Advance Auto Parts' Q3 2025 Earnings Call: Contradictions Emerge on Inflation, Pricing Strategies, Inventory Management, and LIFO Impact

Date of Call: October 30, 2025

Financials Results

• Revenue: $2.0B, down 5% YOY (net sales from continuing operations)
• EPS: $0.92 adjusted diluted EPS from continuing operations, compared with a loss of $0.05 last year
• Gross Margin: 44.8% of net sales, up ~260 bps YOY
• Operating Margin: 4.4% adjusted operating margin, up ~370 bps YOY

Guidance:

• Net sales expected $8.55B–$8.60B with comparable sales +0.7% to +1.3%.
• Adjusted operating margin expected 2.4%–2.6% (midpoint reaffirmed).
• Q4 gross margin planned slightly below 44%; same-SKU inflation expected ~4% in Q4 and a bit higher in Q1; Q4 LIFO expense ~ $70M (80–100 bps headwind).
• Full-year adjusted EPS $1.75–$1.85; CapEx ~ $250M; free cash flow expected negative $90M to negative $80M.
• Carrying higher inventory to support assortment and new stores; expect positive working capital contribution in Q4.

Business Commentary:

* Sales and Profitability Trends: - Advance Auto Parts reported comparable sales growth of 3% for Q3, with both the Pro and DIY channels delivering growth. - Adjusted operating margin expanded by 370 basis points to 4.4% year-over-year, demonstrating progress in the execution of their strategic plan. - The growth was aided by tariff-related price adjustments and improved coverage and availability of hard parts.

• Inventory and Strategic Initiatives:
• The company raised nearly $2 billion in cash, enhancing liquidity and positioning the business for future investment-grade credit rating.
• The strategic focus on improving assortment and market hub expansion is expected to drive future growth, with a significant reduction in distribution centers planned by 2026.

• These initiatives aim to ensure broader inventory coverage and support service levels across the network.

• Inflation and Pricing Strategies:

• Same SKU inflation was 3% in Q3, with expectations for higher inflation in Q4 and Q1 of next year as negotiations with suppliers conclude.
• The company is responding to inflationary pressures by adjusting prices rationally to match rising product costs, while maintaining competitive pricing.

• This strategy is part of their broader efforts to manage costs and margins effectively in a volatile macroeconomic environment.

• Channel Performance and Consumer Behavior:

• Pro channel comps grew by just over 4%, with consistent performance on a 2-year basis, despite consumer budget adjustments due to inflation.
• DIY channel experienced positive low single-digit comps, with sequential improvement on a 2-year basis, indicating resilience despite economic pressures.
• The company is focusing on strengthening relationships with Main Street accounts and optimizing operations to meet consumer demand shifts.

Sentiment Analysis:

Overall Tone: Positive

• Management called this their "strongest quarter in over 2 years," highlighted 370 bps y/y operating margin expansion to 4.4%, and noted they "raised nearly $2 billion in cash" to strengthen liquidity — signaling confidence in the turnaround despite near-term headwinds.

Q&A:

• Question from Simeon Gutman (Morgan Stanley): I want to ask first about elasticity of demand, the health of the consumer and then maybe even throwing something about weather. Can you put all together because it sounds like your quarter started off strong and then decelerated and now it sounds a little soft. And it makes sense given price has come up, not just in this category, but across the board. But how much also is weather a factor? And then can you talk about the things you're doing, the internal initiatives, how you can see and measure progress in those outside of these variables?
  Response: Consumer low-to-mid income is trimming discretionary spend causing noisy demand; much of our sales are nondiscretionary break/fix, and we measure initiative impact via test-vs-control to isolate results from macro/seasonal noise.

• Question from Simeon Gutman (Morgan Stanley): And my quick follow-up is on inventory. Shane, can you talk about where you are versus where you want to be? It sounds like you pivoted a little bit in '25. You bought more than I think you were expecting. You can clarify if that's the case. And why wouldn't that make sense to do in '26? I know you talked about driving free cash flow, but why wouldn't it make sense to invest more in inventory to drive the business?
  Response: We bought ahead for tariffs and to support the assortment rollout (50 DMAs); inventory breadth/depth is now improved, so we expect limited incremental inventory investment in 2026 as sell-through and assortment maturation allow reallocation.

• Question from Christopher Horvers (JPMorgan): So my first question is on the inflation front. So can you talk about what did the exit look like on inflation in the quarter? Is it still your expectation we get to the higher end of the mid-single digits in the fourth quarter? And there's a big debate out there amongst investors when that inflation -- year-over-year inflation benefit peaks. One of your peers is saying it's in the fourth quarter. Another one of your peers are saying, 'Hey, we don't we turn inventory every 10 months.' So it wouldn't be until the spring. So could you help us out with that mystery as well?
  Response: Q3 same‑SKU inflation finished just under 3%; we expect ~4% in Q4 and a slight further increase into Q1 before normalizing, and most vendor negotiations are substantially complete.

• Question from Christopher Horvers (JPMorgan): Got it. That is super helpful. And then as we think about the path to the 7% operating margin, can you help us maybe on the linearity of that? And as a part of the question, it's always hard to put a LIFO question into the call, but what is sort of the net LIFO headwind in '25 between LIFO and the capitalized inventory costs? And how do you think about the recapture of that next year and then more broadly that the linearity of the path to 7% by '27?
  Response: Turnaround progress will be nonlinear and lumpy across initiatives; LIFO is a headwind of roughly 60–80 bps for 2025.

• Question from Bret Jordan (Jefferies): One quick question on the working capital programs, it doesn't sound from channel checks like there's any contraction in availability. But have you seen any increase in risk spreads in the short term related to that particular supplier issue?
  Response: No increase observed in risk spreads; supply-chain-finance program is stable and benefited from this summer's cash support and program restructuring.

• Question from Bret Jordan (Jefferies): Great. And then a quick question on the Atlanta hub greenfield. Could you give us color sort of as to the performance of stores in that market? I mean, as you build the perfect hub, what's the outcome? And sort of what's the timing on developing further greenfield hubs like that one?
  Response: Market hubs typically deliver ~100 bps lift for supported stores; greenfield hubs accelerate targeted coverage and we plan to reach ~60 hubs by mid‑2027 with more greenfields to come.

• Question from Steven Forbes (Guggenheim): Just a follow-up question on gross margin. I think it was Chris' question. I think if you back out the LIFO charge in the quarter, you guys are sort of exceeding that mid-40% range that underpins the long-term guide here. So curious just if there is a takeaway for us today on some of the structural gains that you're capturing on the back of your initiatives or if that sort of mid-40-ish level is still where you guys see the business trending to over the next couple of years here?
  Response: Mid-40s gross margin remains the long-term target; Q3 benefited seasonally and by assortment/footprint savings, but Q4 will moderate due to LIFO and seasonality — still on the journey toward the target.

• Question from Steven Forbes (Guggenheim): And then just another follow-up on really sort of the comp message this morning. So we think about like-for-like inflation, same SKU inflation going to 4%, maybe 4.5% in the first quarter of next year. The guidance for the fourth quarter, the implied comp guide is 1% to 3%. And so what is the sort of takeaway today around transactions? Are you guys seeing weakness in Pro transaction? Or is sort of the spread and moderation expected between same SKU inflation and the consolidated comp really just DIY related? Any sort of color on sort of comp complexion and message around that for the fourth quarter specifically?
  Response: Both Pro and DIY comps are moderating into Q4, but pressure is more pronounced in DIY; Q4 is volatile seasonally and guidance already incorporates this moderation.

• Question from Michael Lasser (UBS): To what extent did the decision to trade some margin for sales or vice versa impact the quarter, meaning you've foregone some lower-margin business that could have negatively impacted your sales but boosted your gross margin. If you could quantify any of those actions in the third quarter and to the degree to which it might impact your fourth quarter, that would be super helpful.
  Response: We are maintaining a competitive, fast‑follower pricing strategy and are not deliberately sacrificing sales to harvest margin; we will selectively optimize certain accounts but not shift overall pricing posture.

• Question from Michael Lasser (UBS): My follow-up question is, Shane, you consistently and repeatedly used the term nonlinear to describe the path forward for Advance Auto Parts. How should we interpret that from a numbers perspective? Does that mean there'll be some quarters maybe when it's hot on the East Coast and there's outperformance in those markets that Advance can rip off a 3 comp and report several hundred basis points of gross margin expansion and then vice versa. The next quarter, it might be a flat to 1 and far less gross margin expansion. How would you characterize that nonlinearity that you would use to describe how the path forward might look over the next couple of years?
  Response: Nonlinearity means results will be lumpy because large initiatives (DC consolidations, assortment, systems) create upfront costs and staggered benefits, so quarters may swing as projects incur costs or realize gains at different times.

• Question from Michael Baker (D.A. Davidson): Maybe following up on Mike Lasser's question. You used the language a couple of times of 2025 and 2026 being build years. What does build years mean? Does that mean in a way, obviously, margins are expanding already, but are you still investing more? And then the idea is that it really -- the margin expansion really kicks in more in 2027. Is that the right way to interpret build year?
  Response: Build years = executing major, multi‑year initiatives (market hubs, DC consolidation, store model, tech); continued investment in 2025–26 to set up scalable margin expansion targeted by 2027.

• Question from Michael Baker (D.A. Davidson): Okay. That makes sense. And if I could ask one more follow-up and maybe not a fair question for you guys. So if not, feel free to pass. But for whatever it's worth, the consensus estimates aren't even close to a 7% margin in 2027. In all your conversations with investors or analysts, what do you think people are missing relative to your plan?
  Response: Skepticism reflects the early stage of the turnaround; management stresses the need for proof points and is providing more metrics as initiatives progress to demonstrate the path to the 7% goal.

Contradiction Point 1

Inflation Expectations and Impact on Pricing Strategy

It involves the company's expectations and strategies related to inflation, which directly affects pricing decisions and financial performance.

Can you provide insights into the inflation situation? Did inflation levels in the quarter align with expectations? - Chris Horvers (JPMorgan Chase & Co.)

2025Q3: Ryan Grimsland reported that inflation ended Q3 just under 3%, expecting it to rise to around 4% in Q4. - [Ryan Grimsland](CFO)

What assumptions are you making about the DIY business, and how do tariff impacts differ between DIFM and DIY? - Simeon Ari Gutman (Morgan Stanley)

2025Q2: Ryan Grimsland expects low to mid-single-digit inflation. - [Ryan Grimsland](CFO)

Contradiction Point 2

Price Elasticity of Demand and Consumer Spending Behavior

It highlights differences in the company's assessment of consumer spending behavior and the impact of inflation on demand, which are crucial for sales forecasting and strategic decisions.

How do you assess demand elasticity, consumer health, and weather impacts on sales? How do you measure internal initiatives relative to external factors? - Simeon Gutman (Morgan Stanley)

2025Q3: Shane OKelly explained that the company is keeping an eye on the low-end consumer's spending behavior due to inflation. - [Shane OKelly](CEO)

What assumptions underlie your DIY business, and how do tariff pricing impacts differ between DIFM and DIY? - Simeon Ari Gutman (Morgan Stanley)

2025Q2: Ryan Grimsland expects low to mid-single-digit inflation, with caution on DIY consumer response to price. - [Ryan Grimsland](CFO)

Contradiction Point 3

Inventory Strategy and Impact on Sales

It involves the company's approach to inventory management, which can impact sales performance and financial results.

How are demand elasticity, consumer health, and weather impacting your sales trends? How do you measure internal initiatives against external factors? - Simeon Gutman (Morgan Stanley)

2025Q3: Shane OKelly mentioned that the company is focusing on having the right part for their customers, taking into account the tariff environment and maintaining the right depth and breadth of inventory. - [Shane OKelly](CEO)

With the revised capital structure, do you expect cost savings due to the reduced risk spread in the factoring program? - Bret David Jordan (Jefferies LLC)

2025Q2: Shane O'Kelly states that while it's too early to confirm cost savings, they expect some benefits over time as they bridge back to an investment-grade credit rating. - [Shane M. O’Kelly](CEO)

Contradiction Point 4

Inflation and LIFO Impact

It involves the impact of inflation and the last-in, first-out (LIFO) inventory accounting method on financial performance, which impacts investor expectations and strategic planning.

How did inflation impact the quarter? Was exit inflation in line with expectations? - Chris Horvers(JPMorgan Chase & Co.)

2025Q3: Inflation ended Q3 just under 3%, expecting it to rise to around 4% in Q4. There's a slight increase expected in early Q1 2026, with a normalization in inflation expected later in the year. - [Ryan Grimsland](CFO)

What was the inflation impact in Q1, and will it accelerate? How does LIFO affect the P&L? - Chris Horvers(JPMorgan)

2025Q1: Inflation impact in Q1 was immaterial. We have a range of mid-single-digit outcomes in our scenarios. LIFO had a $4 million favorable impact in Q1, and we are managing weeks of supply to minimize future LIFO impacts. - [Ryan Grimsland](CFO)

Contradiction Point 5

Inventory Strategy and Investment

It involves the company's inventory strategy and investment decisions, which are critical for operational efficiency and financial performance.

Can you explain the inventory strategy? Why isn't increasing inventory investment a viable option for driving growth? - Simeon Gutman(Morgan Stanley)

2025Q3: We are focused on having the right part for our customers, taking into account the tariff environment and maintaining the right depth and breadth of inventory. - [Shane OKelly](CEO)

What factors are contributing to gross margin improvements beyond supply chain savings? - Scot Ciccarelli(Truist)

2025Q1: We made significant progress in managing our inventory levels, focusing on driving down excess inventory and optimizing our in-stock position. - [Ryan Grimsland](CFO)