Advance Auto Parts 2009 Annual Report Download - page 39

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return privileges when necessary.
Our total inventory reserves decreased by $34.4 million in Fiscal 2009 compared to Fiscal 2008 primarily
related to the entire utilization of our reserve for slow moving inventory established in Fiscal 2008 in connection
with the change in approach for slow moving inventory. Future changes by vendors in their policies or willingness
to accept returns of excess inventory, changes in our inventory management approach for excess and obsolete
inventory or failure by us to effectively manage the lifecycle of our 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 $1.8
million for the fiscal year ended January 2, 2010.
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 at the time of sale based on the historical return experience of the respective
product 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. To the extent vendors provide upfront allowances
in lieu of accepting the obligation for warranty claims and the allowance is in excess of the related warranty
expense, the excess is recorded as a reduction to cost of sales.
A 10% change in the warranty reserves at January 2, 2010 would have affected net income by approximately
$1.9 million for the fiscal year ended January 2, 2010.
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. Our self-insurance reserves for fiscal 2009, 2008 and 2007
were $93.7 million, $90.6 million and $85.5 million, respectively.
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. We have experienced an increase in overall claims during the last three years which is generally reflective
of our overall growth, including an increase in total stores, team members and Commercial delivery vehicles. While
we have seen the severity and frequency of worker’s compensation and general liability claims moderate, the
severity and frequency of automobile liability claims have increased primarily due to the significant increase in the
number of our commercial delivery vehicles.
Our reserve 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. While we do not expect the
amounts ultimately paid to differ significantly from our estimates, our self-insurance reserves and corresponding
SG&A 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 2, 2009 would have affected net income by
approximately $5.9 million for the fiscal year ended January 2, 2010.
Goodwill and Intangible Assets
We evaluate goodwill and indefinite-lived intangibles for impairment annually during our fiscal fourth quarter
or whenever events or changes in circumstances indicate the carrying value of the goodwill or other intangible asset
may not be recoverable. We complete our impairment evaluation by combining information from our internal
valuation analyses by reporting units, considering other publicly available market information and using an