Advance Auto Parts 2003 Annual Report Download - page 37

7—Inventories, Net
Inventories are stated at the lower of cost or market. Cost
was determined using the last-in, first-out (“LIFO”) method
for approximately 93% and 91% of inventories at January 3,
2004 and December 28, 2002, respectively, and the first-in,
first-out (“FIFO”) method for remaining inventories. The
remaining inventories consist of product cores, which consist
of the non-consumable portion of certain parts and batteries.
Core values are included as part of our merchandise costs
and are either passed on to the customer or returned to the
vendor. Additionally, these products are not subject to the
frequent cost changes like our other merchandise inventory,
therefore resulting in no material difference from applying
either the LIFO or FIFO valuation methods.
The Company capitalizes certain purchasing and ware-
housing costs into inventory. Purchasing and warehousing
costs included in inventory, at FIFO, at January 3, 2004
and December 28, 2002, were $75,349 and $69,160,
respectively. Inventories consist of the following:
January 3, December 28,
2004 2002
Inventories at FIFO, net............................. $1,051,678 $ 988,856
Adjustments to state
inventories at LIFO................................ 62,103 59,947
Inventories at LIFO, net............................. $1,113,781 $1,048,803
Replacement cost approximated FIFO cost at January 3,
2004 and December 28, 2002.
Inventory quantities are tracked through a perpetual
inventory system. The Company uses a cycle counting
program in all distribution centers, Parts Delivered Quickly
(“PDQs”), Local Area Warehouses, or LAWs, and retail
stores to ensure the accuracy of the perpetual inventory
quantities of both merchandise and core inventory. The
Company establishes reserves for estimated shrink based on
historical accuracy and effectiveness of the cycle counting
program. The Company also establishes reserves for poten-
tially excess and obsolete inventories based on current
inventory levels of discontinued product and the historical
analysis of the liquidation of discontinued inventory below
cost. The nature of the Company’s inventory is such that the
risk of obsolescence is minimal and excess inventory has
historically been returned to the Company’s vendors for
credit. 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 $16,011 and $16,289 at January 3, 2004 and
December 28, 2002, respectively.
8—Property and Equipment
Property and equipment are stated at cost, less accu-
mulated depreciation and amortization. Expenditures for
maintenance and repairs are charged directly to expense
when incurred; major improvements are capitalized. When
items are sold or retired, the related cost and accumulated
depreciation are removed from the accounts, with any gain or
loss reflected in the consolidated statements of operations.
Depreciation of land improvements, buildings, furniture,
fixtures and equipment, and vehicles is provided over the
estimated useful lives, which range from 2 to 40 years, of
the respective assets using the straight-line method.
Amortization of building and leasehold improvements is
provided over the shorter of the original useful lives of the
respective assets or the term of the lease using the straight-
line method. Depreciation and amortization expense was
$100,737, $94,090 and $70,745 for the fiscal years ended
2003, 2002 and 2001, respectively.
Property and equipment consists of the following:
Original January 3, December 28,
Useful Lives 2004 2002
Land and land improvements ... 0–10 years $ 177,088 $ 178,513
Buildings ................................ 40 years 214,919 209,457
Building and leasehold
improvements ...................... 10–40 years 110,974 101,019
Furniture, fixtures
and equipment ..................... 3–12 years 553,759 505,044
Vehicles .................................. 2–10 years 36,338 32,516
Other ...................................... 14,651 15,724
1,107,729 1,042,273
Less: Accumulated depreciation
and amortization .................. (395,027) (313,841)
Property and equipment, net .... $ 712,702 $ 728,432
The Company capitalized approximately $5,423, $2,888
and $19,699 incurred for the development of internal use
computer software during fiscal 2003, fiscal 2002 and fiscal
2001, respectively. These costs are included in the furniture,
fixtures and equipment category above and are depreciated
on the straight-line method over three to seven years.
9—Assets Held for Sale
The Company applies SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” which
requires that long-lived assets and certain identifiable intan-
gible assets to be disposed of be reported at the lower of the
carrying amount or the fair market value less selling costs.
At January 3, 2004 and December 28, 2002, the Company’s
assets held for sale were $20,191 and $28,346, respectively,
primarily consisting of closed stores as a result of the
Discount integration and a closed distribution center.
Page 35
Advance Auto Parts, Inc. and Subsidiaries