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ADVANCE AUTO PARTS INC (AAP)·Q3 2026 Earnings Summary

Executive Summary

  • Q3 2026 (twelve weeks ended Oct 4, 2025): net sales $2.04B, comparable sales +3.0%, adjusted operating margin 4.4%, GAAP EPS $(0.02), adjusted EPS $0.92; margin expansion driven by footprint optimization and strategic sourcing .
  • Against S&P Global consensus, revenue ($2.04B) and adjusted EPS ($0.92) came in slightly below Street at $2.08B and $0.99*, respectively; management nevertheless highlighted strongest quarter in over two years and raised/ tightened full-year ranges around the midpoint* .
  • FY25 guidance updated: net sales $8.55–$8.60B (raised low end), comps 0.7–1.3%, adjusted op margin 2.4–2.6%, adjusted EPS $1.75–$1.85 (narrowed/raised midpoint), capex ~$250M (lowered), FCF $(90)–$(80)M; market hub openings lifted to 14 from 10 .
  • Liquidity and balance sheet: $3.17B cash; management raised nearly $2B and reorganized debt capital structure; supply chain finance program operating smoothly with undrawn $1B revolver .
  • Near-term watch items: Q4 LIFO expense expected ~ $70M, with DIY pressure and higher same-SKU inflation moderating comps; management flagged Q4 as seasonally volatile .

What Went Well and What Went Wrong

What Went Well

  • “Strongest quarter in over two years,” with comps +3% and adjusted operating margin expanding to 4.4%; Pro channel led growth; DIY positive as well .
  • Adjusted gross margin 44.8% (vs. 42.3% LY), benefiting from footprint optimization and strategic sourcing initiatives; management cited ~50 bps benefit from capitalized inventory costs in Q3 .
  • Liquidity reinforced and vendor finance stable: >$3B cash; raised nearly $2B; supply chain finance program functioning with supportive banking partners and undrawn $1B revolver .

What Went Wrong

  • GAAP EPS was negative $(0.02), reflecting $33M of LIFO expense and a $28M non-cash expected credit loss on a vendor receivable recorded in cost of sales; adjusted results exclude these items .
  • Net sales ($2.04B) below prior year’s $2.15B as store optimization reduced footprint; transactions were down though improved sequentially; DIY showed more pressure vs. Pro .
  • YTD free cash flow $(277)M driven by working capital and ~$130M restructuring cash costs; inventory depth and breadth investments to support assortment and hubs weigh near term .

Financial Results

MetricQ3 2024 (oldest)Q2 2025Q3 2026 (latest)
Net Sales ($USD Millions)$2,148 $2,010 $2,036
Gross Margin % (GAAP)42.3% 43.5% 43.3%
Gross Margin % (Adjusted)42.3% 43.8% 44.8%
Operating Margin % (Adjusted)0.7% 3.0% 4.4%
Diluted EPS (GAAP)$(0.42) $0.25 $(0.02)
Diluted EPS (Adjusted)$(0.05) $0.69 $0.92
Comparable Store SalesN/A0.1% 3.0%
SG&A % of Sales (Adjusted)41.5% 40.7% 40.4%

KPIs and Operating Drivers (Q3 2026):

  • Pro comps: just over +4% .
  • DIY comps: positive low single-digit .
  • LIFO expense: $33M (Q3) .
  • Capitalized inventory cost benefit: ~50 bps to gross margin .
  • Cash & equivalents: $3.174B (period-end) .
  • Stores: 4,297 total; 517 closures YTD as part of optimization .
  • YTD Free Cash Flow: $(277)M; includes ~$130M restructuring/outflows .

Estimates vs. Actuals (S&P Global)

MetricS&P Consensus*ActualSurprise
Revenue ($USD Billions)$2.081*$2.036 ($0.045)
Adjusted Diluted EPS ($)$0.99*$0.92 ($0.07)

Values retrieved from S&P Global.*

Guidance Changes

MetricPeriodPrevious Guidance (Aug 14, 2025)Current Guidance (Oct 30, 2025)Change
Net Sales (Continuing Ops)FY 2025 (53 wks)$8.40–$8.60B $8.55–$8.60B Raised low end
Comparable Store SalesFY 2025 (52 wks)0.5%–1.5% 0.7%–1.3% Narrowed; midpoint reaffirmed
Adjusted Operating MarginFY 20252.0%–3.0% 2.4%–2.6% Narrowed around midpoint
Adjusted Diluted EPSFY 2025$1.20–$2.20 $1.75–$1.85 Narrowed; raised midpoint
Capital ExpendituresFY 2025~ $300M ~ $250M Lowered
Free Cash FlowFY 2025$(85)–$(25)M $(90)–$(80)M Tightened lower
Store OpeningsFY 202530 30 Maintained
Market Hub OpeningsFY 202510 14 Raised
DividendQ4 2025—$0.25/share declared Oct 27, 2025 Declared

Additional Q4 color: planning gross margin slightly below 44% with LIFO ~$70M; comps moderated, more pressure on DIY; Q4 seasonality volatile .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2 2025)Current Period (Q3 2026)Trend
Turnaround cadenceQ1: completed store footprint optimization; reaffirmed FY guide despite tariffs . Q2: returned to profitability; comps +0.1% .“Strongest quarter in 2+ yrs”; adjusted op margin 4.4%; management emphasizes non-linear “build years” through 2026 .Improving margins; staged execution with non-linear path .
Pro vs. DIYQ2: early signs of DIY stabilization; Pro-led comps .Pro comps just over +4%; DIY positive low single-digit; planning for DIY elasticity headwinds .Pro strength sustained; DIY softer .
Pricing/Inflation/TariffsQ1: dynamic tariff backdrop; mitigation actions planned .Same-SKU inflation ~3% in Q3; ~4% in Q4; slight increase into Q1’27; pricing “fast follower” posture .Inflation rising near term; rational industry pricing .
Supply chain/DC & hubsQ1: store optimization completed .U.S. DCs to 16 (from 38 in two years); 6 hubs opened in Q3; 33 by YE; targeting 60 by mid-2027; greenfield hubs ~100 bps store lift .Network consolidation and hub expansion accelerating .
Technology/AI—Multi-year roadmap; gen-AI content and AI applications (assortment, demand forecasting); AI-powered pricing matrix in test; partnership with Palantir .Expanding AI deployment across merchandising/pricing .
Capital structure/liquidityQ2: $1.95B senior notes; $1.0B ABL facility .Raised ~ $2B; >$3B cash; SCF program operating smoothly; revolver undrawn .Ample liquidity to fund turnaround .
Inventory strategyQ2: working capital outflows YTD .Deeper breadth/depth to support assortment and hubs; cap inventory costs helped GM; expect positive 4Q working capital despite higher inventory .Strategic inventory investment persists near term .

Management Commentary

  • “We delivered our strongest quarterly performance in over two years… comparable sales led by growth in the Pro channel… on track to deliver ~200 bps annual margin expansion in the first year of our turnaround.” – Shane O’Kelly, CEO .
  • “Adjusted gross profit…44.8% of net sales… driven by savings from footprint optimization and reduction in product costs via strategic sourcing… same SKU inflation ~3% in Q3; planning ~4% in Q4.” – Ryan Grimsland, CFO .
  • “Our technology team has designed a multi-year roadmap… using generative AI… AI-based applications in merchandising (SKU placement) and supply chain (demand forecasting)… building a centralized price management system; AI-powered pricing matrix in test.” – CEO .
  • “We raised nearly $2B in cash… more than ample liquidity with over $3B in cash and an undrawn $1B revolver… supply chain finance program continues to operate smoothly.” – CFO .
  • “Turnarounds are non-linear… 2025 and 2026 are building block years… we will continue to open market hubs, optimize DC network and roll out the new store operating model in 1H’26.” – CEO/CFO .

Q&A Highlights

  • Consumer elasticity and DIY: management sees DIY more pressured as prices rise; expects week-to-week variability; Pro remains positive; monitoring elasticity while testing initiatives via controlled pilots .
  • LIFO and margins: net LIFO headwind expected at 60–80 bps for 2025; Q4 LIFO ~ $70M; gross margin planned slightly below 44% in Q4 even with capitalized inventory cost benefit .
  • Market hubs: opened 6 in Q3; greenfield strategy highlighted (Atlanta); hubs typically carry 75k–85k SKUs and can add ~100 bps to supported stores’ performance; targeting 60 hubs by mid-2027 .
  • Pricing stance: “competitively priced… fast follower;” not harvesting margin via price; focus on improving mix (Main Street Pro accounts carry higher margins) .
  • Vendor bankruptcy exposure: ~2% of COGS vendor; booked $28M expected credit loss; management views it as isolated and maintains diversified supply; SCF risk spreads stable with supportive bank partners .

Estimates Context

  • Q3 2026 S&P Global consensus: revenue $2.081B*, adjusted EPS ~$0.99*; Reported: revenue $2.036B, adjusted EPS $0.92 – both modestly below Street* .
  • FY25 guidance tightened around midpoints (net sales, adjusted op margin, EPS) and raised low-end sales, which may shift consensus to narrower ranges; near-term Q4 assumptions cautious given DIY softness and elevated LIFO .

Values retrieved from S&P Global.*

Key Takeaways for Investors

  • Sequential margin progress: Adjusted operating margin reached 4.4% (from 3.0% in Q2) on sourcing and footprint benefits; gross margin adjusted at 44.8% supports the trajectory toward long-term mid-40s goals .
  • Mix tailwinds in Pro: Fifth straight quarter of positive Pro performance; strategy to deepen “Main Street” accounts should support higher-margin growth .
  • Near-term headwinds: DIY elasticity, Q4 seasonality, and LIFO (~$70M) may cap Q4 margin; monitor same-SKU inflation (Q4 ~4%) and transaction trends .
  • Execution roadmap: DC consolidation (38 → 16), market hubs (33 by YE; 60 by mid-’27), and store operating model rollout in 1H’26 underpin medium-term improvement .
  • Liquidity as a differentiator: >$3B cash, reorganized debt capital structure, and supportive SCF program reduce funding risk during the turnaround .
  • Guidance credibility: Narrowed FY25 ranges (op margin 2.4%–2.6%, EPS $1.75–$1.85) signal confidence, but management continues to emphasize non-linear progress through 2026 .
  • Trading lens: The narrative is margin expansion amid cautious Q4 setup; watch updates on LIFO, DIY elasticity, and hub rollout pace as catalysts for estimate and multiple revisions .