aap10q.htm

 

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

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 10, 2009
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.

Commission file number 001-16797


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

 
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
54-2049910
(I.R.S. Employer
Identification No.)
 
5008 Airport Road, Roanoke, Virginia 24012
(Address of Principal Executive Offices)
(Zip Code)
 
(540) 362-4911
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report).

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes p No p
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer x Accelerated filer p
Non-accelerated filer   p (Do not check if a smaller reporting company) Smaller reporting company p
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes p No x

As of November 16, 2009, the registrant had outstanding 94,631,221 shares of Common Stock, par value $0.0001 per share (the only class of common stock of the registrant outstanding).
 

 
 

 
       
       
PART I. FINANCIAL INFORMATION
       
  Item 1.  Condensed Consolidated Financial Statements of Advance Auto Parts, Inc. and Subsidiaries (unaudited):   
       
    Condensed Consolidated Balance Sheets as of October 10, 2009 and January 3, 2009 
 1
       
    Condensed Consolidated Statements of Operations for the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008  
 2
       
    Condensed Consolidated Statements of Cash Flows for the Forty Week Periods Ended October 10, 2009 and October 4, 2008 
 3
       
    Notes to the Condensed Consolidated Financial Statements 
 5
       
  Management's Discussion and Analysis of Financial Condition and Results of Operations
22
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
38
       
  Item 4.  Controls and Procedures 
38
       
PART II.  OTHER INFORMATION 
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  39
       
  Item 6. Exhibits 
39
       
SIGNATURE     
S-1
 
 
 
PART I.  FINANCIAL INFORMATION
 
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF
ADVANCE AUTO PARTS, INC. AND SUBSIDIARIES
 
 
Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
October 10, 2009 and January 3, 2009
(in thousands, except per share data)
(unaudited)
 

   
October 10,
   
January 3,
 
Assets
 
2009
   
2009
 
             
Current assets:
           
Cash and cash equivalents
  $ 216,215     $ 37,358  
Receivables, net
    92,993       97,203  
Inventories, net
    1,657,067       1,623,088  
Other current assets
    46,381       49,977  
          Total current assets
    2,012,656       1,807,626  
Property and equipment, net of accumulated depreciation of
               
$884,027 and $817,428
    1,070,217       1,071,405  
Assets held for sale
    3,062       2,301  
Goodwill
    34,387       34,603  
Intangible assets, net
    26,670       27,567  
Other assets, net
    18,906       20,563  
    $ 3,165,898     $ 2,964,065  
Liabilities and Stockholders' Equity
               
Current liabilities:
               
Bank overdrafts
  $ -     $ 20,588  
Current portion of long-term debt
    1,307       1,003  
Financed vendor accounts payable
    51,953       136,386  
Accounts payable
    959,692       791,330  
Accrued expenses
    400,965       372,510  
Other current liabilities
    59,041       43,177  
          Total current liabilities
    1,472,958       1,364,994  
Long-term debt
    278,149       455,161  
Other long-term liabilities
    122,235       68,744  
Commitments and contingencies
               
Stockholders' equity:
               
Preferred stock, nonvoting, $0.0001 par value,
               
   10,000 shares authorized; no shares issued or outstanding
    -       -  
Common stock, voting, $0.0001 par value, 200,000 shares authorized;
               
   104,036 shares issued and 94,663 outstanding at October 10, 2009
               
   and 103,000 shares issued and 94,852 outstanding at January 3, 2009
    10       10  
Additional paid-in capital
    382,766       335,991  
Treasury stock, at cost, 9,373 and 8,148 shares
    (340,681 )     (291,114 )
Accumulated other comprehensive loss
    (7,946 )     (9,349 )
Retained earnings
    1,258,407       1,039,628  
          Total stockholders' equity
    1,292,556       1,075,166  
    $ 3,165,898     $ 2,964,065  
                 
 
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
 
 


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Twelve and Forty Week Periods Ended
October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 

   
Twelve Week Periods Ended
   
Forty Week Periods Ended
 
   
October 10,
   
October 4,
   
October 10,
   
October 4,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net sales
  $ 1,262,576     $ 1,187,952     $ 4,269,056     $ 3,949,867  
Cost of sales, including purchasing and warehousing costs
    641,117       625,777       2,172,959       2,076,555  
         Gross profit
    621,459       562,175       2,096,097       1,873,312  
Selling, general and administrative expenses
    516,604       466,278       1,698,885       1,505,178  
         Operating income
    104,855       95,897       397,212       368,134  
Other, net:
                               
     Interest expense
    (5,339 )     (6,672 )     (18,430 )     (26,247 )
     Other income (expense), net
    487       (223 )     633       (287 )
         Total other, net
    (4,852 )     (6,895 )     (17,797 )     (26,534 )
Income before provision for income taxes
    100,003       89,002       379,415       341,600  
Provision for income taxes
    38,024       32,847       143,521       127,973  
Net income
  $ 61,979     $ 56,155     $ 235,894     $ 213,627  
                                 
Basic earnings per share
  $ 0.65     $ 0.59     $ 2.48     $ 2.24  
                                 
Diluted earnings per share
  $ 0.65     $ 0.58     $ 2.46     $ 2.23  
                                 
Average common shares outstanding
    94,656       95,019       94,647       95,003  
                                 
Average common shares outstanding - assuming dilution
    95,474       95,758       95,325       95,669  
 
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Forty Week Periods Ended
October 10, 2009 and October 4, 2008
(in thousands)
(unaudited)

 
   
Forty Week Periods Ended
 
   
October 10,
   
October 4,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net income
  $ 235,894     $ 213,627  
Adjustments to reconcile net income to net cash provided by
               
operating activities:
               
Depreciation and amortization
    114,856       113,297  
Amortization of deferred debt issuance costs
    277       277  
Share-based compensation
    13,446       13,405  
Loss on property and equipment, net
    7,979       1,272  
Provision (benefit) for deferred income taxes
    56,013       (1,465 )
Excess tax benefit from share-based compensation
    (2,531 )     (8,994 )
Net decrease (increase) in:
               
Receivables, net
    4,210       (8,518 )
Inventories, net
    (33,979 )     (187,741 )
Other assets
    4,988       7,501  
Net increase in:
               
Accounts payable
    168,362       164,869  
Accrued expenses
    43,576       60,656  
Other liabilities
    15,359       7,658  
Net cash provided by operating activities
    628,450       375,844  
Cash flows from investing activities:
               
Purchases of property and equipment
    (132,622 )     (136,954 )
Proceeds from sales of property and equipment
    2,565       6,351  
Other
    -       (3,413 )
Net cash used in investing activities
    (130,057 )     (134,016 )
Cash flows from financing activities:
               
Decrease in bank overdrafts
    (20,565 )     (30,000 )
(Decrease) increase in financed vendor accounts payable
    (84,433 )     28,380  
Dividends paid
    (22,772 )     (23,155 )
Payments on note payable
    (512 )     (498 )
Borrowings under credit facilities
    173,400       301,700  
Payments on credit facilities
    (349,900 )     (335,700 )
Proceeds from the issuance of common stock, primarily exercise
               
of stock options
    31,978       34,533  
Excess tax benefit from share-based compensation
    2,531       8,994  
Repurchase of common stock
    (49,567 )     (219,429 )
Other
    304       -  
Net cash used in financing activities
    (319,536 )     (235,175 )
Net increase in cash and cash equivalents
    178,857       6,653  
Cash and cash equivalents, beginning of period
    37,358       14,654  
Cash and cash equivalents, end of period
  $ 216,215     $ 21,307  
 
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows - (Continued)
For the Forty Week Periods Ended
October 10, 2009 and October 4, 2008
(in thousands)
(unaudited)
 
   
Forty Week Periods Ended
 
   
October 10,
   
October 4,
 
   
2009
   
2008
 
             
Supplemental cash flow information:
 
 
       
Interest paid
  $ 17,868     $ 21,100  
Income tax payments, net
    98,551       106,418  
Non-cash transactions:
               
Accrued purchases of property and equipment
    19,488       22,584  
Changes in other comprehensive income (loss)
    1,403       (2,550 )
 
 
 
 
 
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
 

 

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
1.
Basis of Presentation:
 
The accompanying condensed consolidated financial statements include the accounts of Advance Auto Parts, Inc. and its wholly owned subsidiaries, or the Company. All significant intercompany balances and transactions have been eliminated in consolidation.

The condensed consolidated balance sheets as of October 10, 2009 and January 3, 2009, the condensed consolidated statements of operations for the twelve and forty week periods ended October 10, 2009 and October 4, 2008, and the condensed consolidated statements of cash flows for the forty week periods ended October 10, 2009 and October 4, 2008, have been prepared by the Company. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position of the Company, the results of its operations and cash flows have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s consolidated financial statements for the fiscal year ended January 3, 2009.

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

Use of Estimates

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

Vendor Incentives

The Company receives incentives in the form of reductions to amounts owed and/or payments from vendors related to cooperative advertising allowances, volume rebates and other promotional considerations. Many of these incentives are under long-term agreements (terms in excess of one year), while others are negotiated on an annual basis or less (short-term). Both cooperative advertising allowances and volume rebates are earned based on inventory purchases and initially recorded as a reduction to inventory. These deferred amounts are included as a reduction to cost of sales as the inventory is sold since these payments do not represent reimbursements for specific, incremental and identifiable costs. Total deferred vendor incentives included in Inventory, net were $47,206 and $50,527 at October 10, 2009 and January 3, 2009, respectively.

Similarly, the Company recognizes other promotional incentives earned under long-term agreements as a reduction to cost of sales. However, these incentives are recognized based on the cumulative net purchases as a percentage of total estimated net purchases over the life of the agreement. The Company's margins could be impacted positively or negatively if actual purchases or results from any one year differ from its estimates; however, the impact over the life of the agreement would be the same. Short-term incentives (terms less than one year) are generally recognized as a reduction to cost of sales over the duration of any short-term agreements.

Amounts received or receivable from vendors that are not yet earned are reflected as deferred revenue in the accompanying condensed consolidated balance sheets. Management's estimate of the portion of deferred revenue that will be realized within one year of the balance sheet date has been included in Other current liabilities in the accompanying condensed consolidated balance sheets. Earned amounts that are receivable from vendors are included
 
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
in Receivables, net except for that portion expected to be received after one year, which is included in Other assets, net on the accompanying condensed consolidated balance sheets.

Preopening Expenses

Preopening expenses, which consist primarily of payroll and occupancy costs related to the opening of new stores, are expensed as incurred.

Warranty Liabilities

The warranty obligation on the majority of merchandise sold by the Company with a manufacturer’s warranty is the responsibility of the Company’s vendors. However, the Company has an obligation to provide customers free replacement of merchandise or merchandise at a prorated cost if under a warranty and not covered by the manufacturer. Merchandise sold with warranty coverage by the Company primarily includes batteries but may also include other parts such as brakes and shocks. The Company estimates its warranty obligation based on the historical return experience of the product sold and records any change as income or expense in the period the product is sold.

Sales Returns and Allowances

The Company’s accounting policy for sales returns and allowances consists of establishing reserves for estimated returns at the time of sale. The Company estimates returns based on current sales levels and the Company’s historical return experience on a specific product basis. The Company’s reserve for sales returns and allowances was not material at October 10, 2009 and January 3, 2009.

Financed Vendor Accounts Payable

The Company is party to a short-term financing program with a bank allowing it to extend its payment terms on certain merchandise purchases. The substance of the program is for the Company to borrow money from the bank to finance purchases from vendors. The Company records any discount given by the vendor to its inventory and accretes this discount to the resulting short-term payable to the bank through interest expense over the extended term. At October 10, 2009 and January 3, 2009, $51,953 and $136,386, respectively, was payable to the bank by the Company under this program and is included in the accompanying condensed consolidated balance sheets as Financed vendor accounts payable.

The balance in Financed vendor accounts payable continues to diminish as the Company transitions its merchandise vendors to customer-managed services arrangements.

Earnings per Share

The Company computes earnings per share in accordance with SFAS No. 128, “Earnings per Share” and FASB Staff Position, or FSP, EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (collectively now under ASC Topic 260). The Company adopted FSP EITF 03-6-1 effective January 4, 2009 (the Company’s first quarter), which addresses whether instruments granted in share-based payment awards are participating securities prior to vesting, and therefore, need to be included in the earnings allocation when computing earnings per share under the two-class method as described in SFAS No. 128. In accordance with FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.
 
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
Accordingly, earnings per share is determined using the two-class method and is computed by dividing net income attributable to the Company’s common shareholders by the weighted-average common shares outstanding during the period. The two-class method is an earnings allocation formula that determines income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Diluted income per common share reflects the more dilutive earnings per share amount calculated using the treasury stock method or the two-class method.

Cost of Sales and Selling, General and Administrative (“SG&A”) Expenses

The following table illustrates the primary costs classified in each major expense category:
 
Cost of Sales 
 
SG&A 
               
Total cost of merchandise sold including:
 
Payroll and benefit costs for retail and corporate
 
Freight expenses associated with moving
   
team members;
   
merchandise inventories from our vendors to
 
Occupancy costs of retail and corporate facilities;
   
our distribution center,
 
Depreciation related to retail and corporate assets;
 
Vendor incentives, and
 
Advertising;
 
Cash discounts on payments to vendors;
 
Costs associated with our commercial delivery
Inventory shrinkage;
   
program, including payroll and benefit costs,
Defective merchandise and warranty costs;
   
and transportation expenses associated with moving
Costs associated with operating our distribution
   
merchandise inventories from our retail stores to
  network, including payroll and benefit costs,      our customer locations; 
 
occupancy costs and depreciation; and
 
Self-insurance costs;
Freight and other handling costs associated with
 
Professional services; and
 
moving merchandise inventories through our
Other administrative costs, such as credit card
  supply chain     service fees, supplies, travel and lodging. 
 
From our distribution centers to our retail      
    store locations, and  
 
 
 
From certain of our larger stores which stock a  
 
 
    wider variety and greater supply of inventory, or   
 
 
    HUB stores, and Parts Delivered Quickly warehouses,       
   
or PDQ®s, to our retail stores after the customer
   
 
    has special-ordered the merchandise.       
 
Please see Note 2 for a discussion of a change in accounting principle for costs included in inventory.
 
New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board, or FASB, approved the FASB Accounting Standards Codification, or ASC, as the single source of authoritative nongovernmental GAAP. All existing accounting standard guidance issued by the FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and related literature, excluding guidance from the Securities and Exchange Commission, or SEC, has been superseded by the ASC. All other non-grandfathered, non-SEC accounting literature not included in the ASC has become non-authoritative. The ASC did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The ASC was effective for interim or annual periods ending after September 15, 2009.
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
Accordingly, the Company adopted the ASC as of October 10, 2009 as provided by Accounting Standards Update, or ASU, No. 2009-01, “Topic 105 – Generally Accepted Accounting Principles – amendments based on Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles.” As a result of this adoption, previous references to new accounting standards and literature are no longer applicable. In the current quarter financial statements, the Company has provided references to both new and old guidance to assist in understanding the impacts of recently adopted accounting literature, particularly for guidance adopted since the beginning of the current fiscal year but prior to the ASC.

Effective October 10, 2009, the Company adopted ASU No. 2009-05, “Fair Value Measurements and Disclosures (ASC Topic 820): Measuring Liabilities at Fair Value.” This ASU provides amendments to ASC Topic 820-10, “Fair Value Measurements and Disclosures – Overall,” for the fair value measurement of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using (a) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities and/or (b) an income approach valuation technique or a market approach valuation technique, consistent with the principles of ASC Topic 820.  The adoption did not have a significant impact on the Company’s consolidated financial statements.

                   Effective July 18, 2009 (the Company’s second quarter), the Company adopted FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (currently included in ASC Topic 820-10-65-4). This FSP provides guidance for estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly decreased, as well as guidance on identifying circumstances that indicate a transaction is not orderly. It also requires disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. The adoption had no significant impact on the Company’s consolidated financial statements.

Effective July 18, 2009 (the Company’s second quarter), the Company adopted FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (currently included in ASC Topic 825-10-65-1). This FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This FSP also requires disclosure about the methods and significant assumptions used to estimate the fair value of financial instruments and changes in those methods and significant assumptions, if any, during the period. The adoption had no impact on the Company’s consolidated financial statements other than the additional disclosures.

Effective July 18, 2009 (the Company’s second quarter), the Company adopted SFAS No. 165, “Subsequent Events” (currently ASC Topic 855-10).  This statement sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued.  The Company evaluated all activity through November 19, 2009 (the issuance date of the financial statements) and concluded that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the related notes to the condensed consolidated financial statements.

 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
2.
Change in Accounting Principle:

Effective January 4, 2009, the Company implemented a change in accounting principle for costs included in inventory. Under the Company’s historical accounting policy, freight and other handling costs (collectively “handling costs”) associated with moving merchandise inventories from our distribution centers to our retail stores and handling costs associated with moving our merchandise inventories from our vendors to our distribution centers were capitalized as inventory and expensed in cost of sales as inventory was sold. However, handling costs associated with moving merchandise inventories from our HUB stores and PDQ®s to our retail stores after a customer had special-ordered the merchandise were expensed as incurred in SG&A.

The change relates to capitalizing handling costs associated with moving merchandise inventories from our HUB stores and PDQ®s to our retail stores, which are now treated as inventory product costs. Such costs are includable in inventory and expensed in cost of sales as inventory is sold because they related to the acquisition of goods for resale by the Company. The Company has determined that it is preferable to capitalize such handling costs into inventory because it better represents the costs incurred to prepare inventory for sale to the customer and it is consistent with the Company’s treatment of other handling costs associated with moving merchandise inventories from our distribution centers to our retail stores.

The change in accounting principle has been retrospectively applied to all prior periods presented herein related to cost of sales and SG&A. However, because the inventory transferred is typically at the retail store for only one or two days until customer pick-up, the current and historical impact of this change on the consolidated balance sheets, consolidated net income, earnings per share, and consolidated statements of cash flows is not material and, as a result, Inventories, net was not adjusted. Accordingly, there is no impact on any financial statement line items other than cost of sales and SG&A, and there was no cumulative effect of the change in accounting principle on retained earnings. The change in accounting principle was initially reported in the Company’s first quarter Form 10-Q for fiscal 2009. The tables below represent the impact of the accounting change on the current periods presented for the twelve and forty weeks ended October 10, 2009 and previously reported amounts for the comparable periods in fiscal 2008:
 
   
Twelve week period ended October 10, 2009
   
Forty week period ended October 10, 2009
 
   
Prior to Effect
of Accounting
Change
   
Adjustments
   
As Reported
   
Prior to Effect
of Accounting
Change
   
Adjustments
   
As Reported
 
Cost of sales, including purchasing
                                   
and warehousing costs
  $ 623,963     $ 17,154     $ 641,117     $ 2,121,168     $ 51,791     $ 2,172,959  
                                                 
Gross profit
  $ 638,613     $ (17,154 )   $ 621,459     $ 2,147,888     $ (51,791 )   $ 2,096,097  
                                                 
Selling, general and administrative expenses
  $ 533,758     $ (17,154 )   $ 516,604     $ 1,750,676     $ (51,791 )   $ 1,698,885  
                                                 
   
Twelve week period ended October 4, 2008
   
Forty week period ended October 4, 2008
 
   
As Previously
Reported
   
Adjustments
   
As Adjusted
   
As Previously
Reported
   
Adjustments
   
As Adjusted
 
Cost of sales, including purchasing
                                               
and warehousing costs
  $ 610,833     $ 14,944     $ 625,777     $ 2,028,459     $ 48,096     $ 2,076,555  
                                                 
Gross profit
  $ 577,119     $ (14,944 )   $ 562,175     $ 1,921,408     $ (48,096 )   $ 1,873,312  
                                                 
Selling, general and administrative expenses
  $ 481,222     $ (14,944 )   $ 466,278     $ 1,553,274     $ (48,096 )   $ 1,505,178  

 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
3.
Store Closures and Impairment:

For fiscal 2009, the Company currently expects to divest a total of approximately 40 to 50 stores as part of its store divestiture plan. These store closures will be in addition to approximately 15 stores that will also be closed throughout 2009 as part of the Company’s routine review and closure of underperforming stores at or near the end of their respective lease terms. The store divestiture plan consisted of a review of operating stores to identify locations for potential closing based on both financial and operating factors. These factors included cash flow, profitability, strategic market importance, store full potential and current lease rates.

As of October 10, 2009, the Company had identified 45 stores to close as part of its store divestiture plan. During the twelve weeks ended October 10, 2009, the Company closed 13 stores, 12 of which were under the store divestiture plan. During the forty weeks ended October 10, 2009, the Company closed 43 stores, 36 of which were closed under the store divestiture plan.

During the twelve and forty weeks ended October 10, 2009, the Company recognized $7,129 and $22,235, respectively, of total expense associated with the 45 stores identified to be closed, or divestiture expense. For the twelve and forty weeks ended October 10, 2009, divestiture expense included closed store exit costs of $6,655 and $17,502, respectively. The closed store exit costs primarily included the establishment of the liability for future lease obligations as well as severance. Closed store liabilities primarily include the present value of the remaining lease obligations and management’s estimate of future costs of insurance, property tax and common area maintenance (reduced by the present value of estimated revenues from subleases and lease buyouts). New provisions are established by a charge to SG&A in the accompanying consolidated statement of operations at the time the facilities actually close.

A summary of the Company’s closed store liabilities, which are recorded in accrued expenses (current portion) and long-term liabilities (long-term portion) in the accompanying condensed consolidated balance sheet, are presented in the following table:
 
   
Lease
Obligations
   
Severance and
Other Exit
   
Total
 
For the twelve weeks ended October 10, 2009:
                 
                   
Closed Store Liabilities, July 18, 2009:
  $ 12,242     $ -     $ 12,242  
Reserves established
    6,756       205       6,961  
Change in estimates
    (69 )     -       (69 )
Reserves utilized
    (1,008 )     (205 )     (1,213 )
Closed Store Liabilities, October 10, 2009
  $ 17,921     $ -     $ 17,921  
                         
For the forty weeks ended October 10, 2009:
                       
                         
Closed Store Liabilities, January 3, 2009
  $ 5,067     $ -     $ 5,067  
Reserves established
    17,068       630       17,698  
Change in estimates
    (440 )     -       (440 )
Reserves utilized
    (3,774 )     (630 )     (4,404 )
Closed Store Liabilities, October 10, 2009
  $ 17,921     $ -     $ 17,921  
 
The Company’s ending closed store liabilities at October 10, 2009 included $15,555 related to the store divestiture plan.
 
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
The Company also included impairment charges of $474 and $4,733 in its total divestiture expense during the twelve and forty weeks ended October 10, 2009, respectively. The impairment charges, which primarily consisted of the impairment of store assets contained in leased store locations where the carrying amount of those assets is not recoverable, are included in SG&A in the accompanying condensed consolidated statement of operations.

4.
Inventories, net:

Merchandise Inventory

Inventories are stated at the lower of cost or market. The Company used the LIFO method of accounting for approximately 95% of inventories at both October 10, 2009 and January 3, 2009. Under LIFO, the Company’s cost of sales reflects the costs of the most recently purchased inventories, while the inventory carrying balance represents the costs for inventories purchased in fiscal 2009 and prior years. Historically, the Company’s overall costs to acquire inventory for the same or similar products have been decreasing due to the Company’s significant growth. As a result of utilizing LIFO, the Company recorded a reduction to cost of sales of $16,577 and $6,118 for the forty weeks ended October 10, 2009 and October 4, 2008, respectively.

An actual valuation of inventory under the LIFO method is performed by the Company at the end of each fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected fiscal year-end inventory levels and costs.

Product Cores

The remaining inventories are comprised of product cores, the non-consumable portion of certain parts and batteries, which are valued under the first-in, first-out ("FIFO") method. Product cores are included as part of the Company’s merchandise costs that are either passed on to the customer or returned to the vendor. Because product cores are not subject to frequent cost changes like the Company’s other merchandise inventory, there is no material difference when applying either the LIFO or FIFO valuation method.

Inventory Overhead Costs

The Company capitalizes certain purchasing and warehousing costs into inventory. Purchasing and warehousing costs included in inventory, at FIFO, at October 10, 2009 and January 3, 2009, were $104,836 and $104,594, respectively.

Inventory Balances and Inventory Reserves

Inventory balances at October 10, 2009 and January 3, 2009 were as follows:
 
   
October 10,
   
January 3,
 
   
2009
   
2009
 
Inventories at FIFO, net
  $ 1,559,273     $ 1,541,871  
Adjustments to state inventories at LIFO
    97,794       81,217  
Inventories at LIFO, net
  $ 1,657,067     $ 1,623,088  
 
Inventory quantities are tracked through a perpetual inventory system. The Company uses a cycle counting program in all distribution centers and PDQ®s to ensure the accuracy of the perpetual inventory quantities of both
 
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
merchandise and product core inventory. For our retail stores, the Company began completing physical inventories during its third quarter of fiscal 2008 in addition to cycle counting to ensure the accuracy of the perpetual inventory quantities of both merchandise and core inventory in these locations. The Company establishes reserves for estimated shrink based on results of completed physical inventories, actual results from recent cycle counts and historical results from the Company’s cycle counting program.

The Company also establishes reserves for potentially excess and obsolete inventories based on (i) current inventory levels, (ii) the historical analysis of product sales and (iii) current market conditions. The Company provides reserves when less than full credit is expected from a vendor or when liquidating product will result in retail prices below recorded costs. The Company’s reserves against inventory for these matters were $24,042 and $62,898 at October 10, 2009 and January 3, 2009, respectively. The reduction in the Company’s inventory reserves during the forty weeks ended October 10, 2009 is primarily related to the utilization of its reserve for slow moving inventory primarily established during the fourth quarter of fiscal 2008 in connection with a change in inventory management approach for slow moving inventory.
 
5.
Goodwill and Intangible Assets:
 
Goodwill

The following table reflects the carrying amount of goodwill pertaining to the Company’s two segments, and the changes in goodwill carrying amounts, for the forty weeks ended October 10, 2009:

   
AAP Segment
   
AI Segment
   
Total
 
                   
Balance at January 3, 2009
  $ 16,093     $ 18,510     $ 34,603  
Fiscal 2009 activity
    -       (216 )     (216 )
Balance at October 10, 2009
  $ 16,093     $ 18,294     $ 34,387  
 
Intangible Assets Other Than Goodwill

The carrying amount and accumulated amortization of acquired intangible assets as of October 10, 2009 and January 3, 2009 are comprised of the following:

   
Acquired intangible assets
       
               
Not Subject
       
   
Subject to Amortization
   
to Amortization
       
   
Customer
         
Trademark and
   
Intangible
 
   
Relationships
   
Other
   
Tradenames
   
Assets, net
 
                         
Gross carrying amount at January 3, 2009
  $ 9,800     $ 885     $ 20,550     $ 31,235  
Accumulated Amortization
    3,234       434       -       3,668  
Net book value at January 3, 2009
  $ 6,566     $ 451     $ 20,550     $ 27,567  
                                 
Gross carrying amount at October 10, 2009
  $ 9,800     $ 885     $ 20,550     $ 31,235  
Accumulated Amortization
    4,035       530       -       4,565  
Net book value at October 10, 2009
  $ 5,765     $ 355     $ 20,550     $ 26,670  
 
 
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
   
Twelve Weeks Ended
   
Forty Weeks Ended
 
   
October 10, 2009
   
October 4, 2008
   
October 10, 2009
   
October 4, 2008
 
Amortization expense
  $ 252     $ 296     $ 897     $ 905  
 
Future Amortization Expense

The table below shows expected amortization expense for the next five years for acquired intangible assets recorded as of October 10, 2009:
 
Fiscal Year
     
Remainder of 2009
  $ 250  
2010
    1,059  
2011
    967  
2012
    967  
2013
    967  
 
6.
Receivables, net:

Receivables consist of the following:

   
October 10,
 2009
   
January 3, 
2009
 
             
Trade
  $ 18,732     $ 17,843  
Vendor
    76,293       81,265  
Other
    3,175       3,125  
Total receivables
    98,200       102,233  
Less: Allowance for doubtful accounts
    (5,207 )     (5,030 )
Receivables, net
  $ 92,993     $ 97,203  
 
7.
Derivative Instruments and Hedging Activities:
 
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking hedge transactions. The Company’s derivatives that are designated as hedging instruments currently consist solely of interest rate swaps. Interest rate swaps are entered into to limit cash flow risk associated with the Company’s floating-rate borrowings. The Company also utilizes forward commodity contracts to manage the risk of fluctuating fuel prices. The Company has elected to apply the normal purchase election allowed and therefore does not account for these contracts at fair value.

All derivative instruments designated as hedging are classified as fair value, cash flow or net investment hedges. All derivatives (including those not designated as hedging instruments) are recognized on the condensed consolidated balance sheet at fair value and classified based on the instruments’ maturity dates. Changes in the fair value measurements of the effective portion of the derivative instruments designated as hedging instruments are reflected as adjustments to other comprehensive income, or OCI, with the remaining changes recorded through current earnings.
 
 
 
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
The Company seeks to manage and mitigate cash flow risk on its variable rate debt via receive variable/pay fixed interest rate swaps. Current outstanding interest rate swaps have fixed the Company’s interest rate on an aggregate of $275,000 of hedged debt at rates ranging from 4.01% to 4.98%. The Company elects to receive interest payments based on the 90-day adjusted LIBOR interest rate and has the intent and ability to continue to use this rate on its hedged borrowings. Accordingly, the Company does not recognize any ineffectiveness on the swaps. All of the Company’s interest rate swaps expire in October 2011.

The fair value of these interest rate swaps are determined based on a forward yield curve and the contracted interest rates stated in the interest rate swap agreements. The fair value of the Company’s interest rate swaps at October 10, 2009 and January 3, 2009, respectively, was an unrecognized loss of $19,151 and $21,979, which is reflected in Accumulated other comprehensive income (loss). Any amounts received or paid under these hedges are recorded in the statement of operations during the accounting period the interest on the hedged debt is paid. Based on the estimated current and future fair values of the hedge arrangements at October 10, 2009, the Company estimates amounts currently included in Accumulated other comprehensive income (loss) pertaining to the interest rate swaps that will be reclassified and recorded in the statement of earnings in the next 12 months will consist of a net loss of $11,410.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of October 10, 2009 and January 3, 2009:
 
 
Liability Derivatives
 
 
Balance Sheet
 
Fair Value as of
   
Fair Value as of
 
 
Location
 
October 10, 2009
   
January 3, 2009
 
Derivatives designated as hedging
             
instruments:
             
Interest rate swaps
Accrued expenses
  $ 11,410     $ 9,222  
Interest rate swaps
Other long-term liabilities
    7,741       12,757  
      $ 19,151     $ 21,979  
 
The table below presents the effect of the Company’s derivative financial instruments on the statement of operations for the twelve and forty weeks ended October 10, 2009 and October 4, 2008, respectively:
 
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
Derivatives in SFAS 133
Cash Flow Hedging
Relationships
 
Amount of
Gain or
(Loss)
Recognized
in OCI on
Derivative,
net of tax
(Effective
Portion)
Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective
Portion)
 
Amount of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
 
Location of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount Excluded
from Effectiveness
Testing)
 
Amount of
Gain or (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 
                       
For the Twelve Weeks
Ended October 10, 2009:
 
 
             
                       
Interest rate swaps
  $ 183  
Interest expense
  $ (183 )
Interest expense
  $ -  
                             
For the Twelve Weeks
Ended October 4, 2008:
 
 
                   
                             
Interest rate swaps
  $ (1,730 )
Interest expense
  $ 1,730  
Interest expense
  $ -  
                             
For the Forty Weeks Ended
October 10, 2009:
 
 
                   
                             
Interest rate swaps
  $ 1,720  
Interest expense
  $ (1,720 )
Interest expense
  $ -  
                             
For the Forty Weeks Ended
October 4, 2008:
 
 
                     
                             
Interest rate swaps
  $ (2,271 )
Interest expense
  $ 2,271  
Interest expense
  $ -  
 
8.
Fair Value Measurements:

The Company’s financial assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of these assets or liabilities. These levels are:

● 
Level 1 – Unadjusted quoted prices that are available in active markets for identical assets or liabilities at the measurement date.
● 
Level 2 – Inputs other than quoted prices that are observable for assets and liabilities at the measurement date, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are less active, inputs other than quoted prices that are observable for the asset or liability or corroborated by other observable market data.
● 
  
Level 3 – Unobservable inputs for assets or liabilities that are not able to be corroborated by observable market data and reflect the use of a reporting entity’s own assumptions. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value hierarchy requires the use of observable market data when available. In instances where inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

The following table sets forth our financial liabilities that were measured at fair value on a recurring basis as of October 10, 2009 and January 3, 2009:

 
       
Fair Value Measurements at Reporting Date Using
 
         
Level 1
   
Level 2
   
Level 3
 
                         
         
Quoted Prices in
         
Significant
 
         
Active Markets for
   
Significant Other
   
Unobservable
 
   
Fair Value
   
Identical Assets
   
Observable Inputs
   
Inputs
 
                         
October 10, 2009:
                       
Interest rate swaps
  $ 19,151     $ -     $ 19,151     $ -  
                                 
January 3, 2009:
                               
Interest rate swaps
  $ 21,979     $ -     $ 21,979     $ -  
 
The fair value of these interest rate swaps as of October 10, 2009 and January 3, 2009, was an unrecognized loss of $19,151 and $21,979, respectively. The fair value of the Company’s interest rate swaps is mainly based on observable interest rate yield curves for similar instruments.
 
The carrying amount of the Company’s cash and cash equivalents, accounts receivable, bank overdrafts, financed vendor accounts payable, accounts payable, accrued expenses and current portion of long term debt approximate their fair values due to the relatively short term nature of these instruments. As of October 10, 2009, the fair value of the Company’s long-term debt with a carrying value of $278,149, was approximately $265,000, and was based on similar long-term debt issues available to the Company as of that date. The fair value of the Company’s fixed rate debt was determined by using an assumed market interest rate commensurate with the Company’s credit risk.

Non-Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). At October 10, 2009, the Company had no significant non-financial assets or liabilities that had been adjusted to fair value subsequent to initial recognition. A majority of the Company’s store assets that were subject to impairment in connection with its store divestiture plan had no remaining value and, as a result, were not subject to the fair value disclosure requirements.

 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
9.
Long-term Debt:

Long-term debt consists of the following:

   
October 10, 
2009
   
January 3, 
2009
 
Revolving facility at variable interest rates
           
(1.06% and 4.81% at October 10, 2009 and January 3,
           
2009, respectively) due October 2011
  $ 75,000     $ 251,500  
Term loan at variable interest rates
               
(1.33% and 3.02% at October 10, 2009 and January 3,
               
2009, respectively) due October 2011
    200,000       200,000  
Other
    4,456       4,664  
      279,456       456,164  
Less: Current portion of long-term debt
    (1,307 )     (1,003 )
Long-term debt, excluding current portion
  $ 278,149     $ 455,161  
 
Bank Debt

The Company has a $750,000 unsecured five-year revolving credit facility with the Company’s wholly-owned subsidiary, Advance Stores Company, Incorporated, or Stores, serving as the borrower. The revolving credit facility also provides for the issuance of letters of credit with a sub limit of $300,000, and swingline loans in an amount not to exceed $50,000. The Company may request, subject to agreement by one or more lenders, that the total revolving commitment be increased by an amount not exceeding $250,000 (up to a total commitment of $1,000,000) during the term of the credit agreement. Voluntary prepayments and voluntary reductions of the revolving balance are permitted in whole or in part, at the Company’s option, in minimum principal amounts as specified in the revolving credit facility. The revolving credit facility terminates on October 5, 2011.

As of October 10, 2009, the Company had $75,000 outstanding under its revolving credit facility, and letters of credit outstanding of $102,997, which reduced the availability under the revolving credit facility to $572,003. (The letters of credit generally have a term of one year or less.) A commitment fee is charged on the unused portion of the revolver, payable in arrears. The current commitment fee rate is 0.150% per annum.

In addition to the revolving credit facility, the Company has borrowed $200,000 under its unsecured four-year term loan as of October 10, 2009. The Company entered into the term loan with Stores serving as borrower. The proceeds from the term loan were used to repurchase shares of the Company's common stock under its stock repurchase program during fiscal 2008. The term loan terminates on October 5, 2011.

The interest rate on borrowings under the revolving credit facility is based, at the Company’s option, on an adjusted LIBOR rate, plus a margin, or an alternate base rate, plus a margin. The current margin is 0.75% and 0.0% per annum for the adjusted LIBOR and alternate base rate borrowings, respectively. The Company has elected to use the 90-day adjusted LIBOR rate and has the ability and intent to continue to use this rate on its hedged borrowings. Under the terms of the revolving credit facility, the interest rate and commitment fee are based on the Company’s credit rating.

The interest rate on the term loan is based, at the Company’s option, on an adjusted LIBOR rate, plus a margin, or an alternate base rate, plus a margin. The current margin is 1.0% and 0.0% per annum for the adjusted LIBOR and alternate base rate borrowings, respectively. The Company has elected to use the 90-day adjusted
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
LIBOR rate and has the ability and intent to continue to use this rate on its hedged borrowings. Under the terms of the term loan, the interest rate is based on the Company’s credit rating.

Other

As of October 10, 2009, the Company had $4,456 outstanding under an economic development note and other financing arrangements.

Guarantees and Covenants

The term loan and revolving credit facility are fully and unconditionally guaranteed by Advance Auto Parts, Inc. The Company’s debt agreements collectively contain covenants restricting its ability to, among other things:  (1) create, incur or assume additional debt (including hedging arrangements), (2) incur liens or engage in sale-leaseback transactions, (3) make loans and investments, (4) guarantee obligations, (5) engage in certain mergers, acquisitions and asset sales, (6) change the nature of the Company’s business and the business conducted by its subsidiaries and (7) change the Company’s status as a holding company. The Company is also required to comply with financial covenants with respect to a maximum leverage ratio and a minimum consolidated coverage ratio. The Company was in compliance with these covenants at October 10, 2009 and January 3, 2009. The Company’s term loan and revolving credit facility also provide for customary events of default, covenant defaults and cross-defaults to its other material indebtedness.
 
10.
Warranty Liabilities:
 
The following table presents changes in the Company’s warranty reserves:
 
   
October 10, 
2009
   
January 3, 
2009
 
   
(40 weeks ended)
   
(53 weeks ended)
 
Warranty reserve, beginning of period
  $ 28,662     $ 17,757  
Additions to warranty reserves
    26,083       38,459  
Reserves utilized
    (23,896 )     (27,554 )
                 
Warranty reserve, end of period
  $ 30,849     $ 28,662  
 
11.
Stock Repurchase Program:
 
During the twelve weeks ended October 10, 2009, the Company repurchased 880 shares of common stock at an aggregate cost of $35,198, or an average price of $40.00 per share. During the forty weeks ended October 10, 2009, the Company repurchased 1,225 shares of common stock at an aggregate cost of $49,567, or an average price of $40.48 per share. These shares were repurchased in accordance with the Company’s $250,000 stock repurchase program authorized by its Board of Directors in the second quarter of fiscal 2008.

During the twelve weeks ended October 4, 2008, the Company repurchased 1,372 shares of common stock at an aggregate cost of $53,623, or an average price of $39.09 per share. These shares were repurchased in accordance with the Company’s $250,000 stock repurchase program authorized by its Board of Directors in the second quarter of fiscal 2008. During the forty weeks ended October 4, 2008, the Company repurchased 6,136 shares of common stock at an aggregate cost of $216,471, or an average price of $35.28 per share, of which 4,564 shares of common stock were repurchased under the previous $500,000 stock repurchase program. Additionally, the Company settled $2,959 on shares repurchased prior to the end of fiscal 2007.
 
 
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
As of October 10, 2009, the Company has $139,381 remaining under its $250,000 stock repurchase program, excluding related expenses.
 
12.
Earnings per Share:

Certain of the Company’s shares granted to employees in the form of restricted stock are considered participating securities which require the use of the two-class method for the computation of basic and diluted earnings per share. For the twelve week periods ended October 10, 2009 and October 4, 2008, earnings of $309 and $215, respectively, were allocated to the participating securities exclusive of any cash dividends already reflected in net income. For the forty week periods ended October 10, 2009 and October 4, 2008, earnings of $1,214 and $740, respectively, were allocated to the participating securities exclusive of any cash dividends already reflected in net income.
 
Diluted earnings per share of common stock reflects the weighted-average number of shares of common stock outstanding, outstanding deferred stock units and the impact of outstanding stock options, and stock appreciation rights (collectively “share-based awards”). Diluted earnings per share are calculated by including the effect of dilutive securities. Share-based awards to purchase approximately 64 and 89 shares of common stock that had an exercise price in excess of the average market price of the common stock during the twelve week periods ended October 10, 2009 and October 4, 2008, respectively, were not included in the calculation of diluted earnings per share because they are anti-dilutive. Share-based awards to purchase approximately 1,097 and 2,036 shares of common stock that had an exercise price in excess of the average market price of the common stock during the forty week periods ended October 10, 2009 and October 4, 2008, respectively, were not included in the calculation of diluted earnings per share because they are anti-dilutive.

The following table illustrates the computation of basic and diluted earnings per share for the twelve and forty week periods ended October 10, 2009 and October 4, 2008, respectively:

   
Twelve Weeks Ended
   
Forty Weeks Ended
 
   
October 10,
   
October 4,
   
October 10,
   
October 4,
 
   
2009
   
2008
   
2009
   
2008
 
Numerator
                       
Net income applicable to common shares
  $ 61,979     $ 56,155     $ 235,894     $ 213,627  
Participating securities' share in earnings
    (309 )     (215 )     (1,214 )     (740 )
Net income applicable to common shares
    61,670       55,940       234,680       212,887  
Denominator
                               
Basic weighted average common shares
    94,656       95,019       94,647       95,003  
Dilutive impact of share based awards
    818       739       678       666  
Diluted weighted average common shares
    95,474       95,758       95,325       95,669  
                                 
Basic earnings per common share
                               
Net income applicable to common stockholders
  $ 0.65     $ 0.59     $ 2.48     $ 2.24  
Diluted earnings per common share
                               
Net income applicable to common stockholders
  $ 0.65     $ 0.58     $ 2.46     $ 2.23  
 
 
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
Earnings per share for the twelve weeks and forty weeks ended October 4, 2008 were adjusted retrospectively due to the application of the two-class method rather than the treasury method for the earnings per share calculation. As a result, diluted earnings per share were decreased by $0.01 for the twelve week period ended October 4, 2008 and basic earnings per share were decreased by $0.01 for the forty week period ended October 4, 2008.
 
13.
Postretirement Plan:
 
The Company provides certain health and life insurance benefits for eligible retired Team Members through a postretirement plan, or Plan. These benefits are subject to deductibles, co-payment provisions and other limitations. The Plan has no assets and is funded on a cash basis as benefits are paid. The Company’s postretirement liability is calculated annually by a third-party actuary. The discount rate utilized at January 3, 2009 was 6.25%, and remained unchanged through the forty weeks ended October 10, 2009. The Company expects fiscal 2009 plan contributions to completely offset benefits paid, consistent with fiscal 2008.

The Company’s net periodic postretirement benefit cost includes the amortization of a reduction in unrecognized prior service costs as a result of a plan amendment in fiscal 2004. The components of net periodic postretirement benefit cost for the twelve and forty weeks ended October 10, 2009, and October 4, 2008, respectively, was as follows:
 
   
Twelve Weeks Ended
   
Forty Weeks Ended
 
   
October 10,
   
October 4,
   
October 10,
   
October 4,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Interest cost
  $ 105     $ 115     $ 351     $ 383  
Amortization of negative prior service cost
    (134 )     (134 )     (447 )     (447 )
Amortization of unrecognized net gain
    (22 )     (3 )     (74 )     (10 )
Net periodic postretirement benefit cost
  $ (51 )   $ (22 )   $ (170 )   $ (74 )

14.
Comprehensive Income:
 
The Company includes in comprehensive income the changes in fair value of the Company’s interest rate swaps and changes in net unrecognized other postretirement benefit costs.

Comprehensive income for the twelve and forty weeks ended October 10, 2009 and October 4, 2008 was as follows:
 
   
Twelve Weeks Ended
   
Forty Weeks Ended
 
   
October 10, 
2009
   
October 4, 
2008
   
October 10, 
2009
   
October 4, 
2008
 
                         
Net income
  $ 61,979     $ 56,155     $ 235,894     $ 213,627  
Unrealized gain (loss) on hedge
                               
arrangements, net of tax
    183       (1,730 )     1,720       (2,271 )
Changes in net unrecognized other
                               
postretirement benefit cost, net of tax
    (95 )     (84 )     (317 )     (279 )
Comprehensive income
  $ 62,067     $ 54,341     $ 237,297     $ 211,077  
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2009 and October 4, 2008
(in thousands, except per share data)
(unaudited)
 
15.
Segment and Related Information:
 
The Company has the following two reportable segments: Advance Auto Parts, or AAP, and Autopart International, or AI. The AAP segment is comprised of store operations within the United States, Puerto Rico and the Virgin Islands which operate under the trade names “Advance Auto Parts,” “Advance Discount Auto Parts” and “Western Auto.” These stores offer a broad selection of brand name and proprietary automotive replacement parts, accessories and maintenance items for domestic and imported cars and light trucks.

The AI segment consists solely of the operations of Autopart International, which operates as an independent, wholly-owned subsidiary. AI’s business primarily serves the Commercial market from its store locations throughout the Northeast and recent expansion into the Southeast. In addition, its North American Sales Division services warehouse distributors and jobbers throughout North America.

The Company evaluates each of its segment’s financial performance based on net sales and operating profit for purposes of allocating resources and assessing performance. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1.

The following table summarizes financial information for each of the Company's business segments for the twelve and forty weeks ended October 10, 2009 and October 4, 2008, respectively.

   
Twelve Week Periods Ended
   
Forty Week Periods Ended
 
   
October 10,
   
October 4,
   
October 10,
   
October 4,
 
   
2009
   
2008
   
2009
   
2008
 
Net sales
                       
AAP
  $ 1,213,422     $ 1,146,516     $ 4,115,291     $ 3,822,585  
AI
    51,332       41,436       159,929       127,282  
Eliminations (1)
    (2,178 )     -       (6,164 )     -  
Total net sales
  $ 1,262,576     $ 1,187,952     $ 4,269,056     $ 3,949,867  
                                 
Income before provision for
                               
 income taxes
                               
AAP
  $ 96,239     $ 87,143     $ 370,813     $ 337,667  
AI
    3,764       1,859       8,602       3,933  
Total income before provision for
                               
 income taxes
  $ 100,003     $ 89,002     $ 379,415     $ 341,600  
                                 
Provision for income taxes
                               
AAP
  $ 36,627     $ 32,065     $ 140,277     $ 126,343  
AI
    1,397       782       3,244       1,630  
Total provision for income taxes
  $ 38,024     $ 32,847     $ 143,521     $ 127,973  
                                 
Segment assets
                               
AAP
  $ 2,992,639     $ 2,850,789     $ 2,992,639     $ 2,850,789  
AI
    173,259       157,470       173,259       157,470  
Total segment assets
  $ 3,165,898     $ 3,008,259     $ 3,165,898     $ 3,008,259  
 
(1) 
For the twelve weeks ended October 10, 2009, eliminations represent net sales of $993 from AAP to AI and $1,185 from AI to AAP. For the forty weeks ended October 10, 2009, eliminations represent net sales of $2,755 from AAP to AI and $3,409 from AI to AAP.


ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report. Our first quarter consists of 16 weeks divided into four equal periods. Our remaining three quarters consist of 12 weeks with each quarter divided into three equal periods. Fiscal 2008 was an exception to this rule with the fourth quarter containing 13 weeks due to our 53-week fiscal year.

Certain statements in this report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 an