Advance Auto Parts 2004 Annual Report Download - page 35

Advance฀Auto฀Parts,฀Inc.฀and฀Subsidiaries
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1.฀Organization฀and฀Description฀of฀Business
฀ Advance฀Auto฀Parts,฀Inc.฀(“Advance”)฀conducts฀all฀of฀its฀
operations฀through฀ its฀wholly฀owned฀subsidiary,฀Advance฀
Stores฀Company,฀Incorporated฀and฀its฀subsidiaries฀(“Stores”).฀
Advance฀and฀Stores฀(collectively,฀the฀“Company”)฀operate฀
2,652฀stores฀within฀the฀United฀States,฀Puerto฀Rico฀and฀the฀
Virgin฀ Islands.฀ The฀ Company฀ operates฀ 2,617฀ stores฀
throughout฀39฀states฀in฀the฀Northeastern,฀Southeastern฀and฀
Midwestern฀ regions฀ of฀ the฀ United฀ States.฀ These฀ stores฀
operate฀under฀the฀“Advance฀Auto฀Parts”฀trade฀name฀except฀
for฀ certain฀ stores฀ in฀ the฀ state฀ of฀ Florida฀ which฀ operate฀
under฀the฀“Advance฀Discount฀Auto฀Parts”฀or฀“Discount฀Auto฀
Parts”฀trade฀names.฀These฀stores฀offer฀automotive฀replace-
ment฀ parts,฀ accessories฀ and฀ maintenance฀ items,฀ with฀ no฀
significant฀concentration฀in฀any฀specific฀area.฀In฀addition,฀
the฀Company฀operates฀35฀stores฀under฀the฀“Western฀Auto”฀
trade฀ name,฀ located฀ primarily฀ in฀ Puerto฀ Rico฀ and฀ the฀
Virgin฀Islands,฀which฀offer฀tires฀and฀service฀in฀addition฀to฀
automotive฀parts,฀accessories฀and฀maintenance฀items.
2.฀Summary฀of฀Significant฀Accounting฀Policies
Accounting฀Period
฀ The฀Company’s฀fiscal฀year฀ends฀on฀the฀Saturday฀nearest฀
the฀end฀of฀December,฀which฀results฀in฀an฀extra฀week฀every฀
six฀ years.฀ Accordingly,฀ fiscal฀ 2003฀ includes฀ 53฀ weeks฀ of฀
operations.฀ All฀ other฀ fiscal฀ years฀ presented฀ include฀ 52฀
weeks฀of฀operations.
Principles฀of฀Consolidation
฀ The฀consolidated฀financial฀statements฀include฀the฀accounts฀
of฀the฀Company฀and฀its฀wholly฀owned฀subsidiaries.฀All฀sig-
nificant฀intercompany฀balances฀and฀transactions฀have฀been฀
eliminated฀in฀consolidation.
Use฀of฀Estimates
฀ The฀ preparation฀ of฀ financial฀ statements฀ in฀ conformity฀
with฀accounting฀principles฀generally฀accepted฀in฀the฀United฀
States฀of฀America฀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฀ from฀ those฀
estimates.
Cash,฀Cash฀Equivalents฀and฀Bank฀Overdrafts
฀ Cash฀and฀cash฀equivalents฀consist฀of฀cash฀in฀banks฀and฀
money฀market฀funds.฀Bank฀overdrafts฀include฀net฀outstand-
ing฀checks฀not฀yet฀presented฀to฀a฀bank฀for฀settlement.
Vendor฀Incentives
฀ The฀Company฀receives฀incentives฀in฀the฀form฀of฀reduc-
tions฀ to฀ amounts฀ owed฀ and/or฀ payments฀ from฀ vendors฀
related฀ to฀ cooperative฀ advertising฀ allowances,฀ volume฀
rebates฀and฀other฀promotional฀consideration.฀The฀Company฀
accounts฀for฀vendor฀incentives฀in฀accordance฀with฀Emerg-
ing฀Issues฀Task฀Force,฀or฀EITF,฀No.฀02-16,฀“Accounting฀by฀
a฀Customer฀(Including฀a฀Reseller)฀for฀Certain฀Consideration฀
Received฀from฀a฀Vendor.”฀Many฀of฀the฀incentives฀are฀under฀
long-term฀agreements฀(terms฀in฀excess฀of฀one฀year),฀while฀
others฀are฀negotiated฀on฀an฀annual฀basis.฀Certain฀vendors฀
require฀the฀Company฀to฀use฀cooperative฀advertising฀allow-
ances฀ exclusively฀ for฀ advertising.฀ The฀ Company฀ defines฀
these฀ allowances฀ as฀ restricted฀ cooperative฀ advertising฀
allowances฀and฀recognizes฀them฀as฀a฀reduction฀to฀selling,฀
general฀and฀administrative฀expenses฀as฀incremental฀adver-
tising฀ expenditures฀are฀ incurred.฀ The฀ remaining฀coopera-
tive฀advertising฀allowances฀not฀restricted฀by฀the฀Company’s฀
vendors฀and฀volume฀rebates฀are฀earned฀based฀on฀inventory฀
purchases฀ and฀ recorded฀ as฀ a฀ reduction฀ to฀ inventory฀ and฀
recognized฀through฀cost฀of฀sales฀as฀the฀inventory฀is฀sold.
฀ The฀ Company฀ recognizes฀ other฀ promotional฀ incentives฀
earned฀under฀long-term฀agreements฀as฀a฀reduction฀to฀cost฀
of฀ sales.฀ These฀ incentives฀ are฀ recognized฀ based฀ on฀ the฀
cumulative฀ purchases฀ as฀ a฀ percentage฀ of฀ total฀ estimated฀
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฀agree-
ment฀would฀be฀the฀same.฀Short-term฀incentives฀(terms฀less฀
than฀ one฀ year)฀ are฀ recognized฀ as฀ a฀ reduction฀ to฀ cost฀ of฀
sales฀over฀the฀course฀of฀the฀annual฀agreements฀and฀are฀not฀
recorded฀as฀reductions฀to฀inventory.
฀ Amounts฀ received฀ or฀ receivable฀ from฀ vendors฀ that฀ are฀
not฀ yet฀ earned฀ are฀ reflected฀ as฀ deferred฀ revenue฀ in฀ the฀
accompanying฀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฀
consolidated฀ balance฀ sheets.฀ Total฀ deferred฀ revenue฀ is฀
$17,000฀ and฀ $19,524฀ at฀ January฀ 1,฀ 2005฀ and฀ January฀ 3,฀
2004,฀ respectively.฀ Earned฀ amounts฀ that฀ are฀ receivable฀
from฀vendors฀are฀included฀in฀receivables,฀net฀on฀the฀accom-
panying฀ consolidated฀ balance฀ sheets,฀ except฀ for฀ that฀ por-
tion฀ expected฀ to฀ be฀ received฀ after฀ one฀ year,฀ which฀ is฀
included฀in฀other฀assets,฀net฀on฀the฀accompanying฀consoli-
dated฀balance฀sheets.
Preopening฀Expenses
฀ Preopening฀expenses,฀which฀consist฀primarily฀of฀payroll฀
and฀occupancy฀costs,฀are฀expensed฀as฀incurred.
Advertising฀Costs
฀ The฀ Company฀ expenses฀ advertising฀ costs฀ as฀ incurred฀฀
in฀ accordance฀ with฀ the฀ American฀ Institute฀ of฀ Certified฀
Public฀ Accountant’s฀ Statement฀ of฀ Position,฀ or฀ SOP,฀ 93-7,฀
“Reporting฀ on฀ Advertising฀ Costs.”฀ Gross฀ advertising฀
expense฀incurred฀was฀approximately฀$86,821,฀$75,870฀and฀
$69,637฀in฀fiscal฀2004,฀2003฀and฀2002,฀respectively.
Notes฀to฀Consolidated฀Financial฀Statements
For฀the฀Years฀Ended฀January฀1,฀2005,฀January฀3,฀2004,฀and฀December฀28,฀2002฀(in฀thousands,฀except฀per฀share฀data)