Advance Auto Parts 2008 Annual Report Download - page 39

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with vendors, the level of credit provided by the vendor and management’s estimate of the discounts to be recorded,
if any, required by market conditions. At the end of fiscal 2008, we reviewed our inventory productivity and
changed our inventory management approach for slow moving inventory. As a result, we increased our reserve for
excess and obsolete inventories by $34.1 million, excluding a LIFO and warehousing cost impact of $3.4 million.
Our total inventory reserves increased by $27.3 million in fiscal 2008 compared to fiscal 2007 primarily as a
result of the increase to our excess and obsolete inventory reserve. Future changes by vendors in their policies or
willingness to accept returns of excess inventory or changes in our inventory management approach for excess and
obsolete inventory could require us to revise our estimates of required reserves and result in a negative impact on
our consolidated statement of operations. A 10% difference in actual inventory reserves at January 3, 2009 would
have affected net income by approximately $3.9 million for the fiscal year ended January 3, 2009.
Warranty Reserves
We offer limited warranties on certain products that range from 30 days to lifetime warranties; the warranty
obligation on the majority of merchandise sold by us with a manufacturer’s warranty is borne by our vendors.
However, we have an obligation to provide customers free replacement of merchandise or merchandise at a prorated
cost if under a warranty and not covered by the manufacturer. Merchandise sold with warranty coverage by us
primarily includes batteries but may also include other parts such as brakes and shocks. We estimate and record a
reserve for future warranty claims based on the historical return experience of the products sold and record any
change as income or expense in the period the product is sold. If claims experience differs from historical levels,
revisions in our estimates may be required, which could have an impact on our consolidated statement of operations.
Our warranty reserves increased by $10.9 million in fiscal 2008 compared to fiscal 2007. A portion of this
obligation is funded by incentives from our vendors. The overall increase in our warranty reserves was primarily
attributable to an increase in the quantity and cost of batteries sold during fiscal 2008 as well as an increase in
related warranty claims. Effective December 30, 2007, the Company also began including in its warranty reserves
the warranty obligation on certain other products sold in addition to batteries. A 10% change in the warranty
reserves at January 3, 2009 would have affected net income by approximately $1.8 million for the fiscal year ended
January 3, 2009.
Self-Insurance Reserves
We are self-insured for general and automobile liability, workers' compensation and the health care claims of
our Team Members, although we maintain stop-loss coverage with third-party insurers to limit our total liability
exposure. Our self-insurance program, started in 2001, has not reached full maturity. A reserve for liabilities
associated with these losses is established for claims filed, claims incurred but not yet reported, projected future
claims using actuarial methods followed in the insurance industry and our historical claims experience. Each year,
our reserve for self-insurance increases over the prior year because each year adds an additional layer of reserves
without an equal amount of prior year reserves being fully relieved. Generally, claims have historically taken several
years to settle and thus are not relieved at the same rate as additional reserves are added each year. Our self-
insurance reserves increased by $5.0 million in fiscal 2008 compared to fiscal 2007. This increase was primarily the
result of the increase in the number of workers’ compensation claims and automobile accident claims as well as an
increase in the total cost to settle workers’ compensation claims as compared to the prior year. Although the
increase in self-insured reserves in fiscal 2008 is less than in fiscal 2007, the increase in the number of claims
continues to be driven by overall growth, including an increase in total number of stores, employees and
Commercial delivery vehicles.
While we do not expect the amounts ultimately paid to differ significantly from our estimates, our self-
insurance reserves and corresponding selling, general and administrative expenses could be affected if future claim
experience differs significantly from historical trends and actuarial assumptions. A 10% change in our self-insurance
liabilities at January 3, 2009 would have affected net income by approximately $5.7 million for the fiscal year ended
January 3, 2009.