Advance Auto Parts Inc (AAP) Q3 2026 Earnings Call Transcript

Shane will begin today's call with an update on the business and progress on our strategic priorities. Later, Ryan will discuss results for the third quarter and revise guidance for full year 2026. Following management's prepared remarks, we will open the line for questions. Now, let me turn the call over to our CEO, Shane O'Galley.

Thank you, LaVesh, and good morning, everyone. I want to begin by thanking our frontline team for their continued dedication to serving our customers. During the third quarter, the operating environment remained volatile, and while sales performance was below our expectations, our trend stabilized following the late Q2 slowdown and improved meaningfully as the quarter progressed. Consumer spending continued to be influenced by stretched household budgets, elevated energy costs, and persistent inflation. In Q3, comparable sales declined by approximately 1%, including a decline of approximately 2% during the first eight weeks before turning positive in the final four weeks. Looking at performance by channel, as we discussed last quarter, there was a larger-than-anticipated slowdown in DIY sales in the final four weeks of Q2 that weighed on our overall results. During that final period of Q2, DIY sales declined nearly 7%, marking the channel's low point for the year. Performance improved sequentially through Q3 as our teams intensified their focus on in-store service execution. We saw positive signs of improved customer experience, with net promoter scores exceeding 80, up from the high 70s range last quarter, While attachment rates increased to the mid-30% range from approximately 30% previously. Alongside these improvements, DIY declines narrowed from mid-single-digit levels at the beginning of the quarter to low single-digit levels in the final four weeks. In the pro channel, comparable sales increased in the low single-digit range with positive performance in each month and growth accelerating to approximately 3% during the final four weeks. Main Street Pro continues to be the primary driver of pro growth and market share, and we remain excited about the opportunity ahead. Moving to profitability, we delivered an adjusted operating margin of 4.5% for the third quarter and have generated $109 million of year-to-date free cash flow. These results reflect the continued progress of our productivity initiatives despite the headwinds created by volatile demand and in the inflationary cost environment. Looking at the balance of the year, we have updated our guidance to reflect typical fourth-quarter seasonality associated with the business. We expect to finish the year with approximately 1% comparable sales growth and have also reaffirmed the midpoint of our prior adjusted operating margin guidance range. We remain on track to deliver two consecutive years of annual comparable sales growth and more than 350 basis points of operating margin expansion since announcing our strategic plan at the end of 2024. The strong profitability is also translating to solid cash generation, and as a result, we have raised full-year free cash flow guidance to approximately $150 million, implying more than $400 million of year-over-year growth in 2026. Our initiatives are supporting stronger cash generation in a soft-demand environment, and we expect to stay focused on driving operational improvements across the business while building a stronger foundation for sustainable, profitable, long-term growth. Let's turn to an update on our strategic initiatives, which we believe can support stronger sales growth, continued margin expansion, and improved cash generation. Let's begin with assortment availability. The merchandising team remains focused on expanding our parts catalog and increasing SKU coverage across our network. Our AI-enabled assortment tools continue to improve our ability to align inventory with local demand and allocate the right parts to each store. At the same time, we are working to simplify catalog access to enable our store teams to serve customers more efficiently. We continue to deepen relationships with existing vendors and add new partners to expand assortment while securing competitive product costs. Through disciplined cost management and merchandising actions, we have maintained product margins despite inflationary supply chain costs, supporting nearly 100 basis points of year-to-date gross margin expansion. We are putting added emphasis on assortment planning for our new Market Hub network. These locations are gaining traction with field teams and customers who are recognizing the benefits of more reliable product availability. The square footage allocated to backroom hard parts in these Market Hub locations is more than five times compared to the average store, which helps us significantly improve availability for our customers. We also remain on track to complete the rollout of our centralized pricing and promotion platform. This tool is expected to provide more localized pricing insights and better visibility into customer behavior and transaction trends. We expect to strengthen the execution around seasonal promotions and drive stronger partnership between merchandising and field teams to access market growth opportunities. Turning to supply chain productivity. Our distribution center productivity initiatives remain on track. We have identified key process improvements and expect to implement the changes across all our DCs in stages through the middle of next year. We expect these changes to support margin expansion next year through lower handling costs, improved shipment accuracy, and shorter lead times. Transportation optimization is another significant opportunity within our supply chain productivity efforts. By consolidating volume with fewer carriers, we expect to generate more than 20 basis points in cost savings, even in a flattish sales environment. These savings represent just the first phase of a broader opportunity to improve transportation productivity and margins over time. We continue to improve how we allocate products across our network of stores and market hubs, and as part of this work during the third quarter, we formed a dedicated team to develop a multi-year roadmap for inventory planning and allocation across the network. We believe this effort will support stronger working capital efficiency and stronger cash generation in the future. I also want to provide an update on the development of our Market Hub network. Year-to-date, we have opened 13 Market Hubs, bringing the network to 46 locations. We remain on track to open 15 to 20 Market Hubs this year, extending Market Hub coverage to more than 70% of our store network. We are making steady progress towards our goal of operating 60 market hubs by mid-next year, which will provide faster, same-day parts availability for most of our U.S. store network. Next, store execution and DIY. Our field leaders remain focused on foundational training and proactive customer engagement to improve service execution in stores. These efforts are contributing to stronger customer interactions, larger basket sizes, and improved sales productivity. DIY units per transaction grew in the low single-digit range during Q3, supporting average ticket growth that exceeded same-skew inflation and helping offset some of the transaction pressure in the business. While meaningful opportunity remains, the improvement in these operating metrics gives us confidence that stronger execution can support improved sales performance over time. Earlier this year, we evaluated store team member activities to better understand which tasks create the most value for customers and where productivity can be improved. We are using the findings to modernize our workforce management tools to improve how we allocate labor and drive additional productivity.

We are also investing in technology to improve team member productivity and enhance customer service.

Earlier this year, we introduced Zebra devices to streamline store operations and inventory management. During Q3, we deployed Reliascan across most of our stores. Reliascan is a new, modernized, check engine diagnostic tool, which is offered as a free service to our customers. This tool helps team members identify potential vehicle issues and recommend the appropriate parts, improving both service efficiency and customer experience. With these tools, we are empowering our teams to deliver better customer service, which is expected to translate into stronger transaction performance over time. Finally, I want to provide an update on the Pro Channel. Over the last year, we have made a deliberate pivot to gain share across Main Street Pros, our largest pro segment, representing approximately 80% of total pro sales. Main Street remained the primary driver of pro growth during Q3, with comparable sales outperforming total pro growth by approximately 100 basis points. This growth is being fueled by new customer acquisition and movement of existing customers toward higher weekly spending tiers. We believe these results reflect the combination of improved parts availability, consistent delivery times under 40 minutes, and strong execution by our field team. Going forward, we are initiating new work streams to enhance our segmentation of Main Street customer accounts, and we are reorganizing service territories to capture additional growth opportunities. To conclude, I want to reiterate that our strategic plan is driving positive change across the organization. The improvement in our operating metrics indicates progress on building a stronger foundation for sustainable growth. We remain cognizant of the macro pressures impacting the customer spending in the near term, while we also ensure our teams deliver strong customer service and progress on our strategic efforts. I will now hand the call over to Ryan to discuss our Q3 results and full-year guidance. Ryan?

Thank you, Shane, and good morning, everyone. I want to begin by thanking our frontline associates for their commitment to improving service execution in our stores. We reported net sales of $2 billion for the third quarter, including a comparable sales decline of 1.2%. Pro channel sales increased in the low single digit range during Q3, with Main Street growth outpacing overall results and strengthening throughout the quarter. The optimization of our national account portfolio represented an approximately 50 basis point headwind to total company sales and a 100 basis point headwind to pro sales. The consistency in pro performance was more than offset by a low single digit decline in DIY as persistent inflation and higher gas prices continue to impact household spending. Moving to the cadence of sales, our performance improved meaningfully as the quarter progressed following the softer trends experienced earlier in the summer. In late Q2, comparable sales had declined approximately 3%, primarily driven by a 7% decline in DIY sales. Moving into Q3, in the first eight weeks, comparable sales declined approximately 2%. Including DIY down more than 4%. In the final four weeks, sales growth turned positive, with DIY declines narrowing to a low single-digit range. Our two-year sales trend also accelerated as the quarter progressed, alongside improving customer experience and engagement metrics, which we believe reflects stronger execution across the business. Transaction performance was the primary driver of the acceleration within the quarter as our field teams intensified their focus on service and supporting increasingly value-conscious customers. For the quarter, average ticket was positive and included same SKU inflation of approximately 4%, which was consistent with Q2 and largely driven by increased commodity costs and market-related price adjustments. Turning to category performance, results were strongest in maintenance and failure categories, including motor oil, batteries, fluids, filters, and wipers. Hard parts categories, including engine and undercar, remain soft as value-conscious consumers continue to defer larger repair projects. Pivoting to margins, adjusted gross profit was $899 million, or 44.7% of net sales for Q3, resulting in 16 basis points of contraction compared to the same period last year. As experienced last quarter, the combination of lower DIY sales mix, higher fuel costs, and supply chain expense deleverage accounted for approximately 40 basis points of pressure. In addition, an unfavorable mix shift to lower margin categories, particularly into motor oil and away from hard parts categories, drove approximately 20 basis points of product mix headwind. LIFO expense came in at $11 million compared to $33 million in the same period last year. The benefit of lower LIFO expense was partially offset by the reversal of warehousing benefits associated with our inventory actions last year. On a net basis, this added approximately 40 basis points to gross margin, which is relatively consistent with last quarter. Shifting to expenses, adjusted SG&A was $808 million, or 40.2% of net sales, resulting in approximately 25 basis points of year-over-year leverage. Expenses declined approximately 2%, reflecting our disciplined expense management, even in a volatile sales environment. Adjusted operating income came in at $91 million, or 4.5% of net sales for Q3. Resulting in approximately 10 basis points of year-over-year margin expansion, excluding the benefit of IEPA refunds from last quarter's results, our Q3-2026 adjusted operating margin rate is one of our strongest margin quarters since we began executing the strategic plan two years ago. Adjusted diluted earnings per share was $0.79 compared to $0.92 in the prior year period. The Q3 adjusted effective tax rate of 29% was above our expectations, primarily reflecting an adjustment related to finalization of prior year tax return and lower tax credit benefits following the expiration of the Work Opportunity Tax Credit Program. Moving to cash flows. Year-to-date, we have generated $109 million of free cash flow, which is a significant expansion in cash generation compared to an outflow of approximately $280 million last year. The improvement reflects stronger profitability and working capital management, lower cash costs related to last year's store optimization activity, and tariff refunds. Our balance sheet continues to be in a solid position. We ended the quarter with a cash balance of approximately $3.1 billion and net debt leverage of 2.2 times, well within our targeted range of two to two and a half times. Turning to full year 2026 guidance, let's start with net sales. For the full year, net sales are projected at approximately $8.5 billion. We have revised full-year comparable sales guidance to approximately 1%. While we are encouraged by the recovery in sales compared to the softer trends experienced during the summer, weather and year-end consumer spending patterns during Q4 could create some variability in performance through the balance of the quarter. As a reminder, Q4 last year included an extra week, which generated $132 million in sales, which will not repeat this year. Excluding the impact of the extra week from last year's results, we expect Q4 2026 net sales to grow around 1% year-over-year. During the quarter, we will also cycle through approximately 50 basis points of markdown headwinds from the front-room transition activity last year, and our forecast assumes same-skew inflation in the 3.5% to 4% range. Moving to margins, we have narrowed full-year adjusted operating income margin guidance to a range of 4% to 4.3%. This range reaffirms the midpoint of our prior guidance range and continues to imply more than 150 basis points of operating margin expansion compared to last year. We continue to expect full-year gross margin of approximately 45%, implying over 100 basis points of expansion. For the fourth quarter, we expect gross margin in the mid-44% range and below Q3 levels. This expectation reflects typical business seasonality and continuation of the sales mix and supply chain headwinds experienced over the last two quarters. Regarding LIFO charges, we now expect full-year expenses of $50 million. which is approximately $10 million higher than our prior expectations, driven by the impact of high commodity costs flowing through inventory. For SG&A, we expect full-year expenses to decline in the low single-digit range year-over-year, contributing between 20 to 40 basis points of leverage. This is largely due to cycling of approximately $90 million in non-recurring expenses from 2025. including approximately 50 million related to the extra week last year. Excluding the impact of the extra week from last year's results, we expect fourth quarter SG&A to grow in the mid-single-digit range year-over-year. While this implies a step-up in SG&A growth compared to our year-to-date trend, it is consistent with our expectations from the beginning of the year. The increase is primarily driven by higher occupancy and rent expenses for new stores and market hubs. In addition, our SG&A forecast includes higher real estate taxes, general inflation in insurance and lease costs, along with higher fuel costs for our delivery fleet compared to last year. Moving to other items and guidance, we've revised adjusted diluted EPS guidance to a range of $2.75 to $3.10. The revised EPS outlook includes $5 million in additional interest income from the increase in benchmark interest rates. For the full year, we now expect approximately $105 million of interest income, slightly offset by a higher tax rate of approximately 28% based on year-to-date trends. We continue to plan for pre-tax interest expense of approximately $210 million for the full year. Shifting to cash flow, we continue to expect 2026 capital expenditures of approximately $300 million with spending allocated to new stores and Greenfield Market Hub growth, store infrastructure upgrades, and strategic investments. We have reaffirmed our store and Market Hub opening plans for the year. Through the third quarter, we have opened 18 new stores and 13 Market Hubs. For the year, we continue to plan for 30 to 35 new stores and 15 to 20 market-up openings. We have raised our full-year 2026 free cash flow guidance to approximately $150 million, implying more than $400 million of year-over-year growth, driven by stronger profitability and disciplined working capital management. As part of our broader productivity efforts, we are undertaking additional actions to improve our ability to generate cash flow. This includes simplification of sales collection processes and effective management of vendor payables through improved inventory ordering and allocation practices. We expect these actions to strengthen the foundation of the business and position us to generate stronger free cash flow over time. To conclude, I want to thank our frontline associates for their continued focus on customer service in the quarter. Their efforts are supporting improved conversion while our pro team continues to drive share gains across Main Street. I will now hand the call back to Shane.

Thank you, Ryan. We exited Q3 with improving sales trends, stronger customer metrics, and continued progress on productivity. I'd like to close by thanking the advanced team for their hard work during the quarter. Thank you. Operator, we can now open the line for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. And to withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from Greg Mellick with Evercore ISI. Your line is open. Please go ahead.

Thanks, guys, and appreciate the color and the improvement in trends. I wanted to dig deeper into inflation and tariffs and sort of the dynamic between the two. So it sounds like same-skew inflation, 400 BIPs and 3Q, and you expect it to stay there in 4Q and into next year? And what level of effective tariff rates do you expect as part of that?

Yeah, thanks, Greg. I'll jump in here on this one. So I think our implied guide for Q4, we expect inflation roughly around 3.5% going forward. I think on a two-year basis, those are consistent trends for us and the industry. We had 4%, obviously, in Q3, but I think roughly around 3.5%. Next year, first half probably continues in a similar trajectory. I think there's some of the costs, underlying costs, commodity costs will still be in there. So we'll see that at least in the first half, but a lot to play out over the next couple of months, but at least seeing some of that pressure.

I think we'll update in February when we think on a full year basis.

The cost also just around commodity cost is really the incremental inflation that we saw in the quarter. And right now, we expect that to kind of continue through Q4 and probably into the first part of next year.

Got it. That's the motor oil was 100 BIPs. Is that a fair estimate?

Yeah, that's it. Yeah, about 100 BIPs from motor oil. Really, that's a big area.

Great. And then just the follow-up on tariffs. I know you had last quarter. Are we now done with any IEPA rebates that's fully done, or is there still something flowing through?

Yeah, the bulk of it was there. It's very immaterial in Q3. I think like $600K we got, and we're pretty much done. I think the work that we have left to do is working with our vendor partners on the tariff refunds they've got, and that's ongoing work that we're working with our vendors on. But our direct tariffs, we took most of that in Q2. That was about $26 million. Thank you.

Good luck. Appreciate it. Got it. Thank you.

Your next question comes from Michael Lasser with UBS. Your line is open. Please go ahead.

Good morning. Thank you so much for taking my question. For those of us who have been watching Advanced Auto Parts for a long time, we have seen ebbs and flows on the DIY traffic side. You know, there's been a lot of action. Taken to try and improve the performance, like the loyalty program, new branding campaigns, and yet it still seems to be a challenge and perhaps even the Achilles heel of the business. So, Shane, you've been at this for a little while. Where do you think you can improve the performance in traffic? Because while you're doing a better job with the stores or the customers you're getting, that traffic decline seems to be where there's a bit of a challenge right now.

Yeah.

Good morning, Michael. Thank you for the question. And before I jump into it, I want to thank our team, and we'll go to your question. I've been traveling extensively, most recently in Kansas, Kansas City, Buffalo, Rochester. And one of the elements that helps with DIY is the engagement and excitement that comes from our team. And I see that every time I'm in the stores. We're seeing that, importantly, as it relates to conversion. And think about that in terms of our net promoter score. Think about that in terms of our attachment rate. And think about that in terms of the breadth of products that we're selling. So I know that when we get team members into our stores, we are doing better. Than we have in the past as it relates to creating those sales. So as it goes to awareness, we do have the programs that you mentioned. The loyalty program has been a success for us. Advance to the good parts is well received. From here, we'll continue to build on that with what we're doing on assortment availability. What we're doing as it relates to our web experience. What we're doing in terms of training for our team members, what we're doing in terms of working with our vendors, broadly engaging across our network to make sure that people know that when they come to Advance, we're going to have the parts that they need. Additionally, we've been working with paid search, which we think is an important dimension of how we can engage with the DIY customer, how we optimize the different terms, the geography in terms of where we do that. We think that will contribute to our success as well. Your point's correct in that traffic was down, but we feel better about where it's going to go in the future. We feel good about DIY. We feel good about the assortment. And in particular, as I'm sure we'll get to the call, what we're doing with Main Street Pro.

Yeah, Michael, I'll just add, what we really liked seeing in the quarter was the improvement in our comp trend and DIY was all driven by transaction improvement. So a lot of things we're doing, we started to see, really started to resonate with DIY. Now, the industry has been down, the consumer's been pressured. So traffic's down more industry-wide, but we feel like the actions we're taking, while they're kind of a follow to pro actions we've been taking, we're starting to see some traction there. We still have a ways to go. So we like the rollout of Reliascan. That has been received really well in getting us another capability in our stores where our team members can drive great service for the customers of Wellcam. Okay.

Last point, I'll just add, and I'm sure you'll, yeah, one just quick one. You know, the thing that has factored in is where the consumer is on their sort of relative sense of well-being. We play in the low to middle-income household. Those families have been stressed, the inflationary pressures, energy costs. You know, they're through the tax refund that they had earlier in the year. So how they respond here in the coming months, I think will play a role as well. But we'll continue to do the things that we just mentioned to be prepared when they do come in the stores.

Understood. My quick follow-up question is advances experience is a bit different than what we're seeing from some of the other players in the sector where their SG&A per store costs are rising significantly. Obviously, advances SG&A expenses were down year over year in the most recent quarter. How sustainable is that, and what risk does it create moving into next year that some recapture of investment needs to be made in order to ensure that the quality of the customer experience that Advance is offering is consistent with the other players in the space? Thank you so much.

Yeah. Yeah, good question, Michael. I'll just start. Know that As it relates to where we sit today, that's come through some discipline and rigor on SG&A. That's come from looking where we have productivity opportunities that may have been previously explored by our competition that still yield benefit for us. So if there's things that we can do on the productivity front that create that cost savings, that hasn't come at the expense of how we think about investment, how we think about training, how we think about opening up our market hubs, how we think about investing in inventory. So I don't want anyone to construe that we're not making the efforts and investments in the front line, in the stores, to create a foundation for growth. And so all of those things are going on as it relates to how we're thinking about things.

Yeah, I'll add a couple things. So if you think about Q4, Q4, if you back out the 53rd week, RSG&A is actually going to be up,

grow year-over-year, mid-single-digit growth.

And that's our investment in our market jobs, new stores. In key markets, wages, frontline team members, we are investing in the frontline where the customer interacts with us. We are finding opportunities and productivity in non-customer-facing areas. Indirect spend, we talked about in the past, we continue to drive savings there as contracts come up for renewal. We negotiate them. We have RFPs ongoing. Where that spend is not customer-facing, that's where we're driving opportunities and more productivity. We're investing in key markets and new capabilities. I think the other thing is, as we go into next year, just think about SG&A still being disciplined, but probably growing at the rate of sales, so somewhere around that as we think about next year. I'll give you an example of the investments we are making and why we're able to shift tasking hours to selling hours. When I first got here and Shane first got here, we'd look at competitors, and they had things like Zebra devices and associates being able to walk in the aisles and leverage technology like that. We didn't have that at Advance Auto Parts at the time. We have that now. Every store has Zebra devices. We continue to invest in that technology. That helps drive out some of the tasking hours in our stores to be more customer-facing selling and drive productivity. And we have more to come going into the next year around that as Tony continues to drive that shift from tasking to selling. So we're excited about that. I would think you'd expect SG&A going forward to grow around the same rate of sales as we continue to find other productivity.

Your next question comes from Samian Goodman with Morgan Stanley. Your line is open. Please go ahead.

Hey, good morning, guys. My first question, it's how do you navigate rising supplier pricing or cost of goods with your goals of driving margin savings through category management and promotional savings?

Yeah, thanks, Jimmy. And just around, you know, rising costs and other things that come in, commodity pressure, we've been able to handle some of that. I think we haven't passed all of that along. Some of that I think is, you know, I would call it kind of temporary until kind of the Iran war and other things kind of subside and maybe things get to a more reasonable state. Also, one thing to keep in mind is The industry is fairly rational around pricing, and we've seen that continue. We will be a rational player in this industry and continue to move price when we can. Our goal is that we remain competitive from a pricing standpoint. We'll continue to execute that plan. So as the pricing industry evolves or what's out there, we'll continue to maintain that strategy. So far, traditionally, this has been able to pass along those prices. Right now, we're not fully passing them along, so it's putting some pressure on gross margin. But some of those costs that are in there, we think, are more transitory and temporary, and at some point, will subside. Do think some of those… Right now, we'll continue into next year in some form, but still a lot to play out the rest of the year.

Last thing, I'll just build on that. We're in the APEX show earlier this week, meeting with suppliers. We continue to get a lot of excitement from the supplier community, supporting advances, comeback. Bruce Darns, who leads our merchandising efforts, is still pushing through as it relates to the different forms and dimensions that go into our contracts to make sure we're capturing best prices and minimizing cost inflation wherever possible. And sometimes that includes where we will pivot to one supplier over another, trying to be more agile in that regard than we've been in the past. Coming off of that show, feel good around the support we're getting with vendors, and by the way, relaying them as well, that we need to be competitively positioned vis-a-vis our competition.

Okay, and a follow-up, you know, the release says that transformation is beginning to gain traction. On the surface, it looks like it's more expressed through margin so far than sales, which is fair. Can you talk about, is there a holdback to it? Is it hubs? Is it process? Is it systems? Is there something that you need to get this moving more meaningfully on the top line?

Yeah, I think if you look at the prepared remarks across the key dimensions, I think the industry runs on assortment availability. I think that's the most critical component. The do you have it is the first question that every customer asks. We're making strides there. We've added 100,000 SKUs year to date. We will continue to drive gap closures in our assortment and think about that in terms of adding products across nodes. I think the market hub plays a very important role here. So we'll be 60 by mid-2027 is where we'll sit as it relates to market hubs. So we'll have 70% coverage by the end of the year. Think about that as 85,000 SKUs available same day. So continued effort there. By the way, we've got AI work on the assortment side of the house to make sure we're scanning across the landscape of what relative availability looks like both with us relative to where we were and what's available elsewhere. So that's one. On supply chain, we just finished the consolidation to the 15 DCs. So transportation comes online. So those contracts have been bid out. So we'll see those benefits coming next year. But internal process improvement in supply chain. So keep in mind, if you're a DC that just picked up the volume from a closed DC, you may potentially have hundreds of stores that you now have to route. We have to make sure the assortment's reflective of what those stores need. So now the optimization that occurs on everything from yard management to put away to pick to outbound to accuracy, all those are underway. And what we've got going on with our supply chain leadership team feel good about. And then on the growth side, you heard Michael's question on DIY, certainly want to be leaning in there, but also very excited about Main Street Pro. Our growth accelerated there to where we're in the low to mid single digits. And we think that's an area we can win and look forward to.

Your next question comes from Steve Forbes with Guggenheim Securities. Your line is open. Please go ahead.

Good morning, Shane, Ryan. Shane, maybe just a follow-up on the Market Hub operations. I was curious if you could maybe just set the stage here in terms of, you know, what are the operational sort of – what do the operations look like today? Like, are all 46 locations assisting with same-day order fulfillment? You know, how often are those delivery runs occurring? To each store within the trade area. And then I think it would be helpful if you can maybe contextualize the investments you're making behind the field teams to ensure they can actually drive, share, and ROI.

Okay.

Thanks, Steve.

Good to hear from you. Market hubs. So think about it as 85,000 SKUs. When we first started, the most important thing was to look at the radius of supported stores to make sure that we could get there same day, but do so effectively. So same day service isn't as helpful to you if you've got to order by eight and you don't get it until four. So we've looked at that to make sure that you can get not just product same day, but multiple times inside of the same day. So route refinement in terms of how often we go from the market hub to the supported stores and how far that geography is in terms of time has been an area that we're refining. We continue to refine how we pick inside of a market hub to speed how quickly those orders get ready, how quickly our team members can find them accurately. So a lot of efforts going on in the back of the house there. And by the way, inclusive of that is how we rack a market hub and how many SKUs we can put in there. We've got 85,000 in there today. We want to make sure, as we think about it, is that the right number? Can it be higher? Which SKUs do we have in there? So lots of continued optimization. Remember, this is a brand new node for us that when Ryan and I came to the company, didn't exist. So lots of continued effort underway there to be better for that same-day service. In terms of what we're doing on the store side to be ready, think about that in terms of what we're doing on labor. So this is both in terms of how labor gets allocated and then what activities people spend their time doing. We had a lot of tasks that got sent to the stores. And didn't necessarily come in the right sequence or didn't appreciate what the other activities, e.g. taking care of customers, needed to occur in the store. So we have a control tower now. We're streamlining comms down to the stores to make sure that their selling time is preserved and that the tasks that they need to do are ones that they need to be doing and not ones that can be done elsewhere or not at all. We want to make sure you've got training, onboarding. We want to make sure that in terms of leadership engagement, and to think about that in terms of what our DMs do and rely on them every day, a lot of activities going on there. So Tony Hurst leading our store efforts and feel good about how he's bringing discipline and rigor and process to the stores that'll set us up for success going forward.

That's helpful. And maybe just a quick follow-up. Obviously, great to see the free cash flow improvements. So with that, curious if you can maybe give us a preview on 2027 in terms of how you're thinking about planning for growth capital, both in terms of CapEx plans, right? And I think you already sort of commented expense to grow in line with sales.

Yeah, obviously a little premature. We'll come back in February to talk more about it. But just to give you some thoughts around next year, CapEx will be at or higher than what we're doing today. We've got four market hubs we're building out next year. We've got, by the way, on market hubs. We're going to have 70% coverage by the end of the year, and the majority of our stores will be covered by the middle of next year. I mean, we're really excited about that. We'll continue to invest in those market hubs. We're going to open up more new stores, and we'll provide guidance in February around that as we continue to grow that channel. So expect CapEx to be focused more than probably this year and focused on stores, market hubs. Technology within the stores, really driving that customer experience, more parts availability, that's where we're focused. This is a parts business, and we're going to have more parts closer to the customer, and that's part of the supply chain investments we're making around market hubs, the new stores, inventory assortment, technology capabilities in our stores to drive greater selling hours versus tasking. That's where our CapEx is going to be going next year. So expect that to be up. Free cash flow, obviously not going to get to that just yet, but we don't expect to go backwards next year. So I would expect we can continue to invest in the stores, continue to invest in the business and our initiatives, and still maintain positive free cash flow.

Your next question comes from Brian Nagel with Oppenheimer. Your line is open. Please go ahead.

Hey, guys. Good morning. Thanks for taking my questions. So the first question I have is you discussed in the prepared remarks, the acceleration in business, acceleration in sales growth through the quarter. I just wanted to go a little more in detail, kind of what underpinned that. Was it more, you know, something was happening specifically in advance, or was it more of an industry dynamic? Then, has that uptick in sales growth persisted here into the final quarter of the year?

Yeah, Brian, I'll jump in first here. So the improvement in Q3, I think it was a combination of both improving industry trends, but then better store service execution, absolutely saw it in the stores. We also shifted and improved our value messaging to the consumer. And I think we talked about that in Q2, that we were a little bit behind on that, as we saw the consumer really gravitating towards that and others in the industry doing that. We improved our value messaging, and then we've made a lot of progress on our initiatives in the stores and across merchandising as well. The fundamentals of this industry still remain strong. We see consumers cannot delay spending on maintenance too long. I think some of those maintenance categories, they definitely outperformed in Q3, and we saw some of that delayed spending return. That's just part of the industry. They can only put it off so long. So we did see a lot of improvement coming from our initiatives. We also think that there was some industry trends that helped as well. Coming into Q4, the DIY side, it's a little bouncy. This was early in Q4. It's a little bouncy. It had a hurricane, overlaps, everything else, overall kind of flattish. But the trend in pro continues to accelerate, low to mid-single digits. On the pro side, and really think about Main Street continuing to drive that. I mean, we still have 100 basis points of headwind from national accounts on our pro business, and to see the Main Street continue to accelerate into the quarter, it just indicates the things we're doing around inventory assortment availability, the service in our stores, just really excited to see what we're doing on the pro side and seeing those initiatives come to life.

No, that's very, very helpful. Second question I have. So just got back from Las Vegas, the Apex show, and you spoke with a number of your competitors and companies within the space. And, you know, hearing, I think most people are hearing is, you know, there is a kind of a renewed source of inflation now, particularly on the commodity side. So I guess the question I want to ask is, make sure we hear it from advance, is that, you know, obviously you're seeing this, but I mean, to what extent is this being passed along to consumers? What do you think the duration of that is? And then also from an input cost, you know, how should we think about, you know, just this inflation now and, you know, maybe the extra pressures putting upon the operations of advance, you know, going into the balance of this year and even into 27?

Yeah, Brian, I'll just take that on kind of the numbers side of it. Shane talked a little bit about what he's hearing from the vendors at Apex, because we had a lot of good conversations while we were out there. But just from an inflationary standpoint, first, our philosophy around pricing isn't changed. We're going to remain competitive. It did put some pressure. Mainly, this is commodity. So we had about 100 basis points really related to oil in the quarter from inflation increase. So we did pass along some pricing. It didn't offset completely the cost that we're seeing just yet. But we expect some of those costs to be somewhat transitory. And as things settle down, we'd expect some of those costs to come down because they are commodity based. The overall cost in our structure, we did see a mix and cost pressure impact on gross margins. Think of supply chain was about 20 basis points just from those costs that are in there, whether that's fuel or that's surcharges at the port. We did see a DIY mix had about 20 basis points. And then the product piece, where you see product costs mainly in commodity areas, was about 20 basis points. So all in, we had about 60 basis points of pressure. About 40 of that is really driven by some of these extra costs, whether that's supply chain, surcharge, extra kind of costs and fuel. The fuel component of it was about five basis points in Q3. The rest of those charges came from really kind of surcharges, import freight-type costs. We expect about 10 basis points of fuel impact in Q4, but we still expect overall you'll see some supply chain pressure in those costs. I do think that will carry into the first part of next year. I don't think that's going to go away that fast, so I would expect a little bit of that carrying in some form into the first half of 27, but obviously we'll lap that in the second half of 27 as well.

Just a word on, I think energy is an area that everybody's watching as it relates to inflation, and we met with all the oil companies. For Group 1s and Group 2s, I think that's where, you know, Ryan alluded to, you might see some moderation, maybe even decreases. I think the tricky piece for us is a lot of our motor oil products use a Group 3 rate-based stock, and that's not as readily available. And so that could be something, as Ryan said, that's sustained for a bit, so we'll keep an eye on it. But reiterating, as Ryan said, key for us, we are a fast follower as it relates to price. And so we look at what goes on in the market. We look at where the market clearing pricing is, and that's where we price. We're not looking to lead the market higher. We're not looking to lead the market lower. We're a rational actor, defeating in the industry, and that's how we think about where we price.

Your next question comes from Michael Baker with DA Davidson. Your line is open. Please go ahead.

Thanks. If I could, I know we're not giving 2027 guidance, but you've given a couple pieces. In the past, you said 100 basis points of margin expansion. Now you're saying SG&A about flat. So can we still get 100 basis points? I suppose we'd all have to come from gross margin, and particularly based on what you just said about some first-half pressures from higher energy costs in the first half. Does that make 100 basis points difficult next year? Thanks.

Yeah, Michael, appreciate that. I mean, we absolutely, you know, the 100 basis points framework is really driven out of our pillars, merchandising initiatives, SG&A, labor productivity, supply chain specifically, and we expect that to continue in the next year. I think a couple things to think about as you're building that 100 basis points. So, yes, those initiatives that we have in there, we believe will drive the 100 basis points, but a couple things. One, next year, We won't have 30 basis points of variability from my EPA refund. So that's something I know you guys are already thinking about that. But that's something we'll cycle over. I do think we've got about 50 basis points of headwind from inflationary fuel costs or just deleveraging on weaker sales that's been impacting this year. I think in some form that's going to continue in the next year. So I think the 100 basis points, absolutely. We've got initiatives in play. Probably more think about what's the base you build that off of going into next year. You've got IEPA tariff refunds that won't cycle. You've got some continued pressure. So think of. Maybe like the second half of this year being more of a good proxy to build 100 basis points off of as you think about next year. Obviously, we'll give more from a guidance in February. But as relative to what we're doing to drive the 100 basis points, we like the initiatives we've got in place. And just think of transportation. And we're going to see already 20 basis points of impact from the work we've done on transportation and supply chain. And we still have merchandising initiatives that will come forward next year as that merch team continues to drive productivity in our categories. So we like what we're seeing there from our initiative perspective, just probably more thinking about the base that you're building off of for next year around how that 100 basis point shows up.

Okay, thanks. That makes sense. If I could ask one more, you talked about tariffs before, and so you've gotten your refunds, but vendors are getting refunds. Are you seeing them pass those on to you? And then what is your general plan in terms of what to do with any lower costs you get on things outside of commodity? Does that generally flow to the bottom line? I know historically it does, but are you seeing others take price down, actually? I'm just wondering how you think that. Those refunds flow through for you guys and relative to your competitors.

All right. I'll just jump in on kind of the cost and commodity pressure piece, and I'll also let Shane weigh in a little bit just on the conversations we're having with the vendors around the IEPA tariff refunds. So commodity, one thing, obviously, we have a pricing strategy, so we'll be competitively pricing our industry. These prices tend to be a little stickier in our industry, so it'll be interesting to see how this plays out if those commodity costs do come down. I think in oil, though, they do move up and down more than any other category. In most categories, they tend to be sticky.

In oil, though, they tend to move down a little bit

with the change in commodity costs. So that probably moves more than any other category in our industry. So you might see some movement there. But obviously, we'll just wait to see how the industry plays out and where prices are. We'll remain competitive regardless. But as far as the conversations around Aiba Terra refunds, those are ongoing conversations we have with the vendors. And work with them. And so I don't know if there's anything you want to mention.

So we spend a lot of time recently at APEX and just in general talking to the vendors and making sure that we're getting competitive pricing. We just had a situation with one vendor where we secured a significant reduction in terms of where we're buying the product. Some of that could be where they secured value from their tariff refunds or could just be as we go through our PLR process. So we know that if there's an opportunity for us to source at a lower price, we're going to push for that, whether that comes from being bid competitively against another vendor or just comes from them being able to provide some of their tariff refunds to us. So we always want to be cost position in terms of where we buy at a competitive position. And then as it relates to where that money goes, again, we're a fast follower on the pricing side in a rational market where we want to be priced competitively is how we think about it. So we're not going to lead lower or lead higher, but we'll go where it goes. I think commodities do tend to have some fluctuation that can go up and down. But as a reminder, where we're able to improve our margins, we'll do that. And by the way, where we're able to also use the monies to invest in the business on all the different things around our three pillars, whether that's getting market hubs or stores or inventory positioning. So those monies that we can secure that can help us accelerate what we're doing with our comeback, we can do that as well.

Your next question comes from Zach Fadim with Wells Fargo. Your line is open. Please go ahead.

Hi, good morning. Can you talk about the P&L impact from shifting your mix more to a Main Street Pro versus a larger or regional pro? How much has your mix shifted since you started this process, and then how do you compare the gross margin and operating margin difference between the two for you?

Yeah, so we haven't specifically called out that, but, you know, the shift from national accounts to Main Street Pro, obviously, is a benefit. There's a little bit of a DIY headwind offset. So think of, while we've seen some benefit from the Pro-Knicks shift, we've also seen some offset because we've shifted higher into Pro and DIYs come down. So, they kind of... Net themselves out a little bit, but definitely a higher quality, productive sale from a Main Street Pro customer versus, you know, the national account, just the flow through is a little bit better. So we did mix higher. A little bit, but that's offset a little bit by the DIY pressure that we get there. But we like the profitability. We like the service levels, the ability to serve the Main Street. We like the growth that we see in that space. And that's helping drive some of our free cash flow as well.

Yeah. Hey, Zach, Shane, a couple of quick things there. You know, we're 50-50 Pro DIY is a good way to think about the business. And you can think about Main Street as about 80, it's about 80% of the pro business. So that can help you triangulate a bit about what it looks like in aggregate. And to just relay an anecdote, I went and saw a pro customer in South Carolina growing his business, using our TechNet program, geographically proximate to one of our stores. And so as you think about that relationship where we provide services that give them benefits that they couldn't get, that help them look more like a scale player, and referring to TechNet here, where they can offer a nationwide warranty program for repairs, you know, even if the customer wants their car, And so those types of programs that we offer, the connectivity that comes from our outside sales team, and we have hundreds of men and women visiting shops every day, building relationships, we think that's a great place for us to be and a place where we're doing well. And so we're going to continue to put emphasis there as we go forward.

And, Shane, and Ryan, you mentioned Q4 gross margin implied mid-44 range, which would be up a little year over year. You talked about the 60 basis points from mix and energy from Q3 that likely drips into Q4. In terms of other moving parts we should keep in mind, you know, you talked about LIFO. What about capitalized cost? And when we comb through all of the noise, and there's a lot of it, where would you say your core margin is X oil today?

So LIFO will have a little bit of an offset from warehouse capitalization. So LIFO is a tailwind. It will be offset by warehouse capitalization costs. So kind of almost net neutral on that. We will have some of the pressure coming in on supply chain and other areas. Oil is about 20 basis points in Q3. Expect that to be kind of similar into Q4, but we've obviously moved some pricing in that space, so it's not as big of a drag, but it is a mixed drag. Those are lower margin categories and also been high-performing sales categories for us, so I'd expect that to continue into Q4 as well.

Your last question comes from Stephen Zaccone with Citi. Your line is open. Please go ahead.

Great. Thanks very much for squeezing me in. I wanted to follow up on Zach's question here about the Main Street Pro. You know, you cited 80% penetration. Where does that go longer term? Like, where is the opportunity? And then the drag from national accounts. 100 bps in the fourth quarter. Is that still the right way to think about the potential drag as we look to 2027?

So let's talk about where it goes. There are hundreds of thousands of shops. In the United States, two bays, three bays, four bays, one location, two locations. So we still have customers that we can go visit today that we're not getting their business and say, hey, let's talk about what Advanced Auto Parts can do for you. And as we customize our offering and our efforts towards those accounts, there's a success that comes from bringing them on board into the portfolio. So that's really important. The second thing is, think about where we sit on the call list. So we may have a customer who's buying, I don't know, call it $500 a week from us, and it may be from one particular category that we expose them to, hey, here's our offering in another category, and here's why the price, quality, and service are all what you're looking for, and so we can move up that call list over time to where they might buy $1,000 a week or $2,000 a week or more than that. So so there's a there's a there's two levers that we can pull as it relates to what we do in Main Street. And having the right focus on that is important. And so that's where I feel good about where we're going there in terms of going to business on both of those.

As far as 100 basis points, most of that is this year. The early part of Q1, you'll have a little bit of overlap. But for the most part, we will have cycled most of the major decisions. I mean, we're right where the industry is at from a mixed standpoint. We like this spot, and we'll continue to focus on mainstream, but we like the national accounts in our portfolio. I think we're in a good place right now, but I would expect that overhang, that headwind to kind of diminish the early part of KeyWine and then not be there.

Okay, thanks. The follow-up is a lot of questions here about margins and SG&A. What I was curious on, when you think about the SG&A productivity that you've seen, are we at the point in the business that any sort of savings you get from a productivity standpoint, you really start to, you know, need to invest that in the business or see the acceleration of the top line? Or is there a point where you could still see some of these productivity savings net flow to the bottom line?

Well, we'll continue to see some – we'll be disciplined. We'll still see some productivity go to the bottom line. But we are investing, and we're investing in the front line. We're investing in key markets. We're investing in market hub expansion. We're investing in new stores. We're investing in capabilities within the stores. The idea of shifting tasking to selling hours and being more productive with our hours in the stores. That's the area we're investing our SG&A. So we're finding opportunities along the way. We'll still have some next year. I'll give you one example. Today, we operate in three cloud providers. That's a change. That's a high-cost situation there. So we will structure and streamline that, and that will drive some technology savings as well. So we're finding opportunities in different areas. Across many of our back office functions and teams, and we'll drive productivity there so we can invest in the front line. And that's, you look at the service levels, being above 80 on NPS, our time to serve, our pros continue to expand. Investing in trucks, investing in technology in our stores, our attachment rates continuing to go up mid-30s. So that doesn't come from cutting costs necessarily in the stores. That comes from leaning in there.

Yeah, I'll just add what Ryan and his finance team do is they put a lot of rigor on looking at the relative return across the investment. So think about what we're doing with Assortment or Supply Chain Stores Pro. We look at the different initiatives and we say, hey, what's the return that's going to come from that? What's the investment? What's the timing? What's the difficulty? And that, I think, is a dimension that'll help us as well.

Okay. This concludes our Q&A portion, and we'll pass it back to Shane for closing remarks.

Great. Thank you very much. I want to thank everybody. I want to thank our team for what they're doing. I want to reiterate that I, and on behalf of everybody in advance, we're excited about our future. We know what we need to fix as a company. We're looking at Assortment. We're looking at supply chain. We're looking at our stores. We're looking at Pro. We're making progress in each of We'll look forward to coming back to you in the new year, updating you on what we've done for the remainder of this quarter and what we're going to do in 2027. So thanks for joining us today, and we'll see you soon. Take care.

This concludes today's call. Thank you for attending. You may now disconnect.