AAP

On August 20, Advance Auto Parts (NYSE:AAP) reported second-quarter results that look nothing like the company's recent history. Adjusted diluted earnings per share jumped to $1.03 from $0.69 a year earlier, and free cash flow turned positive for the first time in two years. That marks a real shift for a retailer that was burning cash just twelve months ago. The bigger question is whether this is a genuine turnaround or a temporary lift from refunds and cost discipline. Adjusted gross margin expanded 240 basis points to 46.2%, helped by $26 million in tariff refunds, but the larger share of that gain, roughly 110 basis points, came from actual improvement in product margin tied to merchandising work. Operating margin reached 5.6%, and even after stripping out the benefit from IEEPA refunds, margin still expanded by nearly 130 basis points to 4.3%, a sign the underlying business is healthier, not just luckier. Free cash flow of $120 million year to date compares with two straight years of outflows, and the company used part of that cash to repurchase about $30 million of debt, pushing net leverage down to 2.1 times. With roughly $3.1 billion in cash on hand, both Moody's and S&P have stabilized their outlook on the balance sheet. The company also finished a two-year distribution center consolidation, cutting nearly 40 facilities down to 15 under one unified warehouse system, and it is now rebidding carrier contracts to consolidate volume with 70% fewer carriers, a move expected to generate tens of millions in savings starting in 2027. Market hub openings for the year were raised to 15 to 20 locations after areas with hubs consistently outperformed those without them. On the customer side, Main Street Pro sales outpaced the broader Pro segment by more than 200 basis points, Net Promoter Score climbed to nearly 80 from the high 60s a year ago, and in-store attachment rates reached almost 30%. Total comparable sales still fell 0.5%, driven by a DIY channel that declined in the low single digits and got noticeably worse in the final four weeks of the quarter as household budgets tightened and mild weather hurt categories like cooling and climate control. That softness sits on top of longer-running pressure on the DIY business from vehicle electrification and intense competition from rivals including O'Reilly Automotive and AutoZone. Some of the margin story also comes with an asterisk. IEEPA refunds accounted for about 130 basis points of the operating margin gain, while a channel mix shift toward slower DIY sales and higher freight and fuel costs together added roughly 40 basis points of drag. Same-SKU inflation near 4%, driven partly by rising motor oil and petroleum costs, could squeeze the same budget-strapped shoppers further. And the scars from prior years remain visible: fiscal 2025 revenue fell 5.4% to $8.6 billion with a net margin of just 0.5%, free cash flow was negative $298 million, debt-to-equity sat near 2.4 times, and the company is still absorbing restructuring charges expected to run as high as $40 million through 2026. New store openings for this year were also trimmed to 30 to 35 locations from a prior range of 40 to 45. Hedge fund ownership rose from 34 to 38 funds in the most recent quarter, pointing to growing institutional interest. Short interest, however, sits at 26.88% of float, an unusually high level that shows heavy skepticism still surrounds the stock and leaves room for a sharp move if sentiment turns. At a forward P/E of 17.76, as of August 28, shares are not priced as though a full recovery is guaranteed, which means another rough DIY quarter could undo some of the recent progress quickly. Advance Auto Parts spent years defined by shrinking sales, thin margins, and a stretched balance sheet, and this quarter is the clearest evidence yet that the turnaround plan is gaining traction. Sustained free cash flow without refund support would go a long way toward showing the fixes are structural rather than timing. Another quarter of DIY deterioration would instead suggest the improvement leans more on tariff refunds than a real demand recovery. While we acknowledge the potential of AAP as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock. READ NEXT: 10 Best Future Stocks to Buy Under $10 and 12 Best Performing Semiconductor Stocks to Invest In. Disclosure: None. Follow Insider Monkey on Google News.

Image source: The Motley Fool. Aug. 20, 2026 at 8:00 a.m. ET Vice President, Investor Relations - Lavesh Hemnani President and Chief Executive Officer - Shane O'Kelly Executive Vice President and Chief Financial Officer - Ryan Grimsland Operator: Welcome to the Advance Auto Parts Second Quarter 2026 Earnings Conference Call. I would now like to turn it over to Lavesh Hemnani, Vice President, Investor Relations. Lavesh Hemnani: 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, goals, 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 progress on our strategic priorities for 2026. Later, Ryan will discuss results for the second quarter and provide an update on the guidance for full year 2026. Following management's prepared remarks, we will open the line for questions. Now let me turn over the call to our CEO, Shane O'Kelly. Shane? Shane OKelly: Thank you, Lavesh, and good morning, everyone. I would like to start by expressing my appreciation for our frontline team for their hard work and dedication to serving our customers. During the second quarter, the team navigated a volatile demand environment, which contributed to a slight decline in comparable sales. This included low single-digit sales growth in the Pro channel, which performed in line with our expectations. Within Pro, the Main Street business continued to outpace overall growth, supporting share gains in that segment. In the DIY channel, sales declined more than we anticipated, particularly during the last 4 weeks as tighter household budgets weighed on consumer spending during the quarter. Against this backdrop, the Advance team continued to prioritize actions across our strategic initiatives, which contributed to solid profitability in Q2 with an adjusted operating margin of 5.6%. Excluding the benefit of IEEPA refunds received in the quarter, adjusted operating income margin expanded by nearly 130 basis points to 4.3%. We maintain focus on executing actions within our control, which has translated to sequential improvement in core operational KPIs, including NPS, time to serve, and attachment rates. The second quarter marked an inflection point for Advance with the return to positive free cash flow as we generated $120 million year-to-date compared to an outflow of cash during the last 2 years. During the quarter, we also repurchased approximately $30 million of outstanding debt, which, along with improved profitability, supported further deleveraging of the balance sheet while we continue to allocate more capital to investments to grow the business. Based on our first half performance and updated projections for the remainder of the year, we are reaffirming our full year sales, operating margin, and free cash flow guidance. This includes comparable sales growth in the 1% to 2% range, which considers continued spending pressure in the DIY channel, offset by ongoing strength in the Pro channel, along with higher same-SKU inflation due to increased commodity costs. We are also implementing a focused action plan aimed at strengthening execution across our operational KPIs and driving higher customer engagement to deliver better transaction performance in the second half compared to trends during Q2. Our margin outlook balances the tailwind from recent tariff refunds with incremental headwinds stemming from shifts in channel mix and increased commodity costs. We will continue to prioritize efforts to make progress on our strategic objectives as we work to create long-term value for our shareholders. Let's turn to an update on our strategic priorities for 2026. Our strategy remains unchanged and is built on 3 pillars: merchandising, supply chain, and store operations, supported by targeted initiatives to drive sustainable, profitable growth over the long term. We remain committed to executing actions under our 2026 strategic priorities as we make progress on our journey towards a medium-term 7% adjusted operating margin target. Let's begin with merchandising. We are focused on ensuring reliable product availability, which supports the efforts of our store team to enhance customer service and drive growth in unit sales per transaction. Our new assortment framework launched last year is helping us increase the breadth of parts we carry in each store and broadening availability across our network of DCs, hubs, and stores. Halfway through this year, we have added approximately 80,000 new SKUs to our assortment catalog, building upon the 100,000 new SKUs we introduced last year. Through comprehensive category reviews, we are strengthening relationships with existing vendors and identifying opportunities to improve margins while also partnering with new vendors to further expand our selection of parts. In the near term, our merchandising team is refining communication within the DIY channel to enhance brand awareness and deliver value-driven offerings aimed at increasing customer engagement. We are collaborating with vendors on targeted media campaigns, leveraging Advance Rewards, providing store incentives, and optimizing online paid search to stimulate transaction growth and improve conversion in stores. Moving to an update regarding our pricing and promotions management initiatives. We are on schedule to complete the full deployment of a new pricing framework for both DIY and Pro segments by year-end. Our pricing philosophy remains unchanged. We aim to offer everyday competitive prices and operate rationally in the market. The new framework is expected to enhance visibility of competitive pricing actions and enables the execution of precise market-based pricing strategies. The early results from the Pro channel have shown an increase in team member and customer confidence, which we expect to support efforts to grow share among Main Street Pros. Alongside the implementation of more sophisticated pricing models, we are also improving discipline around the management of store-based promotional activities. We expect to offer everyday competitive prices along with seasonally relevant promotions and plan to deploy marketing dollars on offers that yield an improvement in sales or profitability. On a year-to-date basis, our merchandising initiatives have contributed approximately 100 basis points to product margin expansion. We anticipate building upon this growth in the second half of the year to support our margin improvement goals for the year. Turning to supply chain. In the second quarter, we completed our distribution center consolidation. This initiative commenced more than 2 years ago when we operated nearly 40 DCs across the United States, utilizing multiple warehouse management systems. As of today, we operate 15 DCs supported by a unified warehouse system, marking a key milestone in our efforts to enhance asset productivity throughout our supply chain. Along with consolidating our DC network, we also launched market hubs that improve same-day parts availability for our customers. Areas equipped with market hub locations consistently outperformed those without market hubs, which reaffirms the strategic value of these locations. Year-to-date, we have opened 5 market hubs, bringing the total to 38 locations. Our real estate team has done a great job in expanding our capabilities, and I am pleased to share that we are accelerating the pace of market hub openings for this year. We now plan to open 15 to 20 market hub locations this year and remain on track to achieve our goal of operating 60 locations by mid-2027. Regarding DC productivity, our team is concentrating on key process improvements aimed at streamlining and standardizing operations within our distribution centers. We anticipate that these actions will yield greater operational efficiency and facilitate improved product flow into and out of the DCs. During the second quarter, we completed 25% of the identified process improvements and remain on track to systematically implement the remaining process changes by mid-2027. These actions are aimed at increasing labor productivity within our DCs and provide visibility into cost reductions per unit shipped, which is expected to contribute to margin expansion starting next year. Our strategy is focused on minimizing redundant product handling, improving shipment accuracy, reducing inventory lead times and transitioning to a more variable cost structure. For example, we have now standardized the DC receiving process across our facilities, eliminating a significant number of variations, which is expected to deliver better productivity through higher processing volumes per labor hour. Another critical component of supply chain productivity is transportation optimization. We are currently rebidding all of our carrier contracts, and we expect to consolidate our volume with 70% fewer carriers. This initiative is expected to generate tens of millions of dollars in cost savings, which will support margin expansion in 2027. Collectively, the DC process changes and transportation initiatives are expected to enhance our ability to operate a more efficient and scalable supply chain. Next, I will conclude with an update on our third strategic pillar, store operations. In our stores, we are holding teams accountable for service execution and measuring the effectiveness of our initiatives through clearly identified KPIs as we strive to increase labor utilization. The second quarter provided further evidence of progress on our store-based initiatives. NPS or Net Promoter Scores have improved to nearly 80 points from the high 60-point range in the same period last year, which suggests that our service enhancements are resonating with customers. In-store attachment rates have improved to nearly 30% from the mid-high 20% range in the same period last year, which contributes to unit share gains. And average time to deliver Pro orders consistently track below 40 minutes during each week in Q2, which is improving reliability for our Pro customers. In addition to measuring progress through these KPIs, we are also identifying opportunities to better prioritize store tasks, investing in technology to drive operational efficiencies and enhancing training content to further elevate customer service. These actions will help us strengthen execution across our primary KPIs in the near term, while our store and merchandising teams partner to drive higher customer engagement and improve conversion in the second half of the year. During the second quarter, we also completed an independent evaluation of store task execution with the objective of updating our store labor standards that were previously unchanged for over a decade. This activity follows the rollout of our store operating model last year, which determined the allocation of resources such as trucks and drivers based on market demand factors. The study examined time allocated to routine store responsibilities, including picking or stocking products, receiving shipments from distribution centers and assisting customers with product installations such as batteries and wipers. We expect to use the findings to identify tasks that deliver the highest value to our customers and simultaneously highlight non-value-added activities that can be reduced to enhance productivity. The next phase of this initiative involves updating our labor allocation systems to align with the newly developed labor standards. We anticipate beginning this implementation later this year, which will enable us to further improve NPS and drive productivity in the years to come. To conclude, I want to reiterate that our strategic plan is unchanged. Our KPIs are improving, and we have returned to positive free cash flow. We are cognizant of the external macro pressures impacting consumer spending in the near term. We are implementing a focused action plan to support the business in the second half while we actively manage the execution of our strategic initiatives throughout the year. I will now hand the call over to Ryan to discuss our Q2 financial performance. Ryan? Ryan Grimsland: Thank you, Shane, and good morning, everyone. I want to begin by thanking our frontline associates for their commitment to serving our customers. For the second quarter, we reported net sales of $2 billion with a slight decline in comparable sales. The Pro channel delivered low single-digit growth, which was in line with our expectations. The strength in Pro was more than offset by a decline in DIY sales in the low single-digit range as constrained household budgets impacted spending during the quarter. We also experienced milder summer weather in several of our markets, which drove an underperformance in weather-sensitive categories, such as cooling and climate control and fluids and chemicals. In our view, the combination of a larger-than-anticipated deceleration in DIY spending with deferral in large ticket projects, a reduction in discretionary spending compared to last year and weather-related drivers during Q2 accounted for approximately 100 to 150 basis points of comp headwind in the quarter. Turning to the cadence of sales. During the first 8 weeks of Q2, comparable sales grew by approximately 1%, including a low single-digit growth in Pro and flattish DIY sales. In the final 4 weeks, comp growth moderated in both channels as we cycled through difficult comparisons from last year. Also, this time frame coincided with price changes to reflect movements in commodity costs, which further stretched consumer budgets. In this period, the Pro channel delivered positive comparable sales growth, but DIY volumes slowed further, driving most of the shortfall in sales for the quarter. For the quarter, average ticket was positive and included same SKU inflation of approximately 4%. The sequential step-up in inflation from approximately 3% last quarter was driven by market-related price adjustments and increases in commodity costs, which impacted motor oil and other petroleum products. Our team remains committed to enhancing customer service, and these efforts continue to support growth in units per transaction, which grew on both a 1- and 2-year basis, helping partially offset lower transaction volumes. Diving deeper into category performance, within DIY, sales were stronger in maintenance and failure categories such as filters, motor oil and batteries, while hard parts categories lagged, likely indicating selective spending behavior and deferral of larger projects. On the other hand, in the Pro channel, our hard parts business, including brakes and undercar, continue to outperform, supported by an improvement in parts availability and consistency in delivery times. We maintained our strategic focus on growing share across Main Street Pros, which represents the largest portion of our addressable market. The Pro team carried the momentum from Q1 with transaction performance for this segment outpacing the overall enterprise. The Main Street Pro comp exceeded our total Pro comp by more than 200 basis points, helping offset the headwind created by the optimization of national accounts. Moving to margins. Adjusted gross profit was $924 million or 46.2% of net sales, resulting in approximately 240 basis points of gross margin expansion in Q2 compared to the same period last year. Tariff refunds contributed $26 million in gross margin, accounting for 130 basis points of year-over-year change. The balance 110 basis points of margin expansion was primarily driven by an improvement in product margin and included 2 incremental cost drivers in the quarter. First, a channel mix shift due to the slowdown in DIY sales resulted in a headwind of approximately 20 basis points. Second, supply chain expenses, including higher freight and fuel costs drove approximately 20 basis points of deleverage due to the lower-than-expected sales volume. These headwinds were offset by approximately 40 basis points of tailwind from immaterial LIFO and warehousing expenses in the quarter compared to a headwind in the same period last year. Excluding the benefit of IEEPA refunds, we generated a gross margin of approximately 45% for the first half of 2026, highlighting the progress across our merchandising strategies. Shifting to expenses. Adjusted SG&A was $812 million or 40.6% of net sales, driving 15 basis points of leverage compared to last year. Expenses were down approximately 1% year-over-year, reflecting our focus on labor productivity through simplification of store tasks and management of resource allocation, along with reinvestment of savings from indirect spend optimization. Adjusted operating income came in at $112 million or 5.6% of net sales, resulting in approximately 260 basis points of year-over-year margin expansion. Adjusted diluted earnings per share was $1.03 compared to $0.69 during the second quarter last year. We generated $120 million of free cash flow year-to-date, marking a significant improvement from an outflow of $201 million last year. The improvement in free cash flow was driven by improved profitability and working capital management, a reduction in cash expenses related to our store optimization activity last year and the receipt of tariff refunds. Our balance sheet continues to be in a solid position as we ended the quarter with a cash balance of approximately $3.1 billion. During the quarter, we utilized approximately $30 million of cash to repurchase a portion of our 2028 senior notes, and we ended the quarter with a net debt leverage of 2.1x compared to 2.4x last quarter, which is in line with our targeted range of 2.0 to 2.5x. We remain committed to repaying debt at or before maturity. Turning to full year guidance. Let's start with net sales. For the full year, net sales are projected at approximately $8.5 billion, including comparable sales growth in the 1% to 2% range. Based on product cost inflation experienced during Q2, we now expect full year same SKU inflation of approximately 3%, implying second half inflation of approximately 3%, consistent with the first half of 2026. The step down in inflation compared to the second quarter reflects the comparison against last year's tariff-driven price adjustments. Based on revised inflation expectations, along with our focused action plan to increase customer engagement, our range of comparable sales growth guidance assumes a recovery in transaction volumes compared to the second quarter. Regarding Q3, trends during the first 4 weeks of the quarter are tracking slightly ahead of trends in the final weeks of Q2 and have accelerated on a 2-year basis. As a reminder, these first 4 weeks of Q3 represent our most difficult comparisons to last year, and our comparisons begin to ease significantly over the next 8 weeks. Moving to margins. We have reaffirmed full year adjusted operating income margin guidance between 3.8% to 4.5%, resulting in 130 to 200 basis points of year-over-year margin expansion. We expect full year gross margin to expand in the range of 110 to 150 basis points to approximately 45%. Most of this margin expansion is expected to be driven by the merchandising initiatives related to strategic vendor sourcing and optimization of pricing and promotions. We expect that the benefits from these merchandising initiatives to be partially offset by investments in supply chain productivity. As I discussed earlier, we had some moving items within gross margin in Q2. These items have also been factored into our full year guidance. During the second quarter, we received substantially all the IEEPA refund claims by us. These refunds equate to approximately 30 basis points of gross margin contribution for the full year. However, this benefit is being fully offset by the headwind from changes in sales mix compared to our prior forecast and the incremental impact of higher shipping, freight and fuel costs in the supply chain. We will continue to work closely with our vendor partners to navigate the evolving geopolitical landscape and mitigate potential supply or cost pressure. Regarding SG&A, we expect reported full year expenses to be down year-over-year, contributing between 20 to 50 basis points of leverage. This is largely due to cycling of approximately $90 million in nonrecurring expenses from 2025. Adjusting for these expenses, we expect SG&A to grow at a low single-digit rate compared to last year. We expect to deploy savings generated from better in-store task management, effective resource allocation and a reduction in indirect spending to fund general wage inflation, new store and market hub opening expenses and strategic labor investments in priority markets. As we move forward, we will continue to look for opportunities to streamline tasking operations in stores to dedicate more time to serving customers. Moving to other items and guidance. We have raised adjusted diluted EPS guidance to a range of $2.60 to $3.30. The revised EPS outlook includes approximately $100 million of interest income, which is an increase of $20 million compared to our previous expectations based on trends through Q2. We continue to plan for pretax interest expense of approximately $210 million for the full year. The recent debt repurchase does not have a material impact on guidance. The benefit of higher interest income is being partially offset by a slight increase in tax expectations for the year. Shifting to cash flow. We continue to expect 2026 capital expenditures of approximately $300 million, with spending allocated to new stores and greenfield market hub growth, store infrastructure upgrades and strategic investments. We have revised our store opening schedule for this year. Our revised guidance includes 30 to 35 new store openings this year with 6 stores opened in the first half of 2026. For Market Hubs, our guidance now assumes 15 to 20 new market hubs this year, which exceeds our prior expectations. We opened 5 Market hubs in the first half of 2026 and currently plan to open 9 market hubs during Q3. We are reaffirming our full year free cash flow guidance of approximately $100 million. Our guidance includes the flow-through of tariff refunds received during the second quarter and timing for certain general operating expenses planned for the balance of the year. The change in free cash flow trend compared to our year-to-date trend of $120 million does not reflect any change in underlying operational progress of the business. To conclude, I want to thank our frontline associates for the continued improvement in the quality of service provided to our customers. Their efforts are supporting improved conversion, NPS and attachment rates, while our Pro team continues to drive share gains across the Main Street Pro. I will now hand the call back to Shane. Shane OKelly: Thank you, Ryan. I'd like to close by thanking the Advance team for staying focused on elevating our customer experience and driving operational productivity, which we believe will position us well to create long-term value for our shareholders. Thank you. Operator, we can now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Steve Forbes from Guggenheim Securities. Steven Forbes: Shane, I wanted to maybe dig into customer segmentation and whether you're seeing transaction growth among your largest up and down the street customers and maybe any comments you can provide that help build conviction around sort of sustainable transaction comp growth into the out year here as you reap the benefits of the strategic priorities. Shane OKelly: Yes. Steve, thank you for the question. And let me just begin by thanking our team, important to recognize what they're doing each and every day. So great question. Let's unpack Pro. Think about it in terms of Main Street and think about it in terms of national accounts. We are excited by what we're seeing with Main Street. So the growth there, 200 basis points above what we're seeing in total Pro, and that's inclusive of transactions. What we're doing with Main Street, we're getting real traction. And think about this as in the trenches, seeing a local shop at somebody with 2 or 3 bays and that's where both our connectivity, our reputation and really the quality of what our -- both our outside and inside sales team members can do is making a difference. Know that inside our Pro numbers, we have national account headwinds. And Ryan can unpack the numbers a little bit, but the way I think about it is we're starting to lap that. And remember, this is us saying, hey, where do we want to be in the Pro segment? Where do we have a right to win? Where is our profitability more attractive? All of that points to Main Street. So national accounts waning, and we're starting to see that diminish over time. So given the success we've had with Main Street, given how we're situated to compete with Main Street, we feel good about that, both in what you've seen here and what we think we can do for the future. Ryan Grimsland: Yes, Steve, I'll add a couple of things. Well, just think about the main -- I'll hit on the Main Street and the national accounts. The national account pressure will be about half of what it was in the first half in the second half. So we are starting to lap it. There will still be some pressure there, but it will be about half of what we've seen in the first half of the year. So that will help a little bit on the trends there. On the Main Street Pro, we're not just seeing accounts that we've had for a while continue to shop with us, buy more transactions. We're seeing accounts on Main Street that hadn't shopped much with us before, start to give us some of their business. And that's a good sign that our assortment is getting there, the service level is improving. A couple of things to note why we believe that we're making the right moves here. By the end of the year, 70% of our stores will have a market hub. And we're bringing more parts closer to the customer. And that allows us to reach other Main Street Pros and provide a better level of service to them. So we're excited about the Market Hub acceleration we're able to do here. We still think by the middle of next year, all stores will be at a Market Hub, but being able to accelerate a few more in this year. By the way, we're going to open up 9 in Q3. So that acceleration is going to be impactful, bringing more parts closer to the customer. The other thing is our assortment work that we're doing. And we still have opportunity to improve that assortment for the Pro customer and make sure we got the right coverage. But the work we have done is starting to resonate. We're going to continue to do that. We see opportunity to continue to improve that coverage and be more relevant for our Pro customers. Shane OKelly: A couple of just last additions and then look forward to your follow-up. If you look at how we've played in the Pro space over the years, we have a TechNet program, which has been very successful and included in that is a warranty program. So you say, Steve, you own a small shop somewhere and you fix their car and the customer drives 3 states away and needs to get that original work repaired. They could do that through an unrelated shop through our warranty program and get that paid for. We have programs like MotoVisuals, MotoLogic that help break down what's going on in vehicles, our credit programs, our tools and equipment programs, our ability to work with your account as you grow. And so there's a number of things that we do with Main Street that I'm going to use the word that's specialized or even bespoke relative to what else is out there that helps our level of attractiveness and builds that partnership. Most recently, and this is just sort of coming out now with Anthony Sarlanis and our Pro team is owning the mile, where he's using both our CRM software, the partnership between the outside sales team member, which is called a CAM, and our inside sales team member, which is CPP, to really focus on customers who are geographically proximate to our stores. Now on the plus side, our aggregate total time to serve is under 40 minutes, and we think that's a key threshold. But now when you think about focusing on customers that are very close to the store, and I'm thinking 1, 2, 3 miles, we'll be well under 40 minutes there, and that's a further point of differentiation. So look for us to continue to do that. But net-net, we feel good about what we can do with Main Street Pro. Steven Forbes: Maybe just a quick follow-up, given the commentary around hub growth. I know the transition here with the greenfield growth, I believe, this year over repurposed footage right of the distribution footprint. So can you talk about how those greenfield hubs are performing relative to the original cohort of hubs that were more repurposed footage? And if that sort of performance is what sort of supports the acceleration that you're referencing here into the back half? Ryan Grimsland: Yes. I'll jump in here, and Shane can add color. But the greenfield market hubs, the actual store because there's a store within the market hub, they actually are performing a little bit better than the other ones. And I'll give you just a background on the other ones. We -- the non-greenfield were actually conversions of old, we call them blue, but Carquest DCs, smaller DCs that we converted. They weren't necessarily in prime retail locations. But they did service the market. They do service the market for parts. So the hub runs help the market. The greenfield ones tend to be in a better retail location area where we can get more retail sales out of that hub as well. So from a volume standpoint, they tend to do a little bit better on the greenfield side than the conversions just because of the nature of the retail business we generate from them. And also, the conversions those still supplied some parts to the market through what we call PDQ. So there was still some service level. It wasn't as strong or as efficient as the market hubs are. So when we put a greenfield in place, that is a lot of parts going to that market that weren't there before. So they tend to perform a little bit better than the conversions. Shane OKelly: I'll just add that the market hub paradigm for us is a key part of how we're going to grow, not just with Pro, but with DIY. And so we're accelerating what we're doing there. And as Ryan touched on, we'll open 9 in Q3. We're sitting at 38 currently. We want to be at 50 by the end of the year. As a reminder, think about these as having 70,000, 80,000 SKUs, sometimes a little bit more, being able to get parts same day to a radius of stores, I think 50-plus stores. So that really changes our ability to compete for parts that people want that day. And so we're going to continue it. We're going to refine it, and we'll talk more about what we'll do as we get to the 50 going forward. Operator: Your next question comes from the line of Simeon Gutman from Morgan Stanley. Simeon Gutman: This may be a slight repeat from the prior question. I missed some of the prepared remarks. But thinking about the core driver of do-it-for-me, if there's temporal pressure in the economy, like gas prices, I would expect DIY to be more sensitive, not DIFM. So can you talk about the trajectory you're on with core DIFM improvements and how much of this quarter was more macro or could be like strategy just taking some time to take hold? Ryan Grimsland: Yes, I'll talk about Q2 and then the Q3 trend. So in Q2, the deceleration we saw in our P7, the last period of the months, we were running about flattish on DIY and low single-digit positive in Pro for the first 8 weeks. We saw really DIY decelerate towards the end of the quarter. That was really the bulk of the lower performance than what we expected. DIFM, while slight deceleration was still positive during that time period. I think it was more just a reflection of a little bit of macro pressure there. But the Pro was still positive in the quarter and in the final 4 weeks, still positive. Those -- the momentum in Pro has continued into Q3. We like what we're seeing there. On the DIY side, we've seen a little bit of an acceleration from the trend we saw in Q2. And on a 2-year basis, we've seen some good acceleration. More importantly, on the trends in Q3, we're seeing transaction growth improve. So the transactions have improved versus our Q2 trend where we exited Q2. So some positive things there that give us confidence in our guide for the rest of the year. Simeon Gutman: Okay. And then a quick follow-up. And again, I apologize if you said this already, but merchandising success or excellence, I forget the terminology for some of the gross margin initiatives. I guess, ex tariff, if I got this right, the margin may have come in a little bit, I guess, worse than we expected. I don't know if that's right or wrong. Some of that, I assume, was deleverage of distribution expense? Or was there any slowdown in just the merchandising success strategy during the quarter? Ryan Grimsland: Actually, good question, Simeon. The rate was impacted a little bit by mix here. So you got about 20 basis points of mix impact from DIY the lower volumes that we anticipated. And then you had about 20 basis points. It's fuel surcharge, just things that were flowing through. So those are really the 2 that impacted us that drove it down. It still was like a 44.9%, so close to the 45%, still able to manage close to 45%. The merchandising initiatives still cost out really strong and provided great value for us. I mean, 110 basis points year-over-year if you back out the tariff impact on margins. So the real slight decrease versus our expectation in the quarter was driven by fuel supply chain expenses and the channel mix. Operator: Your next question comes from the line of Steven Zaccone from Citi. Steven Zaccone: I want to follow up on the second half here. So clearly, the decision to reiterate the same-store sales guidance, it does look like the second quarter still missed expectations. So maybe just help us understand some of the phenomenon that can help in the back half. The lost sales due to weather, do you expect them to come back? And then any help on the third quarter versus the fourth quarter because it seems like you've got some work to do and the compares get a bit tougher in the second half of the year. Shane OKelly: Steven, it's Shane. I'll start and then Ryan can unpack it further. So big picture, we cater to the lower and mid-tier consumers. And you see this not just in our numbers, but I think you see it broadly in our market and others. That's been a very stressed consumer. And so from a macro perspective, they've struggled. They've struggled as fuel prices have risen, and those budgets have continued to get tighter as they've gone through. And you saw that, by the way, in our Q2. And if you look at the last 4 weeks of our Q2, we were probably a little slower pivoting to value given that the consumer said, "Hey, this is what's really important to me. So as we look at Q3 and Q4, we're taking a series of actions to be more attractive and to maintain and improve conversion for those consumers as they come and visit us. So here's what's going on with that. So we've got our Advance Rewards program. That's been recently launched. We'll continue to reach out to that cohort of customers. We're doing work with paid search optimization to make sure both in terms of what keywords we're using, what geography of customers we're talking to and how we get them in there. We're going to continue to promote our Good Parts campaign. We're simplifying tasks inside of stores and communications so that when a customer does come in, that experience is as positive as it can be. And by the way, I've seen an uptick in feedback that I personally get from customers about what they're seeing in our stores. We know that value plays are important. We've got ARGOS, which is our private brand of oil, and we're now expanding across a broader line of products that we think will be attractive. We also know that -- and this is a good part of what we do from an assortment perspective is good, better and best. And so in the past, when the consumer is healthier, they'll say, "Hey, tell me more about the better and the best." Now they want to learn a little bit more about, tell me about the better or tell me about the good. We've got those products in. So that speaks to what we're doing on conversion. That speaks on what we're doing with units per transaction. So we have a series of activities geared towards rekindling what's going on with the DIY customer to do as well as we can. On the Pro side, you heard some of that with how we respond to Steve's earlier comments, but we really like what we're doing with Main Street Pro. We're going to continue to push in there. Ryan Grimsland: Yes. And Steven, I'll just be a little specific around what's driving the back half comp performance expectations. So all that Shane talked about, we think, will help with the DIY. And we're actually seeing on a 2-year basis, that accelerated a little bit. And you mentioned difficult compares in the back half. The real difficult compare is P8. It tends to ease as we go throughout the rest of the back half of the year. One thing also to note is we had about 50 basis points of impact last year in Q4 due to product transitions. We won't be cycling that in Q4 this year. It was related to First Brands Group and other product transitions in our front room that had an impact last year. We won't have that this year. So that's kind of a tailwind to cycle over. But we're focused on Pro. Pro will continue to outperform. We're seeing those trends continue, and that will be a driver. We still think there will be DIY channel pressure more than we originally thought. Even though trends have improved after the last 4 weeks of the quarter into Q3, we still are expecting that DIY will be pressured in the back half. But to Shane's point, we think we have a really compelling value offering within our product set and our categories. We have good, better, best. And that ARGOS expansion couldn't -- to other categories couldn't come at a better time, I think, for the consumer. It's a good value offering across many different categories now. I think our efforts to increase customer engagement will be good. One other thing to note in the back half, we've got a 3% inflation expectation. That's really due to kind of the commodity price, oil prices that are going in. That's about 100 basis points higher than we originally planned. Steven Zaccone: My follow-up is the prior commentary, 7% operating target on a medium-term basis. I think next year, '27 was expected to see at least 100 basis points of expansion. Do you still think that's a reasonable target in light of some of these weaker DIY trends and maybe cost inflation across the business? Ryan Grimsland: Yes. I mean we're still focused on 7% as a medium-term target. The 100 basis points next year, that's where we're at today. It's a little too premature to give specific guidance for next year. But I'll tell you what Ron is doing in supply chain because the bulk of this year is supply chain planning, driving improvements, understanding the timing of benefits we'll get from supply chain and also our store optimization work and what we're doing there. And both Ron and Tony have been digging in. What Ron is doing, he's about 25% of the way through really looking at the productivity in different areas, think of our receiving capabilities, our inbound, our outbound. And that team has been hard at work. It's giving us more confidence in the value unlock in supply chain. We're not ready to necessarily give what that guidance will be for next year. We're still working through the planning, but the work he's uncovered year-to-date, it's just continuing to confirm for us that there's opportunity there. So we're still 100 basis points for next year still makes sense for us, but we're not ready to give more specific guidance. Shane OKelly: Yes. And let me build, I think 7% is that right target. We're in a very complicated geopolitical situation that's impacting the consumer. And so the consumer is stressed, but think a little bit longer term, I don't think we're going to be permanently in the state of affairs. If you think longer term, the backdrop of the industry that we're in remains very attractive. So think about that in terms of number of vehicles on the road, think about that in terms of how old they are, think about that in terms of what the penetration of electric vehicles has been or now a prevalence of a hybrid vehicle that has an engine. Think about that in terms of miles driven. Think about that in terms of cost of a new car. People -- new cars are pushing $50,000. People are keeping their cars longer and want to fix them. Think about the total TAM. It's a $160 billion market. It's fragmented. So the idea that all of those backdrop fundamentals for the longer term, just think beyond the immediate pressing concerns of the consumer, those are all good things for us as we compete in the market. And so that's why keeping that target the same is appropriate. Operator: Your next question comes from the line of Bret Jordan from Jefferies. Bret Jordan: How should we think about working capital, I guess, accounts payable to inventory and what your factoring costs are looking like now that your leverage ratio has come down a little bit? Ryan Grimsland: Yes. Well, our coverage actually improved a little bit. I think we would expect that to continue to improve over the medium, long term here. We are making some investments, obviously, in working capital related to our assortment work, but we're also finding productivity. So overall, we'll see improvement in our working capital. We'll see improvement in our coverage. We have great conversations with vendors to work through that, but that's going to be over the medium term. But we did see -- we have seen improvement in our coverage ratio. Obviously, the banks versus -- with our vendors, they obviously provide rates to them. We don't get involved in that. But we know they've kind of stabilized for sure. There's -- obviously, the external rate SOFR has been under pressure as well. But it has stabilized since we put in the transaction last year. And so what I've heard anecdotally is just that the difference is starting to converge, but it's, I think, about where it's been for a while and stabilized in a really volatile rate environment, which is good for our vendors. They want stability. I think one of the key points that happened in Q2 was rating agencies, both Moody's and S&P, stabilized our outlook, which is just a demonstration of the improved balance sheet that we have. It's in a solid position. The free cash flow returning to positive free cash flow. That's the first time in 2 years this company has gone to positive free cash flow. So I think from a balance sheet standpoint, improving. Supply chain finance, very stable. The banks are supportive of the program. I think the transaction really helps bridge us to investment grade. Bret Jordan: And then on the commercial business, ex the national account cutbacks, are you gaining share, if you think or retaining share with the up and down the street business? I mean, sort of adjusting for same SKU inflation and looking at that 200 basis point comp ahead of Pro. Do you think that's a share gain indicator or just holding share? Shane OKelly: I think it's a hold and then potentially in some markets, a gain is how I think about it. A lot of noise going on as we transition the mix with the national accounts to the Main Street. But as I -- personally, when I visit accounts, the consensus on improving time to serve, improving the assortment, thinking about what we're doing with TechNet and other promotions, I think, gives us confidence about what we're doing going forward. Ryan Grimsland: Yes. The Main Street, Bret, larger addressable TAM. I mean you know this, but we're really excited about larger transactions there for us. So the transactions are stronger for us in the Main Street. So I think maybe it's hold and gain in certain areas. We're excited about what we're doing on the Main Street Pro. Operator: Your next question comes from the line of Maksim Rakhlenko from TD Cowen. Maksim Rakhlenko: So first, can you just help bridge gross margin for both 3Q and 4Q, the key puts and takes that we should be considering? And then just any help triangulating to final outcomes compared to 2Q? Ryan Grimsland: Yes, absolutely. A couple of things. I think about the back half of the year, we are expecting -- it does include headwinds from higher freight and fuel costs, some channel mix headwinds. So DIY coming down, you'll have a little bit of a mix pressure on DIY. We still expect elevated freight and fuel costs that will be in our margins. Looking at kind of Q2 as our guide post, sorry, operating income, these cost items drove approximately 30 to 40 basis points of headwind. One thing to keep in mind, we are cycling a 53rd week. So in Q4 operating margins, that's approximately 20 basis points of headwind in the Q4 operating margins. So EBIT margin guide for the second half is 3% to 4% with the high end consistent with last year, excluding the 53rd week. Gross margin specifically, we're assuming a margin range of 44% to 45% with Q3 higher than Q4 just due to seasonality and the mix that we sell. We don't expect any material tariff refunds inflows coming in the back half of the year. So just a thought on that. On SG&A, if you're thinking about operating income and the flow-through there, we expect those dollars to be relatively flat to last year in Q3, including more store openings. The decline in Q4 year-over-year is really due to that extra week. So that extra week of SG&A. So in general, it will be, if you exclude that, a low single-digit increase. Maksim Rakhlenko: And then so you guys repurchased a little bit of debt this quarter for the first time in a while. If you remain on track to hit your guide for this year, should we see further repurchases ahead? And then will it be a similar magnitude or potentially do those step up? And then just bigger picture, can you update us on conversations with the rating agencies? And any sort of goalposts that we should consider as you look to get back to investment grade? Ryan Grimsland: Yes. So a couple of things on that. We're always going to be opportunistic with excess cash that we can't deploy or don't feel like we can deploy into the business. So the way our capital priorities go, we're going to deploy cash into the business to continue to drive this comeback, improve the business operations. When we have excess cash beyond that, if we find economic benefits to retiring debt before maturity, we'll deploy it towards that. We have no plans at this time, but we're always looking at the market. So we'll look to do that at or before maturity is our plan. And if we have excess cash that we're confident in, we'll do that. But again, I'm excited about the fact that this is the first time in a long time we've been able to use excess cash and our cash balance continuing to be a positive for us on the balance sheet. We've got $3.1 billion of cash. We are in excess cash position relative to our obligations. So if we can deploy that to the business, we will. If not, we'll continue to deploy and delever the balance sheet. As far as the rating agencies are concerned, we've had a very constructive dialogue. We are excited about the stable outlook. Just a reminder, to get to investment grade with Moody's, it's about 3 jumps and S&P, it's 2 jumps. So this is a journey that we're on. It's been positive conversations. I think the free cash flow -- returning to positive free cash flow, beginning to delever the balance sheet are all good indicators that I hope they will see as positives. But we have dialogue with them regularly. We're working towards getting back to investment grade, but it is a little bit of a journey. Operator: Your next question comes from the line of Kate McShane from Goldman Sachs. Mark Jordan: This is Mark Jordan on for Kate McShane. As we think about your focus on Main Street customers, is there a way to quantify how much of that DIFM comp is coming right now from existing customers? How much is coming from new customers? And I guess if we think about the time it takes to win a new account, is there a lag or what is the lag between opening a new market hub and maybe signing up a new Pro account? Shane OKelly: Yes. Good question. On the Pro side, most customers know who we are, and we will commonly get some sort of business from them. Within the Pro world, there's a hierarchy where you want to be first call. You want to be the guy that the customer says, "Hey, I'm ordering a lot of parts today and Advance is going to be the first call." And by the way, the questions that go around how you earn that is, do you have the part? Yes or no? When can I get it? Time to serve. And then sometimes, "Hey, what's my cost going to be? " And so as we improve in each of those areas, our ability to get first call customers or earn our way in the first call improves. And we haven't sort of unpacked that number specifically other than to say that we're very focused on it and opening market hub certainly helps. In my experience, when you go into somebody where you're not first call, it's not a question of, hey, I make one visit and then the customer says, great, you're here, and so now I'm going to switch. So it usually takes a series of visits over a period of weeks where you have to both demonstrate the value proposition and earn that right. And usually, it comes in the form of, okay, I'm going to give you guys this category, I'm going to give you this set of orders and then how do you perform and you earn your way in. It's a trust-based business. It's a relationship-based business. And if I go back to some of the things that we talked about before, whether it's our TechNet program or the quality of our CAMs, our outside sales team member, we've got the right constituent parts to go make that happen. And now the Market Hub has become a further enabler of that. But it's not an immediate process, but we feel good in terms of where Main Street Pro sits today. We feel good in terms of how we're migrating through some of our national account business, and we feel good about where we're going forward with our Own The Mile program, our use of CRM, our value plays for our Pro customers, the quality of our inside sales team in our stores, our CPPs, our reputation, Advance has long been known for being in the Pro universe. Ryan Grimsland: And just to add, the mix between new and existing, it's a mix of both. We're seeing growth in both. Mark Jordan: And one follow-up, if I could. You mentioned the same SKU inflation you're seeing on motor oil and other lubricants. Can you just talk about how your ARGOS line is positioned relative to the competitors there? Shane OKelly: Yes. So we like the name. We like the people that we source the product from. We like the performance within the category. ARGOS is actually our highest unit selling motor oil. And by the way, we represent very high-quality prominent brands. And by the way we're proud to sell those as well. But as the consumer says, value is really important to me, they know the quality we put into the product, but the idea that it comes with affordability, reliability, sustainability, it really resonates with them and resonates with our team. And so it's an easy product for our store team members to sell. Operator: Your final question comes from the line of Michael Lasser from UBS. Michael Lasser: It seems like your guidance is basically saying, hey, at the low end, we could do a flat comp. And part of that is you're going to see more like-for-like inflation in the back half of the year. The comparisons get a little easier. But on the other hand, it does seem like the business is becoming more volatile. You had spoken about some volatility coming into the second quarter and some volatility coming out of the second quarter. So how does that influence your perspective on the back half? Said another way, was there any thought to lowering the comp outlook for the back half just to be a little bit more conservative? Ryan Grimsland: Yes. I appreciate it, Michael. Just to talk a little bit about the trends. When we entered into Q2, we did talk a little bit about the DIY slowdown, a little bit of pressure there, softness in DIY. But even then, the first 8 weeks was kind of in line with our expectations. We were tracking around a 1 comp for the first 8 weeks and DIY was roughly flat, Pro, positive low single digits. It was really the last 4 weeks. And I think in that last 4 weeks, we had one, a unique weather impact in our areas. If you look at our store footprint, the average temperature was actually down year-over-year. That's one. I think the DIY really pivoted to value. And I'd just say, I don't want to belabor this, but I think we were slower to pivot our messaging to that. I think we've got a great value offering, and we've pivoted going forward to make sure that the customer sees that. But the last 4 weeks really wasn't indicated of the health of the business. I think that was -- when we see the trends coming in Q3, those Q3 trends have accelerated and more particularly in transactions. And from a 2-year basis, we are in line with what the guide would imply, which is roughly a 3% 2-year stack. And that's what we're expecting going forward. So we're not expecting a deviation from that kind of 2-year trend and where we're tracking today to be within our guidance range. Michael Lasser: Sorry. My follow-up question is on the path moving forward. You have articulated a lot of confidence that over time, there are idiosyncratic drivers to improve Advance Auto Parts profitability, especially from all the actions that have already been made. So are you still of the view that next year, there could be more margin expansion as the fruits of those initiatives take place? And if the overall environment for the aftermarket remains more challenging next year, to what degree does that potentially offset the idiosyncratic gains in profitability that you are expecting in 2027? Ryan Grimsland: Yes. I appreciate it, Michael. I'll just talk about -- we talked about at least 100 basis points next year. We still have confidence in that. And a lot of the work that Ron has been doing because this year has been about supply chain stores, planning, getting under the hood, and he's making his way through supply chain. It's giving us more confidence in the unlock that supply chain will have going forward. We're not ready yet to give specifics on that. We'll update later in the year on that. But honestly, we're getting more confidence as Ron is working through that. And then Tony, on the store side, we're seeing a shift in making sure that our labor hours are as productive as possible serving our customers, less tasking, focus on the customer, driving productivity there. We're seeing that, and we're getting more confidence in the actions that we're going to be able to take there. So we're more confident. I think at least 100 basis points is still a target that we have for next year. You talked about the current pressures, and it's really around DIY, maybe some freight pressures. One, on the DIY, if that persists, there may be a little bit of pressure, and we saw that in Q2. We had 20 basis points of mix pressure, but yet we still delivered our underlying margin growth of over 110 basis points if you exclude tariffs. So the business is still driving operating income growth, gross margin growth even despite some of those headwinds in those trends. And we would expect that to continue. If that were to continue, we'd expect to be able to mitigate that next year. Shane OKelly: Michael, it's Shane. Thanks for the questions. If I come back to the big picture and you're on the big picture, good industry. By the way, if you look at how we're running the business, we're willing to make the tough calls. We're using KPIs to track how we're doing. We're being transparent about it. We're being disciplined in the execution. We're not happy with how Q2 came out. We're putting in a series of initiatives to help us as we think about what we can do with DIY and what we can sustain with Pro. But even in the tough moments, you can point to and find evidence of improvements in areas that are critical for our continued advancement and improvement for our turnaround for our comeback. And you can think about that in terms of NPS. That's -- we rolled that out and our initial numbers were rough. And we've talked about the journey from the 60s to the 80s. That's meaningful. That's a customer saying, "Hey, I had a better experience than what I had last time. You think about things about attachment rate. And you look at our market hub openings, look at what we're doing with the assortment, look at the DC consolidation. We literally just finished the DC consolidation. So I don't want to say we're nascent in the journey because we've been at it for a minute, but we are making improvements and getting better every day on the things that we can control, and we're staying at it in terms of being rational actors and putting in plans to make that improvement continue in the future. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Shane O'Kelly for some closing remarks. Shane OKelly: Thanks, everybody, for joining the call. I want to thank the team members at Advance. It's their hard work that's making the progress on some of the KPIs that I mentioned, and it's their hard work that's helping us as we go through Q3. We look forward to talking to everybody at the end of the quarter, and we appreciate you following the company. Take care. Thank you. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect. Before you buy stock in Advance Auto Parts, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Advance Auto Parts wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $439,308!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,286,826!* Now, it’s worth noting Stock Advisor’s total average return is 964% — a market-crushing outperformance compared to 212% for the S&P 500. Don't miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors. See the 10 stocks » *Stock Advisor returns as of August 27, 2026. This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Advance Auto Parts (AAP) Q2 2026 Earnings Call Transcript was originally published by The Motley Fool

Find your next quality investment with Simply Wall St's easy and powerful screener, trusted by over 7 million individual investors worldwide. Advance Auto Parts stock has had a difficult run, with long term shareholders facing deep value erosion while current valuation checks suggest the shares are not obviously cheap at today’s levels. With the intrinsic value estimate from a Discounted Cash Flow (DCF) model and the market multiples both pointing to a premium, investors are weighing whether the recent price still leaves enough room for upside. Over the past 5 years the share price has declined about 77%, which means anyone who held through that period has seen a very significant loss in capital. The key support for any recovery case now can come from the company’s ability to sustain cash generation in a competitive auto parts market. However, pressure on margins or higher capital needs may limit how much value flows through to shareholders. Advance Auto Parts scores 0 out of 6 on the broader valuation checks, which implies the stock currently leans expensive rather than presenting a clear bargain 0/6 valuation score. The issue now is whether the premium to intrinsic value suggested by the Discounted Cash Flow model and earnings multiples is justified by the outlook for Advance Auto Parts or leaves investors taking on more downside risk than upside potential. Find out why Advance Auto Parts' -22.2% return over the last year is lagging behind its peers. The Discounted Cash Flow (DCF) model here focuses on how much cash Advance Auto Parts can realistically return to shareholders over time. The latest twelve month free cash flow is a loss of about $115.4 million, so the model assumes a recovery path rather than steady strength from the current base. On those cash flow projections, the DCF model points to an estimated intrinsic value of about $30.85 per share. That sits well below the current share price, which implies the market is already pricing in a stronger and cleaner cash flow profile than the model assumes. Given the recent cash flow loss and the need for a rebound to support the valuation, the stock screens as overvalued on this approach. On these cash flow assumptions, Advance Auto Parts stock currently looks overvalued relative to its DCF based intrinsic value estimate. Our Discounted Cash Flow (DCF) analysis suggests Advance Auto Parts may be overvalued by 37.4%. Discover 50 high quality undervalued stocks or create your own screener to find better value opportunities. Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Advance Auto Parts. The P/E ratio is a useful lens here because Advance Auto Parts is valued on its earnings power rather than on rapid revenue expansion or asset value alone. The stock currently trades on a P/E of about 37.6x, which is roughly double the Specialty Retail industry average of 19.0x and well above the peer group average of 17.9x. The fair P/E ratio implied by the broader checks is about 17.3x. That is less than half of where Advance Auto Parts trades today, which suggests the market is assigning a sizeable premium relative to what the model indicates would be reasonable given the company’s profile and risks. For you as an investor, that indicates the earnings multiple already reflects a generous set of expectations, with limited room for disappointment to be absorbed without affecting the share price. On the P/E multiple, Advance Auto Parts stock appears clearly overvalued compared with both its tailored fair ratio and sector benchmarks. See what the numbers say about this price — find out in our valuation breakdown. Simply Wall St Narratives for Advance Auto Parts pick up where the valuation puzzle leaves off and explain what would need to happen to growth, margins and earnings for the stock to be worth materially more or less than today’s price. Each narrative presents Advance Auto Parts' fair value as a thesis about how the business might perform over time, so you can watch how that view holds up as new information arrives. One of the top community narratives on Advance Auto Parts: 30% undervalued Read one of the top narratives on Advance Auto Parts Do you think there's more to the story for Advance Auto Parts? Head over to our Community to see what others are saying! For Advance Auto Parts, both the Discounted Cash Flow (DCF) intrinsic value estimate and the P/E based checks currently point to the same conclusion. The stock screens as overvalued rather than offering a clear margin of safety. With broader valuation checks also weak, the key question for you is whether the company can improve profitability and cash generation enough to make today’s premium look justified. The crux of the bull versus bear debate is whether that improvement shows up quickly and consistently in cash flow and earnings, or whether the valuation needs to reset to reflect current fundamentals. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Companies discussed in this article include AAP. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email [email protected]

AAP's earnings beat included a one-time $26M tariff refund worth $0.31 per share, while revenue of $2B missed estimates and comp sales fell 0.5%. AutoZone fell 3% and O'Reilly slipped 2% as softening DIY demand spooked the broader auto parts sector despite no issues with their own results. AAP entered the print up 45% year to date, amplifying the 21% drop as tighter household budgets hit DIY shoppers harder than management anticipated. Act now: the analyst who called NVIDIA in 2010 just named his top 10 AI stocks — and O'Reilly Automotive didn't make the cut. Grab the names FREE today. Shares of Advance Auto Parts (NYSE:AAP) stock are down 21% to $44.33 Thursday morning after the company posted Q2 2026 results that paired a headline earnings beat with a revenue miss and negative comparable sales. The move is the sharpest single-day slide in the aftermarket group and comes despite a raised full-year adjusted EPS outlook. The read-through is hitting peers as well. AutoZone (NYSE:AZO) stock is down 4% to $2,961, O'Reilly Automotive (NASDAQ:ORLY) stock is down 2% to $89.57, and Genuine Parts (NYSE:GPC) stock is down 3% to $131.05. The peer moves reflect a group-level reaction to softening do-it-yourself demand rather than a proportional hit tied to their own results. Advance Auto Parts reported adjusted diluted EPS of $1.03, topping the $0.81 consensus by 27.9%, while revenue of $2 billion missed the $2.04 billion estimate and slipped 0.5% year over year. Comparable store sales at the retailer declined 0.5%, with the DIY channel weakening sharply in the final four weeks of the quarter and the Pro channel delivering low-single-digit growth. Act now: the analyst who called NVIDIA in 2010 just named his top 10 AI stocks — and O'Reilly Automotive didn't make the cut. Grab the names FREE today. The composition of the beat matters. Advance Auto Parts' management booked $26 million in tariff refunds that contributed $0.31 to adjusted EPS, meaning a significant share of the outperformance is non-recurring. On an underlying basis, adjusted operating margin still expanded more than 250 basis points year over year to 5.6%, and year-to-date free cash flow swung to a positive $120 million from an outflow a year earlier. Guidance also disappointed on the sales side. The company reaffirmed fiscal 2026 net sales of $8.485 billion to $8.575 billion, a midpoint of $8.53 billion that sits below the $8.58 billion consensus, and trimmed store openings to 30 to 35 from 40 to 45. Furthermore, Advance Auto Parts' full-year adjusted EPS guidance was raised to $2.60 to $3.30 from $2.40 to $3.10, but that lift leans on the same one-time refund. Advance Auto Parts CEO Shane O'Kelly accentuated the positive points: Our second quarter comparable sales results reflected low-single-digit growth in the Pro channel, which performed in line with expectations. However, total enterprise sales performance was impacted by the DIY channel as tighter household budgets constrained spending more than we anticipated, especially during the last four weeks of the quarter. Positioning explains why the pain is concentrated on Advance Auto Parts. Through Wednesday's close, Advance Auto Parts stock was up 45% year to date while AutoZone stock was down 9%, so the two entered the print with very different setups and a mixed quarter lands harder on the name that had already run. O'Reilly Automotive stock and Genuine Parts stock entered the day roughly flat and up double digits respectively, cushioning the sympathy moves. Operational proof points at Advance Auto Parts remain constructive under the hood. Adjusted gross margin expanded roughly 240 basis points to 46.2%. Distribution-center consolidation finished with 15 DCs down from nearly 40. Net-debt leverage improved to 2.1 times from 2.4 times last quarter. The market is discounting those wins today in favor of the softer demand signal. The macro backdrop reinforces management's caution about lower- and mid-tier consumers. University of Michigan consumer sentiment sat at 49.5 in June, well below the 60 level flagged as recessionary in the source guide, and U.S. regular gasoline averaged $4.05 per gallon on August 17, up 5% from a month earlier. Both squeeze the exact customer group Advance Auto Parts calls out as most stressed. The Advance Auto Parts conference call at 8:00 a.m. ET has already opened, so commentary on Q3 DIY trends and the durability of Pro-channel growth will shape intraday price discovery. Management said Q3 trends during the first four weeks were tracking slightly ahead of the final weeks of Q2, a claim the sell side will test in follow-up notes. Traders may want to keep an eye on whether AAP stock stabilizes near the $44 area or takes another leg lower. On position sizing, the composition of the beat should shape any fresh exposure to Advance Auto Parts stock. About $0.31 of the $1.03 adjusted EPS came from a tariff refund that won't repeat, so underlying earnings power is meaningfully below the headline. A cautious, smaller position is the more defensible stance while the DIY demand picture clarifies over the second half. Act now: the analyst who called NVIDIA in 2010 just named his top 10 AI stocks — and O'Reilly Automotive didn't make the cut. Grab the names FREE today. Contact [email protected] for any questions or corrections.

Our analysts just identified a stock with the potential to be the next Nvidia. Tell us how you invest and we'll show you why it's our #1 pick. Tap here. Management attributed the slight decline in comparable sales to a larger-than-anticipated deceleration in DIY spending, particularly during the final four weeks of the quarter as tighter household budgets and market-related price adjustments weighed on consumers. The Pro channel performed in line with expectations, driven by 'Main Street' business growth that outpaced the overall segment by 200 basis points, helping to offset the strategic optimization of lower-margin national accounts. Operational KPIs showed sequential improvement, with Net Promoter Scores (NPS) rising from the high 60s to nearly 80 points and in-store attachment rates increasing to nearly 30% due to enhanced service execution. A return to positive free cash flow of $120 million year-to-date marked a critical inflection point, supported by improved working capital management and the receipt of tariff refunds. Merchandising initiatives contributed approximately 100 basis points to product margin expansion through strategic vendor sourcing and the introduction of 80,000 new SKUs to the assortment catalog. The company completed its distribution center consolidation, moving from nearly 40 facilities to 15 unified locations to enhance asset productivity and streamline product flow. Management noted that a combination of factors, including a deceleration in DIY spending, deferral of large-ticket projects, reduced discretionary spending, and weather-related drivers, created an estimated 100 to 150 basis point comp headwind for the quarter. Full-year comparable sales guidance of 1% to 2% assumes a recovery in transaction volumes driven by a focused action plan to increase DIY customer engagement and ongoing strength in the Pro channel. The company is accelerating its Market Hub rollout, now planning 15 to 20 openings this year to reach a total of 60 locations by mid-2027 to improve same-day parts availability. Supply chain productivity initiatives, including rebidding carrier contracts to consolidate volume with 70% fewer carriers, are expected to generate tens of millions in cost savings starting in 2027. Management reaffirmed a medium-term adjusted operating margin target of 7%, supported by updated labor allocation systems and the full deployment of a new pricing framework by year-end. Guidance assumes same-SKU inflation of approximately 3% for the second half of the year, reflecting increased commodity costs for petroleum-based products like motor oil. Tariff refunds (IEEPA) contributed $26 million to gross margin in Q2, though management noted this benefit is being fully offset by headwinds from sales mix shifts and higher freight costs. The company utilized $30 million to repurchase outstanding debt, contributing to a net debt leverage reduction to 2.1x as part of a long-term journey back to investment-grade status. A comprehensive study of store labor standards, unchanged for over a decade, was completed to identify non-value-added activities and optimize resource allocation starting later this year. Management flagged continued macro pressure on lower-to-mid-tier consumers as a primary risk to DIY transaction growth in the near term. One stock. Nvidia-level potential. 30M+ investors trust Moby to find it first. Get the pick. Tap here. Management emphasized that Main Street Pro growth is being driven by both existing and new accounts, supported by the 'Own The Mile' program which focuses on customers within a 3-mile radius of stores. The headwind from national account optimization is expected to diminish, with pressure in the second half of the year projected to be half of what was experienced in the first half. Greenfield hubs are outperforming converted locations because they are situated in prime retail areas that generate higher DIY volume in addition to serving Pro customers. The acceleration to 9 hub openings in Q3 is intended to bring 70,000 to 80,000 SKUs closer to customers, which management views as a key competitive differentiator. Management expressed increased confidence in the 2027 margin unlock as the new supply chain leadership has completed 25% of identified process improvements. The 7% medium-term target remains the goal despite current DIY volatility, as management views the stressed consumer environment as temporal rather than structural.

This article first appeared on GuruFocus. Net Sales: $2 billion for the second quarter, with a slight decline in comparable sales. Comparable Sales: Slight decline overall; Pro channel delivered low-single-digit growth, while DIY sales declined in the low-single-digit range. Adjusted Gross Profit: $924 million, or 46.2% of net sales, reflecting approximately 240 basis points of gross margin expansion year-over-year. Adjusted Operating Income: $112 million, or 5.6% of net sales, resulting in approximately 260 basis points of year-over-year margin expansion. Adjusted Diluted EPS: $1.03, compared to $0.69 in the second quarter last year. Free Cash Flow: $120 million generated year to date, a significant improvement from an outflow of $201 million in the prior year. Same-SKU Inflation: Approximately 4% in the second quarter, with full-year expectations now at approximately 3%. Store Locations: Opened six new stores in the first half of 2026; full-year guidance now includes 30 to 35 new store openings. Market Hubs: Opened five market hubs in the first half of 2026, bringing the total to 38; full-year guidance increased to 15 to 20 openings. Warning! GuruFocus has detected 7 Warning Signs with AAP. Is AAP fairly valued? Test your thesis with our free DCF calculator. Release Date: August 20, 2026 For the complete transcript of the earnings call, please refer to the full earnings call transcript. Adjusted operating margin expanded by nearly 130 basis points to 4.3% in Q2, excluding tariff refunds, showcasing strong underlying profitability. Returned to positive free cash flow, generating $120 million year-to-date compared to an outflow of $201 million last year. Pro channel delivered low-single-digit sales growth, with Main Street Pro outperforming total Pro by over 200 basis points, indicating share gains. Completed distribution center consolidation, reducing from nearly 40 DCs to 15, and accelerated market hub openings to 15-20 this year, improving parts availability. Merchandising initiatives contributed approximately 100 basis points to product margin expansion year-to-date, with new pricing framework deployment on track. Improved key operational KPIs, including NPS (up nearly 80 points), attachment rates (nearly 30%), and time to serve (under 40 minutes for Pro orders). DIY channel sales declined more than anticipated, particularly in the last four weeks of Q2, due to tighter household budgets and reduced discretionary spending. Comparable sales slightly declined in Q2, with a 100-150 basis point headwind from DIY deceleration, weather-related impacts, and commodity cost inflation. Gross margin faced headwinds from channel mix shift (20 basis points) and higher supply chain expenses including freight and fuel costs (20 basis points). Full-year guidance assumes a recovery in transaction volumes, but DIY channel pressure is expected to persist, with same-SKU inflation rising to approximately 3%. National account optimization continues to be a headwind, though it is expected to halve in the second half of the year. The company acknowledged being slower to pivot to value messaging for DIY customers, which contributed to the Q2 sales shortfall. Q: Can you provide more detail on the customer segmentation trends, specifically transaction growth among Main Street Pro customers, and what gives you confidence in sustainable transaction comp growth? A: Shane O'Kelly (CEO) stated that Main Street Pro growth was 200 basis points above total Pro, driven by transaction gains and share gains. This is supported by initiatives like the TechNet program, MotoVisuals, and the "Own the Mile" CRM strategy, which focuses on customers geographically proximate to stores. Ryan Grimsland (CFO) added that national account headwinds will be about half of what they were in the first half during the second half, and that they are seeing new Main Street accounts begin to shop with them, indicating improved assortment and service levels are resonating. Q: How should we think about the trajectory of the DIFM (Do-It-For-Me) business given macro pressures, and how much of the Q2 performance was macro versus strategy execution? A: Shane O'Kelly (CEO) explained that while DIY decelerated significantly in the last four weeks of Q2, Pro (DIFM) remained positive. The momentum in Pro has continued into Q3. On the DIY side, they have seen a slight acceleration from Q2 trends, and importantly, transaction growth is improving in Q3, which gives confidence in the full-year guidance. Q: Can you help bridge the gross margin for Q3 and Q4, and what are the key puts and takes to consider? A: Ryan Grimsland (CFO) detailed that the back half includes headwinds from higher freight and fuel costs and channel mix. He noted that Q2 cost items drove approximately 30-40 basis points of headwind. He also highlighted that Q4 operating margins will face approximately 20 basis points of headwind due to cycling the 53rd week. Gross margin is expected to be in the 44% to 45% range, with Q3 higher than Q4 due to seasonality, and no material tariff refund inflows are expected in the back half. Q: Given the decision to reiterate same-store sales guidance despite the Q2 miss, what gives you confidence in the back half, and how are Q3 trends tracking? A: Shane O'Kelly (CEO) acknowledged the stressed consumer and stated they are implementing a focused action plan to improve conversion, including value-driven offerings, paid search optimization, and the expansion of the ARGOS private brand. Ryan Grimsland (CFO) added that Q3 trends have accelerated on a two-year basis, and they are not expecting a deviation from the roughly 3% two-year stack implied by the guidance. He also noted that Q4 will benefit from lapping last year's product transition headwinds. Q: Are you still confident in the medium-term 7% operating margin target and the expectation of at least 100 basis points of expansion next year, given the weaker DIY trends? A: Shane O'Kelly (CEO) reaffirmed the 7% medium-term target and the expectation of at least 100 basis points of expansion next year. He cited the work being done in supply chain and store operations, which is giving them more confidence in the value unlock. Ryan Grimsland (CFO) added that the long-term industry backdrop remains attractive, with an aging vehicle fleet and a fragmented $160 billion TAM, supporting the rationale for the target. Q: How should we think about working capital, accounts payable to inventory, and factoring costs given the improved leverage ratio? A: Ryan Grimsland (CFO) stated that coverage has improved and is expected to continue improving over the medium to long term. While making investments in working capital related to assortment, they are also finding productivity gains. He noted that the supply chain finance program has stabilized, and the recent stabilization of the outlook by rating agencies (Moody's and S&P) demonstrates the improved balance sheet. Q: Excluding national account cutbacks, are you gaining share in the commercial business, and is the 200 basis point outperformance in Main Street a share gain indicator? A: Ryan Grimsland (CFO) believes it is a hold and potentially a gain in some markets. He cited improving time to serve, better assortment, and initiatives like TechNet as giving confidence. Shane O'Kelly (CEO) added that Main Street represents a larger addressable TAM and that transactions are stronger there, suggesting they are holding or gaining share in certain areas. Q: Can you quantify how much of the Main Street Pro comp is coming from existing versus new customers, and what is the lag between opening a market hub and signing up new Pro accounts? A: Shane O'Kelly (CEO) explained that it is a mix of both, with growth in both new and existing customers. He noted that winning new accounts is a trust-based process that takes a series of visits over weeks, where the company must demonstrate its value proposition. Market hubs are a further enabler, but the process is not immediate. Ryan Grimsland (CFO) confirmed they are seeing growth in both segments. Q: How is the ARGOS private brand positioned relative to competitors, especially given the same-SKU inflation on motor oil? A: Shane O'Kelly (CEO) stated that ARGOS is their highest unit-selling motor oil and resonates well with value-conscious consumers. The product offers affordability, reliability, and sustainability, making it an easy product for store team members to sell, especially as consumers prioritize value. Q: Given the volatility in the business, was there any thought to lowering the comp outlook for the back half to be more conservative? A: Ryan Grimsland (CFO) explained that Q3 trends have accelerated, particularly in transactions, and are in line with the guidance on a two-year basis. He stated they are not expecting a deviation from the roughly 3% two-year stack. The company believes the actions taken to pivot messaging toward value will support the back-half performance. For the complete transcript of the earnings call, please refer to the full earnings call transcript.