Advance Auto Parts 2004 Annual Report Download - page 21

Download and view the complete annual report

Please find page 21 of the 2004 Advance Auto Parts annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 59

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59

Advance฀Auto฀Parts,฀Inc.฀and฀Subsidiaries
19
While฀we฀do฀not฀expect฀the฀amounts฀ultimately฀paid฀to฀dif-
fer฀ significantly฀ from฀ our฀ estimates,฀ our฀ self-insurance฀
reserves฀ and฀ corresponding฀ selling,฀ general฀ and฀ admin-
istrative฀expenses฀could฀be฀ affected฀ if฀future฀ claim฀expe-
rience฀ differs฀ significantly฀ from฀ historical฀ trends฀ and฀
actuarial฀assumptions.
Leases฀and฀Leasehold฀Improvements
฀ We฀ lease฀ certain฀ store฀ locations,฀ distribution฀ centers,฀
office฀space,฀equipment฀and฀vehicles.฀We฀account฀for฀our฀
leases฀under฀ the฀provisions฀ of฀SFAS฀No.฀13,฀“Accounting฀
for฀ Leases,”฀ and฀ subsequent฀ amendments฀ which฀ require฀
that฀leases฀be฀evaluated฀and฀classified฀as฀operating฀leases฀
or฀capital฀leases฀for฀financial฀reporting฀purposes.฀Certain฀
leases฀contain฀rent฀escalation฀clauses,฀which฀are฀recorded฀
on฀ a฀ straight-line฀ basis฀ over฀ the฀ initial฀ term฀ of฀ the฀ lease฀
with฀the฀difference฀between฀the฀rent฀paid฀and฀the฀straight-
line฀rent฀recorded฀as฀a฀deferred฀rent฀liability.฀Lease฀incen-
tive฀ payments฀ received฀ from฀ landlords฀ are฀ recorded฀ as฀
deferred฀rent฀liabilities฀and฀are฀amortized฀on฀a฀straight-line฀
basis฀over฀the฀lease฀term฀as฀a฀reduction฀in฀rent.฀In฀addition,฀
leasehold฀ improvements฀ associated฀ with฀ these฀ operating฀
leases฀ are฀ amortized฀ over฀ the฀ shorter฀ of฀ their฀ economic฀
lives฀or฀the฀respective฀lease฀terms.฀The฀term฀of฀each฀lease฀
is฀ generally฀ the฀ initial฀ term฀ of฀ the฀ lease฀ unless฀ external฀
economic฀ factors฀ were฀ to฀ exist฀ such฀ that฀ renewals฀ poten-
tially฀provided฀for฀in฀the฀lease฀are฀reasonably฀assured฀to฀be฀
exercised.฀In฀those฀instances฀the฀renewal฀period฀would฀be฀
included฀in฀the฀lease฀term฀for฀purposes฀of฀establishing฀an฀
amortization฀ period฀ and฀ determining฀ if฀ such฀ lease฀ quali-
fied฀as฀a฀capital฀or฀operating฀lease.
Closed฀Store฀Liabilities
฀ We฀recognize฀a฀reserve฀for฀future฀obligations฀at฀the฀time฀
we฀close฀a฀leased฀store฀location.฀The฀reserve฀includes฀ the฀
present฀ value฀ of฀ the฀ remaining฀ lease฀ obligations฀ and฀฀
management’s฀ estimate฀ of฀ future฀ costs฀ for฀ common฀ area฀
maintenance฀ and฀ taxes,฀ offset฀ by฀ the฀ present฀ value฀ of฀฀
management’s฀ estimate฀ of฀ potential฀ subleases฀ and฀ lease฀฀
buyouts.฀ These฀ estimates฀ are฀ based฀ on฀ current฀ market฀฀
conditions฀ and฀ our฀ experience฀ of฀ obtaining฀ subleases฀ or฀
buyouts฀ on฀ similar฀ properties.฀ However,฀ our฀ inability฀ to฀
enter฀into฀the฀subleases฀or฀obtain฀buyouts฀due฀to฀a฀change฀
in฀the฀economy฀or฀prevailing฀real฀estate฀markets฀for฀these฀
properties฀ within฀ the฀ estimated฀ time฀ frame฀ may฀ result฀ in฀
increases฀or฀decreases฀to฀these฀reserves฀and฀could฀impact฀
our฀selling,฀general฀and฀administrative฀expenses,฀as฀well฀as฀
our฀consolidated฀statements฀of฀operations฀and฀cash฀flows.
Components฀of฀Statement฀of฀Operations
Net฀Sales
฀ Net฀ sales฀ consist฀ primarily฀ of฀ comparable฀ store฀ sales,฀
new฀ store฀ net฀ sales,฀ service฀ sales฀ (offered฀ only฀ in฀ the฀
Western฀ Auto฀ retail฀ locations)฀ and฀ finance฀ charges฀ on฀
installment฀ sales.฀ We฀ calculate฀ comparable฀ store฀ sales฀
based฀on฀the฀change฀in฀net฀sales฀starting฀once฀a฀store฀has฀
been฀ opened฀ for฀ 13฀ complete฀ accounting฀ periods.฀ We฀
include฀ relocations฀ in฀ comparable฀ store฀ sales฀ from฀ the฀
original฀ date฀ of฀ opening.฀ We฀ exclude฀ net฀ sales฀ from฀ the฀฀
35฀ Western฀ Auto฀ retail฀ stores฀ from฀ our฀ comparable฀ store฀
sales฀as฀a฀result฀of฀their฀unique฀product฀offerings,฀includ-
ing฀automotive฀service฀and฀tires.
฀ Our฀fiscal฀year฀ends฀on฀the฀Saturday฀closest฀to฀December฀
31฀ and฀ consists฀ of฀ 52฀ or฀ 53฀ weeks.฀ Our฀ 2004฀ fiscal฀ year฀
began฀on฀January฀4,฀2004฀and฀consisted฀of฀52฀weeks,฀while฀
our฀ 2003฀ fiscal฀ year฀ began฀ on฀ December฀ 29,฀ 2002฀ and฀฀
consisted฀ of฀ 53฀ weeks.฀ The฀ extra฀ week฀ of฀ operations฀ in฀฀
fiscal฀ 2003฀ results฀ in฀ our฀ fiscal฀ 2004฀ consisting฀ of฀ non-
comparable฀ calendar฀ weeks฀ to฀ fiscal฀ 2003.฀ To฀ create฀ a฀
meaningful฀comparable฀store฀sales฀measure฀for฀fiscal฀2004,฀
we฀have฀compared฀the฀calendar฀weeks฀of฀fiscal฀2004฀to฀the฀
corresponding฀calendar฀weeks฀of฀fiscal฀2003.฀Accordingly,฀
our฀calculation฀of฀ comparable฀stores฀sales฀for฀fiscal฀2004฀
excludes฀week฀one฀of฀operations฀from฀fiscal฀2003.
Cost฀of฀Sales
฀ Our฀ cost฀ of฀ sales฀ consists฀ of฀ merchandise฀ costs,฀ net฀ of฀
incentives฀ under฀ vendor฀ programs,฀ inventory฀ shrinkage฀
and฀warehouse฀and฀distribution฀expenses.฀Gross฀profit฀as฀a฀
percentage฀ of฀ net฀ sales฀ may฀ be฀ affected฀ by฀ variations฀ in฀
our฀product฀mix,฀price฀changes฀in฀response฀to฀competitive฀
factors฀ and฀ fluctuations฀ in฀ merchandise฀ costs฀ and฀ vendor฀
programs.฀ We฀ seek฀ to฀ avoid฀ fluctuation฀ in฀ merchandise฀
costs฀ and฀instability฀ of฀supply฀by฀entering฀into฀long-term฀
purchasing฀ agreements฀ with฀ vendors฀ when฀ we฀ believe฀ it฀฀
is฀advantageous.
Selling,฀General฀and฀Administrative฀Expenses
฀ Selling,฀ general฀ and฀ administrative฀ expenses฀ consist฀ of฀
store฀payroll,฀ store฀ occupancy฀(including฀rent),฀ net฀ adver-
tising฀ expenses,฀ other฀ store฀ expenses฀ and฀ general฀ and฀
administrative฀ expenses,฀ including฀ salaries฀ and฀ related฀
benefits฀of฀corporate฀team฀members,฀administrative฀office฀
expenses,฀data฀processing,฀professional฀expenses฀and฀other฀
related฀expenses฀including฀expenses฀associated฀with฀merger฀
and฀integration.