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Advance Auto (AAP) reported surprisingly strong 1Q25 results, crushing EPS expectations and edging past revenue estimates, igniting a skyrocket move higher for the stock. The huge gains also reflect low expectations amid a multi-year turnaround plan involving a massive store optimization program that includes closing over 500 corporate stores and exiting more than 200 independently owned locations. Furthermore, a relatively high short interest, estimated at 10–12% of the float, has amplified today’s rally through a short squeeze as bearish investors cover positions amid the unexpected beat.

Historically, AAP has underperformed competitors O'Reilly Automotive (ORLY) and AutoZone (AZO), which have consistently delivered operating margins of 18–20% compared to AAP’s low-to-mid single digit range, hampered by self-inflicted wounds such as supply chain inefficiencies, chronic out-of-stock issues, a higher cost structure, and the poor integration of past acquisitions (Carquest in 2013, General Parts Intl in 2014).

• The turnaround plan, initiated under CEO Shane O’Kelly in 2023, focuses on three pillars: store operations, merchandise, and supply chain, with key actions including the $1.5 bln sale of Worldpac to streamline the business and a multiyear supply chain consolidation to address inefficiencies. Until 1Q25, the plan showed limited progress, with prior quarters reflecting weak comps of -1.0% in 4Q24 and -2.3% in 3Q24, alongside disappointing earnings due to bloated expenses and soft demand.
• AAP's Q1 EPS beat stems from early benefits of supply chain improvements, cost reduction initiatives, and the completed store optimization program, which was executed ahead of schedule, reducing 727 locations to standardize operations and boost labor productivity. Still, AAP continues to face industry headwinds, including soft demand for DIY projects and discretionary items like performance parts and accessories, which have weighed on sales as consumers prioritize essential repairs.
• Q1 comps of -0.6% outperformed guidance of -2.0%, while also marking an improvement from recent quarters. The positive trend is primarily driven by strength in the Pro business, which saw eight consecutive weeks of U.S. Pro comp sales growth. The Pro segment, serving professional installers, benefited from improved inventory management and expanded hub store distribution, enhancing product availability. Strength was evident in core categories like brakes, filters, and batteries, which align with essential repair needs.
• AAP reaffirmed its FY25 guidance, projecting adjusted EPS of $1.50–$2.50, net sales of $8.40–$8.60 bln, with comparable store sales expected to range from +0.5% to +1.5%, signaling a return to positive growth. This reaffirmation bolsters investor confidence, as it suggests management’s belief in sustained progress despite prior skepticism about the turnaround’s viability. Before Q1, analysts and investors doubted AAP’s ability to close the performance gap with competitors, given its lower margins, but the reaffirmation, coupled with the Q1 beat, signals that supply chain and cost-cutting measures are gaining traction.

In conclusion, AAP's Q1 outperformance reflects notable success in its turnaround plan, driven by supply chain improvements, store optimization, and Pro segment strength, amplified by a short squeeze. However, risks persist, including ongoing DIY weakness, competitive pressures from ORLY and AZO.