Advance Auto Parts: A Turnaround in the Works Under New Leadership

Advance Auto Parts (AAP) has faced significant headwinds in recent years, including operational challenges, debt pressures, and a volatile stock price. However, under the leadership of CEO Shane O'Kelly, the company is executing a strategic turnaround plan that could position it for long-term growth. Combined with an undervalued stock and favorable industry trends, AAP presents a compelling buy opportunity for investors with a multi-year horizon.

New Leadership: Strategic Moves to Rebuild Value

Since taking the helm in 2023, O'Kelly has implemented bold initiatives to streamline operations and focus on profitability. Key actions include:
1. WorldPac Sale: In early 2024, AAP sold its WorldPac division—a non-core business—to Canadian National Railway for $1.2 billion. This move reduced debt, freed capital for core operations, and eliminated a loss-making unit.
2. Store Rationalization: AAP closed 46 underperforming stores in 2024, with plans to shutter an additional 20 in 2025. This reduces costs and improves store-level efficiency, particularly in regions with overlapping locations.
3. Operational Focus: Gross margin improved to 42.9% in Q2 2025, up from 39.8% in 2022, driven by better inventory management and supplier negotiations.

Undervalued Relative to Peers

AAP's valuation metrics currently favor long-term investors. As of June 2025:
- Forward P/E: 22.08, compared to AutoZone's (AZO) 21.66 and O'Reilly's (ORLY) 21.66.
- P/S Ratio: 0.34, below the industry median of 0.65 and far below peers like ORLY (1.12).
- Dividend Yield: 2.02%, offering income potential alongside growth.

Despite these metrics, AAP's trailing P/E of -9.47 (due to a recent loss) masks its improving fundamentals. The forward P/E suggests the market expects a rebound in profitability, which O'Kelly's initiatives are designed to deliver.

Industry Tailwinds Favor AAP's Core Business

The automotive aftermarket remains a growth driver for AAP:
1. Aging Vehicle Fleet: The average U.S. vehicle age is 12.5 years, up from 10.6 years in 2010. Older cars require more parts and repairs, benefiting auto parts retailers.
2. EV Adoption Delays: The shift to electric vehicles has slowed, with combustion engines expected to dominate roads until at least 2035. This extends demand for traditional parts.
3. Competitive Positioning: AAP's 4,800+ locations and strong brand recognition in the aftermarket provide scale advantages over smaller competitors.

Risks to Consider

• Debt Load: AAP's Debt/Equity ratio of 1.86 is elevated, though the WorldPac sale has improved liquidity.
• Near-Term Earnings Volatility: The company reported a TTM net loss of $351.79 million, and margins remain negative.
• Execution Risks: Turnarounds are never guaranteed; operational improvements must materialize to justify the valuation.

Buy Rating: A Long-Term Opportunity

AAP's stock is trading at a 30% discount to its 3-year average P/E of 25.62 and offers a rare mix of value and growth potential. While near-term challenges remain, the confluence of strategic leadership, undervaluation, and favorable industry trends positions AAP to rebound.

Investors should focus on the following catalysts:
- Debt Reduction: Proceeds from WorldPac and operational savings should lower leverage to safer levels.
- Margin Expansion: Gross margin improvements could spill into operating and net margins as costs decline.
- Share Buybacks: AAP has $430 million remaining on its buyback authorization, which could lift shareholder value as profitability improves.

Conclusion

Advance Auto Parts is at a pivotal juncture. O'Kelly's restructuring and focus on core competencies align with a resilient aftermarket industry. While risks exist, the stock's valuation and strategic moves make it a compelling buy for investors willing to ride out short-term turbulence. AAP could emerge stronger in 2026–2027, rewarding patient shareholders with significant upside.

Rating: Buy
Target Price: $65–$70 (2026)
Risks: Debt, execution, macroeconomic downturn