AAP_10K_12.29.2012
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 December 29, 2012
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
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ADVANCE AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
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Delaware (State or other jurisdiction of incorporation or organization) | 54-2049910 (I.R.S. Employer Identification No.) |
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5008 Airport Road Roanoke, VA (Address of Principal Executive Offices) | 24012 (Zip Code)
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(540) 362-4911
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act
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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 Registration S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration 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 the 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 definition of “large accelerated filer,” "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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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 13, 2012, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the 72,989,206 shares of Common Stock held by non-affiliates of the registrant was $5,217,268,445, based on the last sales price of the Common Stock on July 13, 2012, as reported by the New York Stock Exchange.
As of February 22, 2013, the registrant had outstanding 73,655,224 shares of Common Stock, par value $0.0001 per share (the only class of common stock of the registrant outstanding).
Documents Incorporated by Reference:
Portions of the definitive proxy statement of the registrant to be filed within 120 days of December 29, 2012, pursuant to Regulation 14A under the Securities Exchange Act of 1934, for the 2013 Annual Meeting of Stockholders to be held on May 22, 2013, are incorporated by reference into Part III.
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:
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• | a decrease in demand for our products; |
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• | competitive pricing and other competitive pressures; |
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• | our ability to implement our business strategy; |
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• | 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; |
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• | our dependence on our suppliers to provide us with products that comply with safety and quality standards; |
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• | our ability to attract and retain qualified employees, or Team Members; |
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• | the potential for fluctuations in the market price of our common stock and the resulting exposure to securities class action litigation; |
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• | deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, higher tax rates or uncertain credit markets could have a negative impact on our business, financial condition, results of operations and cash flows; |
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• | 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; |
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• | a security breach or other cyber security incident; |
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• | business interruptions due to the occurrence of natural disasters, extended periods of unfavorable weather, computer system malfunction, wars or acts of terrorism; |
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• | the impact of global climate change or legal and regulatory responses to such change; and |
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• | 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 (the next 53 week fiscal year is 2014).
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. Our Commercial customers consist primarily of delivery customers for whom we deliver product from our store locations to our Commercial customers’ places of business, including independent garages, service stations and auto dealers.
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. At December 29, 2012, the end of our 2012 fiscal year, or Fiscal 2012, we operated 3,794 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, or AI. The AAP segment is comprised of our store operations, which operate under the trade names “Advance Auto Parts” and “Advance Discount Auto Parts.” The AI segment consists solely of the operations of Autopart International, Inc. which operates under the “Autopart International” trade name.
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 20, 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 December 29, 2012, we operated 3,576 AAP stores throughout 39 states in the Northeastern, Mid-Atlantic, Southeastern and Midwestern (inclusive of South Central) regions of the United States, Puerto Rico and the Virgin Islands. 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. Through our integrated operating approach, we serve our DIY and Commercial customers from our store locations and online at www.AdvanceAutoParts.com. 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 Commercial customers can 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 8,000 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 8:00 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 19,000 SKUs, generally consisting of a custom mix of product based on the stores' respective market. Our stores also have access to an additional assortment of 115,000 SKUs for same-day or next-day delivery from one of our 339 HUB stores or our network of 22 Parts Delivered Quickly, or PDQ®, facilities. Additionally, our customers have access to over 483,000 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 part®,' through our Superior Availability and Service Leadership 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:
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• | Parts, including alternators, batteries, belts and hoses, chassis parts, clutches, engines and engine parts, ignition parts, lighting, radiators, starters, spark plugs and wires, transmissions and water pumps; |
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• | Accessories, including floor mats, mirrors, vent shades, MP3 and cell phone accessories, and seat and steering wheel covers; |
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• | Chemicals, including antifreeze, brake and power steering fluid, freon, fuel additives, windshield washer fluid and car washes and waxes; |
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• | Oil, transmission fluid and other automotive petroleum products; and |
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• | 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 based on the demographics in each store's geographic area.
We also provide a variety of services free of charge to our customers including:
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• | Battery & wiper installation; |
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• | Check engine light reading where allowed by law; |
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• | Electrical system testing, including batteries, starters, alternators and sensors; |
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• | Oil and battery recycling; and |
Our stores are 100% company operated and are divided into four 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 35% of our AAP sales in Fiscal 2012. 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.
Since 2008, we have concentrated a significant amount of our investments 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, and have increased the number of parts professionals, delivery trucks and other support services to serve those customers. Most recently, we have added other offerings to our Commercial customers, including online training solutions and MotoLogic,® a fully searchable, diagnostic and repair resource and DriverSide,® an online marketing suite, both of which are available on a subscription basis. 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 December 29, 2012, 3,266 AAP stores, or 91% of total AAP stores, had Commercial delivery programs.
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, have 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.
Our 3,576 AAP stores were located in the following states and territories at December 29, 2012:
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Location | | Number of Stores | | Location | | Number of Stores | | Location | | Number of Stores |
Alabama | | 121 |
| | Maryland | | 88 |
| | Pennsylvania | | 186 |
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Arkansas | | 28 |
| | Massachusetts | | 70 |
| | Puerto Rico | | 25 |
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Colorado | | 51 |
| | Michigan | | 114 |
| | Rhode Island | | 13 |
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Connecticut | | 43 |
| | Minnesota | | 16 |
| | South Carolina | | 132 |
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Delaware | | 11 |
| | Mississippi | | 57 |
| | South Dakota | | 7 |
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Florida | | 472 |
| | Missouri | | 45 |
| | Tennessee | | 138 |
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Georgia | | 239 |
| | Nebraska | | 23 |
| | Texas | | 174 |
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Illinois | | 120 |
| | New Hampshire | | 17 |
| | Vermont | | 8 |
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Indiana | | 108 |
| | New Jersey | | 77 |
| | Virgin Islands | | 1 |
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Iowa | | 27 |
| | New Mexico | | 1 |
| | Virginia | | 185 |
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Kansas | | 25 |
| | New York | | 151 |
| | West Virginia | | 71 |
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Kentucky | | 102 |
| | North Carolina | | 245 |
| | Wisconsin | | 60 |
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Louisiana | | 62 |
| | Ohio | | 215 |
| | Wyoming | | 3 |
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Maine | | 14 |
| | Oklahoma | | 31 |
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The following table sets forth information concerning increases in the total number of our AAP stores during the past five years:
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| 2012 | | 2011 | | 2010 | | 2009 | | 2008 |
Beginning Stores | 3,460 |
| | 3,369 |
| | 3,264 |
| | 3,243 |
| | 3,153 |
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New Stores (1) | 116 |
| | 95 |
| | 110 |
| | 75 |
| | 109 |
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Stores Closed | — |
| | (4 | ) | | (5 | ) | | (54 | ) | | (19 | ) |
Ending Stores | 3,576 |
| | 3,460 |
| | 3,369 |
| | 3,264 |
| | 3,243 |
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(1) | Does not include stores that opened as relocations of previously existing stores within the same general market area or substantial renovations of stores. |
Store Technology. Our store-based information systems are comprised of a proprietary and integrated Point of Sale, electronic parts catalog, or EPC, and store-level inventory management system (collectively "store system"). Information maintained by our store system is used to formulate pricing, marketing and merchandising strategies and to replenish inventory accurately and rapidly. Our fully integrated system 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 store system provides real-time inventory tracking at the store level allowing store Team Members to 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. If a hard-to-find part or accessory is not available at one of our stores, the store system can determine whether the part is carried and in-stock through our HUB or PDQ® networks or can be ordered directly from one of our vendors. Available parts and accessories are then ordered electronically from another store, HUB, PDQ® or directly from the vendor with immediate confirmation of price, availability and estimated delivery time.
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. We also support our store operations with additional proprietary systems and customer driven labor scheduling capabilities. 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. We plan to start rolling out a new and enhanced EPC in Fiscal 2013 which is expected to simplify and improve the customer experience. Among the improvements is a more efficient way to systematically identify add-on sales to ensure our customers have what they need to complete their automotive repair project.
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:
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• | Store support center in Roanoke, Virginia; |
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• | Regional office in Minneapolis, Minnesota; and |
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• | 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 2012, we purchased merchandise from approximately 450 vendors, with no single vendor accounting for more than 9% 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 where we manage the mix of our product offerings to meet customer demand. 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 productivity.
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.
During 2012 we opened our Remington, IN distribution center. This distribution center will provide needed capacity to support our growth and product availability initiatives. It incorporates our new warehouse management system, or WMS, and state of the art order processing technology which, in addition to the features below, will allow us to provide daily replenishment to many of the stores served by Remington. Including the Remington facility, we operate nine AAP distribution centers. All of these distribution centers are equipped with a WMS which provides real-time inventory tracking through the processes of receiving, picking, shipping and replenishing inventory at our distribution centers. The WMS, integrated with material handling equipment, 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 to further increase the efficient utilization of our distribution capacity including planning for the roll-out of the advanced technology used at the Remington facility to other facilities in our supply chain network.
Store inventories are replenished from our nine distribution centers. We utilize reputable dedicated carriers to ship product from our distribution centers to our stores. In addition to a store's normal inventory assortment, we currently offer approximately 83,000 SKUs to support all of our retail stores via our 22 stand-alone PDQ® warehouses and/or our nine distribution centers (all of which stock PDQ® items). Stores have visibility, through our EPC system, to inventory in their respective PDQ® warehouses and distribution centers as well as facilities throughout the Company and can place orders to these facilities through an online ordering system. 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 32,000 less common SKUs which are available to our stores within the HUB stores' service area on a same-day or next-day basis.
Marketing & Advertising. Our marketing and advertising program is designed to drive brand awareness and store traffic by positioning the Advance Auto Parts brand as the service leader in the aftermarket auto parts category. We strive to exceed our customers' expectations through our free and value-added services, extensive parts assortment and quality merchandise offerings.
The 'Service is our best part®' campaign was developed based on extensive research with our customers and Team Members and has become the Company's promise which has been embraced by each of our 55,000 Team Members. The campaign targets core DIY and Commercial customers and emphasizes our commitment to provide market-leading service to our customers. The campaign is built around a multi-channel marketing communication plan which brings together radio, direct marketing and digital marketing. The plan is supported by in-store and event signage as well as mobile and social media. We also use Spanish-language television, radio and outdoor advertising to reach our Latino 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. We are the title sponsor of the show and as such, the Advance brand 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, Advance also sponsors various other grass-roots level events intended to positively impact the individual communities we serve, including Latino and other ethnic communities, and to drive awareness and repeated store visits.
AI Segment
AI's business primarily serves the Commercial market, with an emphasis on parts for imported cars, from its store locations located primarily throughout the Northeastern, Mid-Atlantic and Southeastern regions of the United States. 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 premium parts, expert 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 30,000 SKUs through routine replenishment from its supply chain with access to an additional 100,000 to 120,000 SKUs through local sourcing networks.
AI has significantly increased its store count since our acquisition of AI in September 2005. At December 29, 2012, we operated 218 stores under the “Autopart International” trade name in the following states:
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Location | | Number of Stores | | Location | | Number of Stores | | Location | | Number of Stores |
Alabama | | 1 |
| | Maryland | | 12 |
| | Ohio | | 2 |
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Connecticut | | 17 |
| | Massachusetts | | 31 |
| | Pennsylvania | | 21 |
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Delaware | | 1 |
| | North Carolina | | 4 |
| | Rhode Island | | 4 |
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DC | | 1 |
| | New Hampshire | | 8 |
| | South Carolina | | 1 |
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Florida | | 47 |
| | New Jersey | | 18 |
| | Vermont | | 1 |
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Georgia | | 4 |
| | New York | | 30 |
| | Virginia | | 11 |
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Maine | | 4 |
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The following table sets forth information concerning increases in the total number of our AI stores:
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| 2012 | | 2011 | | 2010 | | 2009 | | 2008 |
Beginning Stores | 202 |
| | 194 |
| | 156 |
| | 125 |
| | 108 |
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New Stores | 21 |
| | 9 |
| | 38 |
| | 32 |
| | 18 |
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Stores Closed | (5 | ) | | (1 | ) | | — |
| | (1 | ) | | (1 | ) |
Ending Stores | 218 |
| | 202 |
| | 194 |
| | 156 |
| | 125 |
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Seasonality
Our business is somewhat seasonal in nature, with the highest sales usually 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 22, 2013, we employed approximately 31,000 full-time Team Members and approximately 24,000 part-time Team Members. Our workforce consisted of 90% of our Team Members employed in store-level operations, 6% employed in distribution and 4% employed in our corporate offices. We have never experienced any labor disruption. 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,” “Autopart International,” “DriverSide,” “MotoLogic” and “Service is our best part,” 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, (v) automobile dealers that supply parts and (vi) internet-based parts providers. 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 collection, transportation and recycling of automotive lead-acid batteries, used automotive oil and other recyclable items, 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, used automotive oil or other recyclable items onto our properties. We currently provide collection and recycling programs for used lead-acid batteries, used oil and other recyclable items at substantially all of our stores as a service to our customers. Pursuant to agreements with third party vendors, lead-acid batteries, used oil and other recyclable items 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. Our third party vendors 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, used oil and other recyclable items 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 and clean up of released hazardous substances have 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 number and average age of vehicles being driven, because the majority of vehicles that are seven years old and older are generally no longer covered under the manufacturers' warranties and tend to need maintenance and repair. If the number and average age of vehicles being driven were to decrease it would negatively impact demand for our products. |
| |
• | the economy, because during periods of declining economic conditions, 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; |
| |
• | the weather, because milder weather conditions may lower the failure rates of automobile parts while extended periods of rain and winter precipitation may cause our customers to defer elective maintenance and repair of their vehicles; |
| |
• | 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, which may be affected by gas prices and other factors, decreases the need for maintenance and repair (while higher miles driven increases the need); |
| |
• | technological advances and the increase in quality of vehicles manufactured, because vehicles that need less frequent maintenance and have low part failure rates will require less frequent repairs using aftermarket parts; |
| |
• | 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; 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 a majority of 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, (v) automobile dealers that supply parts and (vi) internet-based parts providers. 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, more favorable vendor relationships, 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 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, expertise, consistent execution 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, cash flows and liquidity.
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, cash flows and liquidity 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 and/or sourced 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 in the last ten years from 2,435 stores at the end of Fiscal 2002 to 3,794 stores at December 29, 2012. 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. As we open more stores it becomes more critical that we have consistent execution across our entire store chain. 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 desirable 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.
Acquisition Integration
On December 31, 2012, we acquired B.W.P. Distributors, Inc. Strategic acquisitions have been and may continue to be an element of our growth strategy in the future. Acquisitions involve certain risks that could cause our actual growth and profitability to differ from our expectations; examples of such risks include the following:
| |
• | we may not be able to continue to identify suitable acquisition targets or to acquire additional companies at favorable prices or on other favorable terms; |
| |
• | our management's attention may be distracted; |
•we may fail to retain key personnel from acquired businesses;
•we may assume unanticipated legal liabilities and other problems;
| |
• | we may not be able to successfully integrate the operations of businesses we acquire to realize economic, operational and other benefits; and |
| |
• | we may fail or be unable to discover liabilities of businesses that we acquire for which we, as a successor owner or operator, may be liable. |
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 are dependent on our suppliers to supply us with products that comply with safety and quality standards.
If our merchandise offerings do not meet our customers' expectations regarding safety and quality, we could experience lost sales, increased costs and exposure to legal and reputational risk. All of our suppliers must comply with applicable product safety laws, and we are dependent on them to ensure that the products we buy comply with all safety and quality standards. Events that give rise to actual, potential or perceived product safety concerns could expose us to government enforcement action or private litigation and result in costly product recalls and other liabilities. To the extent our suppliers are subject to added government regulation of their product design and/or manufacturing processes, the cost of the merchandise we purchase may rise. In addition, negative customer perceptions regarding the safety or quality of the products we sell could cause our customers to seek alternative sources for their needs, resulting in lost sales. In those circumstances, it may be difficult and costly for us to regain the confidence of our customers.
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 22, 2013, we employed approximately 55,000 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.
The market price of our common stock may be volatile and could expose us to securities class action litigation.
The stock market and the price of our common stock may be subject to wide fluctuations based upon general economic and market conditions. Downturns in the stock market may cause the price of our common stock to decline. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such companies. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management's attention and resources, which could have an adverse effect on our business.
Deterioration in global credit markets and changes in our credit ratings and deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, and higher tax rates 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 and Changes in Credit Ratings
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. We can provide no assurance that the credit market events during 2008 and 2009 will not occur again in the foreseeable future. Conditions and events in the global credit market could have a material adverse effect on our access to short and long-term borrowings to finance our operations and the terms and cost of that debt. 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.
Our overall credit rating may be negatively impacted by deteriorating and uncertain credit markets or other factors which may or may not be within our control. The interest rates on our publicly issued debt and 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 any borrowings under our revolving credit facility or from future issuances of public debt and less favorable terms on other operating and financing arrangements. In addition, it could reduce the attractiveness of our vendor payment program, where certain of our vendors finance payment obligations from us with designated third party financial institutions, which could result in increased working capital requirements. An inability to obtain sufficient financing at cost-effective rates could have a material adverse effect 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 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 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. While macro-economic conditions have improved since 2008 and 2009, unemployment rates have remained at historically high levels, consumer confidence continues to fluctuate at lower levels and payroll taxes have recently increased for most U.S. workers as a result of the changes in tax legislation effective for 2013. This impact could reduce our customers' 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 and product costs, including our merchandise distribution, commercial delivery, utility and product acquisition 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, Team Members 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.
The implementation of healthcare and financial reform legislation as well as pending regulatory rules regarding requirements to disclose efforts to identify the origin of “conflict minerals” in certain portions of our supply chain could increase the cost of doing business, adversely affecting our results of operations. Additionally, we are subject to numerous federal, state and local laws and governmental regulations relating to, among other things, environmental protection, product quality standards, building and zoning requirements, and 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 and operating 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.
We work hard to maintain the privacy and security of our customer and business information and the functioning of our computer systems, website and other online offerings. In the event of a security breach or other cyber security incident, we could experience certain operational problems or interruptions, incur substantial additional costs, or become subject to legal or regulatory proceedings, any of which could lead to damage to our reputation in the marketplace.
The nature of our business requires us to receive, retain and transmit certain personally identifying information that our customers provide to purchase products or services, register on our websites, or otherwise communicate and interact with us. While we have taken and continue to undertake significant steps to protect our customer and confidential information and the functioning of our computer systems, website and other online offerings, a compromise of our data security systems or those of businesses we interact with could result in information related to our customers or business being obtained by unauthorized persons or other operational problems or interruptions. We develop and update processes and maintain systems in an effort to try to prevent this from occurring, but the development and maintenance of these processes and systems are costly and requires ongoing monitoring and updating as technologies change, privacy and information security regulations change, and efforts to overcome security measures become more sophisticated.
Consequently, despite our efforts, our security measures have been breached in the past and may be breached in the future due to cyber attack, team member error, malfeasance, fraudulent inducement or other acts; and unauthorized parties have in the past obtained, and may in the future, obtain access to our data or our customers' data. While costs associated with past security breaches have not been significant, any breach or unauthorized access in the future could result in significant legal and financial exposure and damage to our reputation that could potentially have an adverse effect on our business. While we also seek to obtain assurances that third parties we interact with will protect confidential information, there is a risk the confidentiality of data held or accessed by third parties may be compromised. If a compromise of our data security or function of our computer systems or website were to occur, it could have a material adverse effect on our operating results and financial condition and, possibly, subject us to additional legal, regulatory and operating costs and damage our reputation in the marketplace.
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, tornadoes, 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 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: | | | | | | | | |
Gastonia, North Carolina | | 1969 | | North Carolina, South Carolina | | 634,472 |
| | Owned |
Salina, Kansas | | 1971 | | West, Midwest | | 413,500 |
| | Owned |
Delaware, Ohio | | 1972 | | Midwest | | 480,100 |
| | Owned |
Lakeland, Florida | | 1982 | | South, Offshore | | 552,796 |
| | Owned |
Roanoke, Virginia | | 1988 | | Mid-Atlantic | | 433,681 |
| | Leased |
Gallman, Mississippi | | 1999 | | Southwest, Midwest | | 388,168 |
| | Owned |
Thomson, Georgia | | 1999 | | Southeast | | 374,400 |
| | Owned |
Lehigh, Pennsylvania | | 2005 | | Northeast | | 655,991 |
| | Owned |
Norton, Massachusetts | | 2006 | | All AI Stores | | 317,500 |
| | Leased |
Remington, Indiana | | 2012 | | Midwest | | 542,064 |
| | Owned |
| | | | | | | | |
Master PDQ® Warehouse: | | | | | | | | |
Andersonville, Tennessee | | 1998 | | All | | 113,300 |
| | Leased |
| | | | | | | | |
PDQ® Warehouses: | | | | | | | | |
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 |
Haileah, Florida | | 1997 | | South Florida | | 12,500 |
| | Owned |
Youngwood, Pennsylvania | | 1998 | | East | | 48,320 |
| | Leased |
Mobile, Alabama | | 1998 | | Florida Panhandle | | 10,000 |
| | Owned |
Riverside, Missouri | | 1999 | | West | | 43,912 |
| | Leased |
Temple, Texas | | 1999 | | Southwest | | 61,343 |
| | Leased |
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, Massachusetts | | 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 | | 270,247 |
| | Leased |
Norton, Massachusetts | | 2006 | | AI corporate office | | 30,000 |
| | Leased |
Minneapolis, Minnesota | | 2008 | | All | | 51,674 |
| | Leased |
| |
(1) | Square footage amounts exclude adjacent office space. |
At December 29, 2012, we owned 774 of our stores and leased 3,020 stores. The expiration dates, including the exercise of renewal options, of the store leases are summarized as follows:
|
| | | | | | | | | |
Years | | AAP Stores | | AI Stores | | Total |
2013 | | 23 |
| | 15 |
| | 38 |
|
2014-2018 | | 281 |
| | 70 |
| | 351 |
|
2019-2023 | | 601 |
| | 84 |
| | 685 |
|
2024-2033 | | 732 |
| | 48 |
| | 780 |
|
2034-2043 | | 1,128 |
| | 1 |
| | 1,129 |
|
2044-2069 | | 37 |
| | — |
| | 37 |
|
| | 2,802 |
| | 218 |
| | 3,020 |
|
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 Team Members. 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 cash flows. Historically, our asbestos claims have been inconsistent in type and number and have been immaterial. As a result, we are unable to estimate a possible range of loss with respect to unasserted asbestos claims that may be filed against the Company in the future. 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 cash flows in future periods.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
| |
Item 5. | 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 December 29, 2012 | | | | |
Fourth Quarter | | $ | 84.00 |
| | $ | 64.36 |
|
Third Quarter | | $ | 74.39 |
| | $ | 66.31 |
|
Second Quarter | | $ | 93.08 |
| | $ | 60.87 |
|
First Quarter | | $ | 91.60 |
| | $ | 68.79 |
|
| | | | |
Fiscal Year Ended December 31, 2011 | | | | |
Fourth Quarter | | $ | 71.69 |
| | $ | 59.25 |
|
Third Quarter | | $ | 63.59 |
| | $ | 49.50 |
|
Second Quarter | | $ | 72.32 |
| | $ | 55.15 |
|
First Quarter | | $ | 68.85 |
| | $ | 60.09 |
|
The closing price of our common stock on February 22, 2013 was $79.21. At February 22, 2013, there were 1,864 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 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 fourth quarter ended December 29, 2012 (amounts in thousands, except per share amounts);
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| | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (1) | | 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) |
October 7, 2012 to November 3, 2012 | | — |
| | $ | — |
| | — |
| | $ | 492,385 |
|
November 4, 2012 to December 1, 2012 | | 25 |
| | 76.59 |
| | — |
| | 492,385 |
|
December 2, 2012 to December 29, 2012 | | — |
| | — |
| | — |
| | 492,385 |
|
| | | | | | | | |
Total | | 25 |
| | $ | 76.59 |
| | — |
| | $ | 492,385 |
|
| |
(1) | We repurchased 24,830 shares of our common stock at an aggregate cost of $1.9 million, or an average purchase price of $76.59 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock during the fourth quarter ended December 29, 2012. We did not repurchase any shares under our $500.0 million stock repurchase program during our fourth quarter ended December 29, 2012. |
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(2) | Our stock repurchase program authorizing the repurchase of up to $500.0 million in common stock was authorized by our Board of Directors and publicly announced on May 14, 2012. |
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 Retail Index. The graph assumes that the value of an investment in our common stock and in each such index was $100 on December 29, 2007, 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 RETAIL INDEX
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| | | | | | | | | | | | | | | | | | | | | | | | |
Company/Index | | December 29, 2007 | | January 3, 2009 | | January 2, 2010 | | January 1, 2011 | | December 31, 2011 | | December 29, 2012 |
Advance Auto Parts | | $ | 100.00 |
| | $ | 90.04 |
| | $ | 107.41 |
| | $ | 176.30 |
| | $ | 186.26 |
| | $ | 191.92 |
|
S&P 500 Index | | 100.00 |
| | 63.02 |
| | 75.42 |
| | 85.06 |
| | 85.06 |
| | 94.86 |
|
S&P Retail Index | | 100.00 |
| | 70.96 |
| | 100.25 |
| | 123.96 |
| | 127.58 |
| | 155.94 |
|
Item 6. Selected Consolidated Financial Data.
The following table sets forth our selected historical consolidated statement of operations, balance sheet, cash flows 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 (excluding the Selected Store Data and Performance Measures) at December 29, 2012 and December 31, 2011 and for the three years ended December 29, 2012 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 1, 2011, January 2, 2010 and January 3, 2009 and for the years ended January 2, 2010 and January 3, 2009 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.
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| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year (1) |
| | 2012 | | 2011 | | 2010 | | 2009 | | 2008 |
| | (in thousands, except per share data, store data and ratios) |
| | | | | | | | | | |
Statement of Operations Data: | | | | | | | | | | |
Net Sales | | $ | 6,205,003 |
| | $ | 6,170,462 |
| | $ | 5,925,203 |
| | $ | 5,412,623 |
| | $ | 5,142,255 |
|
Cost of sales (2) | | 3,106,967 |
| | 3,101,172 |
| | 2,963,888 |
| | 2,768,397 |
| | 2,743,131 |
|
Gross Profit | | 3,098,036 |
| | 3,069,290 |
| | 2,961,315 |
| | 2,644,226 |
| | 2,399,124 |
|
Selling, general and administrative expenses | | 2,440,721 |
| | 2,404,648 |
| | 2,376,382 |
| | 2,189,841 |
| | 1,984,197 |
|
Operating income | | 657,315 |
| | 664,642 |
| | 584,933 |
| | 454,385 |
| | 414,927 |
|
Interest expense | | (33,841 | ) | | (30,949 | ) | | (26,861 | ) | | (23,337 | ) | | (33,729 | ) |
Other income (expense), net | | 600 |
| | (457 | ) | | (1,017 | ) | | 607 |
| | (506 | ) |
Income before provision for income taxes | | 624,074 |
| | 633,236 |
| | 557,055 |
| | 431,655 |
| | 380,692 |
|
Income tax expense | | 236,404 |
| | 238,554 |
| | 211,002 |
| | 161,282 |
| | 142,654 |
|
Net income | | $ | 387,670 |
| | $ | 394,682 |
| | $ | 346,053 |
| | $ | 270,373 |
| | $ | 238,038 |
|
| | | | | | | | | | |
Per Share Data: | | | | | | | | | | |
Net income per basic share | | $ | 5.29 |
| | $ | 5.21 |
| | $ | 4.00 |
| | $ | 2.85 |
| | $ | 2.51 |
|
Net income per diluted share | | 5.22 |
| | 5.11 |
| | 3.95 |
| | 2.83 |
| | 2.49 |
|
Cash dividends declared per basic share | | 0.24 |
| | 0.24 |
| | 0.24 |
| | 0.24 |
| | 0.24 |
|
Weighted average basic shares outstanding | | 73,091 |
| | 75,620 |
| | 86,082 |
| | 94,459 |
| | 94,655 |
|
Weighted average diluted shares outstanding | | 74,062 |
| | 77,071 |
| | 87,155 |
| | 95,113 |
| | 95,205 |
|
| | | | | | | | | | |
Cash flows provided by (used in): | | | | | | | | | | |
Operating activities | | $ | 685,281 |
| | $ | 828,849 |
| | $ | 666,159 |
| | $ | 699,690 |
| | $ | 478,739 |
|
Investing activities | | (272,978 | ) | | (289,974 | ) | | (199,350 | ) | | (185,539 | ) | | (181,609 | ) |
Financing activities | | 127,907 |
| | (540,183 | ) | | (507,618 | ) | | (451,491 | ) | | (274,426 | ) |
| | | | | | | | | | |
Balance Sheet and Other Financial Data: | | | | | | | | | | |
Cash and cash equivalents | | $ | 598,111 |
| | $ | 57,901 |
| | $ | 59,209 |
| | $ | 100,018 |
| | $ | 37,358 |
|
Inventory | | 2,308,609 |
| | 2,043,158 |
| | 1,863,870 |
| | 1,631,867 |
| | 1,623,088 |
|
Inventory turnover (3) | | 1.43 |
| | 1.59 |
| | 1.70 |
| | 1.70 |
| | 1.74 |
|
Inventory per store (4) | | 609 |
| | 558 |
| | 523 |
| | 477 |
| | 482 |
|
Accounts payable to Inventory ratio (5) | | 87.9 | % | | 80.9 | % | | 71.0 | % | | 61.2 | % | | 57.2 | % |
Net working capital (6) | | $ | 624,562 |
| | $ | 105,945 |
| | $ | 276,222 |
| | $ | 421,591 |
| | $ | 442,632 |
|
Capital expenditures | | 271,182 |
| | 268,129 |
| | 199,585 |
| | 192,934 |
| | 184,986 |
|
Total assets | | 4,613,814 |
| | 3,655,754 |
| | 3,354,217 |
| | 3,072,963 |
| | 2,964,065 |
|
Total debt | | 605,088 |
| | 415,984 |
| | 301,824 |
| | 204,271 |
| | 456,164 |
|
Total net debt (7) | | 6,977 |
| | 358,083 |
| | 252,171 |
| | 113,781 |
| | 439,394 |
|
Total stockholders' equity | | 1,210,694 |
| | 847,914 |
| | 1,039,374 |
| | 1,282,365 |
| | 1,075,166 |
|
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year (1) |
| | 2012 | | 2011 | | 2010 | | 2009 | | 2008 |
| | (in thousands, except per share data, store data and ratios) |
| | | | | | | | | | |
Selected Store Data and Performance Measures: | | | | | | | | | | |
Comparable store sales growth (8) | | (0.8 | )% | | 2.2 | % | | 8.0 | % | | 5.3 | % | | 1.5 | % |
Number of stores at beginning of year | | 3,662 |
| | 3,563 |
| | 3,420 |
| | 3,368 |
| | 3,261 |
|
New stores | | 137 |
| | 104 |
| | 148 |
| | 107 |
| | 127 |
|
Closed stores | | (5 | ) | | (5 | ) | | (5 | ) | | (55 | ) | | (20 | ) |
Number of stores, end of period | | 3,794 |
| | 3,662 |
| | 3,563 |
| | 3,420 |
| | 3,368 |
|
Stores with commercial delivery program, end of period | | 3,484 |
| | 3,326 |
| | 3,212 |
| | 3,024 |
| | 2,880 |
|
Total commercial sales, as a percentage of total sales (in 000s) | | 38.1 | % | | 37.0 | % | | 34.2 | % | | 32.0 | % | | 29.5 | % |
Average net sales per store (in 000s) (9) | | $ | 1,664 |
| | $ | 1,708 |
| | $ | 1,697 |
| | $ | 1,595 |
| | $ | 1,551 |
|
Operating income per store (in 000s) (10) | | 176 |
| | 184 |
| | 168 |
| | 134 |
| | 125 |
|
Gross margin return on inventory (11) | | 9.3 |
| | 6.6 |
| | 5.1 |
| | 4.0 |
| | 3.5 |
|
Total store square footage, end of period (in 000s) | | 27,806 |
| | 26,663 |
| | 25,950 |
| | 24,973 |
| | 24,711 |
|
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(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. |
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(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. |
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(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. |
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(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. |
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(6) | Net working capital is calculated by subtracting current liabilities from current assets. |
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(7) | Net debt includes total debt and bank overdrafts, less cash and cash equivalents. |
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(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. Fiscal 2008 comparable store sales growth excludes sales from the 53rd week. |
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(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. |
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(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. |
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(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 3.4. |
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 (the next 53 week fiscal year is 2014). Our first quarter consists of 16 weeks, and the other three quarters consist of 12 weeks.
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. Our Commercial customers consist primarily of delivery customers for whom we deliver product from our store locations to our Commercial customers' places of business, including independent garages, service stations and auto dealers. At December 29, 2012, we operated 3,794 stores throughout 39 states, Puerto Rico and the Virgin Islands.
We operate in two reportable segments: Advance Auto Parts, or AAP, and Autopart International, or AI. The AAP segment is comprised of our store operations within the Northeastern, Mid-Atlantic, Southeastern and Midwestern (inclusive of South Central) regions of the United States, Puerto Rico and the Virgin Islands. These stores operate under the trade name “Advance Auto Parts” except for certain stores in the state of Florida, which operate under the “Advance Discount Auto Parts” trade name. At December 29, 2012, we operated 3,576 stores in the AAP segment. Our AAP stores offer a broad selection of brand name and proprietary automotive replacement parts, accessories and maintenance items for domestic and imported cars and light trucks. Through our integrated operating approach, we serve our DIY and Commercial customers from our store locations and online at www.AdvanceAutoParts.com. 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 Commercial customers can conveniently place their orders online.
At December 29, 2012, we operated 218 stores in the AI segment under the “Autopart International” trade name. AI's business serves the Commercial market from its store locations primarily in the Northeastern, Mid-Atlantic and Southeastern regions of the United States.
Management Overview
We generated earnings per diluted share, or diluted EPS, of $5.22 during Fiscal 2012 compared to $5.11 for Fiscal 2011. The increase in our diluted EPS was driven by a lower average share count during Fiscal 2012, partially offset by a decrease in operating income. Throughout most of Fiscal 2012, our sales remained constrained, particularly in our colder weather markets, driven by the unseasonably warmer temperatures which has decreased the demand for failure and maintenance parts. The uncertainty in the U.S. economy also impacted our sales consistent with many other retailers, including our peer companies in the automotive aftermarket industry, as consumers faced high unemployment, fluctuating gas prices and low consumer confidence. In response to the difficult sales environment, we focused on providing better service to our Commercial customers and improving weekend staffing to better serve our DIY customers. Despite our lower performance in Fiscal 2012, we remain encouraged by (i) the long-term dynamics of the automotive aftermarket industry, (ii) initiatives that are underway in support of our strategies and (iii) our growth potential in the more fragmented and faster growing Commercial market.
While our operating income in Fiscal 2012 declined from the comparable period of last year, we generated a significant amount of operating cash flow to enable us to invest in capital projects and initiatives to support our strategies. As discussed later in the "Business and Industry Update," we remain committed to investing in our two key strategies – Superior Availability and Service Leadership.
Fiscal 2012 Highlights
A high-level summary of our financial results and other highlights from our Fiscal 2012 include:
Financial
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• | Total sales during Fiscal 2012 increased 0.6% to $6,205.0 million as compared to Fiscal 2011, primarily driven by the addition of 132 net new stores partially offset by a 0.8% decrease in comparable store sales. |
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• | Our operating income for Fiscal 2012 was $657.3 million, a decrease of $7.3 million from the comparable period in Fiscal 2011. As a percentage of total sales, operating income was 10.6%, a decrease of 18 basis points, due to the deleverage of our SG&A rate partially offset by a slightly higher gross profit rate. |
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• | Our inventory balance as of December 29, 2012 increased $265.5 million, or 13.0%, over the prior year driven primarily by our inventory availability initiatives, including store upgrades, the opening of our new distribution center, continued expansion of our HUB network and new store growth. |
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• | We generated operating cash flow of $685.3 million during Fiscal 2012, a decrease of 17.3% compared to Fiscal 2011, with the largest portion of the decrease consisting of an increase in accounts receivable resulting from the in-sourcing of our Commercial credit program. |
Other
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• | In January 2012 we issued $300 million of senior unsecured notes, due in 2022, with an interest rate of 4.50%. |
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• | We opened our tenth distribution center in Remington, IN which will provide needed warehouse capacity and upgraded supply chain technology. |
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• | We in-sourced our Commercial credit function and rolled out our MotoLogic® diagnostic and repair resource to support the continued investment in our Commercial business. |
Subsequent to Fiscal 2012, we completed the acquisition of B.W.P. Distributors, Inc., a leading Commercial provider in the Northeast.
Refer to the "Results of Operations" and "Liquidity" sections for further details of our income statement and cash flow results, respectively.
Business Update
Our two key strategies, Superior Availability and Service Leadership, remained unchanged in Fiscal 2012 and continue to serve as the foundation for all of the initiatives we undertake. Superior Availability is focused on consistently improving product availability and maximizing the speed, reliability and efficiency of our local market availability. Service Leadership relies on Superior Availability and a more consistent execution of serving our DIY and Commercial customers' needs whether in our stores or online. Through these two key strategies, we believe we can continue to build on the initiatives discussed below and produce favorable financial results over the long term. Sales to Commercial customers remain the biggest opportunity for us to increase our overall market share in the automotive aftermarket industry. Our Commercial sales, as a percentage of total sales, increased to 38% in Fiscal 2012 compared to 37% in Fiscal 2011.
We believe our current initiatives are key for our long-term sales growth and improvement in our gross profit rate. Combined with our focus on balancing support and discretionary expenses with the additional cost of investments in our key strategies, we are committed to achieving our longer-term growth and profitability goals. As we enter Fiscal 2013, the key initiatives under our strategies include:
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• | Growing our Commercial business through improved delivery speed and reliability, increased customer retention and increased volume with national and regional accounts; |
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• | Improving localized parts availability through the continued increase in number of HUBs, strengthened focus on key store availability and leveraging the advancement of our supply chain infrastructure; |
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• | Accelerating our new store growth rate; and |
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• | Continuing our focus on store execution through more effective scheduling, product on-hand accuracy, sales training and customer engagement. |
Acquisition
On December 31, 2012, we acquired B.W.P. Distributors, Inc. ("BWP"), a privately held company that supplies, markets and distributes automotive aftermarket parts and products principally to Commercial customers. BWP operates or supplies 216 locations in the Northeastern United States. We believe this acquisition will enable us to continue our expansion in the competitive Northeast, which is a strategic growth area for us due to the large population and overall size of the market, and to gain valuable information to apply to our existing operations as a result of BWP's expertise in Commercial. As a result of this transaction, we will operate 124 BWP company-owned stores and two distribution centers. We will begin integrating the BWP locations in Fiscal 2013.
Automotive Aftermarket Industry
Operating within the automotive aftermarket industry, we are influenced by a number of general macroeconomic factors similar to those affecting the overall retail industry. These factors include, but are not limited to, fuel costs, unemployment rates, consumer confidence and competition. The ongoing uncertainty in the macroeconomic environment continues to impact us and the retail industry in general. While we believe that the current macroeconomic environment continues to constrain consumer spending, we remain confident that the long-term dynamics of the automotive aftermarket industry are positive. Furthermore, we continue to believe we are well positioned to serve our customers by meeting their needs in a challenging macroeconomic environment.
We believe that two key drivers of demand within the automotive aftermarket are (i) the number of miles driven in the U.S. and (ii) the number and average age of vehicles on the road.
Miles Driven
We believe that the number of total miles driven in the U.S. heavily influences the demand for the repair and maintenance of vehicles. As the number of miles driven increases, consumers' vehicles are more likely to need repair and maintenance, resulting in an increase in the need for automotive parts and maintenance items. Historically, the long-term trend in miles driven in the U.S. has steadily increased; however, according to the Department of Transportation, total miles driven in the U.S. remained relatively flat from 2007 to 2011 as the U.S. experienced difficult macroeconomic conditions. Historically, rapid increases in fuel prices have also negatively impacted total miles driven as consumers react to the increased expense by reducing travel. Average gasoline prices increased approximately 25% during this same time frame. While gas prices remain somewhat volatile and are not predicted to return to pre-recessionary levels, gas prices were relatively flat when comparing the average price of gas in 2012 to 2011 and the number of miles driven in 2012 increased approximately 0.6% as measured through October. We believe that as the U.S. economy continues to recover, and gasoline prices stabilize further, annual miles driven will return to historical growth rates and continue to drive demand in the automotive aftermarket industry.
Number of Registered Vehicles and Increase in Average Vehicle Age
We believe that the total number of vehicles (excluding medium and heavy duty trucks) on the road and the average age of vehicles on the road also heavily influence the demand for products sold within the automotive aftermarket industry. There were 241 million vehicles on the road in 2011 which is 15% higher than in 2001. While recent industry data reported by the Automotive Aftermarket Industry Association (“AAIA”) indicates that the growth in number of vehicles on the road has decelerated and new vehicle registrations are increasing, the average age of vehicle continues to increase. The average age of vehicles has gradually increased over the last five years from 10.3 years in 2008 to 11.3 years in 2012. We believe that the average age of vehicles continues to increase due to relatively constant scrappage rates, a rate of new car sales well under the 10-year trend and an increase in overall quality of vehicles. As the average age of a vehicle increases, a larger percentage of the
miles driven are outside of the manufacturer warranty period. These out-of-warranty, older vehicles generate a stronger demand for automotive aftermarket products due to routine maintenance cycles and more frequent mechanical failures. We believe that consumers will continue to keep their vehicles even longer as the economy slowly recovers contributing to the trend of an aging vehicle population.
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 2012, 2011 and 2010 by segment. We lease 78% of our AAP stores. We lease 100% of our AI stores. All of our AI stores have Commercial delivery programs.
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| | | | | | | | | |
AAP |
| | Fiscal Year |
| | 2012 | | 2011 | | 2010 |
Number of stores, beginning of year | | 3,460 |
| | 3,369 |
| | 3,264 |
|
New stores | | 116 |
| | 95 |
| | 110 |
|
Closed stores | | — |
| | (4 | ) | | (5 | ) |
Number of stores, end of year | | 3,576 |
| | 3,460 |
| | 3,369 |
|
Relocated stores | | 12 |
| | 7 |
| | 9 |
|
Stores with commercial delivery programs | | 3,266 |
| | 3,124 |
| | 3,018 |
|
| | | | | | |
AI |
| | Fiscal Year |
| | 2012 | | 2011 | | 2010 |
Number of stores, beginning of year | | 202 |
| | 194 |
| | 156 |
|
New stores | | 21 |
| | 9 |
| | 38 |
|
Closed stores | | (5 | ) | | (1 | ) | | — |
|
Number of stores, end of year | | 218 |
| | 202 |
| | 194 |
|
Relocated stores | | 7 |
| | 3 |
| | 3 |
|
Stores with commercial delivery programs | | 218 |
| | 202 |
| | 194 |
|
During Fiscal 2013, we anticipate opening 155 to 165 AAP stores and 10 to 15 AI stores (excludes 124 BWP stores acquired on December 31, 2012).
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 and sales from our e-commerce website. Our total sales growth is comprised of both comparable store sales and new store sales. We calculate comparable store sales based on the change in store sales starting once a store has been open for 13 complete accounting periods (approximately one year) and by including e-commerce sales. We include sales from relocated stores in comparable store sales from the original date of opening.
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 (vi) 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 commitments, 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.
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| | | | | | | | | |
| | Fiscal Year Ended |
| | December 29, 2012 | | December 31, 2011 | | January 1, 2011 |
Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales, including purchasing and warehousing costs | | 50.1 |
| | 50.3 |
| | 50.0 |
|
Gross profit | | 49.9 |
| | 49.7 |
| | 50.0 |
|
Selling, general and administrative expenses | | 39.3 |
| | 39.0 |
| | 40.1 |
|
Operating income | | 10.6 |
| | 10.8 |
| | 9.9 |
|
Interest expense | | (0.5 | ) | | (0.5 | ) | | (0.5 | ) |
Other, net | | 0.0 |
| | 0.0 |
| | 0.0 |
|
Provision for income taxes | | 3.8 |
| | 3.9 |
| | 3.6 |
|
Net income | | 6.2 | % | | 6.4 | % | | 5.8 | % |
Fiscal 2012 Compared to Fiscal 2011
Net Sales
Net sales for Fiscal 2012 were $6,205.0 million, an increase of $34.5 million, or 0.6%, over net sales for Fiscal 2011. This growth was primarily due to sales from AAP and AI stores added within the last year partially offset by a decrease in comparable store sales.
AAP segment sales were $5,914.9 million, an increase of $30.0 million, or 0.5%, over Fiscal 2011. This growth was primarily a result of sales from the net addition of 116 new stores over the past year partially offset by a comparable store sales decrease of 0.9%. The comparable store sales decrease was driven by a decrease in transaction count partially offset by an increase in transaction value despite more promotional activity in response to lower customer demand. The increase in transaction value is primarily due to (i) the gradual increase in cost and complexity of automotive parts and commodity prices and (ii) and the positive impact from a higher mix of Commercial sales. AI segment sales were $306.1 million, an increase of $5.1 million, or 1.7%, over Fiscal 2011.
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| | | | | | | | | | | | | | | | | |
| 2012 | | 2011 |
| AAP | | AI | | Total | | AAP | | AI | | Total |
Comparable Store Sales % | (0.9 | )% | | 0.8 | % | | (0.8 | )% | | 1.9 | % | | 8.6 | % | | 2.2 | % |
Net Stores Added | 116 |
| | 16 |
| | 132 |
| | 91 |
| | 8 |
| | 99 |
|
Gross Profit
Gross profit for Fiscal 2012 was $3,098.0 million, or 49.9% of net sales, as compared to $3,069.3 million, or 49.7% of net sales, in Fiscal 2011, an increase of 19 basis points. The increase in gross profit as a percentage of net sales was primarily due to improved shrink and reduced product acquisition costs partially offset by increased promotional activity.
SG&A Expenses
SG&A expenses for Fiscal 2012 were $2,440.7 million, or 39.3% of net sales, as compared to $2,404.6 million, or 39.0% of net sales, for Fiscal 2011, an increase of 36 basis points. This increase as a percentage of net sales was primarily due to expense deleverage as a result of the Company's lower sales volume and increased new store openings in the second half of Fiscal 2012, partially offset by lower incentive compensation.
Operating Income
Operating income for Fiscal 2012 was $657.3 million, representing 10.6% of net sales, as compared to $664.6 million, or 10.8% of net sales, for Fiscal 2011, a decrease of 18 basis points. This decrease was due to a higher SG&A rate partially offset by a slightly higher gross profit rate.
AAP generated operating income of $648.5 million, or 11.0% of net sales, for Fiscal 2012 as compared to $653.1 million, or 11.1% of net sales, for Fiscal 2011. AI generated operating income for Fiscal 2012 of $8.8 million as compared to $11.5 million for Fiscal 2011. The decrease in AI's operating income was primarily due to increased promotional activity and increased percentage of newer stores outside of the Northeastern market which operate at a lower gross profit rate, partially offset by lower incentive compensation.
Interest Expense
Interest expense for Fiscal 2012 was $33.8 million, or 0.5% of net sales, as compared to $30.9 million, or 0.5% of net sales, in Fiscal 2011. The increase in interest expense is primarily a result of the higher average borrowings outstanding during Fiscal 2012 compared to Fiscal 2011.
Income Taxes
Income tax expense for Fiscal 2012 was $236.4 million, as compared to $238.6 million for Fiscal 2011. Our effective income tax rate was 37.9% and 37.7% for Fiscal 2012 and Fiscal 2011, respectively.
Net Income
Net income was $387.7 million, or $5.22 per diluted share, for Fiscal 2012 as compared to $394.7 million, or $5.11 per diluted share, for Fiscal 2011. As a percentage of net sales, net income for Fiscal 2012 was 6.2%, as compared to 6.4% for Fiscal 2011. The increase in diluted EPS was driven primarily by a lower average share count outstanding during Fiscal 2012 partially offset by a slight decrease in net income.
Fiscal 2011 Compared to Fiscal 2010
Net Sales
Net sales for Fiscal 2011 were $6,170.5 million, an increase of $245.3 million, or 4.1%, over net sales for Fiscal 2010. This growth was primarily due to an increase in comparable store sales and sales from AAP and AI stores added within the last year.
AAP produced sales of $5,884.9 million, an increase of $193.8 million, or 3.4%, over Fiscal 2010. The AAP comparable store sales increase of 1.9% was driven by an increase in average sales per customer. AI produced sales of $301.1 million, an increase of $51.6 million, or 20.7%, over Fiscal 2010.
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| | | | | | | | | | | | | | | | | |
| 2011 | | 2010 |
| AAP | | AI | | Total | | AAP | | AI | | Total |
Comparable Store Sales % | 1.9 | % | | 8.6 | % | | 2.2 | % | | 8.1 | % | | 7.0 | % | | 8.0 | % |
Net Stores Added | 91 |
| | 8 |
| | 99 |
| | 105 |
| | 38 |
| | 143 |
|
Gross Profit
Gross profit for Fiscal 2011 was $3,069.3 million, or 49.7% of net sales, as compared to $2,961.3 million, or 50.0% of net sales, in Fiscal 2010, a decrease of 24 basis points. This decrease in gross profit as a percentage of net sales was driven by increased shrink expense, supply chain deleverage due to investments in HUBs and higher fuel costs and commodity price inflation partially offset by improved merchandising and pricing capabilities (such as global sourcing and price optimization) and improved parts availability.
SG&A Expenses
SG&A expenses for Fiscal 2011 were $2,404.6 million, or 39.0% of net sales, as compared to $2,376.4 million, or 40.1% of net sales, for Fiscal 2010, a decrease of 114 basis points. This decrease as a percentage of net sales was primarily due to reduced incentive compensation as a result of lower comparable store sales growth compared to the prior year, store labor leverage resulting from productivity improvements driven by our new variable customer driven labor model, occupancy cost leverage and a decrease in administrative expenses partially offset by increased strategic investments and advertising. These investments included spending in the e-commerce and Commercial areas of our business in support of our Superior Availability and Service Leadership strategies.
Operating Income
Operating income for Fiscal 2011 was $664.6 million, representing 10.8% of net sales, as compared to $584.9 million, or 9.9% of net sales, for Fiscal 2010, an increase of 90 basis points. This increase was due to a lower SG&A rate partially offset by a slightly lower gross profit rate.
AAP produced operating income of $653.1 million, or 11.1% of net sales, for Fiscal 2011 as compared to $580.4 million, or 10.2% of net sales, for Fiscal 2010. AI generated operating income for Fiscal 2011 of $11.5 million as compared to $4.5 million for Fiscal 2010. AI's operating income increased during Fiscal 2011 primarily due to the leverage of SG&A as a result of its improved comparable store sales and decelerated pace of new store openings in Fiscal 2011.
Interest Expense
Interest expense for Fiscal 2011 was $30.9 million, or 0.5% of net sales, as compared to $26.9 million, or 0.5% of net sales, in Fiscal 2010. The increase in interest expense is primarily a result of the amortization of the previously recorded losses in accumulated other comprehensive loss over the remaining life of our interest rate swaps and higher average borrowings outstanding during Fiscal 2011 compared to Fiscal 2010. The interest rate swaps were associated with bank debt which we repaid near the beginning of our second quarter of Fiscal 2010.
Income Taxes
Income tax expense for Fiscal 2011 was $238.6 million, as compared to $211.0 million for Fiscal 2010. Our effective income tax rate was 37.7% and 37.9% for Fiscal 2011 and Fiscal 2010, respectively.
Net Income
Net income was $394.7 million, or $5.11 per diluted share, for Fiscal 2011 as compared to $346.1 million, or $3.95 per diluted share, for Fiscal 2010. As a percentage of net sales, net income for Fiscal 2011 was 6.4%, as compared to 5.8% for Fiscal 2010. The increase in diluted EPS was primarily driven by an increase in net income and our repurchase of $9.9 million shares of our common stock in Fiscal 2011.
Quarterly Consolidated Financial Results (in thousands, except per share data)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 16-Weeks Ended 4/23/2011 | | 12-Weeks Ended 7/16/2011 | | 12-Weeks Ended 10/8/2011 | | 12-Weeks Ended 12/31/2011 | | 16-Weeks Ended 4/21/2012 | | 12-Weeks Ended 7/14/2012 | | 12-Weeks Ended 10/6/2012 | | 12-Weeks Ended 12/29/2012 |
Net Sales | | $ | 1,898,063 |
| | $ | 1,479,839 |
| | $ | 1,464,988 |
| | $ | 1,327,572 |
| | $ | 1,957,292 |
| | $ | 1,460,983 |
| | $ | 1,457,527 |
| | $ | 1,329,201 |
|
Gross profit | | 958,201 |
| | 735,848 |
| | 724,503 |
| | 650,738 |
| | 980,673 |
| | 728,858 |
| | 725,350 |
| | 663,155 |
|
Net income | | 109,583 |
| | 113,107 |
| | 105,553 |
| | 66,439 |
| | 133,506 |
| | 99,606 |
| | 89,503 |
| | 65,055 |
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| | | | | | | | | | | | | | | | |
Net income per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 1.37 |
| | $ | 1.48 |
| | $ | 1.43 |
| | $ | 0.92 |
| | $ | 1.83 |
| | $ | 1.36 |
| | $ | 1.22 |
| | $ | 0.89 |
|
Diluted | | $ | 1.35 |
| | $ | 1.46 |
| | $ | 1.41 |
| | $ | 0.90 |
| | $ | 1.79 |
| | $ | 1.34 |
| | $ | 1.21 |
| | $ | 0.88 |
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Liquidity and Capital Resources
Overview
Our primary cash requirements to maintain our current operations include payroll and benefits, the purchase of inventory, contractual obligations, capital expenditures and the payment of income taxes. In addition, we have used available funds for acquisitions, to repay borrowings under our revolving credit facility, to periodically repurchase shares of our common stock under our stock repurchase programs and for the payment of quarterly cash dividends. We have funded these requirements primarily through cash generated from operations, supplemented by borrowings under our credit facilities and notes offering 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 December 29, 2012, our cash and cash equivalents balance was $598.1 million, an increase of $540.2 million compared to December 31, 2011 (the end of Fiscal 2011). This increase in cash was primarily a result of cash generated from operations and the issuance of senior unsecured notes partially offset by investments in property and equipment and net payments on our credit facilities. Additional discussion of our cash flow results, including the comparison of Fiscal 2012 activity to Fiscal 2011, is set forth in the Analysis of Cash Flows section.
At December 29, 2012, our outstanding indebtedness was $605.1 million, or $189.1 million higher when compared to December 31, 2011, and consisted of borrowings of $598.9 million under our senior unsecured notes and $6.2 million outstanding on economic development notes. Additionally, we had $78.8 million in letters of credit outstanding, which reduced the total availability under our revolving credit facility to $671.2 million.
Subsequent to year end, we used $188.2 million of cash on hand to fund the purchase price and related expenses for our acquisition of BWP as discussed earlier in this Management's Discussion and Analysis and more fully in Note 22 to our consolidated financial statements.
Capital Expenditures
Our primary capital requirements have been the funding of our continued new store openings, maintenance of existing stores, the construction and upgrading of distribution centers, and the development of both proprietary and purchased information systems. While we lease the vast majority of our store locations, we develop and own a small percentage of new store locations depending on market conditions. Our capital expenditures were $271.2 million in Fiscal 2012, an increase of $3.1 million over Fiscal 2011.
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 our existing stores, information technology and our supply chain network. In Fiscal 2013, we anticipate that our capital expenditures will be approximately $275.0 million to $300.0 million. These investments will be primarily driven by new store development (leased and owned locations), investments in our existing stores and investments under our Superior Availability and Service Leadership strategies, including continued investments in our supply chain network and new systems. We anticipate opening 155 to 165 AAP stores and 10 to 15 AI stores during Fiscal 2013 (excluding the 124 BWP stores acquired on December 31, 2012).
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 2012, we repurchased 0.3 million shares of our common stock at an aggregate cost of $19.6 million, or an average price of $76.18 per share. At December 29, 2012, we had $492.4 million remaining under our $500 million stock repurchase program authorized by our Board of Directors on May 14, 2012. Additionally, during Fiscal 2012, we repurchased 0.1 million shares of our common stock at an aggregate cost of $7.5 million, or an average price of $82.42 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock.
Dividend
Since Fiscal 2006, our Board of Directors has declared quarterly dividends of $0.06 per share to stockholders of record. On February 5, 2013, our Board of Directors declared a quarterly dividend of $0.06 per share to be paid on April 5, 2013 to all common stockholders of record as of March 22, 2013.
Commercial Credit Program
During Fiscal 2012, we transitioned our commercial credit program from using a third party financial institution to settle credit transactions with our Commercial customers to processing those transactions internally. Benefits we expect to realize include a higher level of service with our Commercial customers and having a capability in place to increase the amount of Commercial sales on credit while realizing cost savings over the long-term.
Our concentration of credit risk with respect to trade receivables is limited because our customer base consists of a large number of customers with relatively small balances, which allows the credit risk to be spread across a broad base. We also mitigate our exposure to credit risk through a credit approval process including credit checks, pre-determined credit limits and accounts receivable and credit monitoring procedures.
Analysis of Cash Flows
A summary and analysis of our cash flows for Fiscal 2012, 2011 and 2010 is reflected in the table and following discussion.
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| | | | | | | | | | | |
| Fiscal Year |
| 2012 | | 2011 | | 2010 |
| (in millions) |
Cash flows from operating activities | $ | 685.3 |
| | $ | 828.8 |
| | $ | 666.2 |
|
Cash flows from investing activities | (273.0 | ) | | (290.0 | ) | | (199.4 | ) |
Cash flows from financing activities | 127.9 |
| | (540.2 | ) | | (507.6 | ) |
Net increase (decrease) in cash and | |
| | |
| | |
cash equivalents | $ | 540.2 |
| | $ | (1.3 | ) | | $ | (40.8 | ) |
Operating Activities
For Fiscal 2012, net cash provided by operating activities decreased $143.6 million to $685.3 million. This net decrease in operating cash flow was primarily due to:
| |
• | a $74.1 million decrease in cash flows from receivables primarily related to the transition of our in-house commercial credit program; |
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• | a $65.1 million decrease in cash flows from inventory, net of accounts payable, due to a 13% increase in inventory over the prior year driven by our inventory availability initiatives, including store upgrades to a greater coverage of parts, the opening of our new distribution center, continued expansion of our HUB network and new store growth, coupled with a smaller increase in our accounts payable ratio versus the prior year; |
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• | a $26.1 million decrease in provision for deferred income taxes due to the lapse of certain corporate tax legislation; |
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• | a $14.9 million decrease in cash flow from other assets primarily related to timing of refundable income taxes and other working capital; |
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• | a $13.4 million decrease in cash flow from the excess tax benefit from share-based compensation; and |
| |
• | a $7.0 million decrease in net income. |
Partially offsetting the decrease in operating cash flow was:
| |
• | a $56.8 million increase in cash flows provided by an increase in accrued expenses related to timing of the payment of certain expenses. |
For Fiscal 2011, net cash provided by operating activities increased $162.7 million to $828.8 million. This net increase in operating cash flow was primarily due to:
| |
• | a $87.6 million increase in cash flows from inventory, net of accounts payable, as a result of the continued increase in our accounts payable ratio in Fiscal 2011 combined with the deceleration of inventory growth during the second half of Fiscal 2011; |
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• | an increase in net income of $48.6 million; and |
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• | a $12.5 million increase in provision for deferred income taxes. |
Investing Activities
For Fiscal 2012, net cash used in investing activities decreased by $17.0 million to $273.0 million. The decrease in cash used was primarily driven by the decrease in cash used for business acquisitions.
For Fiscal 2011, net cash used in investing activities increased by $90.6 million to $290.0 million. The increase in cash used was primarily driven by investments in our existing stores, supply chain and information technology as well as the acquisition of two small technology companies in support of our e-commerce strategy. The majority of the increase in our supply chain investments is related to the completion of our Remington distribution center.
Financing Activities
For Fiscal 2012, net cash provided by financing activities increased by $668.1 million to $127.9 million. This increase was primarily a result of:
| |
• | a $604.0 million decrease in cash used for the repurchase of common stock under our stock repurchase program; and |
| |
• | $299.9 million provided by the issuance of senior unsecured notes. |
Partially offsetting these increases was a $230.0 million decrease in net borrowings on credit facilities.
For Fiscal 2011, net cash used in financing activities increased by $32.6 million to $540.2 million. Cash used in financing activities increased as a result of:
| |
• | a $31.2 million decrease in financed vendor accounts payable; and |
| |
• | a $21.6 million decrease in proceeds from the issuance of common stock related to the exercise of share-based compensation awards. |
Partially offsetting these decreases was an increase of $16.2 million in net borrowings.
Long-Term Debt
Bank Debt
We have a $750.0 million unsecured five-year revolving credit facility with our wholly-owned subsidiary, Advance Stores Company, Incorporated, or Stores, serving as the borrower. The revolving credit facility also provides for the issuance of letters of credit with a sub-limit of $300.0 million, and swingline loans in an amount not to exceed $50.0 million. We may request, subject to agreement by one or more lenders, that the total revolving commitment be increased by an amount not exceeding $250.0 million (up to a total commitment of $1 billion) during the term of the revolving credit facility. 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 May 27, 2016.
As of December 29, 2012, we had no borrowings outstanding under our revolving credit facility, and had letters of credit outstanding of $78.8 million, which reduced the availability under the revolving credit facility to $671.2 million. The letters of credit generally have a term of one year or less and primarily serve as collateral for our self-insurance policies.
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 1.5% per annum for each of the adjusted LIBOR and alternate base rate borrowings. A facility fee is charged on the total amount of the revolving credit facility, payable in arrears. The current facility fee rate is 0.25% per annum. Under the terms of the revolving credit facility, the interest rate and facility fee are based on our credit rating.
Our revolving credit facility contains covenants restricting our ability to, among other things: (1) permit the subsidiaries of Advance Stores to create, incur or assume additional debt; (2) incur liens or engage in sale-leaseback transactions; (3) make loans and investments (including acquisitions); (4) guarantee obligations; (5) engage in certain mergers and liquidations; (6) change the nature of our business and the business conducted by our subsidiaries; (7) enter into certain hedging transactions; and (8) 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 our covenants in place at December 29, 2012 and December 31, 2011, respectively. Our revolving credit facility also provides for customary events of default, covenant defaults and cross-defaults to other material indebtedness.
Senior Unsecured Notes
Our 5.75% senior unsecured notes were issued in April 2010 at 99.587% of the principal amount of $300 million and are due May 1, 2020 (the "2020 Notes"). The 2020 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. Our 4.50% senior unsecured notes were issued in January 2012 at 99.968% of the principal amount of $300 million and are due January 15, 2022 (the "2022 Notes" or collectively with 2020 Notes, "the Notes"). The 2022 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on January 15 and July 15 of each year. We served as the issuer of the Notes with certain of our domestic subsidiaries currently serving as subsidiary guarantors. The terms of the Notes are governed by an indenture and supplemental indentures (collectively the “Indenture”) among us, the subsidiary guarantors and Wells Fargo Bank, National Association, as Trustee.
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 each of the Indentures for the Notes), 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 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: (i) upon the release of the guarantee of our other debt that resulted in the affected subsidiary becoming a guarantor of this debt; (ii) upon the sale or other disposition of all or substantially all of the stock or assets of the subsidiary guarantor; or (iii) upon our exercise of its legal or covenant defeasance option.
As of December 29, 2012, 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 and our access to additional financing on favorable terms may become more limited. In addition, it could reduce the attractiveness of our vendor payment program, where certain of our vendors finance payment obligations from us with designated third party financial institutions, which could result in increased working capital requirements. Conversely, if these credit ratings improve, our interest rate may decrease.
Off-Balance-Sheet Arrangements
As of December 29, 2012, 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 notes and revolving 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 December 29, 2012 were as follows:
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| | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Period |
Contractual Obligations | | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More Than 5 Years |
| | (in thousands) |
Long-term debt (1) | | $ | 605,088 |
| | $ | 627 |
| | $ | 5,524 |
| | $ | — |
| | $ | 598,937 |
|
Interest payments | | 261,122 |
| | 30,873 |
| | 61,701 |
| | 61,500 |
| | 107,048 |
|
Operating leases (2) | | 2,338,483 |
| | 328,716 |
| | 570,541 |
| | 502,783 |
| | 936,443 |
|
Other long-term liabilities (3) | | 239,021 |
| | — |
| | — |
| | — |
| | — |
|
Purchase obligations (4) | | 59,552 |
| | 25,724 |
| | 15,699 |
| | 13,022 |
| | 5,107 |
|
| | $ | 3,443,714 |
| | $ | 385,940 |
| | $ | 653,465 |
| | $ | 577,305 |
| | $ | 1,647,535 |
|
Note: For additional information refer to Note 6, Long-term Debt; Note 14, Income Taxes; Note 15, Lease Commitments; Note 16, Contingencies; and Note 17, 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.
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(1) | Long-term debt primarily represents the principal amount of our 5.75% Notes and 4.50% Notes, which become due in Fiscal 2020 and Fiscal 2022, respectively. |
| |
(2) | 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. |
| |
(3) | Primarily includes the long-term portion of 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 December 29, 2012. Accordingly, the related balances have not been reflected in the "Payments Due by Period" section of the table. |
| |
(4) | Purchase obligations include agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Included in the table above is the lesser of the remaining obligation or the cancelation penalty under the agreement. Our open purchase orders related to merchandise inventory are based on current operational needs and are fulfilled by our vendors within a short period of time. We currently do not have minimum purchase commitments under our vendor supply agreements nor are our open purchase orders binding agreements. Accordingly, we have excluded open purchase orders from the above table. |