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ROANOKE, VA. -- A more fitting name couldn't have been chosen for Advance Auto Parts, which has been on a steady and determined mission to advance as a leader and innovator in automotive parts and accessories retailing.

Not only did Advance leap past rivals of similar size to the No. 2 spot in the industry several years ago, but its potential to grow is significant, given continued integration of acquired stores and initiatives intended to boost sales and profits. Since 1995, sales have increased at a 27% compounded growth rate, from $603 million to $3.3 billion last fiscal year.

With a more measured growth rate of 10%, and barfing further acquisitions, Advance Auto Parts should double its revenue by 2010 to at least $6 billion.

"We're awfully proud of our past but damned excited about our future," chairman and ceo Larry Castellani told DSN Retailing Today. "We have considerable growth opportunities."

Having inched closer to industry leader AutoZone in store count due to its acquisition of Discount Auto Parts in 2001, Advance can't seem to avoid comparisons with its larger, more profitable rival. Advance operates about 2,500 stores in 38 states, Puerto Rico and the Virgin Islands, while AutoZone has 3,200-plus stores in 48 states, the District of Columbia and Mexico. AuteZone sales for fiscal 2003 were $5.45 billion, while Advance should surpass $3.6 billion when its fiscal year ends in December.

And while AutoZone has a considerable lead in financial performance, including a profit margin that recently grew to 16.8%, Advance might be considered the industry player with the most potential to improve.

"One would think there is a lot of profit expansion potential when they integrate their most recent acquisitions," said Advest analyst Bret Jordan. "I would expect to see continued improvement at the operating level."

Indeed, Advance has focused on boosting its operating margin through category management and reduction of operating costs. The operating margin grew from 4.9% in 2001 to 7.2% in 2002, with gains continuing.

"Our biggest opportunity is to get our operating margin closer to our competitors," said Sheila Stuewe, director of media relations. "Our profit margin this year is anticipated to be about 8.2%"

That of course impacts earnings, which grew from $11.4 million in 2001 to $65 million last year. Comparable earnings per diluted share (excluding integration expenses and one-time items) more than doubled to $2.68.

Category management has been a major catalyst in the margin improvement. This year, Advance completed detailed line reviews on about half of its merchandise categories, which combined yielded 70% of sales. The category management initiative that kicked off last year involves working closely with suppliers to analyze productivity of each category and refine the mix accordingly. As a result, market share gains were made for each category reviewed, according to the retailer's last annual report.

Getting the right products to stores at the right price and time is the goal in category management, and a key to retailing success. But for Advance, this is just one component of its merchandising strategy. Others include expanding private label lines, offering a depth of selection in parts, including hard-to-find items, and tailoring store assortments to neighborhoods.

"We have a very disciplined, focused store format," Castellani told DSNRT. "Our primary focus is on being the best in every single location."

Parts are Advance's expertise, and therefore the chain emphasizes its breadth and selection in this area. To a lesser extent, accessories and impulse items are other elements of the mix, which includes 16,000 to 21,000 SKUs and an additional 105,000 hard-to-find items available the same day or overnight through the chain's Parts Delivered Quickly (PDQ) distribution system. Private label accounts for about 20% of sales and has been expanding with such categories as motor oil and antifreeze added in 2002.

As opposed to some of its competitors, Advance does not sell tires or operate service bays. In recent years, the chain has increased its focus on supplying commercial customers, with that segment growing to 12.8% of sales. This business, offered through 1,477 stores, could grow to 25% of revenue.

Even with the emphasis on parts, Castellani insists people are Advance's greatest asset. The company promotes and nurtures knowledgeable, helpful team members and encourages offering free services such as battery installation and "check engine" warning light diagnosis.

"We think the amount of training and emphasis we put on people is key to our success," the ceo said. "Our advertising slogan for years said, 'the best part is our people.'"

Effective people management has been one goal of the chain's Management Planning and Training (MPT) system, which optimizes labor usage to store needs, resulting in better service and labor savings. This program is still in the process of rolling out, and should be in all stores by year's end.

Another competitive advantage is the chain's proprietary electronic catalog system APAL, which stands for Advance Parts and Accessories Look-up. APAL, incorporating point-of-sales data to check parts availability, features a parts library, technical information and graphics to assist customers with any purchase, offer related items and good/better/best options in each category. More than 1,500 stores now offer APAL, with plans to put this program in all stores by the end of 2004.

Without effective promotion, however, none of these efforts would matter. For that reason, Advance has been rolling out a new store prototype dubbed its 2010 format, and followed that with the debut of a new logo and national advertising campaign earlier this year. A waving racing flag is the new logo, while the ad slogan is "We're ready in Advance."

Stuewe said the advertising campaign, which uses national television for the first time in the chain's history, focuses on building the brand image of Advance Auto Parts as having the best parts, people and prices.

The store redesign, meanwhile, doesn't change the size of the chain's typical 7,000-square-foot box but does add yellow to the former color scheme of red and black. Other elements are bolder signage, elimination of a long parts counter and improved adjacencies. (see sidebar on page 23.)

Changing stores to this new look, though it will take several years to complete, came at a good time for Advance given its ongoing integration of acquired stores. Advance has been extremely aggressive in growing through acquisition, with nearly half of its store base built up this way.

A key deal was the chain's merger with 560-store Western Auto Supply/Parts America in 1998, which essentially doubled the company's size. Stuewe said the automotive aftermarket was embroiled in intense consolidation in the late 1990s, and pressure was on to make some sort of move.

"In 1998, there were a lot of smaller players. We either had to grow or else in effect be acquired. We decided we were going to be one of the acquirers," Stuewe said.

That deal was followed by the purchase of regional chains Carport Auto Parts, Trak Auto and Parts Auto Stores. In late 2001, Advance made another bold move when it acquired 671-store Discount Auto Parts, becoming the second largest player in the industry. That same year, Advance became a public company, trading on the New York Stock Exchange.

Conversion of the former Discount Auto stores to the Advance format is still ongoing, but progressing nicely. Because of the strong customer loyalty and market share Discount had in Florida, with 432 stores, the company decided to rename those units Advance Discount Auto Parts. All stores have been merchandised to the Advance format, while physical remodels take longer, and should be completed in Florida by 2005.

Under Advance's wing, the former Discount stares have performed exceedingly well. Comparable-store sales through the first two quarters were up 4.7% in those stores, beating chainwide comp gains of 1.5% for the first half.

Going forward, Castellani said Advance would continue to consider regional "tuck-in" acquisitions as they arise. The company's geographic reach only lacks a foothold in the far West, which could make rival CSK Auto a potential acquisition candidate. Two analysts said CSK would be a good fit, though both doubted such a deal might occur anytime soon.

"It's much more likely Advance will make smaller regional acquisitions," said Cid Wilson of Whitaker Securities. "I think Advance wants to clean up its balance sheet first."

Reducing debt is a priority for Advance, therefore a major acquisition is unlikely. The company's debt grew to $970 million with the Discount deal and has since dropped to $536 million. About $170 million of expected free cash flow this year is targeted to pay down debt, said Stuewe.