| ADVANCE AUTO PARTS INC Item 1A Risk Factors |
| Risks Relating to Our Business We may not be able to successfully implement our business strategy, including increasing comparable store sales, enhancing our margins and increasing our return on invested capital, which could adversely affect our business, financial condition and results of operations |
| We have implemented numerous initiatives to increase comparable store sales, enhance our margins and increase our return on invested capital in order to increase our earnings and cash flow |
| If these initiatives are unsuccessful, or if we are unable to implement the initiatives efficiently and effectively, our business, financial condition and results of operations could be adversely affected |
| Successful implementation of our business strategy also depends on factors specific to the retail automotive parts industry and numerous other factors that may be beyond our control |
| Adverse changes in the following factors could undermine our business strategy: · general economic conditions and conditions in our local markets, which could reduce our sales; · the competitive environment in the automotive aftermarket parts and accessories retail sector that may force us to reduce prices or increase spending; · the automotive aftermarket parts manufacturing industry, such as consolidation, which may disrupt or sever one or more of our vendor relationships; · our ability to anticipate and meet changes in consumer preferences for automotive products, accessories and services in a timely manner; and · our continued ability to hire and retain qualified personnel, which depends in part on the types of recruiting, training and benefit programs we adopt or maintain |
| We will not be able to expand our business if our growth strategy is not successful |
| We have increased our store count significantly from 1cmam567 stores at the end of 1998 to 2cmam872 stores at December 31, 2005 |
| We intend to continue to expand our base of stores as part of our growth strategy, primarily by opening new stores |
| There can be no assurance that the implementation of this strategy will be successful |
| The actual number of new stores to be opened and their success will depend on a number of factors, including, among other things: · our ability to manage the expansion and hire, train and retain qualified sales associates; · the availability of potential store locations in highly visible, well-trafficked areas; and · the negotiation of acceptable lease or purchase terms for new locations |
| There can be no assurance that 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 &apos profitability will depend on our ability to properly merchandise, market and price the products required in their respective markets |
| Furthermore, we may acquire stores or businesses from, make investments in, or enter into strategic alliances with, companies that have stores or distribution networks in our current markets or in areas into which we intend to expand our presence |
| Any future acquisitions, investments, strategic alliances or related efforts will be accompanied by risks, including: · the difficulty of identifying appropriate strategic partners or acquisition candidates; · the difficulty of assimilating and integrating the operations of the respective entities; · the potential disruption to our ongoing business and diversion of our managementapstas attention; 11 _________________________________________________________________ [56]Table of Contents · the inability to maintain uniform standards, controls, procedures and policies; and · the impairment of relationships with team members and customers as a result of changes in management |
| We cannot assure you that we will be successful in overcoming these risks or any other problems encountered with these acquisitions, investments, strategic alliances or related efforts |
| If overall demand for products sold by our stores slows, our business, financial condition and results of operations will suffer |
| Overall demand for products sold by our stores depends on many factors and may slow for a number of reasons, including: · the weather, as vehicle maintenance may be deferred during periods of inclement weather; · the economy, as during periods of good economic conditions, more of our DIY customers may pay others to repair and maintain their cars instead of working on their own cars |
| In periods of declining economic conditions, both DIY and DIFM customers may defer vehicle maintenance or repair; and · the decline of the average age of vehicles, miles driven or number of cars on the road may result in a reduction in the demand for our product offerings |
| If any of these factors cause overall demand for the products we sell to decline, our business, financial condition and results of operations will suffer |
| We depend on the services of many qualified team members and may not be able to attract and retain such qualified team members |
| Our success depends to a significant extent on the continued services and experience of our many team members |
| We cannot assure you that we will be able to retain our current qualified team members as well as attract and retain additional qualified team members that may be needed in the future |
| Our ability to maintain an adequate number of qualified team members is highly dependent on an attractive and competitive compensation and benefits package |
| If we fail to maintain such an adequate compensation and benefits package, our customer service and execution levels could suffer by reason of a declining quality of our workforce, which could adversely affect our financial condition and results of operations |
| If we are unable to compete successfully against other companies in the automotive aftermarket industry, we could lose customers and our revenues may decline |
| The sale of automotive parts, accessories and maintenance items is highly competitive in many ways, including price, name recognition, customer service and location |
| We compete in both the DIY and DIFM categories of the automotive aftermarket industry, and primarily with national and regional retail automotive parts chains, wholesalers or jobber stores, independent operators, automobile dealers that supply parts, discount stores and mass merchandisers that carry automotive products |
| These competitors and the level of competition vary by market |
| Some of our competitors may possess advantages over us in certain markets we share, including a greater amount of marketing activities, a larger number of stores, longer operating histories, greater name recognition or larger and more established customer bases |
| Our response to these competitive disadvantages may require us to reduce our prices or increase our spending, which would lower revenue and profitability |
| Competitive disadvantages may also prevent us from introducing new product lines or require us to discontinue current product offerings or change some of our current operating strategies |
| If we do not have the resources or expertise or otherwise fail to develop successful strategies to address these competitive disadvantages, we could lose customers and our revenues may decline |
| Disruptions in our relationships with vendors or in our vendors &apos operations could increase our cost of goods sold |
| Our business depends on developing and maintaining close relationships with our vendors and upon the vendors &apos ability or willingness to sell quality products to us at favorable prices and terms |
| Many factors outside of 12 _________________________________________________________________ [57]Table of Contents our control may harm these relationships and the ability or willingness of these vendors to sell us products on favorable terms |
| For example, financial or operational difficulties that some of our vendors may face may increase the cost of the products we purchase from them |
| In addition, the trend towards consolidation among automotive parts suppliers may disrupt or end our relationship with some vendors, and could lead to less competition and, consequently, higher prices |
| Because we are involved in litigation from time to time, and are subject to numerous laws and governmental regulations, we could incur substantial judgments, fines, legal fees and other costs |
| We are sometimes the subject of complaints or litigation from customers, employees or other third parties for various actions |
| In particular, we are currently involved in litigation involving claims related to, among other things, breach of contract, tortious conduct, employment discrimination, asbestos exposure 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 greatly exceeds our coverage limits or our insurance policies do not cover a claim, it could have a material adverse affect on our business and operating results |
| Additionally, we are subject to numerous federal, state and local laws and governmental regulations relating to employment matters, environmental protection and building and zoning requirements |
| If we fail to comply with existing or future laws or regulations, we may be subject to governmental or judicial fines or sanctions |
| In addition, our capital expenses could increase due to remediation measures that may be required if we are found to be noncompliant with any existing or future laws or regulations |
| Risks Relating to Our Financial Condition The covenants governing our senior credit facility impose significant restrictions on us |
| The terms of our senior credit facility impose significant operating and financial restrictions on us and our subsidiaries and require us to meet certain financial tests |
| These restrictions may also have a negative impact on our business, financial condition and results of operations by significantly limiting or prohibiting us from engaging in certain transactions, including: · incurring or guaranteeing additional indebtedness; · paying dividends or making distributions or certain other restricted payments; · making capital expenditures and other investments; · creating liens on our assets; · issuing or selling capital stock of our subsidiaries; · transferring or selling assets currently held by us; · repurchasing stock and certain indebtedness; · engaging in transactions with affiliates; · entering into any agreements that restrict dividends from our subsidiaries; and · engaging in mergers or consolidations |
| The failure to comply with any of these covenants would cause a default under our senior credit facility |
| Furthermore, our senior credit facility contains certain financial covenants, including establishing a maximum leverage ratio and requiring us to maintain a minimum interest coverage ratio and a funded senior debt to current assets ratio, which, if not maintained by us, will cause us to be in default under our senior credit facility |
| Any of these defaults, if not waived, could result in the acceleration of all of our debt, in which case the debt would become immediately due and payable |
| If this occurs, we may not be able to repay our debt or borrow sufficient funds to refinance it |
| Even if new financing were available, it may be on terms that are less favorable or otherwise not acceptable to us |
| Our ability to service our debt will require a significant amount of cash and our operations may not generate the amount of cash we need |
| We will need a significant amount of cash to service our debt |
| Our ability to generate cash depends on our 13 _________________________________________________________________ [58]Table of Contents successful financial and operating performance |
| We cannot assure you that we will generate sufficient cash flow from operations or that we will be able to obtain sufficient funding to satisfy all of our obligations |
| Our financial and operational performance also depends upon a number of other factors, many of which are beyond our control |
| These factors include: · economic and competitive conditions in the automotive aftermarket industry; and · operating difficulties, operating costs or pricing pressures we may experience |
| If we are unable to service our debt, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our debt or raising additional equity capital |
| However, we cannot assure you that any alternative strategies will be feasible or prove adequate |
| Also, some alternative strategies would require the consent of at least a majority in interest of the lenders under our senior credit facility, and we can provide no assurances that we would be able to obtain this consent |
| If we are unable to meet our debt service obligations and alternative strategies are unsuccessful or unavailable, our lenders would be entitled to exercise various remedies, including foreclosing on our assets |
| Under those circumstances, our investors may lose all or a portion of their investments |