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42
investigations and litigation that are being conducted against CSK and certain of its former employees for alleged conduct relating
to periods prior to the acquisition date. As a result of the acquisition, we expect to continue to incur ongoing legal fees related to
such investigations, litigation and indemnity obligations. Our legal reserve was principally recorded as an assumed liability in our
allocation of the purchase price of CSK. Management, with the assistance of outside legal counsel, must make estimates of
potential legal obligations and possible liabilities arising from such litigation and records reserves for these expenditures. If legal
reserves were changed 10% from our estimated reserves at December 31, 2010, the financial impact would have been
approximately $4.3
million or 0.6% of pretax income for the year ended December 31, 2010.
INFLATION AND SEASONALITY
For the last three fiscal years, we have been successful, in many cases, in reducing the effects of merchandise cost increases
principally by taking advantage of vendor incentive programs, economies of scale resulting from increased volume of purchases and
selective forward buying. To the extent our acquisition cost increased due to base commodity price increases industry-wide, we have
typically been able to pass along these increased costs through higher retail prices for the affected products. As a result, we do not
believe our operations have been materially, adversely affected by inflation.
To some extent, our business is seasonal primarily as a result of the impact of weather conditions on customer buying patterns. While
we have historically realized operating profits in each quarter of the year, our store sales and profits have historically been higher in
the second and third quarters (April through September) than in the first and fourth quarters (October through March) of the year.
QUARTERLY RESULTS
The following table sets forth certain quarterly unaudited operating data for fiscal 2010 and 2009. The unaudited quarterly
information includes all adjustments which management considers necessary for a fair presentation of the information shown.
The unaudited operating data presented below should be read in conjunction with our consolidated financial statements and related
notes included elsewhere in this annual report, and the other financial information included therein.
Fiscal 2010
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share and comparable store sales data)
Comparable store sales 6.9% 7.9% 11.1% 9.2%
Sales $ 1,280,067 $ 1,381,241 $ 1,425,887 $ 1,310,330
Gross profit 618,347 672,633 693,415 636,597
Operating income 168,445 181,164 199,031 164,136
Gain on settlement of note receivable - - - 11,639
Net income 97,476 99,595 116,542 105,760
Earnings per share – basic 0.71 0.72 0.84 0.76
Earnings per share – assuming dilution 0.70 0.71 0.82 0.74
Fiscal 2009
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share and comparable store sales data)
Comparable store sales 5.7% 4.8% 5.3% 2.7%
Sales $ 1,163,749 $ 1,251,377 $ 1,258,239 $ 1,173,697
Gross profit 542,670 603,769 610,555 569,534
Operating income 113,336 149,675 149,196 125,412
Net income 62,835 85,515 87,225 71,923
Earnings per share – basic 0.47 0.63 0.64 0.52
Earnings per share – assuming dilution 0.46 0.62 0.63 0.52
RECENT ACCOUNTING PRONOUNCEMENTS
In January of 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends Subtopic
820-10, requiring additional disclosures regarding fair value measurements such as transfers in and out of Levels 1 and 2, as well as
separate disclosures about activity relating to Level 3 measurements. ASU 2010-06 clarifies existing disclosure requirements related
to the level of disaggregation and input valuation techniques. The updated guidance is effective for interim and annual periods
43
beginning after December 15, 2009, with the exception of the new Level 3 activity disclosures, which are effective for interim and
annual periods beginning after December 15, 2010. The adoption of the new guidance did not have a material impact on our
consolidated financial position, results of operations or cash flows. The adoption of the new Level 3 guidance is required in 2011 and
is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
FORM 10-K