SecProbe.io

CORRESP
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filename1.htm

    aapcorresp.htm

                  Jill
                    Livesay

                  Senior
                    Vice
                    President, Controller

                  January 31, 2008
                  5008
                    Airport
                    Road

                  Roanoke,
                    Virginia  24012

                  H. Christopher Owings

                    Direct

                  540-561-6426

                  Assistant Director
                  Fax
                  540-561-6445

                  United States Securities and Exchange
                    Commission

                  Division of Corporation Finance

                  100 F Street, N.E.

                  Washington, D.C. 20549-3561

    Via:  Facsimile
      AND EDGAR

    Re:  Advance
      Auto Parts,
      Inc.

    Form
      10-K For Fiscal Year December 30,
      2006

    Filed
      February 28, 2007

    File
      No.
      001-16797

    Definitive
      Proxy Statement on Schedule 14A

    Filed
      April 11, 2007

    File
      No.
      001-16797

    Dear
      Mr.
      Owings,

    This
      letter sets forth the response of
      Advance Auto Parts, Inc. (the “Company”) to the comment letter, dated December
      31, 2007, of the staff of the Division of Corporation Finance (the “Staff”) to
      the Form 10-K for the Fiscal Year Ended December 30, 2006 filed on February
      28,
      2007 (the “10-K”) and the Definitive Proxy Statement on Schedule 14A filed on
      April 11, 2007 (the “Proxy Statement”).  In order to ease your review,
      we have repeated each comment in its entirety.

    Form
      10-K for Fiscal Year
      Ended December 30, 2006

    Critical
      Accounting
      Policies, page 25

              1.

              We
                note that you maintain reserves for your inventory.  In future
                filings, please include these reserves in your Schedule II provided
                under
                Regulation S-X Rule 5-04(a).  We also note that there was a
                significant increase in the inventory reserve in the most recent
                fiscal
                year.  The reasons for this increase

                should
                  be discussed either here or elsewhere in management’s discussion and
                  analysis.

    Response:  In
      future filings, we will include in the notes to the consolidated financial
      statements any significant reserves for inventory.  We plan to discuss
      significant increases or decreases in the inventory reserve in the section
      of
      the periodic reports entitled critical accounting policies.  The
      increase in the inventory reserve from 2005 to 2006 was due to a change in
      our
      timing of taking physical inventories.  We perform cycle counts to
      evaluate the validity of our physical inventories as well as the adequacy of
      certain inventory reserves.  We develop estimates of certain inventory
      reserves based upon our historic cycle count results, changes in recent events
      and the length of time from the prior cycle count of that specific
      product.  During 2006, management decided to decrease the frequency of
      the performance of our counts compared to prior years.  On average
      each product is counted several times per year.  However, due to the
      systematic reduction in the frequency of our cycle counts compared to prior
      years, our estimated shrink reserve would be expected to increase. The shrink
      expense which is driven by our cycle counts and experience was approximately
      1.25% of sales in 2005 and 2006.

              2.

              We
                note that you accrue reserves for self insurance.  Please tell
                us why these reserves increased significantly from December 30, 2005
                to
                December 31, 2006.  In future filings please provide a table
                that reconciles beginning and ending balances by disclosing additions,
                utilization and adjustments to the accrual.  This table can be
                presented as part of this discussion, in the notes to your financial
                statements or as part of Schedule II.  You should discuss
                significant changes in the accrual as part of your disclosures of
                critical
                accounting policies.

    Response:  Our
      self-insurance program, started in 2001, has not reached full
      maturity.  Each year, our reserve for self-insurance increases over
      the prior year because each year adds an additional layer of reserves without
      an
      equal amount of prior year reserves being fully relieved.  Generally,
      claims have historically taken several years to settle and thus are not relieved
      at the same rate as additional reserves are added each year.  In
      addition, the reserves for self-insurance increased in 2006 compared to 2005
      as
      a result of an increase in the number of workers’ compensation claims and
      vehicle accident claims in 2006 as well as an increase in the total cost to
      settle workers’ compensation claims compared to prior years.  This
      increase in claims is primarily due to an overall growth of our business,
      including an increase of 210 stores and the related increase of approximately
      1,400 employees and an increase in delivery vehicles of 18% from 2005 to
      2006.  We plan to discuss significant increases or decreases in the
      reserve in the critical accounting policies section in future
      filings.  In future filings, we will include a table that reconciles
      beginning and ending balances of reserves for self-insurance by disclosing
      additions, utilization and adjustments to the accrual in the notes to the
      consolidated financial statements.

    Notes
      to Consolidated
      Financial Statements, page F-10

              3.

              We
                note your website states you accept used auto batteries when you
                sell new
                batteries.  Please tell us if there are any environmental costs
                or obligations associated with this business practice.  Tell us
                whether you use a third party to dispose of or recycle the
                batteries.  Confirm that you are in compliance with state laws
                that either mandate the recycling of lead acid batteries or prohibit
                their
                disposal in landfills.

    Response:  Used
      auto batteries that are accepted at our stores are collected at a designated
      indoor location within our stores and returned to our regional distribution
      centers.   The batteries are then consolidated at the distribution
      center where they are stored indoors on pallets until they are collected by
      a
      battery supplier.  The battery supplier picks up the batteries at the
      distribution center and transports them to a recycling facility.  The
      Company contracts almost exclusively with two major auto battery suppliers
      to
      supply auto batteries for sale in our stores.  The terms of these contracts
      permit the battery suppliers to collect the used batteries and require the
      suppliers to represent that they are in compliance with all applicable laws
      and
      regulations.  We do not otherwise dispose of any used auto
      batteries.  We are following industry practices with respect to the
      handling of used auto batteries, and the Company believes that these practices
      comply with any applicable federal and state laws with respect to
      transporting, handling
      or disposing of lead acid batteries.  Based on the Company’s experience,
      management does not believe that there are any material environmental costs
      associated with the current business practice of accepting used batteries as
      these costs are borne by the suppliers.

    Sales
      Returns and
      Allowances, page F-12

              4.

              Please
                include your reserves for sales returns and allowances as part of
                your
                Schedule II.

    Response:  Our
      reserves for sales returns and allowances have been approximately $2 million
      in
      recent years.  In future filings, we will include in the notes to the
      consolidated financial statements reserves for sales returns and allowances
      when
      significant.

    10.
      Accrued Expenses, page
      F-23

              5.

              Please
                explain to us why you have accrued expenses related to capital
                expenditures.

    Response:  The
      capital expenditures reported separately in our accrued expense note to the
      consolidated financial statements represent the total amount of property and
      equipment for which we have received the property and obtained title but remain
      unpaid for as of December 30, 2006.

    14.  Income
      Taxes,
      page F-26

              6.

              Tell
                us why there is a large deferred tax liability associated with your
                inventory.  Explain to us in detail the specific causes that
                result in your inventory being significantly lower for tax purposes
                than
                for GAAP purposes.

    Response:  The
      net deferred tax liability associated with the Company’s inventory arises from
      differences in accounting treatment for certain items as determined by either
      accounting principles generally accepted in the United States of America
      (“GAAP”) for book purpose or the Internal Revenue Code (“Code”) for tax
      purposes.  The net deferred tax liability associated with inventory is
      due to the following items:

                LIFO
                  inventory

              $
              (63,431
              )

              Purchasing
                and warehousing costs

                included
                  in
                  inventory

              (23,381
              )

                Inventory
                  reserves

              7,741

              $
              (79,071
              )

    Last-in,
      first-out (“LIFO”) inventory reported for GAAP purposes is greater than reported
      for tax purposes primarily because of differences in determining the respective
      indices.  For GAAP purposes, the Company uses the double extension
      method which computes the LIFO indices based on the Company’s actual cost per
      unit of inventory.  For tax purposes, the Company utilizes the
      Inventory Price Index Computation (“IPIC”) method which utilizes externally
      published indices based on the Producer’s Price Indexes (“PPI”) by the Bureau of
      Labor Statistics.  This method is specifically allowed for tax
      purposes under the tax regulations.  The LIFO indices computed with
      the PPI index have generally been inflationary which causes LIFO inventory
      for
      tax purposes to be lower than LIFO inventory computed for book purposes using
      an
      internal index.  Accordingly, the cost of sales recognized for tax
      purposes has been higher than for book purposes giving rise to a reduced current
      tax burden.  However, this reduced current tax liability will be
      realized as the inventory is sold and, therefore, is now recorded as a deferred
      tax liability.

    Purchasing
      and warehousing costs included in inventory differ for GAAP and tax purposes
      because of the varying types of costs permitted to be capitalized in accordance
      with GAAP versus the Code, such as certain transportation and storage
      costs.   Purchasing and warehousing costs included in inventory
      consist of costs associated with operating our distribution network, such as
      payroll and benefit costs, occupancy costs, depreciation and freight expenses
      associated with moving merchandise inventories from our distribution centers
      to
      our retail stores as noted in Note 2 to the consolidated financial
      statements.

    Inventory
      reserves for GAAP are greater than for tax purposes as these charges are not
      recognized as a deduction for tax purposes until the liability is
      settled.  Accordingly, reserves recognized reduce the GAAP taxable
      income and are not recognized for tax purposes creating a deferred tax
      asset.

    20.
      Segment and Related
      Information, page F-34

              7.

              In
                your business discussion you state that similar product categories
                contribute different levels of profitability to your operations and
                also
                describe product sales by groups such as replacement parts, maintenance
                items and general accessories. We refer you to pages 3 and 6. Please
                tell
                us why you have not included the disclosures required by paragraph
                37 of
                SFAS No. 131. Alternatively, please provide us with an example of
                your
                proposed disclosure for future
                filings.

    Response:  In
      our 2006 annual report on Form 10-K, we disclosed that “sales of replacement
      parts account for a majority of our net sales and typically generate higher
      gross margins than maintenance items or general accessories.” Paragraph 37 of
      SFAS No. 131 states “An enterprise shall report the revenues from external
      customers for each product and service or each group of similar products and
      services unless it is impracticable to do so.” We also note that the Division of Corporation
      Finance –
Current Accounting and Disclosure Issues publication dated March 4, 2005
      addresses this matter and states “Registrants should remember to identify the
      products and services from which each reportable segment derives its revenues,
      and to report the total revenues from external customers for each product or
      service or each group of similar products and services. Disclosures for products
      and services that are not substantially similar must be
      disaggregated.”

    The
      comment included in our Form 10-K regarding the grouping of our products into
      replacements parts, maintenance items and accessories was made as these are
      common broad groupings of product in the auto aftermarket industry and are
      not
      based on our specific entity information.  Since we have not
      historically produced financial information (revenue or gross margin) separately
      for replacement parts, maintenance items and accessories we will remove this
      disclosure in future filings.  Furthermore, our personnel structure
      does not employ a product manager to administer the distribution and marketing
      of any group of products, nor do we compensate individuals, or evaluate the
      performance of individuals, based upon the performance of any specific product
      group.

    Accordingly,
      we concluded that is appropriate to report our total sales as one primary class
      of product as defined in SFAS No. 131.

    Schedule
      1 – Condensed
      Financial Information of the Registrant, page F-37

              8.

              Please
                tell us how the current disclosure satisfies the requirements concerning
                restrictions on dividends and retained earnings or net income. See
                Rule
                4-08(e)(3)(i) and (ii) and Rule 5-02.31(a)(3) of Regulation S-X.
                If there
                are restrictions between parent and subsidiaries please disclose
                this fact