Advance Auto Parts 2007 Annual Report Download - page 44

Management Overview
We recorded earnings per diluted share of $2.28 in fiscal 2007 compared to $2.16 for fiscal 2006. We continue
to generate significant operating cash flow to allow us to invest in business initiatives and return capital to
shareholders through cash dividends and share repurchases. We remain focused on increasing our sales, operating
margins and return on invested capital and believe certain strategic initiatives introduced during 2007 are beginning
to propel us toward achieving these goals. Specific updates on these initiatives, among other recent developments,
during 2007 are discussed below:
New CEO – We announced in November 2007 the appointment of a new CEO and President, Darren Jackson,
which became effective in January 2008. Mr. Jackson, who previously served on our Audit Committee, Finance
Committee and Board of Directors, had already been involved with management on the completion of certain
strategic studies during 2007 and the formulation of certain initiatives discussed below.
Sales Initiatives – We believe our biggest opportunity is increasing our top line sales growth as we develop
initiatives around a more customer-focused strategy and increased parts availability and related knowledge by the
team members in our stores. Our sales per square foot and sales per employee are currently in the bottom half of the
automotive aftermarket industry. In 2007, we began implementing our plan to increase DIY and DIFM sales through
improving parts availability with an emphasis on late model and foreign vehicles. Our enhanced parts availability
will be funded partially from available working capital as we transition from other less productive inventory.
We believe our DIFM business has started to improve as indicated by an 8.2% comparable store sales increase
during the fourth quarter, although we continue to face a challenging macroeconomic environment, including higher
fuel and credit costs faced by our customers, higher unemployment and lower consumer confidence. In order to
structure our DIFM business for further growth, we continue to examine store staffing and training, compensation
policies and truck utilization. Commercial sales represented approximately 27% of our total sales for fiscal 2007 as
compared to approximately 25% for fiscal 2006. At December 29, 2007, we operated commercial programs in 83%
of our total AAP stores compared to 81% for the prior fiscal year. Lastly, we began improving the productivity and
efficiency of our sales floor in our stores by aligning functions performed by our sales associates with our increased
parts focus, including the transition of less productive inventory.
SG&A Structure – We took significant steps towards reducing and reallocating our selling, general and
administrative expense structure during the second half of 2007. We eliminated 250 positions at our store support
center and other field support areas and terminated our Advance TV network, which together resulted in $6.3
million of expense recognized in our 2007 operating results. Additionally, we reduced our real estate development
by opening fewer new stores, relocating fewer stores and halting the 2010 store remodel program. During the fourth
quarter of 2007, we introduced a 6,000 square foot prototype store. We believe this smaller model can support an
adequate level of parts availability for both our DIY and DIFM customers while reducing our occupancy costs as a
percentage of sales.
Lastly, we completed the further reduction and reallocation of certain advertising expenditures into a more focused
effort in electronic media. We have recently introduced a new brand, “Keep the Wheels Turning.” This campaign
was developed as part of our overall strategic review of the business as well as extensive research conducted with
our customers and team members. We believe this campaign, which targets both DIY and DIFM customers,
differentiates Advance Auto Parts in our industry by positioning us as the source for brand name parts and products
and as the resource for expert advice and knowledge to help customers keep their vehicles running. The campaign
includes creative and compelling television and radio commercials designed to drive sales and build an enduring,
positive image of Advance Auto Parts. Due to the reallocation of our advertising expenditures, we expect 2008
advertising expense to remain generally consistent with 2007 levels.
Return on Invested Capital Improvements –We eliminated certain information technology, logistics and other
investments that did not demonstrate acceptable returns. During the second half of 2007, we halted our store
remodel program while we more closely examine the sales results and overall return from these remodels.
Additionally, we have delayed the opening of our ninth distribution center to the beginning of 2010 as a result of
fewer new store openings planned throughout 2008.
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