Advance Auto Parts (NYSE:AAP) Q3 2025 Earnings Call October 30, 2025 08:00 AM ET Speaker2Hello and welcome everyone to the Advance Auto Parts third quarter 2025 earnings conference call. I would now like to turn it over to Lavesh Hemnani, Vice President, Investor Relations.Speaker0Good 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 wil ...

Core Viewpoint - AutoZone's recent earnings report showed a mixed performance, with earnings per share missing expectations while net sales slightly increased year over year, leading to a downward trend in stock estimates and a Zacks Rank of 4 (Sell) [2][6][8] Financial Performance - AutoZone reported earnings of $48.71 per share for Q4 fiscal 2025, missing the Zacks Consensus Estimate of $50.52, but net sales increased by 0.6% year over year to $6.24 billion, surpassing the estimate of $6.22 billion [2] - Domestic commercial sales rose to $1.76 billion from $1.66 billion in the prior year, while same-store sales increased by 4.8%. However, gross profit decreased to $3.22 billion from $3.26 billion, and operating profit fell by 7.8% year over year to $1.2 billion [3] Store Expansion and Inventory - During the quarter, AutoZone opened 91 new stores in the U.S., 45 in Mexico, and 6 in Brazil, ending with a total of 7,657 stores globally [4] - Inventory increased by 14.1% year over year, with net inventory per store improving to negative $131,000 from negative $163,000 a year ago [4] Cash and Debt Position - As of August 30, 2025, AutoZone had cash and cash equivalents of $271.8 million, down from $298.2 million a year earlier, while total debt decreased to $8.8 billion from $9.02 billion [5] - The company repurchased 117,000 shares for $446.7 million during the fiscal fourth quarter, with $632.3 million remaining under its current share repurchase authorization [5] Market Sentiment and Estimates - Following the earnings release, there has been a downward trend in estimates, with the consensus estimate shifting down by 12.32% [6] - AutoZone currently holds an average Growth Score of C, a Momentum Score of F, and a Value Score of D, resulting in an aggregate VGM Score of D, indicating underperformance across investment strategies [7]

Financial Data and Key Metrics Changes - The company reported a 5.6% increase in comparable store sales for Q3 2025, with total sales increasing by $341 million [5][26] - Operating income increased by 9%, and diluted earnings per share rose by 12% [5] - The updated diluted earnings per share guidance is now in the range of $2.90 to $3.00, reflecting a year-over-year increase of 9% [13][14] - Free cash flow for the first nine months of 2025 was $1.2 billion, down from $1.7 billion in the same period in 2024 [28][29] Business Line Data and Key Metrics Changes - The professional business saw a comparable store sales increase of just over 10%, significantly contributing to overall sales growth [6][7] - The DIY segment experienced low single-digit comparable store sales growth, driven by average ticket benefits but faced pressure on transaction counts [7][8] - Same-skew inflation was just over 4%, impacting both business segments [8][11] Market Data and Key Metrics Changes - The company updated its full-year comparable store sales guidance from 3%-4.5% to 4%-5% [10][11] - Inventory per store finished the quarter at $858,000, up 10% from the previous year [29][30] - The adjusted debt to EBITDA ratio was 2.04 times, slightly up from 1.99 times at the end of 2024 [30][31] Company Strategy and Development Direction - The company plans to open 200-210 net new stores by year-end 2025 and has set a target of 225-235 net new stores for 2026 [22][23] - The focus remains on maintaining strong customer service and product availability to gain market share [12][18] - The company is navigating the evolving tariff environment while ensuring competitive pricing [17][18] Management's Comments on Operating Environment and Future Outlook - Management expressed caution regarding consumer spending due to economic uncertainty but noted that DIY consumers are still willing to invest in vehicle maintenance [9][12] - The company remains optimistic about its ability to gain market share despite potential consumer deferral in larger ticket jobs [9][10] - The overall industry backdrop is described as stable and supportive, with expectations of continued share gains [12][18] Other Important Information - The company reduced its full-year capital expenditure guidance by $100 million to a range of $1.1-$1.2 billion [25] - The gross margin for Q3 was 51.9%, up 27 basis points from the previous year [15][16] - SG&A per store growth was 4%, at the top end of expectations, driven by strong sales performance and inflationary pressures [20][21] Q&A Session Questions and Answers Question: Regarding the 4% same-skew inflation, will there be any residuals in the next quarters? - Management indicated that a tailwind from same-skew inflation is expected in Q4 and Q1, but adjustments needed are mostly behind them [34][35] Question: What has been observed historically regarding price elasticity, particularly on the DIY side? - Historically, larger ticket jobs can be deferred, but the company remains confident in the overall strength of both business segments [36][37] Question: Is the elasticity function getting worse, and why wouldn't comps be higher than expected inflation? - Management noted that various factors influence the outlook, including weather and consumer behavior, but they remain cautious yet optimistic about trends [42][46] Question: Can you discuss the potential for U.S. store growth and international expansion? - The company sees significant growth potential in the U.S. and untapped markets in Mexico and Canada, with plans to accelerate store openings [47][50] Question: Are there any notable differences in geographic performance due to weather patterns? - No material differences were observed in regional performance during Q3, aligning with internal plans [56][57] Question: What risks or exposure does the company have regarding First Brands? - First Brands represents a small portion of COGs, and the company has strong relationships with multiple suppliers to mitigate risks [58][59]

Financial Data and Key Metrics Changes - The company reported a 5.6% increase in comparable store sales for Q3 2025, which was at the high end of expectations [5][11] - Operating income increased by 9%, and diluted earnings per share rose by 12% [5] - The updated diluted earnings per share guidance for the full year is now between $2.90 and $3.00, reflecting a year-over-year increase of 9% [13][14] - Total revenues for 2025 are expected to be between $17.6 billion and $17.8 billion [27] Business Line Data and Key Metrics Changes - The professional business segment saw a comparable store sales increase of just over 10%, driven by pro-ticket count growth [5][6] - The DIY segment experienced low single-digit comparable store sales growth, primarily due to average ticket benefits, although there was pressure on transaction counts [7][10] - Same-skew inflation was reported at just over 4%, impacting both business segments [9] Market Data and Key Metrics Changes - The company noted that the DIY business faced modest pressure from rising prices, which may have led to some deferral in larger ticket jobs [8][10] - The professional side of the business showed strong performance across failure and maintenance-related categories, indicating resilience in customer demand [10][11] Company Strategy and Development Direction - The company plans to open 200 to 210 net new stores by year-end 2025, with a target of 225 to 235 net new stores for 2026 [23][24] - The expansion strategy includes growth in the U.S., Mexico, and Canada, with a focus on building teams and infrastructure to support operations [49][50] - The company aims to maintain competitive pricing and service levels while navigating the evolving tariff environment [18][19] Management's Comments on Operating Environment and Future Outlook - Management expressed caution regarding consumer spending due to economic uncertainty but noted that DIY consumers are still willing to invest in vehicle maintenance [10][13] - The company remains optimistic about gaining market share despite the challenges posed by inflation and tariffs [12][13] - Management highlighted the importance of customer service and product availability in maintaining competitive advantage [19][20] Other Important Information - The gross margin for Q3 was reported at 51.9%, up 27 basis points from the previous year [16][17] - SG&A per store growth was at the top end of expectations at 4%, driven by strong sales performance and inflationary pressures [21] - Free cash flow for the first nine months of 2025 was $1.2 billion, down from $1.7 billion in the same period in 2024 [29] Q&A Session Summary Question: Impact of same-skew inflation - Management indicated that while the majority of cost adjustments are behind them, there may still be some tailwind from same-skew inflation moving into Q4 [35][36] Question: Price elasticity on DIY side - Historical trends suggest that larger ticket jobs may be deferred, but essential repairs are likely to be prioritized by consumers [38][39] Question: Geographic performance differences - No significant material differences were noted in regional performance during Q3, despite varying weather patterns [52][53] Question: Supplier health and risks - The company expressed confidence in its supplier health, noting that First Brands represents only 3% of COGs and that they have multiple sourcing strategies in place [54][56] Question: Conditions for restoring SG&A per store growth - Management acknowledged that broader macroeconomic conditions play a significant role in SG&A growth and emphasized their focus on maintaining high service levels [77][79]

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