Advance Auto Parts AAP Q4 2025 Earnings Transcript

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Date

Feb. 13, 2026 at 8:00 a.m. ET

Call participants

• President and Chief Executive Officer — Shane O’Kelly
• Executive Vice President and Chief Financial Officer — Ryan Grimsland
• Vice President of Investor Relations — Lavesh Hemnani

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Takeaways

• Comparable sales growth -- Company returned to positive comparable sales growth after three years of declines, with full-year comps just under 1% and fourth-quarter comps up 1.1%.
• Adjusted operating income margin -- Adjusted operating income margin expanded to 2.5% for the year, with Q4 at 3.7%, representing nearly 870 basis points of year-over-year expansion in Q4.
• Net sales and channel performance -- Full-year net sales from continuing operations declined 5% to $8.6 billion, primarily driven by store optimization; Pro business grew in low single digits, and DIY declined in low single digits.
• Gross margin -- Adjusted gross profit margin for the year was 43.9% of net sales, with Q4 at 44.2%, indicating significant margin expansion compared to the prior year.
• Store optimization -- The company exited over 500 corporate stores and 200 independent locations, realizing about $70 million in annual operating cost savings and cycling $51 million in liquidation sales.
• Asset and supply chain actions -- Distribution center network consolidated from 38 to 16 DCs, with plans to operate 15 by year-end 2026; 14 new market hubs and 35 new stores opened in 2025, with about $90 million invested in upgrades at over 1,600 stores.
• New initiatives for 2026 -- Guidance targets 1%-2% comparable sales growth, adjusted operating income margin of 3.8%-4.5%, and approximately $100 million in free cash flow generation; margin expansion to be driven by merchandising and operational productivity improvements.
• Pro and DIY channel trends -- Pro business Q4 sales increased nearly 4%, with ongoing positive comps, while DIY channel comps saw a low single-digit percent decline attributable to changes in consumer purchasing behavior.
• Private brand launch -- Introduction of the new owned oil and fluids brand, Argos, to replace a prior private-label offering and serve as a strategic value proposition in maintenance categories.
• Leadership team changes -- Strategic enhancements in executive leadership, including roles such as Senior Vice President of Pro, Chief Technology Officer, Senior Vice President of Supply Chain, and Senior Vice President of U.S. Stores.
• SG&A leverage -- Adjusted SG&A from continuing operations was $3.6 billion for the year (41.4% of net sales), resulting in about 50 basis points of leverage, assisted by reduced store counts and indirect spend initiatives.
• Free cash flow position -- Ended the year with negative $298 million in free cash flow, reflecting $140 million in store optimization-related cash expenses and $160 million from other operating outflows.
• Balance sheet and capital allocation -- The company reported more than $3 billion in cash and an undrawn $1 billion revolving facility, maintaining a net debt leverage ratio of 2.4x within its targeted range.
• Capital expenditures -- Planned capital expenditures for 2026 are approximately $300 million, with allocations to new stores, greenfield market hubs, infrastructure upgrades, and strategic investments.
• Full-year EPS -- Adjusted diluted earnings per share from continuing operations for 2025 was $2.26, reversing a loss of $0.29 in 2024; fourth-quarter EPS was $0.86, with $0.08 attributed to an extra operating week.

Summary

Advance Auto Parts (NYSE:AAP) delivered a turnaround to positive comparable sales and expanded adjusted operating income margin, following multi-year cost savings and operational restructuring actions. Management expects the trajectory of margin improvement to continue in 2026, driven by expansion in merchandising, completed asset optimizations, and new technology initiatives targeting enhanced productivity and customer service. Strategic investments in market hubs and the launch of the proprietary Argos brand are intended to further improve inventory availability and gross margin. A unified real estate and operations approach, coupled with targeted SG&A efficiencies and leadership changes, may enable ongoing profitability gains. Management projects underlying net sales growth, positive free cash flow, and industry-competitive margin expansion ahead, barring unforeseen macro or supply disruptions.

• CEO O’Kelly stated, “we returned to positive comparable sales growth after three consecutive years of negative results,” emphasizing the significance of the performance reversal.
• The company forecasts 1%-2% comparable sales growth, an adjusted operating income margin between 3.8%-4.5%, and approximately $100 million in free cash flow for 2026.
• SG&A leverage is expected to continue from improved resource allocation and store task simplification, with some incremental labor and infrastructure spend offset by lower indirect costs.
• Management highlighted a goal to achieve a 7% adjusted operating income margin over the medium term, with 100 basis points or more of margin expansion targeted for 2027, albeit on a more gradual timeline than previously anticipated.
• Leadership attributed gross margin expansion to both renegotiated vendor contracts and improved assortment capabilities, with further benefit planned from continued supply chain productivity measures.

Industry glossary

• Comparable sales (comps): Year-over-year sales performance for locations open at least 12 months, a key indicator of core operating growth or decline.
• Market hub: Large store or distribution point with expanded inventory, serving as a logistical node for same-day delivery to multiple regional outlets.
• Distribution center (DC): Centralized facility for receiving, storing, and shipping inventory to retail stores or customers across a geographic region.
• SKUs: Stock Keeping Units; unique identifiers for each product/item for tracking and assortment management.
• Pro: The Professional (commercial) customer segment, including garages and installers serviced directly by company deliveries and wholesale support.
• DIY: The Do-It-Yourself customer segment, representing retail shoppers who purchase parts for personal vehicle maintenance and repair.
• SG&A: Selling, General, and Administrative expenses; operating costs not directly tied to production, sales, or inventory procurement.
• Store optimization: Process of closing, consolidating, or upgrading underperforming retail locations to improve margin and operational efficiency.

Full Conference Call Transcript

Operator: Keep your engine running smooth this winter with Mobil 1 Advanced Clean oil change bundles for $38.99 at Advance Auto Parts. Right now at Advance Auto Parts, get five quarts of any Mobil 1 Advanced Clean Motor Oil and any oil filter for $38.99. That is right. Get your oil and any filter for one low price. We are right around the corner and ready to help you save more at Advance Auto Parts and participating Carquest locations. See store for details. Because I am committed to showing up for my team, I rely on quality parts from Advance Auto Parts to keep me ready when it counts.

From quick fixes during the week to game day drives on the weekend, they have the right parts to keep me moving and on the road. So I can be there for every game, every inning, and every moment my team is counting on all the way to life’s good parts. Visit your local Advance Auto Parts today. It is knowing you have always done your part, showing up, preparing it, and making sure they are ready for a new chapter. So when it is time for them to head out on their own, can advance to life’s good parts. Confident capable, and ready for the road ahead. Advance Auto Parts has the right parts close by.

So you can help them stay prepared, keep moving forward, and take on everything that comes next with confidence. Visit your local Advance Auto Parts today. Because I am committed to showing up for my team,

Unidentified Speaker: I rely on quality parts from Advance Auto Parts to keep me ready when it counts. From quick fixes during the week to game day drives on the weekend. They have the right parts to keep me moving and on the road. So I can be there for every game, every inning, and every moment my team is counting on. All the way to life’s good parts. Visit your local Advance Auto Parts today.

Unidentified Speaker: It is knowing you have

Unidentified Speaker: always done your part, showing up, preparing them, and making sure they are ready for a new chapter. So when it is time for them to head out on their own, they can advance to life’s good parts, confident, capable, and ready for the road ahead with the right parts from Advance Auto Parts close by. You help them stay prepared, keep moving forward, and take on everything that comes next with confidence. Visit your local Advance Auto Parts today.

Operator: Keep your engine running smooth this winter with Mobil 1 Advanced Clean Oil Change Bundles starting at $38.99 at Advance Auto Parts. Right now at Advance Auto Parts, get five quarts of any Mobil 1 Advanced Clean motor oil and any oil filter starting at just $38.99.

Unidentified Speaker: That is right. Get your oil and any filter for one low price. We are right around the corner and ready to help you save more at Advance Auto Parts and participating Carquest locations. See store for details. This is how we advance

Operator: Keep your engine running smooth this winter with Mobil 1 Advanced Clean oil change bundles for $38.99 at Advance Auto Parts. Right now at Advance Auto Parts, get five quarts of any Mobil 1 Advanced Clean Motor Oil and any oil filter for $38.99. That is right. Get your oil and any filter for one low price. We are right around the corner and ready to help you save more at Advance Auto Parts and participating Carquest locations. See store for details.

Unidentified Speaker: The

Operator: I am committed to showing up for my team, I rely on quality parts from Advance Auto Parts. To keep me ready when it counts. From quick fixes during the week to game day drives on the weekend, they have the right parts to keep me moving and on the road. So I can be there for every game. Every inning. And every moment my team is counting on all the way to life’s good parts. Visit your local Advance Auto Parts today. It is knowing you have always done your part, showing up, preparing making sure they are ready for a new chapter.

So when it is time for them to head out on their own, they can advance to life’s good part. Confident

Unidentified Speaker: capable, and ready for the road ahead.

Operator: Advance Auto Parts has the right parts close by. So you can help them stay prepared, keep moving forward, and take on everything that comes next with confidence. Visit your local Advance Auto Parts today.

Unidentified Speaker: Because I am committed to showing up for my team, I rely on quality parts from Advance Auto Parts to keep me ready when it counts. From quick fixes during the week to game day drives on the weekend. They have the right parts to keep me moving and on the road. So I can be there for every game, every inning, and every moment my team is counting on. All the way to life’s good parts. Visit your local Advance Auto Parts today.

It is knowing you have always done your part, showing up, preparing them, and making sure they are ready for a new So when it is time for them to head out on their own, can advance to life’s good parts, confident, capable, and ready for the road ahead. With the right parts from Advance Auto Parts close by, you help them stay prepared keep moving forward, and take on everything that comes next with confidence. Visit your local Advance Auto Parts today.

Unidentified Speaker: Keep your engine running smooth this winter

Operator: Welcome to the Advance Auto Parts, Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. I would now like to turn it over to Lavesh Hemnani, Vice President of Investor Relations. Good morning, and thank you for participating in today’s call. I am joined by Shane O’Kelly, President and Chief Executive Officer, and Ryan Grimsland, Executive Vice President and Chief Financial Officer. During today’s call, we will be referencing slides which have been posted to the Investor Relations website. Before we begin, please be advised that management’s remarks today will contain forward-looking statements.

All statements other than statements of historical fact are forward-looking statements, including but not limited to, statements regarding initiatives, plans, projections, goals, guidance, and expectations for the future. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information can be found under forward-looking statements in our earnings release and Risk Factors in our most recent Form 10-Ks and subsequent filings made with the SEC. Shane will begin today’s call with an update on the business and our strategic priorities. Later, Ryan will discuss results for the fourth quarter and full year 2025, and provide guidance for 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’Kelly.

Shane O’Kelly: Thank you, Lavesh, and good morning, everyone. I want to begin today’s call by thanking our frontline team for all of their hard work in 2025. During the year, we laid the foundation to build a better future for the company and create long-term value for our shareholders. Are undergoing a significant transformation focused on the fundamentals of selling auto parts through initiatives guided by the voice of our customer. These efforts are beginning to improve our competitive position are translating to stronger financial performance. In 2025, we returned to positive comparable sales growth after three consecutive years of negative results.

We also expanded adjusted operating income margin by over 200 basis points from near breakeven levels while also navigating a volatile external environment. Our journey has just begun. And the early progress is being recognized by vendor partners, customers, and team members. During 2026, we will continue to actions aimed at enhancing parts availability, and customer service by building on the foundation established in 2025. We expect these efforts to deliver stronger financial performance in 2026 including an acceleration in comparable sales growth to the 1% to 2% range, and expansion in adjusted operating income margin to the 3.8% to 4.5% range, and a return to positive free cash flow.

We expect to generate approximately $100,000,000 in free cash flow in 2026 while allocating more capital to strategic projects and store investments. The progress made for our team in 2025 has created positive momentum that we are carrying into this year, and I am confident in our ability to succeed in 2026. Before I provide an overview of our strategic priorities for this year, let us recap 2025. We entered the year with a renewed emphasis on the blended box and establishing Advance as a consistent, reliable auto parts provider for both Pro and DIY customers. Our team is already driving results through comprehensive actions taken last year.

For example, number one, we rationalized our asset footprint by exiting underperforming locations, including over 500 corporate stores and 200 independents. We achieved this with minimal disruption to our day-to-day operations and saved approximately $70,000,000 in operating costs. Number two, expanded our assortment by 100,000 new SKUs, we improved store availability to the high 90% range, from the low 90% range at the start of 2025, and we also reduced product costs by more than 70 basis points. Number three, we increased our average speed of delivery to Pro customers by cutting more than 10 minutes in delivery time from an average of over 50 minutes at the start of 2025.

Number four, we moved with speed to substantially complete the consolidation of our distribution center network. We now operate 16 distribution centers in the U.S., compared to nearly 40 DCs at the end of 2023. And number five, we opened 14 new market hubs and now operate 33 market hub locations. We also opened 35 new stores to further enhance density in our strongest markets, and we invested nearly $90,000,000 in store infrastructure upgrades at more than 1,600 stores. Throughout the year, we also navigated a series of external challenges, including a volatile tariff and consumer spending environment. We maintain focus on executing actions to improve availability and service.

This enabled us to deliver positive performance in the Pro channel, which strengthened throughout the year. We are progressing on our strategic plan with a stronger balance sheet, having proactively accessed the capital markets during 2025. As we move forward, we will continue to prioritize actions within our control to improve operational performance. In recent months, we have also strengthened key leadership positions through internal promotions and the addition of talented external expertise. These include Anthony Sarlanis, former Regional Vice President of our Northeast operations, was promoted to Senior Vice President of the Pro business. He has been with Advance for over 15 years and brings more than two decades of automotive experience to the role.

Kunal Das, our former Chief Data now promoted to Chief Technology Officer. His team has led the development of proprietary AI tools to improve our day-to-day execution. Ron Gilbert, Ron joined Advance in December as Senior Vice President of Supply Chain. Brings more than 20 years of experience in supply chain logistics with a track record of delivering operational efficiencies in complex supply chain systems. And Tony Hurst, Tony joined Advance in January as Senior Vice President of U.S. Stores. He brings more than 25 years of field leadership and store transformation experience across Pro and DIY with a proven record of simplifying work for the frontline.

The caliber of our leadership team reinforces my confidence in our ability to grow transaction volumes through strong customer service and to deliver greater productivity in our store and distribution center operations. Since late 2023, we have acted decisively to stabilize the business conduct a comprehensive review of operational productivity, sell noncore assets, and develop a strategic plan. To date, this team has delivered approximately 500 basis points of adjusted operating margin expansion. We continue to believe that our goal of 7% adjusted operating income margin with a mid-40% gross margin are appropriate medium-term targets for the company.

As a reminder, about half of our identified margin opportunity is tied to merchandising excellence with the balance being driven by supply chain and store operations. I am pleased with the progress being made in unlocking this margin opportunity. We concluded 2025 with an adjusted operating income margin of 2.5% and for 2026, we are targeting an additional 130 to 200 basis points of expansion to the 3.8% to 4.5% range. This guidance includes an approximate 45% gross margin rate which showcases success against our initiatives on the path to a 7% operating margin target. Our goal is to deliver consistent progress on our plan to narrow our margin gap to the industry.

We currently believe that we can deliver at least another 100 basis points of margin expansion in 2027 which would mark the third straight year of 100 basis points or more of expansion. Although this pace would imply an outcome below our previous target of achieving 7% in 2027, it is important to note that this is not the result of any change to the execution of our strategic plan, rather, we are being prudent about two factors as we consider the expected time frame for achieving our goals. First, initiatives across our three strategic pillars are progressing at varying rates. We have made strong progress in merchandising, and completed the consolidation of distribution centers.

We are now in the early stages of implementing supply chain and store labor productivity initiatives. I am excited to welcome new leaders overseeing the implementation of these activities. We expect our investments in 2026 to enable further margin expansion in 2027 and beyond. And second, top line momentum has lagged original expectations. Our pace of same-store sales growth has been impacted in part by external economic factors that have resulted in a softer consumer spending environment. While we are pleased with the strong positive comps in our Pro business, including traction with Main Street Pros, we still have a lot of opportunity ahead as we continue to improve availability and service metrics.

I want to reiterate, I am pleased with the progress being made on our strategic plan. I remain confident in the ability of our team to deliver against our operational and financial goals. Our quality of execution is improving, and we expect 2026 to be a pivotal year on the path of long-term value creation. Next, let us turn to an update on our strategic plan. As I have indicated previously, our strategy is unchanged and built on three pillars that are supported by targeted initiatives to deliver long-term profitable growth. Turning to our key priorities for 2026, which build on the foundational improvements achieved in 2025.

Merchandising excellence is expected to be the largest contributor of margin expansion during the year, and our four merchandising initiatives for the year,

Operator: include,

Shane O’Kelly: first, in 2025, we began repositioning Advance as a trusted long-term growth partner. Our focus on operational excellence and streamlining legacy processes has signaled to the vendors that Advance is here for the long term. In 2026, we expect to further deepen our vendor partnerships to jointly grow our businesses. We are doing this through strategic business planning, exploring supply consolidation, eliminating nonvalue-add supply chain costs, engaging in training opportunities for the field, and collaborating on joint marketing efforts. We expect this to translate to better cost opportunities and stronger part margins in the year. Second, in 2025, our pricing decisions were made largely in reaction to new tariff programs.

However, we still focused on offering compelling value to our customers through fewer, bigger, and bolder promotions. During 2026, we expect to deploy a new pricing matrix which provides our team better intelligence of market-based pricing by channel and by SKU. Our goal is to offer competitive pricing while continue to operate rationally in the marketplace. We expect the combination of smarter pricing supplemented with seasonally relevant promotions to drive stronger customer engagement and support repeat purchases. Third, 2025 was an important year for our assortment. We addressed product gaps and also improved brand coverage application job fundies for parts in our stores.

We did this by using a specialized data-driven approach as well as improving internal processes and incorporating feedback from customers to develop a new assortment framework that was fully rolled out to all stores last year. This work has expanded parts coverage for brands we carried previously and also enabled us to introduce new brands. Our success with the brake category is a great example of this. Entering 2025, we were running negative comps in brakes, and we finished the year with strong positive comp growth. Showing how deep vendor relationships, targeted SKU placements, and thorough market planning can help win market share.

While we moved fast in 2025 to address parts coverage, we believe we have additional opportunities to amplify our efforts. 2026, we plan to invest in systems that help us dynamically balance inventory across the network to support stronger financial returns on inventory. We will also continue to expand the universe of parts carried in our network and optimize the presentation of SKUs in our stores. This includes accessing opportunities to provide more value for our customers. We are excited to launch our new owned oil and fluids brand, Argos. As a 94-year-old company, we are pleased to back our legacy with a new owned brand in a top maintenance category. This brand was born out of extensive research.

Customers ranked affordability, reliability, and strength as top product attributes they value. Argos offers engine protection and performance comparable to national brands

Operator: at a price that provides meaningful savings, which will be valued by both Pro and DIY customers.

Shane O’Kelly: And fourth, earlier this month, we modernized our DIY loyalty program with the launch of Advance Rewards to replace the prior Speed Perks program. Approximately 60% of our DIY transactions are driven by our loyal customer base of approximately 16,000,000 active members. The new program now provides a refreshed tiered point structure that rewards customers as they spend more with us. With Advance Rewards, members will be able to experience exclusive vendor offers, bonus points promotions, sweepstakes, and other exciting new features. Based on customer feedback, we discontinued unproductive offers like fuel rewards and enhanced the flexibility to redeem coupons, which are very frequently used for purchases in key maintenance categories.

The new Advance Rewards also gives us more tools to engage with our customers which we believe will help drive transaction growth in the DIY channel. Turning to supply chain. We are on track to complete the consolidation of our distribution centers and expect to operate a total of 15 DCs in the U.S. by the end of this year. We believe our DC network is well positioned to support strong service levels and the continued growth of our multi-echelon network. Consolidating DCs is a difficult undertaking, we have done so without major disruption to our 4,000 plus store network. Over the past two years, we have gone from operating 38 DCs in the U.S. to 16 DCs currently.

And I want to thank our supply chain team for their efforts over the last two years. Throughout 2026, we are going to be focused on simplifying and standardizing DC operations along with testing and launching labor performance and transportation management tools. We expect our supply chain productivity initiatives to support gross margin expansion in 2027 and beyond. While consolidating the DCs over the past two years, we have also accelerated our pace of market hub openings, which serve as an additional distribution node in our network with the retail storefront. A market hub typically carries between 75,000–85,000 SKUs and expands same-day parts availability for a service area of about 60 to 90 stores.

At the 2025, we had 33 market hubs and we currently plan to add 10 to 15 market hubs in 2026. Most of these openings will be greenfield buildings serving as new points of distribution in markets where they open. We believe that this strategic expansion will enhance our ability to provide additional hard parts coverage in the previously underserved regions while creating incremental opportunities to gain market share. Next, I will provide an update on key priorities for store operations. We are elevating the experience for our team members through training and simplification of tasks. We have launched targeted programs to provide customized short-duration training that combines product knowledge and sales behaviors to better serve customers.

Our analysis shows a positive correlation in sales performance for stores following the completion of the training programs. We are also beginning to simplify store tasks and streamline communication with stores to help our team members prioritize only the most critical activities. We are investing in industry-leading tools like Zebra devices to increase team member efficiency while allocating payroll hours to support market specific customer needs. In addition to these resources, we are continuing to allocate capital to store infrastructure upgrades as part of a multiyear asset management plan. In 2026, we plan to upgrade more than 1,000 stores. We are also improving service standards in our stores. We launched our new store operating model across all stores in Q4.

We believe that this operating model supports better allocation of labor hours and vehicles while strengthening collaboration between our customer-facing outside sales team and our internal store teams. To drive consistency and service, our teams are being held accountable to two primary metrics, the first one is NPS, which strives for continuous improvement in customer service and the second is time to serve, where we target under 40 minutes for delivery time for Pro orders. With the right training, service standards, and clear metrics for tracking performance, we expect to improve labor utilization and grow our business. While it is still early in the implementation of newer operating standards in our stores, we are seeing signs of improved performance.

For example, efforts to gain share across Main Street Pro is translating to stronger positive comps in that segment. Within DIY, our focus on selling behaviors is driving greater unit productivity with a sequential acceleration in DIY units per transaction in Q4. While we still have considerable work ahead of us, we are pleased with the direction in which we are moving. We believe that an improvement in service standards will also support enhanced productivity of new stores. In 2026, we plan to open 40 to 45 stores and 10 to 15 market hubs as we march toward our goal of opening more than 100 new distribution points over the next two years.

In closing, I want to recognize the Advance team once again for their hard work and commitment to delivering progress. We remain focused on prioritizing actions to drive sustained improvement over the long term. I will now hand the call over to Ryan to discuss our financials. Ryan. Thank you, Shane, and good morning, everyone. I want to begin by thanking our frontline associates for their commitment to serving our customers and delivering a strong finish to 2025. For the fourth quarter, net sales from continuing operations were approximately $2,000,000,000 which declined 1% compared to last year. This is mainly attributable to the store optimization activity completed in 2025. Comparable sales grew 1.1% in the fourth quarter.

Following a softer start to the quarter, transactions improved during the last eight weeks, resulting in positive comparable sales growth over that time frame. In fact, outside of weather-related comparisons, our business has been averaging low single-digit positive comps over the last six months, reflecting operational stability as we execute our strategic plan. Brakes, undercar components, and engine management led performance, indicating progress in improving coverage and availability of hard parts. Ticket was positive for the quarter, driven by a combination of better unit productivity and higher average prices.

Our frontline team has been focused on providing complete job solutions to our customers and I want to thank them as their efforts have translated to an acceleration in units per transaction on a one- and two-year basis. Overall,

Unidentified Speaker: average ticket

Operator: was still below expectations,

Shane O’Kelly: due to some discrete factors. First, same SKU inflation came in just under 3%. This was about 100 basis points lighter than expected, due to successful tariff-related negotiations which were still underway at the start of the quarter. And second, during Q4, we accelerated the transition of some front room assortment, to introduce new brands following recent supplier changes, and to support the planned launch of our new own brand Argos. These transitions led to a higher-than-expected markdown headwind, of about 50 basis points, which impacted comps. This activity has been completed.

Operator: Is not expected to impact Q1 results.

Shane O’Kelly: Looking at channel performance, our Pro business grew by nearly 4% during the quarter, with sales strengthening throughout the quarter on both a one- and two-year basis. Trends in DIY remained volatile leading to a low single-digit percent decline in comps. We believe this is largely a continuation of the market trends we have experienced all year. Our core consumer group has been adjusting purchasing habits in response to rising prices. Moving to margins. Adjusted gross profit from continuing operations was $873,000,000 or 44.2% of net sales, resulting in nearly 530 basis points of gross margin expansion compared to the same period last year.

During the quarter, we cycled through approximately 280 basis points of atypical margin headwinds related to our restructuring activity last year. The balance of margin expansion was driven by savings

Ryan Grimsland: associated with our footprint optimization activity and benefits from our strategic sourcing initiatives. Additionally, LIFO expense came in at $56,000,000 for the quarter, which was lower than previously expected. Adjusted SG&A from continuing operations was $800,000,000 or 40.5% of net sales, resulting in nearly 340 basis points leverage. This was consistent with expectations for a high single-digit percent expense decline, and driven by a reduction in stores compared to last year. As a result, adjusted operating income from continuing operations was $73,000,000 or 3.7% of net sales, resulting in nearly 870 basis points of year-over-year operating margin expansion. Our Q4 results also include an extra operating week which contributed $132,000,000 in net sales and $9,000,000 in adjusted operating income.

Adjusted diluted earnings per share from continuing operations for the quarter was $0.86 compared to a loss of $1.18 last year. The extra week added $0.08 to fourth quarter EPS. Moving to an update on full year 2025 results. Net sales from continuing operations declined 5% to $8,600,000,000 primarily due to store optimization activity that was completed during Q1 2025. Comparable sales grew just under 1% for the year, marking our return to positive comparable sales growth. Both channels improved compared to last year. Our Pro business grew in the low single-digit range, while DIY declined in the low single-digit range. Same SKU inflation contributed about 140 basis points to ticket growth for the year.

Adjusted gross profit from continuing operations was $3,800,000,000 or 43.9% of net sales, resulting in about 165 basis points of gross margin expansion compared to last year. During the year, we cycled through approximately 90 basis points of atypical margin headwinds, related to our restructuring activity from last year. Adjusted SG&A from continuing operations was $3,600,000,000, or 41.4% of net sales, resulting in about 50 basis points of leverage driven by operating fewer stores compared to last year. As a result, adjusted operating income from continuing operations was $216,000,000 or 2.5% of net sales, resulting in 210 basis points of year-over-year operating margin expansion.

Adjusted diluted earnings per share from continuing operations was $2.26 for the full year 2025, compared with a loss of $0.29 for full year 2024. We ended the year with free cash flow of negative $298,000,000 which included approximately $140,000,000 in cash expenses associated with our store optimization activity. The remaining outflow of approximately $160,000,000 impacted our ability to generate positive free cash flow. About half of the variance compared to our expectations was related to a combination of Q4 business performance, timing of certain cash obligations, and a delay in receipt of tax refunds.

The other half was associated with variances relative to our expectations for timing of certain inventory payables, drove approximately $80,000,000 of cash outflow and reduced our payables balance at the end of the year. Separately, we also lowered the usage of our supplier financing program to $2,500,000,000.0 from $2,700,000,000.0 last quarter. We entered 2026 with a solid balance sheet, including more than $3,000,000,000 in cash, and $1,000,000,000 undrawn revolving facility, which is more than sufficient to support approximately $2,500,000,000.0 in supplier financing payables over the long term. Our net debt leverage improved to 2.4 times at the end of the year compared to 2.6 times last quarter, and is in line with our targeted range of 2.0 to 2.5 times.

Turning to 2026 guidance. We expect net sales to decline slightly year over year mainly driven by two nonrecurring items from 2025. First, we generated $51,000,000 in liquidation sales in Q1 last year. And second, Q4 included an extra week which generated $132,000,000 in net sales. In aggregate, both items drive over 200 basis points of headwind to sales growth. Excluding these nonrecurring items, we expect underlying net sales to grow in the range of approximately 1% to 2%, this includes comparable sales growth of 1% to 2%, and about 10 to 20 basis points of pressure related to sales normalization at independent locations following a reduction in locations last year.

We expect positive comp growth in each quarter with a stronger first half owing to easier comparisons. Same SKU inflation is currently planned in the 2% to 3% range for the full year and assumes no change in the current tariff environment. In terms of channel performance, we expect Pro to outperform DIY with both channels contributing positively to comp growth. This is expected to be driven by gradual improvement in transactions, with initiatives focused on enhancing availability and service levels. Are excited to get back on the path of consistently delivering positive comparable sales growth, and expect our strategic plan to ultimately position us to gain market share in the future. Moving to margins.

We expect adjusted operating income margin between 3.8–4.5% for 2026, resulting in 130 to 200 basis points of year-over-year margin expansion. We are forecasting gross margin expansion in the range of 110 to 150 basis points to approximately 45%. This margin expansion includes about 20 basis points of year-over-year favorability from cycling nonrecurring items from 2025. The balance of the expansion is expected to be driven by merchandising initiatives related to strategic vendor sourcing and optimization of pricing and promotions. The benefits from merchandising initiatives will be partially offset by investments to improve productivity in our supply chain operations, following completion of the consolidation phase of our DC network.

Based on the progress of our initiatives, we expect gross margin rate to build throughout the year, starting with Q1 gross margin in the 44% to 45% range. Regarding SG&A, we expect reported full year expenses to be down year over year, contributing 20 to 50 basis points of leverage. Specifically regarding Q1, SG&A expense is planned to be down in the 3% to 4% range, as we cycle through the store closure activity from last year. Full year 2025 SG&A expense included about $90,000,000 of nonrecurring items to support liquidation sales and the extra week, which is expected to drive about 20 basis points of favorability in 2026.

Adjusting for the nonrecurring expense, SG&A is planned to be higher year over year with modest leverage driven by positive comp sales growth. We expect to deploy savings generated from better in-store task management, better resource allocation, and a reduction in indirect spending to fund general wage inflation, store opening expenses, and strategic labor investments in priority markets. As Shane indicated, we have completed the rollout of our new store operating model, which has enabled us to position labor and truck resources based on volume. As we move forward, will continue to look for opportunities to further optimize payroll hours to enable our team members to dedicate more time to customer service by minimizing time spent on tasking.

Moving to other items in our guidance. We expect adjusted diluted EPS in the range of $2.40 to $3.10. Pretax interest expense for full year 2026 is planned at approximately $210,000,000 which is expected to be partially offset by interest income of approximately $80,000,000. We expect to increase capital expenditures in 2026 to approximately $300,000,000 with spending allocated to new stores and greenfield market hub growth, store infrastructure upgrades, and strategic investments. Finally, with respect to cash flow, we expect to generate approximately $100,000,000 in free cash flow for the year supported by stronger comp sales and profitability. Our free cash flow guidance includes modest carryover spending, of $10,000,000 to $20,000,000 related to our store optimization activity.

To conclude, I want to thank the frontline team for their contributions supported solid financial results in 2025. During 2026, we expect our initiatives to provide added financial momentum to narrow our operating margin gap to the industry I will now hand the call back to Shane. Thank you, Ryan. During 2026, we are building on the foundation established last year with a clear focus on executing our strategy to deliver improved operational performance.

Shane O’Kelly: I would like to close by thanking the Advance Auto Parts team for all of their hard work

Ryan Grimsland: and commitment to serving our customers. Thank you. Operator,

Shane O’Kelly: can now open the line for questions.

Operator: Thank you.

Operator: Will now begin today’s Q&A. If you would like to ask a question on today’s and please rejoin the queue to ask further questions. That is star followed by one. And our first question today comes from Chris Horvers from JPMorgan. Chris, please go ahead. Your line is open.

Chris Horvers: Thanks and good morning, guys. So my first question is why is your inflation so much lower than what your peers have reported, specifically, AutoZone and O’Reilly? One could interpret this two ways. A, you are pricing below the market, which I do not think that is what is happening. Or perhaps simply your prices were too high before all this inflation came in and when you came into the company and you were forced to narrow the gap. I guess it could also be sourcing differences but, again, sort of the market price the market price. So if you could help us out there.

Ryan Grimsland: Yeah, Chris. Appreciate that. It is Ryan. So our SKU inflation, I think, is consistent with peers, but we have some we look at 2025. We have some comparison issues. We were wrapping some price investments that we made in the prior year that wrapped in. So in 2025, we still had reported around 3% for Q3 and Q4, which I think is somewhat consistent with them. It was a little bit lower than we expected going in Q4, really that had to do with we are still negotiating some of the tariffs. So that wrap the 1.4 inflation in 2025 is really impacted by the wrap of price investments we made in the prior year.

Shane O’Kelly: Hey, Chris. Shane, just to add, you mentioned first, are we pricing below the market in your hypothesis that is that we are not. That is not our strategy. We are,

Shane O’Kelly: you know, it is a competitive market, but a rational market, and we participated in that way. We are using AI to do better with our promotions as to when we do a promotion and on what products and where we do it. So that can help us a bit, but we are a rational player in the market. Yeah.

Ryan Grimsland: We monitor our pricing relative to everyone else, and we want to make sure we are competitive every day. We are not doing anything inconsistent with that.

Chris Horvers: And then my follow-up question is on the decision to reduce your supply chain financing in the fourth quarter, I guess, one of the hallmarks of this industry is that the vendors finance essentially all the all of the inventory. So what drove that decision? Was there anything on the other side? Because your free cash flow did come in lower than expected because the reasons that you laid out, Ryan, was there any sort of you know, pull push from the other side because of the free cash flow dynamic, or is it something to do with perhaps sort of the margin versus rate negotiation that is implicit in these arrangements?

Ryan Grimsland: Yeah. Good question. So, yeah, about half that change in free cash flow from anticipation was due to lowering the payables, as we mentioned

Shane O’Kelly: earlier.

Ryan Grimsland: And not you know, we are always going to look to see if it makes sense from a economic standpoint to reduce supply chain finance. But only when it makes sense. We are really happy with our program, especially after the

Shane O’Kelly: the structure we put in place this past summer. It is a very stable program. Significant capacity in that program.

Shane O’Kelly: But it was more about leveling the payables

Ryan Grimsland: based on the new purchases that we have based on the sourcing of those and the negotiations we have had. A reminder, this past year, we have had 500 stores we have closed. We accelerated purchases on inventory for

Shane O’Kelly: ahead of the tariffs

Ryan Grimsland: We accelerated our assortment work into our top 50 DMAs. So a lot of moving pieces. On top of that, the merchant organization has been transitioning and working through many PLRs with different vendors as we have executed our strategic sourcing work, and we have yielded really good progress on the margin side. All of that mixes differently sometimes on from a payables balance, and I think it is more about the mix of our purchases and where the true payables balance should be. And we will continue to look for opportunities there if it makes economic sense. That caused a reduction in Q4. In our P&L, to do that.

But we are still sitting let us say, 80% of our COGS is on supply chain finance. We think right now where we are with our vendors we are in a good position. 2.4 to 2.6 is the right target range. To ebb and flow on supply chain finance.

Shane O’Kelly: Last point there, just on a big picture level, we had our annual conference Accelerate down in Orlando this year. Then I would submit that our vendor relations are the best they have ever been. I continually meet with senior leaders from vendors who are behind our comeback and supporting us and the degree to which we are now working on innovative programs to help us grow. Feel great about the vendor community, at Advance Auto Parts.

Chris Horvers: Thank you so much.

Operator: The next question comes from Seth Sigman from Barclays. Seth, your line is open. Please go ahead.

Seth Sigman: Hey, good morning, everyone. Nice progress.

Shane O’Kelly: I wanted to ask first about the real estate

Seth Sigman: Can you talk about the impact that the store closings had on comps and margins in 2025? And then, I guess, how are you thinking about the opportunity to optimize the store portfolio further from here? Maybe just in general, what are you seeing in terms of the gap in performance across the store base? Thanks so much.

Ryan Grimsland: Yeah. So good question. The liquidation impact was about $51,000,000 on the year. So we have kind of swapped the bridge to walk that back off of there. To give you a sense of what that looks like.

Seth Sigman: So

Ryan Grimsland: little bit of an impact there.

Shane O’Kelly: Also cycled over that. We had some liquidation impact in 2024 in Q4 as well. That had a little bit of a drag on that.

Ryan Grimsland: No further closures we expect.

Shane O’Kelly: So growing our new stores significantly growing those new stores.

Operator: Shane, you might want to

Shane O’Kelly: Yeah. So when I came to the company, we had multiple real estate departments. Worldpac had a real estate department, independents, supply chain, stores. And so we were not cohesive about how and where we thought about building out in a market and opening a store. And you think about everything from construction or leases to fixtures to grand opening protocols. And so we have had a lot of effort going on. We have got a unified real estate program under a single leader. In 2025, we opened a total of 35 NSOs. This year, we will do 40 to 45. And by the way, we are opening NSOs in both the U.S. and Canada.

And as we do that, about in the wake of the closures, we think store density is important. So in the wake of the closures, we are number one or number two in 75% of our markets. So we want to expand, concentrically in those markets where we have existing density and move you know, down the road to the to the next part of the market. Sales, the and we think that is a good play because it leverages the existing store base, the outside the Pro customer relationships, the DC connectivity. And so we are getting better at it, and we are pleased with where we are going. And, Seth, just to

Ryan Grimsland: make sure we clarify, the closing stores were not in our comp numbers that we reported out. They are they are in our year over year. So that is why just giving you the dollar impact versus the comp impact.

Seth Sigman: Was there a meaningful impact to the rest of the store base from closing those stores in terms of sales transfer?

Ryan Grimsland: Yeah. The Pro comps did benefit. But still positive even after the benefit. So we did have transfer sales from the Pro business that transferred to the new stores. Actually outperformed our original expectations going into that work. But still, Pro was positive even if you back that up.

Seth Sigman: Okay. And my other follow-up was just thinking about the 7% margin target. The prior guidance was for a lot of the margin progression to be back-end weighted. And the annual gains would ramp really in the out years. Guidance now seems to imply bigger gains, maybe up front, and it is great that you are executing what you laid out for 2025 and it seems like for 2026 as well. But maybe more gradual margin gains going forward. I guess, what really drives that difference in the cadence? And

Shane O’Kelly: just wondering, is there any indication that maybe there is more reinvestment

Seth Sigman: that is required here, or is it just harder than you thought? Thanks so much.

Ryan Grimsland: No. Appreciate the question. So I still think 7% is the right medium term target. And we are actually pleased with the progress so far, especially in merchandising excellence, in being able to get to a 45 gross profit margin really driven in large part by the work the merchandising organization has done. And as a reminder, we talked about 500 basis points that we are going after here and about half of that was merchandise and excellence. And that work started in earnest underway this past year. There was two other pieces, and when we talked about it kind of being back-end weighted a little bit there was in supply chain was the biggest one.

Back-end weighted, and that is because we had to get through the consolidation work. So we are working on getting the consolidation of supply chain down, we have now down to 16 DCs. We expect to be 15 by the end of next year.

Seth Sigman: And

Ryan Grimsland: once we get them consolidated, then we start working on the productivity within those boxes. And Ron on board, is diving in. And so that takes a little bit of time to work through. So and then the store operations pillar. Those are the primary right now, 26 of

Unidentified Speaker: primary investment year for both of those. Supply chain,

Ryan Grimsland: and store operations, then yield the benefit that will come out of it.

Shane O’Kelly: Yeah. Just touching on the pillars. As Ryan mentioned, pleased with the progress. We are controlling what we could control and moving forward on all three of those areas, merchandising, supply chain, store operations, a lot of great stuff coming on the store side as it relates to labor productivity, task simplification. We are investing in store technology. Think about that as servers and POS and Zebra devices. And then for many of our stores, just basic store appear improvements. So we touched 1,600 stores last year. About that as paint, HVAC, parking lots, signage, racking.

So feel good about that, and we will touch another thousand stores this year, so making a better environment for team members and for our customers. All of that goes into creating progress that I would just say has been you know, we are looking to be incrementally better every year in the business.

Seth Sigman: And since those

Ryan Grimsland: two big pillars, the supply chain and store operations, the big investment year, a lot going on in those areas. 2026 will really help inform what we really believe that cadence to be going forward. But

Seth Sigman: want to see 2026 play out a little bit so we can have a better

Shane O’Kelly: informed perspective. And if you look at the bridge we put out around our guidance,

Operator: we will be

Ryan Grimsland: very specific. We know we have line of sight to those numbers. Why we gave a little more detail on that bridge. And we want we want to be able to continue to do that as we march towards 7%.

Operator: Great.

Ryan Grimsland: So much, guys.

Shane O’Kelly: Thank you.

Operator: The next question comes from Simeon Gutman from Morgan Stanley. Simeon, your line is open. Please go ahead.

Simeon Gutman: Hey, good morning, guys, and nice job on the margin gain so far.

Simeon Gutman: My question first question is on margin. So thinking about the gross margin gains and even some of the SG&A leverage, can you talk about the execution risk in getting there? Do you have line of sight with the strategic sourcing? These are deals that are already made or is there a degree of which you have to execute in order to gain that level of gross margin throughout the year? Same question with SG&A. How do you both achieve this better service and availability with SG&A up so modestly for 2026?

Ryan Grimsland: Yes. Simeon, great. I will start and let Shane chime in. On the merch side, we have got really good line of sights. We have made a lot of great progress this year. Some of that benefit is wrapping into next year. There is still some work to be done, but our merchandising organization led by Bruce Starnes has just done a phenomenal job this year executing against that. It is meeting expectations we had. So some of it is already baked

Simeon Gutman: going into the year.

Ryan Grimsland: Some of it is still work to be done.

Unidentified Speaker: In fact, some of those conversations were already starting to work on 2027. So the execution has been solid.

Ryan Grimsland: And we like to see we like to see what is going on there. As far as the other two pillars we talked about, that is work that is being done this year. Progress on the consolidation and supply chain has been great. And reason I bring up supply chains, that is going to have a COGS benefit as well. Long term as we get more productive in that space. Anything you would add? Yeah. I would just say it is a mix. There are

Shane O’Kelly: vendor contracts that we have signed that will create. So that is not just line of sight, but we think we can we can that in the run rate. But then we have discussions with the vendor where we have not signed it, but feel good about it. I would highlight, Smriti’s assortment work where, you know, last year, we improved backroom availability, and we made sure we had left and rights that were matched brands. And we had full kits for different products. She is going to continue doing that. We are doing a better job as it relates to planograms and price changes.

So there are certainly things that we have that we feel we can count on as it relates to going forward, but there are also things that we still have to achieve. But we have a plan against how we are going to go about it. I will just touch on it. You heard it from Ryan. We feel good about the leaders who sit in the seats. And from my perspective, we are done making changes on the core leadership team. And if you look at the executives that we now have in place, you will see a mix. You see some internal promotions.

You see some external hires, but they are each focused on those fundamentals in their particular area and that gives me confidence around where we are going on your line of sight question.

Ryan Grimsland: And Simeon, just to talk about the SG&A question. So a lot of the SG&A reduction, one has come from the rationalization of our store footprint and DCs, but also indirect spend. We went through an initiative and really worked through indirect spend. So you know, an example would be we are able to mitigate not all, but a good portion of inflation seen in our general liabilities, health insurance, and also getting more productive in the spend. So the spend has not been all that productive. We talked about you know, reallocating our trucks to make sure they meet the right volume base.

And we have talked about how we walked into a store and they have got three trucks. Two of them have not been started in months and do not start. They just need to get reallocated or reduced. So we found opportunities to reduce SG&A where it was not being productive. If you look on a like-for-like, so remove the cost of SG&A to support the liquidation sales, it is about $90,000,000. We are actually slightly increasing SG&A next year. And we are investing in labor. We are investing in new stores. We are investing in training. We are investing in the service element and reduction of tasks within our stores.

So if we can reduce the tasks that our associates are working on that are not productive, then we could put more hours in front of a customer. That will be a benefit

Shane O’Kelly: for us. So that is where we are investing SG&A next year.

Simeon Gutman: Okay. Quick follow-up. The $100,000,000 of free cash expected, with the $300,000,000 of CapEx, so roughly $400,000,000 of operating cash. I am sorry if I missed it, but can you just bridge your net income to get to that operating cash?

Ryan Grimsland: Yeah. So we are increasing so it is net income and your operating cash flow, you are about spot on. You are doing the math right. It is about $350,000,000 is operating income. Driven out of that. Payables working capital should be about a neutral. What you would expect, though, just given timing and seasonality of our free cash flow is our typical free cash flow seasonality. You will see in Q1 a cash outflow, and then you will see Q2 through Q4 you would see the cash inflow. And then remember, there is, like, $10,000,000 to $20,000,000 of closure expenses that from our previous that will flow into next year. So that will be in there.

As we initially had said, about $150,000,000 of ex cash outflow for the strategic initiatives and store closures. About $10,000,000 to $20,000,000 is shifting over. So we got realized about $140,000,000 this past. So you see about 10 to 20 shift into that is really related to the leases and getting out of the old stores. But you should expect less volatility

Shane O’Kelly: Thanks.

Ryan Grimsland: Than we saw last year.

Shane O’Kelly: Thanks, David. Thanks. Good luck.

Operator: The next question comes from Scot Ciccarelli from Truist. Scott, please go ahead. Your line is open.

Simeon Ari Gutman: Hi there. Good morning. This is Sherwin on for Scott. Thanks for taking my questions. You mentioned external macro factors acting as a headwind to sales. Can you quantify the sales headwind from DIY in your guidance?

Christian Justin Carlino: Like, outside of smarter pricing, are there other initiatives you are helping like, you are taking to help materialize what I would think is pent up demand from past maintenance deferrals?

Shane O’Kelly: Yeah. So let me touch on Brian, can talk about the numbers. Well, let me talk macro and what we are doing. So if you look at the health of the consumer, first, we are in a great industry. Right? Number of cars, miles driven, age of fleet. So I think that is a good backdrop. But it has been interesting to watch the low-income consumer and to some degree, the mid-income consumer in recent weeks where there has been sort of negative general merchandise spending. Now the good news is, you know, 90% of our industry is kind of break fix.

And so you know, that is helpful, but the overall consumer sentiment in those two tranches, has been negative, and I think it is manifesting in general merchandising spend. Now for us on DIY, we have a number of key things going up. First, we changed and improved our loyalty program. We have 16,000,000 members in Advance Rewards, formerly Speed Perks. And we ditched parts of that program that were expensive for us that were not creating loyalty or sales. So think about that as the fuel rewards component. We also improved usability, and we issued coupons when you have reached certain tiers. If we made it easy for redemptions to occur.

Second, we introduced our own brand of oil and performance fluids, Argos. Really excited about this. I spent a number of years in the oil business, and I understand the both the quality of how you need to manufacture the products and how having your own brand can be can be very compelling. In the past, we had a different brand. By the way, there were royalties for that brand. That brand was in other retailers. That brand is associated with a parent company that is in financial difficulty. So the idea that we move to our own brand that we can control and we pulse the consumer in terms of what they wanted.

They wanted the reliability, the value, the strength of the product. So that is going to be great. By the way, combine that with our other private brands. We have got Carquest. We have got DieHard. So we have a great portfolio of private brands that are about half of our sales. We have got stuff going on in marketing, ecommerce, assortment improvements, training and store experience, all of these things geared towards having us do better with the DIY customer going forward.

Ryan Grimsland: And I will just add a couple data points as we think about it. Both Pro and DIY, we expect to contribute positively to comp growth with Pro outpacing DIY. A couple things as we think about trends going into the year. First, last year, we spent a lot of time focusing on the Pro and the assortment. Right? We you are now seeing us start to do and execute initiatives that we believe will have a positive impact on DIY. Just coming out of the quarter, into Q1, DIY trends have remained stable to what we saw in Q4. And Q1 specifically. And we did see improvement sequentially throughout the quarter in our comp performance.

In fact, the last period, of P13 in Q4 was our highest Pro comp of the year. So some of the work that we are doing, the initiatives around assortment, we are seeing that take hold. So we are excited about the performance in Pro, but we also want to make traction on DIY in the

Shane O’Kelly: That is all helpful. Thanks.

Christian Justin Carlino: And really quickly, you also mentioned on the call you could see another 100 basis points of operating income expansion in 2027. Just curious what comp assumption that is on. Just trying to better understand the sales and earnings leverage relationship.

Ryan Grimsland: Yeah. Not necessarily, giving guidance on the comp percent for that, but I would expect you know, low single digits that we have

Shane O’Kelly: we have given in the past.

Christian Justin Carlino: Alright. Thank you so much. Thank you.

Bret David Jordan: The next question comes from Bret Jordan at Jefferies. Hey, good morning, guys.

Shane O’Kelly: On the private label strategy, you know, given the fact

Unidentified Speaker: you are rolling out Argos, are you expecting to drive private label higher than that 50% of your

Shane O’Kelly: sales mix?

Unidentified Speaker: Yeah. I

Ryan Grimsland: Brett, I would say it should may remain consistent. Mean, it is replacing a brand that we kind of considered a private label, so kind of within that. It may inch up a little bit higher because we actually think this is a really good brand that can get some penetration. We think it is the right value offering in there. I think we will be more competitive in that space. So you know, maybe some minor movement. But we do not have any plans as

Shane O’Kelly: necessarily to significantly increase private

Ryan Grimsland: penetration. We go category by category and what makes sense for the consumer and having the right assortment and brands for them.

Shane O’Kelly: Great. And then on Market Hubs, could you remind us how many of your hubs that you have today were converted Carquest DCs versus greenfield? And maybe what the pipeline of greenfield looks like. I think you said you are going to add 10, but maybe give us some sort of feeling as far as timing and, you know, what these things look like physically.

Ryan Grimsland: Yeah, Brett. More than 20 of our market hubs are conversions. So a good portion of them. We just started opening up our first greenfield this year. Really excited about the greenfields. Going forward, the majority of those market hubs will be greenfield locations.

Shane O’Kelly: Okay. And I guess when you think about the pipeline, which you have for identified properties and sort of you talked about

Shane O’Kelly: 75 to 85,000 SKUs. What do we think about for, like, a square footage, and what kind of capital goes into

Unidentified Speaker: box?

Ryan Grimsland: Yeah. The market hubs on average are roughly $2,000,000, but that does vary depending on whether that is, like, a build or a lease or takeover. So it varies. But right now, they average about $2,000,000 for a market hub.

Shane O’Kelly: From a CapEx expense standpoint.

Christian Justin Carlino: Great. Thank you.

Ryan Grimsland: Yep.

Shane O’Kelly: Thanks, Prem.

Operator: The next question comes from Kate McShane at Goldman Sachs. Kate, please go ahead. Your line is open.

Ryan Grimsland: This is Mark Jordan on

Operator: for Kate McShane. Thank you for taking our questions. As you think about the comp guidance of 1% for the year, can you break down how you think about ticket and transactions? Because think if we look at the expectations for same SKU inflation to be 2% to 3%, you know, I think that suggests either other impacts to ticket or some transaction pressure on

Shane O’Kelly: the year.

Christian Justin Carlino: Yeah. I mean, for the most part, the

Ryan Grimsland: DIY transactions, we would expect to be pressured and continued. Obviously, there is inflation embedded in this. So we talked about inflation. So there is a negative DIY transaction, not inconsistent with what we have seen in 2025. But we would like to see and continue to drive positive transactions. We want to drive growth in the Pro as well.

Shane O’Kelly: But I would expect that this is slightly low single digit transaction, and inflation driving it positive. So

Ryan Grimsland: really, the pressure is on the DIY side there. Nothing significantly different from the trends that we see today.

Operator: Okay. Perfect. And then as you think about the cadence throughout the year, obviously, you know, first half is stronger due to the inflation benefits. But how should we think about maybe some tailwinds from the recent weather events? Are you seeing anything quarter to date on transactions that maybe looks encouraging?

Ryan Grimsland: So, I mean, that is the weather has is an interesting we are seeing weather categories positive. But then also there is the offset of those categories that are impacted negatively by weather. So it has been fairly neutral so far. Our current trends within the quarter are within our guidance. So

Shane O’Kelly: we are seeing some good performance there. But failure items like batteries,

Ryan Grimsland: those are doing well, but maintenance items, cooler weather is that has an impact. We do expect trends to improve as weather kind of normalizes. The Northeast, Atlantic, those have been impacted by the storms. I would say prior to Storm Beryl, if you guys remember Storm Beryl, big deal. We did have an initial build above sales. But post the storm, a portion of our stores were closed. So there is that

Shane O’Kelly: mix. So you got to get past the store closures and

Ryan Grimsland: and you see some of the weather rebound. But right now, we are tracking in line with our guidance range.

Shane O’Kelly: Great. Thank you very much.

Operator: Our final question today will come from Zachary Fadem at Wells Fargo. Zach, please go ahead. Your line is open.

Zachary Fadem: Hey. Good morning, and thanks for fitting me in. I want to make sure I understand your vendor finance commentary as it sounds like you are taking suppliers off the program and generating better gross margins from those vendors,

Christian Justin Carlino: But that also translates to weaker free cash flow due to the impact of payables

Zachary Fadem: So first of all, is that right? And is that the game plan going forward from here?

Ryan Grimsland: Yeah. No impact to gross margin just yet. We do not have a specific target or game plan to go do that. We like our supply chain finance program. Our vendors like it. It is very stable after what we have done this past year with the new structure. This is more of it is a lever and an option that we could pull as we are talking to vendors and we evaluate that like we would evaluate any other negotiation.

Christian Justin Carlino: The

Ryan Grimsland: supply chain finance program is stable. It is in place. We like it, but there is no concerted effort that says, we are going to reduce it any further.

Shane O’Kelly: The vendors like that program.

Ryan Grimsland: If they do come off the program, we would fully expect a positive improvement to our cost of goods. Alright? Because they are paying to be on the program, we would want a positive impact for us. That is an investment of working capital. And so we do the math, and we want to make sure it makes economic sense to our P&L. If we do move them off that program at a greater rate, it would be we would expect a P&L positive impact from it. But right now, we think it is stable, and the program at two five. So anywhere between two four and two six based on payables

Shane O’Kelly: throughout the year is where we expect it to be. There is nothing

Ryan Grimsland: in the works right now that would indicate a difference in approach.

Zachary Fadem: Got it. And then a couple clarifications or housekeeping items. First of all, any expectation for LIFO capitalized inventory costs in Q1 and 2026? Same thing with restructuring costs

Shane O’Kelly: In Q1 or 2026. And it also sounds like Pro comps benefited in 2025 from

Zachary Fadem: store closures. Any quantification there as we think about 2026?

Ryan Grimsland: Yeah. So I will hit the first one on LIFO. LIFO, in 2025, we had about 40 basis points of headwind. In 2026, in our guidance, so it is in our guidance, we expect about 50 basis points of headwind. In Q1 specifically, we are expecting about $30,000,000 of headwind related to LIFO. Now the warehouse capitalization cost in there, expect to be flat as we expect inventory to be roughly flat year over year, so do not expect an impact on that. But LIFO expense for 2026, which is in our guidance, about 50 basis points of headwind.

Shane O’Kelly: That we will see.

Ryan Grimsland: On the other one, we have not quantified externally what it is. What I would just say is that

Operator: we did

Ryan Grimsland: get Pro transfer sales in our comps this past year. Pro would still have been positive that of that transfer sales. So we like how the team executed moving those accounts to the new sister stores. They did a great job in maintaining the service levels of those Pro customers and actually overdelivered our expectation on it and they are servicing those Pros really strongly. I think the initiatives we have, the new assortment, the service level improvement, really helps drive our Pro comps even above that. And we like how that is positioning us going into the year.

Christian Justin Carlino: Thanks, Ryan. Appreciate the time.

Ryan Grimsland: Yeah. This concludes today’s Q&A session.

Operator: So I will hand the call back to CEO, Shane O’Kelly, for any closing comments.

Shane O’Kelly: Thank you, everybody, for participating in today’s call. More importantly, thank you to all of the Advance Auto Parts team members. It is their hard work that we rely on to deliver the results. We appreciate everything that they do. We look forward to sharing our Q1 results in May and stay tuned for those when they come. Thanks, everybody. Take care. Bye-bye.

Operator: This concludes today’s call. You very much for your attendance. You may now disconnect your lines.

Operator: Keep your engine running smooth this winter with Mobil 1 Advanced Clean oil change bundles for $38.99 at Advance Auto Parts. Right now at Advance Auto Parts, get five quarts of

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