ADVANCE AUTO PARTS INC Q1 2026 earnings call

Good morning and thank you for participating in today's call. I'm 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 our 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-K and subsequent filings made with the SEC. Shane will begin today's call with an update on the business and progress on our strategic priorities for 2026.

Later, Ryan will discuss results for the Q1 and guidance for the year. Following management's prepared remarks, we will open the line for questions. Let me turn the call over to our CEO, Shane O'Kelly.

Thank you, Lavesh, and good morning, everyone. I want to begin by thanking our frontline team for their hard work, which delivered a solid start to 2026. Comparable sales grew by 3.5% in theQ1, marking our strongest quarter of growth in five years. Based on market indicators, we believe our results were closely aligned to broader market trends, reflecting meaningful progress over the last two years. The Pro channel was the primary driver of sales, with consistent monthly growth in the mid-single-digit range. Performance in the Pro channel was driven by our strategic focus on the Main Street Pro, where the sales growth remains stronger. The DIY channel also delivered positive low double-digit growth, reversing the softness experienced last quarter. Our Q1 performance reflects continued improvement in parts availability and customer service, which is helping us respond to favorable industry dynamics.

We continue to execute initiatives firmly rooted in the fundamentals of selling auto parts as we aim to stabilize market share in the near term while positioning ourselves for share gain in the future. The team also delivered healthy profitability in the Q1. Adjusted operating margin expanded by over 400 basis points to 3.8%. This progress was partly fueled by effective merchandising execution and product margin expansion. We expect merchandising to remain the primary catalyst for margin improvement throughout the year, and I'm encouraged by the progress our team has made. We also continue to drive accountability across the organization to improve productivity, which contributed to healthy expense leverage in Q1. We are pleased with the strong start to the year, and we continue to make progress on our strategic initiatives, which gives us confidence to reaffirm our full year guidance.

We are closely monitoring consumer spending patterns as we transition beyond the recent tax refund tailwinds that have shaped trends in recent months. While higher gas prices may introduce temporary fluctuations in demand, we remain confident in our long-term growth prospects, supported by robust underlying fundamentals, including an aging vehicle population, growing car park, and increasing miles driven. Next, let's turn to an update on our strategic priorities for 2026. Our strategy remains unchanged and is built on three pillars, supported by targeted initiatives to drive sustainable, profitable growth over the long term. We remain committed to executing actions under our 2026 strategic priorities as we make progress on our journey towards a medium-term seven percent adjusted operating margin target. Let's begin with merchandising. Over the past year, our strategic business planning efforts have helped strengthen our vendor relationships.

We are doing this through better internal processes, streamlining of non-value-added vendor costs, and closer collaboration through field training and marketing initiatives. In addition, last year, we implemented a new assortment framework to optimize product placement across our network. This framework continues to evolve and is helping us expand parts availability while improving market access for our vendors. Our customers are seeing more reliable product availability, which is supporting improved transaction volumes. With a broader SKU assortment, we are better positioned to meet demand and to capture growth opportunities. This is especially evident in our pro business, where the expanded assortment in brakes and undercar is driving above-average comps and helping us capture more Main Street business. At the front of the store, we are elevating the shopping experience to better meet the needs of our customers.

For example, if you visit an Advance store in your neighborhood today, you'll notice a refreshed wash and wax section. We have refined the product selection based on customer feedback to better align with how customers shop by job with related product attachments. We plan to implement a similar approach across other front-room categories to enhance the experience for our DIY customers. Our newly launched owned oil brand, ARGOS, is now a standout feature in the front room. Since introduction, ARGOS has met our expectations and is one of our top brands in the category. This brand delivers engine protection and performance comparable to leading national brands while offering significant cost savings, a value proposition that we believe will resonate strongly with both pro and DIY customers.

In addition to motor oil, we have also expanded the Argos brand to other products such as hydraulic oils, antifreeze, performance chemicals, and washer fluid. We are prioritizing customer insights to deliver quality solutions to drive higher customer satisfaction.

During Q1, we also launched our modernized DIY loyalty program, Advance Rewards, which replaced the prior Speed Perks program. Advance Rewards gives members greater flexibility in redeeming coupons, along with access to exclusive vendor offers, bonus point promotions, and other exciting features. The transition to Advance Rewards has been seamless. We are already observing strong early engagement from our customers. New member sign-ups, program penetration, and total transactions from loyalty members have increased since launch. These early trends suggest customers are responding well to the modernized program, which we believe has the potential to deepen loyalty and engagement across our DIY customer base. Following the introduction of our Argos brand and the Advance Rewards loyalty program, we are amplifying our connection with the DIY community through the launch of an impactful new brand campaign, Good Parts.

This campaign reinforces our commitment to empower customers to get back on the road quickly and with confidence by providing trusted products and exceptional service across our expansive network of over 4,300 stores. Turning to supply chain. With the consolidation of our distribution centers nearing completion, our team has transitioned their focus to streamline and standardize DC operations to deliver greater efficiency. Following a comprehensive review of DC workflows, we have identified key process improvements, which will be systematically implemented throughout the year. We expect the productivity savings from these process improvements to drive gross margin expansion in 2027 and beyond. These enhancements are designed to improve how product flows into our DCs, through the facilities, and out to hubs and stores. We expect these actions to raise operational efficiency and support our productivity goals for both our supply chain and our stores.

For example, one critical objective is to achieve near-perfect shipment accuracy to stores. Achieving this will eliminate the need for store teams to manually scan each product upon receipt, which can save labor hours allocated for those tasks. We have also launched tools that improve visibility into parts movement between hubs and stores, helping free up more time for customer service. Additionally, we are working to optimize vendor ordering practices, which will address the current fragmentation in order volumes that drives higher handling costs for us and our vendors. By refining these processes, we aim to minimize redundant touches on product lines, streamline transportation costs, and alleviate congestion in our store back rooms. We expect these operational changes to lower the cost per unit shipped from our distribution centers while improving consistency for store teams and service levels for customers.

Our existing distribution center network is well-equipped to support strong parts availability as we expand our multi-echelon network. We are on track to open 10- 15 market hubs this year. To date, we have opened two additional market hubs, bringing our total to 35 hubs as we progress towards our target of 60 locations in 2027. The strategic expansion of market hubs locations is enabling us to enhance same day hard parts coverage across the store network, which creates incremental opportunities to capture market share. I will conclude with an update on our third strategic pillar, store operations. Our store leadership team is prioritizing better task execution, stronger sales productivity, and higher labor utilization. Our field leaders are simplifying task workflows and improving scheduling to help teams operate more efficiently. Concurrently, we are upgrading training content to strengthen team capabilities while also providing transparent performance measurements to drive accountability.

The new store operating model was fully implemented in Q4 and is yielding opportunities for strategic investments in key markets to support transaction growth. We will continue to allocate payroll and store resources strategically while monitoring the new operating model to increase productivity. Early indicators of our service enhancements are encouraging, including an improvement in customer Net Promoter Scores, which reinforces our confidence in the actions we are taking. Delivering strong customer service remains a long-term priority, and we are pleased with our consistent pro delivery times of under 40 minutes, as well as the continued focus on improving in-store NPS. Technology is also playing a pivotal role in unlocking better store productivity. We have equipped our store teams with tools like Zebra devices to improve daily task efficiency, like inventory management. We are also modernizing servers and other systems infrastructure to drive store efficiency.

These technological investments are integrated into our financial plan and are in addition to physical store upgrades being executed at more than 1,000 locations this year as part of our multi-year asset management plan. In closing, I want to once again thank the team for their hard work this quarter. This past April marked Advance Auto Parts' 94th year in business. As we reflect on how far we've come, we believe we have a bright future, thanks to the passion of our team members, who continue to drive us forward. I will now hand the call over to Ryan to provide details on our Q1 financial performance. Ryan.

Thank you, Shane, and good morning, everyone. I want to begin by thanking our frontline associates for continuing to serve our customers and delivering a strong Q1. For the first quarter, we reported net sales of $2.6 billion. Which grew one percent compared to last year. This included comparable sales growth of 3.5%, which was offset by two points of headwind created from cycling $51 million in liquidation sales related to the store optimization activity that was completed in Q1 last year. Let's dive into the cadence of our comparable sales performance. Our Q1 fiscal period stretches across 16 weeks from January through April. The early part of the quarter witnessed multiple winter storms, which helped drive sales of failure-related items. We also experienced some disruption with temporary store closures and delayed spending on maintenance categories. Starting in mid-February, sales trends began to improve.

This was driven by a combination of consumers deploying tax refunds and resuming spending on vehicle maintenance in the backdrop of better weather during March. As we transitioned into April, the contribution from weather was relatively muted as some of our markets witnessed unusually dry conditions, while others experienced a prolonged transition into spring. On balance, we estimate that weather was not a material driver of results in fiscal Q1. Outside of these factors, Q1 performance primarily benefited from our focus on Main Street Pro, along with improvements in parts availability and customer service. The benefits from our initiatives were evident in the acceleration in our two-year comparable sales trend throughout the quarter, despite the more onerous comparisons during the second half of Q1. Looking at performance by channel, the pro channel grew in the mid-single-digit range, with monthly growth tracking consistently within that range.

As we have indicated previously, we are strategically optimizing our large national account Pro business and focusing our selling efforts on the Main Street Pros. Our outside sales team has been doing a tremendous job in engaging with these customers, which is yielding more than 200 basis points of outperformance in comparable sales relative to our overall Pro comp. While the optimization of national accounts is creating a natural headwind in the Pro channel this year, our underlying comparable sales trajectory is healthier, and we expect our actions this year to position us more favorably over the long term. The Main Street Pro represents a larger portion of the addressable market, and we see a meaningful opportunity to grow within this segment. In the DIY channel, comparable sales grew in the low double-digit range. Performance within the channel remains tempered due to the broader inflationary backdrop and stretched household budgets.

In this environment, our teams remain focused on serving customers well and delivering a strong in-store experience. Ticket was positive for the quarter and included same SKU inflation of approximately three percent, which was in line with expectations. Transaction volumes improved in both channels, and we continue to be encouraged by the growth in units per transaction. Both metrics accelerated on a one and two-year basis, highlighting our progress with enhancing parts availability and customer service. Moving to margins. Adjusted gross profit was approximately $1.2 billion, or 45.1% of net sales, resulting in over 210 basis points of gross margin expansion compared to the same period last year. The improvement in gross margin was mainly driven by product margin expansion, reflecting the strength in our underlying merchandising initiatives and commitment to operational progress.

During the quarter, we also cycled through approximately 90 basis points of atypical margin headwinds related to our store optimization activity last year. This benefit was more than offset by a year-over-year margin headwind created by $17 million in LIFO expense during the quarter. Adjusted SG&A was approximately $1.1 billion, or 41.3% of net sales, resulting in approximately 200 basis points of leverage. SG&A declined three percent compared to last year as we cycled through an estimated $37 million in expenses associated with our store optimization project. Adjusting for this comparison, SG&A was relatively flat to last year, reflecting strong productivity in the business. As a result, adjusted operating income was $99 million, or 3.8% of net sales, resulting in 410 basis points of year-over-year margin expansion. Adjusted diluted earnings per share for the quarter was $0.77 compared to a loss of $0.22 last year.

We ended the quarter with free cash outflow of $75 million compared to an outflow of $198 million in the same period last year. The improvement in free cash flow year-over-year was primarily driven by stronger operating performance, improved working capital management, and a reduction in cash expenses for restructuring costs associated with the store optimization activity. Inventory at the end of Q1 grew by approximately five percent compared to year-end 2025, reflecting our focus on expanding product depth and breadth across the network while aligning availability with market demand. We expect to continue allocating inventory investments on a market-by-market basis to provide broader access to parts for our customers.

Our balance sheet is in a solid position with approximately $3 billion in cash at the end of the quarter. Net debt leverage was stable at 2.4 times compared to last quarter, and in line with our targeted range of 2 - 2.5x. Turning to full year guidance. Let's start with net sales. For the full year, net sales is projected at approximately $8.5 billion. This includes comparable sales growth in the one -two percent range. Each quarter is expected to deliver positive same-store sales growth. Although the first half is expected to be stronger, owing to easier comparisons and the strong Q1 performance. Same SKU inflation is planned in the two - three percent range for the year. The recent tariff regulations have not altered our inflation expectations. 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 a gradual improvement in transactions, with initiatives focused on enhancing availability and service levels. While we are encouraged by the strong start to the year, our outlook considers the potential for some near-term demand variability related to continued pressure on the consumer, which is now being intensified by elevated gas prices. Moving to margins. We expect adjusted operating income margin between 3.8% and 4.5% for 2026, resulting in 130-200 basis points of year-over-year margin expansion. We expect gross margin expansion in the range of 110-150 basis points to approximately 45%. Most of this margin expansion is expected to be driven by merchandising initiatives related to strategic vendor sourcing and optimization of pricing and promotions.

We expect that the benefits from merchandising initiatives will be partially offset by investments to improve supply chain productivity following completion of the consolidation phase of our DC network. We plan to continue to work closely with our vendor partners to navigate the current volatility due to the evolving geopolitical landscape and the goal of mitigating any potential supply or cost pressures. Regarding SG&A, we expect reported full year expenses to be down year-over-year, contributing 20-50 basis points of leverage. This is largely due to cycling of approximately $90 million in non-recurrent expenses from 2025. Adjusting for these expenses, we expect SG&A to grow at a low single-digit rate compared to last year.

We expect the deployed savings generated from better in-store task management, effective resource allocation, and a reduction in indirect spending to fund general wage inflation, store opening expenses, and strategic labor investments in priority markets. As we move forward, we will continue to look for opportunities to streamline task and operations in stores to create more time for customer service. The slide presentation accompanying today's call provides a detailed view of our full year 2026 sales and operating margin guidance. Moving to other items in guidance. We expect adjusted diluted EPS in the range of $2.40 to $3.10. This includes full year pre-tax interest expense of approximately $210 million, partially offset by pre-tax interest income of approximately $80 million. During Q1, we experienced favorability in interest income based on rates in the quarter.

We are not updating full year EPS expectations on account of higher interest income, given that it's still relatively early in the year. We expect to increase capital expenditures in 2026 to approximately $300 million, with spending allocated to new stores and greenfield market hub growth, store infrastructure upgrades, and strategic investments. We plan to open 40-45 new stores and 10-15 market hubs during the year. Full year 2026 free cash flow is expected at approximately $100 million, supported by stronger sales and profitability. Q1 typically represents a seasonal trough for free cash flow, and we expect stronger cash generation for the balance of the year. To conclude, I want to thank our frontline team for delivering a strong Q1 and their commitment to serving our customers and enhancing operational execution. I will now hand the call back to Shane.

Thank you, Ryan. I'd like to close by thanking the Advance team for building momentum against our strategic priorities. We are strengthening the business by enhancing the customer's experience and our operational productivity, which we believe will position us well to drive long-term growth. Thank you. Operator, we can now open the line for questions.