Advance Auto Parts (AAP, Financial) saw an 8% rise in its stock after announcing a major operational overhaul following a disappointing Q3 earnings and sales report. The auto parts retailer plans to close over 500 corporate and 200 independent stores, along with a few distribution centers. To counterbalance these closures, AAP aims to accelerate the opening of new stores, hoping to attract customers from competitors like AutoZone (AZO, Financial) and O'Reilly (ORLY, Financial). Additionally, AAP is enhancing its product lineup, improving market availability, and managing prices and promotions to boost gross margins.

AAP projects net sales of $8.4-8.6 billion for FY25, with an increase to approximately $9.0 billion by FY27. Despite closing 700 locations by mid-2025, the company expects to maintain FY24 revenue levels, potentially boosting earnings. AAP forecasts comparable sales growth to rise from an estimated -1.0% in FY24 to +0.5-1.5% in FY25, reaching positive low-single-digits by FY27.

• In Q3, the challenging macroeconomic environment negatively impacted DIY demand, with comparable sales declining by a low-single-digit percentage. AAP's Pro business also experienced a low-single-digit drop, leading to a -2.3% decrease in same-store sales and a 3.2% year-over-year drop in total revenue to $2.15 billion, missing consensus estimates.
  • Two unusual events affected Q3 comp growth by about 50 basis points: a global CrowdStrike system outage temporarily halted customer service, and Hurricane Helene disrupted sales at over 300 locations.
• Despite these setbacks, AAP expanded its gross margins by 540 basis points year-over-year to 42.3% in Q3, aided by favorable year-over-year comparisons and stabilized product costs. Adjusted operating income from continuing operations improved significantly compared to the previous year. However, due to Q3's one-off challenges, AAP's adjusted EPS turned negative at $(0.04).

AAP has been working on a turnaround, aiming to increase free cash flow and competitiveness. Although progress has been slow, recent comprehensive changes could shift investor sentiment. However, given past challenges, it may be prudent to observe another quarter to ensure initiatives remain on track.