AAP

This section is organized by strategic pillar, per management:

• Merchandising

  • Added 80,000 new SKUs to the company's assortment catalog in the first half of 2026, following 100,000 new SKUs added in 2025, increasing in-store product availability across the distribution and store network
  • On track to complete full deployment of a new pricing framework for both DIY and Pro segments by the end of 2026, which enables precise market-based pricing and has already improved customer and team member confidence in the Pro segment
  • Improved promotional discipline, focusing marketing spending on offers that drive sales or profitability gains
  • Merchandising initiatives contributed 100 basis points of product margin expansion year-to-date
  • Launched new value-focused private brand Argo, initially for motor oil, and is expanding it across additional product categories to meet consumer demand for affordable, reliable options

• Supply Chain

  • Completed distribution center (DC) consolidation in Q2 2026, reducing the network from nearly 40 DCs with multiple warehouse management systems to 15 DCs operating on a unified system, a key strategic milestone
  • Accelerated market hub openings, now targeting 15-20 new hubs in 2026 (up from prior guidance), with 5 opened in H1 2026 and 9 planned for Q3 2026, to reach a total of 60 hubs by mid-2027; markets with hubs consistently outperform non-hub markets on same-day availability
  • 25% complete with planned DC process improvements, which are on track to be fully implemented by mid-2027; improvements are focused on streamlining operations, standardizing processes (e.g., standardized receiving), increasing labor productivity, and reducing per-unit shipping costs, with margin expansion benefits starting in 2027
  • Currently rebidding all carrier contracts, planning to consolidate volume with 70% fewer carriers, which is expected to generate tens of millions of dollars in annual cost savings and support 2027 margin expansion

• Store Operations

  • Core operational KPIs showed sequential and year-over-year improvement: Net Promoter Score (NPS) improved to nearly 80 points from the high 60s year-over-year, in-store attachment rates rose to nearly 30% from the mid-high 20s year-over-year, and average Pro order delivery time consistently tracked below 40 minutes per week in Q2
  • Completed an independent evaluation of store task execution to update 10-year-old labor standards; the study examined time allocation for core tasks (picking, stocking, receiving, customer installations) to identify high-value customer activities and eliminate non-value-added work
  • Implementation of updated labor allocation systems aligned to the new standards will begin later in 2026, to further improve NPS and store productivity

• Financial and Balance Sheet Operational Highlights

  • Returned to positive year-to-date free cash flow of $120 million, after two years of cash outflows
  • Repurchased $30 million of outstanding 2028 senior notes in Q2, reducing net debt leverage to 2.1x, which falls within the company's targeted 2.0-2.5x range

• Full year 2026 guidance is reaffirmed for net sales, comparable sales, adjusted operating margin, and free cash flow:
  • Net sales projected at ~$8.5 billion, with comparable sales growth guided in the 1% to 2% range
  • Full year same-skew inflation is now expected to be ~3%, matching H1 2026 levels
  • Adjusted operating income margin is reaffirmed at 3.8% to 4.5%, representing 130 to 200 basis points of year-over-year margin expansion; gross margin is expected to expand 110 to 150 basis points to ~45%
  • Full year adjusted diluted EPS guidance is raised to $2.60 to $3.30, driven by higher-than-expected interest income
  • Free cash flow guidance is reaffirmed at ~$100 million
  • Capital expenditures are maintained at ~$300 million, with 30-35 new store openings guided for 2026 (up from prior plans, with 6 opened in H1)
• The 100 basis points of full year gross margin expansion from merchandising initiatives will be fully offset by the 30 basis point full year benefit of IEPA refunds already received in Q2, plus headwinds from channel mix shifts and higher shipping costs
• SG&A is expected to decline year-over-year in reported terms, contributing 20 to 50 basis points of leverage, driven by lapping $90 million of 2025 non-recurring expenses; adjusted for non-recurring items, SG&A is expected to grow at a low single-digit rate
• Management confirms the medium-term adjusted operating margin target of 7% remains in place, and expects at least 100 basis points of margin expansion in 2027, with full guidance for 2027 to be released later this year

For Q2 2026, Advance Auto Parts reported total net sales of $2 billion, with a slight overall decline in comparable sales. The Pro segment delivered low single-digit comparable sales growth, which met management expectations. Pro represented the positive growth driver for the quarter, with its Main Street Pro sub-segment outperforming overall Pro comparable sales by more than 200 basis points, supporting share gains; the national accounts Pro sub-segment continued to experience headwinds from ongoing optimization. Pro hard parts categories (brakes, undercar) outperformed, supported by improved parts availability and faster delivery times. The DIY segment saw a larger-than-expected low single-digit comparable sales decline, driven by tighter household budgets, constrained discretionary spending, deferral of large-ticket projects, and mild summer weather that hurt performance in weather-sensitive categories (cooling/climate control, fluids/chemicals). Within DIY, maintenance and failure categories (filters, motor oil, batteries) outperformed, while hard parts categories lagged. The Pro segment contributed the majority of positive growth for the quarter, offsetting DIY weakness. Average ticket grew 4% from same-skew inflation, while units per transaction grew year-over-year, partially offsetting lower DIY transaction volumes.

• Persistent macroeconomic pressure on lower and mid-tier household budgets continues to weigh on DIY segment spending, leading to larger-than-anticipated declines in transaction volumes, especially for large-ticket discretionary projects
• Milder than expected weather negatively impacted performance of weather-sensitive DIY categories in Q2, creating near-term sales headwinds
• Higher commodity and fuel costs increased same-skew inflation and created supply chain cost headwinds that offset a portion of margin expansion gains
• Ongoing geopolitical uncertainty creates potential supply chain disruptions and additional cost pressure
• The national accounts Pro segment optimization continues to create near-term sales headwinds, though the magnitude of these headwinds is expected to halve in H2 2026 compared to H1

Q: How is transaction growth tracking for up-and-down-the-street Main Street Pro customers, and why does the company have conviction in sustainable long-term growth for this segment? / A: Main Street Pro comparable growth is 200 basis points above overall Pro growth, including transaction growth, and both existing Main Street customers are increasing transaction volumes and new customers are starting to allocate more business to Advance. National account optimization headwinds will halve in H2 2026 as the company laps most of the adjustments. By the end of 2026, 70% of stores will be supported by a market hub, bringing more parts closer to Pro customers, while ongoing assortment improvements and service initiatives (such as the industry-leading TechNet warranty program and faster delivery times) are improving the value proposition for small local shops, which is the largest addressable segment of the Pro market.

Q: Given Q2 missed expectations but full year sales guidance was reaffirmed, what factors will drive a second half recovery, and does the medium-term 7% operating margin target still hold amid ongoing DIY weakness? / A: Q2 weakness was concentrated in the final four weeks, driven by unanticipated macro softness and slower pivot to value messaging for DIY consumers, but Q3 trends have already accelerated from the end of Q2. The most difficult comparable sales are in early Q3, and comparisons will ease through the back half, with a tailwind from lapping 2025 product transition impacts in Q4. The 7% medium-term operating margin target remains appropriate; long-term industry fundamentals (older vehicle fleet, high new car prices pushing consumers to keep vehicles longer, large fragmented $160 billion TAM) are very favorable. The company still expects at least 100 basis points of margin expansion in 2027, with ongoing supply chain and store productivity initiatives on track to deliver these gains even if DIY pressure persists.

Q: After the first debt repurchase in some time, what are the company's future plans for debt reduction, and what is the timeline for returning to investment grade credit ratings? / A: Advance will remain opportunistic: capital allocation prioritizes investing in the business to drive growth, but any excess cash will be used to retire debt before maturity if it makes economic sense. There are no specific plans for further repurchases at this time, but the company holds $3.1 billion in cash and has a solid excess cash position relative to obligations. Credit rating agencies have already stabilized the company's outlook, reflecting the improved balance sheet and return to positive free cash flow. Returning to investment grade is a multi-step journey (three notches for Moody's, two for S&P), and the company has regular constructive dialogue with agencies as it continues deleveraging.

Q: Management saw DIY decelerate sharply in the final four weeks of Q2; why wasn't full year comparable sales guidance lowered, and what is the outlook for margin through the back half? / A: The Q2 final four-week slowdown was driven by temporary factors (unexpected weather shifts, slower messaging pivot to value) and was not indicative of underlying business health. Q3 trends have already accelerated, with transaction growth improving, and the company is tracking at the two-year stacked growth rate implied by the current guidance range. The company has already pivoted to highlight its value offering, including expanding the new value private brand Argo, which is well-positioned for the current cost-conscious consumer environment. Back half gross margin is expected to be 44% to 45%, with Q3 higher than Q4 due to seasonality, and no additional material tariff refunds are expected in H2.