Advance Auto Parts 2001 Annual Report Download - page 25

44 ADVANCE AUTO PARTS ANNUAL REPORT 2001 ADVANCE AUTO PARTS ANNUAL REPORT 2001 45
advertising. These restricted cooperative advertising allowances are
recognized as a reduction to selling, general and administrative expenses
as advertising expenditures are incurred. Unrestricted cooperative
advertising revenue, rebates and other miscellaneous incentives are earned
based on purchases and/or the sale of the product. Amounts received or
receivable from vendors that are not yet earned are reflected as deferred
revenue in the consolidated balance sheets included elsewhere in this
prospectus. We record unrestricted cooperative advertising and volume
rebates earned as a reduction of inventory and recognize the incentives as
a reduction to cost of sales as the inventory is sold. Short-term incentives
are recognized as a reduction to cost of sales over the course of the annual
agreement term and are not recorded as reductions to inventory.
We recognize other incentives earned related to long-term agreements
as a reduction to cost of sales over the life of the agreement based on the
timing of purchases. These incentives are not recorded as reductions to
inventory. The amounts earned under long-term arrangements not
recorded as a reduction of inventory are based on our estimate of total
purchases that will be made over the life of the contracts and the amount
of incentives that will be earned. The incentives are generally recognized
based on the cumulative purchases as a percentage of total estimated
purchases over the life of the contract. Our margins could be impacted
positively or negatively if actual purchases or results differ from our
estimates, but over the life of the contract would be the same.
During the fourth quarter of 2001, we changed our method of
accounting for unrestricted cooperative advertising allowances. These
incentives are now treated as a reduction to inventory and the
corresponding cost of sales. Previously, we accounted for these incentives
as a reduction to selling, general and administrative expenses to the extent
advertising expense was incurred.
Inventory
Minimal inventory shrink reserves are recorded related to Advance Auto
Parts stores as a result of our extensive and frequent cycle counting
program. Our estimates related to these shrink reserves depend on the
effectiveness of the cycle counting programs. We evaluate the
effectiveness of these programs on an on-going basis.
Minimal reserves for potentially excess and obsolete inventories are
recorded as well. The nature of our inventory is such that the risk of
obsolescence is minimal. In addition, historically we have been able to
return excess items to the vendor for credit. We provide reserves where
less than full credit will be received for such returns and where we
anticipate that items will be sold at retail prices that are less than recorded
cost. Future changes by vendors in their policies or willingness to accept
returns of excess inventory could require us to revise our estimates of
required reserves for excess and obsolete inventory.
Warranties
We record accruals for future warranty claims related to warranty
programs for batteries, tires, road-side assistance and Craftsman products.
Our accruals are based on current sales of the warranted products and
historical claim experience. If claims experience differs from historical
levels, revisions in our estimates may be required.
Restructuring and Closed Store Liabilities
We recognize a provision for future obligations at the time a decision is made
to close a store location. This provision includes future minimum lease
payments, common area maintenance and taxes. Additionally, we make
certain assumptions related to potential subleases and lease buyouts that
reduce the recorded amount of the accrual. These assumptions are based on
our knowledge of the market and the relevant experience. However, the
inability to enter into the subleases or obtain buyouts within the estimated
timeframe may result in increases or decreases to these reserves.
Contingencies
We accrue for obligations, including estimated legal costs, when it is
probable and the amount is reasonably estimable. As facts concerning
contingencies become known, we reassess our position both with respect
to gain contingencies and accrued liabilities and other potential exposures.
Estimates that are particularly sensitive to future change include tax,
environmental and legal matters, which are subject to change as events
evolve and as additional information becomes available during the
administrative and litigation process.
Results of Operations
The following table sets forth certain of our operating data expressed as a
percentage of net sales for the periods indicated.
Fiscal Year
1999 2000 2001
Net sales 100.0% 100.0% 100.0%
Cost of sales (1) 63.6 60.8 57.2
Expenses associated with supply
chain initiatives - - 0.4
Gross profit 36.4 39.2 42.4
Selling, general and administrative
expenses (1) (2) 33.5 35.0 37.6
Expenses associated with supply
chain initiatives - - 0.1
Impairment of assets held for sale - - 0.5
Expenses associated with merger related
restructuring - - 0.1
Expenses associated with merger
and integration 1.9 - 0.0
Non-cash stock option
compensation expense 0.1 0.1 0.5
Operating income 0.9 4.1 3.5
Interest expense 2.8 2.9 2.5
Other income, net 0.2 0.0 0.1
Income tax (benefit) expense (0.6) 0.5 0.4
Income (loss) before extraordinary item
and cumulative effect of a change in
accounting principle (1.1) 0.7 0.7
Extraordinary item, gain (loss) on debt
extinguishment, net of income taxes - 0.1 (0.1)
Cumulative effect of a change in accounting
principle, net of income taxes - - (0.1)
Net income (loss) (1.1)% 0.8% 0.5%
(1) Cost of sales and selling, general and administrative expenses
presented for fiscal 2001 reflect the change in accounting principle
related to cooperative advertising funds. This change resulted in lower
cost of sales with corresponding increases in selling, general and
administrative expenses.
(2) Selling, general and administrative expenses are adjusted for certain
non-recurring and other items.
Quarterly Financial Results (unaudited)
16-Weeks 12-Weeks 12-Weeks 12-Weeks 16-Weeks 12-Weeks 12-Weeks 12-Weeks
Ended Ended Ended Ended Ended Ended Ended Ended
(in thousands, except per share data) 4/22/2000 7/15/2000 10/7/2000 12/30/2000 4/21/2001(a) 7/14/2001(a) 10/6/2001(a) 12/29/2001(a)
Net sales $ 677,582 $ 557,650 $ 552,138 $ 500,652 $ 729,359 $ 607,478 $ 598,793 $ 582,009
Gross profit 258,975 216,533 223,903 196,484 311,450 257,228 256,734 241,515
(Loss) income before
extraordinary item and
cumulative effect of a change
in accounting principle (956) 10,381 9,507 (2,306) 3,873 14,124 15,232 16,040)
Extraordinary item, gain (loss)
on debt extinguishment, net of
($1,759) and $2,424 income
taxes, respectively - - 2,933 - - - - (3,682)
Cumulative effect of a change in
accounting principle, net of
$1,360 income taxes ----- --(2,065)
Net (loss) income $ (956) $ 10,381 $ 12,440 $ (2,306) $ 3,873 $ 14,124 $ 15,232 $ (21,787)
Basic earnings (loss) per
common share:
Before extraordinary item
and cumulative effect of a
change in accounting
principle $ (0.03) $ 0.37 $ 0.34 $ (0.08) $ 0.14 $ 0.50 $ 0.54 $ (0.54)
Extraordinary item, gain on
debt extinguishment, net
of ($1,759) and $2,424
income taxes,
respectively - - 0.10 - - - - (0.12)
Cumulative effect of a
change in accounting
principle, net of $1,360
income taxes ----- --(0.07)
Net (loss) income $ (0.03) $ 0.37 $ 0.44 $ (0.08) $ 0.14 $ 0.50 $ 0.54 $ (0.73)
Diluted earnings (loss) per
common share:
Before extraordinary item
and cumulative effect of a
change in accounting
principle $ (0.03) $ 0.36 $ 0.33 $ (0.08) $ 0.14 $ 0.49 $ 0.53 $ (0.54)
Extraordinary item, gain on
debt extinguishment, net of
($1,759) and $2,424 income
taxes, respectively - - 0.10 - - - - (0.12)
Cumulative effect of a change
in accounting principle,
net of $1,360 income taxes ----- --(0.07)
Net (loss) income $ (0.03) $ 0.36 $ 0.44 $ (0.08) $ 0.14 $ 0.49 $ 0.53 $ (0.73)
(a) Reflects the change in accounting principle related to the cooperative advertising funds.