Advance Auto Parts(AAP -7.95%) reported second-quarter 2025 results on Aug. 14, 2025, with GAAP net sales of $2 billion, down 8% year-over-year, and adjusted earnings per share (EPS) of $0.69. The company returned to profitability, reaffirmed its full-year sales, operating margin, and free cash flow guidance, and tightened its adjusted EPS outlook due to higher interest expense from a $1.95 billion debt offering. The following highlights focus on cost management, capital structure, and transformation progress.
Cost actions drive margin expansion at Advance Auto Parts
Gross margin from continuing operations expanded by 16 basis points year-over-year to 43.8%, supported by store optimization and ongoing cost reduction initiatives. Tariffs now affect about 40% of cost of goods sold at a blended rate of 30%, increasing the importance of disciplined pricing and vendor negotiations.
"We have completed about two-thirds of our line reviews and continue to march towards our goal of delivering about 50 basis points of annualized cost reductions in 2025. We expect to build on this next year as the remaining activities are completed over the next few months. The groundwork laid by this team over the last year is also supporting productive negotiations with vendors on sharing the tariff burden. As we have indicated previously, approximately 40% of our reported cost of goods is exposed to tariffs at a blended rate of approximately 30%. The dynamic tariff environment has certainly presented challenges across the industry. However, we have been able to navigate through this complex landscape, thanks to our much-improved price management capabilities. Our pricing team has been successful in identifying dutiable components across product lines, which is enabling more effective discussions with vendors around cost increases. Simultaneously, the team has been proactive in exploring alternative sources of supply and diversifying countries of origin to mitigate costs."
— Shane O'Kelly, President and Chief Executive Officer
Advance Auto Parts’ ability to identify tariff exposures, negotiate with vendors, and diversify sourcing is helping to offset inflationary pressures and support sustainable margin improvement despite a challenging macro environment.
Advance Auto Parts strengthens balance sheet with debt overhaul
In August 2025, the company issued $1.95 billion in new senior notes (split between 2030 and 2033 maturities) and replaced its $1 billion revolving facility with a $1 billion asset-backed revolver, resulting in over $3 billion in cash on the balance sheet. Much of this liquidity is allocated to support a $3 billion supply chain financing program, and management now targets a net adjusted debt leverage ratio of 2 to 2.5 times by fiscal 2027.
"Proceeds from the senior notes offering were used to redeem $300 million of outstanding senior notes due 2026. Following this redemption, we expect to carry more than $3 billion of cash on the balance sheet. Up to $2.5 billion of this cash plus other assets, including inventory and accounts receivable, will be used to support the new $1 billion asset-backed revolving credit facility and the $3 billion supply chain financing program. Essentially, we are providing a one-for-one asset support for the new debt capital structure. I would like to note that we expect to operate the supply chain financing program as we did prior to the debt offering. The revolving credit capacity under the new ABL facility provides an additional liquidity source beyond our cash on hand."
— Ryan Grimsland, Executive Vice President and Chief Financial Officer
This proactive capital structure overhaul provides Advance Auto Parts with greater financial flexibility, reduces refinancing risk, and ensures continued support for key supplier relationships during its multi-year turnaround.
Transformation initiatives accelerate sales and operational progress
The company is executing a three-pillar transformation plan focused on merchandising, supply chain consolidation, and store and market hub investments. The rollout of new assortment technology in the top 50 designated market areas (DMAs), covering about 70% of sales, is on track for completion by the end of Q3 2025, and market hubs have delivered an average 100 basis points comparable sales uplift.
"Over the past year, we have made considerable progress on analyzing customer needs, identifying gaps within our assortment, and improving internal processes to introduce new products in the market. This has enabled us to add more than 60,000 new SKUs in our network year to date, which is up nearly 300% compared to last year. Providing faster access to parts enables us to respond to demand signals more quickly, driving more effective placement of SKUs across our network. The progress we have achieved in SKU expansion has also contributed to the improvement in our store availability KPI, which increased by approximately 100 basis points compared to Q1 and is currently in the mid-90s range."
— Shane O'Kelly, President and Chief Executive Officer
Advance Auto Parts’ measurable progress in SKU expansion, product availability, and infrastructure upgrades is enhancing its competitive position with both professional and DIY customers, supporting its goal of consistent sales growth and margin expansion.
Looking Ahead
Management reaffirmed full-year guidance for fiscal 2025 net sales of $8.4 billion to $8.6 billion, comparable sales growth of 50 to 150 basis points, and an adjusted operating income margin of 2% to 3%, with Q3 expected above 4%. Adjusted diluted EPS guidance for fiscal 2025 was revised to $1.20 to $2.20, primarily due to higher interest expense. Free cash flow is projected between negative $85 million and negative $25 million for the year, and the company reiterated its fiscal 2027 targets of approximately 7% adjusted operating income margin and a net adjusted debt leverage ratio of 2 to 2.5 times, with margin gains expected to be nonlinear as transformation initiatives mature.
