predictable based on the historical patterns and maturity of the program and is relied upon in determining the current portion of these liabilities. While we do not expect the amounts ultimately paid to differ significantly from our estimates, our self-insurance reserves and corresponding SG&A could be affected if future claim experience differs significantly from historical trends and actuarial assumptions. A 10% change in our self-insurance liabilities at January 1, 2011 would have affected net income by approximately $6.0 million for the fiscal year ended January 1, 2011.



Goodwill and Intangible Assets

We evaluate goodwill and indefinite-lived intangibles for impairment annually during our fiscal fourth quarter or whenever events or changes in circumstances indicate the carrying value of the goodwill or other intangible asset may not be recoverable. We complete our impairment evaluation by combining information from our internal valuation analyses by reporting units, considering other publicly available market information and using an independent valuation firm.  We determine fair value using widely accepted valuation techniques, including discounted cash flows and market multiple analyses. These types of analyses contain uncertainties because they require management to make assumptions as a marketplace participant would and to apply judgment to estimate industry economic factors and the profitability of future business strategies of our company and our reporting units. These assumptions and estimates are a major component of the derived fair value of our reporting units.  The margin of calculated fair value over the respective carrying value of our reporting units may not be indicative of the total company due to differences in the individual reporting units, including but not limited to size and projected growth.

It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as our future expectations. We have not made any material changes in the accounting methodology we use to assess impairment loss during the past three fiscal years. We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material. A 10% change in our total goodwill and intangible assets outstanding at January 1, 2011 would have affected net income by approximately $3.7 million for the fiscal year ended January 1, 2011.

Tax Reserves

The determination of our income tax liabilities is based upon the tax law, codes, regulations, pronouncements and court cases for the taxing jurisdictions in which we do business. Our income tax returns are periodically examined by those jurisdictions. These examinations include, among other things, auditing our filing positions, the timing of deductions and allocation of income among the various jurisdictions. At any particular time, multiple years are subject to examination by various taxing authorities.

In evaluating our income tax positions, we record a reserve when a tax benefit cannot be recognized and measured in accordance with the authoritative guidance on uncertain tax positions. These tax reserves are adjusted in the period actual developments give rise to such change. Those developments could be, but are not limited to: settlement of tax audits, expiration of the statute of limitations, the evolution of tax law, codes, regulations and court cases, along with varying applications of tax policy and administration within those jurisdictions.

These tax reserves contain uncertainties because management is required to make assumptions and apply judgment to estimate exposures associated with our various filing positions. Although management believes that the judgments and estimates are reasonable, actual results could differ and we may be exposed to gains or losses that could be material. To the extent that actual results differ from our estimates, the effective tax rate in any particular period could be materially affected. Favorable tax developments would be recognized as a reduction in our effective tax rate in the period of resolution. Unfavorable tax developments would require an increase in our effective tax rate and a possible use of cash in the period of resolution. A 10% change in the tax reserves at January 1, 2011 would have affected net income by approximately $1.2 million for the fiscal year ended January 1, 2011.

New Accounting Pronouncements

For a description of recently announced accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see New Accounting Pronouncements in Note 2 to the Consolidated Financial Statements in this Report on Form 10-K.



Item 7A. Quantitative and Qualitative Disclosures about Market Risks.

On April 29, 2010, we issued $300 million of senior unsecured notes with an interest rate of 5.75% due in 2020 and repaid $275 million outstanding under our revolving credit facility and term loan with the proceeds from the notes offering. Our revolving credit facility currently remains in place and matures in October 2011. Therefore, we may be exposed to cash flow risk due to changes in LIBOR in the event we borrow under our revolving credit facility.

Historically we have used interest rate swaps to mitigate the impact that movements in LIBOR would have on the interest from our bank debt. As we have paid off our bank debt, these interest rate swaps now present their own exposure to movements in LIBOR.
 
The table below presents principal cash flows and related weighted average interest rates on our interest rate swaps outstanding at January 1, 2011, by expected maturity dates. The table includes the impact of the anticipated average pay and receive rates of our interest rate swaps through their maturity dates. Expected maturity dates approximate contract terms. Weighted average variable rates are based on implied forward rates in the yield curve at January 1, 2011. Implied forward rates should not be considered a predictor of actual future interest rates.

                                             
Fair
 
   
Fiscal
   
Fiscal
   
Fiscal
   
Fiscal
   
Fiscal
               
Market
 
   
2011
   
2012
   
2013
   
2014
   
2015
   
Thereafter
   
Total
   
Liability
 
   
(dollars in thousands)
 
                                                 
Interest rate swap:
                                               
                                                 
Variable to fixed(1)
  $ 275,000     $ -     $ -     $ -       -       -       275,000     $ 9,321  
Weighted average pay rate
    4.4 %     -       -       -       -       -       4.4 %     -  
Weighted average receive rate
    -       -       -       -       -       -       -       -  

 (1) Amounts presented may not be outstanding for the entire year.

Item 8. Financial Statements and Supplementary Data.

See financial statements included in Item 15 “Exhibits, Financial Statement Schedules” of this annual report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.



Item 9A. 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.

Management's Report on Internal Control over Financial Reporting

 Management’s Report on Internal Control over Financial Reporting is set forth in Part IV, Item 15 of this annual report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended January 1, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.



PART III

Item 10.  Directors, Executive Officers and Corporate Governance.

For a discussion of our directors, executive officers and corporate governance, see the information set forth in the sections entitled “Proposal No. 1 – Election of Directors,” “Corporate Governance,” “Meetings and Committees of the Board,” “Information Concerning Our Executive Officers,” “Audit Committee Report,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our proxy statement for the 2011 annual meeting of stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended January 1, 2011 (the “2011 Proxy Statement”), which is incorporated herein by reference.

Item 11. Executive Compensation.

See the information set forth in the sections entitled “Meetings and Committees of the Board – Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report,” “Compensation Discussion and Analysis,” “Additional Information Regarding Executive Compensation” and “Non-Management Director Compensation” in the 2011 Proxy Statement, which is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
See the information set forth in the sections entitled “Equity Compensation Plan Information” and "Security Ownership of Certain Beneficial Owners and Management" in the 2011 Proxy Statement, which is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

See the information set forth in the sections entitled "Related-Party Transactions,” “Director Independence,” and “Committees of the Board” in the 2011 Proxy Statement, which is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

See the information set forth in the section entitled “2010 and 2009 Audit Fees” in the 2011 Proxy Statement, which is incorporated herein by reference.



 

Item 15.   Exhibits, Financial Statement Schedules.
     
 
 
(a) (1)  Financial Statements
 
       
 
Audited Consolidated Financial Statements of Advance Auto Parts, Inc. and Subsidiaries for the years ended January 1, 2011, January 2, 2010 and January 3, 2009:
 
F-1
 
F-2
 
F-4
 
F-5
 
F-6
  Consolidated Statements of Cash Flows
F-7
  Notes to the Consolidated Financial Statements
F-9
       
  (2)  Financial Statement Schedules
 
       
  Report of Independent Registered Public Accounting Firm 
F-42
  Schedule I - Condensed Financial Information of the Registrant
F-43
  Schedule II - Valuation and Qualifying Accounts 
F-49
       
  (3)  Exhibits
 
       
  The Exhibit Index following the signatures for this report is incorporated herein by reference.  



MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING


Management of Advance Auto Parts, Inc. and its subsidiaries (collectively the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13(a) – 15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal financial officer, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

As of January 1, 2011, management, including the Company’s principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of January 1, 2011 is effective. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Deloitte & Touche LLP, the Company’s independent registered public accounting firm who audited the Company’s consolidated financial statements, has issued an attestation report on the Company’s internal control over financial reporting as of January 1, 2011 which is included on page F-3 herein.
 

 

/s/ Darren R. Jackson    /s/ Michael A. Norona  
Darren R. Jackson   Michael A. Norona  
Chief Executive Officer and Director
Executive Vice President and Chief Financial Officer
    
March 1, 2011



 
F-1


 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Advance Auto Parts, Inc. and Subsidiaries
Roanoke, Virginia

We have audited the accompanying consolidated balance sheets of Advance Auto Parts, Inc. and subsidiaries (the "Company") as of January 1, 2011 and January 2, 2010, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended January 1, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Advance Auto Parts, Inc. and subsidiaries as of January 1, 2011 and January 2, 2010, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 2011, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of January 1, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2011 expressed an unqualified opinion on the Company's internal control over financial reporting.


/s/ Deloitte & Touche LLP

Richmond, VA
March 1, 2011



 
F-2



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Advance Auto Parts, Inc. and Subsidiaries
Roanoke, Virginia

We have audited the internal control over financial reporting of Advance Auto Parts, Inc. and subsidiaries (the "Company") as of January 1, 2011 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended January 1, 2011 of the Company and our report dated March 1, 2011 expressed an unqualified opinion on those financial statements.


/s/ Deloitte & Touche LLP
 
Richmond, VA
March 1, 2011
 
 
 
F-3

 
ADVANCE AUTO PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 1, 2011 and January 2, 2010
(in thousands, except per share data)
 
   
January 1,
   
January 2,
 
Assets
 
2011
   
2010
 
             
Current assets:
           
Cash and cash equivalents
  $ 59,209     $ 100,018  
Receivables, net
    124,227       92,560  
Inventories, net
    1,863,870