aap 10K

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TABLE OF CONTENTS
			Page

Part I.

	Item 1.	Business	2

	Item 1A.	Risk Factors	11

	Item 2.	Properties	15

	Item 3.	Legal Proceedings	16

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

Part II.

	Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17

	Item 6.	Selected Financial Data	18

	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

	Item 7A.	Quantitative and Qualitative Disclosures About Market Risks	37

	Item 8.	Financial Statements and Supplementary Data	37

	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	37

	Item 9A.	Controls and Procedures	37

	Item 9B.	Other Information	38

Part III.

	Item 10.	Directors and Executive Officers of the Registrant	39

	Item 11.	Executive Compensation	39

	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	39

	Item 13.	Certain Relationships and Related Transactions	39

	Item 14.	Principal Accountant Fees and Services	39

Part IV.

	Item 15.	Exhibits and Financial Statement Schedules	40

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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:

	·	the implementation of our business strategies and goals;
	·	our ability to expand our business;
	·	competitive pricing and other competitive pressures;
	·	a decrease in demand for our products;
	·	the occurrence of natural disasters and/or extended periods of inclement weather;
	·	deterioration in general economic conditions;
	·	our ability to attract and retain qualified team members;
	·	integration of acquisitions;
	·	our relationships with our vendors;
	·	our involvement as a defendant in litigation or incurrence of judgments, fines or legal costs;
	·	adherence to the restrictions and covenants imposed under our credit facility;
	·	acts of terrorism; and
	·	other statements that are not of historical fact made throughout this report, including in the sections entitled “Business,” "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors."

We assume no obligations to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time to time in our other reports and documents filed with the Securities and Exchange Commission, and you should not place undue reliance on those statements.

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PART I

Item 1. Business.

Unless the context otherwise requires, “Advance,” “we,” “us,” “our,” and similar terms refer to Advance Auto Parts, Inc., its predecessor, its 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. Fiscal 2003 included 53 weeks of operations. All other fiscal years presented included 52 weeks of operations.

Overview

We primarily operate within the United States automotive aftermarket industry, which includes replacement parts (excluding tires), accessories, maintenance items, batteries and automotive chemicals for cars and light trucks (pickup trucks, vans, minivans and sport utility vehicles). We currently are the second largest specialty retailer of automotive parts, accessories and maintenance items to "do-it-yourself," or DIY, and “do-it-for-me”, or DIFM, customers in the United States, based on store count and sales. Currently, we operate in one reportable segment.

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, including our 1998 Western Auto Supply Company acquisition and our 2001 acquisition of Discount Auto Parts, or Discount. More recently in 2005, we acquired Autopart International, Inc., or AI, and substantially all the assets of Lappen Auto Supply.

In addition to our DIY business we also serve DIFM customers via sales to commercial accounts through our retail stores. Since 1996, we have aggressively expanded our sales to DIFM customers through our commercial delivery program. Sales to DIFM customers represented approximately 22% of our sales in 2005 and consisted of sales to both walk-in commercial customers and sales delivered to our commercial customers’ places of business, including independent garages, service stations and auto dealers. At December 31, 2005, we had 2,254 stores with commercial delivery programs.

At December 31, 2005, we operated 2,810 stores within the United States, Puerto Rico and the Virgin Islands. We operated 2,774 stores throughout 40 states in the Northeastern, Southeastern and Midwestern regions of the United States. These stores operated under the “Advance Auto Parts” trade name except for certain stores in the state of Florida, which operated under the “Advance Discount Auto Parts” trade name, collectively referred to herein as AAP. Our stores offer a broad selection of brand name and proprietary automotive replacement parts, accessories and maintenance items for domestic and imported cars and light trucks, with no significant concentration in any specific area. In addition, we operated 36 stores under the “Western Auto” and “Advance Auto Parts” trade names, located primarily in Puerto Rico and the Virgin Islands. We also operated 62 stores operating under the “Autopart International” trade name, or AI stores, at December 31, 2005.

We also provide our customers online shopping and access to over 1 million stock keeping units, or SKUs. Our online site allows our customers to pick up merchandise at a conveniently located store or have their purchase shipped directly to their home or business.

Our Internet address is www.AdvanceAutoParts.com. We make available free of charge through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Competitive Strengths

We believe our competitive strengths include the following:

Leading Market Position. We compete in both the DIY and DIFM categories of the automotive aftermarket

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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. We believe we have strong brand recognition and customer traffic in our stores as a result of our significant marketing activities. In addition, we have purchasing, distribution, marketing and advertising efficiencies due to our economies of scale.

Industry Leading Selection of Quality Products. As the number of automotive replacement parts has proliferated, we believe our broad inventory selection allows us to meet our DIY customers' demands. We believe this has created a strong competitive advantage for specialty automotive parts retailers that, like us, have the distribution capacity, sophisticated information systems and knowledgeable sales staff needed to offer a broad inventory selection to DIY customers. We offer one of the largest selections of brand name and proprietary automotive parts, accessories and maintenance items in the automotive aftermarket industry. Our Advance Auto Parts stores, or AAP stores, carry between 16,000 and 28,000 in-store SKUs. We also offer approximately 100,000 additional SKUs that are available on a same-day or overnight basis through our PDQ^®and our Master PDQ^® distribution systems, including harder-to-find replacement parts.

Superior Customer Service. We believe our customers place significant value on our well-trained store teams, who offer knowledgeable assistance in product selection and installation, and this differentiates us from mass merchandisers. We invest substantial resources in the recruiting and training of our employees, who we refer to as team members. Such resources include formal classroom workshops, online seminars, Automotive Service Excellence(TM) certification and an increased focus on bilingual language skills to build technical, managerial and customer service skills. In addition, we have a performance management process that aligns each team member’s goals with our strategic corporate goals. This process has enabled us to improve our retention of high performing team members, which we believe leads to increased customer satisfaction and higher sales. Additionally, we strive to reach our customers' needs through our Consumer Education Program designed to improve the customers' knowledge on performing DIY projects and by providing programs viewed over our proprietary television network within our AAP stores.

Experienced Management Team with Proven Track Record. The 20 members of our senior management team have an average of nine years of experience with us and 13 years in the automotive aftermarket industry, and have successfully grown our Company to become 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, increasing the penetration of our commercial delivery program and making acquisitions.

Growth Strategy

Our growth strategies consist of the following:

Increase Our Average Sales per Store. Our average sales per AAP store rose to more than $1.5 million during 2005, which is one of the highest among our major competitors. We continue to be among the industry leaders in comparable store sales growth, averaging 5.9% annually over the last five years. We plan to increase our average sales per store by, among other things: (1) improving store execution towards “best in class” in automotive aftermarket retail; (2) execution of our category management program; (3) continued maturation of our sales initiatives for our DIY customers including local purchase ordering, factory direct ordering, salvage body parts and our custom mix (store specific merchandise assortment); (4) the implementation of our 2010 store remodeling program, with now more than 50% of our chain remodeled and targeting a total of 200 to 225 AAP stores to be remodeled annually; (5) consistent growth and execution of our commercial plans; (6) enhanced national advertising and (7) focus on making our supply chain more responsive and improving our in-stock position.

Continue to Expand Our Operating Margins. In addition to driving operating margin expansion through increased average sales per store and continued strong comparable store sales growth, we will continue to focus on increasing margins by: (1) improving our purchasing efficiencies with vendors; (2) utilizing our supply chain infrastructure and existing distribution network to optimize our inventory mix and maximize distribution capacity; (3) leveraging our overall scale to reduce other operating expenses as a percentage of sales and (4) continuing to

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implement our category management and custom mix initiatives, including the expansion of our private label and proprietary brands in our AAP stores.

Generate Strong Free Cash Flow. We have generated strong free cash flow over the last five years. Our strategy is to invest back into our business through our key initiatives for increasing sales per store and operating margins. We look to deploy additional cash in the most optimal way to increase shareholder value, which has included stock repurchases and acquisitions and as recently announced, the opportunity for cash dividends.

Increase Return on Invested Capital. We believe we can successfully continue to increase our return on invested capital by generating strong comparable store sales growth and increasing our margins. We believe we can also increase our return on invested capital by leveraging our supply chain initiatives to increase sales faster than inventory growth and selectively expanding our store base primarily in existing markets. 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 open at least 170 to 180 AAP stores primarily in existing markets in 2006.

Industry

The United States automotive aftermarket industry is generally grouped into two major categories: DIY and DIFM. According to the Automotive Aftermarket Industry Association, or AAIA^®, Aftermarket Factbook, from 2000 to 2004, the DIY category grew at a 4.5% compound annual growth rate from $28.9 billion to $34.5 billion. This category represents sales to consumers who maintain and repair vehicles themselves. We believe this category is characterized by stable, more recession-resistant demand than most retailers because of the need-based characteristics of the DIY category. Additionally, in difficult economic times, we believe people tend to drive more and use air travel less. We also believe difficult economic times result in people retaining their vehicles longer, which moves these vehicles in the range of years in age when more repairs are needed. Alternatively, in an improving economy, we believe the need-based characteristics of our DIY customers still exist, and they are more inclined to complete preventative maintenance than to defer these activities. From 2000 to 2004, the DIFM category grew at a 5% compound annual growth rate, from $62.2 billion to $75.5 billion according to the AAIA Aftermarket Factbook. This category represents sales to professional installers, such as independent garages, service stations and auto dealers. DIFM parts and services are typically offered to vehicle owners who are less inclined to repair their own vehicles.

We believe the United States 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, and increasing number of cars coming off of warranty, particularly previously 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;
	·	continued consolidation of automotive aftermarket retailers;
	·	move to higher priced premium parts, which offer enhanced features, benefits and/or warranties; and
	·	market share growth opportunities for specialty retailers relative to other channels selling similar merchandise.

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

Autopart International

We completed the acquisition of AI in September 2005. The acquisition, which included 61 stores throughout New England and New York, a distribution center and AI’s wholesale distribution business, will complement our growing presence in the DIFM market in the Northeast. In 2005, AI generated annual sales of approximately $102 million, of which we have reflected $30.3 million in our consolidated revenues subsequent to the acquisition.

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AI’s business serves the commercial market from its store locations in addition to warehouse distributors and jobbers throughout North America serviced by its North American Sales Division. We believe AI provides a high level of service to its commercial customers by providing high quality parts, unsurpassed counter service and immediate parts delivery. As a result of its extensive sourcing network, AI is able to serve its customers in search of replacement parts for both domestic and imported cars and light trucks with a greater focus on imported parts. In addition to sourcing product globally, AI works with certain manufacturers on the production of several product lines under its proprietary brand. The AI stores offer an average of 8,600 SKU’s with access to an additional 21,000 unique SKU’s in AI’s two distribution centers.

AAP Store Operations

Our well-merchandised retail stores are where our customers judge and value our service. While completing approximately 220 million customer interactions per year, our focus is to execute our promise; “With Low Prices on Quality Parts our Dedicated Team Will Serve you Better”, one customer at a time.

Our stores generally are located in freestanding buildings in areas with high vehicle traffic counts, good visibility and easy access to major roadways. Our stores typically range in size from 5,000 to 10,000 square feet averaging approximately 7,400 square feet. The size of our new and remodeled stores is generally 7,000 square feet. All stores have a standard SKU offering while certain stores may have a more expansive SKU offering as follows:

Type of Store	Description	SKU Offering
Standard	· Includes standard SKU offering	16,000
Hub / Undercar	· Provides customized assortment of merchandise in a centralized market location specifically identified based on the demand within an individual market · Benefits all our DIY and DIFM customer within the market	16,600 - 18,000
Local Area Warehouse (LAW)	· LAW concept utilizes existing space in selected stores to ensure the availability of a customized assortment in addition to hub and undercar assortments to other stores served by LAW · Product is available on a same day basis to stores served by LAW	24,600 - 28,000

To ensure our stores have the right product at the right time, we also utilize a network of Parts Delivered Quickly, or PDQ®, facilities and one Master PDQ® facility. Our PDQ® and Master PDQ® network of facilities provide our customers an additional assortment of 100,000 additional harder to find parts and accessories on a same day or overnight basis. In addition, all our stores offer a Factory Direct Ordering, or FDO, option for customers to have access to thousands of additional SKU’s.

In addition, our proprietary electronic parts catalog, or EPC system (as discussed further below), enables our team members to identify and suggest the appropriate quality and price options for the SKU’s that we carry, as well as the related products, tools or advice that is required by our customer to complete their automotive repair projects properly and safely. Replacement parts sold at our stores include an extensive number of applications of those parts including:

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Automotive filters	Starters	CV shafts	Suspension parts
Radiators	Alternators	Spark splugs	Engines
Brake pads	Batteries	Transmission parts	Transmissions
Fan Belts	Shock absorbers	Clutches
Radiator hoses	Struts	Electronic ignition components

Our retail stores are 100% company operated and are divided into geographic areas. A senior vice president, who is supported by four to five regional vice presidents, manages each area of retail stores. Division managers report to the regional vice presidents and have direct responsibility for store operations in a specific division, which typically consists of 10 to 15 stores. Depending on store size and sales volume, each store is staffed by 10 to 20 team members under the leadership of a store manager. Our stores generally are open from 7:30 a.m. to 9:00 p.m. six days a week and 9:00 a.m. to 9:00 p.m. on Sundays and most holidays to meet the needs of our DIY and DIFM customers.

Total stores. Our 2,872 retail stores were located in the following states and territories at December 31, 2005:

		Number of				Number of				Number of
Location		Stores		Location		Stores		Loc

Delaware (State or other jurisdiction of incorporation or organization)	54-2049910 (I.R.S. Employer Identification No.)
5673 Airport Road Roanoke, Virginia (Address of Principal Executive Offices)	24012 (Zip Code)