Advance Auto Parts reaffirms $8.4B–$8.6B sales target for 2025 amid turnaround and supply chain optimization

Earnings Call Insights: Advance Auto Parts (AAP) Q2 2025

MANAGEMENT VIEW

* Shane M. O’Kelly, CEO, emphasized the company's "return to profitability" in Q2, supported by store footprint optimization and progress on strategic initiatives. He noted, "Comparable sales growth was about flat for the quarter, and our performance was driven by strength in the Pro business, which continued to deliver positive comp growth." O’Kelly highlighted that momentum has continued into the first four weeks of Q3, with both Pro and DIY delivering positive results.
* O’Kelly detailed the company's actions to manage tariff-related cost increases and stated, "We are working with our vendor partners to effectively manage tariff-related cost increases while thoughtfully adjusting retail prices in response to market dynamics." He reaffirmed full-year sales, operating margin, and free cash flow guidance, indicating a cautious approach for the rest of the year.
* O’Kelly described progress across three strategic pillars: merchandising, supply chain, and stores, including accelerated rollout of a new assortment framework, SKU expansion (over 60,000 new SKUs year-to-date), and improvements in store availability.
* O’Kelly addressed debt capital structure, stating, "We proactively reorganized our debt capital structure earlier this month to ensure financial flexibility in the turnaround. We believe this action will enable us to support our current supplier financing program while also allowing us to strategically optimize its utilization for the long term."
* CFO Ryan Grimsland stated, "For the second quarter, net sales from continuing operations were $2 billion, an 8% decline compared to last year. This decline is mainly attributable to the store optimization activity that was completed during Q1." Grimsland noted positive comparable sales and gross margin expansion, as well as improved free cash flow from last quarter.

OUTLOOK

* Full-year 2025 net sales guidance is reaffirmed at $8.4 billion to $8.6 billion, with comparable sales expected to grow 50 to 150 basis points. Adjusted operating income margin is expected in the range of 2% to 3%.
* Adjusted diluted EPS guidance is revised to $1.20 to $2.20, down from $1.50 to $2.50, due to higher interest expense from the recent $1.95 billion senior notes offering.
* Free cash flow for the year is targeted in the range of negative $85 million to negative $25 million, incorporating $150 million of cash expenses related to store optimization.
* For Q3, the company expects adjusted operating income margin above 4%, with gross margin about in line to slightly better than Q2.
* O’Kelly and Grimsland both emphasized a cautious outlook, citing ongoing market transition, consumer adaptation to higher prices, and potential tariff impacts.

FINANCIAL RESULTS

* Net sales from continuing operations for Q2 were $2 billion, with an 8% year-over-year decline attributed mainly to store optimization.
* Comparable sales growth was 0.1%, including a 25 basis points headwind from Easter timing shift.
* Adjusted gross profit was $880 million or 43.8% of net sales, representing a 16 basis points gross margin expansion versus last year.
* Adjusted SG&A was $819 million or 40.7% of net sales, about flat year-over-year, with savings from operating fewer stores.
* Adjusted operating income from continuing operations was $61 million or 3.0% of net sales, resulting in about 20 basis points of margin expansion.
* Adjusted diluted earnings per share was $0.69 compared with $0.62 in Q2 last year.
* Year-to-date free cash flow was a use of $201 million, including $20 million in store optimization cash costs.
* Grimsland provided details on the new debt structure: $1.95 billion of senior notes issued, new $1 billion asset-backed revolving credit facility, and more than $3 billion of cash on the balance sheet.

Q&A

* Bret David Jordan, Jefferies: Asked about cost savings from the revised capital structure and CapEx needs for store upgrades. CFO Grimsland explained the debt program's main value is "bridging back to investment grade," with no immediate cost savings assumed in guidance. On CapEx, Grimsland described ongoing upgrades: "Just to give you an example from an HVAC perspective, we had 80% of our HVACs beyond useful life. So it should give you a basis of kind of where the fleet was at."
* Simeon Ari Gutman, Morgan Stanley: Inquired about confidence in comp pickup in the second half. Grimsland cited both "easier comparisons" and "improving trends," saying, "we saw improving 2-year comp trends coming out of Q1 into Q2. And also the later part of Q2, we saw improving trends moving into the back half of the year."
* Michael Lasser, UBS: Asked about visibility and margin trajectory. CEO O’Kelly responded, "2025, this year and next year are really the big implementation years... Other areas are a little more nonlinear."
* Christian Justin Carlino, JPMorgan: Queried about peers’ reactions to tariffs and potential share gains. Grimsland stated, "it's been a rational environment. What we've seen from our peers, we haven't seen significant deviation in our CPI from any price actions we've taken."
* Scot Ciccarelli, Truist: Questioned margin targets and gross margin drivers. Grimsland said, "a larger portion of that is going to come from gross margin, and that's really 2 pieces... merchandising excellence... and our supply chain and productivity."
* Seth Ian Sigman, Barclays: Focused on DIY trends and margin guidance composition. Grimsland noted, "we saw transactions in the DIY improve, not quite positive yet, but we did see it improve."

SENTIMENT ANALYSIS

* Analysts expressed cautious optimism but raised pointed questions about margin visibility, competitive pricing, and consumer elasticity. There was a neutral to slightly skeptical tone, especially regarding the nonlinear progress of strategic initiatives and the impact of tariffs.
* Management maintained a confident but prudent tone, frequently referencing the "cautious approach" and emphasizing ongoing implementation. Phrases such as "we are confident that the long-term advantages... will serve as catalysts for driving EPS growth" were used, but also frequent reminders of "early phases" and "nonlinear" outcomes.
* Compared to the previous quarter, analysts’ tone remained largely consistent—questioning the sustainability and pace of improvements—while management’s confidence was reiterated but tempered by acknowledgments of continuing risk and a need for patience.

QUARTER-OVER-QUARTER COMPARISON

* The company reaffirmed its full-year net sales guidance of $8.4 billion to $8.6 billion, unchanged from the previous quarter.
* EPS guidance was revised downward to $1.20–$2.20 from $1.50–$2.50, primarily due to higher interest expense.
* Comparable sales growth outlook remained at 50–150 basis points.
* Both quarters featured ongoing focus on Pro business strength, supply chain consolidation, and merchandising initiatives, but the current call provided more granularity on SKU expansion and assortment framework acceleration.
* Analyst focus remained on margin drivers, consumer trends, and strategic clarity, similar to Q1.
* Management’s tone was consistent, continuing to stress disciplined execution and caution amid external volatility.

RISKS AND CONCERNS

* Tariff-related cost increases were repeatedly mentioned as a material risk, with the expectation that the impact will be more pronounced in the second half of the year.
* Consumer behavior and demand elasticity, especially in the DIY segment, were highlighted as uncertainties. O’Kelly stated, "we are closely monitoring consumer behavior and the potential for recalibration in purchasing habits, especially within our DIY business."
* Margin expansion relies heavily on successful execution of merchandising and supply chain initiatives, which are still in early stages with nonlinear benefits.
* Store infrastructure lag and maintenance needs were acknowledged, with significant capital expenditures planned over the next 3 to 5 years.
* Management is proactively monitoring vendor negotiations, supply chain financing stability, and maintaining financial flexibility through the new debt structure.

FINAL TAKEAWAY

Advance Auto Parts management reiterated a disciplined, multi-year turnaround strategy centered on merchandising, supply chain, and store improvements, while reaffirming 2025 sales and margin guidance. The company addressed tariff headwinds and shifted its EPS outlook lower due to increased interest expenses from its debt restructuring, but remains optimistic about growth potential in the Pro segment, progress in SKU expansion, and ongoing supply chain efficiencies. Management continues to monitor consumer response and macro volatility, reinforcing a cautious yet constructive outlook for the remainder of the year.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/aap/earnings/transcripts]

MORE ON ADVANCE AUTO PARTS

* Advance Auto Parts, Inc. (AAP) Q2 2025 Earnings Call Transcript [https://seekingalpha.com/article/4813647-advance-auto-parts-inc-aap-q2-2025-earnings-call-transcript]
* Advance Auto Parts, Inc. 2025 Q2 - Results - Earnings Call Presentation [https://seekingalpha.com/article/4813645-advance-auto-parts-inc-2025-q2-results-earnings-call-presentation]
* Advance Auto Parts Could Be A Bargain Bin Value Stock [https://seekingalpha.com/article/4809189-advance-auto-parts-could-be-bargain-bin-value-stock]
* Advance Auto Parts beats top-line and bottom-line estimates; lowers FY25 EPS outlook [https://seekingalpha.com/news/4485192-advance-auto-parts-beats-top-line-and-bottom-line-estimates-lowers-fy25-eps-outlook]
* Advance Auto Parts Q2 2025 Earnings Preview [https://seekingalpha.com/news/4484805-advance-auto-parts-q2-2025-earnings-preview]