What Management Said
Read the full Q4 2025 transcript ↗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. 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. Later, Ryan will discuss results for the fourth quarter and full year 2025 and provide guidance for 2026. In 2025, we returned to positive comparable sales growth after three consecutive years of negative results.
We also expanded adjusted operating income margin by over 200 basis points from near-breakeven levels, while also navigating a volatile external environment. We expect to generate approximately $100 million in free cash flow in 2026, while allocating more capital to strategic projects and store investments. We improved store availability to the high-90% range from the low-90% range at the start of 2025, and we also reduced product costs by more than 70 basis points. We are progressing on our strategic plan with a stronger balance sheet, having proactively accessed the capital markets during 2025.
He brings more than 20 years of experience in supply chain logistics, with a track record of delivering operational efficiencies in complex supply chain systems. He brings more than 25 years of field leadership and store transformation experience across pro and DIY, with a proven record of simplifying work for the front line. To date, this team has delivered approximately 500 basis points of adjusted operating margin expansion. We continue to believe that our goal of 7% adjusted operating income margin with a mid-40% gross margin, are appropriate medium-term targets for the company.
What went well
- Advance Auto Parts returned to positive comparable sales growth in fiscal 2025 (up just under 1% for the year), its first positive comp after three consecutive years of negative results, with both the Pro and DIY channels improving versus 2024.
- Fourth-quarter comparable sales grew 1.1%, with transactions turning positive over the last eight weeks of the quarter; outside of weather-related comparisons the business has averaged low-single-digit positive comps over the last six months.
- The company expanded adjusted operating income margin by over 200 basis points for the full year (to 2.5% from near-breakeven), and by nearly 870 basis points year-over-year in Q4 to 3.7%, driven by footprint optimization savings and strategic sourcing.
- The Pro channel grew nearly 4% in Q4 and strengthened throughout the quarter, with traction among Main Street Pros; brakes, undercar components, and engine management led performance, signaling improved hard-parts coverage and availability.
- Operational turnaround milestones were hit in 2025: store availability improved to the high-90% range from the low-90% range, product costs were cut by more than 70 basis points, roughly 100,000 new SKUs were added, and average Pro delivery time was cut by more than 10 minutes from over 50 minutes.
- The balance sheet strengthened materially, ending the year with more than $3 billion in cash plus a $1 billion undrawn revolver, net debt leverage improving to 2.4x (from 2.6x last quarter) within the 2.0-2.5x target range, after proactively accessing the capital markets in 2025.
- The supply-chain transformation is largely complete, with the DC network consolidated to 16 distribution centers from nearly 40 at the end of 2023, plus 33 market hubs (14 opened in 2025) and 35 new stores opened.
- Management strengthened leadership with internal promotions and external hires, including a new SVP of Pro (Anthony Sarlanis), CTO (Kunal Das), SVP of Supply Chain (Ron Gilbert), and SVP of U.S. Stores (Tony Hurst).
What went wrong
- Full-year free cash flow was negative $298 million, including about $140 million of store-optimization cash expenses; roughly $80 million of the miss versus expectations came from lower-than-planned inventory payables, with the rest from Q4 performance, timing of cash obligations, and delayed tax refunds.
- DIY comps declined in the low-single-digit range in Q4 and for the full year, as core low- and mid-income consumers adjusted purchasing habits in response to rising prices and softer general-merchandise spending.
- Q4 average ticket came in below expectations: same-SKU inflation was just under 3% (about 100 bps lighter than planned) due to still-in-progress tariff negotiations, and an accelerated front-room assortment transition (new brands plus the ARGOS owned-brand launch) drove an unexpected ~50 bps markdown headwind to comps.
- Net sales declined for both the quarter (down about 1%) and the full year (down 5% to $8.6 billion), primarily reflecting the Q1 2025 store-optimization activity that closed over 500 corporate stores and 200 independents.
- Management pushed out the 7% adjusted operating margin target beyond 2027, citing top-line momentum that lagged original expectations amid a softer consumer and supply-chain/store-labor initiatives still in early implementation.
- The company lowered its supplier-financing program usage to $2.5 billion from $2.7 billion, which reduced the year-end payables balance and pressured free cash flow.
Guidance Changes
| Metric | Period | Current guidance |
|---|---|---|
| Net sales growth (reported) | FY2026 | Down slightly YoY (over 200 bps of headwind from cycling $51M Q1-2025 liquidation sales and the $132M extra week) |
| Underlying net sales growth (ex non-recurring items) | FY2026 | ~1%-2% |
| Comparable sales growth | FY2026 | 1%-2% (positive every quarter, stronger first half on easier comps) |
| Adjusted operating income margin | FY2026 | 3.8%-4.5% (130-200 bps expansion) |
| Gross margin | FY2026 | ~45% (110-150 bps expansion; Q1 in the 44%-45% range) |
| SG&A leverage | FY2026 | Reported expenses down YoY, contributing 20-50 bps of leverage (Q1 SG&A down 3%-4%) |
| Same-SKU inflation | FY2026 | 2%-3% (assumes no change in current tariff environment) |
| Free cash flow | FY2026 | ~$100M positive (on ~$350M operating cash flow and ~$300M CapEx) |
| LIFO expense | FY2026 | ~50 bps headwind (~$30M in Q1) |
| New store openings | FY2026 | 40-45 NSOs (U.S. and Canada) |
| Adjusted operating margin expansion | FY2027 | At least another 100 bps of expansion (third straight year of 100+ bps); 7% now pushed beyond 2027 |
Performance Breakdown
| Metric | YoY | Note |
|---|---|---|
| Q4 net sales (continuing ops) | -1.2% (~$1.97B) | Store optimization completed in Q1 2025; partly cushioned by a $132M extra operating week. |
| Q4 comparable sales | +1.1% | Transactions turned positive over the last eight weeks; brakes, undercar, and engine management led. |
| Q4 adjusted gross margin | +~530 bps to 44.2% ($873M) | Cycled ~280 bps of atypical restructuring headwinds plus footprint-optimization savings and strategic sourcing. |
| Q4 adjusted operating income | +~870 bps to 3.7% ($73M) | Gross margin expansion and ~340 bps of SG&A leverage from operating fewer stores; extra week added $9M. |
| Q4 adjusted diluted EPS (continuing ops) | $0.86 vs -$1.18 | Margin expansion and lower-than-expected LIFO expense; extra week added $0.08. |
| Q4 Pro channel | +~4% | Strengthening throughout the quarter on a one- and two-year basis, plus Pro transfer sales from closed stores. |
| Q4 DIY channel | low-single-digit decline | Volatile trends as core consumers adjusted habits to rising prices. |
| FY2025 net sales (continuing ops) | -5% to $8.6B | Store optimization activity completed during Q1 2025. |
| FY2025 comparable sales | +just under 1% | Return to positive comps after three negative years; both channels improved. |
| FY2025 adjusted operating income | +210 bps to 2.5% ($216M) | Gross margin +~165 bps and ~50 bps SG&A leverage from fewer stores. |
| FY2025 adjusted diluted EPS (continuing ops) | $2.26 vs -$0.29 | Operating margin expansion across the turnaround. |
| FY2025 free cash flow | -$298M | ~$140M store-optimization cash costs plus ~$80M inventory-payables timing and delayed tax refunds. |
Earnings Call Themes & Trends
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| Turnaround / three strategic pillars | Stabilizing the business since late 2023; strategy laid out | Strategy unchanged; ~500 bps of adjusted operating margin expansion delivered to date across merchandising, supply chain, and store operations | — |
| Merchandising excellence | Addressing product gaps and building a new assortment framework in 2025 | Expected to be the largest 2026 margin contributor via strategic vendor sourcing, a new pricing matrix (by channel/SKU), and deeper vendor partnerships | — |
| Supply chain productivity | Consolidating from nearly 40 DCs (end 2023) | Down to 16 DCs, heading to 15 by end of 2026; 2026 is a primary investment year to unlock productivity within the boxes, led by new SVP Ron Gilbert | — |
| 7% adjusted operating margin target | Targeted 7% by 2027 | Still the medium-term goal (with mid-40% gross margin) but pushed beyond 2027; expects at least 100 bps more expansion in 2027 | — |
| Pro vs. DIY | Renewed emphasis on the Blended Box for both Pro and DIY | Pro positive and strengthening; DIY still pressured but 2026 initiatives (loyalty revamp, ARGOS owned brand, marketing, assortment) aimed at improving it | — |
| Owned/private brands | ~50% of sales via Carquest, DieHard and a licensed oil brand with royalties | Launched ARGOS owned oil/fluids brand replacing a licensed brand tied to a financially troubled parent; private-label mix expected to stay roughly consistent (~50%) | — |
| Free cash flow / capital returns | Negative free cash flow (-$298M in 2025) | Targeting ~$100M positive free cash flow in 2026 while investing more in strategic projects and stores | — |
| Store base / real estate | Exited 500+ corporate and 200 independent stores; unified real estate under one leader | No further closures expected; #1 or #2 in 75% of markets; 40-45 new stores in 2026 (U.S. and Canada), expanding concentrically in dense markets | — |
Q&A Summary
(JPMorgan) Why is your same-SKU inflation so much lower than peers like AutoZone and O'Reilly -- are you pricing below the market?
Management said underlying SKU inflation is consistent with peers; the low FY2025 figure (~1.4%) reflects wrapping prior-year price investments, and Q4 came in near 3% but a bit light due to still-in-progress tariff negotiations. They stressed they are a rational, competitive market participant, not pricing below market, and are using AI to sharpen promotions.
(JPMorgan) What drove the decision to reduce supply-chain financing in Q4, and did it hurt free cash flow?
About half the free-cash-flow shortfall came from lowering payables. The reduction was about leveling payables to the mix of new purchases (500 store closures, pre-tariff inventory buys, assortment work, PLR negotiations), not a strategic pivot. The program is stable, ~80% of COGS runs through it, and they will only pull the lever further when it makes economic sense in the P&L.
(Barclays) What impact did the 2025 store closings have on comps and margins, and is there more portfolio optimization ahead?
Liquidation was about a $51M year-over-year sales impact (not in comps, which excluded closing stores). No further closures are expected. They are growing new stores (40-45 in 2026) concentrically in markets where they rank #1 or #2 (75% of markets), leveraging existing density, outside sales, and DC connectivity.
(Barclays) Why does the margin cadence now imply bigger gains up front and more gradual gains later toward the 7% target?
7% remains the right medium-term target. Merchandising excellence (about half the ~500 bps opportunity) is progressing well and delivering early. Supply chain and store operations were always more back-end weighted because the DC consolidation had to finish first; 2026 is a primary investment year for both, which will yield benefits in 2027 and beyond.
(Morgan Stanley) What is the execution risk in the gross-margin and SG&A guidance -- are the sourcing deals already done?
Merchandising has good line of sight: some benefit is already baked from signed vendor contracts wrapping into 2026, some is still work to be done (with 2027 conversations underway), led by Bruce Starnes. SG&A savings come from footprint rationalization and indirect-spend work (e.g., reallocating underused trucks), funding reinvestment in labor, new stores, and service.
(Morgan Stanley) Can you bridge net income to the ~$400M of operating cash implied by $100M free cash flow and $300M CapEx?
It is roughly $350M of operating cash driven by net income, with working capital/payables about neutral. Expect typical seasonality: a Q1 cash outflow then Q2-Q4 inflows, plus about $10-20M of prior restructuring/lease closure costs shifting into 2026, and much less volatility than 2025.
(Truist) Can you quantify the DIY sales headwind and what initiatives address pent-up demand?
The industry backdrop (car parc, miles driven, fleet age) is healthy and ~90% of demand is break/fix, but low- and mid-income consumer sentiment is negative. DIY initiatives include a revamped Advance Rewards loyalty program (16M members), the new ARGOS owned oil/fluids brand, plus marketing, e-commerce, and assortment improvements.
(Truist) What comp assumption underlies the ~100 bps of operating-income expansion expected in 2027?
Management did not give a specific 2027 comp guide but pointed to the low-single-digit comp range provided historically.
(Jefferies) With ARGOS rolling out, will private-label rise above ~50% of the sales mix?
It should stay roughly consistent since ARGOS replaces a brand already treated as private label; it may inch up modestly given a strong value offering, but there is no plan to significantly increase private penetration -- decisions are made category by category.
(Jefferies) How many market hubs are converted Carquest DCs versus greenfield, and what is the box economics?
More than 20 of the market hubs are conversions; the first greenfields opened this year and the majority going forward will be greenfield. Market hubs cost roughly $2 million of CapEx on average (varying by build, lease, or takeover).
(Goldman Sachs) How does the 1%-2% comp guide break down between ticket and transactions given 2%-3% inflation?
DIY transactions are expected to stay pressured (consistent with 2025), with inflation embedded in ticket; overall a slightly-low-single-digit positive with inflation as the driver. They aim to drive positive transactions in both channels, but the pressure remains on the DIY side.
(Goldman Sachs) Any encouraging quarter-to-date transaction tailwinds from recent weather?
Weather has been fairly neutral -- failure items like batteries are doing well but cooler-weather maintenance items are offset, and Storm Fern initially built sales then closed some Northeast/Atlantic stores. Current trends are within the guidance range and expected to improve as weather normalizes.
(Wells Fargo) Are you taking suppliers off the financing program for better gross margins at the cost of weaker free cash flow?
There is no gross-margin impact yet and no specific game plan to reduce the program, which is stable and liked by vendors. It is one negotiating lever; if vendors do come off the program, Advance would expect a positive cost-of-goods benefit to justify the working-capital investment. The program stays around $2.5B (2.4-2.6x range).
(Wells Fargo) What are the LIFO, warehouse-capitalization, and Pro store-transfer assumptions for 2026?
LIFO was ~40 bps of headwind in 2025 and is guided to ~50 bps in 2026 (~$30M in Q1); warehouse capitalization is expected flat on roughly flat inventory. Pro comps benefited from store-transfer sales in 2025 but would still have been positive net of that, and new assortment and service levels should drive Pro comps higher.
More on Advance Auto Parts Inc
Reported 2026-02-13 · figures from the Advance Auto Parts Inc Q4 2025 earnings call.
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