Story Stocks^®

Advance Auto (AAP -15%) cannot get itself out of reverse following Q4 results as the economic environment continues to throw wrenches in its turnaround plan. The aftermarket auto part retailer projected downbeat Q1 revenue guidance and another quarter of declining same-store sales growth. AAP has struggled mightily over the past couple of years, especially when stacked against its competition, including AutoZone (AZO) and O'Reilly Automotive (ORLY). Both of these companies warned that the end consumer remains sensitive to the current economic situation, clipping demand for DIY projects and discretionary items, such as performance parts and accessories. Still, AAP's rivals have been able to steer through a lot of the dust clouding near-term demand, illuminated by their stock prices heading over +25% higher in the past year compared to AAP's 25% loss over that same period.

• AAP is currently taking on a comprehensive overhaul, shuttering roughly 700 stores by the middle of this year while accelerating its pace of new store openings. The company hopes its efforts of a more optimized and remodeled footprint will lure customers back from the competition. While the store closings are going to result in a material loss of revenue -- AAP reiterated its previous FY27 revenue outlook of $9.0 bln, consistent with its FY24 total of $9.1 bln -- the company expects a positive low single-digit percentage comp in FY27, an improvement from the -0.7% drop in FY24.
• However, AAP's road ahead is anything but smooth. During Q4, discretionary categories remained pressured, hindering Pro and DIY demand, both of which posted negative comp growth. As a result, total comps in the quarter slid by -1%.
• Still, management noted that it is still in the early stages of stabilization, illuminated by comps improving modestly from a -2.3% drop last quarter. AAP anticipates results will gradually improve as it moves through 2025, evidenced by its FY25 projections, including revenue of $8.4-8.6 bln and comps of +0.5-1.5%, respectively, representing noticeable improvements over Q1 revenue and comp guidance of $2.50 bln and -2%, respectively.
• Throughout 2025, AAP will be focused on a few strategic pillars. For instance, AAP is conducting reviews for front and back room assortment to secure products at better costs. It anticipates savings from lower costs to mount throughout 2025, with a large benefit to be realized in 2H25. AAP is also ensuring it has the proper parts situated closer to the customer to help boost store performance. Meanwhile, AAP is consolidating distribution centers to drive incremental productivity enhancements.

AAP's Q4 report was underwhelming. However, this was mostly expected, given the company finalized its turnaround plan just one quarter ago. Skepticism over the company's ability to achieve its three-year roadmap is likely fueling most of today's selling pressure, especially following downbeat Q1 guidance. Even though AAP is confident that performance will improve as the year progresses, too many uncertainties tied to the economy lie ahead. As such, it may take another quarter or two of clear progress toward AAP's goals before turnaround conviction takes hold among market participants.