Advance Auto Parts (AAP)

Auto parts and accessories retailer Advance Auto Parts (NYSE:AAP) beat Wall Street’s revenue expectations in Q3 CY2025, but sales fell by 5.2% year on year to $2.04 billion. The company expects the full year’s revenue to be around $8.58 billion, close to analysts’ estimates. Its non-GAAP profit of $0.92 per share was 23.4% above analysts’ consensus estimates.

Company Overview

Founded in Virginia in 1932, Advance Auto Parts (NYSE:AAP) is an auto parts and accessories retailer that sells everything from carburetors to motor oil to car floor mats.

Cars are complex machines that need maintenance and occasional repairs, and auto parts retailers cater to the professional mechanic as well as the do-it-yourself (DIY) fixer. Work on cars may entail replacing fluids, parts, or accessories, and these stores have the parts and accessories or these jobs. While e-commerce competition presents a risk, these stores have a leg up due to the combination of broad and deep selection as well as expertise provided by sales associates. Another change on the horizon could be the increasing penetration of electric vehicles.

Competitors offering auto parts and accessories include AutoZone (NYSE:AZO), O’Reilly Automotive (NASDAQ:ORLY), Genuine Parts (NYSE:GPC), and private company Pep Boys.

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $8.63 billion in revenue over the past 12 months, Advance Auto Parts is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale.

As you can see below, Advance Auto Parts struggled to generate demand over the last six years (we compare to 2019 to normalize for COVID-19 impacts). Its sales dropped by 1.9% annually as it closed stores.

This quarter, Advance Auto Parts’s revenue fell by 5.2% year on year to $2.04 billion but beat Wall Street’s estimates by 0.7%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. Although this projection suggests its newer products will catalyze better top-line performance, it is still below the sector average.

Number of Stores

A retailer’s store count often determines how much revenue it can generate.

Advance Auto Parts listed 4,297 locations in the latest quarter and has generally closed its stores over the last two years, averaging 4.6% annual declines.

When a retailer shutters stores, it usually means that brick-and-mortar demand is less than supply, and it is responding by closing underperforming locations to improve profitability.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales is an industry measure of whether revenue is growing at those existing stores and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Advance Auto Parts’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat. This performance isn’t ideal, and Advance Auto Parts is attempting to boost same-store sales by closing stores (fewer locations sometimes lead to higher same-store sales).

In the latest quarter, Advance Auto Parts’s same-store sales rose 3% year on year. This growth was a well-appreciated turnaround from its historical levels, showing the business is regaining momentum.

Advance Auto Parts has great unit economics for a retailer, giving it ample room to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an excellent 42.5% gross margin over the last two years. That means Advance Auto Parts only paid its suppliers $57.55 for every $100 in revenue.

This quarter, Advance Auto Parts’s gross profit margin was 43.3%, up 1 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Operating margin is an important measure of profitability for retailers as it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.

Although Advance Auto Parts was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 4.8% over the last two years. Despite the consumer retail industry’s secular decline, unprofitable public companies are few and far between. It’s unfortunate that Advance Auto Parts was one of them.

Analyzing the trend in its profitability, Advance Auto Parts’s operating margin decreased by 11.2 percentage points over the last year. Advance Auto Parts’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q3, Advance Auto Parts generated an operating margin profit margin of 1.1%, up 1.1 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Advance Auto Parts broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, we can see that Advance Auto Parts’s margin dropped by 3.5 percentage points over the last year. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s in the middle of an investment cycle.

Advance Auto Parts’s free cash flow clocked in at $200.7 million in Q3, equivalent to a 9.9% margin. This result was good as its margin was 8.3 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Advance Auto Parts historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 0.1%, lower than the typical cost of capital (how much it costs to raise money) for consumer retail companies.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Advance Auto Parts burned through $124.7 million of cash over the last year, and its $5.26 billion of debt exceeds the $3.17 billion of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Advance Auto Parts’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Advance Auto Parts until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

It was great to see Advance Auto Parts’s full-year EPS guidance top analysts’ expectations. We were also glad its same-store sales rose and its EPS outperformed Wall Street’s estimates. On the other hand, its gross margin fell short of Wall Street’s estimates. Overall, this print was mixed but still had some key positives. The stock traded up 7% to $59.01 immediately after reporting.

Updated: December 4, 2025 at 9:37 PM EST

When considering an investment in Advance Auto Parts, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Advance Auto Parts falls short of our quality standards. First off, its revenue has declined over the last three years. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its declining EPS over the last three years makes it a less attractive asset to the public markets. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Advance Auto Parts’s P/E ratio based on the next 12 months is 20.5x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $54.30 on the company (compared to the current share price of $53).