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After another earnings miss and a surprisingly steep sales miss in Q3, Advance Auto (AAP +8%) finalized a sweeping overhaul of its operations. The auto parts retailer is looking to close over 500 corporate stores and 200 independent locations alongside a handful of distribution centers. In connection with the closings, AAP will accelerate the pace of new store openings, likely anticipating that a refreshed look and more lucrative location will pull consumers away from the competition, including AutoZone (AZO) and O'Reilly (ORLY). AAP is also fortifying its product assortment, bringing parts to market faster and improving availability while managing prices and promotions to enhance gross margins.

AAP anticipates its actions will result in net sales of $8.4-8.6 bln in FY25, growing this to around $9.0 bln by FY27. While the FY27 figure is identical to AAP's FY24 projection, the company is shuttering 700 locations by mid-2025, removing a massive source of revenue. As such, AAP predicts achieving the same revenue from FY24 but with considerably less, which should provide a decent boost to earnings. AAP also expects comparable sales growth to inch higher over the next few years following its -1.0% estimate in FY24, targeting +0.5-1.5% in FY25 and positive low-single-digits in FY27.

• In the interim, the macroeconomic environment continues to hinder DIY demand, with comps sliding by a low-single-digit percentage in Q3. However, a new unfavorable development unfolded in Q3 as AAP's typically strong Pro business also endured a low-single-digit drop. As a result, AAP reversed its string of improving same-store sales performance, registering a -2.3% decline in Q3. This dragged total revenue down by 3.2% yr/yr to $2.15 bln, falling noticeably short of consensus.
  • It is worth mentioning that two one-off events clipped comp growth by roughly 50 bps in Q3. First, AAP was adversely impacted by the global CrowdStrike system outage, which resulted in AAP being temporarily unable to serve customers. Second, Hurricane Helene disrupted sales at over 300 locations.
• Due to a favorable yr/yr comparison and a stabilization of product costs, AAP expanded its gross margins by 540 bps yr/yr to 42.3% in Q3. Adjusted operating income from continuing operations (AAP divested its Canadian Worldpac business this year) also improved mightily from -3.3% in the year-ago period. However, due to the one-off headwinds in Q3, AAP's adjusted EPS went red at $(0.04).

AAP has been amid a turnaround for some time, gradually making inroads on its initiatives to increase free cash flow and become more competitive. We mentioned in late February that AAP's check engine light was still flashing even after making a few repairs, likely resulting in a few more quarters before a turnaround can accelerate. However, AAP may finally be turning a corner. We noted in our preview that comprehensive changes could be coming given how far AAP has sunk this year, and outlining a sufficient plan of action could quickly flip investor sentiment. Nevertheless, given AAP's past turnaround struggles, it may be better to wait another quarter to see if its initiatives stay on track.