Advance Auto Parts: Navigating Near-Term Headwinds to Unlock Long-Term Value

Advance Auto Parts (AAP) has embarked on a bold turnaround strategy, positioning itself to capitalize on a $150 billion addressable market while confronting significant near-term challenges. The company's Q1 2025 results offer a glimpse into its progress—and the risks it must overcome—to unlock its long-term potential. For investors weighing whether to buy now, the calculus hinges on whether the strategic initiatives can offset short-term execution hurdles and deliver sustainable growth.

The Turnaround Play: Strategic Pillars and Progress

At the core of AAP's strategy are five pillars: store footprint optimization, merchandising and inventory management, supply chain transformation, store operations upgrades, and customer-centric marketing. Progress to date is measurable but uneven.

Store Footprint & Expansion: AAP has consolidated its presence in high-density markets, with 75% of stores now in top-tier locations. This geographic focus, coupled with plans to open over 100 new stores by 2028, aims to solidify its dominance. The Pro segment—a key revenue driver—has shown resilience, growing in the low single digits during Q1, with eight consecutive weeks of positive comps in the U.S. This momentum is critical, as Pro sales represent over 60% of AAP's business.

Merchandising & Inventory: The rollout of its dynamic inventory framework—designed to align SKUs with local demand—has accelerated. By August 2025, 30 of the top 50 Designated Market Areas (DMAs) will use the system, up from 12 originally planned. Store availability metrics now sit in the mid-90% range, a 200-basis-point improvement, which directly supports sales by ensuring Pro customers can source complete job bundles.

Supply Chain Overhaul: The most ambitious initiative is the consolidation of 38 distribution centers (DCs) into 12 by 2026. As of Q1, six closures were completed, with six more planned by year-end. This transformation aims to cut costs and boost efficiency, with labor productivity improving in the low single digits. New market hubs—21 in total—stock 75,000–85,000 SKUs, enabling same-day availability for clusters of stores. Markets with hubs already saw a 100-basis-point comp sales boost, a clear proof point of the strategy's value.

Near-Term Risks: Execution, Cash Flow, and DIY Stagnation

Despite the progress, AAP faces significant hurdles.

1. Supply Chain Execution: The DC consolidation is a logistical and operational marathon. Delays or cost overruns could strain margins and cash flow. Current guidance projects negative free cash flow of $85M–$25M in 2025, driven by inventory investments and lease disposition costs. While this is expected to reverse in 2026, the interim pressure on liquidity is a concern.

2. DIY Segment Struggles: The DIY channel, representing roughly 40% of sales, declined in the low single digits in Q1 due to weak consumer spending. AAP's new marketing campaign, “Right Around the Corner and Ready to Help,” aims to re-engage DIY customers, but macroeconomic headwinds—particularly inflation—could prolong the slump.

3. Tariff Headaches: With 40% of sourced goods subject to 30% tariffs, AAP's ability to negotiate vendor terms, source alternatives, or pass costs to customers will determine margin recovery. Management has factored these efforts into its 2025 guidance, but upside scenarios depend on successful mitigation.

Long-Term Catalysts: Margins, Market Share, and Scale

The payoff hinges on AAP's ability to translate these initiatives into margin expansion and top-line growth.

Margin Improvement: The 2%–3% adjusted operating margin target for 2025 is a starting point. Once the DC consolidation is complete, annual savings of $70M from reduced overhead and labor efficiencies could accelerate margin growth. Vendor renegotiations and SKU rebalancing—targeting 50 basis points of annualized cost reductions—add further upside.

Pro Segment Dominance: AAP's Pro sales have consistently outperformed peers, and the company's focus on inventory availability and delivery times (now averaging 30–40 minutes) could deepen its lead. Pro's resilience in a slowing economy suggests it's a safer bet for revenue stability.

Market Share Gains: With 100 new stores planned and a 12-DC network by 2026, AAP aims to become the low-cost, high-availability leader. The 10% test of standardized store operating models—showing early success—hints at broader labor productivity gains.

Valuation: A Discounted Turnaround Play

AAP's stock currently trades at a trailing P/E of ~10x, well below peers like O'Reilly (OLLY, 22x) and AutoZone (AZO, 17x). This discount reflects near-term execution risks but also sets up a compelling opportunity if AAP meets its long-term targets.

Consider this: AAP's 2025 sales guidance of $8.4B–$8.6B implies modest growth, but the company projects a comp sales acceleration in the second half. If Pro momentum continues and the supply chain transformation delivers on cost savings, AAP could approach $10B in sales by 2027. At that scale, even a modest 5% operating margin (versus peers' 8%–12%) would justify a higher valuation.

Why Invest Now?

AAP is a classic “value in turnaround” story. The stock's current undervaluation relative to peers, coupled with its strategic progress—75% of stores in top markets, inventory improvements, and margin-focused initiatives—suggests it's pricing in worst-case scenarios. Meanwhile, the Pro segment's strength and store expansion pipeline offer tangible catalysts for growth.

The risks are real: execution delays, cash flow constraints, and DIY volatility. But AAP's management has shown discipline, accelerating inventory and DC timelines while maintaining financial flexibility. For investors with a 3–5-year horizon, AAP's potential to close its margin gap with peers and leverage its market dominance makes it a compelling buy at current levels.

Investment Thesis: AAP's strategic moves position it to transform into a low-cost, high-service player with Pro-led growth. Near-term pain is priced in, but long-term gains could be substantial.

Final Call: Buy AAP for its turnaround potential, but monitor closely for execution on DC consolidation and Pro sales momentum.