Advance Auto Parts 2013 Annual Report Download - page 62

ADVANCE AUTO PARTS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 28, 2013, December 29, 2012 and December 31, 2011
(in thousands, except per share data)
F-10
The Company’s vendor receivables are established as it receives concessions from its vendors through a variety of
programs and arrangements, including allowances for new stores and warranties, volume purchase rebates and co-operative
advertising. Amounts receivable from vendors also include amounts due to the Company for changeover merchandise and
product returns. The Company regularly reviews vendor receivables for collectability and assesses the need for a reserve for
uncollectable amounts based on an evaluation of the Company’s vendors’ financial positions and corresponding abilities to
meet financial obligations. The Company’s allowance for doubtful accounts related to vendor receivables is not significant.
Inventory
Inventory amounts are stated at the lower of cost or market. The cost of the Company’s merchandise inventory is
determined using the last-in, first-out (“LIFO”) method. Under the LIFO method, the Company’s cost of sales reflects the costs
of the most recently purchased inventories, while the inventory carrying balance represents the costs relating to prices paid in
prior years.
Vendor Incentives
The Company receives incentives in the form of reductions to amounts owed and/or payments from vendors related to
cooperative advertising allowances, volume rebates and other promotional considerations. Many of these incentives are under
long-term agreements (terms in excess of one year), while others are negotiated on an annual basis or less (short-term). Volume
rebates and cooperative advertising allowances not offsetting in selling, general and administrative expenses, or SG&A, are
earned based on inventory purchases and initially recorded as a reduction to inventory. These deferred amounts are included as
a reduction to cost of sales as the inventory is sold. 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. Total deferred vendor incentives included as a reduction of Inventory was $111,304 and $102,975 as of
December 28, 2013 and December 29, 2012, respectively.
Similarly, the Company recognizes other promotional incentives earned under long-term agreements not specifically
related to volume of purchases as a reduction to cost of sales. However, these incentives are not deferred as a reduction of
inventory and 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 in the accompanying
consolidated balance sheets. Management’s estimate of the portion of deferred revenue that will be realized within one year of
the balance sheet date has been included in Other current liabilities in the accompanying consolidated balance sheets. 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 on the accompanying consolidated balance sheets.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense, net of vendor promotional funds, was $69,116,
$83,871 and $84,656 in Fiscal 2013, 2012 and 2011, respectively. Vendor promotional funds, which reduced advertising
expense, amounted to $18,622 and $11,445 in Fiscal 2013 and 2012. Prior to Fiscal 2011, the Company received no vendor
promotional funds to reduce advertising expense.
Preopening Expenses
Preopening expenses, which consist primarily of payroll and occupancy costs related to the opening of new stores, are
expensed as incurred.