Why Should You Consider Retaining Advance Auto in Your Portfolio Now?

Advance Auto Parts, Inc. AAP, is a leading automotive parts provider in North America, serving both the do-it-yourself or DIY and professional installers.

While AAP expects some hiccups due to rising debt and competition, strategic initiatives, supply-chain improvements and store expansion efforts are expected to support sales recovery, margin improvement and gradually strengthen overall growth prospects.

Factors to Drive AAP’s Prospects

In March 2025, the company achieved a key strategic milestone by completing its store footprint optimization program. Now, about 75% of its stores are located in markets where it holds the number one or two position in terms of store density. Building on this foundation, the company has launched a bold new phase of expansion, aiming to strengthen its presence in these high-potential regions and capture a larger share of the more than $150 billion total addressable market. In 2026, the company plans to open 40-45 new stores.

Supporting this expansion is the company’s effort to consolidate its supply chain into a single unified network. The strategy focuses on simplifying and standardizing distribution center operations, deploying labor performance and transportation management tools, and converting smaller legacy distribution centers into market hubs. AAP currently operates 16 distribution centers and expects to operate 15 in the United States by the end of 2027. It plans to open 10-15 market hubs in 2026 as part of its broader goal of launching more than 100 new distribution points over the next two years to support growth acceleration.

Operational improvements are already translating into better financial performance. Adjusted operating income from continuing operations reached $73 million in fourth-quarter 2025, reflecting an approximately 870-basis-point improvement year over year, driven by lower SG&A expenses. The company expects SG&A expenses to decline in 2026, contributing 20-50 basis points of leverage, with first-quarter expenses projected to fall 3-4% as store closure impacts ease. Continued initiatives to improve parts availability and customer service are expected to support comparable sales growth of 1-2% and expand adjusted operating margin to 3.8-4.5%, up from 2.5% in 2025. AAP targets a 100-basis-point margin expansion in 2027 and maintains medium-term goals of a 7% adjusted operating margin and mid-40% gross margin.

Further enhancing execution, the company launched its updated operating model across all stores in fourth-quarter 2025. The model optimizes driver and store labor hours and improves vehicle allocation to better match demand, enhancing coordination between sales and store teams. Combined with new store openings and a 40-minute delivery commitment, the initiative is expected to drive faster transactions, improved labor efficiency and accelerated growth across professional accounts.

AAP Exposed to Rising Debt, Competition and Spending Pressure

While operational momentum is improving, several challenges continue to pose risks. AAP’s stretched balance sheet remains a concern, with long-term debt increasing to $3.41 billion as of Jan. 3, 2026, from $1.8 billion as of Dec. 28, 2024. The company’s long-term debt-to-capital ratio stands at 0.61 compared with the auto sector’s 0.17, limiting financial flexibility.

Demand pressures are also evident in the DIY segment, where financially strained consumers are reducing discretionary purchases. Although the automotive aftermarket benefits from essential maintenance demand, near-term softness continues to weigh on DIY sales trends.

At the same time, higher investment requirements may pressure cash flows. AAP is increasing capital expenditures to support store expansion, supply-chain enhancements and merchandising initiatives aimed at improving inventory availability, along with store and technology upgrades such as roofing, HVAC and system improvements. The company expects capital expenditures of around $300 million in 2026, up from $252 million in 2025.

Competitive intensity remains another headwind, as Advance Auto faces pricing pressure from national and regional automotive retailers, such as AutoZone, O’Reilly Automotive, Pep Boys and CSK Auto Corporation, along with growing online competition and increasing parts complexity.

Conclusion

Advance Auto Parts is advancing its turnaround strategy through store optimization, supply chain transformation and an updated operating model designed to improve efficiency, parts availability and customer service. Planned store expansion, market hub development and cost-control initiatives are expected to support comparable sales growth and margin recovery, strengthening the company’s long-term growth trajectory and competitive positioning.

However, rising debt levels, higher capital expenditures and ongoing price competition pose notable risks. Pressure in the DIY segment and increased spending requirements, along with its present Zacks Rank #3 (Hold), suggest a cautious near-term outlook dependent on consistent execution and demand stabilization.

Advance Auto Parts, Inc. Price, Consensus and EPS Surprise

Advance Auto Parts, Inc. price-consensus-eps-surprise-chart | Advance Auto Parts, Inc. Quote

Key Picks

Some better-ranked stocks in the auto space are RENAULT RNLSY, Magna International MGA and Strattec Security STRT, each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for RNLSY’s 2026 sales and earnings implies year-over-year growth of 14.4% and 176.3%, respectively. The EPS estimates for 2026 and 2027 have improved 34 cents and 18 cents, respectively, in the past 30 days.

The Zacks Consensus Estimate for MGA’s 2026 sales and earnings implies year-over-year growth of 2.3% and 18.7%, respectively. The EPS estimate for 2026 and 2027 has improved 8 cents and 14 cents, respectively, in the past seven days.

The Zacks Consensus Estimate for STRT’s fiscal 2026 sales and earnings implies year-over-year growth of 2.1% and 16.2%, respectively. The EPS estimate for fiscal 2026 and fiscal 2027 has improved 85 cents and 48 cents, respectively, in the past 30 days.

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This article originally published on Zacks Investment Research (zacks.com).

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