Advance Auto Cuts 700 Stores, Boosts Margins as DIY Sales Wane

Date of Call: Feb 13, 2026

Financials Results

• Revenue: $2B for Q4, down 1% YOY; Full year $8.6B, down 5% YOY
• EPS: $0.86 adjusted diluted EPS for Q4 vs loss of $1.18 prior year; Full year $2.26 vs loss of $0.29 prior year
• Gross Margin: 44.2% for Q4, up nearly 530 basis points YOY; Full year 43.9%, up 165 basis points YOY
• Operating Margin: 3.7% for Q4, up nearly 870 basis points YOY; Full year 2.5%, up 210 basis points YOY

Guidance:

• Revenue for 2026 expected to decline slightly YOY excluding nonrecurring items; underlying net sales growth of 1% to 2%.
• Comparable sales growth of 1% to 2% expected.
• Adjusted operating income margin between 3.8% and 4.5% for 2026, representing 130 to 200 basis points of expansion.
• Gross margin expansion of 110 to 150 basis points to approximately 45%.
• Adjusted diluted EPS in the range of $2.40 to $3.10.
• Free cash flow of approximately $100 million expected.
• Capital expenditures increased to approximately $300 million.
• Q1 gross margin expected in the 44% to 45% range.

Business Commentary:

Operational Performance and Margin Expansion:

• Advance Auto Parts reported an adjusted operating income margin of 2.5% for 2025, expanding by 210 basis points year-on-year.
• The company expects to further expand this margin to between 3.8% and 4.5% in 2026.
• This improvement is driven by initiatives in merchandising excellence, strategic vendor partnerships, and supply chain optimizations.

Store Optimization and Footprint Rationalization:

• The company closed over 500 corporate stores and 200 independent stores, saving approximately $70 million in operating costs.
• This action resulted in a 1% decline in net sales from continuing operations in Q4 2025.
• The closures were part of a strategy to focus on high-performing locations and enhance overall store availability and service.

Pro and DIY Channel Performance:

• Pro business sales grew by nearly 4% in Q4 2025, with positive comparable sales growth throughout the year.
• DIY channel sales declined in the low single-digit range, influenced by consumer spending trends.
• The performance difference is attributed to strategic improvements in Pro service levels and assortment, while DIY faces challenges due to macroeconomic factors affecting consumer behavior.

Supply Chain and Distribution Network Consolidation:

• Advance Auto Parts reduced its U.S. distribution centers from nearly 40 to 16 as of 2025, with plans to reach 15 by the end of 2026.
• This consolidation aims to improve service levels and operational efficiencies, supporting the company's growth strategy.

Financial Guidance and Free Cash Flow:

• The company expects to generate approximately $100 million in free cash flow for 2026, despite a projected slight decline in net sales.
• This guidance reflects improvements in comparable sales growth and operational efficiencies, offset by prior-year nonrecurring items.

Sentiment Analysis:

Overall Tone: Positive

• CEO stated 'I am confident in our ability to succeed in 2026' and 'We are seeing signs of improved performance.' Management highlighted returning to positive comparable sales growth, margin expansion, and progress on strategic initiatives, creating positive momentum.

Q&A:

• Question from Christopher Horvers (JPMorgan Chase & Co): Why is your inflation so much lower than what your peers have reported?
  Response: Inflation was lower due to tariff negotiations and the wrap of prior price investments; company is a rational player in the market using AI for promotions.

• Question from Christopher Horvers (JPMorgan Chase & Co): On the decision to reduce your supply chain financing in the fourth quarter.
  Response: Reduction was due to leveling payables based on new purchases and sourcing; vendor relations are strong, and the program remains stable.

• Question from Seth Sigman (Barclays Bank PLC): Impact of store closings on comps and margins in 2025 and opportunity to optimize store portfolio.
  Response: Store closings impacted comps via $51M in liquidation sales; no further closures expected. Company is focused on opening 40-45 new stores in 2026 to increase density.

• Question from Seth Sigman (Barclays Bank PLC): Cadence of margin gains and the 7% target.
  Response: 2026 is an investment year in supply chain and store operations, with benefits expected in 2027; 7% remains the medium-term target.

• Question from Simeon Gutman (Morgan Stanley): Execution risk on gross margin and SG&A guidance.
  Response: Merchandising has good line of sight; SG&A reductions from store rationalization and indirect spend, with investments in labor and new stores.

• Question from Simeon Gutman (Morgan Stanley): Bridge from net income to operating cash for free cash flow guidance.
  Response: Operating cash flow includes $350M from operating income; typical seasonality with Q1 outflow and Q2-Q4 inflow; $10M-$20M of closure expenses carryover.

• Question from Unknown Analyst (Truist): Quantify DIY sales headwind and initiatives to materialize pent-up demand.
  Response: DIY trends pressured by consumer sentiment; initiatives include new loyalty program, owned brand ARGOS, and marketing efforts.

• Question from Bret Jordan (Jefferies LLC): Private label strategy and market hub details.
  Response: Private label mix should remain consistent; market hubs include over 20 conversions, with majority future greenfields averaging ~$2M CapEx.

• Question from Mark Jordan (Goldman Sachs Group, Inc.): Comp guidance breakdown and cadence considerations.
  Response: Comp growth driven by low single-digit transactions and 2%-3% inflation; DIY transactions pressured, Pro positive; weather impact neutral to date.

• Question from Zachary Fadem (Wells Fargo Securities, LLC): Vendor finance commentary and expectations for LIFO, restructuring costs.
  Response: No game plan to reduce supply chain finance; LIFO headwind of ~50 bps in 2026; Pro comps benefited from transfer sales in 2025.

Contradiction Point 1

Supply Chain Finance Program Strategy and Impact

It involves a change in the rationale for reducing the supply chain finance program, shifting from a strategic focus to an operational cause, which may affect financial metrics like gross margins.

Could you comment on the earnings call? - Christopher Horvers (JPMorgan Chase & Co)

2025Q4: The reduction in payables/supply chain finance was due to operational mix changes... not a strategic pullback from the program. - [Ryan Grimsland](CFO) & [Shane OKelly](CEO)

What factors led to the Q4 reduction in supply chain financing, specifically free cash flow dynamics or margin/rate negotiations? - Michael Lasser (UBS Investment Bank)

2025Q3: The biggest Pro opportunity is with Main Street accounts... The company is ensuring the outside sales team prioritizes these accounts... - [Shane OKelly](CEO) & [Ryan Grimsland](CFO)

Contradiction Point 2

LIFO Headwind Magnitude and Timing

It involves a potential inconsistency in quantifying the net LIFO headwind for 2025, which is critical for financial planning and forecasting.

What are your key takeaways from the earnings report? - Zachary Fadem (Wells Fargo Securities, LLC)

2025Q4: 2025 had a ~40 bps inflation headwind... Net LIFO headwind for 2025... is 60-80 basis points. - [Ryan Grimsland](CFO)

What are the expectations for LIFO in Q1 and 2026, restructuring costs in Q1, and the quantification of Pro comp benefits from store closures in 2025? - Christopher Horvers (JPMorgan Chase & Co)

2025Q3: Net LIFO headwind for 2025, after offsetting capitalized inventory costs, is 60-80 basis points. - [Ryan Grimsland](CFO)

Contradiction Point 3

Store Closing Impact on Comps

It involves conflicting statements on whether professional (Pro) comparable store sales were positively impacted net of transfer sales from store closures.

What are your thoughts on the current market conditions affecting revenue growth? - Zachary Fadem (Wells Fargo Securities, LLC)

2025Q4: Pro comps would still have been positive net of that benefit in 2025. - [Ryan Grimsland](CFO)

What are the expectations for LIFO in Q1 and 2026, restructuring costs in Q1, and quantification of Pro comp benefit from store closures in 2025? - Bret David Jordan (Jefferies LLC)

2025Q2: Transfer sales from closures are expected to support comps in the back half of 2025. - [Ryan Grimsland](CFO)

Contradiction Point 4

Margin Expansion Progression

It involves a shift in confidence and specificity regarding the timeline for achieving annual operating margin targets.

Seth Sigman (Barclays Bank PLC), could you share your perspective? - Seth Sigman (Barclays Bank PLC)

2025Q4: The 7% long-term margin target remains unchanged. Progress so far is strong... The guidance is based on specific line-of-sight, and execution is on track. - [Ryan Grimsland](CFO) & [Shane OKelly](CEO)

Why is the margin expansion guidance more gradual than prior back-end-weighted targets—is it due to reinvestment or execution challenges? - Michael Lasser (UBS Investment Bank)

2025Q2: It is too early to specify the margin expansion for 2026. The company expects some progression toward the 7% target, but the timing and magnitude will be clearer later. - [Ryan Grimsland](CFO) & [Shane M. O’Kelly](CEO)

Contradiction Point 5

SG&A Expense Outlook

It involves a direct contradiction on the direction of SG&A expense growth between the quarters.

Can you provide an update on Morgan Stanley's earnings performance? - Simeon Gutman (Morgan Stanley)

2025Q4: SG&A is planned to increase slightly in 2026 to fund these strategic initiatives. - [Ryan Grimsland](CFO)

What execution risks exist for achieving the gross margin and SG&A guidance, are strategic sourcing deals already in place or still pending execution, and how can SG&A increase while improving service/availability? - Simeon Gutman (Morgan Stanley)

2025Q1: SG&A expenses are expected to be down year-over-year, offset by store closure savings and productivity gains. - [Ryan Grimsland](CFO), [Shane O'Kelly](CEO)