Advance Auto Parts (AAP)

Auto parts and accessories retailer Advance Auto Parts (NYSE:AAP) reported Q1 CY2025 results beating Wall Street’s revenue expectations, but sales fell by 6.8% year on year to $2.58 billion. The company expects the full year’s revenue to be around $8.5 billion, close to analysts’ estimates. Its non-GAAP loss of $0.22 per share was 68% 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 is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $8.90 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’s revenue declined by 1.3% per year over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it closed stores.

This quarter, Advance Auto Parts’s revenue fell by 6.8% year on year to $2.58 billion but beat Wall Street’s estimates by 3.2%.

Looking ahead, sell-side analysts expect revenue to decline by 4.6% over the next 12 months, a deceleration versus the last six years. This projection is underwhelming and suggests its products will see some demand headwinds.

Number of Stores

The number of stores a retailer operates is a critical driver of how quickly company-level sales can grow.

Advance Auto Parts listed 4,285 locations in the latest quarter and has generally closed its stores over the last two years, averaging 3.4% 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 provides a deeper understanding of this issue because it measures organic growth at brick-and-mortar shops for at least a year.

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 year on year same-store sales were flat. This performance was more or less in line with its historical levels.

At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.

Advance Auto Parts’s unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it averaged a decent 35.8% gross margin over the last two years. Said differently, Advance Auto Parts paid its suppliers $64.19 for every $100 in revenue.

Advance Auto Parts’s gross profit margin came in at 42.9% this quarter, up 14.2 percentage points year on year and exceeding analysts’ estimates by 4.1%. Advance Auto Parts’s full-year margin has also been trending up over the past 12 months, increasing by 4.8 percentage points. If this move continues, it could suggest the company has less pressure to discount products and is realizing better unit economics due to stable or shrinking input costs (such as labor and freight expenses to transport goods).

Despite the consumer retail industry’s secular decline, unprofitable public companies are few and far between. Unfortunately, Advance Auto Parts was one of them over the last two years as its high expenses contributed to an average operating margin of negative 4.8%.

Looking at the trend in its profitability, Advance Auto Parts’s operating margin decreased by 10.4 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.

Advance Auto Parts’s operating margin was negative 5.1% this quarter. The company's consistent lack of profits raise a flag.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Advance Auto Parts’s full-year EPS turned negative over the last five years. In a mature sector such as consumer retail, we tend to steer our readers away from companies with falling EPS because it could imply changing secular trends and preferences. If the tide turns unexpectedly, Advance Auto Parts’s low margin of safety could leave its stock price susceptible to large downswings.

In Q1, Advance Auto Parts reported EPS at negative $0.22, down from $0.67 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Advance Auto Parts’s full-year EPS of negative $0.69 will flip to positive $2.14.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Advance Auto Parts has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.3%, subpar for a consumer retail business.

Taking a step back, we can see that Advance Auto Parts’s margin dropped by 8 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 a big investment cycle.

Advance Auto Parts burned through $198 million of cash in Q1, equivalent to a negative 7.7% margin. The company’s cash burn increased from $46.27 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

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 2.6%, 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 $247.9 million of cash over the last year, and its $3.67 billion of debt exceeds the $1.67 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.

We were impressed by how significantly Advance Auto Parts blew past analysts’ EPS expectations this quarter. We were also glad its full-year EPS guidance trumped Wall Street’s estimates. Overall, we think this was a very solid quarter with some key areas of upside, especially amid fears of economic weakness and tariff headwinds. The stock traded up 22.3% to $38.25 immediately following the results.

Updated: May 22, 2025 at 6:46 AM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Advance Auto Parts.

Advance Auto Parts falls short of our quality standards. For starters, its revenue has declined over the last six years, and analysts expect its demand to deteriorate over the next 12 months. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its operating margins reveal poor profitability compared to other retailers.

Advance Auto Parts’s P/E ratio based on the next 12 months is 14.6x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $40.15 on the company (compared to the current share price of $38.25).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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