Advance Auto Parts 2005 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... Auto Parts' Loaner Tool program solves that problem for me. They let you borrow the tools you need for free. With the tool kits and great information on Advance's web site, Billy and I are zipping through this restoration and enjoying every minute. I Miguel Special Order Center My tuner car...

  • Page 3
    ...making sure everything is in good working condition is important for my long trips. Advance Auto Parts offers many free services that keep me traveling safely. Advance's employees have installed my wipers and checked and replaced my battery. And I know if there is another problem or a project I want...

  • Page 4
    2 letter to our STOCKHOLDERS At Advance Auto Parts, we know our success hinges upon our ability to give Customers industry-leading service. That is why the title of this year's annual report is "Customer Care," reflecting our company's focus on answering our Customers' needs, both now and in the ...

  • Page 5
    Advance Auto Parts, Inc. I Annual Report 2005 I 3 L Brought more locations to our Customers by adding 231 L Introduced many new and innovative products to our information. We invite you to visit our enhanced site at www.AdvanceAutoParts.com. L Opened our new distribution center near Allentown...

  • Page 6
    ... needs. In 2005, this was particularly apparent with Advance posting very strong sales gains despite record high gas prices. In the coming year, we will continue to drive enhanced Customer Service by opening an anticipated 170 to 180 new stores and remodeling 200 to 225 stores to our 2010 format. We...

  • Page 7
    ... obtenidas de la adquisición de Autopart International, Inc. Eso nos permitió cerrar el año con un total de 2,872 tiendas en 40 estados, Puerto Rico y las Islas Vírgenes. L Remodelamos totalmente al formato Advance 2010 todas las tiendas Discount Auto Parts en Florida, así como otras 96 tiendas...

  • Page 8
    ... 2005, we moved toward becoming an industry leader in sales per store, while continuing to focus on initiatives that will drive further steady improvement in our operating margin and earnings per share. Our balanced growth-being driven by new-store openings, comparable-store sales growth, operating...

  • Page 9
    ... (6)...Selected Store Data: Comparable store sales growth ...Number of stores, end of period...Total retail store square footage, end of period (in thousands) (7)...Average net retail sales per store (8)...Average net retail sales per square foot (9) ...Balance Sheet Data: Inventory...Net working...

  • Page 10
    ... to shop Advance Auto Parts? Let us show you how Advance Auto Parts is uniquely positioned to satisfy each of these Customers' needs. 54 2010 format stores in 2004: 42%, in 2005: percent Are you strapped for time? Look for a nearby Advance Auto Parts store or use the locator on our web site at...

  • Page 11
    ...to Advance stores, ending the year with a total of 2,192 Advance stores which offer commercial delivery. As our store openings, relocations and commercial growth this past year suggest, we understand that our Customers are busy, with little spare time. Advance Auto Parts is dedicated to bringing new...

  • Page 12
    ...part to repair your vehicle, it's great to know that Advance will have the part you need and, in some cases, can help you install it or teach you how. Advance Customers enjoy the benefits of a friendly, helpful team and a variety of free services, such as battery checks and installation, wiper blade...

  • Page 13
    ... and "Know-How" for our Customers' vehicle repair and maintenance questions. Advance Auto Parts prides itself "Advance Auto Parts provides us with the tools and training we need to build Store Growth 2,872 2,652 2,539 2,484 2,435 01 02 03 04 05 service, our store Team Members participate in...

  • Page 14
    ... is price. Several years ago, Advance began developing its Direct Advance Auto Parts' Consumer Education program provides Customers with information they need for vehicle-related repairs. Features of the program include 128 free brochures available in stores and video clinics that are aired monthly...

  • Page 15
    ... Import Program In 2005 added: and Commercial Customers' decisions easier by offering a wide variety of parts, products and accessories specifically tailored to meet their needs. Advance's category management process is part of our daily culture and is constantly being fine-tuned to benefit our...

  • Page 16
    ... special order parts availability forward. Our financial future is bright and we control it. SERVING OUR TEAM Providing Legendary Customer Service to our internal Customers, our stores, is the role of our Store Support Center in Roanoke, Virginia. By providing 2.4 million Customer Contact Center...

  • Page 17
    Advance Auto Parts, Inc. I Annual Report 2005 I 15 real estate and risk services teams moved a few miles across Roanoke and joined their counterparts in advertising, corporate purchasing, human resources, legal and merchandising- putting all these Team Members under one roof. This consolidation...

  • Page 18
    16 The success of Advance Auto Parts is complemented by the strength of our senior leadership team. Great retail companies are committed to excellence; that expectation starts from the top. This experienced group of people is leading Advance and creating its future.

  • Page 19
    ...Flows Notes to Consolidated Financial Statements Management's Report on Internal Control over Financial Reporting Report of Independent Registered Public Accounting Firm Management's Responsibility for Financial Statements Market for Registrant's Common Equity, Related Stockholder Matters and Issuer...

  • Page 20
    ...: (Loss) income from operations of discontinued Wholesale Distribution Network (including loss on disposal of $2,693 in 2003)...- (Benefit) provision for income taxes...- (Loss) income on discontinued operations...- Cumulative effect of a change in accounting principle, net of $1,360 income taxes...

  • Page 21
    ... of year...New stores ...Closed stores(18) ...Number of stores, end of period ...Relocated stores ...Stores with commercial delivery program, end of period ...Total commercial sales, as a percentage of total sales...Total store square footage, end of period(19) ...Average net sales per store(20...

  • Page 22
    ... and Advance stores closed as part of the integration of Discount. (19) Total store square footage excludes the square footage of the Autopart International, or AI, stores. (20) Average net sales per store is calculated as net sales divided by the average of beginning and ending number of stores for...

  • Page 23
    ... of Discount Auto Parts, or Discount. More recently in 2005, we acquired Autopart International, Inc. and substantially all the assets of Lappen Auto Supply. In addition to our DIY business we also serve "do-it-for-me," or DIFM, customers via sales to commercial accounts through our retail stores...

  • Page 24
    ...our Florida stores acquired from Discount Auto Parts. Acquisitions On September 14, 2005, we completed the acquisition of Autopart International, Inc., or AI. The acquisition, which included 61 stores throughout New England and New York, a distribution center and AI's wholesale distribution business...

  • Page 25
    ... our stores; • Moving inventory closer to our commercial customers to ensure quicker deliveries; • Growing our market share of the commercial market through internal growth and selected acquisitions; • Providing trained parts experts to assist commercial customers' merchandise selections; and...

  • Page 26
    ... merchandise inventory and certain services. Due to the wide variety of products supplied to the dealers and the reduced concentration of stores spread over a wide geographic area, it had become difficult to serve these dealers effectively. This component of our business operated in the wholesale...

  • Page 27
    ...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...

  • Page 28
    ... related benefits of store support center Team Members, store support center administrative office expenses, data processing, professional expenses and other related expenses. RESULTS OF OPERATIONS The following table sets forth certain of our operating data expressed as a percentage of net sales...

  • Page 29
    ... net sales increase was due to an increase in comparable store sales of 8.7%, contributions from the 151 new stores opened within the last year and sales from acquired operations. The comparable store sales increase was driven by an increase in average ticket sales and a slight increase in customer...

  • Page 30
    ...80 stores acquired as part of the acquisitions of AI and Lappen Auto Supply. We anticipate adding at least 170 to 180 new stores during fiscal 2006, excluding any acquisitions. Vendor Financing Program Historically, we have negotiated extended payment terms from suppliers that help finance inventory...

  • Page 31
    ... health care and life insurance benefits for eligible retired Team Members through our postretirement plan. At December 31, 2005, our accrued benefit cost related to this plan was $16.3 million. The plan has no assets and is funded on a cash basis as benefits are paid/incurred. The discount rate...

  • Page 32
    ... stock repurchase program; • a $56.9 million cash inflow associated with inventory purchased under our vendor financing program; • a $25.0 million increase in net borrowings as a result of $105.0 million in principal prepayments on our previous senior credit facility prior to scheduled maturity...

  • Page 33
    Advance Auto Parts I Annual Report 2005 I 31 under our vendor supply agreements nor are our open purchase orders for goods and services binding agreements. Accordingly, we have excluded open purchase orders from this table. The purchase obligations consist of the amount of fuel required to be ...

  • Page 34
    ... on accounting for transactions in which an entity obtains employee services in share-based payment CREDIT RATINGS At December 31, 2005, we had a credit rating on our senior credit facility from Standard & Poor's of BB+ and a credit rating of Ba1 from Moody's Investor Service. The current pricing...

  • Page 35
    ... of debt under our senior credit facility. The first swap fixed our LIBOR rate at 4.153% on $50 million of debt for a term of 48 months, expiring in March 2009. The second swap fixed our LIBOR rate at 4.255% on $75 million of debt for a term of 60 months, expiring February 2010. Beginning in March...

  • Page 36
    ...our credit facility; • acts of terrorism; and • other statements that are not of historical fact made throughout this report, including in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" found in our Form 10-K filed...

  • Page 37
    Advance Auto Parts I Annual Report 2005 I 35 CONSOLIDATED BALANCE SHEETS December 31, 2005 and January 1, 2005 December 31, 2005 (in thousands, except per share data) January 1, 2005 Assets Current assets: Cash and cash equivalents ...$ 40,783 Receivables, net ...94,689 Inventories, net...1,...

  • Page 38
    ... operations ...$ Loss on discontinued operations...$ Net income per diluted share from: Income from continuing operations before loss on discontinued operations ...$ Loss on discontinued operations...$ Average common shares outstanding ...Dilutive effect of stock options...Average common shares...

  • Page 39
    ......Comprehensive income ...Issuance of shares upon the exercise of stock options ...Tax benefit related to exercise of stock options ...Stock issued as compensation under employee stock purchase plan...Repayment of management loans ...Balance, January 3, 2004 ...Net income...Unrealized gain on hedge...

  • Page 40
    ...taxes ...Tax benefit related to exercise of stock options ...Loss on extinguishment of debt ...Net decrease (increase) in, net of business acquisitions: Receivables, net ...Inventories, net...Other assets...Net increase (decrease) in, net of business acquisitions: Accounts payable...Accrued expenses...

  • Page 41
    ... for certain stores in the State of Florida which operate under the "Advance Discount Auto Parts" trade name. 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, with no...

  • Page 42
    ...The Company anticipated returns based on current sales levels and the Company's historical return experience on a specific product basis. Warranty Costs The Company's vendors are primarily responsible for warranty claims. Warranty costs relating to merchandise (primarily batteries) and services sold...

  • Page 43
    ... Auto Parts I Annual Report 2005 I 41 Revenue Recognition and Trade Receivables The Company recognizes merchandise revenue at the point of sale to customers. The Company establishes reserves for returns and allowances at the time of sale based on current sales levels and historical return rates...

  • Page 44
    ... consolidated balance sheets as Financed Vendor Accounts Payable. Lease Accounting The Company leases certain store locations, distribution centers, office space, equipment and vehicles, some of which are with related parties. Initial terms for facility leases are typically 10 to 15 years, followed...

  • Page 45
    Advance Auto Parts I Annual Report 2005 I 43 leased premises and include options to renew. Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other leases. Hedge Activities The Company has entered into interest rate swap agreements to ...

  • Page 46
    ...instruments for goods or services, primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the...

  • Page 47
    ... of Autopart International, Inc. The acquisition, which included 61 stores throughout New England and New York, a distribution center and AI's wholesale distribution business, will complement the Company's growing presence in the Northeast. AI's business serves the growing commercial market in...

  • Page 48
    ... Distribution Network, or Wholesale. Wholesale consisted of independently owned and operated dealer locations, for which the Company supplied merchandise inventory. This component of the Company's business operated in the Company's previously reported wholesale segment. The Company has accounted...

  • Page 49
    ... (long-term portion) in the accompanying consolidated balance sheets. In August 2005, the Company began using a new third party provider to process its private label credit card transactions related to its commercial business. In conjunction with this transition, the Company sold the credit card...

  • Page 50
    ... inventory system. The Company uses a cycle counting program in all distribution centers, Parts Delivered Quickly warehouses, or PDQ®s, 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...

  • Page 51
    ...amount or the fair market value less selling costs. At December 31, 2005 and January 1, 2005, the Company's assets held for sale were $8,198 and $18,298, respectively, primarily consisting of closed stores as a result of the Discount integration and a closed distribution center. 11. ACCRUED EXPENSES...

  • Page 52
    ... currently requires nominal monthly principal repayments ranging from $5 to $7 until maturity on January 1, 2010. The interest rates on the tranche A and B term loans, the delayed term loan and the revolver are based, at the Company's option, on an adjusted LIBOR rate, plus a margin, or an alternate...

  • Page 53
    ... 15, 2005, replaced the remaining portion of a $200,000 stock repurchase program authorized by the Company's Board of Directors during fiscal 2004. The program allows the Company to repurchase its common stock on the open market or in privately negotiated transactions from time to time in accordance...

  • Page 54
    ...,160, or an average price of $26.91 per share, excluding related expenses. During the third quarter of fiscal 2005, the Company also retired 7,121,850 shares of common stock, of which 91,950 shares were repurchased under the $300,000 stock repurchase plan and 7,029,900 shares were repurchased under...

  • Page 55
    ... 16. LEASE COMMITMENTS: The Company leases certain store locations, distribution centers, office space, equipment and vehicles, some of which are with related parties. Initial terms for facility leases are typically 10 to 15 years, followed by additional terms containing renewal options at 5 year...

  • Page 56
    ...(in thousands, except per share data) retail customers. Finance charges of $1,763, $2,257 and $3,380 on the installment sales program are included in net sales in the accompanying consolidated statements of operations for the fiscal years ended December 31, 2005, January 1, 2005 and January 3, 2004...

  • Page 57
    ...-term liabilities in the accompanying consolidated balance sheets. Postretirement Plan The Company provides certain health care and life insurance benefits for eligible retired Team Members through a postretirement plan, or the Plan. These benefits are subject to deductibles, co-payment provisions...

  • Page 58
    ...the Advance Auto Parts, Inc. Deferred Stock Unit Plan for NonEmployee Directors and Selected Executives, or the DSU Plan. The DSU Plan provides for the annual grant of deferred stock units, or DSUs, to the Company's Board of Directors as allowed under the LTIP. Each DSU is equivalent to one share of...

  • Page 59
    ... Auto Parts I Annual Report 2005 I 57 the director until he or she ceases to be a director. The DSUs are then distributed to the director following his or her last date of service. The Company granted six and nine DSUs in fiscal years 2005 and 2004, respectively at a weighted average fair value...

  • Page 60
    ... per share data) years 2005, 2004 and 2003, respectively. At December 31, 2005, there were 1,551 shares available to be issued under the plan. Effective January 1, 2006, the plan was amended such that eligible Team Members may purchase common stock at 95% of fair market value. 21. FAIR VALUE OF...

  • Page 61
    ... Auto Parts I Annual Report 2005 I 59 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Advance Auto Parts, Inc. and subsidiaries (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal...

  • Page 62
    60 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Advance Auto Parts, Inc. and Subsidiaries Roanoke, Virginia We have audited the accompanying consolidated balance sheets of Advance Auto Parts, Inc. and subsidiaries (the Company) as of December...

  • Page 63
    ... PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Advance Auto Parts, Inc. and Subsidiaries Roanoke, Virginia We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Advance Auto Parts, Inc...

  • Page 64
    ... Committee of the Board of Directors, consisting solely of outside directors, meets periodically with members of management, internal audit and the Company's independent registered public accounting firm to discuss accounting, auditing, control and other financial reporting matters. The committee...

  • Page 65
    Advance Auto Parts I Annual Report 2005 I 63 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is listed on the New York Stock Exchange, or NYSE, under the symbol "AAP." The table below sets forth, for the fiscal ...

  • Page 66
    ... Board and Retired Chief Executive Officer, Advance Auto Parts, Inc. Michael N. Coppola President and Chief Executive Officer, Advance Auto Parts, Inc. Darren R. Jackson (1, 3) Executive Vice President-Finance and Chief Financial Officer, Best Buy Co., Inc. William S. Oglesby (3*, 4) Senior Managing...

  • Page 67
    Advance Auto Parts, Inc. I Annual Report 2005 I 19 2 1 4 5 6 7 8 9 3 Your Board of Directors: left to right; Carlos Saladrigas(1); Darren Jackson(2); William Oglesby(3); William Salter(4); Mike Coppola(5); Gilbert Ray(6); John Brouillard(7); Larry Castellani(8); Francesca Spinelli(9) S T ...

  • Page 68
    5673 Airport Road, Roanoke, Virginia 24012 I 540.362.4911 I www.AdvanceAutoParts.com