Advance Auto Parts 2012 Annual Report Download - page 40

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Cooperative advertising allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to
promote a vendor's products are included as an offset to SG&A when the cost is incurred. Certain of our vendor agreements
contain purchase volume incentives that provide for increased funding when graduated purchase volumes are met. Amounts
accrued throughout the year could be impacted if actual purchase volumes differ from projected annual purchase volumes.
Total deferred vendor incentives included in inventory was $103.0 million and $82.7 million at December 29, 2012 and
December 31, 2011, respectively.
Similarly, we recognize other promotional incentives earned under long-term agreements as a reduction to cost of sales.
However, these incentives are recognized based on the cumulative net purchases as a percentage of total estimated net
purchases over the life of the agreement. Short-term incentives (terms less than one year) are generally recognized as a
reduction to cost of sales over the duration of any short-term agreements.
Amounts received or receivable from vendors that are not yet earned are reflected as deferred revenue. Management's
estimate of the portion of deferred revenue that will be realized within one year of the balance sheet date is included in Other
current liabilities. Earned amounts that are receivable from vendors are included in Receivables, net except for that portion
expected to be received after one year, which is included in Other assets, net. We regularly review the receivables from vendors
to ensure they are able to meet their obligations. Historically, the change in our reserve for receivables related to vendor
funding has not been significant. A 10% difference in our vendor incentives deferred in inventory at December 29, 2012 would
have affected net income by approximately $6.4 million for the fiscal year ended December 29, 2012.
Inventory Reserves
Our inventory reserves consist of reserves for projected losses related to shrink and for potentially excess and obsolete
inventory. An increase to our inventory reserves is recorded as an increase to our cost of sales. Conversely, a decrease to our
inventory reserves is recorded as a decrease to our cost of sales. Our inventory reserves for Fiscal 2012, 2011 and 2010 were
$31.4 million, $30.8 million and $18.2 million, respectively.
Shrink may occur due to theft, loss or inaccurate records for the receipt of merchandise, among other things. We establish
reserves for estimated store shrink at a point in time based on results of physical inventories conducted by independent third
parties in substantially all our stores over the course of the year, results from other targeted inventory counts in our stores and
historical and current loss trends. In our distribution facilities, we perform cycle counts throughout the year to measure actual
shrink and to estimate reserve requirements. We believe we have sufficient current and historical knowledge to record
reasonable estimates for our shrink reserve and that any differences in our shrink rate in the future would not have a material
impact on our shrink reserve.
While our shrink expense increased in Fiscal 2011 from a loss of inventory as determined by the completion of physical
inventories in our stores, our shrink rate has fluctuated less than 40 basis points over the last three years. Historically, we have
not experienced material adjustments to our shrink reserve. Furthermore, we have consistently completed a similar number of
physical inventories at comparable times throughout the year.
Our inventory consists primarily of parts, batteries, accessories and other products used on vehicles that have reasonably
long shelf lives. Although the risk of obsolescence is minimal, we also consider whether we may have excess inventory based
on our current approach for effectively managing slower moving inventory. We strive to optimize the life cycle of our inventory
to ensure our product availability reflects customer demand. We have return rights with many of our vendors and the majority
of excess inventory is returned to our vendors for full credit. We establish reserves for potentially excess and obsolete
inventories based on (i) current inventory levels, (ii) the historical analysis of product sales and (iii) current market conditions.
In certain situations, we establish reserves when less than full credit is expected from a vendor or when liquidating product will
result in retail prices below recorded costs.
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 life cycle 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 December 29, 2012 would have affected net income by
approximately $2.0 million for the fiscal year ended December 29, 2012.
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