Advance Auto Parts (NYSE:AAP) executives told investors the company is building on what it described as early gains from a multi-year transformation focused on improving parts availability, customer service, and profitability, after returning to positive comparable sales growth in fiscal 2025.
On the company’s fourth-quarter and full-year 2025 earnings call, CEO Shane O’Kelly said Advance is “undergoing a significant transformation focused on the fundamentals of selling auto parts,” guided by customer feedback. He said those efforts helped the company deliver positive comparable sales for the year after three consecutive years of negative results and expand adjusted operating margin by more than 200 basis points from “near breakeven levels.”
2025 actions: footprint changes, assortment expansion, and network consolidation
Other initiatives cited on the call included expanded parts coverage and changes to logistics and distribution:
- Added roughly 100,000 new SKUs and improved store availability to the “high 90% range” from the “low 90% range” at the start of 2025, while reducing product costs by more than 70 basis points.
- Improved average delivery speed to professional customers by cutting more than 10 minutes from an average of over 50 minutes at the start of 2025.
- Substantially completed consolidation of its distribution center network, operating 16 U.S. distribution centers versus nearly 40 at the end of 2023.
- Opened 14 new market hubs in 2025 to reach 33 total, opened 35 new stores, and invested nearly $90 million in infrastructure upgrades across more than 1,600 stores.
O’Kelly also said the company navigated external pressures, including a “volatile tariff and consumer spending environment,” while maintaining focus on availability and service, which he said supported positive performance in the professional channel. He added the company strengthened its balance sheet by proactively accessing capital markets during 2025.
Leadership changes and medium-term margin target
O’Kelly said Advance made leadership changes through promotions and external hires, including naming Anthony Sarlanis as SVP of the Pro business and promoting Kunal Das to chief technology officer. The company also brought in Ron Gilbert as SVP of supply chain and Tony Hurst as SVP of U.S. stores.
He reiterated a medium-term goal of 7% adjusted operating income margin with a mid-40% gross margin, noting about half of the identified margin opportunity is tied to merchandising excellence, with the remainder tied to supply chain and store operations. Advance ended 2025 with a 2.5% adjusted operating income margin, and management guided to 3.8% to 4.5% in 2026.
O’Kelly said the company believes it can deliver “at least another 100 basis points” of margin expansion in 2027, though he noted that pace would imply a timeline below the company’s previous target of reaching 7% in 2027. He attributed the shift to varying progress rates across initiatives and “top-line momentum” that has lagged original expectations due in part to a softer consumer spending environment.
2026 priorities: pricing tools, loyalty refresh, market hubs, and store standards
For 2026, management outlined priorities across merchandising, supply chain, and store operations. O’Kelly said merchandising excellence is expected to be the largest contributor to margin expansion this year, with initiatives including deeper vendor partnerships, the rollout of a new pricing matrix to better align market-based pricing by channel and SKU, and further assortment work, including systems intended to dynamically balance inventory across the network.
He also highlighted the launch of a new owned oil and fluids brand, Argos, which the company said was developed from customer research and is positioned to offer performance comparable to national brands at a lower price.
In DIY, Advance recently replaced its Speed Perks program with Advance Rewards. O’Kelly said roughly 60% of DIY transactions come from a loyal base of about 16 million active members, and the new program includes a tiered points structure, vendor offers, and bonus points promotions. He said the company discontinued “unproductive offers like fuel rewards” and increased flexibility to redeem coupons.
On the supply chain side, O’Kelly said Advance expects to operate 15 U.S. distribution centers by the end of 2026 and will focus on simplifying and standardizing distribution center operations while testing labor performance and transportation management tools. He said the company plans to add 10 to 15 market hubs in 2026, with most expected to be greenfield sites. In Q&A, CFO Ryan Grimsland said more than 20 of the existing market hubs were conversions and that market hubs average roughly $2 million in capital spending, varying by build versus lease or takeover.
In stores, O’Kelly said the company is investing in training and task simplification, including Zebra devices, and will upgrade more than 1,000 stores in 2026 as part of a multi-year asset management plan. Advance rolled out a new store operating model in the fourth quarter and is holding teams accountable to two key metrics: customer net promoter score and “time to serve,” targeting under 40 minutes for delivery time on professional orders. The company expects to open 40 to 45 stores in 2026, alongside the market hub additions.
Fourth-quarter results: positive comps, big margin gains, and extra week benefit
CFO Ryan Grimsland said fourth-quarter net sales from continuing operations were about $2.0 billion, down 1% year over year, primarily due to store optimization activity completed in the first quarter of 2025. Comparable sales increased 1.1%, with transactions improving during the last eight weeks of the quarter after a softer start.
Category performance was led by brakes, undercar components, and engine management, which Grimsland said reflected progress in hard parts availability. Average ticket was positive due to improved unit productivity and higher average prices, though he said same-SKU inflation came in just under 3%, about 100 basis points lighter than expected due to tariff-related negotiations. He also cited a roughly 50 basis point markdown headwind tied to assortment transitions to introduce new brands and support the Argos launch, which he said is complete and not expected to affect first-quarter results.
By channel, pro sales grew nearly 4% in the quarter, while DIY comps declined by a low single-digit percentage, which management attributed to consumers adjusting purchasing habits in response to rising prices.
Adjusted gross profit was $873 million, or 44.2% of sales, representing about 530 basis points of gross margin expansion, driven by cycling prior-year restructuring headwinds, footprint optimization savings, and strategic sourcing benefits. Adjusted SG&A was $800 million, or 40.5% of sales, producing roughly 340 basis points of leverage, and adjusted operating income was $73 million, or 3.7% of sales.
The quarter included an extra operating week, which management said contributed $132 million in net sales and $9 million in adjusted operating income, adding $0.08 to adjusted diluted EPS. Adjusted diluted EPS from continuing operations was $0.86 versus a loss of $1.18 a year earlier.
Full-year results and 2026 guidance: comp growth target and return to positive free cash flow
For full-year 2025, net sales from continuing operations declined 5% to $8.6 billion, primarily due to store optimization activity. Comparable sales increased just under 1%, with pro up low single digits and DIY down low single digits. Adjusted operating income from continuing operations was $216 million, or 2.5% of sales, and adjusted diluted EPS was $2.26, compared with a loss of $0.29 in 2024.
Advance ended the year with free cash flow of negative $298 million, which included approximately $140 million of cash expenses tied to store optimization. Grimsland said the remaining outflow was driven by a combination of fourth-quarter business performance, timing of cash obligations, a delay in tax refunds, and timing-related variances in inventory payables that reduced payables by about $80 million. He also noted the company reduced supplier financing usage to $2.5 billion from $2.7 billion in the prior quarter.
Management said it entered 2026 with more than $3 billion in cash and a $1 billion undrawn revolving facility, and net debt leverage of 2.4 times, within its targeted 2.0 to 2.5 times range.
For 2026, the company guided to slightly lower reported net sales due to two non-recurring items in 2025: $51 million in liquidation sales in the first quarter and the extra week in the fourth quarter. Excluding those items, Advance expects underlying net sales growth of about 1% to 2%, including comparable sales growth of 1% to 2%. Same-SKU inflation is planned at 2% to 3%, assuming no change in the current tariff environment.
Advance expects adjusted operating income margin of 3.8% to 4.5% in 2026, with gross margin expansion of 110 to 150 basis points to about 45%, partially offset by investments in supply chain productivity and store operations. The company guided to adjusted diluted EPS of $2.40 to $3.10, capital expenditures of about $300 million, and approximately $100 million in free cash flow for the year.
About Advance Auto Parts (NYSE:AAP)
Advance Auto Parts, Inc (NYSE: AAP) is a leading distributor of automotive aftermarket parts, accessories, and maintenance items. The company operates a network of stores and distribution centers across North America, serving both do-it-yourself (DIY) customers and professional service providers. Advance Auto Parts focuses on offering a comprehensive selection of replacement parts, batteries, engine components, and performance products for cars and light trucks.
The company’s product portfolio includes engine oils and lubricants, cooling system components, brake and suspension parts, filters, belts, hoses, and diagnostic tools.
