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<SEC-DOCUMENT>0000898430-02-001066.txt : 20020415
<SEC-HEADER>0000898430-02-001066.hdr.sgml : 20020415
ACCESSION NUMBER: 0000898430-02-001066
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 20011229
FILED AS OF DATE: 20020328

FILER:

COMPANY DATA:
COMPANY CONFORMED NAME: ADVANCE AUTO PARTS INC
CENTRAL INDEX KEY: 0001158449
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO & HOME SUPPLY STORES [5531]
IRS NUMBER: 542049910
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231

FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-16797
FILM NUMBER: 02589402

BUSINESS ADDRESS:
STREET 1: 5673 AIRPORT RD
CITY: ROANOKE
STATE: VA
ZIP: 24012
BUSINESS PHONE: 5405613225

MAIL ADDRESS:
STREET 1: 5673 AIRPORT RD
CITY: ROANOKE
STATE: VA
ZIP: 24012
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>d10k.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>

================================================================================

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

-------------

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 29, 2001

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from___________ to __________ .

Commission file number 001-16797

-------------

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

<TABLE>
<CAPTION>
Delaware 54-2049910
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

5673 Airport Road
Roanoke, Virginia 24012
(Address of Principal Executive Offices) (Zip Code)
</TABLE>

(540) 362-4911
(Registrant's telephone number, including area code)

-------------

Securities Registered Pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
<S> <C>
Common Stock New York
($0.0001 par value) Stock Exchange
</TABLE>

Securities Registered Pursuant to Section 12(g) of the Act:

None

-------------

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 [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_] Not Applicable.

As of March 20, 2002, the registrant had outstanding 34,952,182 shares of
Common Stock, par value $0.0001 per share (the only class of common equity of
the registrant outstanding). The aggregate market value of the 14,793,797
shares of Common Stock held by non-affiliates of the registrant (excluding, for
this purpose, shares held by executive officers, directors or 10% stockholders)
was $659,211,594 based on the last sales price of the Common Stock on March 20,
2002, as reported on the New York Stock Exchange.

Documents Incorporated by Reference:

Portions of the definitive Proxy Statement of the registrant dated April 12,
2002 for the 2002 Annual Meeting of Stockholders to be held on May 23, 2002 are
incorporated by reference into Part III.

================================================================================

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Part I.

Item 1. Business.................................................................. 1

Item 2. Properties................................................................ 14

Item 3. Legal Proceedings......................................................... 15

Item 4. Submission of Matters to a Vote of Security Holders....................... 16

Part II.

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 17

Item 6. Selected Financial Data................................................... 18

Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 22

Item 7a. Quantitative and Qualitative Disclosures About Market Risks............... 40

Item 8. Financial Statements...................................................... 41

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 41

Part III.

Item 10. Directors and Executive Officers of the Registrant........................ 42

Item 11. Executive Compensation.................................................... 42

Item 12. Security Ownership of Certain Beneficial Owners and Management............ 42

Item 13. Certain Relationships and Related Transactions............................ 42

Part IV.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 43
</TABLE>

<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 and Section 21E of the
Securities Exchange Act of 1934, which are usually identified by the use of
words such as "will," "anticipates," "believes," "estimates," "expects,"
"projects," "forecasts," "plans," "intends," "should" or similar expressions.
We intend those forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995 and are included in this statement for purposes
of complying with these safe harbor provisions.

These forward-looking statements reflect current views about our plans,
strategies and prospects, which are based on the information currently
available and on current assumptions.

Although we believe that our plans, intentions and expectations as reflected
in or suggested by those forward-looking statements are reasonable, we can give
no assurance that the plans, intentions or expectations will be achieved.
Listed below and discussed elsewhere in this report are some important risks,
uncertainties and contingencies which could cause our actual results,
performance or achievements to be materially different from the forward-looking
statements made in this report. These risks, uncertainties and contingencies
include, but are not limited to, the following:

. our ability to expand our business;

. the implementation of our business strategies and goals;

. integration of our previous and future acquisitions;

. a decrease in demand for our products;

. competitive pricing and other competitive pressures;

. our relationships with our vendors;

. deterioration in general economic conditions;

. our ability to meet debt obligations and adhere to the restrictions and
covenants imposed under our debt instruments; and

. other statements that are not of historical fact made throughout this
report, including in the sections entitled "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."

We assume no obligations to update publicly and 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,
and you should not place undue reliance on those statements.

PART I

Item 1. Business.

Unless the context otherwise requires, "Advance," "we," "us," "our," and
similar terms refer to Advance Auto Parts, Inc., its predecessor, it
subsidiaries and their respective operations. Our fiscal year consists of 52 or
53 weeks ending on the Saturday closest to December 31 of each year.

Overview

We are the second largest specialty retailer of automotive parts,
accessories and maintenance items to "do-it-yourself," or DIY, customers in the
United States, based on store count and sales. We are the largest specialty

<PAGE>

retailer of automotive products in the majority of the states in which we
currently operate, based on store count. We had 2,444 stores operating under
the "Advance Auto Parts" and "Discount Auto Parts" trade names in 37 states in
the Northeastern, Southeastern and Midwestern regions of the United States at
December 29, 2001. In addition, as of that date, we had 40 stores operating
under the "Western Auto" trade name located in Puerto Rico, the Virgin Islands
and California. Our stores offer a broad selection of brand name and private
label automotive products for domestic and imported cars and light trucks. Our
stores average approximately 7,500 square feet in size and carry between 16,000
and 21,000 stock keeping units, or SKUs. We also offer approximately 105,000
additional SKUs that are available on a same day or overnight basis through our
Parts Delivered Quickly, or PDQ(R), distribution systems. In addition to our
DIY business, we serve "do-it-for-me", or DIFM, customers via sales to
commercial accounts. Sales to DIFM customers represented approximately 15% of
our retail sales in 2001. We also operate a wholesale distribution network,
which offers automotive parts, accessories and certain other merchandise to
approximately 470 independently-owned dealer stores in 44 states. Our wholesale
operations accounted for approximately 3.9% of our net sales in 2001.

Since 1997, we have achieved significant growth through a combination of
comparable store sales growth, new store openings, increased penetration of our
commercial delivery program and strategic acquisitions. From 1997 through 2001,
we:

. increased our store count at year-end from 814 to 2,484;

. achieved positive comparable store sales growth in every quarter and
averaged 6.9% annually;

. increased our net sales at a compound annual growth rate of 38.8%, from
$848.1 million to $3.1 billion (pro forma for the Discount acquisition);
and

. increased our EBITDA, as adjusted (see Item 6. Selected Financial Data),
at a compound annual growth rate of 39.9%, from $68.4 million to
$261.9 million (pro forma for the Discount acquisition).

In 2001, our comparable store sales growth was 6.2%. In addition, our
EBITDA, as adjusted (see Item 6. Selected Financial Data), for 2001 increased
23.4%, to $199.7 million from $161.9 million for 2000.

We believe that our sales growth has exceeded the industry average as a
result of our industry leading selection of quality brand name and private
label products at competitive prices, our strong name recognition and our high
levels of customer service. In addition, we believe our large size provides
numerous competitive advantages over smaller retail chains and independent
operators, which together generate the majority of the sales in the automotive
aftermarket industry. These advantages include: (1) greater product
availability; (2) purchasing, distribution and marketing efficiencies; (3) a
greater number of convenient locations with longer store hours; and (4) the
ability to invest heavily in employee training and information systems.

Industry

We operate within the large and growing U.S. automotive aftermarket
industry, which includes replacement parts (excluding tires), accessories,
maintenance items, batteries and automotive fluids for cars and light trucks
(pickup trucks, vans, minivans and sport utility vehicles). Based on data from
the U.S. Department of Commerce, sales in the automotive aftermarket industry
(excluding tires and labor costs) increased at a compound annual growth rate of
6.0%, between 1991 and 2000 from approximately $58 billion to $98 billion.

The automotive aftermarket industry is generally grouped into two major
categories DIY and DIFM. From 1991 to 2000, the DIY category grew at a 5.8%
compound annual growth rate from $22 billion to $36 billion. This category
represents sales to consumers who maintain and repair vehicles themselves. We
believe this category is characterized by stable, recession-resistant demand
because the DIY customer is more likely to delay a new vehicle purchase during
a recession. In addition, in difficult economic times, we believe people tend
to drive more and use air travel less. From 1991 to 2000, the DIFM category
grew at a 6.0% compound annual growth rate, from $36 billion to $62 billion.
This category represents sales to professional installers, such as

<PAGE>

independent garages, service stations and auto dealers. DIFM parts and services
are typically offered to vehicle owners who are less price sensitive or who are
less inclined to repair their own vehicles.

We believe the U.S. automotive aftermarket industry will continue to benefit
from several favorable trends, including the:

. increasing number and age of vehicles in the United States, increasing
number of miles driven annually, increasing number of cars coming off of
warranty, particularly leased vehicles;

. higher cost of replacement parts as a result of technological changes in
recent models of vehicles and increasing number of light trucks and
sport utility vehicles that require more expensive parts, resulting in
higher average sales per customer; and

. continued consolidation of automotive aftermarket retailers, resulting
in a reduction in the number of stores in the marketplace and enhanced
profitability and returns on capital.

We believe these trends will continue to support strong comparable store
sales growth in the industry.

We compete in both the DIY and DIFM categories of the automotive aftermarket
industry. Our primary competitors include 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. Although the number of competitors and level of
competition vary by market, both the DIY and DIFM categories are highly
fragmented and generally very competitive. However, as the number of automotive
replacement parts has proliferated, we believe discount stores and mass
merchandisers have had increasing difficulties in maintaining a broad inventory
selection and providing the service levels that DIY customers demand. We
believe this has created a strong competitive advantage for specialty
automotive parts retailers, like us, that have the distribution capacity,
sophisticated information systems and knowledgeable sales staff needed to offer
a broad inventory selection to DIY customers. As a result, according to Lang
Marketing Resources, a market research firm, specialty automotive parts
retailers have increased their market share of DIY sales significantly from
approximately 26% in 1990 to 41% in 2000, primarily by taking market share from
discount stores and mass merchandisers.

History

We were formed in 1929 and operated as a retailer of general merchandise
until the 1980s. During the 1980s, we sharpened our focus to target sales of
automotive parts and accessories to DIY customers. From the 1980s to the
present, we have grown significantly as a result of strong comparable store
sales growth, new store openings and strategic acquisitions. In 1996, we began
to aggressively expand our sales to DIFM customers by implementing a commercial
delivery program. Our commercial delivery program includes marketing that is
specifically designed to attract DIFM customers and consists of the delivery of
automotive parts and accessories to professional installers, such as
independent garages, service stations and auto dealers.

The Recapitalization. In April 1998, Freeman Spogli & Co. and Ripplewood
Partners, L.P. acquired a majority ownership interest in us through a
recapitalization. Freeman Spogli & Co. and Ripplewood purchased an 80%
ownership interest in us, and our management purchased a 6% ownership interest.
In the recapitalization, Nicholas F. Taubman and the Arthur Taubman Trust, our
existing shareholders, retained a 14% ownership interest in us.

Western Acquisition. In November 1998, we acquired Western from Sears,
Roebuck and Co. Western operated over 600 stores under the "Parts America" and
"Western Auto" trade names, as well as a wholesale distribution network. As
consideration, Sears received approximately 11.5 million shares of our common
stock, which was valued at $193 million, and $185 million in cash. In addition,
Freeman Spogli & Co., Ripplewood,

<PAGE>

Nicholas F. Taubman and the Arthur Taubman Trust made an additional $70 million
equity investment in us to fund a portion of the purchase price. The remaining
cash portion of the purchase price was funded through additional borrowings
under our prior credit facility.

Carport Acquisition. In April 2001, we acquired the assets of Carport,
including 30 stores, net of closures, in Alabama and Mississippi. The
acquisition made us the market leader in Alabama and continued our new store
development program in Alabama and Mississippi without adding new stores to the
market.

Discount Acquisition. In November 2001, we acquired Discount, which was the
fifth largest specialty retailer of automotive products to both DIY and DIFM
customers in the United States, based on store count. At November 28, 2001,
Discount had 671 stores operating under the "Discount Auto Parts" trade name in
six states, with 437 stores in Florida, 120 stores in Georgia, 46 stores in
Louisiana, 42 stores in Mississippi, 19 stores in Alabama and seven stores in
South Carolina. For 2001, Discount generated net sales and EBITDA of $661.7
million and $65.7 million. Since Discount's inception in 1971, members of the
Fontaine family, including Herman Fontaine, Denis L. Fontaine and Peter J.
Fontaine, have managed Discount and played key roles in formulating and
carrying out its business strategies. Peter J. Fontaine, who has been with
Discount for over 26 years and previously served as Chief Operating Officer,
was elected as President and Chief Executive Officer in 1994 and continued to
hold the position of Chief Executive Officer until January 2002. At the closing
of the Discount acquisition, Peter J. Fontaine became a member of our board of
directors.

Benefits of the Discount Acquisition

As a result of our successful integration of prior acquisitions, we believe
that we have established a proven model that will enable us to integrate
Discount successfully. Our integration of Western included the conversion of
the acquired stores, net of closures, to the Advance Auto Parts format and
name, and the addition of 39 Western Auto stores located primarily in Puerto
Rico and the Virgin Islands and a wholesale distribution network that supplies
independent dealer stores that license the "Western Auto" trade name. We
converted successfully the 545 Parts America stores in 11 months, more than six
months ahead of our schedule, including physical renovation, store systems
conversions and inventory mix changes. Largely due to increasing economies of
scale that we were able to obtain primarily from existing vendors following
this acquisition, we increased our gross margin on a company-wide basis from
36.4% for 1999 to 39.2% for 2000. In April 2001, we acquired 30 Carport stores,
net of closures, in Alabama and Mississippi. The conversion of Carport stores
to the Advance Auto Parts format and name, which began in late May, was
completed in six weeks. Comparable store sales growth for these stores was
26.6% for the period from the end of the conversion on July 7, 2001 through
December 29, 2001.

We expect to realize the following benefits from our acquisition of Discount:

Strengthened Position within Target Markets. Our acquisition of Discount
has provided us with the leading market position in Florida, where Discount had
437 stores at November 28, 2001, which is especially attractive due to the
state's strong DIY customer demographics. The Florida market has a favorable
climate that allows for year-round maintenance and repair of vehicles, has a
population growth rate that exceeds the national average and is ranked third in
the United States in terms of registrations of cars and light trucks. This
acquisition also further solidified our leading position throughout the
Southeast. At November 28, 2001, Discount had an additional 234 stores in five
other Southeastern states in which we currently operate and which are part of
our core markets.

<PAGE>

Improved Purchasing, Distribution and Administrative Efficiencies. We
expect to achieve ongoing purchasing, distribution and administrative savings
as a result of the Discount acquisition. Purchasing savings will be derived
primarily through economies of scale. We also expect to achieve significant
savings from the optimization of our combined distribution network, including
more efficient capacity utilization at Discount's Mississippi distribution
center, and from the reduction of overlapping administrative functions. During
2002, we expect these savings to result in approximately $30 million of
incremental EBITDA, excluding one-time integration expenses.

Opportunity to Increase Discount's Store Sales. We plan to increase
Discount's store sales by, among other things, (1) re-merchandising stores to
increase parts availability and in-stock position, (2) increasing customer
service and improving store execution through staffing and training
initiatives, (3) enhancing existing commercial delivery programs and
selectively adding new programs and (4) refurbishing the store layout and
appearance.

Competitive Strengths

We believe our competitive strengths include the following:

Leading Market Position. We are the second largest specialty retailer of
automotive products to DIY customers in the United States, based on store count
and sales. Our acquisition of Discount further solidified this position and
provides us with additional critical mass in our existing markets, particularly
in the rapidly growing Southeast. We enjoy significant competitive advantages
over smaller retail chains and independent operators. We believe we have strong
brand recognition and customer traffic in our stores as a result of our number
one position in the majority of our markets, based on store count, and our
significant marketing activities. In addition, we have purchasing, distribution
and marketing efficiencies due to our economies of scale. As the number of
makes and models of vehicles continues to increase, we believe we will continue
to have a significant competitive advantage, as many of these competitors may
not have the resources, including management information systems, purchasing
power or distribution capabilities, required to stock and deliver a broad
selection of brand name and private label automotive products at competitive
prices.

Industry Leading Selection of Quality Products. We offer one of the largest
selections of brand name and private label automotive parts, accessories and
maintenance items in the automotive aftermarket industry. Our stores carry
between 16,000 and 21,000 in-store SKUs. We also offer approximately 105,000
additional SKUs that are available on a same-day or overnight basis through our
PDQ(R) distribution systems, including harder-to-find replacement parts, which
typically carry a higher gross margin. During 2000, we initiated a local area
warehouse concept that utilizes existing space in selected stores to ensure the
availability of certain PDQ items on a same-day basis. On average, a local area
warehouse carries between 7,500 and 12,000 SKUs. In addition, our proprietary
electronic parts catalog enables our sales associates to identify an extensive
number of applications for the SKUs that we carry, as well as parts that are
required for or complementary to these applications. We believe that our
ability to deliver an aggregate of approximately 120,000 SKUs, as well as the
capabilities provided by our electronic parts catalog, are highly valued by our
customers and differentiate us from our competitors, particularly mass
merchandisers.

Superior Customer Service. We believe that our customers place significant
value on our well-trained sales associates, who offer knowledgeable assistance
in product selection and installation, and that this differentiates us from
mass merchandisers. We invest substantial resources in the recruiting and
training of our employees and provide formal classroom workshops, seminars and
Automotive Service Excellence(TM) certification to build technical, managerial
and customer service skills. In addition, we enhanced our human resources
management capabilities in 2000 by hiring an experienced senior vice president
of human resources and by introducing new training programs and human resource
systems in order to increase employee retention. As a result of these
initiatives, our number of retained employees at December 29, 2001 increased
3.1% when compared with the number retained during 2000. We believe that higher
employee retention levels lead to increased customer satisfaction and higher
sales, and differentiate us from mass merchandisers.

<PAGE>

Experienced Management Team with Proven Track Record. The 18 members of our
senior management team have an average of 15 years experience with us and 17
years in the industry and successfully have grown our company to the second
largest specialty retailer of automotive products in the United States. Our
management team has accomplished this using a disciplined strategy of growing
comparable store sales, opening new stores and making selective acquisitions.
Through the 545-store acquisition of Western Auto in November 1998 and the
30-store acquisition of Carport in April 2001, this team has demonstrated its
ability to integrate efficiently and successfully both large and small
acquisitions. We intend to leverage this experience as we integrate Discount.
In addition, the Discount acquisition provided us with access to a pool of
talented managers. In particular, Peter Fontaine, the former Chairman and CEO
of Discount, became a member of our board of directors upon the closing of the
Discount acquisition.

Growth Strategy

Our growth strategy consists of the following:

Increase Our Comparable Store Sales. We have been an industry leader in
comparable store sales over the last five years, averaging 6.9% annually. We
plan to increase our comparable store sales in both the DIY and DIFM categories
by, among other things, (1) implementing merchandising and marketing
initiatives, (2) investing in store-level systems to enhance our ability to
recommend complementary products in order to increase sales per customer,
(3) refining our store selection and in-stock availability through customized
assortments and other supply chain initiatives, (4) continuing to increase
customer service through store staffing and retention initiatives and (5)
increasing our commercial delivery sales by focusing on key customers to grow
average sales per truck. In particular, we intend to continue to make the
necessary investments in several applications that are critical to improving
our customer service and in-stock availability. We have established strong
inventory management systems at the store and distribution center level and in
2001 began to implement a fully-integrated point-of-sale system and electronic
parts catalog.

Continue to Enhance Our Margins. We have improved our EBITDA margin by 241
basis points from 5.5% in 1999 to 7.9% in 2001. In addition to driving
operating margin expansion via improved comparable store sales, we will
continue to focus on increasing margins by: (1) improving our purchasing
efficiencies with vendors; (2) optimizing our supply chain infrastructure and
existing distribution network; and (3) leveraging our overall scale to reduce
other operating expenses as a percentage of sales. Following a comprehensive
review of our supply chain infrastructure, we have identified specific cost
savings and opportunities to improve inventory turns. As a result, we believe
we can increase supply chain efficiencies through selective facility
rationalization, such as our recent decision to close our Jeffersonville, Ohio
facility, more efficient truck scheduling and routing and better utilization of
custom inventory mixes.

Increase Return on Capital. We believe we can increase our return on
capital successfully by (1) leveraging our supply chain initiatives to increase
inventory turns, (2) further extending payment terms with our vendors and (3)
generating strong comparable store sales as well as increasing our margins. In
addition, we believe we can drive return on capital by expanding our store base
in existing markets selectively. Based on our experience, such in-market
openings provide higher returns on our invested capital by enabling us to
leverage our distribution infrastructure, marketing expenditures and local
management resources. We intend to add stores in existing markets, including
100 to 125 stores in 2002 through new store openings and selective acquisitions.

Successfully Integrate Discount. Our management team has developed a
detailed strategy to integrate Discount, including: (1) re-merchandising stores
to increase parts availability and in-stock position; (2) increasing purchasing
efficiencies; (3) leveraging distribution and administrative costs; and (4)
enhancing existing commercial delivery programs and selectively adding programs
to Discount stores. We plan to convert all of Discount's stores to the Advance
Auto Parts store format and name. We have prepared a systematic integration
plan that includes separate timetables for stores located inside and outside of
Florida. We plan to convert all Discount stores that are located outside of
Florida to Advance Auto Parts stores by the end of 2002. During this period,
Discount stores that are located in Florida will be refurbished and converted
to our systems

<PAGE>

and merchandising plans, with complete conversions to Advance Auto Parts
stores, including name change and store format remodeling, phased in over the
next three to four years. We believe that Discount's geographic store
concentration and our use of dedicated integration teams will result in minimal
disruption of the combined business.

Retail Store Operations

Advance Operations. The retail store is the focal point of our operations.
Our stores generally are located in free-standing buildings in high traffic
areas with good visibility and easy access to major roadways. Our stores
typically range in size from 5,000 to 10,000 square feet with an average of
approximately 7,500 square feet, and offer between 16,000 and 21,000 SKUs. We
also offer approximately 105,000 additional SKUs that are available on a same
day or overnight basis through our PDQ(R) and Master PDQ(R) systems, including
harder-to-find replacement parts, which typically carry a higher gross margin.
During 2000, we initiated a local area warehouse concept that utilizes existing
space in selected stores to ensure the availability of certain PDQ(R) items on
a same-day basis. On average, a local area warehouse carries between 7,500 and
12,000 SKUs. In addition, our proprietary electronic parts catalog enables our
sales associates to identify an extensive number of applications for the SKUs
that we carry, as well as parts that are required for or complementary to such
applications. Replacement parts sold at our stores include brake shoes, brake
pads, belts, hoses, starters, alternators, batteries, shock absorbers, struts,
CV half shafts, carburetors, transmission parts, clutches, electronic
components, suspension parts, chassis parts and engine parts.

At December 29, 2001, 1,370 of our retail stores, including Discount stores,
participated in our commercial delivery program, which serves DIFM customers.
We serve our DIFM customers from our existing retail store base.

Our retail stores are divided into five divisions, including the newly
formed Florida division. Each division is managed by a senior vice president,
who is supported by regional vice presidents. District managers report to the
regional vice presidents and have direct responsibility for store operations in
a specific district, which typically consists of 10 to 15 stores. Depending on
store size and sales volume, each store is staffed by 8 to 30 employees under
the leadership of a store manager. Stores generally are open from 8:00 a.m. to
9:00 p.m., seven days a week.

Discount Operations. Discount has developed three types of retail store
formats: the mini-depot store, the full service store and the depot store
format. The average mini-depot store has approximately 6,700 square feet and
carries an average of 14,000 SKUs. The average full service store generally has
the same footprint as a mini-depot store, but offers a wider selection of parts
because it also provides commercial delivery service. On average, a full
service store carries approximately 17,500 SKUs. The typical depot store has
approximately 11,000 square feet on average and carries an average of
approximately 21,000 SKUs.

In March 1998, Discount began the rollout of a commercial delivery program
called "Pro2Call." Under this program, commercial customers can establish
commercial accounts and purchase and receive automotive parts. The automotive
parts are either delivered or are available for pick up at nearby Discount
stores. At November 28, 2001, 167 of Discount's store locations provided
commercial delivery service.

<PAGE>

Total stores. Our retail stores were located in the following states and
territories at December 29, 2001 (including stores acquired in the Discount
acquisition):

<TABLE>
<CAPTION>
Number Number Number
of of of
Location Stores Location Stores Location Stores
----------- ------ -------------- ------ -------------- ------
<S> <C> <C> <C> <C> <C>
Alabama 113 Maine 7 Puerto Rico 37
Arkansas 21 Maryland 30 Rhode Island 3
California 1 Massachusetts 20 South Carolina 100
Colorado 15 Michigan 47 South Dakota 6
Connecticut 24 Mississippi 65 Tennessee 117
Delaware 5 Missouri 37 Texas 51
Florida 461 Nebraska 16 Vermont 2
Georgia 253 New Hampshire 4 Virgin Islands 2
Illinois 23 New Jersey 21 Virginia 125
Iowa 24 New York 96 West Virginia 62
Indiana 68 North Carolina 174 Wisconsin 16
Kansas 26 Ohio 140 Wyoming 2
Kentucky 66 Oklahoma 2
Louisiana 70 Pennsylvania 132
</TABLE>

The following table sets forth information concerning increases in the
number of our stores during the past five years:

<TABLE>
<CAPTION>
1997 1998 1999 2000 2001
---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Beginning Stores 649 814 1,567 1,617 1,729
New Stores(1)... 170 821 (2) 102 140 781(3)
Stores Closed... (5) (68)(2) (52) (28) (26)
--- ----- ----- ----- -----
Ending Stores... 814 1,567 1,617 1,729 2,484
</TABLE>
- ---------------------
(1)Does not include stores that opened as relocations of existing stores within
the same general market area or substantial renovations of stores.
(2)Includes 560 Parts America stores, net of 52 closures, acquired as part of
the Western merger in November 1998. Subsequent to 1998, we closed an
additional 15 Western stores resulting in a net of 545 stores obtained in
the Western merger. Three Advance stores were also closed during fiscal 1998
in connection with the Western merger.
(3)Includes 30 Carport stores acquired on April 23, 2001 and 671 Discount
stores acquired on November 28, 2001.

As part of our integration of Discount, we expect to close certain Discount
and Advance stores that are in overlapping markets, as well as Discount stores
that do not meet profitability objectives.

Wholesale Operations.

Our wholesale dealer operations are managed by a senior vice president (who
is also responsible for the Western Auto retail stores and two regions of
Advance stores), a vice president, a national sales manager, an operations
manager and various field and support personnel. The wholesale dealer
operations consist of a network of independently owned locations, which
includes associate, licensee, sales center and franchise dealers. Associate,
licensee and franchise stores have rights to the use of the "Western Auto" name
and certain services provided by us. Sales centers only have the right to
purchase certain products from Western. We also provide services to the
wholesale dealer network through various administrative and support functions,
as negotiated by each independent location. Our wholesale operations generated
approximately 3.9% of our net sales in 2001.

<PAGE>

Purchasing and Merchandising

Virtually all of our merchandise is selected and purchased for our stores by
personnel at our corporate offices in Roanoke, Virginia. In addition, specialty
merchandise is purchased in our Kansas City, Missouri office. In 2001, we
purchased merchandise from over 200 vendors, with no single vendor accounting
for more than 8% of purchases. Our purchasing strategy involves negotiating
multi-year agreements with certain vendors. In connection with our acquisition
of Western, we entered into several long-term agreements that provided more
favorable terms and pricing due to our increased purchasing volumes. Due
largely to the purchasing efficiencies that we were able to obtain primarily
from existing vendors as a result of the Western merger, we increased our gross
margin on a company-wide basis from 36.4% for 1999 to 39.2% for 2000. We also
expect to achieve incremental cost savings from the Discount acquisition. To
date, we have renegotiated successfully the majority of our existing contracts
with our major vendors, resulting in lower product costs as a result of
increasing economies of scale.

Our purchasing team is currently led by a group of six senior professionals,
who have an average of over 15 years of automotive purchasing experience and
over 20 years in retail. This team is skilled in sourcing products globally and
maintaining high quality levels, while streamlining costs associated with the
handling of merchandise through the supply chain. The purchasing team has
developed strong vendor relationships in the industry and is involved currently
in implementing a "best-in-class" category management process to improve
comparable store sales, gross margin and inventory turns.

Our merchandising strategy is to carry a broad selection of high quality
brand name automotive parts and accessories such as Monroe, Bendix, Purolator
and AC Delco, which generates DIY customer traffic and also appeals to
commercial delivery customers. In addition to these branded products, we stock
a wide selection of high quality private label products that appeal to value
conscious customers. Sales of replacement parts account for a majority of our
net sales and typically generate higher gross margins than maintenance items or
general accessories. We are currently in the process of customizing our product
mix based on a merchandising program designed to optimize inventory mix at each
individual store based on that store's historical and projected sales mix and
regionally specific needs.

Marketing and Advertising

We have an extensive marketing and advertising program designed to
communicate our merchandise offerings, product assortment, competitive prices
and commitment to customer service. The program is focused on establishing us
as the solution for a customer's automotive needs. We utilize a combination of
tools to reinforce our brand image, including print, promotional signage,
television, radio and outdoor media, plus our proprietary in-store television
network and Internet site.

Our advertising plan is based on a monthly program built around a
promotional theme and a feature product campaign. The plan is supported by
print and in-store signage. Our television advertising is targeted on a
regional basis to sports programming. Radio advertising, which is used as a
supplementary medium, generally airs during peak drive times. We also sponsor
sporting events, racing teams and other events at all levels in a grass-roots
effort to impact individual communities.

We intend to implement a marketing and advertising program for the Discount
stores that is consistent with our marketing and advertising program for our
Advance Auto Parts stores, which we believe will increase sales in the Discount
stores.

Distribution and Warehousing

We operate currently five distribution centers that service Advance Auto
Parts stores. We also operate a separate distribution center that supports the
Western Auto retail stores and the wholesale dealer operations and

<PAGE>

in 2002 will service our Advance stores. All distribution centers are equipped
with technologically advanced material handling equipment, including carousels,
"pick-to-light" systems, radio frequency technology and automated sorting
systems.

We offer over 25,000 SKUs to substantially all of our domestic retail stores
via our nine PDQ(R) warehouses. Stores place orders to these facilities through
an online ordering system, and ordered parts are delivered to substantially all
stores on a same day or next day basis through our dedicated PDQ(R) trucking
fleet. In addition, we operate a PDQ(R) warehouse that stocks approximately
80,000 SKUs of harder to find automotive parts and accessories. This facility
is known as the "Master PDQ(R)" warehouse and utilizes existing PDQ(R)
distribution infrastructure to provide next day service to substantially all of
our stores. During 2000, we implemented a new local area warehouse distribution
concept that utilizes store space to provide certain markets with an additional
customized mix of approximately 7,500 to 12,000 SKUs. At December 29, 2001, we
operated six local area warehouse facilities.

We also operate two distribution centers that were acquired through the
Discount acquisition. In addition, we operate 10 Parts Express warehouses that
deliver parts to our stores on a same day or next day basis. As a result of the
integration of Discount, we expect to rationalize further our distribution
facilities to utilize the distribution capacity we acquired from Discount, more
efficiently.

Management Information Systems

We have developed a flexible technology infrastructure that supports our
growth strategy. Our information technology infrastructure is comprised of
software and hardware designed to integrate store, distribution and vendor
services into a seamless network. All stores, corporate and regional offices,
and distribution centers are linked via a communications network, which is
based on frame relay technology. Our stores in Puerto Rico are linked to the
communications network via satellite. Electronic documents transferred between
us and our vendors expedite the ordering, receiving and merchandise payment
processes. We expect to integrate our technology platform into Discount's
stores, distribution centers and administrative offices by early 2003.

Store Based Information Systems

Our store based information systems, which are designed to improve the
efficiency of our operations and enhance customer service, are comprised of
point-of-sale, or POS, electronic parts catalog, or EPC, store-level inventory
management and store intranet, or STORENET, systems. These systems are
integrated tightly and together provide real time, comprehensive information to
store and merchandising personnel, resulting in improved customer service
levels and in-stock availability. We intend to have the Discount Auto Parts
stores integrated into our store based information systems by the end of 2002.

Point-of-Sale. Our POS system was originally installed in 1981, enhanced
over the years and reengineered in 1995. POS information is used to formulate
pricing, marketing and merchandising strategies and to replenish inventory
rapidly. This system has improved store productivity and customer service by
streamlining store procedures. We are currently rolling out a new POS system in
all of our stores. The new POS system is designed to improve customer check-out
time and decrease the time required to train new store associates. In addition,
the new POS system will provide additional customer purchase and warranty
history, which may be used for customer demographic analysis.

Electronic Parts Catalog. Our EPC system is a software system that enables
our sales associates to identify over 20 million application uses for
automotive parts and accessories. The EPC system enables sales associates to
assist customers in parts selection and ordering based on the year, model,
engine type and application needed. If a part is not available at one of our
stand-alone stores, the EPC system can also determine whether the part is
carried and in-stock through our PDQ(R) system. The EPC system also enables our
sales associates to identify additional parts that are required for or
complementary to a customer's specific application.

<PAGE>

This generally leads to increased average sales per transaction. The
integration of this system with our POS system improves customer service by
reducing time spent at the cash register and fully automating the sales process
between the parts counter and our POS register. This system enables sales
associates to order parts and accessories electronically from our PDQ(R)
system, with immediate confirmation of price, availability and estimated
delivery time. Additionally, information about a customer's automobile can be
entered into a permanent customer database that can be accessed immediately
whenever the customer visits or telephones the store.

In conjunction with the rollout of our new POS system, we are also
installing a new EPC in our stores. This new catalog, which is fully integrated
with the new POS system, will provide store associates with additional product
information, including graphics and system diagrams. The new catalog will use
search engines and more user friendly navigation tools that will enhance our
sales associates' ability to look-up parts.

To ensure ongoing improvement of EPC information in all stores, we have
developed a centrally based EPC data management system that allows us to reduce
the cycle time for cataloging and delivering updated product data to stores.
This system also provides the capability of cataloging non-application specific
parts and additional product information, such as technical bulletins, images
of parts and related diagrams of automobiles and expanded lists of related
parts for the item being purchased.

Store-level Inventory Management System. Our store-level inventory
management system provides real-time inventory tracking at the store-level.
With the store-level system, store personnel can check the quantity of on-hand
inventory for any SKU, automatically process returns and defective merchandise,
designate SKUs for cycle counts and track merchandise transfers. We are testing
the effectiveness and viability of radio frequency hand held devices in
approximately 200 of our retail stores that should increase inventory
utilization and ensure the accuracy of inventory movements.

Store Intranet. Installed in June of 1998, our STORENET system delivers
product information, electronic manuals, forms and internal communications to
all store employees. Financial reports are delivered to the store managers via
STORENET each accounting period. Our online learning center delivers online
training programs to all employees. A tracking and reporting function provides
human resources and management with an overview of training schedules and
results by employee.

Customer Contact Center. In the first quarter of 2001, we installed new
call routing software and customer service software, established a customer
contact center and consolidated all support centers. Implementation of the
customer contact center has resulted in a substantial improvement in the speed
of call answers, a reduction in calls to voice mail and a reduction in the
number of outbound calls required to respond to voice mail.

Logistics and Purchasing Information Systems

Distribution Center Management System. Our distribution management system,
or DCMS, provides real-time inventory tracking through the processes of
receiving, picking, shipping and replenishing at our distribution centers. The
DCMS, integrated with material handling equipment, significantly reduces
warehouse and distribution costs, while improving efficiency. All of our
logistic facilities currently use this technology. As a result, we have the
capacity to service over 2,500 stores and our wholesale operations from our six
distribution centers. In addition, we acquired two distribution centers through
the Discount acquisition, increasing our capacity to service stores. We are
currently in the process of enhancing the DCMS and inventory systems to support
service of multiple segments from the same distribution center. In addition, we
intend to have the operations of Discount integrated into our distribution
management systems by the end of 2002.

Replenishment Systems. Our E3 Replenishment System, or E3, which was
implemented in 1994, monitors the distribution center and PDQ warehouse
inventory levels and orders additional products when appropriate. In addition,
the system tracks sales trends by SKU, allowing us to adjust future orders to
support seasonal and

<PAGE>

demographic shifts in demand. We are currently in the process of enhancing this
system to improve support of transfer of merchandise among distribution
centers. We recently completed the implementation of a store-level
replenishment version of E3 for our Advance Auto Parts stores. In addition, we
intend to implement our replenishment systems in Discount's stores and other
facilities by the end of 2002.

Employees

At December 29, 2001, we employed approximately 16,739 full-time employees
and 8,997 part-time employees. Approximately 84.8% of our workforce is employed
in store-level operations, 11.1% is employed in distribution and 4.1% is
employed in our corporate offices in Roanoke, Virginia and Kansas City,
Missouri. We have never experienced any labor disruption and are not party to
any collective bargaining agreements. We believe that our labor relations are
good.

At November 28, 2001, Discount employed approximately 6,300 individuals, of
which approximately 5,000 were full-time employees. Approximately 87% of
Discount's employees are employed in stores or in direct field supervision,
while 13% work in the distribution center or corporate and support functions.
Discount has no collective bargaining agreements covering any of its employees
and has never experienced any material labor disruption. We believe that
Discount's labor relations are good.

We allocate substantial resources to the recruiting, training and retaining
of employees. In addition, we have established a number of empowerment programs
for employees, such as employee task forces and regular meetings, to promote
employee recognition and address customer service issues. We believe that these
efforts have provided us with a well-trained, loyal workforce that is committed
to high levels of customer service.

Trade Names, Service Marks and Trademarks

We own and have registrations for the trade names "Advance Auto Parts,"
"Western Auto" and "Parts America" and the trademark "PDQ(R)" with the United
States Patent and Trademark Office for use in connection with the automotive
parts retailing business. In addition, we own and have registered a number of
trademarks with respect to our private label products, and we also acquired
from Discount various registered trademarks, service marks and copyrights. 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 marks and actively defend and enforce them.

Competition

We compete in the automotive aftermarket parts industry, which includes
replacement parts (excluding tires), accessories, maintenance items, batteries
and automotive fluids, and which, according to the U.S. Department of Commerce
and the Automotive Aftermarket Industry Association, generated approximately
$100 billion in sales in 2000 (excluding tires and labor costs). We compete in
both the DIY and DIFM categories of the automotive aftermarket industry.
Although the number of competitors and the level of competition vary by market,
both categories are highly fragmented and generally very competitive. Our
primary competitors are both national and regional retail chains of automotive
parts stores, including AutoZone, Inc., O'Reilly Automotive, Inc. and The Pep
Boys--Manny, Moe & Jack, wholesalers or jobber stores, independent operators,
automobile dealers that supply parts, discount stores and mass merchandisers
that carry automotive products, including Wal-Mart, Target and K-Mart. We
believe that chains of automotive parts stores, like us, with 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 competitive factors
that affect our business include price, store location, customer service and
product offerings, quality and availability.

<PAGE>

Environmental Matters

We are subject to various federal, state and local laws and governmental
regulations relating to the operation of our business, including those
governing recycling of batteries and used lubricants, and regarding ownership
and operation of real property. We handle hazardous materials as part of our
operations, and our customers may also use hazardous materials on our
properties or bring hazardous materials or used oil onto our properties. We
currently provide collection and recycling programs for used automotive
batteries and used lubricants at some of our stores as a service to our
customers under agreements with third party vendors. Pursuant to these
agreements, used batteries and lubricants are collected by our employees,
deposited into vendor supplied containers or pallets and stored by us until
collected by the third party vendors for recycling or proper disposal. Persons
who arrange for the 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. In
January 1999, we were notified by the United States Environmental Protection
agency that Western may have potential liability under the Comprehensive
Environmental Response Compensation and Liability Act relating to two battery
salvage and recycling sites that were in operation in the 1970s and 1980s. This
matter has since been settled for an amount not material to our current
financial position or future results of operations.

We own and lease real property. Under various environmental laws and
regulations, a current or previous owner or operator of real property may be
liable for the cost of removal or remediation of hazardous or toxic substances
on, under or in such property. These laws often impose joint and several
liability and may be imposed without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous or toxic
substances. Other environmental laws and common law principles also could be
used to impose liability for releases of hazardous materials into the
environment or work place, and third parties may seek recovery from owners or
operators of real properties for personal injury or property damage associated
with exposure to released hazardous substances. Compliance with these laws and
regulations has not had a material impact on our operations to date. We believe
that we are currently in material compliance with these laws and regulations.

<PAGE>

Item 2. Properties.

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

<TABLE>
<CAPTION>
Opening Nature of
Facility Date Area Served Size (Sq. ft.) Occupancy
- ------------------------------------------ ------- ----------------------------------- -------------- ---------
<S> <C> <C> <C> <C>
Main Distribution Centers:
Roanoke, Virginia(1)..................... 1988 Mid-Atlantic 440,000 Leased
Gadsden, Alabama......................... 1994 South 240,000 Owned
Lakeland, Florida(2)..................... 1982 Florida, Georgia and South Carolina 600,000 Owned
Gastonia, North Carolina(3).............. 1969 Western Auto retail stores, 663,000 Owned
wholesale dealer network
Gallman, Mississippi(2).................. 2001 Alabama, Mississippi and Louisiana 400,000 Owned
Salina, Kansas(3)........................ 1971 West 441,000 Owned
Delaware, Ohio(3)........................ 1972 Northeast 510,000 Owned
Thomson, Georgia(4)...................... 1999 Southeast 383,000 Leased

Master PDQ(R) Warehouse:
Andersonville, Tennessee................. 1998 All 116,000 Leased

PDQ(R) Warehouses:
Salem, Virginia.......................... 1983 Mid-Atlantic 50,400 Leased
Smithfield, North Carolina............... 1991 Southeast 42,000 Leased
Jeffersonville, Ohio(5).................. 1996 Midwest 50,000 Owned
Thomson, Georgia(6)...................... 1998 South, Southeast 50,000 Leased
Goodlettesville, Tennessee............... 1999 Central 41,900 Leased
Youngwood, Pennsylvania.................. 1999 East 49,000 Leased
Riverside, Missouri...................... 1999 West 45,000 Leased
Guilderland Center, New York............. 1999 Northeast 47,400 Leased
Temple, Texas(3)(7)...................... 1999 Southwest 100,000 Owned

Parts Express Warehouses:(2)
Altamonte Springs, Florida............... 1996 Central Florida 10,000 Owned
Jacksonville, Florida.................... 1997 Northern Florida and Southern 12,712 Owned
Georgia
Tampa, Florida........................... 1997 West Central Florida 10,000 Owned
Hialeah, Florida......................... 1997 South Florida 12,500 Owned
West Palm Beach, Florida................. 1998 Southeast Florida 13,300 Leased
Mobile, Alabama.......................... 1998 Alabama and Mississippi 10,000 Owned
Atlanta, Georgia......................... 1999 Georgia and South Carolina 16,786 Leased
Tallahassee, Florida..................... 1999 South Georgia and Northwest 10,000 Owned
Florida
Kenner, Louisiana........................ 1999 Louisiana 12,500 Leased
Fort Myers, Florida...................... 1999 Southwest Florida 14,330 Owned

Corporate/Administrative Offices:
Roanoke, Virginia - corporate(8)......... 1995 All 49,000 Leased
Kansas City, Missouri - corporate........ 1999 All 12,500 Leased
Roanoke, Virginia - administrative....... 1998 All 40,000 Leased
Lakeland, Florida - administrative(2)(6). 1982 All 67,000 Owned
Roanoke, Virginia - administrative....... 2002 All 69,200 Leased
</TABLE>
- ---------------------
(1)This facility is owned by Nicholas F. Taubman. See "Certain Relationships
and Related Transactions."
(2)We acquired this facility in November 2001 through our acquisition of
Discount.
(3)We acquired this facility in November 1998 through our acquisition of
Western.
(4)The construction of this facility was financed in 1997 by a $10.0 million
industrial revenue bond issuance from the Development Authority of McDuffie
County of the State of Georgia, from whom we lease the facility. We have an
option to purchase this facility for $10.00 at the end of five years or upon
prepayment of the outstanding bonds. This bond matures in November 2002.
(5)Total capacity of this facility is approximately 433,000 square feet, of
which 50,000 square feet continues to be used as a PDQ(R) warehouse. This
facility was also used as a distribution center prior to its closure in the
fourth quarter of 2001. This facility is currently held for sale.
(6)This facility is located within the main distribution center.
(7)Total capacity of this facility is approximately 550,000 square feet, of
which 100,000 is currently being used as a PDQ(R) warehouse. Subsequent to
December 29, 2001, approximately 215,000 square feet of this facility

<PAGE>

was subleased to a third party. This facility was once also used as a
distribution center and is currently for sale.
8) This facility is owned by Ki, L.C., a Virginia limited liability company
owned by two trusts for the benefit of a child and grandchild of Nicholas F.
Taubman. See "Related-Party Transactions."

Advance Stores. At December 29, 2001, we owned 113 of our Advance Auto
Parts and Western Auto stores and leased 1,702. The expiration dates, including
the exercise of renewal options, of the store leases are summarized as follows:

<TABLE>
<CAPTION>
Years Stores(1)
----- ---------
<S> <C>
2001-2002 27
2003-2007 157
2008-2012 321
2013-2022 1,065
2023-2032 84
2033-2048 48
</TABLE>
- ---------------------
(1)Of these stores, 21 are owned by our affiliates. See "Certain Relationships
and Related Transactions."

Discount Stores. Discount has historically owned the majority of its store
locations. On February 27, 2001, Discount completed a sale/leaseback
transaction. Under the terms of the sale/leaseback, Discount sold 101
properties, including land, buildings and improvements, for approximately $62.2
million. Each store was leased back from the purchaser under non-cancelable
operating leases with lease terms of 22.5 years. Net rent expense during each
of the first five years of the lease term will be approximately $6.4 million,
with increases periodically thereafter. After taking into account the
sale/leaseback transaction, Discount owned 486, or 72%, of its locations and
leased 185, or 28%, of its locations at November 28, 2001.

Item 3. Legal Proceedings.

In February 2000, the Coalition for a Level Playing Field and over 100
independent automotive parts and accessories aftermarket warehouse distributors
and jobbers filed a lawsuit styled Coalition for a Level Playing Field, et al.
v. AutoZone, Inc. et al., Case No. 00-0953 in the United States District Court
for the Eastern District of New York against various automotive parts and
accessories retailers. In March 2000, we and Discount were notified that we had
been named defendants in the lawsuit. The plaintiffs claim that the defendants
have knowingly induced and received volume discounts, rebates, slotting and
other allowances, fees, free inventory, sham advertising and promotional
payments, a share in the manufacturers' profits, and excessive payments for
services purportedly performed for the manufacturers in violation of the
Robinson-Patman Act. The complaint seeks injunctive and declaratory relief,
unspecified treble damages on behalf of each of the plaintiffs, as well as
attorneys' fees and costs. The defendants, including us and Discount, filed a
motion to dismiss in late October 2000. On October 18, 2001, the court denied
the motion to dismiss on all but one count. It is expected that the discovery
phase of the litigation will now commence (including with respect to us and
Discount); however, determinations as to the discovery schedule and scope have
not yet been made. We believe these claims are without merit and intend to
defend them vigorously; however, the ultimate outcome of this matter can not be
ascertained at this time.

In November 1997, Joe C. Proffitt, Jr., on behalf of himself and all others
in the states of Alabama, California, Georgia, Kentucky, Michigan, North
Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia and West Virginia
who purchased batteries from us from November 1, 1991 to November 5, 1997,
filed a class action complaint and motion of class certification against us in
the circuit court for Jefferson County, Tennessee, alleging the sale by us of
used, old or out-of-warranty automotive batteries as new. The complaint seeks
compensatory and punitive damages. In September 2001, the court granted our
motion for summary judgment

<PAGE>

against the plaintiff and dismissed all claims against us. The period for
appeal has not yet expired. We believe that we do not have any liability for
such claims and intend to defend them vigorously.

In addition to the above matters, we currently and from time to time are
involved in litigation incidental to the conduct of our respective business.
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 believe currently that, in the aggregate, they will not result
in liabilities material to our consolidated financial condition, future results
of operations or cash flow.

Item 4. Submission of Matters to a Vote of Security Holders.

No matter was submitted to a vote of our stockholders during the fourth
quarter of 2001.

<PAGE>

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

Our common stock is listed on the New York Stock Exchange, or NYSE, under
the symbol "AAP." The table below sets forth, for the fiscal periods indicated,
the high and low sale prices per share for our common stock, as reported by the
NYSE. Our common stock has been listed on the NYSE since November 29, 2001, the
closing date of the Discount acquisition. Prior to that date, there was no
public market for our common stock.

<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year Ended December 29, 2001
Fourth Quarter from November 29.. $47.65 $39.70
Fiscal Year Ending December 28, 2002
First Quarter (through March 20). $49.75 $40.90
</TABLE>

The closing sale price of our common stock on March 20, 2002 was $44.56. At
March 20, 2002, there were 410 holders of record of our common stock.

We have not declared or paid cash dividends on our common stock in the last
two years, We anticipate that we will retain all of our earnings in the
foreseeable future to finance the expansion of our business and, therefore, do
not anticipate paying any dividends on our common stock. In addition, the terms
of our senior credit facility and the indentures governing our senior
subordinated notes and senior discount debentures currently prohibit us from
declaring or paying any dividends or other distributions on any shares of our
capital stock. 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, earnings, capital requirements, contractual restrictions contained
in our senior credit facility and notes indentures, or other agreements, the
General Corporation Law of the State of Delaware, which provides that dividends
are only payable out of surplus or current net profits, and other factors
deemed relevant by our board of directors.

The following is a summary of the transactions we engaged in, as successor
in interest to Advance Holding Corporation, or Advance Holding, during 2001 and
through March 20, 2002 involving sales of our securities that were not
registered under the Securities Act:

From January 1, 2001 through February 6, 2002, we issued and sold 47,600
shares of our common stock at a price per share of $21.00, for aggregate
proceeds of $999,600, to certain of our employees pursuant to our 1998 employee
stock subscription plan. As consideration for the shares, we received $500,000
in cash and $499,600 in the form of secured promissory notes, the payment of
which are secured by individual stock pledge agreements with the employees.

On October 31, 2001, Advance Stores Company, Incorporated, or Advance
Stores, our wholly-owned subsidiary, issued and sold $200 million aggregate
principal amount of its 10.25% senior subordinated notes due 2008 to J.P.
Morgan Securities Inc., Credit Suisse First Boston Corporation and Lehman
Brothers Inc., for aggregate net proceeds of approximately $185.6 million in
cash, before payment of approximately $5.6 million in commissions.

On February 6, 2002, we issued and sold 11,474,606 shares of our common
stock to Sears, Roebuck and Co. in exchange for the transfer by Sears to us of
the outstanding common stock of W.A. Holding Co.

The issuances described above were exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act, Rule 701
promulgated thereunder, which exempts certain offers and sales of securities
pursuant to certain compensatory benefits plans, Rule 144A thereunder or
Regulation D promulgated thereunder as a transaction by an issuer not involving
a public offering, where each purchaser was either an accredited investor or a
nonaccredited investor (where the aggregate number of such investors did not
exceed 35), with knowledge and experience in financial and business matters
sufficient for evaluating the associated merits and risks (either alone or with
a purchaser representative), each of which represented its intention to acquire
the securities for investment only and not with a view to distribution, and
received or had access to adequate

<PAGE>

information about us. Appropriate legends were affixed to the certificates
issued in these transactions and there was no general solicitation or
advertising.

As of March 20, 2002, the Board of Directors had approved the grant of
options to purchase an aggregate of 531,600 shares of our common stock to our
directors, officers and employees, all of which were outstanding, with a
weighted average exercise price of $42.00. At the time these options were
issued under our various stock option plans, we believed that each of the
issuances were exempt from the registration requirements of the Securities Act
either by virtue of (i) an exemption provided by Rule 701 promulgated under the
Securities Act for securities offered under compensatory benefit plans and
contracts, or (ii) a "no-sale" theory under Section ii of the Securities Act,
since none of the optionees provided any consideration for the grants (the sale
of the underlying option shares occurs only when the option is exercised and
the purchase price for the shares is paid to us).

Except as described above, no underwriter was employed with respect to any
sales of the securities in the transactions described above and no commissions
or fees were paid with respect to any such sales.

Item 6. Selected Financial Data.

The following table sets forth our selected historical consolidated
statement of operations, balance sheet and other operating data. The selected
historical consolidated financial and other data at December 30, 2000 and
December 29, 2001 and for the three years ended December 29, 2001 have been
derived from our audited consolidated financial statements and the related
notes included elsewhere in this report. The historical consolidated financial
and other data at January 3, 1998, January 2, 1999 and January 1, 2000 and for
the years ended January 3, 1998 and January 2, 1999 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 the consolidated financial statements and the related notes of
Advance included elsewhere in this report.

<TABLE>
<CAPTION>
Fiscal Year(1)
-------------------------------------------------------
1997 1998 1999 2000 2001
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data: (in thousands, except per share and selected store data)

Net sales............................................................ $848,108 $1,220,759 $2,206,945 $2,288,022 $2,517,639
Cost of sales........................................................ 524,586 766,198 1,404,113 1,392,127 1,441,613
Supply chain initiatives(2).......................................... -- -- -- -- 9,099
-------- ---------- ---------- ---------- ----------
Gross profit......................................................... 323,522 454,561 802,832 895,895 1,066,927
Selling, general and administrative expenses(3)...................... 278,039 392,353 740,481 801,521 947,531
Expenses associated with supply chain initiatives(4)................. -- -- -- -- 1,394
Impairment of assets held for sale(5)................................ -- -- -- 856 12,300
Expenses associated with the recapitalization(6)..................... -- 14,277 -- -- --
Expenses associated with the merger related restructuring(7)......... -- 6,774 -- -- 3,719
Expenses associated with merger and integration(8)................... -- 7,788 41,034 -- 1,135
Expenses associated with private company(9).......................... 3,056 845 -- -- --
Non-cash stock option compensation expense(10)....................... -- 695 1,082 729 11,735
-------- ---------- ---------- ---------- ----------
Operating income..................................................... 42,427 31,829 20,235 92,789 89,113
Interest expense..................................................... 6,086 35,038 62,792 66,640 61,895
Other income (expense), net.......................................... (321) 943 4,647 1,012 1,283
-------- ---------- ---------- ---------- ----------
Income (loss) before income taxes, extraordinary items and cumulative
effect of a change in accounting principle.......................... 36,020 (2,266) (37,910) 27,161 28,501
Income tax expense (benefit)......................................... 14,733 (84) (12,584) 10,535 11,312
-------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item and cumulative effect of a
change in accounting principle...................................... 21,287 (2,182) (25,326) 16,626 17,189
Extraordinary item, gain (loss) on debt extinguishment, net of $1,759
and $2,424 income taxes, respectively............................... -- -- -- 2,933 (3,682)
Cumulative effect of a change in accounting principle, net of $1,360
income taxes........................................................ -- -- -- -- (2,065)
-------- ---------- ---------- ---------- ----------
Net income (loss).................................................... $ 21,287 $ (2,182) $ (25,326) $ 19,559 $ 11,442
Income (loss) before extraordinary item and cumulative effect of a
change in accounting principle per basic share...................... $ 0.87 $ (0.12) $ (0.90) $ 0.59 $ 0.60
Income (loss) before extraordinary item and cumulative effect of a
change in accounting principle per diluted share.................... $ 0.87 $ (0.12) $ (0.90) $ 0.58 $ 0.59
Net income (loss) per basic share.................................... $ 0.87 $ (0.12) $ (0.90) $ 0.69 $ 0.40
Net income (loss) per diluted share.................................. $ 0.87 $ (0.12) $ (0.90) $ 0.68 $ 0.39
Weighted average basic shares outstanding............................ 24,288 18,606 28,269 28,296 28,637
Weighted average diluted shares outstanding.......................... 24,288 18,606 28,269 28,611 29,158
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Fiscal Year(1)
---------------------------------------------------------
1997 1998 1999 2000 2001
-------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>

Other Financial Data:

EBITDA, as adjusted(11)........................................ $ 68,361 $ 92,612 $ 121,899 $ 161,876 $ 199,710
Capital expenditures(12)....................................... 48,864 65,790 105,017 70,566 63,695

Cash flows provided by (used in):

Operating activities........................................... $ 42,478 $ 44,022 $ (20,976) $ 103,951 $ 103,536
Investing activities........................................... (48,607) (230,672) (113,824) (64,940) (451,008)
Financing activities........................................... 6,759 207,302 121,262 (43,579) 347,580

Selected Store Data:

Comparable store sales growth(13).............................. 5.7% 7.8% 10.3% 4.4% 6.2%
Net new stores(14)............................................. 165 753 50 112 755
Number of stores, end of period................................ 814 1,567 1,617 1,729 2,484
Stores with commercial delivery program, end of period......... 421 532 1,094 1,210 1,370
Total commercial delivery sales, as a percentage of total sales 7.4% 8.8% 9.0% 13.4% 13.5%
Total retail store square footage, end of period (in thousands) 5,857 12,084 12,476 13,325 18,717
Average net retail sales per store (in thousands)(15).......... $ 1,159 $ 1,270 $ 1,267 $ 1,295 $ 1,346
Average net retail sales per square foot(16)................... $ 161 $ 172 $ 164 $ 168 $ 175

At
---------------------------------------------------------
1/3/98 1/2/99 1/1/00 12/30/00 12/29/01
-------- ---------- ---------- ----------- ----------

Balance Sheet Data:

Cash and cash equivalents...................................... $ 15,463 $ 36,115 $ 22,577 $ 18,009 $ 18,117
Net working capital............................................ 121,140 310,113 355,608 318,583 442,099
Total assets................................................... 461,257 1,265,355 1,348,629 1,356,360 1,950,615
Total net debt................................................. 95,633 485,476 627,467 582,539 972,368
Total stockholders' equity..................................... 143,548 159,091 133,954 156,271 288,571
</TABLE>
- ---------------------
(1)Our fiscal year consists of 52 or 53 weeks ending on the Saturday nearest
to December 31. All fiscal years presented are 52 weeks except for 1997,
which consisted of 53 weeks.
(2)Represents restocking and handling fees associated with the return of
inventory as a result of our supply chain initiatives.
(3)Selling, general and administrative expenses exclude certain non-recurring
charges discussed in notes (4), (5), (6), (7), (8), (9) and (10) below. The
1997 amount includes an unusual medical claim that exceeded our stop loss
insurance coverage. The pre-tax amount of this claim, net of related
increased insurance costs, was $882. We increased our stop loss coverage
effective January 1, 1998 to a level that would provide insurance coverage
for a medical claim of this magnitude.
(4)Represents costs of relocating certain equipment held at facilities closed
as a result of our supply chain initiatives.
(5)Represents the devaluation of certain property held for sale, including the
$1.6 million charge taken in the first quarter of 2001 and a $10.7 million
charge taken in the fourth quarter of 2001.
(6)Represents expenses incurred in our 1998 recapitalization related primarily
to non-recurring bonuses paid to certain employees and to fees for
professional services.
(7)Represents expenses related primarily to lease costs associated with 31 of
our stores closed in overlapping markets in connection with the Western
merger and 27 closed as a result of the Discount acquisition.
(8)Represents certain expenses related to the Western merger and integration,
conversion of the Parts America stores and the Discount acquisition.
(9)Reflects our estimate of expenses eliminated after the recapitalization
that related primarily to compensation and other benefits of our chairman,
who prior to our recapitalization was our principal stockholder.
(10)Represents non-cash compensation expenses related to stock options granted
to certain of our employees, including a non-recurring charge of $8.6
million in the fourth quarter of 2001 related to variable provisions of our
stock option plans that were in place when we were a private company, and
that have since been eliminated.

<PAGE>

(11)EBITDA, as adjusted, represents operating income plus depreciation and
amortization, non-cash and other employee compensation expenses and certain
non-recurring charges as scheduled below, included in operating income.
EBITDA, as adjusted, is not intended to represent cash flow from operations
as defined by GAAP, and should not be considered as a substitute for net
income as an indicator of operating performance or as an alternative to
cash flow (as measured by GAAP) as a measure of liquidity. We have included
EBITDA, as adjusted, herein because our management believes this
information is useful to investors, as such measure provides additional
information with respect to our ability to meet our future debt service,
capital expenditures and working capital requirements. In addition, certain
covenants in our indentures and credit facility are based upon an EBITDA
calculation. Our method for calculating EBITDA, as adjusted, may differ
from similarly titled measures reported by other companies. Our management
believes certain recapitalization expenses, non-recurring charges, private
company expenses, non-cash and other employee compensation expenses, and
merger and integration expenses should be eliminated from the EBITDA
calculation to evaluate our operating performance, and we have done so in
our calculation of EBITDA, as adjusted.

The following table reflects the effect of these items:

<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------
1997 1998 1999 2000 2001
--------- ------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Other Data:
EBITDA(a).............................................................. $65,110 $61,793 $78,382 $159,615 $160,344

Supply chain initiatives (see note 2 above)............................ -- -- -- -- 9,099

Expenses associated with supply chain initiatives (see note 4 above)... -- -- -- -- 1,394

Impairment of assets held for sale (see note 5 above).................. -- -- -- -- 10,700

Recapitalization expenses (see note 6 above)........................... -- 14,277 -- -- --

Merger related restructuring expenses (see note 7 above)............... -- 6,774 -- -- 3,719

Merger and integration expenses (see note 8 above)..................... -- 7,788 41,034 -- 1,135

Private company expenses (see note 9 above)............................ 3,056 845 -- -- --

Non-cash stock option compensation expense (see note 10 above)......... -- 695 1,082 729 11,735

Non-operating interest expense on postretirement benefits(b)........... 195 440 1,401 1,532 1,584
--------- ------- -------- -------- --------

EBITDA, as adjusted(c)................................................. $ 68,361 $92,612 $121,899 $161,876 $199,710
========= ======= ======== ======== ========
</TABLE>
- ---------------------

(a)The 1997 EBITDA amount excludes an unusual medical claim that exceeded
our stop-loss insurance coverage. The pre-tax amount of this claim, net
of related increased insurance costs, was $882. We increased our
stop-loss coverage effective January 1, 1998 to a level that would
provide insurance coverage for a medical claim of this magnitude.
(b)Represents the interest component of the net periodic postretirement
benefit cost associated with our postretirement benefit plan.
(c)EBITDA, as adjusted, for 2000 includes a non-recurring net gain of $3.3
million, which represents a portion of a cash settlement received in
connection with a lawsuit against a supplier. EBITDA, as adjusted, for
2001 includes a non-recurring net gain of $3.2 million, recorded in the
first quarter of 2001, which represents a portion of the cash settlement
received in connection with the lawsuit against a supplier, partially
offset by nonrecurring closed store expenses and the $1.6 million
write-down of an administrative facility taken in the first quarter of
2001.

(12)Capital expenditures for 2001 exclude $34.1 million for our November 2001
purchase of Discount's Gallman, Mississippi distribution facility from the
lessor in connection with the Discount acquisition.

<PAGE>

(13)Comparable store sales growth is calculated based on the change in net
sales starting once a store has been opened for thirteen complete
accounting periods (each period represents four weeks). Relocations are
included in comparable store sales from the original date of opening. The
Parts America stores acquired in the Western merger and subsequently
converted to Advance Auto Parts stores are included in the comparable store
sales calculation after thirteen complete accounting periods following
their physical conversion. Additionally, the stores acquired in the Carport
and Discount acquisitions will be included in the comparable store sales
calculation following thirteen complete accounting periods following their
system conversion to the Advance Auto Parts store system. Comparable store
sales do not include sales from the Western Auto stores.

(14)Net new stores represent new stores opened and acquired, less stores closed.

(15)Average net retail sales per store is based on the average of beginning and
ending number of stores for the respective period. The 1998 amounts were
calculated giving effect to the Parts America retail net sales and number
of stores for the period from November 1, 1998 through January 2, 1999. The
2001 amounts were calculated giving effect to the Discount retail net sales
and number of stores for the period from December 2, 2001 through December
29, 2001.

(16)Average net retail sales per square foot is based on the average of
beginning and ending total store square footage for the respective period.
The 1998 amounts were calculated giving effect to the Parts America retail
net sales and square footage for the period from November 1, 1998 through
January 2, 1999. The 2001 amounts were calculated giving effect to the
Discount retail net sales and number of stores for the period from
December 2, 2001 through December 29, 2001.

<PAGE>

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

The following discussion and analysis of financial condition and results of
operations should be read in conjunction with "Selected Financial Data," our
consolidated historical financial statements and the notes to those statements
that appear elsewhere in this report. Our fiscal year ends on the Saturday
nearest December 31 of each year. Our first quarter consists of 16 weeks, and
the other three quarters consist of 12 weeks. 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 "Risk Factors" and "Business" and
elsewhere in this report.

General

We conduct all of our operations through our wholly owned subsidiary,
Advance Stores Company, Incorporated and its subsidiaries, or Advance Stores.
We were formed in 1929 and operated as a retailer of general merchandise until
the 1980s. In the 1980s, we sharpened our marketing focus to target sales of
automotive parts and accessories to "do-it-yourself," or DIY, customers and
accelerated our growth strategy. From the 1980s through the present, we have
grown significantly through new store openings, strong comparable store sales
growth and strategic acquisitions. Additionally, in 1996, we began to
aggressively expand our sales to "do-it-for-me," or DIFM, customers by
implementing a commercial delivery program that supplies parts and accessories
to third party professional installers and repair providers.

At December 29, 2001, we had 1,775 stores operating under the "Advance Auto
Parts" trade name, in 37 states in the Northeastern, Southeastern and
Midwestern regions of the United States and 669 stores operating under the
"Discount Auto Parts" trade name in the Southeastern region of the United
States. In addition, we had 40 stores operating under the "Western Auto" trade
name primarily located in Puerto Rico and the Virgin Islands. We are the second
largest specialty retailer of automotive parts, accessories and maintenance
items to DIY customers in the United States, based on store count and sales. We
currently are the largest specialty retailer of automotive products in the
majority of the states in which we operate, based on store count.

Our combined operations are conducted in two operating segments, retail and
wholesale. The retail segment consists of our retail operations operating under
the trade names "Advance Auto Parts" and "Discount Auto Parts" in the United
States and "Western Auto" in Puerto Rico, the Virgin Islands and one store in
California. Our wholesale segment includes a wholesale distribution network
which includes distribution services of automotive parts and accessories to
approximately 470 independently owned dealer stores in 44 states operating
under the "Western Auto" trade name. Our wholesale operations accounted for
approximately 3.9% of our net sales for the year ended December 29, 2001. The
discussion for all periods presented in this section has been restated to
reflect our Western Auto store located in California in the retail segment.

Acquisitions and Recapitalization

Discount Acquisition. On November 28, 2001, we acquired Discount in a
transaction in which Discount's shareholders received $7.50 per share in cash
(or approximately $128.5 million in the aggregate) plus 0.2577 shares of our
common stock for each share of Discount common stock. We issued approximately
4.3 million shares of our common stock to the former Discount shareholders,
which represented 13.2% of our total shares outstanding immediately following
the acquisition. The acquisition has been accounted for under the purchase
method of accounting. Accordingly, the results of operations for Discount for
the periods from December 2, 2001 are included in the accompanying consolidated
financial statements. The purchase price has been allocated to assets acquired
and liabilities assumed based on their respective fair values. Negative
goodwill of $75.7 million, resulting from total excess fair value over the
purchase price, was allocated proportionately as a reduction to non-current
assets, primarily property and equipment.

<PAGE>

In connection with the Discount acquisition, we issued an additional $200
million face value of 10.25% senior subordinated notes and entered into a new
senior credit facility that provides for (1) a $180 million tranche A term loan
facility and a $305 million tranche B term loan facility and (2) a $160 million
revolving credit facility (including a letter of credit sub-facility). Upon the
closing of the Discount acquisition, we used $485 million of borrowings under
the new senior credit facility and net proceeds of $185.6 million from the sale
of the senior subordinated notes to, among other things, pay the cash portion
of the acquisition consideration, repay all amounts outstanding under our
then-existing credit facility, repay $204.7 million of outstanding indebtedness
of Discount, including prepayment penalties, and purchase Discount's Gallman
distribution facility from the lessor.

At November 28, 2001, Discount had 671 stores in six states, including the
leading market position in Florida, with 437 stores. Including the acquired
Discount stores, we had 2,484 stores at December 29, 2001. On a pro forma
basis, our net sales and EBITDA, as adjusted, for 2001 would have been
$3.1 billion and $261.9 million. We expect to achieve ongoing purchasing
savings as a result of the acquisition. In addition, we expect to achieve
significant savings from the optimization of our combined distribution network,
including more efficient capacity utilization at Discount's Mississippi
distribution center, as well as from the reduction of overlapping
administrative functions. During 2002, we expect these savings to result in
approximately $30 million of incremental EBITDA, excluding certain one-time
integration expenses. We expect these one-time integration expenses to total
approximately $53 million from the close of the acquisition through the end of
2003, approximately $41 million of which we expect to incur in 2002.

Carport Acquisition. On April 23, 2001, we completed our acquisition of the
assets used in the operation of Carport Auto Parts, Inc. retail auto parts
stores located throughout Alabama and Mississippi. Based upon store count, this
made us the largest retailer of automotive parts in this market. Upon the
closing of the acquisition, we decided to close 21 Carport stores not expected
to meet long-term profitability objectives. The remaining 30 Carport locations
were converted to the Advance Auto Parts store format within six weeks of the
acquisition. The acquisition has been accounted for under the purchase method
of accounting. Accordingly, the results of operations of Carport for the
periods from April 23, 2001 are included in the accompanying consolidated
financial statements. The purchase price of $21.5 million has been allocated to
the assets acquired and the liabilities assumed, based on their fair values at
the date of acquisition. This allocation resulted in the recognition of $3.7
million in goodwill.

Western Auto Acquisition. On November 2, 1998, we acquired Western Auto
Supply Company, or Western, from Sears. The purchase price included the payment
of 11,474,606 shares of our common stock and $185.0 million in cash. Certain of
our stockholders invested an additional $70.0 million in equity to fund a
portion of the cash portion of the purchase price, the remainder of which was
funded through additional borrowings under our prior credit facility, and cash
on hand. The Western merger was accounted for under the purchase method of
accounting. Accordingly, the results of operations of Western for the periods
from November 2, 1998 are included in the accompanying consolidated financial
statements. The purchase price has been allocated to assets acquired and
liabilities assumed based on their respective fair values. Negative goodwill of
$4.7 million, resulting from total excess fair value over the purchase price,
was allocated proportionately as a reduction to non-current assets, primarily
property and equipment.

We have achieved significant benefits from the combination with Western
through improved purchasing efficiencies from vendors, consolidated
advertising, distribution and corporate support efficiencies. The Western
merger resulted in the addition of a net 545 Advance Auto Parts stores, 39
Western Auto stores and the wholesale distribution network.

Recapitalization. On April 15, 1998, we consummated a recapitalization in
which Freeman Spogli & Co. and Ripplewood Partners, L.P. purchased
approximately $80.5 million and $20.0 million of our common stock,
respectively, representing approximately 64% and 16% of our outstanding common
stock immediately following the recapitalization. In connection with the
recapitalization, management purchased approximately $8.0 million,

<PAGE>

or approximately 6%, of our outstanding common stock. The purchase of common
stock by management resulted in stockholder subscription receivables. The notes
are full recourse and provide for annual interest payments, at the prime rate,
with the entire principal amount due on April 15, 2003. In addition, on April
15, 1998, we entered into our prior credit facility and also issued $200
million of senior subordinated notes and approximately $112 million in face
amount of senior discount debentures. In connection with these transactions, we
extinguished a substantial portion of our existing notes payable and long-term
debt. These transactions collectively represent the "recapitalization." We have
accounted for the recapitalization for financial reporting purposes as the sale
of common stock, the issuance of debt, the redemption of common and preferred
stock and the repayment of notes payable and long-term debt. In connection with
the Discount acquisition, we repaid all amounts outstanding under our prior
credit facility and entered into our senior credit facility.

Non-recurring Charges

During the fourth quarter of 2001, we recorded the following non-recurring
charges, net of tax: $0.7 million in integration expenses associated with the
Discount acquisition; $2.2 million in lease termination expenses resulting from
the planned closure of approximately 27 Advance Auto Parts stores that overlap
with Discount stores; $5.2 million in stock option compensation charges
described below; $6.3 million in supply chain initiatives described below; $6.5
million to reduce the book value of certain excess property currently held for
sale described below; $2.1 million to implement an accounting change associated
with the reclassification of cooperative income from selling, general and
administrative expense to gross margin described below; and $3.7 million in
charges related to the write-off of deferred debt issuance costs associated
with refinancing our credit facility in connection with the Discount
acquisition.

The $5.2 million, net of tax, in stock option compensation charges resulted
from variable provisions of our employee stock option plans that were in place
when we were a private company, and that we since have eliminated. Under the
modified plan, option exercise prices are fixed and therefore will not result
in future compensation expense. No additional common shares or options were
issued as a result of these modifications.

The $6.3 million, net of tax, in expenses relating to supply change
initiatives is related to our recent review of our supply chain and logistics
operations, including our distribution costs and inventory stocking levels. As
part of this review, we have identified a portion of our inventory and expect
to identify additional inventory that we may offer in the future only in
certain store locations or regions. The expenses related to this initiative are
primarily related to restocking and inventory handling charges. We may generate
significant cash proceeds as a result of this initiative by reducing our
inventory investment while continuing to maintain high levels of customer
service and in-stock positions.

The reduction of book value of certain properties of $6.5 million, net of
tax, is related to the revaluation of certain excess properties currently held
for sale. In addition, we have closed and may explore the future possibility of
closing additional distribution facilities and may write-down the value of such
facilities in connection with our supply chain initiative.

The expense of $2.1 million, net of tax, to implement an accounting change
results from a change in our method of accounting for certain cooperative
advertising funds received from vendors. Previously, we accounted for these
funds as a reduction to advertising expense as the related advertising expenses
were incurred. In order to better align the reporting of these payments with
the sale of the associated product, we decided to recognize these payments as a
reduction to the cost of inventory acquired from vendors, which results in a
lower cost of sales for the products sold. We believe this is a preferable
method of accounting. The change will result in a slightly more conservative
recognition of income in future periods. This change in accounting principle
has been applied in our 2001 financial statements as if the change occurred at
the beginning of our 2001 fiscal year, and has been recognized as a cumulative
effect of the change in accounting principle. This change results in lower cost
of sales with corresponding increases in selling, general and administrative
expenses.

<PAGE>

Critical Accounting Policies

Our financial statements have been prepared in accordance with accounting
policies generally accepted in the United States. 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 these 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 from these estimates.

The following critical accounting policies are used in the preparation of
the financial statements as discussed above.

Vendor Incentives

We receive incentives from vendors related to cooperative advertising
allowances, volume rebates and other miscellaneous agreements. Many of the
incentives are under long-term agreements (terms in excess of one year), while
others are negotiated on an annual basis. Our vendors require us to use certain
cooperative advertising allowances exclusively for advertising. These
restricted cooperative advertising allowances are recognized as a reduction to
selling, general and administrative expenses as advertising expenditures are
incurred. Unrestricted cooperative advertising revenue, rebates and other
miscellaneous incentives are earned based on purchases and/or the sale of the
product. Amounts received or receivable from vendors that are not yet earned
are reflected as deferred revenue in the consolidated balance sheets included
elsewhere in this prospectus. We record unrestricted cooperative advertising
and volume rebates earned as a reduction of inventory and recognize the
incentives as a reduction to cost of sales as the inventory is sold. Short-term
incentives are recognized as a reduction to cost of sales over the course of
the annual agreement term and are not recorded as reductions to inventory.

We recognize other incentives earned related to long-term agreements as a
reduction to cost of sales over the life of the agreement based on the timing
of purchases. These incentives are not recorded as reductions to inventory. The
amounts earned under long-term arrangements not recorded as a reduction of
inventory are based on our estimate of total purchases that will be made over
the life of the contracts and the amount of incentives that will be earned. The
incentives are generally recognized based on the cumulative purchases as a
percentage of total estimated purchases over the life of the contract. Our
margins could be impacted positively or negatively if actual purchases or
results differ from our estimates, but over the life of the contract would be
the same.

During the fourth quarter of 2001, we changed our method of accounting for
unrestricted cooperative advertising allowances. These incentives are now
treated as a reduction to inventory and the corresponding cost of sales.
Previously, we accounted for these incentives as a reduction to selling,
general and administrative expenses to the extent advertising expense was
incurred.

Inventory

Minimal inventory shrink reserves are recorded related to Advance Auto Parts
stores as a result of our extensive and frequent cycle counting program. Our
estimates related to these shrink reserves depend on the effectiveness of the
cycle counting programs. We evaluate the effectiveness of these programs on an
on-going basis.

Minimal reserves for potentially excess and obsolete inventories are
recorded as well. The nature of our inventory is such that the risk of
obsolescence is minimal. In addition, historically we have been able to return
excess items to the vendor for credit. We provide reserves where less than full
credit will be received for such returns and where we anticipate that items
will be sold at retail prices that are less than recorded cost. Future changes
by vendors in their policies or willingness to accept returns of excess
inventory could require us to revise our estimates of required reserves for
excess and obsolete inventory.

<PAGE>

Warranties

We record accruals for future warranty claims related to warranty programs
for batteries, tires, road-side assistance and Craftsman products. Our accruals
are based on current sales of the warranted products and historical claim
experience. If claims experience differs from historical levels, revisions in
our estimates may be required.

Restructuring and Closed Store Liabilities

We recognize a provision for future obligations at the time a decision is
made to close a store location. This provision includes future minimum lease
payments, common area maintenance and taxes. Additionally, we make certain
assumptions related to potential subleases and lease buyouts that reduce the
recorded amount of the accrual. These assumptions are based on our knowledge of
the market and the relevant experience. However, the inability to enter into
the subleases or obtain buyouts within the estimated timeframe may result in
increases or decreases to these reserves.

Contingencies

We accrue for obligations, including estimated legal costs, when it is
probable and the amount is reasonably estimable. As facts concerning
contingencies become known, we reassess our position both with respect to gain
contingencies and accrued liabilities and other potential exposures. Estimates
that are particularly sensitive to future change include tax, environmental and
legal matters, which are subject to change as events evolve and as additional
information becomes available during the administrative and litigation process.

<PAGE>

Results of Operations

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

<TABLE>
<CAPTION>
Fiscal Year
--------------------
1999 2000 2001
----- ----- -----
<S> <C> <C> <C>
Net sales................................................................... 100.0% 100.0% 100.0%
Cost of sales(1)............................................................ 63.6 60.8 57.2
Expenses associated with supply chain initiatives........................... -- -- 0.4
----- ----- -----
Gross profit................................................................ 36.4 39.2 42.4
Selling, general and administrative expenses(1)(2).......................... 33.5 35.0 37.6
Expenses associated with supply chain initiatives........................... -- -- 0.1
Impairment of assets held for sale.......................................... -- -- 0.5
Expenses associated with merger related restructuring....................... -- -- 0.1
Expenses associated with merger and integration............................. 1.9 -- 0.0
Non-cash stock option compensation expense.................................. 0.1 0.1 0.5
----- ----- -----
Operating income............................................................ 0.9 4.1 3.5
Interest expense............................................................ 2.8 2.9 2.5
Other income, net........................................................... 0.2 0.0 0.1
Income tax (benefit) expense................................................ (0.6) 0.5 0.4
----- ----- -----
Income (loss) before extraordinary item and cumulative effect of a change in
accounting principle...................................................... (1.1) 0.7 0.7
Extraordinary item, gain (loss) on debt extinguishment, net of income taxes. -- 0.1 (0.1)
Cumulative effect of a change in accounting principle, net of income taxes.. -- -- (0.1)
----- ----- -----
Net income (loss)........................................................... (1.1)% 0.8% 0.5%
===== ===== =====
</TABLE>
- ---------------------
(1)Cost of sales and selling, general and administrative expenses presented for
fiscal 2001 reflect the change in accounting principle related to
cooperative advertising funds. This change resulted in lower cost of sales
with corresponding increases in selling, general and administrative expenses.
(2)Selling, general and administrative expenses are adjusted for certain
non-recurring and other items.

<PAGE>

Quarterly Financial Results (unaudited) (in thousands, except per share data)

<TABLE>
<CAPTION>
16-Weeks 12-Weeks 12-Weeks 12-Weeks 16-Weeks 12-Weeks 12-Weeks 12-Weeks
Ended Ended Ended Ended Ended Ended Ended Ended
4/22/2000 7/15/2000 10/7/2000 12/30/2000 4/21/2001(a) 7/14/2001(a) 10/6/2001(a) 12/29/2001(a)
--------- --------- --------- ---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $677,582 $557,650 $552,138 $500,652 $729,359 $607,478 $598,793 $582,009
Gross profit.................... 258,975 216,533 223,903 196,484 311,450 257,228 256,734 241,515
(Loss) income before
extraordinary item and
cumulative effect of a change
in accounting principle........ (956) 10,381 9,507 (2,306) 3,873 14,124 15,232 (16,040)
Extraordinary item, gain (loss)
on debt extinguishment, net of
$1,759 and $2,424 income
taxes, respectively............ -- -- 2,933 -- -- -- -- (3,682)
Cumulative effect of a change in
accounting principle, net of
$1,360 income taxes............ -- -- -- -- -- -- -- (2,065)
-------- -------- -------- -------- -------- --------- -------- --------
Net (loss) income............... $ (956) $ 10,381 $ 12,440 $ (2,306) $ 3,873 $ 14,124 $ 15,232 $(21,787)
======== ======== ======== ======== ======== ========= ======== ========
Basic earnings (loss) per
common share:
Before extraordinary item
and cumulative effect of a
change in accounting
principle................... $ (0.03) $ 0.37 $ 0.34 $ (0.08) $ 0.14 $ 0.50 $ 0.54 $ (0.54)
Extraordinary item, gain on
debt extinguishment, net
of $1,759 and $2,424
income taxes,
respectively................ -- -- 0.10 -- -- -- -- (0.12)
Cumulative effect of a
change in accounting
principle, net of $1,370
income taxes................ -- -- -- -- -- -- -- (0.07)
-------- -------- -------- -------- -------- --------- -------- --------
Net (loss) income............ $ (0.03) $ 0.37 $ 0.44 $ (0.08) $ 0.14 $ 0.50 $ 0.54 $ (0.73)
======== ======== ======== ======== ======== ========= ======== ========
Diluted earnings (loss) per
common share:
Before extraordinary item
and cumulative effect of a
change in accounting
principle................... $ (0.03) $ 0.36 $ 0.33 $ (0.08) $ 0.14 $ 0.49 $ 0.53 $ (0.54)
Extraordinary item, gain on
debt extinguishment, net
of $1,759 and $2,424
income taxes,
respectively................ -- -- 0.10 -- -- -- -- (0.12)
Cumulative effect of a
change in accounting
principle, net of $1,370
income taxes................ -- -- -- -- -- -- -- (0.07)
-------- -------- -------- -------- -------- --------- -------- --------
Net (loss) income............ $ (0.03) $ 0.36 $ 0.44 $ (0.08) $ 0.14 $ 0.49 $ 0.53 $ (0.73)
======== ======== ======== ======== ======== ========= ======== ========
</TABLE>
- ---------------------
(a)Reflects the change in accounting principle related to the cooperative
advertising funds.

Net Sales

Net sales consist primarily of comparable store sales, new store net sales,
service net sales, net sales to the wholesale dealer network and finance
charges on installment sales. Comparable store sales is calculated based on the
change in net sales starting once a store has been open for 13 complete
accounting periods (each period represents four weeks). Relocations are
included in comparable store sales from the original date of opening. Each
Parts America store that was acquired in the Western merger and subsequently
converted to an Advance Auto Parts store has been included in the comparable
store sales calculation after 13 complete accounting periods following the
completion of its physical conversion to an Advance Auto Parts store.
Additionally, the stores acquired in the Carport and Discount acquisitions will
be included in the comparable store sales calculation

<PAGE>

following thirteen complete accounting periods following their system
conversion to the Advance Auto Parts store system. We do not include net sales
from the Western Auto retail stores in our comparable store sales calculation.

Cost of Sales

Our cost of sales includes merchandise costs and warehouse and distribution
expenses as well as service labor costs of our Western Auto stores. Gross
profit as a percentage of net sales may be affected by variations in our
product mix, price changes in