Financial Data and Key Metrics Changes - Valvoline reported net sales of $462 million, an increase of 11% on a reported basis and 15% when adjusted for refranchising impacts from the previous year [12] - The gross margin rate improved by 50 basis points year-over-year to 37.4%, driven by labor and product cost leverage, despite increases in service delivery costs [12][13] - Adjusted EBITDA margin increased by 60 basis points to 25.4%, while EPS grew by 16%, or 28% when adjusted for refranchising [12][13] Business Line Data and Key Metrics Changes - System-wide same-store sales grew by 5.8% and 13.8% on a two-year stack, with ticket prices being the largest contributor to this growth [5][6] - Franchise same-store sales were slightly higher than the system average, indicating strong performance across both company and franchise stores [6] - The company added 162 stores from the Breeze transaction and 38 net new stores, with 10 from franchise [7][8] Market Data and Key Metrics Changes - Customer demand for nondiscretionary services remains strong, with no signs of trade-down or deferral observed [6] - Valvoline's customer satisfaction is reflected in a 4.7-star rating and NPS scores over 80% [6] Company Strategy and Development Direction - The company aims to expand its network to over 3,500 stores, with a focus on productivity and margin improvement [5][9] - Valvoline is integrating the Breeze stores and expects to leverage best practices across the organization [8][9] - The company is also exploring a national advertising fund to enhance marketing efficiency as its network grows [84] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in meeting fiscal year 2026 guidance, citing strong core business fundamentals despite near-term headwinds from immature stores [10][15] - The company anticipates that customer behavior will normalize post-weather disruptions, with expectations of recouping lost transactions [34][111] Other Important Information - Valvoline raised over $1.8 million for local children's hospitals, marking a nearly 40% increase from the previous year [11] - The company is focused on reducing leverage to 2.5 times adjusted EBITDA to resume share repurchase activities [14][79] Q&A Session Summary Question: Impact of non-oil change revenue on same-store sales - Management confirmed that non-oil change revenue contributed around 20 basis points to same-store sales this quarter [18] Question: Franchise store growth pipeline - Management indicated a robust pipeline for franchise openings, with nine new units opened in January [19] Question: Trends in sales composition - Management noted that ticket prices were the larger contributor to same-store sales growth, with balanced growth across both ticket and transaction [24][61] Question: Breeze integration focus - Management stated that Breeze represents less than 10% of financial commitments for FY 2026, emphasizing strong core business momentum [26] Question: Gross margin performance - Management highlighted that gross margin improved due to labor and product cost leverage, with expectations for continued progress [55] Question: Customer trade-down behavior - Management noted that convenience is a significant driver for customers switching from dealerships to Valvoline, rather than solely price considerations [66] Question: Impact of Winter Storm Fern - Management acknowledged that while the storm affected transactions, historical patterns suggest customers will return for service once conditions normalize [111]

Core Viewpoint - The Zacks Automotive - Retail and Wholesale - Parts industry is experiencing a positive outlook driven by trends such as an aging vehicle fleet, increasing vehicle technology complexity, and advancements in digitization that enhance customer experience [1][4][6]. Industry Overview - The industry encompasses retailing, distribution, and installation of vehicle parts, with options for consumers to either repair vehicles themselves (DIY) or seek professional assistance (DIFM) [3]. - The competitive landscape is evolving due to changing customer expectations and technological innovations [3]. Factors at Play - **Aging Vehicles Fuel Auto Parts Demand**: The average age of vehicles on U.S. roads has reached 12.8 years, leading to increased demand for repairs and maintenance as consumers prefer to maintain existing vehicles rather than purchase new ones [4]. - **Technology Changing Repair Dynamics**: Advanced vehicle technologies are making repairs more complex, resulting in a shift from DIY repairs to reliance on professional mechanics and service centers [5]. - **Digitization Enhancing Customer Experience**: Companies are investing in digital transformation to improve customer engagement through online platforms and transparent pricing tools, which are becoming essential for competitiveness [6]. - **Softening Auto Sales to Support Aftermarket Reliance**: Economic pressures are expected to soften new vehicle sales, prompting consumers to repair existing vehicles, thereby supporting demand for auto parts and services [7]. Industry Ranking and Performance - The Zacks Auto Retail & Wholesale Parts industry holds a favorable Zacks Industry Rank of 62, placing it in the top 25% of approximately 245 Zacks industries, indicating strong near-term prospects [8][9]. - Despite this, the industry has underperformed compared to the Auto, Tires, and Truck sector and the S&P 500 over the past year, with a growth of 2% compared to 12% and 20% respectively [11]. Current Valuation - The industry is currently trading at an EV/EBITDA ratio of 25.82X, higher than the S&P 500's 18.9X and the sector's 26.87X, reflecting the debt-laden nature of automotive companies [14]. - Over the past five years, the industry has seen an EV/EBITDA range from 22.15X to 32.70X, with a median of 26.23X [15]. Stocks in Focus - **Driven Brands (DRVN)**: The largest automotive services company in North America, focusing on oil changes and maintenance, with a strong growth trajectory through franchising and a solid cash generation model. The company has a Zacks Rank of 2 (Buy) with a projected EPS growth of 16.7% for 2026 [18][19]. - **O'Reilly Automotive (ORLY)**: Known for its disciplined expansion and strong distribution network, O'Reilly has achieved record revenues for 32 consecutive years. The company has a Zacks Rank of 3 (Hold) with an expected EPS growth of 11% for 2026 [22][23]. - **AutoZone (AZO)**: With 36 years of record sales, AutoZone is expanding its hub and mega-hub stores to improve service speed and parts availability. The company has a Zacks Rank of 3 with projected EPS growth of 3% for 2026 [26][27].