SecProbe.io

CORRESP
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filename1.htm

    aapcorresp.htm

                    Jill
      Livesay

                    Senior Vice
      President, Controller

                    February 28, 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 comments, dated February 13, 2008, 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

        Note 14.  Income
Taxes, page F-26

                  1.

                  We
      have read your response to our comment six of our letter dated December
      31, 2007.  With respect to the portion of your response that
      addresses purchasing and warehousing costs included in inventory your
      response does not adequately explain why there would be a large difference
      between tax and GAAP.  You highlight that certain
      transportation, storage and purchasing costs are responsible for the
      differences.  However, we direct your attention to Treasury
      Regulation 1.263A-3(c)(3), (4) and (5)
which

            1

                    indicate
      minimal differences between the costs that you are required to capitalize
      as part of inventory under Unicap and the expenses you disclose in note 2
      to your financial statements.  Further, we note that in note 5
      to your financial statements you disclose that the total amount of
      purchasing and warehousing costs capitalized under GAAP was $95.6
      million.  The amount of deferred tax liability associated with
      purchasing and warehousing costs appears unusually large in comparison
      with the amount you have capitalized for GAAP purposes.  Please
      provide us with a more detailed analysis that identifies the specific
      costs, including dollar amounts that you are treating differently for GAAP
      and tax purposes.

        Response:  In
our response dated January 31, 2008, we identified a deferred tax liability of
$23.4 million related to purchasing and warehousing costs.  We note
your reference to Treasury Regulation 1.263A-3(c)(3), (4) and (5) (the “Treasury
Reg”).  We agree that there are minimal differences between the
purchasing and warehousing costs that we capitalize under accounting principles
generally accepted in the United States of America (“GAAP”) and those noted in
the Treasury Reg.  While our response dated January 31, 2008 stated
that we had differences, the major portion of our deferred tax is due to the
method in which the capitalized costs are expensed for GAAP and tax purposes,
and not due to the specific types of costs.  We would also like to
note that during 2006 we capitalized $195.1 million under GAAP and $184.4
million for tax purposes, respectively, of which $95.6 million remained in
inventory for GAAP and $36.1 million remained in inventory for tax purposes at
December 30, 2006.  The approximate deferred tax differences are
attributable to the following:

        Table 1

                    Amount

                     Description

                    (in
      millions)

                     Expense
      Methodology

                  $
                  56.2

                     Cost
      Differences

                  3.3

                    Total

                  $
                  59.5

                     Deferred
      Tax Liability

                     (39.3%
      tax rate)

                  $
                   23.4

        Expense
Methodology:

        Since the
specific costs used in calculating capitalizable costs for GAAP and tax purposes
are substantially the same, the primary reason for the difference between
purchasing and warehousing costs included in inventory for GAAP and tax purposes
is the difference in the expense methodology for capitalizing costs to ending
inventory.  For GAAP purposes, the Company determines which
costs

            2

        remain
capitalized to inventory each period by dividing the purchasing and warehousing
costs eligible for capitalization during a period by the purchases of inventory
during the period and applying that percentage to the amount remaining in
inventory at period end.  The balance of purchasing and warehousing
costs is reported in current period cost of sales.

        We
adopted the Unicap methodology for both GAAP and tax purposes in 1986, when the
Unicap regulations became effective.  The methodology used at the time
of adoption was substantively the same for GAAP and tax
purposes.  However, in 1996, we obtained approval from the IRS through
a Form 3115 filing to utilize a specific identification method to allocate IRC
Section 263A capitalizable costs to ending inventory.  We did not
change our methodology for GAAP purposes at this time, thus creating the current
difference in methods.  Under the specific identification method, the
Company determines the amount of the purchasing and warehousing costs to be
allocated to specific units and records that amount as a cost of sale upon the
sale of that specific unit. The amount capitalized that remains in
inventory is lower for tax than GAAP purposes because the overall unit inventory
turn rate is approximately 35 percent faster than the dollar inventory turn rate
due to the high turnover of low-dollar units.  Additionally, the
methodology used to determine the amount that remains in inventory for tax
purposes calculates the costs of handling inventory by category.  The
categories with higher units on hand are on average less expensive to handle per
unit, which causes fewer dollars to remain in inventory for tax.

        Cost
Differences:

        Cost
differences exist between GAAP and tax as noted in the table below.

        Table 2

                     Description

                     (in
      millions)

                    GAAP

                    Tax

                    Difference

                     Management

                     Activities Costs

                  $
                  5.9

                  $
                  10.7

                  $
                  (4.8
                  )

                     Warehousing
      Costs

                  186.4

                  163.4

                  23.0

                     Mixed
      Service Costs

                  2.8

                  10.3

                  (7.5
                  )

                    Total

                  $
                  195.1

                  $
                  184.4

                  $
                  10.7

                     a

        a – The
$3.3 million of cost differences noted in Table 1 is the amount remaining in the
balance sheet of $10.7 million in total cost differences capitalized during
2006.

        We
capitalize certain warehousing costs for GAAP and tax purposes based upon the
various activities that occur.  The differing treatments of the
activities are:

            3

                  ·

                  Management Activities
      Costs: Costs related to purchasing and replenishment payroll costs
      within our supply chain are capitalized for GAAP and tax
      purposes.  Payroll costs associated with management activities
      attributable to business activities as a whole are not capitalized to the
      cost of inventory for GAAP purposes while they are required to be
      capitalized for tax purposes.  During 2006, the Company
      capitalized $5.9 million for GAAP and $10.7 million for tax for these
      purposes.

                  ·

                  Warehousing Costs:
      Capitalizable expenditures at the distribution centers are costs connected
      with the receiving, replenishment, order pulling, shipping, and
      transportation functions performed at those facilities.  The
      main differences between capitalizable costs at the distribution centers
      for GAAP purposes as opposed to tax purposes are related to the
      reclamation and cycle count processes.  During 2006, the Company
      capitalized $186.3 million for GAAP and  $163.4 million for tax
      related to these warehousing costs for the following
  items:

                  o

                  Each
      distribution center facility has a reclamation area dedicated to
      processing defective and discontinued inventory.  The
      warehousing costs associated with operating this area are not capitalized
      for GAAP or tax purposes due to the costs being directly related to
      inventory that is no longer held for sale.  For tax purposes a
      portion of freight costs is allocated to the reclamation process while it
      is not allocated for GAAP purposes.  The defective and
      discontinued inventory is picked up at a store at the time of each
      scheduled inventory delivery and brought back to a distribution center to
      be processed and returned to the vendor.  For GAAP purposes none
      of the freight costs are allocated to the reclamation process due to the
      fact that the truck would be returning to the distribution center with or
      without any reclamation product and no incremental costs are incurred by
      carrying the reclamation product back to the distribution
      center.

                  o

                  The
      cycle count process involves scheduled routine physical inventory counts
      of the stock keeping units (“SKUs”) stored within the distribution
      center.  These costs are capitalized for GAAP purposes as we
      have determined these costs to be part of distributing inventory to
      stores.  These costs are not capitalized for tax purposes as the
      cycle count costs have been deemed not to fit the definition of handling
      costs or storage costs for tax.

                  ·

                  Mixed Service Costs:
      Mixed service costs as defined in Treasury Regulation 1.263A-1(e) (4) (ii)
      (C) are service costs that are partially allocable to production or resale
      activities (capitalizable mixed service

            4

                    costs)
      and partially allocable to non-production or non-resale activities
      (deductible mixed service costs).  Service costs are defined in
      Treasury Regulation 1.263A-1(e)(4)(i)(A) as indirect costs (e.g. general
      and administrative) that can be identified specifically with a service
      department or function, or that directly benefit or are incurred by reason
      of a service department or function.  Mixed service costs are
      not included as part of capitalizable costs for GAAP purposes with the
      exception of certain local area warehouse (“LAW”) costs, but are included
      for tax purposes.  A LAW is one physical location which houses a
      retail outlet as well as an area warehouse and is capitalizable as the
      location is segregated between the two areas and the costs of the
      warehouse section can be determined readily and segregated from the sales
      section of the store.  A total of $2.8 million of these costs
      were deemed to be capitalizable for GAAP purposes and $10.3 million was
      determined to be capitalizable for tax
purposes.

        Schedule
14A

        Compensation Discussion
& Analysis, page 13

        Annual Incentive Plan, page
14

                  2.

                  We
      are in receipt of your response to our comment 13 of our letter dated
      December 31, 2007.  We note your indication that you disclose on
      page 15 of your Proxy Statement the 2006 financial performance targets and
      their relative weights, however, the disclosure that appears on the
      referenced page appears to contain only the weight of such
      targets.  In future filings, please ensure that you disclose the
      amounts used for the financial targets for 2006.  Also, with
      respect to the reason why you have not disclosed the financial targets for
      2007, please tell us with greater specificity as to why the disclosure
      could have a “detrimental effect on [y]our ability to negotiate with
      vendors and customers.”  We also note your indication that
      “[a]ny actions taken in early 2007 to set performance targets for fiscal
      year 2007 had no impact on the compensation paid to executives for the
      prior year.”  It is not clear what you mean when you state the
      targets “had no impact.”  Please revise to
    clarify.

        Response:  The
Company notes the Staff’s comments and agrees to include the amounts used for
the financial targets for 2006 in future filings.

        With
respect to our statement that disclosing the current year’s financial and
strategic targets would be detrimental, we believe that such disclosure could
have had a negative impact on the Company’s ability to negotiate with our

            5

        vendors
and suppliers by allowing them to determine our sales and operating income goals
when pricing goods and services.   The disclosure of the
Company’s internal financial and strategic targets could also lead customers,
vendors and others to make assumptions about the Company’s business and retail
pricing practices that may not be accurate.

                  In
      addition, to clarify our statement that our performance targets may not
      have an impact on compensation paid to employees, the bonuses paid to the
      Company’s named executive officers under the annual incentive plan in any
      given year are not affected by the financial and strategic thresholds and
      targets set in subsequent years for the subsequent year bonus
      award.   In other words, the financial and strategic
      thresholds and targets set in early 2007 for the 2007 bonus award did not
      affect the amount of the bonuses awarded to the named executive officers
      with respect to fiscal year 2006.  Accordingly, disclosure of
      the financial and strategic thresholds and targets that were established
      for fiscal year 2007 is not information that is material to an
      understanding of the named executive officers’ compensation for the
      completed fiscal year and may properly be
      excluded.  Furthermore, we respectfully submit that Instruction
      2 of Item 402(b) of Regulation S-K does not require disclosure of the
      specific financial and strategic thresholds and targets for
      2007.

        Long Term Incentive
Compensation, page 15

                  3.

                  We
      are in receipt of your response to our comment 15 of our letter dated
      December 31, 2007.  In future filings, please confirm that you
      will disclose the explanation you provided in your
    response.

                  Response:  In
      future filings, we will disclose the explanation of total compensation
      provided in our response dated January 31, 2008, to comment 15 of your
      comment letter.