Advance Auto Parts 2007 Annual Report Download - page 47

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regulations, along with varying application of tax policy and administration within those jurisdictions.
These tax reserves contain uncertainties because management is required to make assumptions and apply
judgment to estimate exposures associated with our various filing positions. Although management believes that the
judgments and estimates are reasonable, actual results could differ and the company may be exposed to gains or
losses that could be material. To the extent that actual results differ from our estimates, the effective tax rate in any
particular period could be materially affected. Favorable tax developments would be recognized as a reduction in
our effective tax rate in the period of resolution. Unfavorable tax developments would require an increase in our
effective tax rate and a possible use of cash in the period of resolution. A 10% change in the tax reserves at
December 29, 2007 would have affected net income by approximately $1.4 million for the fiscal year ended
December 29, 2007.
Components of Statement of Operations
Net Sales
Net sales consist primarily of comparable store sales and new store net 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 from comparable store
sales the net sales from the Offshore and AI stores.
Cost of Sales
Our cost of sales consists of merchandise costs, net of incentives under vendor programs; inventory shrinkage,
defective and warranty costs; 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, vendor programs, inventory shrinkage, defective and warranty costs and warehouse and
distribution costs. We seek to minimize fluctuations in merchandise costs and instability of supply by entering into
long-term purchasing agreements, without minimum purchase volume requirements, with vendors when we believe
it is advantageous. Our gross profit may not be comparable to those of our competitors due to differences in industry
practice regarding the classification of certain costs. See Note 2 in our consolidated financial statements for
additional discussion of these costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of store payroll, store occupancy (including rent),
advertising expenses, other store expenses and general and administrative expenses, including salaries and related
benefits of store support center team members, share-based compensation expense, store support center
administrative office expenses, data processing, professional expenses and other related expenses.
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