Advance Auto Parts, Inc. Q4 FY2025 earnings call

• 2025 achievements: Rationalized asset footprint by exiting underperforming locations, expanded assortment by 100,000 new SKUs, increased average speed of delivery to Pro customers, completed consolidation of distribution center network, opened new market hubs and stores, and invested in store infrastructure upgrades. - 2026 strategic priorities:
  • Merchandising excellence: Deepen vendor partnerships, deploy new pricing matrix, invest in inventory management systems, launch new owned oil and fluids brand ARGOS, modernize DIY loyalty program.
  • Supply chain: Complete consolidation of distribution centers, simplify and standardize DC operations, test and launch labor performance and transportation management tools, expand market hubs.
  • Store operations: Elevate team member experience through training and task simplification, upgrade stores, improve service standards, open new stores and market hubs.

For the fourth quarter, net sales from continuing operations were approximately $2 billion, down 1% compared to the previous year. Comparable sales grew 1.1%. Adjusted operating income from continuing operations was $73 million, or 3.7% of net sales. For the full year 2025, net sales from continuing operations declined 5% to $8.6 billion. Comparable sales grew just under 1%. Adjusted operating income from continuing operations was $216 million, or 2.5% of net sales. The Pro business grew nearly 4% in the fourth quarter and low single-digit for the year. The DIY business had a low single-digit percent decline in the fourth quarter and low single-digit decline for the year.

• Net sales: Slightly decline year-over-year mainly due to nonrecurring items from 2025, but excluding nonrecurring items, underlying net sales expected to grow 1%-2%, including comparable sales growth 1%-2%.
• Margins: Adjusted operating income margin expected 3.8%-4.5% for 2026, resulting in 130-200 basis points year-over-year margin expansion; gross margin expected to expand 110-150 basis points to approximately 45%.
• Earnings: Adjusted diluted EPS expected in range of $2.40-$3.10.
• Cash flow: Expect to generate approximately $100 million in free cash flow in 2026, capital expenditures expected at approximately $300 million.

• External environment volatility, including tariff and consumer spending environment. - Topline momentum lagged original expectations due to external economic factors. - Initiatives across 3 strategic pillars progress at varying rates. - Store portfolio optimization execution risk.

Q: Why is your inflation so much lower than peers?

A: Our SKU inflation is consistent with peers, but had comparison issues in 2025 with wrap of price investments made in prior year and still negotiating tariffs. We are a rational player in the market using AI for promotions.

Q: What drove the decision to reduce supply chain financing?

A: Half of the change in free cash flow was due to lowering payables based on mix of purchases and sourcing negotiations. We are happy with the supply chain finance program and it's stable.

Q: Impact of store closings on comps and margins in 2025?

A: Liquidation impact was about $51 million on the year, with Pro comps benefiting but still positive even after the benefit.

Q: Cadence of margin gains?

A: 7% is the medium-term target. Progress in merchandising and excellence, but supply chain and store operations pillars have different progress rates. 2026 is a primary investment year for these pillars.

Q: Execution risk in getting to margin gains?

A: Merchandising organization has solid execution, progress on supply chain consolidation, and SG&A is being invested in areas like labor and service improvement.

Q: Bridge to free cash flow?

A: Operating income, payables, working capital and seasonality affect free cash flow, with typical seasonality and closure expenses to consider.

Q: Private label strategy with ARGOS?

A: ARGOS is replacing a brand and may inch up private label mix slightly but no significant increase planned.

Q: Market hubs conversion and greenfield?

A: More than 20 market hubs are conversions, majority of new ones will be greenfield, averaging about $2 million in CapEx.

Q: Comp guidance breakdown?

A: Slightly low single-digit transaction pressure in DIY, with inflation and trends affecting it, and first half stronger due to easier comparisons.

Q: Vendor finance and free cash flow?

A: Supply chain finance program is stable, no concerted effort to reduce further, and moving vendors off program could have P&L positive impact if economic sense.

Q: LIFO and restructuring costs in Q1?

A: LIFO expense expected about $30 million in Q1, restructuring costs not quantified externally, Pro comps benefited from store closures with strong execution.