With a combined revenue of $21 trillion and $2.1 trillion in profits, the 2026 Fortune 500 is the definitive list of America's largest companies.

Fortune 500

Almost $20 trillion in revenue—and a record-breaking $1.87 trillion in profits. Introducing the 2025 Fortune 500, the definitive list of the biggest companies in America.

Industries included in the sector are automotive retail, general merchandisers, internet retail, and specialty retail.

Fortune Sector Leaders: Retailing

The Fortune 500, in its 70th year in 2024, ranks the biggest U.S. companies by revenue.

The Fortune 500, in its 69th year in 2023, ranks the biggest U.S. companies by revenue.

This year’s Fortune 500 marks the 68th running of the list.

This year’s Fortune 500 marks the 67th running of the list.

F500-2021-301-Advance Auto Parts

As one of the leading aftermarket auto parts retailers, the company serves professional installers and vehicle owners with automotive goods and services at over 4,000 locations.

This year's Fortune 500 marks the 66th running of the list.

F500-2020-330-Advance-Auto-Parts

The automotive retailer sells aftermarket parts, accessories, and maintenance items to both professional installers and do-it-yourself customers.

This year's Fortune 500 marks the 65th running of the list.

This year's Fortune 500 marks the 64th running of the list.

This year's Fortune 500 marks the 63rd running of the list.

This year's Fortune 500 marks the 62nd running of the list.

This year's Fortune 500 marks the 61st running of the list. Wal-Mart claims the top spot again. See who made the list.

Wal-Mart stayed on top as its sales crept closer to half-a-trillion dollars. Apple moved into the top five. And UnitedHealth Group continued its steady climb. 

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Advance Auto Parts is an automotive aftermarket parts provider. Founded in 1929, the company offers replacement parts, accessories, batteries, and maintenance items for a variety of vehicles including cars, vans, SUVs, and trucks. The company operates over 4,200 stores and serves more than 800 Carquest-branded stores across these locations.

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Q3 2024

Advance Auto Parts (AAP): Company Profile, Stock Price, News, Rankings

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Advance Auto Parts

advance auto parts

Hello and welcome everyone to the Advance Auto Parts third quarter 2025 earnings conference call. I would now like to turn it over to Lavesh Hemnani, Vice President, Investor Relations.

Good morning and thank you for participating in today's call. I'm joined by Shane O'Kelly, President and Chief Executive Officer, and Ryan Grimsland, Executive Vice President and Chief Financial Officer. During today's call we will be referencing slides which have been posted to our Investor Relations website. Before we begin, please be advised that management's remarks today will contain forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including but not limited to statements regarding initiatives, plans, projections, guidance, and expectations for the future. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information can be found under forward-looking statements in our earnings release and risk factors in our most recent Form 10-K and subsequent filings made with the SEC. Shane will begin today's call with an update on the business and our strategic priorities.

Later, Ryan will discuss results for the third quarter and provide an update on full year guidance. Following management's prepared remarks, we will open the line for questions. Now let me turn the call over to our CEO, Shane O'Kelly. Shane?

Thank you Lavesh and good morning everyone. I want to take a moment to acknowledge and thank the team for their hard work and dedication. Their unwavering focus on delivering exceptional customer service and advancing our strategic priorities helped us achieve our strongest quarter in over two years. For the third quarter, we reported comparable sales growth of 3% with both Pro and DIY channels delivering growth. Adjusted operating margin expanded by 370 basis points year-over-year to 4.4%, demonstrating progress on the execution of our strategic plan. During the quarter, we also strengthened our balance sheet by proactively reorganizing our debt capital structure. We raised nearly $2 billion in cash, which provides enhanced liquidity for the business as well as a path to return to an investment-grade credit rating in the future.

As anticipated, tariff-related price increases have accelerated in the auto aftermarket, and in our view, the industry has been responding rationally by adjusting prices in response to rising product costs. We saw some variability in performance as prices moved higher during the quarter, although on a two-year basis both transaction and unit trends were relatively stable. As we look to the balance of the year, we believe there is potential for temporary volatility in sales trends as consumers manage household budgets in an inflationary backdrop. Our teams are prepared to navigate in this dynamic environment and provide consistent, high-quality service to our customers. The long-term fundamental drivers of the industry remain healthy. More than 90% of our sales are driven by maintenance and break-fix repair, which gives us confidence for the long term.

Based on our performance to date and expectations for the remainder of Q4, we have updated our full-year guidance. We have reaffirmed the midpoint of our prior comparable sales growth and adjusted operating margin guidance, which implies approximately 200 basis points of margin expansion for the year. I want to recognize the team for their tremendous effort in delivering operational stability and maintaining focus on our turnaround priorities. We still have considerable work ahead of us as the initiatives underlying our strategic pillars continue to build through 2026. We remain committed to the steady execution of our plan to expand margins and create long-term value for shareholders. The Advance team is prioritizing actions to successfully execute the basics of selling auto parts while strategically utilizing innovative technological assets to position the company for the future.

Our technology team has designed a multi-year roadmap to support the effective execution of our plan. These include using generative AI content and deploying AI-based applications in routine processes and providing sharp analytical data for our teams to improve service levels. Some of the areas where we are leveraging these applications include processes within merchandising to power our SKU placement decisions and within our supply chain to determine optimum demand forecasting for millions of SKU combinations in our network. These are just a couple of examples among other projects where we believe we will collectively establish a foundation for stronger execution across fundamental retail operations. Next, let's turn to an update of our strategic plan. To recap, our turnaround goals are built on three pillars, each supported by targeted initiatives that we believe will position us to deliver profitable growth.

I will share updates on the progress we have made within each pillar, and then Ryan will discuss our financial performance. Let's begin with merchandising. Throughout the year, we have taken deliberate and strategic actions to position Advance Auto Parts as a trusted long-term growth partner for our vendors. With a sense of urgency, we have streamlined legacy processes, reduced complexities in order management, restructured our distribution center footprint, and prioritized operational excellence to enhance the overall vendor experience. Our vendor community is reacting positively to the bold, decisive actions we've made, such as exiting underperforming markets and investing in new stores and market hubs. They are actively engaging in strategic business planning, exploring supply consolidation opportunities, and collaborating on joint marketing efforts to support our transformation. This alignment has already begun to deliver improved product margins, and we expect additional cost benefits in the future.

I am proud of the team's progress, especially given the added complexities of navigating a new tariff environment. Another key priority for the company has been enhancing the availability of hard parts. We are pleased to report the successful completion of the rollout of our new assortment framework across our top 50 Designated Market Areas (DMAs), which cover approximately 70% of our sales. We achieved this ahead of schedule by leveraging proprietary assortment planning tools that have significantly improved our ability to make data-driven decisions and quickly adapt SKU requirements to meet specific market needs. We expect this initiative to deliver incremental growth over and above the initial 50 basis point uplift as these markets mature over the next 12-18 months. Along with refreshing our store assortment, we have also improved distribution center stocking programs to drive greater effectiveness in store replenishment processes for each market.

These activities have enabled us to achieve our store availability target and ensure improved depth of hard parts in stores and distribution centers. With this major milestone accomplished, we are now focused on improving the speed at which we bring new parts to market to expand our breadth of coverage. We have already introduced tens of thousands of new SKUs into our network this year, and our work has uncovered additional opportunities to enhance our responsiveness to market demand signals. Increasing the breadth of hard parts coverage will enable us to further improve service levels for our Pro customers. Moving to Pricing and Promotion Management, as a company, our goal is to offer competitive pricing, supplemented with seasonally relevant promotions to engage customers and drive repeat purchases.

We are in the initial stages of testing a new AI-powered pricing matrix to inform pricing decisions for SKUs within the DIY and Pro channels. Separately, we have also built guidelines for field discounting programs to take advantage of select market growth opportunities. In this regard, we are adopting a fundamental retail approach by installing a centralized price management system for segmenting categories, markets, SKUs, and customer channels. Consistent with prior expectations, we expect this initiative to deliver a larger benefit in 2026 and beyond. Turning to supply chain, our U.S. Distribution Center consolidation plan is progressing on schedule, and we expect to end the year with 16 DCs in the U.S., which is a significant reduction from 38 DCs just two years ago.

We will enter the next phase of consolidation in 2026, and as part of our planning process, we are evaluating our operational capabilities across the network. DC productivity, measured through product lines per hour, has improved in the mid-single digit percentage range compared to last year, and our team is putting incremental focus on execution of key functions in our DCs. These include product picking, packing, and routing to drive additional productivity. We believe our current DC network is well positioned to support strong service levels and the continued growth of our multi-echelon network. A key element of this growth is opening new market hubs. Approximately 75% of our stores are in markets where we have the number one or number two position based on store density. Our team has made great strides in accelerating market hub openings, which is enabling us to capitalize in markets of strength.

During Q3, we opened 6 locations and concluded the quarter with 28 market hubs. We now expect to open a total of 14 market hubs this year, including 10 conversions and 4 greenfield locations. With these openings, we expect to end the year with 33 locations. A market hub typically carries between 75,000-85,000 SKUs, expanding same day parts availability for a service area of about 60-90 stores. Thus far in Q4, we have opened one greenfield location in the Atlanta area. Built from the ground up, this facility is poised to serve as a model for future hub development. We are particularly enthusiastic about the opportunities presented by greenfield openings as these facilities enable us to establish new points of distribution within designated market areas.

This strategic expansion not only enhances our ability to provide additional hard parts coverage in previously underserved regions, but it also creates incremental opportunities to gain market share. We will continue to open new market hubs in 2026 and stay on the path to opening 60 market hubs by mid-2027. Moving to store operations, as we've previously communicated throughout the year, we have been testing a refresh store operating model designed to enhance productivity and ensure the delivery of consistent, high quality service to our customers. I would like to thank our frontline team for their collaboration and adaptability during the testing phase as we work to identify a more effective path forward. We are now prepared to launch this model in Q4 as part of the first phase of the rollout, with full implementation anticipated during the first half of 2026.

This updated operating model enables us to improve driver and store team labor hours along with vehicle allocations, aligning them more effectively with demand patterns to better serve our customers. We expect this model to provide three key benefits. First, it will enable us to instill greater confidence in our Pro customers while strengthening our reputation as a trusted and reliable parts provider in the aftermarket. Second, it strengthens the collaboration between our customer-facing outside sales team and our internal store teams who play a role in efficiently procuring and delivering parts. Third, from an economic standpoint, this model should support greater transaction velocity, improve labor utilization, and enable us to compete more effectively. The introduction of this new operating model combined with the expansion of new store locations and our delivery commitment of 30-40 minutes naturally positions us to accelerate growth in each Pro account.

Our team is putting added emphasis on strengthening relationships with Main Street and regional accounts. The Main Street customer group represents our single largest opportunity for higher margin market share in the Pro channel. To further boost our sales within this cohort, we are providing our account managers with enhanced visibility on customer data and additional training resources to increase our transaction volumes. For our national accounts, we are actively collaborating with them to optimize parts availability in specific categories by market, which will enable us to improve service levels. Shifting to DIY, as we refocus on the core fundamentals of selling auto parts and work to execute each initiative, we have asked our store team members to embrace significant changes.

The fact that our team members are committed to supporting our customers and the sequential improvement in DIY transactions on both a one year and two year basis is a testament to their customer-focused mindset. As a management team, we have launched a renewed effort to simplify store tasks and streamline communication to the stores to improve the experience for our team. This initiative is being managed through a centralized execution team, which oversees weekly communications and provides organizational visibility in the tasks being assigned to the stores. By prioritizing only the most critical activities, we expect to drive further operational efficiency. We believe this new level of operational discipline will create additional capacity within our stores, allowing teams to dedicate more time to training and customer service separately.

To monitor the performance in our stores, we have also launched a new Net Promoter Score, or NPS, metric that is collected through customer transactions. In addition to providing visibility into the impact of strategic actions being executed by the stores, the data is used by store and district managers to drive targeted service improvements. We expect to focus on operational discipline along with our ongoing effort to upgrade store infrastructure. To enhance the overall experience for team members and for our customers, we continue to upgrade HVAC systems, reroofing, parking lots, and signage in our stores as part of a multi-year asset management plan. Year-to-date, we have invested about $50 million in store upgrades, which is more than double the total CapEx allocated to these projects last year. To date, we have updated more than 1,400 stores compared to 440 stores upgraded in all of 2024.

In addition to these critical store upgrades, we are also building a pipeline of new store openings for the future and continue to target at least 100 new store openings over the next two years. To wrap up my section, I want to once again recognize the team for their hard work and for the progress achieved thus far. We remain focused on prioritizing actions to deliver sustained improvement in our turnaround. I will now hand the call over to Ryan to discuss our financials. Ryan?

Thank you, Shane, and good morning, everyone. I want to begin by thanking our frontline associates for their commitment to serving our customers and delivering strong Q3 results for the third quarter. Net sales from continuing operations were $2 billion, which declined 5% compared to last year. This decline was mainly attributable to the store optimization activity that was completed during Q1. Comparable sales grew 3% during the quarter with positive weekly performance throughout the quarter. Sales trends were strongest during the first four weeks, followed by a moderation during the last eight weeks. From a category perspective, brakes, undercar components, and engine management led performance. We have made significant progress in improving our coverage and availability of hard parts, which is helping us deliver better service to customers. For the quarter, ticket was positive and largely driven by tariff-related price adjustments that expanded throughout the quarter.

Our industry has been reacting rationally to rising product costs, and we have been adjusting prices in response to market dynamics. In aggregate, same SKU inflation was about 3% in Q3 compared to about 2% last quarter. Transactions were down but improved sequentially as we cycled through discrete events from last year on a two-year basis. Transactions and unit productivity were relatively stable to last quarter, reflecting the team's continued focus on delivering consistent, high-quality service. Now let's look at channel performance. Pro comps grew by just over 4% as we cycled through the softness from last year on a two-year basis. The Pro channel recorded its fifth consecutive quarter of positive performance and relatively consistent two-year trends in each month. Our DIY channel delivered positive low single-digit comps in the quarter and improved sequentially on a two-year basis.

Moving to margins, adjusted gross profit from continuing operations was $913 million, or 44.8% of net sales, resulting in gross margin expansion of about 260 basis points compared to last year. The year-over-year margin expansion was driven by savings associated with our footprint optimization activity completed in March and reduction in product costs driven by our strategic sourcing initiatives. I want to recognize the merchandising team for their solid execution this year. They have been able to secure competitive product costs while managing prices in a higher tariff environment to offset incremental cost pressures, which is yielding stronger merchandise margins. During the quarter, we cycled through approximately 70 basis points of atypical margin headwinds from last year. We also experienced a benefit of approximately 50 basis points related to capitalized inventory costs driven by our strategic decision to carry more inventory through the year.

Regarding product costs, as previously anticipated, we expected LIFO expenses to move higher due to cost inflation. This resulted in total LIFO expenses of $33 million for Q3. Shifting to operating expenses, adjusted SG&A from continuing operations was $823 million or 40.4% of net sales and was consistent with our expectations. The year-over-year reduction in SG&A expense is primarily related to operating fewer stores compared to last year. As a result, adjusted operating income from continuing operations was $90 million or 4.4% of net sales, resulting in about 370 basis points of year-over-year operating margin expansion. Our strongest operating margin in over two years, adjusted diluted earnings per share from continuing operations was $0.92 compared with a loss of $0.05 last year.

Year-to-date free cash flow is -$277 million, largely driven by payments for inventory purchased in Q3 last year, which is in line with our typical cadence for managing payables. Also, during the quarter we spent an additional $20 million on cash costs related to our store optimization activity for a total of approximately $130 million incurred through the year. Looking at year-to-date free cash flow more closely, we have only seen a modest change in operating cash flow between Q2 and Q3, which shows the stability of our operational execution while we continue to allocate higher CapEx to strategic investments. Turning to an update on full year guidance, starting with net sales, we expect net sales of $8.55-$8.6 billion, including comparable sales growth between 0.7%-1.3%.

Q4 is typically our most volatile quarter of the year and our guidance includes trends through the first three weeks, which have started off soft. While the Pro channel continues to track positive, the DIY channel is seeing pressure with more week-to-week variability in transactions. We believe this is being driven primarily by adjustments in consumer purchasing habits in response to rising prices. Same SKU inflation is expected to move higher compared to Q3, and we remain cautious in our planning assumptions based on recent trends. In addition, I want to highlight two sales-related items that are unique to Q4. First, last year in Q4 we generated $74 million in non-recurring liquidation sales related to our store optimization activity, and second, we expect between $100 million-$120 million in sales from the 53rd week. As a reminder, neither of these items impact comparable sales growth.

Moving to margins, we expect adjusted operating income margin between 2.4%-2.6%, reaffirming the midpoint of our prior guidance range. Given the typical seasonality of the business through the end of the year, we expect Q4 gross margin to moderate compared to Q3. We are planning for Q4 gross margin slightly below 44%, which includes the benefit of higher capitalized inventory costs continuing through the end of the year as inventory levels are expected to be higher than previously planned. Strong coverage of parts across our network is critical for our long-term success, and we are working to ensure we provide our customers access to the right depth and breadth of parts. However, this inventory benefit is expected to be offset by higher than previously planned LIFO expenses that is driving 80-100 basis points of added pressure.

We currently estimate total fourth quarter LIFO expense of approximately $70 million. Based on cost trends through Q3 for SG&A, we expect Q4 expense dollars to decline in the high single-digit range compared to last year, which is in line with prior expectations. As a reminder, we are also lapping approximately 280 basis points of atypical margin headwinds, which will drive favorability in the year-over-year operating margin expansion. Moving to the other items in our guidance, we have updated our adjusted EPS guidance to a range of $1.75-$1.85, which includes slightly higher interest income compared to prior expectations for Q4. Our interest expense is expected to move higher due to a full quarter impact of the debt refinancing transaction that was completed in Q3.

For capital expenditures, we have revised our target to approximately $250 million for the year compared to the prior expectations of approximately $300 million, but about half of the change is associated with the allocation of spend between PP&E and other assets on our balance sheet, which is a net neutral. From a free cash flow perspective, the balance of the CapEx reduction is related to shift in timing of projected spend from Q4 into next year as we continue to execute initiatives across our three strategic pillars. Regarding free cash flow, we have revised our expectations to a range of -$90 million to $80 million for the year. As I indicated earlier, we expect to carry higher than previously planned inventory through the end of the year.

This is being driven by our strategic decision to improve the depth and breadth of assortment across our network and to support new store growth. Despite the higher inventory, we expect positive working capital contribution in the fourth quarter, which is in line with our planning assumption. At the start of the year, we continue to expect full year cash expenses of approximately $150 million related to our store optimization activity. Adjusting for this spend, our core free cash flow would have been positive for the year, which gives us confidence in our ability to deliver positive free cash flow in 2026 and beyond. In summary, we are pleased with our year-to-date financial performance and remain on track to end the year with solid margin expansion after two consecutive years of decline.

We have enhanced our liquidity position to fuel our turnaround, and the team is doing a commendable job by staying nimble in a dynamic macro backdrop. Before moving to your questions, I want to address a recent industry concern stemming from the bankruptcy proceedings of a supplier. In our view, this is an isolated situation and not a broader concern regarding the health of the aftermarket industry. Over the last 12-18 months, our merchant team has worked to diversify our vendor base, including consolidation of product lines, and we currently source less than 2% of our cost of goods from this supplier. Given the risk associated with the bankruptcy proceedings, we have recorded a non-cash charge of $28 million to cost of sales in the third quarter.

This charge reflects an estimate for future credit losses on certain other receivables due from the supplier and is recorded in our GAAP income statement. It does not impact adjusted results and full year guidance. Following this charge, we have reserved against the risk associated with potential credit losses. We are maintaining a positive dialogue with the vendor and continue to work with them. We also source products from hundreds of other suppliers and maintain alternate sources of supply to minimize any disruption to our operations. Separately, we have also heard market concerns related to our supply chain finance program and the aftermath of financial issues related to the supplier. We do not believe these concerns are applicable to us. I want to emphasize Advance's suppliers continue to receive early payments on their confirmed invoices through our network of large reputable banks.

As a reminder, earlier this summer we raised nearly $2 billion in cash to support the operations of our supply chain finance program, an asset-backed lending facility. Following the execution of the facility, our vendor programs continue to operate smoothly. We have a strong balance sheet and more than ample liquidity with over $3 billion in cash and have access to a $1 billion revolving credit facility that is currently undrawn. In closing, I want to recognize the team once again for delivering our strongest financial results in over two years. This quarter was also our third straight quarter of delivering results in line with expectations. As we look ahead to next year, we expect to build on our recent performance to drive further progress across the business. I will now hand the call back to Shane.

Thank you, Ryan. We believe we have the right strategy centered on core retail fundamentals along with a talented team driving execution of our strategic initiatives. We appreciate your interest in Advance Auto Parts and look forward to reconnecting in the new year. Thank you, operator. We can now open the line for questions.

Thank you. If you would like to ask a question, you may do so by pressing star followed by one on your telephone keypad. If you do change your mind, please press star followed by two. Please limit yourselves to one question and a follow up. Please ensure your line is unmuted locally. Our first question today comes from Simeon Gutman from Morgan Stanley. Please go ahead, Simeon. Your line is now open.

Hey, I want to ask first about elasticity of demand, the health of the consumer, and then maybe even throw in something about weather. Can you put all together, you know, because it sounds like your quarter started off strong and then decelled and now it sounds a little soft, and it makes sense given prices come up not just in this category but across the board. How much also is weather a factor? Can you talk about the things you're doing, the internal initiatives, how you can see and measure progress in those outside of these variables?

Hey, good morning, Simeon. Thanks for the question. I'll start, and let me start with the consumer because I think it's important in general we're keeping an eye on the overall health of the low end, low to mid end consumer where our, that's where our customer base is. Broadly, you see some data points that suggest that they may be depressing their spend in aggregate across general merchandise. Think about that as the subprime auto market, the general consumer sentiment where discretionary spend's going, credit cards. That impacts how they spend. The good news about our industry is the car is the linchpin of how they get to work and their social activities. Much of what we sell is break fix and non discretionary. I think that's important. I do think consumers are adjusting their budgets in response to the inflationary environment.

I think the cost of some routine jobs has moved up a bit, which may make them reconsider some of their intervals in which they do maintenance with us. I would describe it as a noisy situation for them. Long term, feel good about what's going on in our industry and what we're doing. To the second part of your question, then turn it over to Ryan for sort of the elasticity specifically. We've got a lot going on as it relates to what we're doing in our stores to create an environment that's positive for DIY and what we found is we were over tasking our stores with a lot of tasks that took them away from being attentive to customers as they come in. I got a great note actually last night from a customer who said, I came in your store. I was greeted right away.

Our team member took the time to diagnose what their situation was, spend an additional 20 minutes going through what the options and then ultimately selling a part. We need to be there for our customers and freeing up their time so visit results in a more likely conversion to a transaction. That's what we're doing. Ryan, on the specifics.

Yeah. You know, on the elasticity piece, it's still early for us to gauge exactly what the impact is on the consumer. More broadly, we see the consumer impacted across retail. More recently we've heard from other retailers how much of that is the government shutdown and that impact. How much of that is price inflation that you see in the industry? We're still trying to understand that. I think the industry is still trying to understand that, but we're watching it closely. One thing you did ask was how do we measure our initiatives in the midst of this stuff going on around us. The way we do that is we take a very measured approach to that by looking at tests versus control.

When we go out and roll out, whether that's the assortment work or looking at our market hubs, you look at how these perform versus like stores that perform similarly in the past and we're able to gauge the success of those and the traction of that and get learnings from that before we roll out. We do test and control here around our initiatives before we start rolling things out more broadly. That helps us better understand whether it's working, what is working, what's not working as we roll those things out. That helps a little bit because the pricing piece is more macro across our store fleet and we're able to isolate the discrete initiatives that we're putting in place.

My quick follow up is on inventory. Shane, can you talk about where you are versus where you want to be? It sounds like you pivoted a little bit in 2025. You bought more than I think you were expecting, you can clarify if that's the case. Why wouldn't that make sense to do in 2026? I know you talked about driving free cash flow, but why would it make sense to invest more in inventory to drive the business?

As a reminder, we're doing our assortment rollout, so there's a lot of activities going on here, and we're pleased that we've got all 50 DMAs that we originally planned to do done. If you think about that, there are hundreds of SKUs coming in and out of stores, and we want to make sure that we've got the right amount of product going into those stores. Keep in mind also that in the tariff environment, we bought ahead. We wanted to make sure that we had the inventory we needed, preferably at the price pre moves, so that we could be in good position. We're focusing on having the part for our customer, which means investing to get it in our system both at the DC and the store level.

Yeah, I'll just add we're really focused on the breadth. I think the depth is one that we've been really hitting on and getting the right depth, but now it's the number of SKUs and making sure that we've got the right assortment at the different levels within the supply chain echelon. I think that inventory can come down and then some inventory investment will be needed. That's more of a mix as we get the right depth and breadth for the consumer. Not a big investment needed going into next year. We've already made some pretty big investments. Now it's managing through that. We'll have some sell through with that earlier buys that we made and the assortment work we've done, and that will afford us the ability to invest in the other areas of breadth that we need.

Thank you. The next question comes from Chris Horvers from JPMorgan. Please go ahead, Chris. Your line is now open.

Thanks guys and good morning. My first question is on the inflation front. Sir, can you talk about what did the exit look like on inflation in the quarter? Is it still your expectation we get to the higher end of the mid single digits in the fourth quarter? There's a big debate out there amongst investors when that year-over-year inflation benefit peaks. One of your peers is saying it's in the fourth quarter. Another one of your peers is saying hey, we turn inventory every 10 months so it wouldn't be until the spring. Can you help us out with that mystery as well? Thank you.

Yeah, absolutely Chris. Thanks, this is Ryan. On the inflationary front, we finished Q3 just under 3%. So close to 3%. Q4 we expect it to be around 4%, but going into, say, Q1 of next year, we expect that to increase slightly, but not at the same rate of increase. By that point in time, I think we'll be getting more to a normalized state. Obviously, there's a lot that can play out. I mean, we just had a China deal overnight that we still have to think through. This thing is ever evolving. For the most part, we are substantially done with the negotiations with our vendors around that, a few left. So substantially done. As those have gone into the system, the prices are going into the system. I would expect there's some balance between what our peers are saying, and somewhere in between there is probably where we reach the peak. Obviously, it's an evolving landscape. We're thinking 4% Q4 and then a slight increase in Q1 of next year.

Got it. That is super helpful. As we think about the path to the 7% operating margin, can you help us maybe on the linearity of that, and as a part of the question, it's always hard to put a LIFO question into the call, but what is sort of the net LIFO headwind in 2025 between LIFO and the capitalized inventory costs, and how do you think about the recapture of that next year, and then more broadly, the linearity of the path to 7% by 2027. Thanks so much.

Just quickly, Chris. On the strategy, we think we've got the right strategy for the company, we've got the right focus areas and our goal is unchanged for 2027. Having said that, there's a lot of space between now and then and you use the word linear. I would say turnarounds are non linear in terms of how things go. There's puts and takes. Some initiatives go faster, some go slower, market receptivity. We view 2025 and 2026 as building block years.

If you look at what's happened this year, just think about it. Two quarters ago, we were closing stores, exiting California, we were going through the Worldpac TSA transitions, you know, doing our assortment. This year we'll go from 28-16 distribution centers. These are huge muscle mover activities and 2026 will feature a lot of building block tough things that we're doing to continue forward. We're really pleased with the products, really pleased with the team, and we're focused on closing 2025 strong. As we go forward, 2026 is a building block year and I would emphasize the non-linear nature of turnarounds. As for LIFO, I'm going to go over to Ryan for that.

Hey Chris. Yeah, just to give you net of the warehouse capitalization cost, obviously that netted out some of it. LIFO is still a headwind, is roughly 60-80 basis points. We expect it to be, by the end of the year, 60-80 basis points of headwind in 2025. Hope that that's helpful for you.

Thank you. The next question comes from Bret Jordan from Jefferies. Please go ahead, Bret. Your line is now open.

Hey, good morning guys. One quick question on the working capital, on the working capital programs. It doesn't sound from channel checks like there's any contraction in availability, but have you seen any increase in risk spreads in the short term related to that particular supplier issue?

No, actually we haven't seen any change in the risk spreads there. Our supply chain finance program, if you're talking about the supply chain finance program rates they're getting, obviously that's a decision between the banks and the vendor. The work we did this summer created a lot of stability within that program, and it's been a very positive movement. We've had positive discussions with the banks around rates. Not ready to provide any further information around that, but we haven't seen the spreads increase. We've had positive discussions around probably the other side of that given the stability of this program now with the structure that we put in place.

We're supporting that program with the cash and assets on our balance sheet, which provides a downward risk pressure for the banks for that program, kind of unique relative to the other programs in the industry. Right now as we're bridging ourselves back to investment-grade just to add in.

That, as Ryan said, we're really pleased with how we've got supply chain finance set up with the capital raise we did with the cash support we provide for it. As it relates to that vendor in particular, because I do think it's a one-off situation. First, merchandising excellence, a key pillar for us, Bruce Starnes and his team, they've introduced the TLR process and real rigor as it relates to how we develop plans and partnerships with vendors. They had engaged with this vendor long before these current circumstances and as a result of that had started to move certain product categories away to other vendors. COGS exposure pretty small, 2%, maybe a little under 2% now. We're still in active dialogue with them and we'll continue the relationship and wish them well. If they come through, then I think there'll be continued relationships there.

In general, across merchandising and that emphasis we have, alternative sources of supply is also a key tenet. For anything we buy, we look to say, hey, where else would we buy it? Where else should we buy it? That would apply with this vendor as well. Thank you.

Great. A quick question on the Atlanta hub, greenfield, could you give us color as to the performance of stores in that market? You build the perfect hub. What is the, what's the outcome and sort of what's the timing on developing further greenfield hubs like that one?

Yeah, great question. It's open. By the way, our market hubs open with a store nested inside as a reminder, 75,000-85,000 SKUs in aggregate. We view it as a 100 basis point lift play for the supported stores. The market hub typically in and of itself thrives as a store just because you have literally all that inventory sitting on site. We really like what we're doing with the market hubs. We originally planned for 29 this year. The idea that we said, this is a good thing, we want to keep accelerating, so we'll get to 33. We're now moving past the phase of where we were doing some smaller distribution center conversions. We're moving past that phase to where we're now greenfielding. We've got four greenfield market hubs. You'll start to see that be more prominent in the opening paradigm.

There's a lot of excitement around that because instead of repurposing something, we can now specifically pick where we need it to best support the stores. Our real estate team has been digging in to start identifying those sites so it doesn't create a slower trajectory. 100 basis points is what we see as the network. We'll keep you apprised as to if that goes up or down and then more greenfields going forward and real estate looking to keep that tempo moving. 60 and mid 2027 is where we want to be and we'll keep you updated on that as well.

Thank you. The next question comes from Stephen Forbes from Guggenheim. Please go ahead, Stephen. Your line is now open.

A follow up question. Just a follow up question on gross margin. I think it was Chris's question. I think if you back out the LIFO charge in the quarter, you guys are sort of exceeding that mid 40% range that underpinned the long-term guide here. So curious just if there is a takeaway for us today on some of the structural gains that you're capturing on the back of your initiatives, or if that sort of mid-40% level is still where you guys see the business trending to over the next couple years here.

Yes, good question. Yes, in Q3 tends to be a little bit better rate as well, just seasonality wise. We'll see that come down a little bit in Q4. Our goals are still the same long term. We still like that spot long term and we're making good progress. The merchant team's done an excellent job this year making progress towards that. We still are on a journey. 2025 and 2026 are build years as we're building against that. I wouldn't say it's perfectly linear. You can see that in our Q4 we're going to have some LIFO expense, it's going to have an impact on it. Net net we are happy with the progress we're making. Still committed to that goal.

We think that's a good strategic long term play for us and where we want to be from a gross margin perspective.

Just another follow up on really sort of the comp message this morning. We think about like, for like inflation, same SKU inflation going to 4%, maybe 4.5% in the first quarter of next year. The guidance for the fourth quarter, the implied comp guide is 1% -3%. What is the sort of takeaway today around transactions? Are you guys seeing weakness in Pro transaction or is sort of the spread?

Moderation expected between same SKU inflation in the consolidated comp, really just DIY-related. Any sort of color on sort of comp complexion and message around that for the fourth quarter specifically?

Yeah, I think in Q4 moderating both of them, both Pro and DIY. We are seeing a little bit more on the DIY side. We kind of talked about some pressure we think the consumer is feeling right now and still trying to understand is this short term in nature, what could be some of the drivers? Is it price elasticity? I think we've heard in the industry there's some questions around that as well, more on the DIY side. We are seeing moderation in both of them going into Q4. Q4 is the most volatile quarter of the year. You've got a lot of weather that impacts that quarter. We see it every year from a seasonality standpoint. When it's colder out there, people are less apt to do their oil change. Just natural, the seasonality.

We expect it to be a little volatile. We've seen a little softness. We've seen both moderate but more pressure on the DIY side in the quarter. All those scenarios play out within the guidance we just provided.

Thank you. The next question comes from Michael Lasser from UBS. Please go ahead, Michael. Your line is now open.

Good morning. Thank you so much for taking my question. To what extent did the decision to trade the margin for sales or vice versa impact the quarter, meaning you foregone some lower margin business that could have negatively impacted your sales but boosted your gross margin? If you could quantify any of those actions in the third quarter and the degree to which it might impact your fourth quarter, that'd be super helpful.

Yeah, Mike, appreciate the question. What we're doing from just a pricing standpoint, I just want to talk about our strategy around pricing. We are going to remain a competitively priced business here. We're not trying to be low in the market, we're not trying to be higher in the market. We're not trying to find ways to get margin out of that. We're staying competitively priced. We like our pricing position. We think we are a fast follower in the market. Not trying to harvest margin, not in the appropriate way. We're sticking to that strategy going forward. We're not doing that. There are some areas of our business.

That we will look to make more profitable, look at certain accounts, etc. that we're working through. I'll let Shane talk a little bit more about that. We're going to stick to our strategy, which was we're going to be competitively priced in the market. We're a fast follower, and that's what we'll continue to do.

Hey, good morning, Michael. Just touching on the Pro side, we think our biggest opportunity is with Main Street. Those are smaller accounts. Typically the margin's a little bit higher. We certainly appreciate our national account and larger customers, and we're working closely with them, and we've got a series of initiatives, but we don't want that to come at the expense of seeing the small two or three bay garage at the end of Main Street. We're making sure that our outside sales team members aren't skipping by those accounts, and we're making sure that as we interact with them, they understand the breadth of capabilities that we offer, to include things like our TechNet services. As we do that, we're gaining traction. That's something we will look to do going forward and is a current emphasis as well.

Thank you very much. My follow up question is Shane, you consistently and repeatedly used the term nonlinear to describe the path forward for Advance Auto Parts. How should we interpret that from a numbers perspective? Does that mean there'll be some quarters? Maybe when it's hot on the East Coast and there's outperformance in those markets. Advance Auto Parts can rip off a 3 comp and report several hundred basis points of gross margin expansion, and then vice versa, the next quarter it might be a flat to one and for less gross margin expansion. How would you characterize that non-linearity that you would use to describe how the path forward might look over the next couple of years? Thanks.

Yeah, I think about if you're okay, Michael, I'm going to talk about it. Sort of tangible activities. Think about if you close a DC and you'd say, okay, if I'm going to combine this DC with that DC, there ought to be X dollars of value that comes from it. When we start to do that process, we anticipate what the closure expenses will be. We might take several hundred stores of replenishment from the old DC to the new DC and there's costs there. There's friction in terms of getting the routing set up. Maybe there's particular products that the closing DC had that we need to get sourced. It's lumpy. It's not something where we say, okay, we could take the cost of the $100, we'll say it's $20 a month over the next five months.

We may have more costs sooner, we may have costs that emerge at the end. Similarly, the benefits may not inure at the tempo that we've indicated. There's a sort of micro example. Now imagine you're undertaking big moves like that across everything we do. Maybe there's a big software implementation that we want to do as part of routing. That might take months to implement and then months past that as we do the assortment. We're, we like the lift we've got, but reminder, we're changing out hard parts across the network. Some of these are slower term products. It takes time for it to infuse. We're going to Main Street customers.

The first time you walk in, if they're working with another supplier, they may be happy to see us, but maybe it takes four visits, five visits, 10 visits before they say, hey, we'll give you a try.

So, so discrete predictability on exactly what the cost will be and when the benefit comes is hard. We end up with fits and starts. There are periods where we've got benefit that comes at a quicker tempo. There are situations where we have costs that are less or more. That's why I emphasize that the nonlinear part of it, what we are pleased with though is when you look back over periods of time, you can see clear progress on those three strategic pillars. We think we got the right pillars, we think we have the right subset of activities and we're setting against it. If you know the strategy's right, if you know you've got the large muscle mover activities and if you know the industry backdrop's a good one, then we're going to keep at it.

Michael, I'll just add just tangible ones that have happened this year. Big initiatives, we accelerated the assortment work because we saw good learning. That's acceleration. On the store operating model, we paused to test longer and further to learn more than what we really. We knew when we roll it out we've got the right operating model now. That didn't go with our plan, and the stores and the teams had to overcome the challenges and productivity that we would have likewise had seen if we would have rolled it out earlier with the right model. It's not perfectly linear because we're testing our way into things, and some are going to be delayed and we're purposely delaying them for the right reasons. Some of them will accelerate when we can. That's some of the nuance that we're talking about. Less about weather, more about the initiatives. The rollout of those, to Shane's point, when do we move up the call list with the Pro?

Thank you. The next question comes from Michael Baker from D.A. Davidson & Co. Please go ahead. Michael, your line is now open.

Hi, thanks. Maybe following up on Mike Lasser's question, you used language a couple times of 2025 and 2026 being build years. What does build years mean? Does that mean in a way, obviously margins are expanding already, but are you still investing more? The idea is that it really, you know, the margin expansion really kicks in more in 2027. Is that the right way to interpret build year?

Yes. By build year it means we're still doing large scale activities to set the company up for success. Let's do an example. Market hubs, we didn't have any and we'll end the year with 33, but that's half of what we envision having by mid-2027. There's going to be a ton of activity in the real estate team around making that happen. That's a good example. On our DC consolidation we're continuing now as we move to the smaller network. How do we optimize that? How do we optimize our routing? How do we optimize our lines per hour? On our new store opening, we put out 30 NSOs, but we want to continue to amplify the number that we do for that. By the way, if you want to open a single store, you got to go prospect 10 sites.

There's huge activity going on in each of the pillars to get to more of what that run rate will be longer term and that's really what creates that nonlinear dimension.

Yeah, I think it's the initiatives that we've laid out. The three pillars we've laid out was not a 2025 and done. Then see the benefit is a three year plan that we've laid out, that strategy unchanged, and we're going to continue to execute against that.

I think we just talked about that operating model being one in our stores that we're going to start rolling out in Q4, which will roll out into next year. That's getting our assets right, the trucks in the right place, the hours to meet the demand. In our stores there's technology built. We're building different technology capabilities. Think of our pricing tools that are coming later this year and into next year. We're partnering with Palantir as part of some of the AI work that we're implementing. A lot of that technology takes time to build and that'll start building into next year as well. The build over the next two years is as we ramp up our strategy in these three pillars, it's not a 12 months and done, it's going to be a two year plan to really start to see the fruits of it.

Okay, that makes sense. If I could ask one more follow up and maybe not a fair question for you guys, so if not, feel free to pass for whatever it's worth, the consensus estimates aren't even close to a 7% margin in 2027. In all your conversations with investors or analysts, what do you think people are missing relative to your plan?

I'll start and I'll let Shane jump in. I'll just say the first thing is our strategy is unchanged. It's still our goal but it is early. We're two quarters away from when we closed our stores, so we're still early in this turn. I think there's a need to see proof points, and that's why we are giving more metrics and data around what we're seeing as we're going through this process. To be two quarters past closing all of our stores and the decisions that we've made around accelerating the assortments work, accelerating market hubs we brought in, we're opening more market hubs this year. We're trying to get proof points of how things are working.

Now we have to show it in our numbers, and it's still to me early, but you'll have to ask everyone else why they don't believe in that goal. I think to us this is a build.

Yeah. I don't know what goes into any analyst's specific assessment, but as leaders and as a company, we have to build a track record. We have to demonstrate what the say-do ratio is. Early on, our pledge is we're focusing on auto parts. We're on auto parts retail. Second is we're trying to create a clear strategy that fits that and that's understandable externally. More importantly, it's understandable internally and by our customer. Third, we're being decisive in our approach in getting there and we'll make tough decisions and we'll do those things again. What would an auto parts retailer do to be successful in a particular situation? Lastly, we'll be transparent. We'll share with you what our progress is. You guys have to then take all of that and say, hey, to what degree do I think that that's going to occur or not?

Then put it in the long-term perspective. We'll be out here doing that each and every day and notably in our footprint now where we're one or two in terms of store density, getting our stores better. That's really you. We're operating under the mantra of an inverted pyramid, which our customers come first and then, by the way, everything runs through the front line. We'll keep doing that and focusing on auto parts with decisive activities, and hopefully there'll be some closure in terms of what you guys think and what we're saying, and we'll look forward to sharing that along the way.

Advance Auto Parts (AAP) Q3 2025 Earnings Call Transcript

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