Executive Summary

Q4 net sales were $2.00B (-0.9% y/y) with comps -1.0%; adjusted gross margin contracted to 39.0% (down ~170 bps y/y) and adjusted operating margin fell to -5.0% on transitory inventory clean-up and liquidation at closing locations (~280 bps margin headwind; ~$0.68 EPS impact) .
FY24 free cash flow was -$40.3M (improved vs -$83.9M in FY23) and year-end cash rose to $1.87B on Worldpac proceeds (~$1.45B net), with the related tax liability now estimated ~$200M lower than prior expectations, bolstering liquidity for the turnaround .
2025 guide reaffirmed: sales $8.4–$8.6B, comps +0.5%–1.5% (52 wks), adjusted operating margin 2%–3%, adjusted EPS $1.50–$2.50, capex ~$300M, FCF $(85)–$(25); Q1 2025 expected to be messy (sales ≈$2.5B, comps ≈-2%, adj. OI margin ≈-2%) as closure costs flow through; management maintained 2027 target of ~7% adjusted OI margin .
Execution catalysts in 2025 include rollout of new store-level assortments across top 50 DMAs, DC consolidation (toward 12 by end-2026) and scaled “market hubs” (19 now; plan 60 by mid-2027); management reiterated vendor support and expects gross margin improvements to build in 2H25 as cost savings materialize .

What Went Well and What Went Wrong

What Went Well

Liquidity and balance sheet strengthened: year-end cash was $1.87B, supported by ~$(200)M lower-than-expected tax on Worldpac proceeds and no borrowings on the revolver, providing flexibility to fund the turnaround .
Assortment pilots and “market hubs” tracking positively: pilot DMA delivered better performance vs control, prompting a rollout across the top 50 DMAs over 12–18 months; market hubs (85k SKUs) and surrounding stores delivered above-target comp growth .
Vendor partnerships and leadership upgrades: management cited “overwhelming support” from vendors post the national meeting; added an experienced CTO to accelerate technology modernization; upgraded legal leadership .
- “We ended 2024 with a healthy balance sheet and strong liquidity to navigate our turnaround.” — Shane O’Kelly .

What Went Wrong

Profitability pressure intensified: adjusted gross margin fell to 39.0% (≈-170 bps y/y) and adjusted operating margin to -5.0% on end-of-year inventory adjustments and liquidation at closing stores/DCs (≈280 bps headwind not adjusted out of non-GAAP) .
Traffic softness and deleverage: comps -1.0%; adjusted SG&A delevered to 44.0% (+175 bps y/y) on higher labor, driving adjusted operating loss of $99M .
Early Q1 trends below plan amid weather and delayed tax refunds; management flagged week-to-week volatility and consumer pressure in AAP’s cohort, implying near-term risk skewed to the low end of the 2025 guide if sales do not normalize .

Financial Results

Metric	Q2 2024	Q3 2024	Q4 2024
Net Sales ($USD Billions)	$2.683	$2.148	$1.996
Comparable Store Sales (%)	+0.4%	-2.3%	-1.0%
Gross Margin % (GAAP)	41.5%	42.3%	17.4%
Adjusted Gross Margin % (Non-GAAP)	N/A	N/A	39.0%
Adjusted Operating Income Margin %	N/A	0.8%	-5.0%
Diluted EPS (GAAP)	$0.75	$(0.42) (cont. ops)	$(10.16)
Adjusted Diluted EPS (Non-GAAP)	N/A	$(0.04)	$(1.18)

Notes: Q2 figures pre-date Worldpac closing; Q3 and Q4 reflect continuing operations and reclassify Worldpac as discontinued operations, limiting perfect cross-quarter comparability .

KPIs and Balance Sheet/FCF

KPI	FY 2023	FY 2024
Free Cash Flow ($USD Millions)	$(83.9)	$(40.3)
Cash & Equivalents ($USD Millions, end-period)	$503.5	$1,869.4
Adjusted Debt / Adjusted EBITDAR (x)	4.5x	4.2x
Store Count (end of period)	4,786	4,788
Market Hubs (count)	—	19 (17 added in 2024)

Drivers and adjustments: Management estimated atypical items not included in non-GAAP adjustments caused ~280 bps operating margin headwind and ~$0.68 of Q4 EPS headwind; FY24 atypicals ~60 bps OI headwind and ~$0.64 EPS headwind .

Segment breakdown: Not applicable (company reports as a single business with channel commentary) .

Guidance Changes

Metric	Period	Previous Guidance (11/14/24)	Current Guidance (2/26/25)	Change
Net Sales ($B)	FY 2025 (53 wks)	$8.4–$8.6	$8.4–$8.6	Maintained
Comparable Store Sales (%)	FY 2025 (52 wks)	+0.5%–1.5%	+0.5%–1.5%	Maintained
Adjusted Operating Income Margin (%)	FY 2025	2%–3%	2%–3%	Maintained
Adjusted Diluted EPS ($)	FY 2025	—	$1.50–$2.50	Added metric
Capital Expenditures ($M)	FY 2025	$175–$225 (FY24 outlook reference)	≈$300	Updated outlook level for FY25
Free Cash Flow ($M)	FY 2025	—	$(85)–$(25)	Added metric
Q1 Net Sales ($B)	Q1 2025	—	≈$2.5	New disclosure
Q1 Comparable Sales (%)	Q1 2025	—	≈-2%	New disclosure
Q1 Adj. OI Margin (%)	Q1 2025	—	≈-2%	New disclosure
Dividend ($/share)	Ongoing	$0.25 declared 10/29/24	$0.25 declared 2/11/25	Maintained
Net Sales ($B)	FY 2027	≈$9.0	≈$9.0	Maintained
Adjusted OI Margin (%)	FY 2027	≈7%	≈7%	Maintained
Leverage (Adj. Debt/Adj. EBITDAR)	FY 2027	≈2.5x	≈2.5x	Maintained
New Store Growth	FY 2027	50–70	50–70	Maintained

Earnings Call Themes & Trends

Topic	Previous Mentions (Q2 & Q3)	Current Period (Q4)	Trend
Merchandising/Assortment, Pricing	Strategic pricing investments pressured margins; comps +0.4% (Q2) . Q3 cited lapping inventory reserve change, cost stabilization .	Pilot DMA assortment improved performance; rollout to top 50 DMAs; expect cost savings to build through 2H25 .	Improving execution; benefits skew 2H25 .
Supply Chain/DC Consolidation	Target 13 DCs by 2026; asset optimization program announced .	Closed 10 DCs since 2023; plan to close 12 in 2025 toward 16 by YE25 and 12 by end-2026; routing optimization in 2025 .	Accelerating consolidation; productivity to improve in 2H25 .
Market Hubs	Goal of 60 by mid-2027 .	19 operating (17 opened in 2024); test/control shows above-target comp lift at hubs and service stores; +10 hubs in 2025 .	Scaling with positive comps evidence .
Time to Serve (Pro)	—	Target 30–40 minutes; currently behind target but pilot stores showing improved service/throughput .	Early improvement; broader rollout in 2025 .
Macro/Consumer & Weather/Refunds	Q3 noted hurricane Helene, CrowdStrike downtime atypicals .	Q1 off to a slower start amid weather volatility and delayed tax refunds; consumer still pressured .	Near-term headwind persists .
Atypicals vs Non-GAAP	Q3 atypicals ≈125 bps OI headwind; not adjusted .	Q4 atypicals ~280 bps OI headwind; ~$0.68 EPS headwind; clarifies non-GAAP excludes strategic transformation costs, not period-specific atypicals .	Transparency improved; atypicals fade post-closures .
Controls/Cyber	Material weaknesses & cyber incident costs disclosed in 2024 .	All material weaknesses remediated by YE24; minor cyber costs referenced .	Resolved; lower risk to P&L .
Pricing/Inflation/Tariffs	Strategic pricing investments in 2024 .	Pricing now “very competitive”; ~1% inflation; will act rationally incl. on tariffs .	Stable/competitive .

Management Commentary

“We ended the year with liquidity to fuel our initiatives and I remain optimistic about the future of Advance and our opportunities for value creation.” — CEO Shane O’Kelly .
“We expect the savings from lower product costs to build throughout the year with a larger benefit expected to be realized in the second half of 2025.” — CEO .
“We currently operate 19 [market hubs]… delivering above-target comparable sales growth.” — CEO .
“We estimate that [atypical items] amounted to approximately 280 basis points of operating margin headwind and approximately $0.68 of EPS headwind during the fourth quarter.” — CFO .
“We now expect to spend approximately $300 million [on closures]… majority in Q1 2025; together with lower-than-expected tax liability, this has further enhanced our cash position.” — CFO .

Q&A Highlights

Atypicals vs. adjustments: Management distinguished period-specific atypicals (not excluded from non-GAAP) from strategic transformation costs (excluded) and expects sequential improvement each quarter from initiatives taking hold .
Vendor cost trajectory: Cost and terms improving; promotional funding also helping COGS; benefits should manifest sequentially, more in 2H25 as pricing investments roll over .
Time-to-serve and Pro growth: Material dispersion across DMAs; faster delivery correlates with higher Pro sales; standardized operating model rolling out in 2025 to improve speed and labor productivity .
Macro cadence and Q1: Weather volatility and delayed tax refunds pressured early Q1; consumer remains stretched; trends currently below expectations, with easing comps expected to help later in the quarter .
Long-term margin bridge: To reach ~7% in 2027, model mid-40s gross margin and sub-40% SG&A rate; merchandising and supply chain productivity are key drivers .

Estimates Context

S&P Global Wall Street consensus estimates for Q4 2024 and prior quarters were unavailable at the time of analysis due to data access limits; as a result, we do not present vs-consensus comparisons for revenue or EPS in this recap (Values retrieved from S&P Global).

Key Takeaways for Investors

Near-term reset: Q1 expected to be the trough for operating margin given closure costs; management flagged early-quarter sales volatility and consumer pressure, biasing risk to the low end of FY25 guidance if trends persist .
Margin recovery path: Gross margin expansion is the primary 2025 driver via product cost savings, DC labor productivity, and transport optimization; benefits should build through 2H25 and into 2026 .
Execution watchlist: Track rollout pace of new assortments (top 50 DMAs), market hubs (to 60 by mid-2027), time-to-serve metrics (30–40 minutes target), and vendor cost realization cadence .
Liquidity cushion: ~$1.87B cash post-Worldpac with reduced tax burden provides runway to invest ~$300M capex in 2025 and absorb closure cash costs while pursuing KPI-driven turnaround milestones .
Structural simplification: Store/DC closures and exit of Worldpac streamline focus on core retail and Pro service; management expects $60–$80M operating cost savings at run rate, half contributing in 2025 .
Long-term target intact: Reaffirmed FY27 ~7% adjusted OI margin and ~2.5x leverage objective; successful execution on merchandising and supply chain pillars remains the fulcrum for multiple re-rating .
Trading setup: Print was in line with revised expectations, but the narrative hinges on proof of sequential improvement and 2H margin traction; Q1 commentary and monthly comps will be critical catalysts for sentiment .

ADVANCE AUTO PARTS INC (AAP)·Q4 2024 Earnings Summary