• Net Sales: $2.1 billion from continuing operations, a 3% decrease compared to Q3 last year.
• Gross Profit: $908 million or 42.3% of net sales, an improvement of approximately 540 basis points over the prior year.
• Adjusted SG&A: $891 million, flat year over year, with a 130-basis point deleverage attributed to lower sales.
• Adjusted Operating Income: $16.7 million, 80 basis points as a percent of net sales.
• Adjusted Diluted Loss Per Share: $0.04 compared with a loss of $1.19 per share in the prior year.
• Comparable Sales Growth: Pro comp was positive on a two-year basis, with DIY and Pro channels declining in the low single-digit range.
• Store Closures: Plan to close more than 500 Advance stores and exit relationships with over 200 independent locations.
• Operating Margin Goal: Targeting approximately 7% adjusted operating margin by year-end 2027.
• Cash Position: Approximately $2 billion in cash following the sale of Worldpac.
• Capital Expenditures: Expected to be between $175 million to $225 million for the full year 2024.

• Warning! GuruFocus has detected 7 Warning Signs with AAP.

Release Date: November 14, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Advance Auto Parts Inc (NYSE:AAP) has outlined a strategic plan to achieve an adjusted operating margin of approximately 7% by the end of 2027, driven by merchandizing excellence, internal supply chain transformation, and store efficiency.
• The company successfully completed the sale of Worldpac, adding $1.5 billion of additional liquidity to its balance sheet, which strengthens its financial position.
• AAP has identified opportunities to improve profitability through a comprehensive productivity review, including store footprint optimization and supply chain consolidation.
• The leadership team has been strengthened with new hires bringing deep automotive and retail expertise, which is expected to drive the turnaround efforts.
• AAP is focusing on core retail fundamentals and has initiated several strategic actions, such as improving parts availability, enhancing customer service, and optimizing pricing and promotions.

Negative Points

• Q3 results came in below expectations due to persistent sales softness, macroeconomic headwinds, and specific events like hurricanes and a CrowdStrike outage.
• Net sales from continuing operations decreased by 3% compared to Q3 last year, reflecting ongoing challenges in consumer spending.
• The company plans to close more than 500 stores and exit relationships with over 200 independent locations, which could impact market presence and employee morale.
• AAP's adjusted operating income from continuing operations was only $16.7 million, indicating significant room for improvement in profitability.
• The company faces a significant operating margin gap compared to industry peers, which it aims to narrow through cost reductions and operational improvements.

Q & A Highlights

Q: How much reinvestment have you assumed from the cost savings into the business over the next couple of years, and will you maintain your vendor financing program? A: We are targeting to maintain the $2.8 billion capacity for our supply chain finance. In terms of reinvestment, we are at a good SG&A level and have factored in incremental CapEx, moving up to $300 million on average per year. Most cost savings will be brought to the bottom line, offset by inflation.

Q: Is Advance Auto planning to compete as a leaner, more regional organization, given the store closures and market exits? A: We are confident in our ability to compete effectively. We perform well in markets where we have density, and post-store closures, we will be number one or two in terms of density in 75% of our markets. The focus is on winning and returning to growth, including opening new stores.

Q: Are there one-time costs included in Q4 non-GAAP that won't recur, and how much of the 200 basis points of operating margin expansion in 2025 is due to discrete laps? A: Q4 will see some disruption due to the turnaround, but strategic initiatives are adjusted out of the guide. The 125 basis points in Q3 were atypical items like the hurricane and CrowdStrike impact. The 200 basis points expansion in 2025 is driven by clear business actions and objectives, not just laps of one-time costs.

Q: Can you break down the expected EBIT improvement from COGS in 2025 and the three-year plan? A: The improvement is driven by better first costs through vendor partnerships, pricing and promotional improvements, and supply chain efficiencies. The merchandizing excellence portion will likely contribute more to COGS improvement than supply chain changes.

Q: What gives you confidence that the margin targets are achievable, given past challenges? A: Confidence stems from leadership changes and decisive actions taken, such as the sale of Worldpac, supply chain consolidation, and strategic store closures. The focus is on core retail fundamentals and executing plans that are within management's control.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.