Advance Auto Parts

We will discontinue analyst coverage of Advance Auto Parts on or about April 20.

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We raise our fair value estimate on Advance Auto Parts’ shares to $58 from $56 as we increase our 2026 earnings forecast on margin gains from its efficiency efforts.

In the fourth quarter, Advance Auto Parts posted 1.1% comparable sales growth in 2025's final quarter. Against an easy comparison due to large restructuring charges in 2024's fourth quarter, Advance's adjusted operating margin reached 3.7% on better product margins through sourcing optimization and expense cuts. Comparable sales growth was at the low end of its implied guidance— for which the firm blamed the economy—but adjusted operating margin was marginally better than our 3.6% forecast.

Looking ahead, we anticipate that tariff costs can be offset with price increases as demand for auto parts is price inelastic. Tariffs do pose a risk to economic conditions and consumer spending generally, but demand seems to be holding up well. For 2026, we project 1.5% comparable sales growth (unchanged) and $2.94 in EPS (up from $2.47). Based on our 2026 estimates, our valuation implies a P/E of 20 and an EV/EBITDA of 6.

With over 4,000 store and branch locations across North America, Advance is a leading auto-parts retailer in an industry with little demand variation from year to year. We think favorable tailwinds such as continued growth in the average vehicle age (now above 12 years in the US) and modest growth in the vehicle fleet should position the aftermarket auto-parts industry for 3% annual growth in the coming years. By channel, we expect sales to professional customers to drive the bulk of the aftermarket industry’s growth trajectory. In contrast, DIY sales growth remains in the flat to 2% range amid ongoing vehicle complexity.

While our forecast for end-market demand is favorable, we expect Advance to underperform the broader industry over our 10-year explicit forecast. We think that Advance competes with at least one other national auto-parts retailer in most of the markets it serves. As it embarks on its third strategic turnaround in just 15 years, we think its large competitors will continue expanding their store footprint and investing to improve distribution speed. Advance has already suffered market share losses over the past 10 years, and we think this trend is likely to continue as Advance lacks a compelling proposition to its customer base when considering product availability and price relative to nearby operators. We model growth in Advance’s same-store sales of around 1.5% over the next decade (versus our 3% industry forecast).

We expect margins to remain under pressure as Advance struggles to ward off competition from AutoZone, O’Reilly, and Napa. We model midcycle EBITDA margin of about 7% (versus an 8% average over the preceding 10 years), trailing well behind our midcycle forecasts for AutoZone and O’Reilly in the low-20s. We think O’Kelly should be able to reduce the firm’s corporate cost structure, but we think weak top-line growth will limit the potential benefits from fixed-cost leverage.

We expect capital expenditures to land around 3.5% of sales, or about $75,000 per store. Capital spending is being directed toward improvements in distribution infrastructure and store remodels.

Despite operating in an attractive industry with steady end-market demand, we do not believe Advance Auto Parts benefits from a durable competitive edge. The retailer’s underperformance compared with larger peers (such as AutoZone and O’Reilly and narrow-moat Genuine Parts) could simply be due to operational mismanagement and rectified under new leadership. However, the firm’s ostensible turnaround efforts have required three management teams and have been underway for over 15 years. As such, we don’t think Advance’s prolonged underperformance will be an easy fix, nor do we believe its main competitors will back down from their pursuit of market share, making us wary of the retailer’s ability to outearn its capital cost.

We think signs of Advance’s underperformance were evident in the early 2000s. During 2000-09, when 70%-80% of the firm’s sales were to DIY customers, Advance’s average operating margin was around 7.5%, lagging that of AutoZone (16%) and O’Reilly (11%). After the acquisition of Worldpac and Carquest in 2014, which skewed Advance’s sales mix to about 60% professional, the firm’s underperformance seems to have intensified.

While Advance grappled with integrating its namesake stores with Carquest and Worldpac into a unified supply chain for the last 10 years (resulting in inferior product availability and a lagging cost position), we believe larger peers were expanding their operational lead. Since 2014, Advance’s store and branch presence has remained mostly steady at around 5,000 locations (about 4,000 of which operate under its namesake banner), while AutoZone and O’Reilly have expanded to over 6,000 domestic storefronts each. More importantly, those two leading auto-parts retailers have continued investing heavily in their existing store base and distribution infrastructure. AutoZone and O’Reilly have been aggressively pursuing growth in the professional channel, where product availability and speed of service are critical competitive factors to winning business as repair shops seek to turn over service bays as quickly as possible. We think lackluster investment on the part of Advance—capital expenditures per store averaged $50,000 annually over the last decade versus AutoZone and O’Reilly at $90,000 and $100,000, respectively—contributed to its ongoing issues with product availability and service speed, which has translated into a weak top line and market share losses.

On a comparable sales basis, Advance’s sales growth over the last 10 years has averaged 1.3%, trailing the industry’s 3%-4%. The auto-parts retail industry still sees some competition from small operators, as the Auto Care Association estimated that the top four retail chains (AutoZone, O’Reilly, Advance, and Napa) in 2023 operated just 50% of the industry’s aggregate store base of over 39,000 locations. However, we think that the largest players frequently compete in many of the markets they serve. As such, while Advance’s scale should give it an advantage over smaller independent retailers, we don't believe this translates into a durable competitive edge, as consumers’ cost to switch is virtually nonexistent, and larger and better operators consistently loom nearby.

We think Advance’s abysmal adjusted operating margin relative to competitors (10-year average of about 5%, well below the 19%-20% levels of AutoZone and O’Reilly) is partially attributable to years of poor operational execution and lower investments in distribution. While the sheer dollar value of investment alone should not prevent an economic moat, we think Advance’s financial capacity to expand its store base and improve its supply chain is inferior, which should position AutoZone and O’Reilly to widen the operational and financial performance gap with Advance in the future. Advance does have opportunities to improve operating efficiency by cutting corporate and supply chain redundancies. Still, its flagging market position and its financial underperformance dating back to the early 2000s make us skeptical of its ability to rival its larger peers. While Advance has brought in a new leadership team to rationalize its existing distribution assets (which we expect will be a multiyear process), its larger competitors are planning to grow their store bases further and build out their hub-and-spoke distribution networks.

Advance’s supplier relationships have also proved to be an ongoing disadvantage as the firm's accounts payable terms are less favorable than those of its most prodigious peers. The working capital divergence strikes us as precarious and likely is a partial culprit for Advance’s product availability woes. Starboard touted better accounts payable management as an economic value creation lever during its 2015 activist campaign. However, changes never materialized despite Starboard Value CEO Jeff Smith eventually serving as chair of Advance’s board.

Without a clear product availability or efficiency advantage, Advance’s customer appeal appears precarious, particularly as it often competes with other auto-parts retail giants. As the firm embarks on its third turnaround strategy in about 15 years, we are skeptical of its long-term competitive standing, which seemingly continues to deteriorate based on poor returns on invested capital. Specifically, we calculate that Advance’s adjusted ROIC including goodwill was in the low single digits in each of the past three years, well below our 8% weighted average cost of capital estimate.

Advance’s top line should benefit as its sales mix skews toward the professional end market, which is a faster-growing channel than DIY.

Consumer demand for auto parts tends to be agnostic to the broader economic environment, which should enable stability in financial results.

Advance may be able to leverage its size relative to independent and regional auto-parts retailers, allowing it to maintain or take market share.

Electrification of the vehicle fleet could stymie demand for aftermarket auto parts as EVs have fewer moving parts than vehicles with an internal combustion engine.

Online competition may pressure Advance’s DIY business as online channels typically have less overhead expense and can thus offer lower prices on auto parts.

Advance’s accounts payable terms continue to prove disadvantageous relative to its larger peers and will continue to weigh on its product availability.