10-K 1 aap_10kx12312016.htm 10-K Document

 

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 December 31, 2016
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
________________________

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ADVANCE AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
________________________

 Delaware
(State or other jurisdiction of
incorporation or organization)
    54-2049910
(I.R.S. Employer
Identification No.)
 5008 Airport Road
Roanoke, VA
(Address of Principal Executive Offices)
    24012
(Zip Code)


(540) 362-4911
(Registrant’s telephone number, including area code)
 
Securities Registered Pursuant to Section 12(b) of the Act
Title of each class
Common Stock
($0.0001 par value)
Name of each exchange on which registered
New York
Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None


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 Registration 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 x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration 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 the 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 definition 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 15, 2016, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the 70,769,205 shares of Common Stock held by non-affiliates of the registrant was $11,647,903,451, based on the last sales price of the Common Stock on July 15, 2016, as reported by the New York Stock Exchange.

As of February 23, 2017, the registrant had outstanding 73,761,599 shares of Common Stock, par value $0.0001 per share (the only class of common stock of the registrant outstanding).

Documents Incorporated by Reference:

Portions of the definitive proxy statement of the registrant to be filed within 120 days of December 31, 2016, pursuant to Regulation 14A under the Securities Exchange Act of 1934, for the 2017 Annual Meeting of Stockholders to be held on May 17, 2017, are incorporated by reference into Part III.
 




TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




FORWARD-LOOKING STATEMENTS

Certain statements in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). 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:

a decrease in demand for our products;
competitive pricing and other competitive pressures;
our ability to implement our business strategy;
our ability to expand our business, including the location of available and suitable real estate for new store locations, the integration of any acquired businesses and the continued increase in supply chain capacity and efficiency;
our dependence on our suppliers to provide us with products that comply with safety and quality standards;
our ability to attract, develop and retain executives and other key employees, or Team Members;
the potential for fluctuations in the market price of our common stock and the resulting exposure to securities class action litigation;
the risk that our level of indebtedness may limit our operating flexibility or otherwise strain our liquidity and financial condition;
deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, higher tax rates or uncertain credit markets;
regulatory and legal 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 or administrative investigations or proceedings;
a security breach or other cyber security incident;
business interruptions due to the occurrence of natural disasters, extended periods of unfavorable weather, computer system malfunction, wars or acts of terrorism;
the impact of global climate change or legal and regulatory responses to such change; 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.



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PART I

Item 1.    Business.

Unless the context otherwise requires, “Advance,” “we,” “us,” “our,” and similar terms refer to Advance Auto Parts, Inc., its subsidiaries and their respective operations. References to the acquisition of GPI refer to our January 2, 2014 acquisition of General Parts International, Inc. Our fiscal year consists of 52 or 53 weeks ending on the Saturday closest to December 31st of each year. Our Fiscal 2016 and Fiscal 2015 included 52 weeks of operations, while Fiscal 2014 included 53 weeks of operations. Our last 53-week year prior to 2014 was in 2008.

Overview

We are a leading automotive aftermarket parts provider in North America, serving both professional installers, or "Professional", and "do-it-yourself", or DIY, customers as well as independently-owned operators. Our stores and branches offer a broad selection of brand name, original equipment manufacturer ("OEM") and private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy duty trucks. As of December 31, 2016, the end of our 2016 fiscal year, or 2016, we operated 5,062 total stores and 127 branches primarily under the trade names "Advance Auto Parts", "Autopart International", "Carquest" and "Worldpac".

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 began targeting the sale of automotive parts and accessories to DIY customers. We began our Professional delivery program in 1996 and have steadily increased our sales to Professional customers since 2000. We have grown significantly as a result of comparable store sales growth, new store openings and strategic acquisitions. Our parent company, Advance Auto Parts, Inc., a Delaware corporation, was incorporated in 2001 in conjunction with the acquisition of Discount Auto Parts, Inc.

Our most recent strategic acquisition was on January 2, 2014 when we acquired GPI. GPI, formerly a privately held company, was a leading distributor and supplier of original equipment and aftermarket automotive replacement products for Professional markets operating under the Carquest and Worldpac names. As of the acquisition date, GPI operated 1,233 Carquest stores and 103 Worldpac branches located in 45 states and Canada and serviced approximately 1,400 independently-owned Carquest stores. The acquisition allowed us to expand our geographic presence, Professional capabilities and overall scale to better serve our customers.

Our Internet address is www.AdvanceAutoParts.com. The information on our website is not part of this Annual Report on Form 10-K for our 2016 fiscal year. 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 Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish them to the Securities and Exchange Commission ("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

During 2016 we operated as a single reportable segment comprised of our store and branch operations. A discussion of our segment structure and disclosure of sales by product category is available in Note 19, Segment and Related Information, of the Notes to the Consolidated Financial Statements, included in Item 15, Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K.

Store Names

Through our integrated operating approach, we serve our Professional and DIY customers through a variety of channels ranging from traditional "brick and mortar" store locations to self-service e-commerce sites. We believe we are better able to meet our customers' needs by operating under several store names.

Advance Auto Parts - Consists of 4,273 stores as of December 31, 2016 generally located in freestanding buildings with a heavy focus on both Professional and DIY customers. The average size of an Advance store is approximately 7,500 square feet with the size of our typical new stores ranging from approximately 6,000 to 8,500 square feet. These stores carry a wide variety of products serving aftermarket auto part needs for both domestic and import vehicles. Our Advance Auto Parts stores carry a product offering of approximately 23,000 stock keeping units, or SKUs, generally


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consisting of a custom mix of product based on each store's respective market. Supplementing the inventory on-hand at our stores, additional less common SKUs are available in many of our larger stores, known as HUB stores. These additional SKUs are available on a same-day or next-day basis.

Carquest - Consists of 608 stores as of December 31, 2016, including 138 stores in Canada. Our Carquest stores are generally located in freestanding buildings with a heavy focus on Professional customers, but also serving DIY customers. The average size of a Carquest store is approximately 7,600 square feet. These stores carry a wide variety of products serving the aftermarket auto part needs for both domestic and import vehicles with a product offering of approximately 23,000 SKUs. We continue to convert or consolidate the U.S. Carquest stores with our Advance Auto Parts stores as part of our multi-year integration plan. As of December 31, 2016, Carquest also served approximately 1,250 independently-owned stores which operate under the Carquest name.

Worldpac - Consists of 127 branches as of December 31, 2016 that principally serve Professional customers utilizing an efficient and sophisticated on-line ordering and fulfillment system. The Worldpac branches are generally larger than our other store locations averaging approximately 27,000 square feet in size. Worldpac specializes in imported, OEM parts. Worldpac's complete product offering includes over 120,000 SKUs for over 40 import and domestic vehicle carlines.

Autopart International ("AI") - Consists of 181 stores as of December 31, 2016 operating primarily in the Northeastern and Mid-Atlantic regions of the United States focusing on the Professional customer. These stores specialize in imported aftermarket and private label branded auto parts. The AI stores offer approximately 41,000 SKUs through routine replenishment from their supply chain.

We acquired the Carquest and Worldpac operations as part of our acquisition of GPI on January 2, 2014. Since the acquisition, we have consolidated or converted approximately 615 Carquest stores into the Advance Auto Parts format, completed support center consolidations, integrated our field teams, harmonized pricing and brands and substantially completed product changeovers. In addition, we have been able to utilize cross-sourcing of inventory between most of our enterprise-wide locations to expand availability and the breadth of our product offerings to better meet the needs of our customers. Under our strategic business plan we will continue integrating the operations of Advance Auto Parts and Carquest.

Through our integrated operating approach, we also serve our customers online at www.AdvanceAutoParts.com and www.Worldpac.com. Our Professional customers, consisting primarily of delivery customers for whom we deliver product from our store or branch locations to our Professional customers’ places of business, can conveniently place their orders online through these websites. Our online websites also allow our DIY customers to pick up merchandise at a conveniently located store or have their purchases shipped directly to them.

We strive to be the leader in the automotive aftermarket industry by providing superior availability and outstanding customer service. We offer our customers quality products which are covered by a solid warranty. Many of our products are offered at a good, better or best recommendation differentiated by price and quality.



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The following table shows some of the types of products that we sell by major category of items:
Parts & Batteries
Accessories & Chemicals
Engine Maintenance
Batteries and battery accessories
AC chemicals and accessories
Air filters
Belts and hoses
Air fresheners
Fuel and oil additives
Brakes and brake pads
Antifreeze and washer fluid
Fuel filters
Chassis parts
Electrical wire and fuses
Grease and lubricants
Climate control parts
Electronics
Motor Oil
Clutches and drive shafts
Floor mats, seat covers and interior accessories
Oil filters
Engines and engine parts
Hand and specialty tools
Part cleaners and treatments
Exhaust systems and parts
Lighting
Transmission fluid
Hub assemblies
Performance parts
 
Ignition components and wire
Sealants, adhesives and compounds
 
Radiators and cooling parts
Tire repair accessories
 
Starters and alternators
Vent shades, mirrors and exterior accessories
 
Steering and alignment parts
Washes, waxes and cleaning supplies
 
 
Wiper blades
 

Our Customers

We serve both Professional and DIY customers. Our Professional customers consist primarily of delivery customers for whom we use our Professional delivery fleet to deliver product from our store or branch locations to our Professional customers’ places of business, including garages, service stations and auto dealers. We also serve approximately 1,250 independently-owned Carquest stores with shipments directly from our distribution centers. Our DIY customers are primarily served through our stores and can also order online to pick up merchandise at a conveniently located store or have their purchases shipped directly to them. The majority of the Company's online DIY sales are picked up at store locations.

We employ parts professionals, or parts pros, who have extensive technical knowledge of automotive replacement parts and other related applications to better serve our Professional and DIY customers. Many of our stores also include bilingual Team Members to better serve our diverse customer base. We offer training to all of our Team Members, including formal classroom workshops, e-learning and certification by the National Institute for Automotive Service Excellence, or ASE. ASE is broadly recognized for training certification in the automotive industry.

Our Professional sales represented approximately 58% and 57% of our sales in 2016 and 2015, respectively. Since 2008, we have concentrated a significant amount of our investments on increasing our Professional sales at a faster rate in light of favorable market dynamics. Serving professional customers requires a high-quality product assortment, delivery service that is fast and consistent, technology to drive growth and the ease of doing business, a sales team dedicated to providing excellent customer service, and training to enable our customers to grow their business. We believe our investments and commitment to continually improving the overall customer experience will enable us to gain more Professional customers as well as increase our sales to existing customers who will use us as their “first call” or "first click" supplier.
While Professional is our growth engine, DIY customers remain a sizable portion of our business and we remain focused on growing sales to DIY customers. Similar to the Professional customer, high quality parts availability and outstanding customer service are important to our DIY customers. In addition to location, some of the factors driving the decisions on how DIYers choose an auto parts retailer include vehicle history, repair complexity and their level of expertise. To ensure that we can meet these needs we continue to improve parts availability and are focused on training to build knowledge and capability in priority segments. We are also increasing our investment in mobile and digital technology to seamlessly connect the online and in-store experience. Store Team Members utilize our point-of-sale ("POS") system, including a fully integrated electronic parts catalog ("EPC"), 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 are required by our DIY customers to complete their automotive repair projects properly and safely. Except where prohibited, we also provide a variety of services at our stores free of charge to our customers including:

Battery and wiper installation;
Battery charging;


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Check engine light reading;
Electrical system testing, including batteries, starters, alternators and sensors;
“How-To” video clinics;
Oil and battery recycling; and
Loaner tool programs.

Store Development

Our store development program has historically focused on adding new stores and branches within existing markets where we can achieve a larger presence, remodeling or relocating existing stores and entering new markets. The addition of new locations, 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 Professional and DIY customers, will continue to play a significant role in our future growth and success.

We open and operate stores in both large, densely-populated markets and small, less densely-populated areas. We complete substantial research prior to entering a new market. Key factors in selecting new site and market locations include population, demographics, traffic count, vehicle profile, number and strength of competitors' stores and the cost of real estate.

Our 5,189 stores and branches were located in the following states, territories and international locations as of December 31, 2016:

Location
 
Number of
Stores
 
Location
 
Number of
Stores
 
Location
 
Number of
Stores
U.S. States:
 
 
 
 
 
 
 
 
 
 
Alabama
 
137

 
Louisiana
 
71

 
Ohio
 
263

Alaska
 
11

 
Maine
 
40

 
Oklahoma
 
29

Arizona
 
19

 
Maryland
 
135

 
Oregon
 
28

Arkansas
 
24

 
Massachusetts
 
127

 
Pennsylvania
 
266

California
 
93

 
Michigan
 
148

 
Rhode Island
 
22

Colorado
 
87

 
Minnesota
 
46

 
South Carolina
 
147

Connecticut
 
77

 
Mississippi
 
65

 
South Dakota
 
10

District of Columbia
 
1

 
Missouri
 
64

 
Tennessee
 
156

Delaware
 
17

 
Montana
 
26

 
Texas
 
265

Florida
 
534

 
Nebraska
 
31

 
Utah
 
22

Georgia
 
273

 
Nevada
 
15

 
Vermont
 
12

Idaho
 
9

 
New Hampshire
 
29

 
Virginia
 
246

Illinois
 
182

 
New Jersey
 
131

 
Washington
 
30

Indiana
 
120

 
New Mexico
 
15

 
West Virginia
 
81

Iowa
 
41

 
New York
 
263

 
Wisconsin
 
110

Kansas
 
40

 
North Carolina
 
312

 
Wyoming
 
13

Kentucky
 
112

 
North Dakota
 
6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Territories:
 
 
 
 
 
 
 
 
 
 
Puerto Rico
 
27

 
Virgin Islands
 
1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Canadian Provinces:
 
 
 
 
 
 
 
 
Alberta
 
3

 
New Brunswick
 
11

 
Ontario
 
63

British Columbia
 
4

 
Newfoundland and Labrador
 
3

 
Prince Edward Island
 
1

Manitoba
 
1

 
Nova Scotia
 
12

 
Quebec
 
62




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The following table sets forth information concerning changes in the total number of our stores and branches during the past five years:
 
2016
 
2015
 
2014
 
2013
 
2012
Beginning Stores
5,293

 
5,372

 
4,049

 
3,794

 
3,662

Stores Acquired (1)

 

 
1,336

 
124

 

New Stores (2)
78

 
121

 
151

 
172

 
137

Stores Closed (3)
(182
)
 
(200
)
 
(164
)
 
(41
)
 
(5
)
Ending Stores
5,189

 
5,293

 
5,372

 
4,049

 
3,794


(1) 
Includes 1,336 stores and branches resulting from our acquisition of GPI on January 2, 2014 and 124 stores resulting from our acquisition of B.W.P. Distributors, Inc. ("BWP") on December 31, 2012. We consider stores acquired in smaller acquisitions new stores for purposes of the store rollforward as they are converted to our systems and processes upon acquisition and do not require significant integration activities.
(2) 
Does not include stores that opened as relocations of previously existing stores within the same general market area or substantial renovations of stores.
(3) 
The number of store closures in 2016, 2015, 2014 and 2013 includes planned consolidations of 159, 111, 145 and 20, respectively, Carquest, AI and BWP stores.

Store Technology

Our stores utilize operating systems comprised of an integrated POS system and EPC, which enable our store Team Members to assist our customers in their parts selection and ordering based on the year, make, model and engine type of their vehicles. Historically we have operated separate legacy store systems for Advance Auto Parts and Carquest stores. Under our strategic business plan, we have begun the rollout of a single POS and EPC that leverages the benefits of each system. 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. If a hard-to-find part or accessory is not available, the store system can determine whether the part is carried and in-stock through our supply chain network, or can be ordered directly from one of our vendors. Parts and accessories are then ordered electronically with immediate confirmation of price, availability and estimated delivery time.

The Worldpac speedDIAL® parts catalog and fulfillment ordering system provides expanded capabilities to Worldpac's Professional customers and other stores throughout our enterprise. This tool allows customers to check real-time parts availability on over 110,000 parts, view images on over 85,000 parts, check prices, place orders, view invoices and submit self-service returns.

Store Support Centers

We serve our Advance Auto Parts and Carquest stores primarily from our store support centers in Roanoke, VA and Raleigh, NC. We also maintain a store support center in Newark, CA to support our Worldpac and e-commerce operations and in Norton, MA to support our Autopart International stores.

Merchandising. In 2016, we purchased merchandise from over 500 vendors, with no single vendor accounting for more than 8% 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.

Our merchandising teams have developed strong vendor relationships in the industry and, in a collaborative effort with our vendor partners, utilize a category management process where we manage the mix of our product offerings to meet customer demand. 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 productivity.

Our merchandising strategy is to carry a broad selection of high quality and reputable brand name automotive parts and accessories which we believe will appeal to our Professional customers and also generate DIY customer traffic. Since our acquisition of GPI, we have rolled out cross-sourcing capabilities to the majority of our stores and have substantially completed the integration of our product offerings in our Advance Auto Parts and Carquest stores. Some of our brands include Bosch®, Castrol®, Dayco®, Denso®, Gates®, Moog®, Monroe®, NGK®, Prestone®, Purolator®, Trico® and Wagner®. In addition to these branded products, we stock a wide selection of high quality private label products that appeal to value-conscious customers.


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These lines of merchandise include chemicals, interior automotive accessories, batteries and parts under various private label names such as Autocraft®, Autopart International®, Driveworks®, Tough One® and Wearever®as well as the Carquest® brand acquired from GPI.

Supply Chain. Our supply chain consists of a network of distribution centers, HUBs, stores and branches which enable us to provide same-day or next-day availability to our customers. As of December 31, 2016, we operated 50 distribution centers, ranging in size from approximately 55,000 to 665,000 square feet with total square footage of approximately 10.8 million. Currently, our smaller distribution centers primarily service our Carquest stores acquired with GPI, including those that have converted to the Advance Auto Parts format, while our larger distribution centers primarily service Advance Auto Parts, Autopart International and Worldpac locations. In 2016, we closed one distribution center in Sutton, MA and opened one new Worldpac distribution center in the greater Dallas, TX area. We also plan to open a new distribution center in the greater Nashville, TN area in 2017.

We tailor the delivery frequency from our distributions centers to our stores and branches to the demands of our local markets. We also utilize HUBs and other in-market strategies to increase in-market parts availability and decrease order-to-delivery time, while at the same time reducing inventory and days on hand. In addition, we utilize cross-sourcing of inventory between most of our enterprise-wide locations to expand availability and the breadth of our product offerings to better meet the needs of our customers.

Our inventory management teams utilize replenishment systems to monitor inventory levels across the network and order additional product when appropriate while streamlining handling costs. Our replenishment systems utilize the most up-to-date information from our POS systems as well as inventory movement forecasting based upon sales history, sales trends by SKU, seasonality (and weather patterns) and demographic shifts in demand. These factors are combined with service level goals, vendor lead times and cost of inventory assumptions to determine the timing and size of purchase orders.

Our strategic initiatives include streamlining our entire supply chain infrastructure to build new capabilities to improve availability, delivery consistency and speed, and drive growth, while removing unnecessary costs. We plan to begin simplifying and fully integrating our Advance Auto Parts and Carquest networks by 2018, which will include the implementation of a single information technology system. This optimization will improve product availability, drive productivity through reducing the number of miles from the distribution center to the store, and simplify our systems and processes by enabling seamless inventory transfer throughout the chain.

Marketing & Advertising. Our marketing and advertising program is designed to drive brand awareness, consideration and omni-channel traffic by positioning Advance Auto Parts as the leader in parts availability, in-store parts and project expertise within the aftermarket auto parts category. We strive to exceed our customers' expectations end-to-end through a comprehensive online and pick up in-store experience, extensive parts assortment, experienced parts professionals and our DIY customer loyalty program, Speed Perks.

Our DIY campaign was developed based on observations of consumer behavior changes, research with our customers and analytics. It appeals to those customers and emphasizes our understanding of the parts, service and support they need to get back on the road. It is built around a multi-channel communications plan which brings together radio, television, direct marketing, social media, sponsorships store events and Speed Perks.
We also have Professional programs that are designed to build loyalty with our Professional customers who rely on us for quality products and services each and every day so they can in turn successfully serve their customers. In addition to various loyalty and rebate programs, we offer dedicated training support and other services to our Professional customers, including:

TECH-NET Professional Auto Service® - our marketing solutions program offered to the professional shop owner to help them attract and retain customers by having consistent branding, banner programs and solutions for attracting automotive technicians and access to other resources.

CARQUEST Technical Institute® (CTI) - offers our valued customers the tools and training to stay ahead of an increasingly competitive and dynamic marketplace. We target service facility owners, shop managers, service consultants and professional technicians. CTI instructors have over 350 ASE certifications, understand the technical skills required to be productive and profitable, and reach over 25,000 technicians annually.
MotoShop® - is a technology solution portfolio consisting of a suite of electronic tools that supports our Professional customers with: (i) online marketing solutions, (ii) fully searchable diagnostic and repair service resources, (iii) online shop tech training and (iv) a shop management system.


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Seasonality

Our business is somewhat seasonal in nature, with the highest sales usually 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. Our fourth quarter is generally our most volatile as weather and spending trade-offs typically influence our Professional and DIY sales.

Team Members

As of February 23, 2017, we employed approximately 41,000 full-time Team Members and approximately 33,000 part-time Team Members. Our workforce consisted of 87% of our Team Members employed in store-level operations, 9% employed in distribution and 4% employed in our corporate offices. As of February 23, 2017, less than 1% of our Team Members were represented by labor unions. We have never experienced any labor disruption. We believe that our Team Member relations are solid.

Intellectual Property

We own a number of trade names and own and have federally registered several service marks and trademarks, including "Advance Auto Parts”, “Autopart International”, “Carquest", “CARQUEST Technical Institute”, “DriverSide”, “MotoLogic”, “MotoShop”, “Worldpac”, “speedDIAL” and “TECH-NET Professional Auto Service” for use in connection with the automotive parts business. In addition, we own and have registered a number of trademarks for our private label brands. 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 Professional and DIY markets of the automotive aftermarket industry. Our primary competitors are (i) both national and regional chains of automotive parts stores, including AutoZone, Inc., NAPA, O'Reilly Automotive, Inc., The Pep Boys-Manny, Moe & Jack and Auto Plus (formerly Uni-Select USA, Inc.), (ii) discount stores and mass merchandisers that carry automotive products, (iii) wholesalers or jobber stores, including those associated with national parts distributors or associations, (iv) independently-owned stores, (v) automobile dealers that supply parts and (vi) internet-based retailers. 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 customer service, product offerings, availability, quality, price and store location.

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 collection, transportation and recycling of automotive lead-acid batteries, used automotive oil and other recyclable items, and ownership and operation of real property. We sell products containing hazardous materials as part of our business. In addition, our customers may bring automotive lead-acid batteries, used automotive oil or other recyclable items onto our properties. We currently provide collection and recycling programs for used lead-acid batteries, used oil and other recyclable items at a majority of our stores as a service to our customers. Pursuant to agreements with third party vendors, lead-acid batteries, used oil and other recyclable items 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 require that they are in compliance with all applicable laws and regulations. Our third party vendors 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, used oil and other recyclable items as these costs are borne by the respective third party vendors.

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


8


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 and clean up of released hazardous substances have not had a material impact on our operations to date.

Item 1A. Risk Factors.

Our business is subject to a variety of risks. 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.

If overall demand for the products we sell 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:

a decrease in the number of vehicles or in the number of annual miles driven, because fewer vehicles means less maintenance and repairs, and lower vehicle mileage, which may be affected by gas prices and other factors, decreases the need for maintenance and repair (while higher miles driven increases the need);
the economy, because during periods of declining economic conditions, consumers may defer vehicle maintenance or repair and discretionary spending; 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;
the weather, because milder weather conditions may lower the failure rates of automobile parts while extended periods of rain and winter precipitation may cause our customers to defer elective maintenance and repair of their vehicles;
the average duration of manufacturer warranties and average age of vehicles being driven, because newer cars typically require fewer repairs and will be repaired by the manufacturers' dealer network using dealer parts pursuant to warranties (which have gradually increased in duration and/or mileage expiration over the recent past), while vehicles that are seven years old and older are generally no longer covered under manufacturers' warranties and tend to need more maintenance and repair than newer vehicles;
technological advances and the increase in quality of vehicles manufactured, because vehicles that need less frequent maintenance and 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 Professional and DIY customers require to diagnose, repair and maintain their vehicles, because this may force consumers to have a majority of diagnostic work, repairs and maintenance performed by the vehicle manufacturers’ dealer network.

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 Professional and DIY categories of the automotive aftermarket industry, primarily with: (i) national and regional chains of automotive parts stores, (ii) discount stores and mass merchandisers that carry automotive products, (iii) wholesalers or jobbers stores, including those associated with national parts distributors or associations (iv) independently-owned stores, (v) automobile dealers that supply parts and (vi) internet-based retailers. 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 with respect to the level of marketing activities, number of stores, store locations, store layouts, operating histories, name recognition, established customer bases, vendor relationships, prices and product warranties. Consolidation among our competitors could enhance their market share and financial position, provide them with the ability to achieve better purchasing terms and allow them to provide more competitive prices to customers for whom we compete.

In addition, our reputation is critical to our continued success. If we fail to maintain high standards for, or receive negative publicity (whether through social media or normal media channels) relating to, product safety, quality or integrity, we could lose customers to our competition. The product we sell is branded both in brands of our vendors and in our own private label brands. If the perceived quality or value of the brands we sell declines in the eyes of our customers, our results of operations could be negatively affected.


9



These potential 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, expertise, consistent execution 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.

If we are unable to successfully implement our business strategy, including increasing sales to Professional and DIY customers, expanding our margins and increasing our return on invested capital, our business, financial condition, results of operations, cash flows and liquidity could be adversely affected.

We have identified numerous initiatives as part of our business strategy to increase sales to both Professional and DIY customers and expand our margins in order to increase our earnings and cash flows. If we are unable to implement these initiatives efficiently and effectively, or if these initiatives are unsuccessful, our business, financial condition, results of operations, cash flows and liquidity could be adversely affected. Successful implementation of our business strategy also depends on factors specific to the automotive aftermarket industry and numerous other factors that may be beyond our control. For that portion of our inventory manufactured and/or sourced outside the United States, geopolitical changes, changes in trade regulations, currency fluctuations, shipping related issues, natural disasters, pandemics and other factors beyond our control may increase the cost of items we purchase or create shortages which could have a material adverse effect on our sales and profitability. In addition, adverse changes in our ability to anticipate changes in consumer preferences and to meet customers’ needs for automotive products (particularly parts availability) in a timely manner could undermine our business strategy and have a material adverse effect on our business, financial condition, results of operations and cash flows:

If we are unable to successfully implement our growth strategy through new store openings, targeted acquisitions, and the continued increase in supply chain capacity and efficiency, we will not be able to expand our business which could adversely affect our financial condition, results of operations and cash flows.

Store Growth

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. As we open and operate more stores it becomes more critical that we have consistent execution across our entire store chain. 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. 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 desirable 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 to hire, train and retain qualified Team Members.

We also expect to continue to make strategic acquisitions as an element of our growth strategy. Acquisitions, including our 2014 acquisition of GPI, involve certain risks that could cause our growth and profitability to differ from our expectations. The success of our acquisitions depend on a number of factors, including among other things:

Our ability to continue to identify suitable acquisition targets or to acquire additional companies at favorable prices or on other favorable terms;
The risk that management’s attention may be distracted;
Our ability to retain key personnel from acquired businesses;
Our ability to successfully integrate the operations and systems of the acquired companies and achieve the strategic, operational, financial or other anticipated benefits of the acquisition;
We may incur significant transaction and integration costs in connection with acquisitions that may not be offset by the benefits achieved from the acquisition in the near term, or at all;
We may assume or become subject to loss contingencies, known or unknown, of the acquired companies, which could related to past, present, or future facts, events circumstances or occurrences.



10


Supply Chain

Our store inventories are primarily replenished by shipments from our network of distribution centers, warehouses and HUB stores. As we service our growing store base, we will need to increase the efficiency and capacity of our supply chain network in order to achieve the business goal of reducing inventory costs while improving availability and movement of goods throughout our supply chain to meet consumer product needs and channel preferences. We continue to streamline and optimize our supply chain network and systems as we integrate GPI and cannot be assured of our ability to increase the productivity and efficiency of our overall supply chain network to desired levels. If we fail to effectively utilize our existing supply chain or if our investments in our supply chain do not provide the anticipated benefits, we could experience sub-optimal inventory levels in our locations or increase in our costs, which could adversely affect our business, financial condition, results of operations and cash flows.

We are dependent on our suppliers to supply us with products that comply with safety and quality standards at competitive prices.

We are dependent on our vendors continuing to supply us quality products on terms that are favorable to us. If our merchandise offerings do not meet our customers’ expectations regarding safety and quality, we could experience lost sales, increased costs and exposure to legal and reputational risk. All of our suppliers must comply with applicable product safety laws, and we are dependent on them to ensure that the products we buy comply with all safety and quality standards. Events that give rise to actual, potential or perceived product safety concerns could expose us to government enforcement action and/or private litigation and result in costly product recalls and other liabilities. To the extent our suppliers are subject to additional government regulation of their product design and/or manufacturing processes, the cost of the merchandise we purchase may rise. In addition, negative customer perceptions regarding the safety or quality of the products we sell could cause our customers to seek alternative sources for their needs, resulting in lost sales. In those circumstances, it may be difficult and costly for us to regain the confidence of our customers.

We depend on the services of many qualified executives and other Team Members, whom we may not be able to attract, develop and retain.

Our success depends to a significant extent on the continued services and experience of our executives and other Team Members. As of February 23, 2017, we employed approximately 74,000 Team Members. We may not be able to retain our current executives and other key Team Members or attract and retain additional qualified executives and Team Members who may be needed in the future. We must also continue to motivate employees and keep them focused on our strategies and goals. Our ability to maintain an adequate number of executive and other qualified Team Members is highly dependent on an attractive and competitive compensation and benefits package. In addition, less than one percent of our team members are represented by unions. If these team members were to engage in a strike, work stoppage, or other slowdown, or if the terms and conditions in labor agreements were renegotiated, we could experience a disruption in our operations and higher ongoing labor costs. If we fail or are unable to maintain competitive compensation, 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.

The market price of our common stock may be volatile and could expose us to securities class action litigation.

The stock market and the price of our common stock may be subject to wide fluctuations based upon general economic and market conditions. Downturns in the stock market may cause the price of our common stock to decline. The market price of our stock may also be affected by our ability to meet analysts' expectations. Failure to meet such expectations, even slightly, could have an adverse effect on the price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against such a company. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources, which could have an adverse effect on our business.

Our level of indebtedness could limit the cash flow available for operations and could adversely affect our ability to service our debt or obtain additional financing; and a downgrade in our credit ratings or deterioration in global credit markets or general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, and higher tax rates could have a negative impact on our business, financial condition, results of operations and cash flows



11


Level of Indebtedness

Our level of indebtedness could restrict our operations and make it more difficult for us to satisfy our debt obligations. For example, our level of indebtedness could, among other things:

affect our liquidity by limiting our ability to obtain additional financing for working capital, limit our ability to obtain financing for capital expenditures and acquisitions or make any available financing more costly;
require us to dedicate all or a substantial portion of our cash flow to service our debt, which would reduce funds available for other business purposes, such as capital expenditures, dividends or acquisitions;
limit our flexibility in planning for or reacting to changes in the markets in which we compete;
place us at a competitive disadvantage relative to our competitors who may have less indebtedness;
render us more vulnerable to general adverse economic and industry conditions; and
make it more difficult for us to satisfy our financial obligations.

In addition, the indenture governing our notes and credit agreement governing our credit facilities contain financial and other restrictive covenants. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt, including such notes.

Impact of Changes in Credit Ratings and Credit Market Uncertainty

Our overall credit rating may be negatively impacted by deteriorating and uncertain credit markets or other factors which may or may not be within our control. The interest rates on our publicly issued debt and revolving credit facility 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 on any borrowings under our revolving credit facility or future issuances of public debt and less favorable terms on other operating and financing arrangements. In addition, it could reduce the attractiveness of our vendor payment programs, where certain of our vendors finance payment obligations from us with designated third party financial institutions, which could result in increased working capital requirements.

Conditions and events in the global credit market could have a material adverse effect on our access to short and long-term borrowings to finance our operations and the terms and cost of that debt. It is possible that one or more of the banks that provide us with financing under our revolving credit facility may fail to honor the terms of our existing credit facility or be financially unable to provide the unused credit as a result of significant deterioration in its financial condition. An inability to obtain sufficient financing at cost-effective rates could have a material adverse effect 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 and willingness to sell quality products to us at favorable prices and terms. Many factors outside our control may harm these relationships and the ability or willingness of these suppliers to sell us products on favorable terms. Such factors include 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. If our suppliers fail to develop new products we may not be able to meet the demands of our customers and our results of operations could be negatively affected.

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 our customers' willingness or ability to pay for accessories, maintenance or repair of their vehicles, which results in lower sales in our stores. An increase in fuel costs may also reduce the overall number of miles driven by our customers resulting in fewer parts failures and a reduced need for elective maintenance.



12


Impact on Operating Costs

Rising energy prices could directly impact our operating and product costs, including our merchandise distribution, Professional delivery, utility and product acquisition costs.

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, which may include class action litigation from customers, Team Members or others 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, labor discrimination, breach of laws or regulations (including The Americans With Disabilities Act), payment of wages, asbestos exposure, real estate, regulatory compliance 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 effect on our business, financial condition, results of operations and cash flows.

We are subject to numerous federal, state and local laws and governmental regulations relating to, among other things, environmental protection, product quality standards, building and zoning requirements, discrimination, labor and employment and income taxes. The implementation of and compliance with existing and future laws and regulations could increase the cost of doing business and adversely affect our results of operations. 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 and operating 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 work diligently to maintain the privacy and security of our customer, supplier, Team Member and business information and the functioning of our computer systems, website and other on-line offerings. In the event of a security breach or other cyber security incident, we could experience adverse operational effects or interruptions, incur substantial additional costs, or become subject to legal or regulatory proceedings, any of which could lead to damage to our reputation in the marketplace and added costs on an ongoing basis.

The nature of our business requires us to receive, retain and transmit certain personally identifiable information about our customers, suppliers and Team Members, some of which is entrusted to third-party service providers. While we have taken and continue to undertake significant steps to protect such personally identifiable information and other confidential information and to protect the functioning of our computer systems, website and other online offerings, a compromise of our data security systems or those of businesses we interact with could result in information related to our customers, suppliers, Team Members or business being obtained by unauthorized persons or adverse operational effects or interruptions, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We develop and update processes and maintain systems in an effort to try to prevent this from occurring, but the development and maintenance of these processes and systems are costly and requires ongoing monitoring and updating as technologies change, privacy and information security regulations change, and efforts to overcome security measures become more sophisticated.

Consequently, despite our efforts, our security measures have been breached in an immaterial manner in the past and may be breached in the future due to a cyber-attack, computer malware and/or viruses, team member error, malfeasance, fraudulent inducement (including so-called "social engineering" attacks and "phishing" scams) or other acts. Unauthorized parties have in the past obtained, and may in the future obtain, access to our data or the data of our customers, suppliers or Team Members’ or may otherwise cause damage to or interfere with our equipment and/or network. While costs associated with past security breaches have not been significant, any breach, damage to or interference with our equipment or network, or unauthorized access in the future could result in significant legal and financial exposure and damage to our reputation that could potentially have an adverse effect on our business. While we also seek to obtain assurances that others we interact with will protect confidential information, there is always the risk that the confidentiality or accessibility of data held or utilized by others may be compromised. If a compromise of our data security or function of our computer systems or website were to occur, it could have a material adverse effect on our operating results and financial condition and, possibly, subject us to additional legal, regulatory and operating costs and damage our reputation in the marketplace.

Business interruptions may negatively impact our store hours, operability of our computer systems and the availability and cost of merchandise which may adversely impact our sales and profitability.



13


Hurricanes, tornadoes, earthquakes or other natural disasters, war or acts of terrorism, or the threat of any of these calamities or others, may have a negative impact on our ability to obtain merchandise to sell in our stores, result in certain of our stores being closed for an extended period of time, negatively affect the lives of our customers or Team Members, or otherwise negatively impact our operations. Some of our merchandise is imported from other countries. If imported goods become difficult or impossible to import into the United States due to business interruption (including regulation of exporting or importing), and if we cannot obtain such merchandise from other sources at similar costs and without an adverse delay, our sales and profit margins may be negatively affected.

In the event that commercial transportation, including the global shipping industry, is curtailed or substantially delayed, our business may be adversely impacted, as we may have difficulty receiving merchandise from our suppliers and shipping it to our stores.

Terrorist attacks, war in the Middle East, or insurrection involving any oil producing country could result in an abrupt increase in the price of crude oil, gasoline and diesel fuel. 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.

We rely extensively on our computer systems and the systems of our business partners to manage inventory, process transactions and report results. These systems are subject to damage or interruption from power outages, telecommunication failures, computer viruses, security breaches and catastrophic events. If our computer systems or those of our business partners fail we may experience loss of critical data and interruptions or delays in our ability to process transactions and manage inventory. Any such loss, if widespread or extended, could adversely affect the operation of our business and our results of operations.

We may be affected by global climate change or by legal, regulatory, or market responses to such change.

The concern over climate change has led to legislative and regulatory initiatives aimed at reducing greenhouse gas emissions ("GHG"). For example, proposals that would impose mandatory requirements related to GHG continue to be considered by policy makers in the United States and elsewhere. Laws enacted to reduce GHG that directly or indirectly affect our suppliers (through an increase in their cost of production) 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. New federal or state restrictions on emissions that may be imposed on vehicles could also adversely affect annual miles driven or the demand for the products we sell and lead to changes in automotive technology. Changes in automotive technology and 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 all of which could adversely impact the demand for our products and our business, financial condition, results of operations or cash flows.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The following table summarizes the location, ownership status and total square footage of space utilized for distribution centers and principal corporate offices at the end of 2016:

 
 
 
 
Square Footage (in thousands)
 
 
Location
 
Leased
 
Owned
Distribution Centers
 
50 locations in 32 states and 4 Canadian provinces
 
6,484

 
4,273

Store Support Centers:
 
 
 
 
 
 
Roanoke, Virginia
 
Roanoke, Virginia
 
270

 

Raleigh, North Carolina
 
Raleigh, North Carolina
 
146

 


As of December 31, 2016, we owned 816 of our stores and leased 4,373 stores and branches. We also operate several smaller warehouse locations and subsidiary offices to support our operations.


14



Item 3. Legal Proceedings.

We currently and from time to time are involved in litigation and regulatory proceedings incidental to the conduct of our business, including litigation relating to employment or arising from claims of discrimination as a result of claims by current and former Team Members or others. 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 the Company and 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, but not limited to, automobile manufacturers, automotive parts manufacturers and their material suppliers 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 a defendant in many of these lawsuits. The automotive products at issue in these lawsuits are primarily brake parts. The plaintiffs have alleged that these products contained asbestos and were manufactured, distributed and/or sold by the various defendants. Many of the pending cases against us and our subsidiaries are in early stages of litigation. The damages claimed against the defendants in some of these proceedings are substantial. Additionally, many of the suppliers and manufacturers of asbestos and asbestos-containing products have dissolved or declared bankruptcy, which will limit plaintiffs’ ability to recover monetary damages from those entities. 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 the Company and our shareholders. We also believe that many 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 substantial damages that were not covered by insurance, these claims could have a material adverse effect on our operating results, financial position and cash flows. Historically, our asbestos claims have been inconsistent in fact patterns alleged and number and have been immaterial. Furthermore, the outcome of such legal matters is uncertain and our liability, if any, could vary widely. As a result, we are unable to estimate a possible range of loss with respect to unasserted asbestos claims that may be filed against the Company or its subsidiaries in the future. 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 cash flows in future periods.

Item 4. Mine Safety Disclosures.

Not applicable.



15


PART II

Item 5.
Market for Registrants 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 the high and low sale prices per share for our common stock, as reported by the NYSE, for the fiscal periods indicated.

 
 
High
 
Low
Fiscal Year Ended December 31, 2016
 
 
 
 
Fourth Quarter
 
$
177.83

 
$
134.08

Third Quarter
 
$
172.87

 
$
145.15

Second Quarter
 
$
166.32

 
$
132.98

First Quarter
 
$
165.99

 
$
131.59

 
 
 
 
 
Fiscal Year Ended January 2, 2016
 
 
 
 
Fourth Quarter
 
$
201.24

 
$
144.73

Third Quarter
 
$
194.61

 
$
151.30

Second Quarter
 
$
169.90

 
$
142.63

First Quarter
 
$
165.00

 
$
143.02


The closing price of our common stock on February 23, 2017 was $157.72. At February 23, 2017, there were 417 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 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 forth information with respect to repurchases of our common stock for the fourth quarter ended December 31, 2016:
Period
 
Total Number
of Shares
Purchased (1)
 
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)
(In thousands)
October 9, 2016 to November 5, 2016
 
3

 
$
156.66

 

 
$
415,092

November 6, 2016 to December 3, 2016
 
12,608

 
170.75

 

 
415,092

December 4, 2015 to December 31, 2016
 
22,607

 
174.26

 

 
415,092

 
 
 
 
 
 
 
 
 
Total
 
35,218

 
$
173.00

 

 
$
415,092

 
(1) 
We repurchased 35,218 shares of our common stock at an aggregate cost of $6.1 million, or an average purchase price of $173.00 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock units during the fourth quarter ended December 31, 2016. We did not repurchase any shares under our $500.0 million stock repurchase program during our fourth quarter ended December 31, 2016.
(2) 
Our stock repurchase program authorizing the repurchase of up to $500.0 million in common stock was authorized by our Board of Directors and publicly announced on May 14, 2012.



16


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 Retail Index. The graph assumes that the value of an investment in our common stock and in each such index was $100 on December 31, 2011, 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 RETAIL INDEX

aap_10kx1231xchart-36254.jpg
   
Company/Index
 
December 31, 2011
 
December 29, 2012
 
December 28, 2013
 
January 3, 2015
 
January 2, 2016
 
December 31, 2016
Advance Auto Parts
 
$
100.00

 
$
102.87

 
$
158.46

 
$
228.88

 
$
217.49

 
$
244.64

S&P 500 Index
 
100.00

 
114.07

 
152.98

 
174.56

 
177.01

 
198.18

S&P Retail Index
 
100.00

 
122.23

 
178.55

 
196.06

 
245.31

 
256.69




17


Item 6.    Selected Consolidated Financial Data.
  
The following table sets forth our selected historical consolidated statements of operations, balance sheets, cash flows 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 (excluding the Selected Store Data and Performance Measures) as of December 31, 2016 and January 2, 2016 and for the three years ended December 31, 2016, January 2, 2016 and January 3, 2015 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 as of January 3, 2015, December 28, 2013 and December 29, 2012 and for the years ended December 28, 2013 and December 29, 2012 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)
 
 
2016
 
2015
 
2014 (2)
 
2013
 
2012
 
 
(in thousands, except per share data, store data and ratios)
 
 
 
 
 
 
 
 
 
 
 
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
9,567,679

 
$
9,737,018

 
$
9,843,861

 
$
6,493,814

 
$
6,205,003

Cost of sales
 
5,311,764

 
5,314,246

 
5,390,248

 
3,241,668

 
3,106,967

Gross profit
 
4,255,915

 
4,422,772

 
4,453,613

 
3,252,146

 
3,098,036

Selling, general and administrative expenses (3)
 
3,468,317

 
3,596,992

 
3,601,903

 
2,591,828

 
2,440,721

Operating income
 
787,598

 
825,780

 
851,710

 
660,318

 
657,315

Interest expense (4)
 
(59,910
)
 
(65,408
)
 
(73,408
)
 
(36,618
)
 
(33,841
)
Other income (expense), net
 
11,147

 
(7,484
)
 
3,092

 
2,698

 
600

Income before provision for income taxes
 
738,835

 
752,888

 
781,394

 
626,398

 
624,074

Income tax expense
 
279,213

 
279,490

 
287,569

 
234,640

 
236,404

Net income
 
$
459,622

 
$
473,398

 
$
493,825

 
$
391,758

 
$
387,670

 
 
 
 
 
 
 
 
 
 
 
Per Share Data:
 
 
 
 
 
 
 
 
 
 
Basic earnings per common share
 
$
6.22

 
$
6.45

 
$
6.75

 
$
5.36

 
$
5.29

Diluted earnings per common share
 
$
6.20

 
$
6.40

 
$
6.71

 
$
5.32

 
$
5.22

Cash dividends declared per basic share
 
$
0.24

 
$
0.24

 
$
0.24

 
$
0.24

 
$
0.24

Weighted average basic shares outstanding
 
73,562

 
73,190

 
72,932

 
72,930

 
73,091

Weighted average diluted shares outstanding
 
73,856

 
73,733

 
73,414

 
73,414

 
74,062

 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by (used in):
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
500,874

 
$
689,642

 
$
708,991

 
$
545,250

 
$
685,281

Investing activities
 
$
(262,044
)
 
$
(253,366
)
 
$
(2,288,237
)
 
$
(362,107
)
 
$
(272,978
)
Financing activities
 
$
(194,691
)
 
$
(445,952
)
 
$
575,911

 
$
331,217

 
$
127,907

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet and Other Financial Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
135,178

 
$
90,782

 
$
104,671

 
$
1,112,471

 
$
598,111

Inventory
 
$
4,325,868

 
$
4,174,768

 
$
3,936,955

 
$
2,556,557

 
$
2,308,609

Inventory turnover (5)
 
1.25

 
1.31

 
1.47

 
1.33

 
1.43

Inventory per store (6)
 
$
834

 
$
789

 
$
733

 
$
631

 
$
609

Accounts payable to Inventory ratio (7)
 
71.3
%
 
76.7
%
 
78.6
%
 
85.3
%
 
87.9
%
Net working capital (8)
 
$
1,496,718

 
$
1,143,269

 
$
1,086,624

 
$
1,359,317

 
$
758,410

Capital expenditures
 
$
259,559

 
$
234,747

 
$
228,446

 
$
195,757

 
$
271,182

Total assets (9)
 
$
8,315,033

 
$
8,127,701

 
$
7,954,392

 
$
5,556,054

 
$
4,607,816

Total debt (9)
 
$
1,043,255

 
$
1,206,895

 
$
1,628,927

 
$
1,044,864

 
$
599,090

Total stockholders' equity
 
$
2,916,192

 
$
2,460,648

 
$
2,002,912

 
$
1,516,205

 
$
1,210,694

 
 
 
 
 
 
 
 
 
 
 


18


 
 
Fiscal Year (1)
 
 
2016
 
2015
 
2014 (2)
 
2013
 
2012
 
 
(in thousands, except per share data, store data and ratios)
 
 
 
 
 
 
 
 
 
 
 
Selected Store Data and Performance Measures:
 
 
 
 
 
 
 
 
 
 
Comparable store sales growth (10)
 
(1.4
%)
 
0.0
%
 
2.0
%
 
(1.5
%)
 
(0.8
%)
Number of stores, beginning of year (11)
 
5,293

 
5,372

 
4,049

 
3,794

 
3,662

New stores (11) (12)
 
78

 
121

 
1,487

 
296

 
137

Closed stores (11) (13)
 
(182
)
 
(200
)
 
(164
)
 
(41
)
 
(5
)
Number of stores, end of year (11)
 
5,189

 
5,293

 
5,372

 
4,049

 
3,794

Stores with Professional delivery program, end of period
 
4,501

 
4,745

 
4,981

 
3,702

 
3,484

Total Professional sales, as a percentage of total sales
 
57.5
%
 
57.2
%
 
57.0
%
 
40.4
%
 
38.1
%
Total store square footage, end of period (in 000s)
 
41,737

 
42,185

 
43,338

 
29,701

 
27,806


(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 2014, which consisted of 53 weeks. The impact of week 53 included in sales, gross profit and selling, general and administrative expenses for 2014 was $150,386, $67,780 and $46,720, respectively.
(2) 
We have included the financial results of GPI in our consolidated financial statements commencing with its acquisition on January 2, 2014.
(3) 
Selling, general and administrative expenses include the impact of GPI integration, store closure and consolidation costs and support center restructuring costs of $72,828, $127,059 and $82,234 and amortization of GPI intangibles of $40,940, $42,281 and $42,696 for 2016, 2015 and 2014, respectively. It also includes acquisition costs associated with our acquisition of GPI on January 2, 2014 of $24,983 and integration costs associated with our integration of BWP of $8,004 for 2013.
(4) 
Interest expense includes the impact of acquisition costs associated with our acquisition of GPI on January 2, 2014 of $1,987 for 2013.
(5) 
Inventory turnover is calculated as cost of sales divided by the average of beginning and ending inventories. For 2014 the ratio was calculated using an average of ending inventories over the last five quarters to adjust for the impact of the acquisition of GPI and its inventories on January 2, 2014.
(6) 
Inventory per store is calculated as ending inventory divided by ending store and branch count. Our branches have a larger footprint than our stores.
(7) 
Accounts payable to inventory ratio is calculated as ending accounts payable divided by ending inventory.
(8) 
Net working capital is calculated by subtracting current liabilities from current assets. We retrospectively adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2015-17 during the fourth quarter of 2015, which requires the presentation of all deferred income taxes as long-term assets or liabilities. Accordingly, 2014, 2013 and 2012 have been adjusted by $88,650, $134,718 and $133,848, respectively.
(9) 
We retrospectively adopted ASU 2015-3 and ASU 2015-15 at the beginning of fiscal 2016, which required a reclassification of debt issuance costs from Other Assets to Long-term Debt. Accordingly 2015, 2014, 2013 and 2012 have been adjusted by $6,864, $7,966, $8,720 and $5,998, respectively.
(10) 
Comparable store sales include net sales from our stores, branches and e-commerce websites. Sales to independently-owned Carquest branded stores are excluded from our comparable store sales.The change in store sales is calculated based on the change in net sales starting once a store or branch has been open for 13 complete accounting periods (each period represents four weeks). Relocations are included in comparable store sales from the original date of opening. Acquired stores are included in our comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date (approximately one year). Comparable store sales growth for 2014 and 2015 excludes sales from the 53rd week of 2014.
(11) 
Store count activity includes Worldpac branches.
(12) 
Includes 1,336 stores and branches resulting from our acquisition of GPI during 2014 and 124 stores resulting from our acquisition of BWP during 2013.
(13) 
The number of store closures includes planned consolidations of 159, 111, 145 and 20 stores in 2016, 2015, 2014 and 2013, respectively.
(1)




19


Item 7. Managements 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 2014 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 2014 which contained 13 weeks due to our 53-week fiscal year in 2014. Our next 53-week fiscal year is 2020.

Unless otherwise noted, our financial results have been presented on a GAAP basis. In limited instances, we have presented our financial results on a GAAP and non-GAAP (adjusted) basis which is described further in the section entitled "Reconciliation of Non-GAAP Financial Measures."

Introduction

We are a leading automotive aftermarket parts provider in North America, serving both "do-it-for-me", or Professional, and "do-it-yourself", or DIY, customers. As of December 31, 2016 we operated a total of 5,062 stores and 127 branches. We operate primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. Our stores operate primarily under the trade names "Advance Auto Parts", "Autopart International" and "Carquest" and our distribution branches operate under the "Worldpac" trade name. In addition, we served approximately 1,250 independently-owned Carquest branded stores as of December 31, 2016 across these locations in addition to Mexico, the Bahamas, Turks and Caicos, the British Virgin Islands and the Pacific Islands. We acquired the Carquest and Worldpac operations as part of our acquisition of GPI on January 2, 2014.

Our stores and branches offer a broad selection of brand name, OEM and private label automotive replacement parts, accessories, batteries, and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy duty trucks. Through our integrated operating approach, we serve our Professional and DIY customers from our store locations and online at www.AdvanceAutoParts.com and www.Worldpac.com. Our DIY customers can elect to pick up merchandise ordered online at a conveniently located store or have their purchases shipped directly to them. Our Professional customers consist primarily of delivery customers for whom we deliver products from our store locations to our Professional customers’ places of business, including independent garages, service stations and auto dealers. Our Professional customers can also conveniently place their orders online.

Management Overview

We generated diluted earnings per share, or diluted EPS, of $6.20 during 2016 compared to $6.40 for 2015. When adjusted for the following non-operational items, our adjusted diluted earnings per share ("Adjusted EPS") in 2016 was $7.15 compared to $7.82 during 2015:
 
 
2016
 
2015
GPI integration, store closure and consolidation, and support center restructuring costs
 
$
0.61

 
$
1.07

Amortization related to the acquired intangible assets from GPI
 
$
0.34

 
$
0.35


Refer to "Reconciliation of Non-GAAP Financial Measures" for further details of our comparable adjustments and the usefulness of such measures to investors.

Total sales for 2016 decreased 1.7% from 2015 and comparable store sales decreased 1.4%. Our sales were negatively impacted in 2016 by challenges with inventory availability and service levels. We are making investments to better serve our customers, accelerate sales momentum and gain market share. While these investments have pressured our operating margins, we began to experience improvements in our comparable store sales trends towards the end of the year. Our first priority is to stabilize sales growth to consistently deliver positive comparable store sales performance and then turn our attention to bottom


20


line profitability margins. We remain confident in the long-term growth and profitability opportunity as we balance our investments in the business with productivity measures to expand margins.

2016 Highlights

A high-level summary of our financial results and other highlights from 2016 include:

Total sales during 2016 decreased 1.7% to $9,567.7 million as compared to 2015. This decrease was primarily driven by a decline in comparable store sales of 1.4%, store closures and the effect of Carquest store consolidations, partially offset by new store openings.
Our operating income for 2016 was $787.6 million, a decrease of $38.2 million from 2015. As a percentage of total sales, operating income was 8.2%, a decrease of 25 basis points as compared to 2015, due to a decrease in our gross profit rate, partially offset by a decrease in our SG&A rate.
Our inventory balance as of December 31, 2016 increased $151.1 million, or 3.6%, over the prior year driven mainly by the build-up of transitional inventory associated with our Carquest product and store integration that began to drop by the end of the year, and the opening of new locations, including a new Worldpac distribution center.
We generated operating cash flow of $500.9 million during 2016, a decrease of 27.4% compared to 2015, primarily due to a decrease in net income and accounts payable.

Refer to “Consolidated Results of Operations” and “Liquidity and Capital Resources” for further details of our income statement and cash flow results, respectively.

Business Update

Our focus in 2017 is to regain top line sales growth as the first step towards driving sustainable, long-term financial performance improvement. Under the leadership of our CEO, who joined the Company in April 2016, we have evaluated all facets of our business in conjunction with the development of a strategic business plan that is intended to significantly improve our customer service and financial performance over the next five years. Our first priority is to refocus on the customer by implementing and reinforcing the best drivers for improving customer satisfaction. Once we stabilize the drivers to consistently deliver an outstanding experience for our customers and consistent positive comparable store sales performance, we will turn our attention to bottom line profitability margins.

The underlying framework of this plan focuses on growth, productivity, people and culture. The growth and margin expansion elements of our strategic business plan include i) Supply Chain, ii) Professional, iii) DIY and iv) Productivity.

Supply Chain - By 2018, we plan to begin rolling out new supply chain capabilities that will enhance inventory positioning in our network, improve assortment and in-market availability and improve speed and accuracy of delivery. Over the longer-term we will continue to further streamline our supply chain network and systems from the GPI acquisition to enable a more seamless inventory transfer throughout the entire chain across both Company owned and independent stores, driving productivity. The GPI integration plan has been fully embedded in our strategic business plan.

Professional - For our Professional customers our focus is on providing high quality parts, improved product availability, consistency of service and fast delivery. We believe we have the right parts assortment and are focused on improving sales and customer service capabilities. We will continue to leverage best practices and technology platforms, including market differentiators like TechNet and the Carquest and Worldpac Training Institutes, across all of our Professional businesses to simplify the customer experience.

DIY - We are also focused on growing sales to DIY customers. We are strengthening our Speedperks program to build stronger loyalty. We have also initiated test markets for DIY designed to improve the customer experience in the store, online and at each touchpoint. This includes more focused and enhanced training along with investments in mobile and digital to better serve our customers when and where they want to be served.

Productivity - Our productivity agenda will focus on removing unnecessary costs while driving new capabilities and investing in long-term growth creation. Our productivity pipeline is sequenced over the five year horizon of our strategic business plan. We are not simply cutting costs to drive short-term profit results, but are materially changing our processes to drive permanent cost reductions.



21


This agenda will be supported and executed with a focus on our talent and culture. Throughout our Company, we are hard at work evolving our culture to one which is focused on the customer and driving high levels of accountability, ownership and a drive for results throughout the organization.

Automotive Aftermarket Industry

Operating within the automotive aftermarket industry, we are influenced by a number of general macroeconomic factors similar to those affecting the overall retail industry. These factors include, but are not limited to, fuel costs, unemployment rates, consumer confidence and competition. We believe the macroeconomic environment should position our industry favorably in 2017 as continued lower fuel costs, a stabilized labor market and increasing disposable income should help to provide a positive impact. In addition, industry fundamentals continue to be strong with miles driven increasing and the number of vehicles 11 years and older continuing to increase.
We believe that two key drivers of demand within the automotive aftermarket are (i) the number of miles driven in the U.S. and (ii) the number and average age of vehicles on the road.
Miles Driven
We believe that the number of total miles driven in the U.S. influences the demand for the repair and maintenance of vehicles. As the number of miles driven increases, consumers’ vehicles are more likely to need repair and maintenance, resulting in an increase in the need for automotive parts and maintenance items. According to the latest statistics available from the Federal Highway Administration, the total number of vehicle miles traveled on U.S. roads increased by approximately 3.0% in 2016, which we attribute primarily to decreased gasoline prices. Long-term industry forecasts remain favorable, as lower gas prices and continued strength in the labor market are expected to result in an annual miles driven growth rate of 2% through 2019.
Number of Registered Vehicles and Increase in Average Vehicle Age
We believe that the total number of vehicles (excluding medium and heavy duty trucks) on the road and the average age of vehicles on the road also heavily influence the demand for the products we sell within the automotive aftermarket industry. As vehicles age and go out-of-warranty, they generate a stronger demand for automotive aftermarket products due to both routine maintenance requirements and more frequent mechanical failures. During 2016, the number of registered vehicles grew 2.4% to a record 264 million vehicles. According to industry analysts, the number of vehicles on the road is expected to continue to climb and will reach 278 million vehicles by 2019. The average vehicle age, which has exceeded 11 years for the past five years, also points to favorable growth in the industry. Despite continued growth in new car registrations, the vehicle scrappage rate for 2016 fell to its lowest rate in 14 years resulting in an increase in number of older vehicles on the road as reflected by a five-year compounded annual growth rate is 4.1% for vehicles over 11 years old compared to a compounded annual growth rate for all vehicles of 1.1%. We believe that the average age of vehicles will continue to benefit our industry in the near term and the overall increase in the total number of vehicles on the road is positive for the longer-term as these vehicles age outside of their manufacturer warranty period and require more expensive maintenance and repairs due to the increased complexity of automobiles.

 


22


Store Development

We serve our Professional and DIY customers in a similar fashion through four different store brands. The table below sets forth details of our store and branch development activity for the year ended December 31, 2016, including the consolidation of stores as part of our integration plans and the number of locations with Professional delivery programs. In addition to the changes in our store counts detailed below, we relocated 47 of our stores during 2016. During 2017, we anticipate adding approximately 75 to 85 new stores and branches.
 
AAP
 
AI
 
CARQUEST (1)
 
WORLDPAC
 
Total
 
January 2, 2016
4,102

 
184

 
885

 
122

 
5,293

 
New
64

 

 
9

 
5

 
78

 
Closed
(13
)
 
(3
)
 
(7
)
 

 
(23
)
 
Consolidated (2)
(3
)
 

 
(156
)
 

 
(159
)
 
Converted (3)
123

 

 
(123
)
 

 

 
December 31, 2016
4,273

 
181

 
608

 
127

 
5,189

 
Stores with professional delivery programs
3,585

 
181

 
608

 
127

 
4,501

 
(1) Includes activity for stores acquired with B.W.P. Distributors, Inc. that operate under the Carquest trade name.
(2) Consolidated stores include Carquest stores whose operations were consolidated into existing AAP locations as a result of the planned integration of Carquest. In 2014, we began the multi-year process of consolidating and converting our Carquest stores into AAP locations.
(3) Converted stores include Carquest stores that were re-branded as an AAP store as a result of the planned integration of Carquest.

Components of Statement of Operations

Net Sales

Net sales consist primarily of merchandise sales from our store and branch locations to both our Professional and DIY customers, sales from our e-commerce websites and sales to independently-owned Carquest branded stores. Sales are recorded net of discounts and rebates, sales taxes and estimated returns and allowances. 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 or branch sales starting once a location has been open for 13 complete accounting periods (approximately one year) and by including e-commerce sales. Sales to independently-owned Carquest branded stores are excluded from our comparable store sales. We include sales from relocated stores in comparable store sales from the original date of opening. Acquired stores are included in our comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date (approximately one year). Comparable store sales growth for 2014 and 2015 excludes sales from the 53rd week of 2014.

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, including depreciation and amortization. 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 (vi) 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 cost of sales and gross profit rates may not be comparable to that of our competitors due to differences in industry practice regarding the classification of certain costs and mix of Professional and DIY sales. See Note 1, Summary of Significant Accounting Policies, to our Consolidated Financial Statements elsewhere in this report for additional discussion of these costs.



23


Selling, General and Administrative Expenses

SG&A expenses consist of store payroll, store occupancy (including rent and depreciation), advertising expenses, acquisition and integration related expenses, Professional delivery expenses, other store expenses and general and administrative expenses, including salaries and related benefits of store support center Team Members, share-based compensation expenses, store support center administrative office expenses, data processing, professional expenses, self-insurance costs, depreciation and amortization, closed facility expense and impairment charges, if any, and other related expenses. See Note 1, Summary of Significant Accounting Policies, to our Consolidated Financial Statements for additional discussion of these costs.

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
 
 
December 31,
2016
 
January 2,
2016
 
January 3,
2015
Net sales
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales, including purchasing and warehousing costs
 
55.5

 
54.6

 
54.8

Gross profit
 
44.5

 
45.4

 
45.2

Selling, general and administrative expenses
 
36.3

 
36.9

 
36.6

Operating income
 
8.2

 
8.5

 
8.7

Interest expense
 
(0.6
)
 
(0.7
)
 
(0.7
)
Other, net
 
0.1

 
(0.1
)
 
0.0

Provision for income taxes
 
2.9

 
2.9

 
2.9

Net income
 
4.8
 %
 
4.9
 %
 
5.0
 %

2016 Compared to 2015

Net Sales

Net sales for 2016 were $9,567.7 million, a decline of $169.3 million, or 1.7%, from net sales in 2015. This decrease was primarily due to our comparable store sales decline of 1.4% and the portion of sales that did not transfer from stores that were consolidated. During 2016, we consolidated 159 stores and closed 23 stores, which was partially offset by the opening of 78 new stores. Our decline in comparable store sales was driven by a decline in overall transactions, partially offset by an increase in the average transaction value. While the number of comparable store transactions decreased from the comparable period in all four quarters of 2016, we saw improving trends in the second half of the year.

Our comparable store sales for the year were negatively impacted by challenges with product availability and service levels, particularly in our Northeast and Great Lakes markets. On a quarterly basis our comparable store sales decreased 1.9%, 4.1% and 1.0% in the first, second and third quarters of 2016, respectively, and increased 3.1% in the fourth quarter of 2016. We attribute the improvement in our comparable store sales in the last half of the year to our efforts to improve our focus on the customer, including sustained investments in availability, customer service and incentives for front line employees, as well as improved levels of execution throughout our supply chain. We also benefited in the fourth quarter of 2016 from the timing of the Christmas and New Years holidays.

Gross Profit

Gross profit for 2016 was $4,255.9 million, or 44.5% of net sales, as compared to $4,422.8 million, or 45.4% of net sales, in 2015, a decrease of 94 basis points. The decrease in gross profit as a percentage of net sales was primarily the result of higher supply chain costs driven by significantly higher inventory levels in the first half of 2016 and disruption in our distributions centers located in our Northeast and Great Lakes markets resulting from changes in delivery frequency.



24


SG&A Expenses

SG&A expenses for 2016 were $3,468.3 million, or 36.3% of net sales, as compared to $3,597.0 million, or 36.9% of net sales, for 2015, a decrease of 69 basis points. This decrease as a percentage of net sales was primarily due to lower GPI integration costs, store closure and consolidation expenses and support center restructuring costs in 2016 compared to the prior year. Excluding these costs, SG&A decreased 14 basis points as a percentage of sales compared to the prior year driven by lower administrative costs partially offset by higher customer facing costs including store labor and incentives and inventory availability support costs.

Operating Income

Operating income for 2016 was $787.6 million, representing 8.2% of net sales, as compared to $825.8 million, or 8.5% of net sales, for 2015, a decrease of 25 basis points. This decrease was due to a lower gross margin rate, partially offset by a decrease in our SG&A rate. These changes on a rate basis were due to the gross profit and SG&A drivers previously discussed.

Interest Expense

Interest expense for 2016 was $59.9 million, or 0.6% of net sales, as compared to $65.4 million, or 0.7% of net sales, in 2015. The decrease in interest expense was due to repayments made on our credit facility over the last year.

Income Taxes

Income tax expense for 2016 was $279.2 million, as compared to $279.5 million for 2015. Our effective income tax rate was 37.8% and 37.1% for 2016 and 2015, respectively. Our income tax rates in both 2016 and 2015 reflect favorable income tax settlements and statute of limitation expirations. The increase in our effective tax rate for 2016 compared to 2015 is primarily due to $7.8 million of settlements recorded in 2016 related to income tax audits of GPI for time periods prior to our acquisition of GPI. We believe these settlements will be largely recoverable under the escrow for indemnification claims in our purchase agreement with GPI and therefore recorded corresponding income of $7.3 million in Other Income, net.

Net Income

Net income was $459.6 million, or $6.20 per diluted share, for 2016 as compared to $473.4 million, or $6.40 per diluted share, for 2015. As a percentage of net sales, net income for 2016 was 4.8%, as compared to 4.9% for 2015. The decrease in diluted EPS was driven primarily by the decrease in net income.

2015 Compared to 2014

Net Sales

Net sales for 2015 were $9,737.0 million, a decline of $106.8 million, or 1.1%, over net sales for 2014. This decrease was primarily due to the 53rd week of 2014, which contributed $150.4 million in sales to 2014. Excluding the impact of the 53rd week, net sales for 2015 increased 0.4% over 2014, while comparable store sales were flat. The slight increase in net sales when excluding the 53rd week is due to the addition of 121 new stores, partially offset by the portion of sales that did not transfer from the consolidation of 111 stores and closure of 89 stores during 2015.

Our comparable store sales for the year were negatively impacted by disruptions from integration activities, including the alignment of our field structure, products and pricing. In addition the impact of foreign currency exchange rates on our Canadian operations reduced comparable store sales for the year by 36 basis points. Partially offsetting these negative impacts is an estimated 50 basis points of positive contribution from the sales transferred to comparable stores from stores consolidated during 2015. Our fourth quarter of 2015 was our weakest quarter in terms of comparable store sales with a decline of 2.5%. The unseasonably warm start to winter impacted both our Professional and DIY business, particularly in batteries and cold weather-related hard parts categories such as starters, alternators and related products.   

Gross Profit

Gross profit for 2015 was $4,422.8 million, or 45.4% of net sales, as compared to $4,453.6 million, or 45.2% of net sales, in 2014, an increase of 18 basis points. The increase in gross profit as a percentage of net sales was primarily the result of lower product acquisition costs, inclusive of merchandise synergies as a result of the acquisition of GPI.



25


SG&A Expenses

SG&A expenses for 2015 were $3,597.0 million, or 36.9% of net sales, as compared to $3,601.9 million, or 36.6% of net sales, for 2014, an increase of 35 basis points. This increase as a percentage of net sales was primarily due to an increase in GPI integration costs, store closure and consolidation expenses and support center restructuring costs. Excluding these costs, SG&A decreased 18 basis points as a percent of sales compared to the prior year driven by lower administrative costs and incentive compensation as well as lower delivery costs as fuel prices had declined. These benefits were partially offset by expense deleverage as a result of softer sales.

Operating Income

Operating income for 2015 was $825.8 million, representing 8.5% of net sales, as compared to $851.7 million, or 8.7% of net sales, for 2014, a decrease of 17 basis points. This decrease was due to a higher SG&A rate, partially offset by an increase in our gross profit rate. These changes on a rate basis were due to the gross profit and SG&A drivers previously discussed.

Interest Expense

Interest expense for 2015 was $65.4 million, or 0.7% of net sales, as compared to $73.4 million, or 0.7% of net sales, in 2014. The decrease in interest expense was due to repayments made on our credit facility over the last year.

Income Taxes

Income tax expense for 2015 was $279.5 million, as compared to $287.6 million for 2014. Our effective income tax rate was 37.1% and 36.8% for 2015 and 2014, respectively. Our income tax rate in both 2015 and 2014 reflect favorable income tax settlements and statute of limitation expirations.

Net Income

Net income was $473.4 million, or $6.40 per diluted share, for 2015 as compared to $493.8 million, or $6.71 per diluted share, for 2014. As a percentage of net sales, net income for 2015 was 4.9%, as compared to 5.0% for 2014. The decrease in diluted EPS was driven primarily by the decrease in net income.

Reconciliation of Non-GAAP Financial Measures

"Management’s Discussion and Analysis of Financial Condition and Results of Operations" include certain financial measures not derived in accordance with generally accepted accounting principles (“GAAP”). Non-GAAP financial measures should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. However, we have presented the non-GAAP financial measures as we believe the presentation of financial results that exclude non-cash charges related to the acquired GPI intangibles and non-operational expenses associated with i) the integration of GPI, ii) store closure and consolidation costs and iii) support center restructuring costs is useful and indicative of our base operations because the expenses vary from period to period in terms of size, nature and significance and relate to the integration of GPI and store closure activity in excess of historical levels. These measures assist in comparing our current operating results with past periods and with the operational performance of other companies in our industry. The disclosure of these measures allows investors to evaluate our performance using the same measures management uses in developing internal budgets and forecasts and in evaluating management’s compensation. Included below is a description of the expenses we have determined are not normal, recurring cash operating expenses necessary to operate our business and the rationale for why providing these measures are useful to investors as a supplement to the GAAP measures.

GPI Integration Expenses - As disclosed in our filings with the SEC, we acquired GPI for $2.08 billion on January 2, 2014 and are in the midst of a multi-year integration plan to integrate the operations of GPI with Advance Auto Parts. This includes the integration of product brands and assortments, supply chain and information technology. The integration is being completed in phases and the nature and timing of expenses will vary from quarter to quarter over several years. The integration of product brands and assortments was primarily completed in 2015 and our focus has shifted to integrating the supply chain and information technology systems beginning in 2016. Due to the size of the acquisition, we consider these expenses to be outside of our base business. Therefore, we believe providing additional information in the form of non-GAAP measures that exclude these costs is beneficial to the users of our financial statements in evaluating the operating performance of our base business and our sustainability once the integration is completed.



26


Store Closure and Consolidation Expenses - Store closure and consolidation expenses consist of expenses associated with our announced plans to (i) convert and consolidate the Carquest stores acquired from GPI, (ii) close our Autopart International stores in Florida and (iii) close approximately 80 underperforming Advance Auto Parts stores in the fourth quarter of fiscal 2015. The conversion and consolidation of the Carquest stores is a multi-year process that began in 2014. As of December 31, 2016, 333 Carquest stores acquired from GPI had been consolidated into existing Advance Auto Parts stores and 282 stores had been converted to the Advance Auto Parts format. As of December 31, 2016, we operated 608 stores under the Carquest name. The closure of the 40 Autopart International stores in Florida, primarily in the first quarter of 2015, and closure of 80 underperforming Advance Auto Parts stores in the fourth quarter of 2015 significantly exceeded our average historical store closure activity. While periodic store closures are common, these closures represent major programs outside of our typical market evaluation process. We believe it is useful to provide additional non-GAAP measures that exclude these costs to provide investors greater comparability of our base business and core operating performance. We also continue to have store closures that occur as part of our normal market evaluation process and have not excluded the expenses associated with these store closures in computing our non-GAAP measures.

Support Center Restructuring Expenses - The costs excluded for support center restructuring activities include costs associated with (i) closing our Minnesota office and relocating functions to existing offices, (ii) relocating functions within our Roanoke, VA office and Raleigh, NC office (formerly the headquarters for GPI) and (iii) eliminating duplicative functions between these two offices. These actions are a direct consequence of the acquisition and integration of GPI and therefore we do not consider these expenses to be normal, recurring, cash operating expenses necessary to operate our business. These actions were substantially completed as of the end of fiscal 2015 and we have had no material store support center restructuring expenses following the end of fiscal 2015.

We have included a reconciliation of this information to the most comparable GAAP measures in the following tables.

 
 
Fiscal Year Ended
(in thousands, except per share data)
 
 
December 31,
2016
 
January 2,
2016
Net income (GAAP)
 
$
459,622

 
$
473,398

SG&A adjustments (a)
 
113,768

 
169,340

Provision for income taxes on adjustments (b)
 
(43,232
)
 
(64,349
)
Adjusted net income
 
$
530,158

 
$
578,389

 
 
 
 
 
Diluted earnings per common share (GAAP)
 
$
6.20

 
$
6.40

SG&A adjustments, net of tax
 
0.95

 
1.42

Adjusted Cash EPS
 
$
7.15

 
$
7.82


(a)
The adjustments to SG&A expenses for 2016 include GPI integration, store consolidation costs and support center restructuring costs of $72,828 and GPI amortization of acquired intangible assets of $40,940. The adjustments to SG&A expenses for 2015 include GPI integration, store closure and consolidation costs and support center restructuring costs of $127,059 and GPI amortization of acquired intangible assets of $42,281.
(b)
The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments.



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Quarterly Consolidated Financial Results (in thousands, except per share data)
 
 
16-Weeks
Ended
4/25/2015
 
12-Weeks
Ended
7/18/2015
 
12-Weeks
Ended
10/10/2015
 
12-Weeks
Ended
1/2/2016
 
16-Weeks
Ended
4/23/2016
 
12-Weeks
Ended
7/16/2016
 
12-Weeks
Ended
10/8/2016
 
12-Weeks
Ended
12/31/2016
Net Sales
 
$
3,038,233

 
$
2,370,037

 
$
2,295,203

 
$
2,033,545

 
$
2,979,778

 
$
2,256,155

 
$
2,248,855

 
$
2,082,891

Gross profit
 
1,393,924

 
1,087,289

 
1,032,387

 
909,172

 
1,349,889

 
1,010,257

 
988,205

 
907,564

Net income
 
148,112

 
149,998

 
120,469

 
54,819

 
158,813

 
124,600

 
113,844

 
62,365

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
2.02

 
$
2.04

 
$
1.64

 
$
0.75

 
$
2.16

 
$
1.69

 
$
1.54

 
$
0.84

Diluted
 
$
2.00

 
$
2.03

 
$
1.63

 
$
0.74

 
$
2.14

 
$
1.68

 
$
1.53

 
$
0.84


Liquidity and Capital Resources

Overview

Our primary cash requirements to maintain our current operations include payroll and benefits, the purchase of inventory, contractual obligations, capital expenditures, the payment of income taxes and funding of our strategic business plan. In addition, we may use available funds for acquisitions, to repay borrowings under our credit agreement, to periodically repurchase shares of our common stock under our stock repurchase programs and for the payment of quarterly cash dividends. Historically, we have funded these requirements primarily through cash generated from operations, supplemented by borrowings under our credit facilities and notes offerings as needed. We believe funds generated from our expected results of operations, available cash and cash equivalents, and available borrowing under our credit facility will be sufficient to fund our primary obligations for the next fiscal year. Cash holdings in our foreign affiliates are not significant relative to our overall operations and therefore would not restrict the liquidity needs for our domestic operations.

As of December 31, 2016, our cash and cash equivalents balance was $135.2 million, an increase of $44.4 million compared to January 2, 2016. This increase in cash was primarily a result of net cash generated from operations, partially offset by capital expenditures and net repayments on credit facilities. Additional discussion of our cash flow results, including the comparison of 2016 activity to 2015, is set forth in the Analysis of Cash Flows section.

As of December 31, 2016, our outstanding indebtedness was $1,043.3 million consisting primarily of our senior unsecured notes. This is $163.6 million lower when compared to January 2, 2016, as a result of net payments on our credit facility. As of December 31, 2016, we had no borrowings under our term loan or revolving credit facility. We had $100.7 million in letters of credit outstanding, which reduced the available borrowings on our revolver to $899.3 million as of December 31, 2016.

Capital Expenditures

Our primary capital requirements have been the funding of our new store development (leased and owned locations), maintenance of existing stores, investments in supply chain and information technology and GPI integration expenditures. We lease approximately 84% of our stores. Our capital expenditures were $259.6 million in 2016, an increase of $24.8 million from 2015.

Our future capital requirements will depend in large part on the number and timing of new stores we open within a given year and the investments we make in existing stores, information technology, supply chain network and the integration of GPI. In 2017, we anticipate that our capital expenditures will be approximately $250.0 million, but may vary with business conditions. These investments will primarily include GPI integration expenditures for store conversions and supply chain and systems integration activities; new store development (leased and owned locations); and investments in our existing stores, supply chain network and systems. We anticipate opening between 75 to 85 stores and branches during 2017.


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Stock Repurchases

We have a stock repurchase program that allows us to repurchase our common stock on the open market or in privately negotiated transactions from time to time in accordance with the requirements of the SEC. As of December 31, 2016, we had $415.1 million remaining under our $500 million stock repurchase program authorized by our Board of Directors on May 14, 2012. During 2016, we made no repurchases under the stock repurchase program.

Dividend

Since 2006, our Board of Directors has declared quarterly dividends of $0.06 per share to stockholders of record. On February 15, 2017, our Board of Directors declared a quarterly dividend of $0.06 per share to be paid on April 7, 2017 to all common stockholders of record as of March 24, 2017.

Analysis of Cash Flows

A summary and analysis of our cash flows for 2016, 2015 and 2014 are reflected in the following table and discussion.
 
Fiscal Year
 
2016
 
2015
 
2014
 
(in millions)
Cash flows from operating activities
$
500.9

 
$
689.6

 
$
709.0

Cash flows from investing activities
(262.0
)
 
(253.4
)
 
(2,288.2
)
Cash flows from financing activities
(194.7
)
 
(446.0
)
 
575.9

Effect of exchange rate changes on cash
0.3

 
(4.2
)
 
(4.5
)
Net (decrease) increase in cash and cash equivalents
$
44.4

 
$
(13.9
)
 
$
(1,007.8
)

Operating Activities

For 2016, net cash provided by operating activities decreased $188.8 million to $500.9 million. This net decrease in operating cash flow was primarily driven by a decrease in accounts payable, lower net income and the timing of payments within working capital, partially offset by the timing of income tax deductions. Our inventory balance as of December 31, 2016 increased $151.1 million, or 3.6%, over the prior year driven mainly by the build-up of transitional inventory associated with our Carquest product and store integration that began to drop by the end of the year, and the opening of new locations, including a new Worldpac distribution center.

For 2015, net cash provided by operating activities decreased $19.3 million to $689.6 million. This net decrease in operating cash flow was primarily driven by lower net income, the timing of income tax deductions and an increase in cash outflows from inventory purchases, net of accounts payable. Our inventory balance as of January 2, 2016 increased $237.8 million, or 6.0%, over the prior year driven mainly by transitional inventory growth resulting from our product integration and the consolidation of our Carquest stores and the opening of new stores and branches. These decreases in cash flow were partially offset by increases in cash flow from accrued expenses and other assets related to the timing of rent and other payments to non-merchandise vendors.

Investing Activities

For 2016, net cash used in investing activities increased by $8.7 million to $262.0 million compared to 2015. The increase in cash used in investing activities was primarily driven by cash used for purchases of property and equipment.

For 2015, net cash used in investing activities decreased by $2,034.9 million to $253.4 million compared to 2014. The decrease in cash used in investing activities was primarily driven by cash used in the acquisition of GPI during 2014.

Financing Activities

For 2016, net cash used in financing activities decreased by $251.3 million to $194.7 million. This decrease was primarily a result of lower net repayments on the revolving credit facility and term loan than in the prior year.



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For 2015, net cash used in financing activities increased by $1,021.9 million to $446.0 million. This increase was primarily a result of net repayments on the revolving credit facility and term loan.

Long-Term Debt

Bank Debt

As of December 31, 2016 we had a credit agreement (the "2013 Credit Agreement") which provided a $1.0 billion unsecured revolving credit facility with Advance Stores Company, Inc. ("Advance Stores"), as Borrower, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent. The revolving credit facility also provided for the issuance of letters of credit with a sub-limit of $300.0 million and swingline loans in an amount not to exceed $50.0 million. We could request, subject to agreement by one or more lenders, that the total revolving commitment be increased by an amount not to exceed $250.0 million by those respective lenders (up to a total commitment of $1.25 billion) during the term of the 2013 Credit Agreement. Voluntary prepayments and voluntary reductions of the revolving balance were permitted in whole or in part, at our option, in minimum principal amounts as specified in the 2013 Credit Agreement. Under the terms of the 2013 Credit Agreement, the revolving credit facility terminated in December 2018. The 2013 Credit Agreement previously included a term loan that was repaid in full during 2016.

As of December 31, 2016, under the 2013 Credit Agreement, we had no outstanding borrowings under the revolver. As of December 31, 2016, we had letters of credit outstanding of $100.7 million, which reduced the availability under the revolver to $899.3 million. The letters of credit generally have a term of one year or less and primarily serve as collateral for our self-insurance policies.

The interest rate on borrowings under the revolving credit facility was based, at our option, on adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. A facility fee was charged on the total amount of the revolving credit facility, payable in arrears. The facility fee rate as of December 31, 2016 was 0.15% per annum. Under the terms of the 2013 Credit Agreement, the interest rate and facility fee were subject to change based on our credit rating.

The 2013 Credit Agreement contains customary covenants, which include a maximum leverage ratio and minimum consolidated coverage ratio, and are further described in Note 7, Long-term Debt, to our Consolidated Financial Statements in this Form 10-K. We were in compliance with our covenants with respect to the 2013 Credit Agreement as of December 31, 2016.

Subequent to the end of 2016, on January 31, 2017, we entered into a new credit agreement which provides a $1 billion unsecured revolving credit facility (the “2017 Credit Agreement”) with Advance Stores, as Borrower, the lenders party thereto, and Bank of America, N.A., Administrative Agent (the "Agent"). This new revolver under the 2017 Credit Agreement replaced the revolver under the 2013 Credit Agreement. The new revolver provides for the issuance of letters of credit with a sublimit of $200.0 million. We may request that the total revolving commitment be increased by an amount not exceeding $250.0 million during the term of the 2017 Credit Agreement. Voluntary prepayments and voluntary reductions of the revolving loan balance, if any, are permitted in whole or in part, at our option, in minimum principal amounts as specified in the 2017 Credit Agreement.

The interest rates on outstanding amounts, if any, on the revolving facility under the 2017 Credit Agreement will be based, at our option, on an adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. After an initial interest period, we may elect to convert a particular borrowing to a different type. The initial margins per annum for the revolving loan are, 1.10% for the adjusted LIBOR and 0.10% for alternate base rate borrowings. A facility fee of 0.15% per annum will be charged on the total revolving facility commitment, payable quarterly in arrears. Under the terms of the 2017 Credit Agreement, the interest rate spread, facility fee and commitment fee will be based on our credit rating. The revolving facility terminates in January 2022; however, we may request one or two one-year extensions of the termination date prior to the first or second anniversary of the Closing Date.

The 2017 Credit Agreement contains customary covenants which include a maximum leverage ratio and minimum consolidated coverage ratio, and are further described in Note 7, Long-term Debt, to our Consolidated Financial Statements in this Form 10-K.

As of December 31, 2016, we had a credit rating from Standard & Poor’s of BBB- and from Moody’s Investor Service of Baa2. The current outlooks by Standard & Poor’s and Moody’s are both stable. The current pricing grid used to determine our borrowing rate under our revolving credit facility is based on our credit ratings. If these credit ratings decline, our interest rate on outstanding balances may increase and our access to additional financing on favorable terms may become more limited. In


30


addition, it could reduce the attractiveness of our vendor payment program, where certain of our vendors finance payment obligations from us with designated third party financial institutions, which could result in increased working capital requirements. Conversely, if these credit ratings improve, our interest rate may decrease.

Senior Unsecured Notes

At December 31, 2016 our outstanding senior notes consisted of i) $450 million of 4.50% notes maturing in December 2023 (the “2023 Notes”); ii) $300 million of 4.50% notes maturing in January 2022 (the “2022 Notes”); and iii) $300 million of 5.75% notes maturing in May 2020 (the “2020 Notes” or collectively with the 2023 Notes and the 2022 Notes, “the Notes”). The 2023 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on June 1 and December 1 of each year. The 2022 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on January 15 and July 15 of each year. The 2020 Notes bear interest at a rate of 5.75% per year payable semi-annually in arrears on May 1 and November 1 of each year.

Advance served as the issuer of the Notes with certain of Advance's domestic subsidiaries currently serving as subsidiary guarantors. The terms of the Notes are governed by an indenture (as amended, supplemented, waived or otherwise modified, the “Indenture”) among us, the subsidiary guarantors from time to time party thereto and Wells Fargo Bank, National Association, as Trustee. The terms of the Indenture are further described in Note 7, Long-term Debt, in this Form 10-K.

Off-Balance-Sheet Arrangements

We guarantee loans made by banks to various of our independent store customers totaling $26.3 million as of December 31, 2016. These loans are collateralized by security agreements on merchandise inventory and other assets of the borrowers. We believe the likelihood of performance under these guarantees is remote and that the fair value of these guarantees is very minimal. As of December 31, 2016, we had no other off-balance-sheet arrangements as defined in Regulation S-K Item 303 of the SEC regulations. We include other off-balance-sheet arrangements in our Contractual Obligations table including operating lease payments, interest payments on our Notes and revolving credit facility and letters of credit outstanding.

Contractual Obligations

In addition to our Notes and revolving credit facility, we utilize operating leases as another source of financing. The amounts payable under these operating leases are included in our schedule of contractual obligations. Our future contractual obligations related to long-term debt, operating leases and other contractual obligations as of December 31, 2016 were as follows:
 
 
 
 
Payments Due by Period
Contractual Obligations
 
Total
 
Less than
1 Year
 
1 - 3 Years
 
3 - 5 Years
 
More Than
5 Years
 
 
(in thousands)
Long-term debt (1)
 
$
1,050,306

 
$
306

 
$

 
$
300,000

 
$
750,000

 Interest payments
 
278,775

 
51,006

 
102,000

 
78,779

 
46,990

Operating leases (2)
 
3,161,077

 
472,723

 
851,446

 
655,148

 
1,181,760

Other long-term liabilities (3)
 
679,846

 

 

 

 

Purchase obligations (4)
 
50,136

 
29,083

 
13,478

 
3,600

 
3,975

 
 
$
5,220,140

 
$
553,118

 
$
966,924

 
$
1,037,527

 
$
1,982,725


Note: For additional information refer to Note 7, Long-term Debt; Note 13, Income Taxes; Note 14, Lease Commitments; Note 15, Contingencies; and Note 16, Benefit Plans, in the Notes to the Consolidated Financial Statements, included in Item 15. Exhibits, Financial Statement Schedules, of this Annual Report on Form 10-K.

(1) 
Long-term debt primarily represents the principal amount of our 2020 Notes, 2022 Notes and 2023 Notes, which become due in 2020, 2022 and 2023, respectively.
(2) 
We lease certain store locations, distribution centers, office space, equipment and vehicles. Our property leases generally contain renewal and escalation clauses and other concessions. These provisions are considered in our calculation of our minimum lease payments which are recognized as expense on a straight-line basis over the


31


applicable lease term. Any lease payments that are based upon an existing index or rate are included in our minimum lease payment calculations.
(3) 
Includes the long-term portion of deferred income taxes and other liabilities, including self-insurance reserves for which no contractual payment schedule exists and we expect the payments to occur beyond 12 months from December 31, 2016. Accordingly, the related balances have not been reflected in the “Payments Due by Period” section of the table.
(4) 
Purchase obligations include agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Included in the table above is the lesser of the remaining obligation or the cancellation penalty under the agreement. Our open purchase orders related to merchandise inventory are based on current operational needs and are fulfilled by our vendors within a short period of time. We currently do not have minimum purchase commitments under our vendor supply agreements nor are our open purchase orders binding agreements. Accordingly, we have excluded open purchase orders from the above table.

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.

Goodwill and Indefinite-Lived Intangible Assets

We evaluate goodwill and indefinite-lived intangibles for impairment annually as of the first day of 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 test goodwill for impairment at the reporting unit level. As of December 31, 2016, our goodwill balance was allocated to four reporting units. Effective in the second quarter of 2016, we realigned our operating segments resulting in a reevaluation of our reporting units. Goodwill was reassigned to the affected reporting units using a relative fair value approach. Our detailed impairment testing involves comparing the fair value of each reporting unit to its carrying value, including goodwill. If the fair value exceeds carrying value, we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure possible goodwill impairment loss.

Our indefinite-lived intangible assets primarily consist of the Carquest and Worldpac brands acquired in the acquisition of GPI on January 2, 2014 and are tested for impairment at the asset group level. Indefinite-lived intangibles are evaluated by comparing the carrying amount of the asset to the future discounted cash flows that the asset is expected to generate. If the fair value based on the future discounted cash flows exceeds the carrying value, we conclude that no intangible asset impairment has occurred. If the carrying value of the indefinite-lived intangible asset exceeds the fair value, we recognize an impairment loss.

We complete our impairment evaluations by combining information from our internal valuation analyses, 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 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. Critical assumptions include projected sales growth, gross profit rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates and terminal growth rates.

The carrying value of goodwill was $990.9 million and $989.5 million at December 31, 2016 and January 2, 2016, respectively. The carrying value of indefinite-lived intangible assets was $335.5 million and $334.7 million at December 31, 2016 and January 2, 2016, respectively. The increase to goodwill and indefinite-lived intangible assets in 2016 was due to changes in foreign currency exchange rates. For the periods presented, the impairment assessments indicated that the fair values of each reporting unit or asset group exceeded the carrying values of the respective goodwill or indefinite-lived intangible asset and therefore no impairment existed. 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 there will be a material


32


change in the future estimates or assumptions we use to test for impairment losses on goodwill or indefinite-lived intangible assets. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.

Income 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.

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 December 31, 2016 would have affected net income by approximately $3.6 million for the fiscal year ended December 31, 2016.

Inventory Reserves

Our inventory reserves consist of reserves for projected losses related to shrink and for potentially excess and obsolete inventory. An increase to our inventory reserves is recorded as an increase to our cost of sales. Conversely, a decrease to our inventory reserves is recorded as a decrease to our cost of sales. Our inventory reserves for 2016, 2015 and 2014 were $90.6 million, $70.4 million and $49.4 million, respectively. The increase in our inventory reserves in 2016 was primarily related to an increase in our excess and obsolete inventory reserve on imported product and an increase in our shrink reserve based on timing of our cycle counts and a slight increase in our shrinkage rate. The increase in our inventory reserves in 2015 was primarily due to estimated shrink on a higher volume of product returns associated with our product changeovers and conversions and increases to our excess and obsolete inventory reserve on imported product.

Shrink may occur due to theft, loss or inaccurate records for the receipt of merchandise, among other things. We establish reserves for estimated store shrink at a point in time based on results of physical inventories conducted in the majority of our stores and branches over the course of the year, results from other targeted inventory counts in our stores and historical and current loss trends. In our distribution facilities, we perform cycle counts throughout the year to measure actual shrink and to estimate reserve requirements. We believe we have sufficient current and historical knowledge to record reasonable estimates for our shrink reserve and that any differences in our shrink rate in the future would not have a material impact on our shrink reserve. 

Our inventory consists primarily of parts, batteries, accessories and other products used on vehicles that have reasonably long shelf lives. Although the risk of obsolescence is minimal, we also consider whether we may have excess inventory based on our current approach for effectively managing slower moving inventory. We strive to optimize the life cycle of our inventory to ensure our product availability reflects customer demand. We have return rights with many of our vendors and the majority of excess inventory is returned to our vendors for full credit. We establish reserves for potentially excess and obsolete inventories based on (i) current inventory levels, (ii) the historical analysis of product sales and (iii) current market conditions. In certain situations, we establish reserves when less than full credit is expected from a vendor or when liquidating product will result in retail prices below recorded costs.

Future changes by vendors in their policies or willingness to accept returns of excess inventory, changes in our inventory management approach for excess and obsolete inventory or failure by us to effectively manage the life cycle of our inventory could require us to revise our estimates of required reserves and result in a negative impact on our consolidated statement of operations. A 10% difference in actual inventory reserves at December 31, 2016 would have affected net income by approximately $5.6 million for the fiscal year ended December 31, 2016.


33



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 reserves for 2016, 2015 and 2014 were $140.6 million, $134.0 million and $137.0 million, respectively. Our self-insurance reserves have remained relatively flat over the last three years.

Our self-insurance reserves consist of the estimated exposure for claims filed, claims incurred but not yet reported and projected future claims, and are established using actuarial methods followed in the insurance industry and our historical claims experience. Specific factors include, but are not limited to, assumptions about health care costs, the severity of accidents and the incidence of illness and the average size of claims. Generally, claims for automobile and general liability and workers’ compensation take several years to settle. We classify the portion of our self-insurance reserves that is not expected to be settled within one year in long-term liabilities.

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 December 31, 2016 would have affected net income by approximately $8.7 million for the fiscal year ended December 31, 2016.

Vendor Incentives

We receive incentives in the form of reductions to amounts owed and/or payments from vendors related to volume rebates and other promotional considerations. Many of these incentives are under long-term agreements (terms in excess of one year), while others are negotiated on an annual basis or less (short-term). Volume rebates and vendor promotional allowances not offsetting in SG&A are earned based on inventory purchases and initially recorded as a reduction to inventory. These deferred amounts are included as a reduction to cost of sales as the inventory is sold.

Vendor promotional allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products are included as an offset to SG&A when the cost is incurred, if the fair value of that benefit can be reasonably estimated. Certain of our vendor agreements contain purchase volume incentives that provide for increased funding when graduated purchase volumes are met. Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected annual purchase volumes. Total deferred vendor incentives included in inventory was $211.1 million and $210.7 million as of December 31, 2016 and January 2, 2016, respectively.

Similarly, we recognize other promotional incentives earned under long-term agreements as a reduction to cost of sales. However, these incentives are recognized based on the cumulative net purchases as a percentage of total estimated net purchases over the life of the agreement. Short-term incentives (terms less than one year) are generally recognized as a reduction to cost of sales over the duration of any short-term agreements.

Amounts received or receivable from vendors that are not yet earned are reflected as deferred revenue. Management’s estimate of the portion of deferred revenue that will be realized within one year of the balance sheet date is included in Other current liabilities. Earned amounts that are receivable from vendors are included in Receivables, net except for that portion expected to be received after one year, which is included in Other assets, net. We regularly review the receivables from vendors to ensure they are able to meet their obligations. Historically, the change in our reserve for receivables related to vendor funding has not been significant. A 10% difference in our vendor incentives deferred in inventory at December 31, 2016 would have affected net income by approximately $13.1 million for the fiscal year ended December 31, 2016.

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.


34



A 10% change in the warranty reserves at December 31, 2016 would have affected net income by approximately $2.9 million for the fiscal year ended December 31, 2016.

New Accounting Pronouncements

For a description of recently adopted and issued accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Recently Adopted Accounting Pronouncements and Recently Issued Accounting Pronouncements in Note 1 to the Consolidated Financial Statements in this Report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures about Market Risks.

Interest Rate Risk

Our primary financial market risk is due to changes in interest rates. Historically, we have reduced our exposure to changes in interest rates by entering into various interest rate hedge instruments such as interest rate swap contracts and treasury lock agreements. We have historically utilized interest rate swaps to convert variable rate debt to fixed rate debt and to lock in fixed rates on future debt issuances and have designated these hedges as cash flow hedges. We had no derivative instruments outstanding as of December 31, 2016.

The interest rates on borrowings under our revolving credit facility and term loan are based, at our option, on adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. As of December 31, 2016 we had no borrowings outstanding under our revolving credit facility or term loan. However, if we elect to borrow on our revolving credit facility, we may be exposed to interest rate risk due to changes in LIBOR or alternate base rate. There is no interest rate risk associated with our 2020, 2022 or 2023 Notes, as the interest rates are fixed at 5.75%, 4.50% and 4.50%, respectively, per annum.

Credit Risk

Our financial assets that are exposed to credit risk consist primarily of trade accounts receivable and vendor receivables. We are exposed to normal credit risk from customers. Our concentration of credit risk is limited because our customer base consists of a large number of customers with relatively small balances, which allows the credit risk to be spread across a broad base. We strive to maintain a close working relationship with our vendors and frequently monitor their financial strength. We have not historically had significant credit losses.

Foreign Currency Exchange Rate Risk

Our primary foreign currency exposure arises from our Canadian operations and the translation of Canadian dollar denominated revenues, profits and net assets into U.S. dollars. During 2016, the translation of the operating results of our Canadian subsidiaries did not significantly impact net income. We view our investments in the Canadian subsidiaries as long-term, and any changes in our net assets in the Canadian subsidiaries relating to foreign currency exchange rates would be reflected in the foreign currency translation component of Accumulated other comprehensive loss, unless the Canadian subsidiaries are sold or otherwise disposed.

In addition, we are exposed to foreign currency exchange rate fluctuations for the portion of the Company's inventory purchases denominated in foreign currencies and for intercompany balances. We believe that the price volatility of these inventory purchases as it relates to foreign currency exchange rates is partially mitigated by our ability to adjust selling prices. Gains from foreign currency transactions, which are included in Other income, net, were $0.7 million during 2016.

Item 8. Financial Statements and Supplementary Data.

See financial statements included in Item 15 “Exhibits, Financial Statement Schedules” of this annual report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.



35


Item 9A. Controls and Procedures.

Disclosure Controls and Procedures

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of December 31, 2016 in accordance with Rule 13a-15(b) under the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Management’ s Report on Internal Control over Financial Reporting

Management’s Report on Internal Control over Financial Reporting is set forth in Part IV, Item 15 of this annual report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.



36


PART III


Item 10. Directors, Executive Officers and Corporate Governance.

For a discussion of our directors, executive officers and corporate governance, see the information set forth in the sections entitled “Proposal No. 1 - Election of Directors,” “Corporate Governance,” “Meetings and Committees of the Board,” “Information Concerning Our Executive Officers,” “Audit Committee Report,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our proxy statement for the 2017 annual meeting of stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2016 (the “2017 Proxy Statement”), which is incorporated herein by reference.

Item 11. Executive Compensation.

See the information set forth in the sections entitled “Meetings and Committees of the Board,” “Compensation Committee Report,” “Compensation Discussion and Analysis,” “Additional Information Regarding Executive Compensation” and “Director Compensation” in the 2017 Proxy Statement, which is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

See the information set forth in the sections entitled “Equity Compensation Plan Information Table” and "Security Ownership of Certain Beneficial Owners and Management" in the 2017 Proxy Statement, which is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

See the information set forth in the sections entitled "Corporate Governance" and “Meetings and Committees of the Board” in the 2017 Proxy Statement, which is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

See the information set forth in the section entitled “2016 and 2015 Audit Fees” in the 2017 Proxy Statement, which is incorporated herein by reference.



37


PART IV

Item 15.     Exhibits, Financial Statement Schedules.

(a)(1) Financial Statements
 
 
 
 
 
 
 
 
 
 
Audited Consolidated Financial Statements of Advance Auto Parts, Inc. and Subsidiaries for the years ended December 31, 2016, January 2, 2016 and January 3, 2015:
 
 
 
 
 
 
 
 
 
 
(2) Financial Statement Schedule
 
 
 
 
 
 
 
 
 
(3) Exhibits
 
 
 
 
 
The Exhibit Index following the signatures for this report is incorporated herein by reference.
 
 



38


Management’s Responsibility for Financial Statements

Management of Advance Auto Parts, Inc. and its subsidiaries (collectively, the “Company”) is responsible for the preparation, integrity, consistency and objectivity of the consolidated financial statements and supplemental financial information in this Annual Report on Form 10-K. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and, as such, include amounts based on management’s best estimates and judgments.

The Company’s consolidated financial statements have been audited by the independent registered public accounting firm, Deloitte & Touche LLP, who conducted their audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). The independent registered public accounting firm’s responsibility is to express an opinion as to whether such consolidated financial statements present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in accordance with GAAP.


Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13(a) - 15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal financial officer, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with GAAP.

Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the override of controls. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the reliability of financial reporting and financial statement preparation and presentation.  Further, because of changes in conditions, the effectiveness may vary over time.

As of December 31, 2016, management, including the Company’s principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2016 is effective.

Deloitte & Touche LLP, the Company’s independent registered public accounting firm who audited the Company's consolidated financial statements, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2016 which is included on page F-3 herein.


/s/ Thomas R. Greco
 
/s/ Thomas B. Okray
 
Thomas R. Greco
 
Thomas B. Okray
 
President and Chief Executive Officer and Director
 
Executive Vice President and Chief Financial Officer

February 28, 2017





F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
Advance Auto Parts, Inc. and Subsidiaries
Roanoke, Virginia

We have audited the accompanying consolidated balance sheets of Advance Auto Parts, Inc. and subsidiaries (the "Company") as of December 31, 2016 and January 2, 2016, and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Advance Auto Parts, Inc. and subsidiaries as of December 31, 2016 and January 2, 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.



/s/ Deloitte & Touche LLP

Charlotte, North Carolina
February 28, 2017



F-2



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
Advance Auto Parts, Inc. and Subsidiaries
Roanoke, Virginia

We have audited the internal control over financial reporting of Advance Auto Parts, Inc. and subsidiaries (the "Company") as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2016 of the Company and our report dated February 28, 2017 expressed an unqualified opinion on those financial statements and financial statement schedule.



/s/ Deloitte & Touche LLP

Charlotte, North Carolina
February 28, 2017




F-3


ADVANCE AUTO PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2016 and January 2, 2016
(in thousands, except per share data)

 
December 31,
2016
 
January 2,
2016
 
Assets
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
135,178

 
$
90,782

 
Receivables, net
641,252

 
597,788

 
Inventories, net
4,325,868

 
4,174,768

 
Other current assets
70,466

 
77,408

 
Total current assets
5,172,764

 
4,940,746

 
Property and equipment, net of accumulated depreciation of $1,660,648 and $1,489,766
1,446,340

 
1,434,577

 
Goodwill
990,877

 
989,484

 
Intangible assets, net
640,903

 
687,125

 
Other assets, net
64,149

 
75,769

 
 
$
8,315,033

 
$
8,127,701

 
Liabilities and Stockholders' Equity
 

 
 

 
Current liabilities:
 

 
 

 
Current portion of long-term debt
$
306

 
$
598