Advance Auto Parts, Inc. Q3 FY2025 earnings call

• Merchandising: Streamlined processes, reduced complexities, restructured distribution centers, and improved vendor experience. Rolled out new assortment framework across top 50 DMAs. - Pricing and Promotion: Testing AI-powered pricing matrix and building guidelines for field discounting. - Supply Chain: U.S. distribution center consolidation progressing, with 16 DCs expected by year-end. Opened 6 market hubs in Q3, with 33 expected by year-end. - Store Operations: Testing refreshed operating model, launching new Net Promoter Score, and upgrading store infrastructure. Focus on Main Street and regional accounts for Pro channel. - DIY: Simplifying store tasks, improving operational discipline, and upgrading store infrastructure with $50 million invested year-to-date in store upgrades.

For the third quarter, comparable sales grew 3% with both Pro and DIY channels delivering growth. Net sales from continuing operations were $2 billion, down 5% compared to last year. Adjusted operating margin expanded by 370 basis points year-over-year to 4.4%. Pro comps grew by just over 4%, and the DIY channel delivered positive low single-digit comps. 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.

• Reaffirmed midpoint of comparable sales growth and adjusted operating margin guidance. - Updated adjusted EPS guidance to $1.75-$1.85. - Revised CapEx to approximately $250 million for the year, free cash flow to -$90 million to $80 million. - Q4 gross margin expected to moderate, SG&A expense to decline in high single-digit range, and lapping atypical margin headwinds.

• Isolated supplier bankruptcy situation with a $28 million noncash charge to cost of sales. - Concerns related to supply chain finance program and credit losses from the supplier, but balanced by strong balance sheet and liquidity.

Q: About elasticity of demand, health of the consumer, and weather impact.

A: Consumers adjusting budgets due to inflation, industry watching retail trends; measured initiatives via test vs control.

Q: On inventory, where Advance is vs where they want to be.

A: Focus on assortment rollout, ensuring right product in stores; managing mix of depth and breadth.

Q: On inflation front, exit and expectations for Q4.

A: Q3 under 3%, Q4 expected around 4%, with slight increase in Q1 2026.

Q: On path to 7% operating margin, linearity.

A: Turnarounds nonlinear; using test vs control to gauge initiatives, LIFO headwind around 60-80 basis points in 2025.

Q: On working capital programs and supplier issue risk spreads.

A: No increase in risk spreads, stable supply chain finance program with cash support.

Q: On Atlanta hub greenfield performance.

A: Market hubs provide 100 basis point lift, 33 expected by year-end with more greenfields.

Q: On gross margin and structural gains.

A: Mid-40% range long-term, making progress; Q4 gross margin expected to moderate.

Q: On nonlinear path forward.

A: Nonlinear due to lumpy activities like DC closures, software implementations, and store interactions; build years 2025-2026 setting up for 2027.

Q: On build years meaning.

A: Build years involve large-scale activities like market hub expansion, DC consolidation, and store operating model rollout to set up for long-term success.