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Advance Auto Parts 10-K 2010
aap10k.htm

 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2010
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.

Commission file number 001-16797


 
ADVANCE AUTO PARTS, INC.
 

 
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
54-2049910
(I.R.S. Employer
Identification No.)
 
5008 Airport Road
Roanoke, Virginia
(Address of Principal Executive Offices)
 
24012
(Zip Code)
 
(540) 362-4911
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ¨ Yes  ¨ No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x   Accelerated filer o
     
Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

As of July 17, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the 95,058,600 shares of Common Stock held by non-affiliates of the registrant was $4,289,994,618, based on the last sales price of the Common Stock on July 17, 2009, as reported by the New York Stock Exchange.

As of February 26, 2010, the registrant had outstanding 92,261,371 shares of Common Stock, par value $0.0001 per share (the only class of common equity of the registrant outstanding).

 
 
 
     
Page
       
Part I.    
       
  Business
2
       
  Risk Factors
10
       
  Unresolved Staff Comments
13
       
  Properties
15
       
  Legal Proceedings
16
       
  Reserved
16
       
Part II.    
       
  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
17
       
  Selected Consolidated Financial Data
18
       
  Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
       
  Item 7A. Quantitative and Qualitative Disclosures About Market Risks
37
       
  Item 8. Financial Statements and Supplementary Data
37
       
  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
37
       
  Item 9A. Controls and Procedures
37
       
  Other Information
38
       
Part III.     
       
  Item 10. Directors, Executive Officers and Corporate Governance
39
       
  Executive Compensation
39
       
 
39
       
  Item 13. Certain Relationships and Related Transactions, and Director Independence
39
       
  Item 14. Principal Accountant Fees and Services
39
       
 
 
       
  Exhibits, Financial Statement Schedules
40
 
 
 
FORWARD-LOOKING STATEMENTS

Certain statements in this report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are usually identified by the use of words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "likely," "may," "plan," "position," "possible," "potential," "probable," "project," "projection," "should," "strategy," "will," or similar expressions.   We intend for any forward-looking statements to be covered by, and we claim the protection under, the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based upon assessments and assumptions of management in light of historical results and trends, current conditions and potential future developments that often involve judgment, estimates, assumptions and projections. Forward-looking statements reflect current views about our plans, strategies and prospects, which are based on information currently available.

Although we believe that our plans, intentions and expectations as reflected in or suggested by any forward-looking statements are reasonable, we do not guarantee or give assurance that such plans, intentions or expectations will be achieved.  Actual results may differ materially from our anticipated results described or implied in our forward-looking statements, and such differences may be due to a variety of factors. Our business could also be affected by additional factors that are presently unknown to us or that we currently believe to be immaterial to our business.

Listed below and discussed elsewhere in further detail in this report are some important risks, uncertainties and contingencies which could cause our actual results, performance or achievements to be materially different from any forward-looking statements made or implied in this report. These include, but are not limited to, the following:
 
·  
deterioration in general economic conditions, including unemployment, inflation or deflation, consumer debt levels, high energy and fuel costs, uncertain credit markets and bankruptcies or other recessionary type conditions that could have a negative impact on our business, customers and suppliers;
·  
a decrease in demand for our products;
·  
our ability to develop and implement business strategies and achieve desired goals;
·  
our ability to expand our business, including locating available and suitable real estate for new store locations and the integration of any acquired businesses;
·  
competitive pricing and other competitive pressures;
·  
our relationships with our vendors;
·  
our ability to attract and retain qualified employees , or Team Members;
·  
the occurrence of natural disasters and/or extended periods of unfavorable weather;
·  
our ability to obtain affordable insurance against the financial impacts of natural disasters and other losses;
·  
regulatory and legal risks, such as environmental or OSHA risks, including being named as a defendant in administrative investigations or litigation, and the incurrence of legal fees and costs, the payment of fines or the payment of sums to settle litigation cases or administrative investigations or proceedings;
·  
the impact of global climate change or legal and regulatory responses to such change;
·  
acts of terrorism; and
·  
other statements that are not of historical fact made throughout this report, including the sections entitled “Business,” "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors."
 
We assume no obligations to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time to time in our other reports and documents filed with the Securities and Exchange Commission, or SEC, and you should not place undue reliance on those statements.



Item 1.                       Business.

Unless the context otherwise requires, “Advance,” “we,” “us,” “our,” and similar terms refer to Advance Auto Parts, Inc., its predecessor, its subsidiaries and their respective operations. Our fiscal year consists of 52 or 53 weeks ending on the Saturday closest to December 31st of each year. Fiscal 2008 included 53 weeks of operations. All other fiscal years presented include 52 weeks of operations.

Overview

We are a leading specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States. Our stores carry an extensive product line for cars, vans, sport utility vehicles and light trucks. We serve both "do-it-yourself," or DIY, and “do-it-for-me,” or Commercial, customers.

We were founded in 1929 as Advance Stores Company, Incorporated and operated as a retailer of general merchandise until the 1980s. During the 1980s, we sharpened our focus to target sales of automotive parts and accessories to DIY customers. From the 1980s to the present, we have grown significantly as a result of comparable store sales growth, new store openings and strategic acquisitions. Since 1996, we have aggressively expanded our sales to Commercial customers through our commercial delivery program. Our parent company, Advance Auto Parts, Inc., a Delaware corporation, was incorporated in 2001 in conjunction with the acquisition of Discount Auto Parts, Inc., or Discount. At January 2, 2010, our 2009 fiscal year-end, we operated 3,420 total stores.

Our Internet address is www.AdvanceAutoParts.com. We make available free of charge through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC's website at www.sec.gov.

Operating Segments

We operate in two reportable segments: Advance Auto Parts, or AAP, and Autopart International, or AI. The AAP segment is comprised of our store operations within the United States, Puerto Rico and the Virgin Islands which operate under the trade names “Advance Auto Parts,” “Advance Discount Auto Parts” and “Western Auto.” The AI segment consists solely of the operations of Autopart International, Inc., or Autopart International, which operates as an independent, wholly-owned subsidiary and primarily serves the Commercial market. We acquired Autopart International in September 2005.

Financial information on our segments is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report on Form 10-K. In addition, selected financial data for our segments is available in Note 21, Segment and Related Information, of the Notes to Consolidated Financial Statements, included in Item 15. Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K.

AAP Segment

At January 2, 2010, we operated 3,264 AAP stores within the United States, Puerto Rico and the Virgin Islands. We operated 3,238 stores throughout 39 states in the Northeastern, Southeastern and Midwestern regions of the United States. These stores operated under the “Advance Auto Parts” trade name except for certain stores in the state of Florida, which operated under the “Advance Discount Auto Parts” trade name. These stores offer a broad selection of brand name and proprietary automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars and light trucks. In addition, we operated 26 stores under the “Western Auto” and “Advance Auto Parts” trade names, located in Puerto Rico and the Virgin Islands, or Offshore.

 
We also provide our customers online shopping at www.AdvanceAutoParts.com and access to over 100,000 parts and accessories. Our new website was launched in October 2009 and is operated by our dedicated e-commerce team. Our online website allows our customers to pick up merchandise at a conveniently located store or have their purchases shipped directly to their home or business.

AAP Stores

Store Overview>.   Our stores generally are located in freestanding buildings in areas with high vehicle traffic counts, good visibility and easy access to major roadways and to our Commercial customers. We believe that our stores exhibit a customer-friendly format with the majority of our stores featuring an updated exterior and interior, bright lighting, and a well-designed and easily navigated floor plan. The average size of our stores is 7,400 square feet with the size of our typical new stores approximating 6,000 to 7,000 square feet. Our stores generally are open from 7:30 a.m. to 9:00 p.m. six days a week and 9:00 a.m. to 9:00 p.m. on Sundays and most holidays to meet the needs of our DIY and Commercial customers. We offer extended hours in a limited number of our stores, including 24 hours per day in certain stores.

Our stores carry a standard product offering of approximately 16,000 stock keeping units, or SKUs. Certain stores carry slightly more SKUs within centralized market locations where there is demand for a more customized assortment of merchandise. Additionally, some of our stores carry an additional customized assortment of 11,000 SKUs for same-day or next-day delivery to other select stores within the respective service area. We refer to these stores as HUB stores. The standard SKU offering within each of our stores is replenished from one of our eight distribution centers once per week on average.

We also utilize a network of Parts Delivered Quickly, or PDQ®, facilities and one Master PDQ® facility to ensure our stores have the right product at the right time to meet our customers’ needs. Our PDQ® and Master PDQ® network of facilities provide our customers with an additional assortment of approximately 87,000 less common SKUs on a same-day or overnight basis. Lastly, our customers have access to over 340,000 SKUs by ordering directly from one of our vendors for delivery to a particular store or other destination as chosen by the customer.

Store Team Members utilize our proprietary point-of-sale, or POS, system, including a fully integrated electronic parts catalog to identify and suggest the appropriate quality and price options for the SKUs we carry, as well as the related products, tools or additional information that is required by our customers to complete their automotive repair projects properly and safely.  We strive to be the leader in the automotive aftermarket industry in serving our customers by providing quality products at the right price and backed by a solid warranty and outstanding customer service. We offer many of the products in our stores at a good, better or best recommendation differentiated by price and quality.

The primary categories of product we offer in our stores include:

·  
Parts, including alternators, batteries, chassis parts, clutches, engines and engine parts, radiators, starters, transmissions and water pumps;
·  
Accessories, including floor mats, mirrors, vent shades, MP3 and cell phone accessories, and seat and steering wheel covers;
·  
Chemicals, including antifreeze, freon, fuel additives and car washes and waxes;
·  
Oil and other automotive petroleum products; and
·  
Other miscellaneous offerings.

The product in our stores is generally arranged in a uniform and consistent manner based on standard store formats and merchandise presentation.  The parts inventory is generally located on shelves behind the customer service counter with the remaining product, or front room merchandise, arranged on the sales floor to provide easy customer access, maximum selling space and to prominently display high-turnover products and accessories to customers. We utilize aisle displays to feature high-demand or seasonal merchandise, new items and advertised specials, including bilingual signage based on the demographics in each store’s geographic area.
 
 
We also provide a variety of services free of charge to our customers including:

·  
Battery & wiper installation
·  
Battery charging
·  
Check engine light reading where allowed by law
·  
Electrical system testing, including batteries, starters, alternators and sensors
·  
“How-To” Video Clinics & Project Brochures
·  
Oil and battery recycling

Our stores are 100% company operated and are divided into three geographic areas. Each geographic area is managed by a senior vice president, who is supported by regional and district management. District managers have direct responsibility for store operations in a specific district, which typically consists on average of 15 stores. Depending on store size and sales volume, each store is staffed by 8 to 16 Team Members, under the leadership of a general manager. Store Team Members are comprised of full and part-time Team Members. Each store include a parts professional, or parts pro, who has an extensive technical knowledge of automotive replacement parts and other related applications  to better serve our commercial and DIY customers. Many of our stores include bilingual Team Members to better serve our diverse customer base. We offer training to all of our Team Members which includes formal classroom workshops, online seminars and certification by the National Institute for Automotive Service Excellence, or ASE. ASE is broadly recognized for training certification in the automotive industry.


Under our Commercial Acceleration strategy, we are focused on increasing our Commercial sales at a faster rate in light of the favorable market dynamics.  During 2009, we increased the size of our sales force by approximately 45% for a greater emphasis on acquiring new Commercial customers and increasing our share of existing commercial customers’ purchases. We have added key product brands in our stores that are well recognized by our Commercial customers, as well as increased the parts knowledge of our store Team Members. We believe these initiatives will enable us to gain more Commercial customers as well as increase our sales from existing customers who will use us as their “first call” supplier. At January 2, 2010, 2,868 AAP stores, or 88% of total AAP stores, had Commercial delivery programs, which was up slightly from 85% at January 3, 2009.

Store Development.> Our store development program has historically focused on adding new stores within existing markets where we can achieve a larger presence, remodeling or relocating existing stores and entering new markets. The addition of new stores, along with strategic acquisitions, has played a significant role in our growth and success. We believe the opening of new stores, and their strategic location in relation to our DIY and Commercial customers, will continue to play a significant role in our future growth and success.

We open and operate stores profitably in both large, densely populated markets and small, less densely populated areas that would not otherwise support a national chain selling primarily to the retail automotive aftermarket. We complete substantial research prior to entering a new market. Key factors in selecting new site and market locations include population, demographics, vehicle profile, number and strength of competitors’ stores and the cost of real estate.
 
 
Our 3,264 AAP stores were located in the following states and territories at January 2, 2010:

Location
 
Number of
Stores
 
Location
 
Number of
Stores
 
Location
 
Number of
Stores
                     
Alabama
 
119
 
Maryland
 
74
 
Pennsylvania
 
163
Arkansas
 
29
 
Massachusetts
 
61
 
Puerto Rico
 
25
Colorado
 
44
 
Michigan
 
95
 
Rhode Island
 
9
Connecticut
 
37
 
Minnesota
 
14
 
South Carolina
 
126
Delaware
 
7
 
Mississippi
 
56
 
South Dakota
 
7
Florida
 
457
 
Missouri
 
43
 
Tennessee
 
139
Georgia
 
227
 
Nebraska
 
21
 
Texas
 
168
Illinois
 
82
 
New Hampshire
 
12
 
Vermont
 
7
Iowa
 
26
 
New Mexico
 
1
 
Virgin Islands
 
1
Indiana
 
101
 
New Jersey
 
55
 
Virginia
 
166
Kansas
 
24
 
New York
 
123
 
West Virginia
 
66
Kentucky
 
94
 
North Carolina
 
238
 
Wisconsin
 
46
Louisiana
 
62
 
Ohio
 
192
 
Wyoming
 
3
Maine
 
13
 
Oklahoma
 
31
       
 
The following table sets forth information concerning increases in the total number of our AAP stores during the past five years:

   
2009
   
2008
   
2007
   
2006
   
2005
 
Beginning Stores
    3,243       3,153       2,995       2,810       2,652  
New Stores (1)
    75       109       175       190       169  
Stores Closed
    (54 )     (19 )     (17 )     (5 )     (11 )
Ending Stores (2)
    3,264       3,243       3,153       2,995       2,810  
 
(1)  
Does not include stores that opened as relocations of previously existing stores within the same general market area or substantial renovations of stores.
(2)  
Includes 2 and 7 stores not operating at December 30, 2006 and December 31, 2005, respectively, primarily due to hurricane damage.

Store Technology. > Our store-based information systems, which are designed to improve the efficiency of our operations and enhance customer service, are comprised of a proprietary POS system and electronic parts catalog, or EPC, system.  Information maintained by our POS system is used to formulate pricing, marketing and merchandising strategies and to replenish inventory accurately and rapidly. Our POS system is fully integrated with our EPC system and enables our store Team Members to assist our customers in their parts selection and ordering based on year, make, model and engine type of their vehicles. Our centrally-based EPC data management system enables us to reduce the time needed to (i) exchange data with our vendors and (ii) catalog and deliver updated, accurate parts information.

Our EPC system also contains enhanced search engines and user-friendly navigation tools that enhance our Team Members’ ability to look up any needed parts as well as additional products the customer needs to complete their automotive repair project. If a hard-to-find part or accessory is not available at one of our stores, the EPC system can determine whether the part is carried and in-stock through our PDQÒ system. Available parts and accessories are then ordered electronically from another store, PDQÒ or Master PDQÒ with immediate confirmation of price, availability and estimated delivery time.

We also support our store operations with additional proprietary systems. Our store-level inventory management system provides real-time inventory tracking at the store level. With the store-level system, store Team Members can check the quantity of on-hand inventory for any SKU, adjust stock levels for select items for store
 
 
specific events, automatically process returns and defective merchandise, designate SKUs for cycle counts and track merchandise transfers. Our stores use radio frequency hand-held devices to help ensure the accuracy of our inventory. Our standard operating procedure, or SOP, system is a web-based, electronic data management system that provides our Team Members with instant and quick access to any of our standard operating procedures through a comprehensive on-line search function.  Additionally, we utilize a labor scheduling system known as management planning and training, or MPT. All of these systems are tightly integrated and provide real-time, comprehensive information to store personnel, resulting in improved customer service levels, Team Member productivity and in-stock availability.
 
Store Support Center


·  
Store support center in Roanoke, Virginia,
·  
Regional office in Minneapolis, Minnesota; and
·  
Global sourcing office in Taipei, Taiwan beginning in 2009.

Our Roanoke team is primarily responsible for the parts categories and our Minnesota team is primarily responsible for accessories, oil and chemicals. Our global sourcing team works closely with both teams.

In Fiscal 2009, we purchased merchandise from approximately 400 vendors, with no single vendor accounting for more than 9% of purchases. Our purchasing strategy involves negotiating agreements with most of our vendors to purchase merchandise over a specified period of time along with other terms, including pricing, payment terms and volume.

The merchandising team has developed strong vendor relationships in the industry and, in a collaborative effort with our vendor partners, utilizes a category management process. The merchandising team continues to refine its category management process and has recently implemented the first phase of a category management system which consists of a multi-phase implementation of an Oracle system solution. We believe this process, which develops a customer-focused business plan for each merchandise category, and our global sourcing operation are critical to improving comparable store sales, gross margin and inventory turns.

Our merchandising strategy, which generates DIY customer traffic and also appeals to Commercial customers, is to carry a broad selection of high quality brand name automotive parts and accessories such as Bosch®, Castrol®, Sylvania®, Prestone®, Monroe®, Wagner®, Purolator®, Dayco®, Trico® and Federal-Mogul Moog®, or Moog®. In addition to these branded products, we stock a wide selection of high quality proprietary products that appeal to value conscious customers. These lines of merchandise include everything from chemical and wash-and-wax products to tools, batteries, parts and interior automotive accessories under various private label names such as Wearever® and Autocraft®.

Supply Chain.> Our supply chain consists of centralized inventory management and transportation functions which support a supply chain network of distribution centers, PDQ® warehouses and stores. Our inventory management team utilizes a replenishment system to monitor the distribution center, PDQ® warehouse and store inventory levels and orders additional product when appropriate while streamlining handling costs. Our replenishment system utilizes the most up-to-date information from our POS system as well as inventory movement forecasting based upon sales history, sales trends by SKU, seasonality (and weather patterns) and demographic shifts in demand. Our replenishment system combines these factors with service level goals, vendor lead times and cost of inventory assumptions to determine the timing and size of purchase orders. A significant portion of our purchase orders are sent via electronic data interchange, with the remainder being sent by computer generated e-mail or facsimile.

Our transportation team utilizes a transportation management system to efficiently manage incoming shipments to our distribution centers and from our distribution centers to our stores. Benefits from this system include (i) reduced vendor to distribution center freight costs, (ii) visibility of purchase orders and shipments for the entire
 
 
supply chain, (iii) a reduction in distribution center inventory, or safety stock, due to consistent transit times, (iv) decreased third party freight and billing service costs, (v) decreased distribution center to store freight costs and (vi) higher store in-stock position. We utilize two reputable dedicated carriers to ship product from our distribution centers to our stores.
 
We currently operate eight distribution centers. All of these distribution centers are equipped with our distribution center management system, or DCMS. Our DCMS provides real-time inventory tracking through the processes of receiving, picking, shipping and replenishing inventory at our distribution centers. The DCMS, integrated with technologically advanced material handling equipment, significantly reduces warehouse and distribution costs, while improving efficiency. This equipment includes carousels, “pick-to-light” systems, radio frequency technology, voice technology and automated sorting systems. Through the continued implementation of our supply chain initiatives such as engineered standards in our distribution centers, we expect to further increase the efficient utilization of our distribution capacity. We believe our current supply chain network, including a new distribution projected to open in Indiana in 2011, provides ample capacity for our projected growth in the foreseeable future.

We currently offer approximately 56,000 SKUs to support all of our retail stores via our 20 stand-alone PDQ® warehouses and/or our eight distribution centers (all of which stock PDQ® items). Stores have system visibility to inventory in their respective PDQÒ warehouses and distribution centers and can place orders to these facilities, or as an alternative, through an online ordering system to virtually any of the other facilities. Ordered parts are delivered to substantially all stores on a same day or next day basis through our dedicated PDQ® trucking fleet and third party carriers. Store inventories are replenished from our eight distribution centers. In addition, we operate a Master PDQ® warehouse that stocks approximately 31,000 incremental SKUs of harder-to-find automotive parts and accessories and utilizes our existing PDQ® distribution infrastructure and/or third party arrangements to provide next day service to substantially all of our stores.

Marketing & Advertising. > We have an extensive marketing and advertising program designed to communicate our ability to meet consumers’ needs through our merchandise offerings, parts assortment and availability, competitive prices, free services and commitment to customer service. Our marketing and advertising program is focused on establishing Advance Auto Parts as the primary resource for a customer's automotive needs. We reinforce our brand image through a mix of media that includes television, radio, promotional signage, outdoor media, print, on-line advertising and our Internet site.

Our marketing and advertising plan is a brand-building program primarily built around television, direct marketing, radio advertising, and local marketing. The plan is supported by in-store signage, on-line advertising and print. Our television advertising is a combination of national and regional media in both sports and entertainment programming. Radio advertising generally airs during peak drive times. We use Spanish-language radio and television advertising to market to our Hispanic customers. Our advertising program is also supported through a new title sponsorship program for Monster Jam, a live family oriented motorsports event tour and television show highlighted by the racing and freestyle competition of monster trucks, and sponsorships of sporting events, racing teams and other grass-root level events intended to positively impact individual communities, including Hispanic and other ethnic communities, to create awareness and drive traffic for our stores. Since 2004, we have used an integrated consumer education program to build our image as not only the best source for parts, but also the best resource for vehicle information. Our goal with our consumer education initiative is to continue our long-term brand building success, increase customer loyalty and expand our customer base.

We continue to support our 2008 branding campaign, “Keep the wheels turning.” This campaign was developed based on a strategic review of our business as well as extensive research conducted with our customers and Team Members. We believe this campaign, which targets core DIY and Commercial customers, differentiates Advance Auto Parts in our industry by positioning us as (i) the brand that best understands customers’ needs, (ii) the source for brand name parts and products and (iii) the resource for expert advice and knowledge to help customers keep their vehicles running. The campaign includes creative and compelling television and radio commercials designed to drive sales and build an enduring, positive image of Advance Auto Parts with our targeted customers.


AI Segment

AI’s business primarily serves the Commercial market, with an emphasis on parts for imported cars, from its store locations located primarily throughout the Northeast and Mid-Atlantic regions. In addition, its North American Sales Division serves warehouse distributors and jobbers throughout North America. We believe AI provides a high level of service to its Commercial customers by providing quality parts, unsurpassed customer service and efficient parts delivery. As a result of its extensive sourcing network, AI is able to serve its customers in search of replacement parts for both domestic and imported cars and light trucks with a greater focus on imported parts. The vast majority of AI’s product is sold under its own proprietary brand. The AI stores offer approximately 18,000 SKUs with access to an additional 17,000 unique SKUs through its supply chain network.

AI has significantly increased its store count since our acquisition of AI in September 2005. At January 2, 2010, we operated 156 stores under the “Autopart International” trade name in the following states:

Location
 
Number of
Stores
 
Location
 
Number of
Stores
 
Location
 
Number of
Stores
                     
Connecticut
 
17
 
Massachusetts
 
32
 
Pennsylvania
 
20
Delaware
 
1
 
New Hampshire
 
8
 
Rhode Island
 
4
Florida
 
3
 
New Jersey
 
16
 
Vermont
 
1
Maine
 
4
 
New York
 
25
 
Virginia
 
12
Maryland
 
13
               
 
The following table sets forth information concerning increases in the total number of our AI stores:

   
2009
   
2008
   
2007
   
2006
   
2005
 
Beginning Stores
    125       108       87       62       -  
New Stores
    32       18       21       25       62  (1)
Stores Closed
    (1 )     (1 )     -       -       -  
Ending Stores
    156       125       108       87       62  
 
(1)  
Of the 62 new stores in 2005, 61 stores were acquired in September 2005 as part of our AI acquisition.

Seasonality

Our business is somewhat seasonal in nature, with the highest sales occurring in the spring and summer months. In addition, our business can be affected by weather conditions. While unusually heavy precipitation tends to soften sales as elective maintenance is deferred during such periods, extremely hot or cold weather tends to enhance sales by causing automotive parts to fail at an accelerated rate.

Team Members

At February 26, 2010, we employed approximately 29,000 full-time Team Members and approximately 20,000 part-time Team Members. Our workforce consisted of 90% of our Team Members employed in store-level operations, 7% employed in distribution and 3% employed in our corporate offices. We have never experienced any labor disruption and are not party to any collective bargaining agreements. We believe that our Team Member relations are good.

Intellectual Property

We own a number of trade names and own and have federally registered several service marks and trademarks, including “Advance Auto Parts,” “Western Auto,” “Parts America,” “Autopart International” and “PDQ®” for use in connection with the automotive parts retailing business. In addition, we own and have registered a number of
 
trademarks for our proprietary products. We believe that these trade names, service marks and trademarks are important to our merchandising strategy. We do not know of any infringing uses that would materially affect the use of these trade names and marks, and we actively defend and enforce them.
 
Competition

We operate in both the DIY and Commercial markets of the automotive aftermarket industry. Our primary competitors are (i) both national and regional retail chains of automotive parts stores, including AutoZone, Inc., O'Reilly Automotive, Inc. and The Pep Boys–Manny, Moe & Jack, (ii) discount stores and mass merchandisers that carry automotive products, (iii) wholesalers or jobber stores, including those associated with national parts distributors or associations, such as NAPA and Carquest, (iv) independent operators and (v) automobile dealers that supply parts. We believe that chains of automotive parts stores that, like us, have multiple locations in one or more markets, have competitive advantages in customer service, marketing, inventory selection, purchasing and distribution as compared to independent retailers and jobbers that are not part of a chain or associated with other retailers or jobbers. The principal methods of competition in our business include store location, product offerings, availability, quality, price and customer service.

Environmental Matters

We are subject to various federal, state and local laws and governmental regulations relating to the operation of our business, including those governing recycling of automotive lead-acid batteries and used automotive oil, and ownership and operation of real property. We sell consumer products containing hazardous materials as part of our business. In addition, our customers may bring automotive lead-acid batteries or used automotive oil onto our properties. We currently provide collection and recycling programs for used lead-acid batteries and used oil at substantially all of our stores as a service to our customers. Pursuant to agreements with third party vendors, lead-acid batteries and used oil are collected by our Team Members, deposited onto pallets or into vendor supplied containers and stored by us until collected by the third party vendors for recycling or proper disposal. The terms of our contracts with third party vendors provide that they are in compliance with all applicable laws and regulations. Persons who arrange for the removal, disposal, treatment or other handling of hazardous or toxic substances may be liable for the costs of removal or remediation at any affected disposal, treatment or other site affected by such substances. Based on our experience, we do not believe that there are any material environmental costs associated with the current business practice of accepting lead-acid batteries and used oil as these costs are borne by the respective third parties.

We own and lease real property. Under various environmental laws and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. These laws often impose joint and several liability and may be imposed without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous or toxic substances. Other environmental laws and common law principles also could be used to impose liability for releases of hazardous materials into the environment or work place, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. From time to time, we receive notices from the Environmental Protection Agency and state environmental authorities indicating that there may be contamination on properties we own, lease or operate or may have owned, leased or operated in the past or on adjacent properties for which we may be responsible.  Compliance with these laws and regulations has not had a material impact on our operations to date.



Item 1A. Risk Factors.

Our business is subject to a variety of risks, both known and unknown. Our business, financial condition, results of operations and cash flows could be negatively impacted by the following risk factors. These risks are not the only risks that may impact our business.

Deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, uncertain credit markets or other recessionary type conditions could have a negative impact on our business, financial condition, results of operations and cash flows.

Deterioration in general macro-economic conditions impacts us through (i) higher operating costs from higher energy prices, (ii) potential adverse effects from deteriorating and uncertain credit markets and (iii) the negative impact on our suppliers and customers.

Impact of Credit Market Uncertainty
 
Our overall credit rating may be negatively impacted by deteriorating and uncertain credit markets. The interest rates on our credit facilities are linked directly to our credit ratings. Accordingly, any negative impact on our credit rating would likely result in higher interest rates and interest expense we pay on borrowed funds. Additionally, we may be limited in our ability to borrow additional funds to finance our operations. It is possible that one or more of the banks that provides us with financing under our credit facilities may fail to honor the terms of our existing credit facilities or be financially unable to provide the unused credit. An inability to obtain sufficient financing at cost-effective rates could have a materially adverse affect on our business, financial condition, results of operations and cash flows.
 
Impact on our Suppliers

Our business depends on developing and maintaining close relationships with our suppliers and on our suppliers' ability or willingness to sell quality products to us at favorable prices and terms. Many factors outside of our control may harm these relationships and the ability or willingness of these suppliers to sell us products on favorable terms.  One such factor is a general decline in the economy and economic conditions and prolonged recessionary conditions.  These events could negatively affect our suppliers’ operations and make it difficult for them to obtain the credit lines or loans necessary to finance their operations in the short-term or long-term and meet our product requirements.  Financial or operational difficulties that some of our suppliers may face could also increase the cost of the products we purchase from them or our ability to source product from them. We might not be able to pass our increased costs onto our customers. In addition, the trend towards consolidation among automotive parts suppliers as well as the off-shoring of manufacturing capacity to foreign countries may disrupt or end our relationship with some suppliers, and could lead to less competition and result in higher prices.  We could also be negatively impacted by suppliers who might experience bankruptcies, work stoppages, labor strikes or other interruptions to or difficulties in the manufacture or supply of the products we purchase from them.

Impact on our Customers

Deterioration in macro-economic conditions may have a negative impact on our customers’ net worth, financial resources and disposable income. This impact could reduce their willingness or ability to pay for accessories, maintenance or repair of their vehicles, which results in lower sales in our stores. Higher fuel costs may also reduce the overall number of miles driven by our customers resulting in less parts failures and elective maintenance required to be completed.

If overall demand for products sold by our stores slows or declines, our business, financial condition, results of operations and cash flows will suffer.   Decreased demand could also negatively impact our stock price.

Overall demand for products sold by our stores depends on many factors and may slow or decrease due to any number of reasons, including:
 
 
·  
the economy, because during periods of declining economic conditions, as mentioned above, both DIY and Commercial customers may defer vehicle maintenance or repair; conversely, during periods of favorable economic conditions, more of our DIY customers may pay others to repair and maintain their cars or they may purchase new cars;
·  
changing weather patterns along with increased frequency or duration of extreme weather conditions, as elective vehicle maintenance may be deferred during periods of unfavorable weather;
·  
the average duration of manufacturer warranties and the decrease in the number of annual miles driven, because newer cars typically require fewer repairs and will be repaired by the manufacturer’s dealer network using dealer parts; and lower vehicle mileage decreases the need for maintenance and repair (while higher miles driven increases the need);
·  
the quality of vehicles manufactured, because vehicles that have low part failure rates will require less frequent repairs using aftermarket parts; and
·  
the refusal of vehicle manufacturers to make available diagnostic, repair and maintenance information to the automotive aftermarket industry that our DIY and Commercial customers require to diagnose, repair and maintain their vehicles, because this may force consumers to have all diagnostic work, repairs and maintenance performed by the vehicle manufacturers’ dealer network.

If any of these factors cause overall demand for the products we sell to decline, our business, financial condition, results of operations and cash flows will suffer.

If we are unable to compete successfully against other companies in the automotive aftermarket industry we may lose customers, our revenues may decline, and we may be less profitable or potentially unprofitable.

The sale of automotive parts, accessories and maintenance items is highly competitive in many ways, including name recognition, location, price, quality, product availability and customer service. We compete in both the DIY and Commercial categories of the automotive aftermarket industry, primarily with: (i) national and regional retail automotive parts chains, (ii) discount stores and mass merchandisers that carry automotive products, (iii) wholesalers or jobber stores, (iv) independent operators and (v) automobile dealers that supply parts. These competitors and the level of competition vary by market. Some of our competitors may possess advantages over us in certain markets we share, including a greater amount of marketing activities, a larger number of stores, store locations, store layouts, longer operating histories, greater name recognition, larger and more established customer bases, lower prices, and better product warranties. Our response to these competitive disadvantages may require us to reduce our prices below our normal selling prices or increase our promotional spending, which would lower our revenue and profitability. Competitive disadvantages may also prevent us from introducing new product lines, require us to discontinue current product offerings, or change some of our current operating strategies. If we do not have the resources or expertise, or otherwise fail to develop successful strategies to address these competitive disadvantages, we may lose customers, our revenues and profit margins may decline and we may be less profitable or potentially unprofitable.
 

Our success depends to a significant extent on the continued services and experience of our Team Members. At February 26, 2010, we employed approximately 49,000 Team Members. We may not be able to retain our current qualified Team Members or attract and retain additional qualified Team Members that may be needed in the future. Our ability to maintain an adequate number of qualified Team Members is highly dependent on an attractive and competitive compensation and benefits package. If we fail or are unable to maintain such a package, our customer service and execution levels could suffer by reason of a declining quality of our workforce, which could adversely affect our business, financial condition, results of operations and cash flows.

We may not be able to successfully implement our business strategy, including increasing comparable store sales, enhancing our margins and increasing our return on invested capital, which could adversely affect our business, financial condition, results of operations and cash flows.
 
 
We have implemented numerous initiatives as part of our business strategy, including four key strategies introduced in 2008, to increase comparable store sales, enhance our margins and increase our return on invested capital in order to increase our earnings and cash flow. If we are unable to implement these initiatives efficiently and effectively, or if these initiatives are unsuccessful, our business, financial condition, results of operations and cash flows could be adversely affected.

Successful implementation of our business strategy also depends on factors specific to the retail automotive parts industry and numerous other factors that may be beyond our control. In addition to the aforementioned risk factors, adverse changes in the following factors could undermine our business strategy and have a material adverse affect on our business, financial condition, results of operations and cash flow:

·  
the competitive environment in the automotive aftermarket parts and accessories retail sector that may force us to reduce prices below our desired pricing level or increase promotional spending;
·  
our ability to anticipate changes in consumer preferences and to meet customers’ needs for automotive products (particularly parts availability) in a timely manner;
·  
our ability to maintain and eventually grow DIY market share; and
·  
our ability to continue our Commercial sales growth at a more rapid pace than DIY and attain a 50/50 DIY and Commercial sales mix.

We will not be able to expand our business if our growth strategy is not successful, including the availability of suitable locations for new store openings or the successful integration of any acquired businesses, which could adversely affect our business, financial condition, results of operations and cash flows.

 
New Store Openings
 
We have increased our store count significantly from 814 stores at the end of Fiscal 1997 to 3,420 stores at January 2, 2010. We intend to continue to increase the number of our stores and expand the markets we serve as part of our growth strategy, primarily by opening new stores. We may also grow our business through strategic acquisitions. We do not know whether the implementation of our growth strategy will be successful. The actual number of new stores to be opened and their success will depend on a number of factors, including, among other things:

· the availability of potential store locations;
· the negotiation of acceptable lease or purchase terms for new locations;
· the availability of financial resources, including access to capital at cost-effective interest rates; and
· our ability to manage the expansion and hire, train and retain qualified sales associates.

We are unsure whether we will be able to open and operate new stores on a timely or sufficiently profitable basis, or that opening new stores in markets we already serve will not harm existing store profitability or comparable store sales. The newly opened and existing stores' profitability will depend on the competition we face as well as our ability to properly merchandise, market and price the products desired by customers in these markets.

 
Acquisitions, Investments or Strategic Alliances

We may acquire stores or businesses from, make investments in, or enter into strategic alliances with companies that have stores or distribution networks in our current markets or in areas into which we intend to expand our presence. Any future acquisitions, investments, strategic alliances or related efforts will be accompanied by risks, including but not limited to:

·  
the difficulty of identifying appropriate strategic partners or acquisition candidates;
·  
securing adequate financing on cost-effective terms for acquisition or post-acquisition expenditures;
·  
the potential disruption to our ongoing business and diversion of our management's attention;
·  
the inability or failure to discover liabilities prior to completion of an acquisition, including the assumption of legal liabilities;
·  
the difficulty of assimilating and integrating the operations of the respective entities to realize anticipated economic, operational or other favorable benefits;
 
 
·  
the inability to maintain uniform standards, controls, procedures and policies;
·  
the inability or failure to retain key personnel from the acquired business; and
·  
the impairment of relationships with Team Members and customers as a result of changes in management.

We are unsure whether we will be successful in overcoming these risks or any other problems encountered with any acquisitions, investments, strategic alliances or related efforts. If we fail to successfully open and operate new stores or make strategic acquisitions or alliances, then our business, financial condition, results of operations and cash flows may be negatively impacted.

Because we are involved in litigation from time to time, and are subject to numerous laws and governmental regulations, we could incur substantial judgments, fines, legal fees and other costs.

We are sometimes the subject of complaints or litigation from customers, employees or other third parties for various actions. From time to time, we are involved in litigation involving claims related to, among other things, breach of contract, tortious conduct, employment discrimination, payment of wages, asbestos exposure, real estate, and product defects. The damages sought against us in some of these litigation proceedings are substantial. Although we maintain liability insurance for some litigation claims, if one or more of the claims were to greatly exceed our insurance coverage limits or if our insurance policies do not cover a claim, this could have a material adverse affect on our business, financial condition, results of operations and cash flows.

Additionally, we are subject to numerous federal, state and local laws and governmental regulations relating to environmental protection, product quality standards, building and zoning requirements, as well as employment law matters. If we fail to comply with existing or future laws or regulations, we may be subject to governmental or judicial fines or sanctions, while incurring substantial legal fees and costs. In addition, our capital expenses could increase due to remediation measures that may be required if we are found to be noncompliant with any existing or future laws or regulations.

We may be affected by global climate change or by legal, regulatory, or market responses to such change.
 
The growing political and scientific sentiment is that global weather patterns are being influenced by increased levels of greenhouse gases in the earth’s atmosphere. This growing sentiment and the concern over climate change have led to legislative and regulatory initiatives aimed at reducing greenhouse gas emissions. For example, proposals that would impose mandatory requirements on greenhouse gas emissions continue to be considered by policy makers in the United States. Laws enacted that directly or indirectly affect our suppliers (through an increase in the cost of production or their ability to produce satisfactory products) or our business (through an impact on our inventory availability, cost of sales, operations or demand for the products we sell) could adversely affect our business, financial condition, results of operations and cash flows.  Significant increases in fuel economy requirements or new federal or state restrictions on emissions of carbon dioxide that may be imposed on vehicles and automobile fuels could adversely affect demand for vehicles, annual miles driven or the products we sell or lead to changes in automotive technology.  Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by us or our suppliers. Our inability to respond to changes in automotive technology could adversely impact the demand for our products and our business, financial condition, results of operations or cash flows.
 
War or acts of terrorism, or the threat of either, may negatively impact the availability and cost of merchandise and our customers and adversely impact our sales and profitability.

War or acts of terrorism, or the threat of either, may have a negative impact on our ability to obtain merchandise available for sale in our stores. Some of our merchandise is imported from other countries. If imported goods become difficult or impossible to import into the United States, and if we cannot obtain such merchandise from other sources at similar costs, our sales and profit margins may be negatively affected.

In the event that commercial transportation is curtailed or substantially delayed, our business may be adversely impacted, as we may have difficulty shipping merchandise to our distribution centers and stores.

Furthermore, terrorist attacks, war in the Middle East, or war within or between any oil producing country
 

would likely result in an abrupt increase in the price of crude oil, gasoline, diesel fuel and energy costs. Such price increases would increase the cost of doing business for us and our suppliers, and also would negatively impact our customers' disposable income and have an adverse impact on our business, sales, profit margins and results of operations.
 
Item 1B. Unresolved Staff Comments.

None.


Item 2. Properties.

The following table sets forth certain information relating to our distribution and other principal facilities:

Facility
 
Opening
Date
 
Area Served
 
Size
(Sq. ft.)(1)
 
Nature of
Occupancy
                   
Main Distribution Centers:
               
 
Roanoke, Virginia
 
1988
 
Mid-Atlantic
 
     433,681
 
Leased
 
Lehigh, Pennsylvania
 
2004
 
Northeast
 
     655,991
 
Owned
 
Lakeland, Florida
 
1982
 
Southeast, Offshore
 
     552,796
 
Owned
 
Gastonia, North Carolina
 
1969
 
South
 
     634,472
 
Owned
 
Gallman, Mississippi
 
2001
 
West, Midwest
 
     388,168
 
Owned
 
Salina, Kansas
 
1971
 
Southwest, Midwest
 
     413,500
 
Owned
 
Delaware, Ohio
 
1972
 
North and South Carolina
 
     480,100
 
Owned
 
Thomson, Georgia
 
1999
 
Southeast
 
     374,400
 
Owned
                   
Master PDQ® Warehouse:
               
 
Andersonville, Tennessee
 
1998
 
All
 
     113,300
 
Leased
                   
PDQ® Warehouses:
               
 
Youngwood, Pennsylvania
 
1999
 
East
 
       48,320
 
Leased
 
Riverside, Missouri
 
1999
 
West
 
       43,912
 
Leased
 
Temple, Texas
 
1999
 
Southwest
 
       61,343
 
Leased
 
Altamonte Springs, Florida
 
1996
 
Central and Northeast Florida
 
       10,000
 
Owned
 
Jacksonville, Florida
 
1997
 
Southeastern Georgia
 
       12,712
 
Owned
 
Tampa, Florida
 
1997
 
West Central Florida
 
       10,000
 
Owned
 
Hialeah, Florida
 
1997
 
South Florida
 
       12,500
 
Owned
 
West Palm Beach, Florida
 
1998
 
Southeast Florida, South Alabama
       13,300
 
Leased
         
and Southeastern Mississippi
       
 
Mobile, Alabama
 
1998
 
Florida Panhandle
 
       10,000
 
Owned
 
Atlanta, Georgia
 
1999
 
Georgia
 
       16,786
 
Leased
 
Tallahassee, Florida
 
1999
 
Northwest Florida
 
       10,000
 
Owned
 
Fort Myers, Florida
 
1999
 
Southwest Florida
 
       14,330
 
Owned
 
Brooklyn Heights, Ohio
 
2008
 
Cleveland, Ohio
 
       22,000
 
Leased
 
Chicago, Illinois
 
2009
 
Mid-West
 
       42,600
 
Leased
 
Rochester, New York
 
2009
 
Northeast
 
       38,000
 
Leased
 
Leicester, Massachussetts
 
2009
 
Northeast
 
       34,200
 
Leased
 
Washington, DC
 
2009
 
East
 
       33,124
 
Leased
 
Houston, Texas
 
2009
 
Southwest
 
       36,340
 
Leased
 
Denver, Colorado
 
2009
 
West
 
       25,400
 
Leased
 
West Deptford, New Jersey
 
2009
 
East
 
       33,029
 
Leased
                   
Corporate/Administrative Offices:
               
 
Roanoke, Virginia
 
1995
 
All
 
       49,000
 
Leased
 
Roanoke, Virginia
 
2002
 
All
 
     202,293
 
Leased
 
Minneapolis, Minnesota
 
2008
 
All
 
       51,674
 
Leased
                   
AI Properties:
               
 
Norton, Massachusetts
 
2006
 
AI corporate office
 
       30,000
 
Leased
 
Norton, Massachusetts
 
2006
 
Primarily Northeast and
 
     317,500
 
Leased
         
Mid-Atlantic
       
 
(1)  
Square footage amounts exclude adjacent office space.


At January 2, 2010, we owned 666 of our stores and leased 2,754 stores. The expiration dates, including the exercise of renewal options, of the store leases are summarized as follows:

Years
 
AAP Stores
 
AI Stores
 
Total
2009-2010
 
                      22
 
                     6
 
                28
2011-2015
 
                    251
 
                   67
 
              318
2016-2020
 
                    626
 
                   44
 
              670
2021-2030
 
                    739
 
                   39
 
              778
2031-2040
 
                    836
 
                      -
 
              836
2041-2057
 
                    124
 
                      -
 
              124
   
                 2,598
 
                 156
 
           2,754

Item 3. Legal Proceedings.

We currently and from time to time are involved in litigation incidental to the conduct of our business, including litigation arising from claims of employment discrimination or other types of employment matters as a result of claims by current and former employees. Although we diligently defend against these claims, we may enter into discussions regarding settlement of these and other lawsuits, and may enter into settlement agreements, if we believe settlement is in the best interests of our shareholders. The damages claimed against us in some of these proceedings are substantial. Although the amount of liability that may result from these matters cannot be ascertained, we do not currently believe that, in the aggregate, they will result in liabilities material to our consolidated financial condition, future results of operations or cash flow.

Our Western Auto subsidiary, together with other defendants including automobile manufacturers, automotive parts manufacturers and other retailers, has been named as a defendant in lawsuits alleging injury as a result of exposure to asbestos-containing products. We and some of our other subsidiaries also have been named as defendants in many of these lawsuits. The plaintiffs have alleged that these products were manufactured, distributed and/or sold by the various defendants. To date, these products have included brake and clutch parts and roofing materials. Many of the cases pending against us or our subsidiaries are in the early stages of litigation. The damages claimed against the defendants in some of these proceedings are substantial. Additionally, some of the automotive parts manufacturers named as defendants in these lawsuits have declared bankruptcy, which will limit plaintiffs’ ability to recover monetary damages from those defendants. Although we diligently defend against these claims, we may enter into discussions regarding settlement of these and other lawsuits, and may enter into settlement agreements, if we believe settlement is in the best interests of our shareholders. We also believe that most of these claims are at least partially covered by insurance. Based on discovery to date, we do not believe the cases currently pending will have a material adverse effect on us. However, if we were to incur an adverse verdict in one or more of these claims and were ordered to pay damages that were not covered by insurance, these claims could have a material adverse effect on our operating results, financial position and liquidity. If the number of claims filed against us or any of our subsidiaries alleging injury as a result of exposure to asbestos-containing products increases substantially, the costs associated with concluding these claims, including damages resulting from any adverse verdicts, could have a material adverse effect on our operating results, financial position and liquidity in future periods.

Item 4. Reserved.

None.



Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed on the New York Stock Exchange, or NYSE, under the symbol "AAP." The table below sets forth, for the fiscal periods indicated, the high and low sale prices per share for our common stock, as reported by the NYSE.
   
High
   
Low
 
Fiscal Year Ended January 2, 2010
           
Fourth Quarter
  $ 41.77     $ 36.11  
Third Quarter
  $ 47.41     $ 37.31  
Second Quarter
  $ 45.59     $ 40.50  
First Quarter
  $ 44.64     $ 29.50  
Fiscal Year Ended January 3, 2009
               
Fourth Quarter
  $ 37.37     $ 24.17  
Third Quarter
  $ 44.61     $ 36.75  
Second Quarter
  $ 41.74     $ 33.57  
First Quarter
  $ 37.99     $ 31.20  
 
The closing price of our common stock on February 26, 2010 was $40.80. At February 26, 2010, there were 363 holders of record of our common stock (which does not include the number of individual beneficial owners whose shares were held on their behalf by brokerage firms in street name).

Our Board of Directors has declared a $0.06 per share quarterly cash dividend since its inception in Fiscal 2006. Any payments of dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors.

The following table sets for the information with respect to repurchases of our common stock for the quarter ended January 2, 2010 (amounts in thousands, except per share amounts);

Period
 
Total Number
of Shares
Purchased
   
Average
Price Paid
per Share (1)
   
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (2)
   
Maximum Dollar
Value that May Yet
Be Purchased Under
the Plans or Programs
(2)(3)
 
                         
October 11, 2009, to November 7, 2009
    -     $ -       -     $ 139,381  
November 8, 2009, to December 5, 2009
    700       39.93       700       111,422  
December 6, 2009, to January 2, 2010
    542       40.59       542       89,406  
                                 
Total
    1,242     $ 40.22       1,242     $ 89,406  
 
(1)  
Average price paid per share excludes related expenses paid on previous repurchases.
(2)  
All of the above repurchases were made on the open market at prevailing market rates plus related expenses under our stock repurchase program, which authorized the repurchase of up to $250 million in common stock. Our stock repurchase program was authorized by our Board of Directors and publicly announced on May 15, 2008. Subsequent to January 2, 2010, our Board of Directors authorized a new $500 million stock repurchase program on February 16, 2010. The new program cancelled and replaced the remaining portion of our previous $250 million stock repurchase program.
(3)  
The maximum dollar value yet to be purchased under our stock repurchase program excludes related expenses paid on previous purchases or anticipated expenses on future purchases.



Stock Price Performance

The following graph shows a comparison of the cumulative total return on our common stock, the Standard & Poor’s 500 Index and the Standard & Poor’s 500 Specialty Retail Index. The graph assumes that the value of an investment in our common stock and in each such index was $100 on January 1, 2005, and that any dividends have been reinvested. The comparison in the graph below is based solely on historical data and is not intended to forecast the possible future performance of our common stock.

COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
ADVANCE AUTO PARTS, INC., S&P 500 INDEX
AND S&P 500 SPECIALTY RETAIL INDEX
snpchart2009
 
Company / Index
Jan 1, 2005
Dec 31, 2005
Dec 30, 2006
Dec 29, 2007
Jan 3, 2009
Jan 2, 2010
Advance Auto Parts
100
149.24
122.91
132.77
119.57
142.62
S&P 500 Index
100
104.91
121.48
129.04
83.29
102.12
S&P 500 Specialty Retail Index
100
102.86
109.69
87.08
69.29
88.73

Item 6.                       Selected Consolidated Financial Data.

The following table sets forth our selected historical consolidated statement of operations, balance sheet and other operating data. Included in this table are key metrics and operating results used to measure our financial progress. The selected historical consolidated financial and other data at January 2, 2010 and January 3, 2009 and for the three years ended January 2, 2010 have been derived from our audited consolidated financial statements and the related notes included elsewhere in this report. The historical consolidated financial and other data at December 29, 2007, December 30, 2006 and December 31, 2005 and for the years ended December 30, 2006 and December 31, 2005 have been derived from our audited consolidated financial statements and the related notes that have not been included in this report. You should read this data along with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and the related notes included elsewhere in this report.

 
   
Fiscal Year (1)
 
                               
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(in thousands, except per share data and ratios)
 
                               
Statement of Operations Data:
                             
Net sales
  $ 5,412,623     $ 5,142,255     $ 4,844,404     $ 4,616,503     $ 4,264,971  
Cost of sales (2)(15)
    2,768,397       2,743,131       2,585,665       2,472,203       2,301,799  
Gross profit
    2,644,226       2,399,124       2,258,739       2,144,300       1,963,172  
Selling, general and administrative expenses (15)
    2,189,841       1,984,197       1,842,310       1,740,950       1,554,680  
Operating income
    454,385       414,927       416,429       403,350       408,492  
Interest expense
    (23,337 )     (33,729 )     (34,809 )     (35,992 )     (32,384 )
Gain on extinguishment of debt
    -       -       -       986       -  
Other income (expense), net
    607       (506 )     1,014       1,571       2,815  
Income from continuing operations before
                                       
     income taxes and loss on
                                       
     discontinued operations
    431,655       380,692       382,634       369,915       378,923  
Income tax expense
    161,282       142,654       144,317       138,597       144,198  
Net income
    270,373       238,038       238,317       231,318       234,725  
                                         
Per Share Data:
                                       
Net income per basic share
  $ 2.85     $ 2.51     $ 2.29     $ 2.18     $ 2.17  
Net income per diluted share
  $ 2.83     $ 2.49     $ 2.28     $ 2.16     $ 2.13  
Cash dividends declared per basic share
  $ 0.24     $ 0.24     $ 0.24     $ 0.24     $ -  
Weighted average basic shares outstanding
    94,459       94,655       103,826       106,129       108,318  
Weighted average diluted shares outstanding
    95,113       95,205       104,637       107,124       109,987  
                                         
Cash flows provided by (used in):
                                       
Operating activities
  $ 699,690     $ 478,739     $ 410,542     $ 333,604     $ 321,632  
Investing activities
    (185,539 )     (181,609 )     (202,143 )     (258,642 )     (302,780 )
Financing activities
    (451,491 )     (274,426 )     (204,873 )     (104,617 )     (34,390 )
                                         
Balance Sheet and Other Financial Data:
                                       
Cash and cash equivalents
  $ 100,018     $ 37,358     $ 14,654     $ 11,128     $ 40,783  
Inventory
  $ 1,631,867     $ 1,623,088     $ 1,529,469     $ 1,463,340     $ 1,367,099  
Inventory turnover(3)
    1.70       1.74       1.73       1.75       1.79  
Inventory per store(4)
  $ 477     $ 482     $ 469     $ 475     $ 476  
Accounts payable to inventory ratio(5)
    61.2 %     57.2 %     55.1 %     53.2 %     54.8 %
Net working capital(6)
  $ 421,591     $ 442,632     $ 456,897     $ 498,553     $ 406,476  
Capital expenditures
  $ 192,934     $ 184,986     $ 210,600     $ 258,586     $ 216,214  
Total assets
  $ 3,072,963     $ 2,964,065     $ 2,805,566     $ 2,682,681     $ 2,542,149  
Total debt
  $ 204,271     $ 456,164     $ 505,672     $ 477,240     $ 438,800  
Total net debt(7)
  $ 113,781     $ 439,394     $ 521,018     $ 500,318     $ 448,187  
Total stockholders' equity
  $ 1,282,365     $ 1,075,166     $ 1,023,795     $ 1,030,854     $ 919,771  
                                         
Selected Store Data:
                                       
Comparable store sales growth (8)
    5.3 %     1.5 %     0.7 %     1.6 %     8.2 %
Number of stores at beginning of year
    3,368       3,261       3,082       2,872       2,652  
   New stores
    107       127       196       215       231  
   Closed stores
    (55 )     (20 )     (17 )     (5 )     (11 )
Number of stores, end of period
    3,420       3,368       3,261       3,082       2,872  
Relocated stores
    10       10       29       47       54  
Stores with commercial delivery program, end of period
    3,024       2,880       2,712       2,526       2,254  
Total commercial sales, as a percentage of total sales
    32.0 %     29.5 %     26.6 %     25.0 %     21.8 %
SG&A expenses per store (in 000s)(9)(10)(15)
  $ 645     $ 599     $ 581     $ 585     $ 585  
Operating income per team member (in 000s)(11)(15)
  $ 9.41     $ 9.02     $ 9.40     $ 9.29     $ 10.30  
Total store square footage, end of period
    24,973       24,711       23,982       22,753       21,246  
Average net sales per store (in 000s)(10)(12)
  $ 1,595     $ 1,551     $ 1,527     $ 1,551     $ 1,555  
Average net sales per square foot(10)(13)
  $ 218     $ 211     $ 207     $ 210     $ 209  
Gross margin return on inventory(14)
  $ 3.98     $ 3.47     $ 3.29     $ 3.29     $ 3.34  
 
(1)  
Our fiscal year consists of 52 or 53 weeks ending on the Saturday nearest to December 31st. All fiscal years presented are 52 weeks, with the exception of Fiscal 2008 which consisted of 53 weeks.
 
 
(2)  
Cost of sales includes a non-cash inventory adjustment of $37.5 million recorded in Fiscal 2008 due to a change in our inventory management approach for slow moving inventory.
(3)  
Inventory turnover is calculated as cost of sales divided by the average of beginning and ending inventories.
(4)  
Inventory per store is calculated as ending inventory divided by ending store count.
(5)  
Accounts payable to inventory ratio is calculated as ending accounts payable divided by ending inventory. We aggregate financed vendor accounts payable with accounts payable to calculate our accounts payable to inventory ratio.
(6)  
Net working capital is calculated by subtracting current liabilities from current assets.
(7)  
Net debt includes total debt and bank overdrafts, less cash and cash equivalents.
(8)  
Comparable store sales growth is calculated based on the change in net sales starting once a store has been open for 13 complete accounting periods (each period represents four weeks). Relocations are included in comparable store sales growth from the original date of opening. Beginning in Fiscal 2008, we include in comparable store sales growth the net sales from stores operated Offshore and AI stores. The comparable periods have been adjusted accordingly. Fiscal 2008 comparable store sales growth excludes sales from the 53rd week.
(9)  
Selling, general and administrative, or SG&A, expense per store is calculated as total SG&A expenses divided by the average of beginning and ending store count. SG&A expenses per store for Fiscal 2009 were $638 excluding the $26.1 million impact of store divestitures. SG&A expenses per store for Fiscal 2008 were $590 excluding the impact of the 53rd week of Fiscal 2008 of approximately $28.4 million.
(10)  
The ending store count and/or store square footage used in the calculation of the 2005 ratios has been weighted for the period of the AI acquisition.
(11)  
Operating income per team member is calculated as operating income divided by an average of the beginning and ending number of team members. Operating income per team member for Fiscal 2009 was $9.94 excluding the $26.1 million impact of store divestitures. Excluding the operating income impact of the 53rd week of Fiscal 2008 of approximately $15.8 million and a $37.5 million non-cash inventory adjustment, operating income per team member in Fiscal 2008 was $9.49.
(12)  
Average net sales per store is calculated as net sales divided by the average of the beginning and the ending number of stores for the respective period. Excluding the net sales impact of the 53rd week of Fiscal 2008 of approximately $88.8 million, average net sales per store in Fiscal 2008 was $1,524.
(13)  
Average net sales per square foot is calculated as net sales divided by the average of the beginning and ending total store square footage for the respective period. Excluding the net sales impact of the 53rd week of Fiscal 2008 of approximately $88.8 million, average net sales per square foot in Fiscal 2008 was $208. This measure is presented in whole dollars.
(14)  
Gross margin return on inventory is calculated as gross profit divided by an average of beginning and ending inventory, net of accounts payable and financed vendor accounts payable. Excluding the gross profit impact of the 53rd week of Fiscal 2008 of approximately $44.0 million and a $37.5 million non-cash inventory adjustment, gross margin return on inventory in Fiscal 2008 was $3.37.
(15)  
Effective first quarter 2009, we implemented a change in accounting principle for costs included in inventory. Accordingly, we have retrospectively applied the change in accounting principle to all prior periods presented herein related to cost of sales and SG&A.

Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with "Selected Consolidated Financial Data," our consolidated historical financial statements and the notes to those statements that appear elsewhere in this report. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the sections entitled “Forward-Looking Statements” and "Risk Factors" elsewhere in this report.

Our fiscal year ends on the Saturday nearest December 31st of each year, which results in an extra week every several years (Fiscal 2008 contained 53 weeks). Our first quarter consists of 16 weeks, and the other three quarters consist of 12 weeks, with the exception of the fourth quarter of Fiscal 2008 which contained 13 weeks due to our 53-week Fiscal 2008.


Introduction

We are a leading specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States. Our stores carry an extensive product line for cars, vans, sport utility vehicles and light trucks. We serve both DIY and Commercial customers. At January 2, 2010, we operated 3,420 stores throughout 39 states, Puerto Rico and the Virgin Islands.

We operate in two reportable segments: Advance Auto Parts, or AAP, and Autopart International, or AI.  The AAP segment is comprised of our store operations within the United States, Puerto Rico and the Virgin Islands which operate under the trade names “Advance Auto Parts,” “Advance Discount Auto Parts” and “Western Auto.” At January 2, 2010, we operated 3,264 stores in the AAP segment, of which 3,238 stores operated under the trade names “Advance Auto Parts” and “Advance Discount Auto Parts” throughout 39 states in the Northeastern, Southeastern and Midwestern regions of the United States. These stores offer automotive replacement parts, accessories and maintenance items.  In addition, we operated 26 stores under the “Western Auto” and “Advance Auto Parts” trade names, located in Puerto Rico and the Virgin Islands, or Offshore.

At January 2, 2010, we operated 156 stores in the AI segment under the “Autopart International” trade name. We acquired AI in September 2005. AI operates as an independent, wholly-owned subsidiary. AI’s business primarily serves the Commercial market from its store locations located primarily in the Northeast and Mid-Atlantic regions. In addition, its North American Sales Division services warehouse distributors and jobbers throughout North America.

Management Overview

During Fiscal 2009, we produced favorable financial results primarily due to top-line sales growth and strong gross profit improvement resulting in earnings per diluted share, or EPS, of $2.83 compared to $2.49 in Fiscal 2008. Although we have presented our financial results in this Form 10-K in conformity with accounting principles generally accepted in the United States (GAAP), our financial results for Fiscal 2009 and Fiscal 2008 include the impact of the following significant items. Our Fiscal 2009 results were reduced by an EPS impact of $0.17 resulting from the closure of 45 stores in connection with our store divestiture plan. Our Fiscal 2008 financial results included an extra week of operations (53rd week) as well as a non-cash obsolete inventory write-down of $37.5 million due to a change in inventory management approach for slow moving inventory, or non-cash inventory adjustment. The impact of the Fiscal 2008 items was a net reduction in EPS of $0.15. We generated significant operating cash flow in Fiscal 2009 that allowed us to invest in business initiatives related to our four key strategies, repay a significant portion of our bank debt and repurchase shares of our common stock.

Fiscal 2009 Highlights

Highlights from our Fiscal 2009 include:

 Financial
·  
Total sales for Fiscal 2009 increased 5.3% over Fiscal 2008 to $5.41 billion. Excluding the impact of the 53rd week in Fiscal 2008, our total sales increased 7.1%. This growth was primarily due to a comparable store sales increase of 5.3% and sales from the net addition of 52 total stores opened within the last year.
 
·  
Our gross profit rate increased 220 basis points as compared to Fiscal 2008. Approximately 73 basis points of this increase is related to the non-cash inventory adjustment of $37.5 million in Fiscal 2008.
 
·  
Our selling, general and administrative expenses, or SG&A, rate increased 187 basis points as compared to Fiscal 2008 partially due to 48 basis points of store divestiture expenses. Excluding store divestitures, this increase in SG&A is primarily linked to the targeted investments we are making to support each of our four key strategies which have already begun to yield benefits in our sales and gross profit results.
 
·  
We generated operating cash flow of $699.7 million for the year, an increase of $221.0 million over Fiscal 2008, and used available operating cash to pay down $252.2 million of outstanding bank debt and
 
 
 
  
repurchase 2.5 million shares of our common stock at a cost of $99.6 million.
 
General

·  
Our continuous improvements in customer satisfaction and Team Member engagement scores, renewed focus on core values and ongoing initiatives within each of our four key strategies – Commercial Acceleration, DIY Transformation, Availability Excellence and Superior Experience – were equally important in driving our favorable financial results for the year.
 
·  
We began our global sourcing operation in Taiwan which we expect will provide gross profit improvements and allow us to more quickly source products that our customers want and need.
 
·  
We launched our new AAP e-commerce website, which offers our customers online shopping and access to over 100,000 parts and accessories.
 
·  
We continued to make progress towards our goal of obtaining investment grade credit ratings based on our increased profitability and cash flow and strength of our balance sheet.

Key Strategies

Fiscal 2009 marked the end of the turnaround phase of our strategic plan. We made significant investments in each of our four key strategies with the ultimate focus on the customer and growth in our business. Our principal focus during this turnaround phase has been on Commercial Acceleration and Availability Excellence to accelerate our growth and profitability. We have made strategic choices to fund investments in each of these strategies and will continue to balance our investments between Commercial and DIY over the long term.  As we transition from our turnaround phase to a transformation phase, we expect to increase our focus on customer facing capabilities to ensure our customers have a superior experience with us.

Ø  
Commercial Acceleration

Our Commercial comparable store sales increase was 13.7% during Fiscal 2009. Our Commercial sales, as a percentage of total sales, increased 25 basis points to 32.0% for Fiscal 2009 as compared to Fiscal 2008. We believe our consistent growth in Commercial sales and market share is being driven in part by the investments we have made over the last year and continue to make under our Commercial Acceleration strategy.  As of the end of Fiscal 2009, we have made substantial investments in parts, key brands, and additional parts professionals, delivery trucks and drivers in approximately one-third of our stores. We have also increased our Commercial sales force by approximately 45% from the beginning of Fiscal 2009. We continue to make progress in redefining and realigning the roles and responsibilities of our operational teams in preparation for the continued growth in Commercial at a faster pace than DIY.  We plan to eventually generate closer to a 50/50 mix of Commercial and DIY sales as a result of the highly fragmented Commercial market.  Our current market share is less than 5% of the $40 billion Commercial market.

Ø  
DIY Transformation

Our Fiscal 2009 DIY comparable store sales increase of 1.7% marks our first positive increase for a full fiscal year since Fiscal 2005. The overall growth in DIY sales during Fiscal 2009 was impacted by the acceleration of store closings, the deceleration of new store openings, reduced marketing spend in the second and third quarters, and the absence of an E-commerce platform. The industry continues to benefit from increased customer traffic as consumers are saving money by maintaining their existing vehicles rather than replacing them and miles driven have started to increase again. Although industry data reported by The NPD Group indicates the market grew slightly faster than we did during Fiscal 2009, we believe we can maintain and eventually increase DIY market share based on our recently revamped marketing programs and other initiatives underway in our DIY Transformation.

We have initiatives underway to address both the conversion rate of our existing customers as well as the consideration rate of potential customers. Conversion rate initiatives include the installation of traffic counters and updated phone systems to provide valuable information about the customer experience, improved staffing and
 
 
targeting certain stores with specific research and sales development efforts to help us better solve our customers’ problems and leverage the parts availability and merchandising improvements we are making in our stores. Regarding consideration rate, we have made significant changes to our marketing program during the second half of the year which includes a more targeted approach to attract our highest potential customers. We established a title sponsorship with Monster Jam, a live family oriented motorsports event tour and television show highlighted by the racing and freestyle competition of monster trucks. The Monster Jam tour destinations align closely with our store footprint.

Ø  
Availability Excellence

Our Availability Excellence strategy represents our commitment to enhance the breadth and depth of our parts availability in our stores and improve the speed of our parts delivery, in order to help us better serve both our Commercial and DIY customers. In addition to our positive sales results, we believe our ongoing investments and initiatives under this strategy are driving our strong gross profit results. Our gross profit for Fiscal 2009 increased 149 basis points compared to Fiscal 2008, excluding the non-cash inventory adjustment and impact of the 53rd week in Fiscal 2008.

During Fiscal 2009, we made significant progress in capabilities to help drive our sales and gross profit growth, including the continued improvement in parts availability, the strengthening and development of a price optimization capability and implementation of the first phase of our core merchandising system. We also added six net PDQ® facilities and 80 larger stores which stock a wider selection and greater supply of inventory, or HUB stores, to our supply chain network and completed the implementation of engineered standards in all eight of our distribution centers to improve productivity, increase efficiency and ultimately reduce distribution expenses.

We disposed of substantially all of the nonproductive inventory we identified in Fiscal 2008 by the end of Fiscal 2009. We continue to manage our inventory productivity by removing unproductive inventory from our store assortments through utilizing markdown strategies and our vendor return privileges. We expect to manage more effectively the growth in our inventory as compared to our sales growth.

Ø  
Superior Experience

Superior Experience is centered around our store operations and providing superior customer service. The successful rollout and completion of Commercial and DIY initiatives in our stores is greatly dependent on the Superior Experience strategy. The feedback from our customer satisfaction surveys, coupled with our Team Member engagement surveys, provides the evidence of our continued focus and commitment to understand what our customers need and how to engage our Team Members to fulfill that goal. We have a dedicated team of field operations leaders who are leading the rollout of initiatives over our entire store chain in a very disciplined and focused way. These initiatives include improving staffing, structuring operations to more effectively serve both Commercial and DIY customers, providing sales development and coaching and driving gross profit improvements through new battery warranty procedures, better pricing decisions and improved shrink control.

Store Divestiture Plan

For Fiscal 2009, we divested a total of 45 stores that were delivering strategically or financially unacceptable results. These closures were in addition to 10 stores that we closed as part of our routine review and closure of underperforming stores at or near the end of their respective lease terms. During Fiscal 2009, we recognized expenses of $26.1 million related to our store divestiture plan. The majority of this expense was related to the estimated remaining lease obligations at the time of the closures. As of January 2, 2010, we had completed our store divestiture plan. Our total store closures for Fiscal 2010 are estimated at 10 to 15.

Change in Accounting Principle

We have retrospectively adjusted all comparable periods related to cost of sales and SG&A as a result of a change in accounting principle effective January 4, 2009. We changed our accounting for freight and other handling costs associated with transferring merchandise from our HUB stores and PDQ® facilities to our retail stores from recording such costs as SG&A to recording such costs in cost of sales. This change, which had no impact to operating income or cash flows, more accurately reflects the nature of the expense.

 
The net adjustment increasing cost of sales and decreasing SG&A was $63.9 million and $62.3 million for Fiscal 2008 and 2007, respectively. For additional information regarding this change, see Note 3, Change in Accounting Principle, of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

Industry

Challenging macroeconomic conditions continue with the unemployment rate at 9.7%, the highest in over 25 years, and consumer confidence remaining low. Financial results from the leading automotive aftermarket companies suggest that the entire industry is benefiting from the economic downturn because consumers are keeping their vehicles longer, which in turn increases the average age of vehicles and the need to repair and complete routine maintenance on those vehicles. Recent statistics indicate miles driven have increased three straight quarters reversing a negative trend throughout 2008 and early 2009. In addition, gas prices remain well under the historic highs experienced throughout most of 2008 and the average vehicle age continues to rise and is slightly over 10 years.

In summary, the economic environment continues to present mixed results to our industry with opportunities to serve customers in need of parts and other required maintenance but other elective maintenance and accessory purchases being deferred until disposable income returns to higher levels. We believe we can maintain market share and eventually increase our market share in the less fragmented DIY market. We also believe we will continue to significantly increase our market share in the Commercial market where our current market share is less than 5% of the $40 billion Commercial market.

We are pleased with our Fiscal 2009 financial results.  We remain committed to making the necessary investments to help ensure our long-term profitability and the success of our transformation as we strive to become the industry leader.

Store Development by Segment

The following table sets forth the total number of new, closed and relocated stores and stores with Commercial delivery programs during Fiscal 2009, 2008 and 2007. We lease approximately 81% of our stores.

AAP
 
   
Fiscal Year
 
   
2009
   
2008
   
2007
 
Number of stores at beginning of year
    3,243       3,153       2,995  
   New stores
    75       109       175  
   Closed stores
    (54 )     (19 )     (17 )
Number of stores, end of period
    3,264       3,243       3,153  
Relocated stores
    6       10       29  
Stores with commercial delivery programs
    2,868       2,755       2,604  
                         
AI
 
   
Fiscal Year
 
      2009       2008       2007  
Number of stores at beginning of year
    125       108       87  
   New stores
    32       18       21  
   Closed stores
    (1 )     (1 )     -  
Number of stores, end of period
    156       125       108  
Relocated stores
    4       -       -  
Stores with commercial delivery programs
    156       125       108  
 
During Fiscal 2010, we anticipate adding approximately 110 AAP and 40 AI stores and closing 10 to 15 total stores.

 
Critical Accounting Policies
 
 
Our financial statements have been prepared in accordance with accounting policies generally accepted in the United States of America. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ materially from these estimates.

The preparation of our financial statements included the following significant estimates and exercise of judgment.

Vendor Incentives

We receive 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). Both cooperative advertising allowances and volume rebates 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 since these payments do not represent reimbursements for specific, incremental and identifiable costs. Total deferred vendor incentives included in inventory was $46.3 million at January 2, 2010.

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. Our margins could be impacted positively or negatively if actual purchases or results from any one year differ from our estimates; however, the impact over the life of the agreement would be the same. 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.

Inventory Reserves

Our inventory reserves consist of reserves for projected losses related to shrink and for potentially excess and obsolete inventory. An increase (or decrease) to our inventory reserves is recorded as an increase (or decrease) to our cost of sales.

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 based on results of completed independent physical inventories, results from recent cycle counts and historical and current loss trends. We perform cycle counts in the distribution facilities throughout the year to measure actual shrink and to estimate reserve requirements.  If estimates of our shrink reserves are inaccurate based on the inventory counts, we may be exposed to losses or gains that could be material.
 
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. We also provide reserves when less than full credit is expected from a vendor or when liquidating product will result in retail prices below recorded costs. 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. This non-cash expense was presented as an increase to cost of goods sold in our consolidated statement of operations. With this change in inventory management approach, we intend to more effectively manage slow moving inventory and continue to utilize vendor
 
 
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
 
 
independent valuation firm.  We determine fair value using widely accepted valuation techniques, including discounted cash flows and market multiple analyses. These types of analyses contain uncertainties because they require management to make assumptions as a marketplace participant would and to apply judgment to estimate industry economic factors and the profitability of future business strategies of our company and our reporting units. These assumptions and estimates are a major component of the derived fair value of our reporting units.  The margin of calculated fair value over the respective carrying value of our reporting units may not be indicative of the total company due to differences in the individual reporting units, including but not limited to size and  projected growth.
 
It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as our future expectations. We have not made any material changes in the accounting methodology we use to assess impairment loss during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material. A 10% change in our total goodwill and intangible assets outstanding at January 2, 2010 would have affected net income by approximately $3.8 million for the fiscal year ended January 2, 2010.

Tax Reserves

The determination of our income tax liabilities is based upon the tax law, codes, regulations, pronouncements and court cases for the taxing jurisdictions in which we do business. Our income tax returns are periodically examined by those jurisdictions. These examinations include, among other things, auditing our filing positions, the timing of deductions and allocation of income among the various jurisdictions. At any particular time, multiple years are subject to examination by various taxing authorities.

In evaluating our income tax positions, we record a reserve when a tax benefit cannot be recognized and measured in accordance with the authoritative guidance on uncertain tax positions. These tax reserves are adjusted in the period actual developments give rise to such change. Those developments could be, but are not limited to: settlement of tax audits, expiration of the statute of limitations, the evolution of tax law, codes, regulations and court cases, along with varying applications of tax policy and administration within those jurisdictions.

These tax reserves contain uncertainties because management is required to make assumptions and apply judgment to estimate exposures associated with our various filing positions. Although management believes that the judgments and estimates are reasonable, actual results could differ and we may be exposed to gains or losses that could be material. To the extent that actual results differ from our estimates, the effective tax rate in any particular period could be materially affected. Favorable tax developments would be recognized as a reduction in our effective tax rate in the period of resolution. Unfavorable tax developments would require an increase in our effective tax rate and a possible use of cash in the period of resolution. A 10% change in the tax reserves at January 2, 2010 would have affected net income by approximately $1.0 million for the fiscal year ended January 2, 2010.

Components of Statement of Operations

Net Sales

Net sales consist primarily of merchandise sales from our retail store locations to both our DIY and Commercial customers. Our total sales growth is comprised of both comparable store sales and new store sales. We calculate comparable store sales based on the change in store sales starting once a store has been opened for 13 complete accounting periods (approximately one year). We include sales from relocated stores in comparable store sales from the original date of opening. Beginning in Fiscal 2008, we began including in comparable store sales the net sales from the Offshore and AI stores. The comparable periods have been adjusted accordingly. Fiscal 2008 comparable store sales exclude the effect of the 53rd week.

Cost of Sales

Our cost of sales consists of merchandise costs, net of incentives under vendor programs; inventory shrinkage, defective merchandise and warranty costs; and warehouse and distribution expenses. Gross profit as a percentage of
 
 
net sales may be affected by (i) variations in our product mix, (ii) price changes in response to competitive factors and fluctuations in merchandise costs, (iii) vendor programs, (iv) inventory shrinkage, (v) defective merchandise and warranty costs and (v) warehouse and distribution costs. We seek to minimize fluctuations in merchandise costs and instability of supply by entering into long-term purchasing agreements, without minimum purchase volume requirements, when we believe it is advantageous. Our gross profit may not be comparable to those of our competitors due to differences in industry practice regarding the classification of certain costs. See Note 2 to our consolidated financial statements elsewhere in this report for additional discussion of these costs and Note 3 for additional discussion of a change in accounting principle for freight and other handling costs associated with transferring merchandise from HUB stores and PDQ® facilities to our retail stores from recording such costs as SG&A to recording such costs in cost of sales.

Selling, General and Administrative Expenses

SG&A consists of store payroll, store occupancy (including rent and depreciation), advertising expenses, Commercial delivery expenses, other store expenses and general and administrative expenses, including salaries and related benefits of store support center Team Members, share-based compensation expense, store support center administrative office expenses, data processing, professional expenses, self-insurance costs, closed store expense, impairment charges, if any, and other related expenses. See Note 2 to our consolidated financial statements for additional discussion of these costs and Note 3 for additional discussion of a change in accounting principle.

Consolidated Results of Operations

The following table sets forth certain of our operating data expressed as a percentage of net sales for the periods indicated.

   
Fiscal Year Ended
 
   
January 2,
2010
   
January 3,
2009
   
December 29,
2007
 
                   
Net sales
    100.0 %     100.0 %     100.0 %
Cost of sales
    51.1       53.3       53.4  
Gross profit
    48.9       46.7       46.6  
Selling, general and administrative expenses
    40.5       38.6       38.0  
Operating income
    8.4       8.1       8.6  
Interest expense
    (0.4 )     (0.7 )     (0.7 )
Other income, net
    0.0       (0.0 )     0.0  
Income tax expense
    3.0       2.8       3.0  
Net income
    5.0       4.6       4.9  
 
 
Fiscal 2009 Compared to Fiscal 2008
 
Net Sales

Net sales for Fiscal 2009 were $5,412.6 million, an increase of $270.4 million, or 5.3%, over net sales for Fiscal 2008. Excluding the $88.8 million impact of the 53rd week in Fiscal 2008, our sales increase was 7.1%. This growth was primarily due to an increase in comparable store sales of 5.3% and sales from the net addition of 52 new AAP and AI stores opened within the last year.
 
AAP produced sales of $5,218.3 million, an increase of $241.7 million, or 4.9%, over Fiscal 2008. Excluding the $86.5 million impact of the 53rd week in Fiscal 2008, AAP’s sales increase was 6.7%. This growth was primarily due to a 5.1% comparable store sales increase and sales from the net addition of 21 new stores opened within the last year. The AAP comparable store sales increase was driven by an increase in average ticket sales and overall customer traffic. AI produced sales of $202.6 million, an increase of $36.9 million, or 22.3%, over Fiscal 2008. Excluding the $2.3 million impact of the 53rd week in Fiscal 2008, AI’s sales increase was 24.0%.  This growth was primarily reflective of a 9.9% comparable store sales increase and sales from the net addition of 31 new stores opened within the last year.

 
 
Gross Profit

Gross profit for Fiscal 2009 was $2,644.2 million, or 48.9% of net sales, as compared to $2,399.1 million, or 46.7% of net sales, in Fiscal 2008, or an increase of 220 basis points. Excluding the impacts of the $37.5 million non-cash inventory adjustment and the 53rd week in Fiscal 2008, the increase in gross profit rate was 149 basis points. This increase in gross profit as a percentage of net sales was primarily due to continued investments in pricing and merchandising capabilities (including global sourcing), increased parts availability resulting in the sale of more parts which generally contribute a higher gross profit and improved store execution partially offset by decreased inventory shrink.

SG&A

SG&A expenses for Fiscal 2009 were $2,189.8 million, or 40.5% of net sales, as compared to $1,984.2 million, or 38.6% of net sales, for Fiscal 2008, or an increase of 187 basis points. Store divestiture expenses comprised 48 basis points of the increase in SG&A as a percentage of net sales. The remaining increase was primarily due to: