Image source: The Motley Fool.

DATE

Thursday, May 21, 2026 at 8 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Shane O'Kelly
• Executive Vice President and Chief Financial Officer — Ryan Grimsland

TAKEAWAYS

• Comparable Sales Growth -- 3.5% increase, the highest in five years, led by sustained mid-single-digit gains in the Pro channel and a reversal of softness in DIY.
• Net Sales -- $2.6 billion, up 1%, impacted by a 2 percentage point headwind from cycling $51 million in prior-year liquidation sales.
• Adjusted Operating Margin -- Expanded over 400 basis points to 3.8%, with margin gains largely attributed to merchandising execution and product margin improvement.
• Gross Margin -- 45.1%, an increase of more than 210 basis points; influenced by product margin expansion and offset by $17 million in LIFO expense.
• Adjusted SG&A -- $1.1 billion or 41.3% of net sales with a 3% decline, benefiting from the absence of $37 million in store optimization expenses.
• Adjusted Diluted EPS -- $0.77, rebounding from a loss of $0.22 in the prior year period.
• Free Cash Flow -- Outflow of $75 million, improved from a $198 million outflow last year, attributed to higher operating performance and reduced restructuring costs.
• Inventory -- Increased approximately 5% from year-end, reflecting a focus on expanded product breadth and depth.
• Net Debt Leverage -- 2.4x, stable quarter over quarter and within the company’s target range.
• Full-Year Sales Guidance -- Net sales projected at about $8.5 billion, with comparable sales growth targeted at 1%-2% for the year.
• Inflation Expectations -- SKU inflation planned at 2%-3% for the full year, with higher rates expected in the first half.
• Margin Guidance -- Adjusted operating income margin expected in the 3.8%-4.5% range, up 130-200 basis points from the prior year.
• Capital Expenditures -- Expected to total around $300 million, focused on new stores, market hubs, store upgrades, and strategic investments.
• Store and Hub Expansion -- Plans call for 40-45 new stores and 10-15 new market hubs during the year, with a target of 60 hubs by 2027.
• DIY Loyalty Program -- Launch of Advance Rewards replaced Speed Perks, resulting in increased new member sign-ups and program transaction penetration.
• ARGOS Brand Performance -- Newly launched own-brand oil and related products met expectations, ranking among the top brands in the category.
• Market Hub Performance -- Regions with market hubs are delivering approximately 100 basis points higher sales lift compared to those without.

Need a quote from a Motley Fool analyst? Email [email protected]

RISKS

• Ryan Grimsland said, "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."
• Management explicitly flagged that comparable sales may moderate in upcoming quarters, with growing uncertainty in consumer demand after recent tax refund tailwinds dissipate.
• Continuing headwinds in the Pro channel are expected in the near term from the optimization and reduction of national account business, with "Q1 is probably the largest headwind."
• Higher SG&A and logistics costs are expected due to ongoing transportation and supply chain investments, although the company intends to partially offset these through productivity gains.

SUMMARY

Advance Auto Parts (AAP +15.39%) delivered its highest comparable sales growth in five years, driven by Main Street Pro outperformance and positive trends in both Pro and DIY channels. Management reaffirmed full-year sales and margin guidance, pointing to merchandising initiatives and improved operational productivity as key contributors to profitability expansion. Strategic actions—such as market hub deployment, a new assortment framework, and the rollout of owned brands—were specifically credited with strengthening parts availability, customer engagement, and transaction volumes. Investments are being made to modernize stores, streamline the supply chain, and further leverage technology, with clear targets for additional hub expansion and inventory depth. The company emphasized that it is closely watching evolving consumer patterns and external inflationary pressures but remains confident in its ability to manage potential volatility and execute its margin roadmap.

• The company intends to fund wage inflation and targeted labor investments in priority markets by deploying savings from improved in-store task management and indirect spend reductions.
• Ryan Grimsland noted that Q2 and Q3 are expected to produce higher gross margin and EBIT margin relative to other quarters, with full-year operating income margin likely at the high end of the guidance range during those periods.
• Management reported 3% same-SKU inflation for the quarter, aligning with expectations and supporting ticket growth and improved units per transaction.
• Supply chain process standardization and new workflow improvements are positioned to drive further margin growth beginning in 2027, following the recent distribution center consolidation.
• The proportion of Main Street Pro accounts has increased, which carries a higher margin profile and presents greater market opportunity compared to national accounts.
• Advance Rewards, the company’s new DIY loyalty program, has resulted in higher transaction counts and stronger early customer engagement metrics after rollout.
• Pricing remains rational and competitive, as management reiterated, "We are not trying to be the low-price in the market."

INDUSTRY GLOSSARY

• Main Street Pro: Segment of professional installers servicing local or regional customers, distinguished from national accounts and identified as having a higher margin opportunity.
• Market Hub: Centralized facility designed to improve parts availability and same-day fulfillment across a network of stores, supporting increased transaction volumes and operational efficiency.
• LIFO Expense: Accounting charge tied to the "last-in, first-out" inventory methodology, impacting reported gross margin results.
• ARGOS: Advance Auto Parts' proprietary brand for oil, lubricants, and related automotive chemicals, intended to address both Pro and DIY customer segments.

Full Conference Call Transcript

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 the first quarter, marking our strongest quarter of growth in 5 years. Based on market indicators, we believe our results were closely aligned to broader market trends, reflecting meaningful progress over the last 2 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 single-digit growth, reversing the softness experienced last quarter. Our Q1 performance reflects continued improvement in parts availability and comer 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 first quarter. 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 7% 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, and 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 in 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 to 15 market hubs this year. To date, we have opened 2 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 Hub's locations is enabling us to enhance same-day hard parts coverage across the store network, which creates incremental opportunities to capture market share. Next, 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 multiyear 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' 95th 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?

Ryan Grimsland: 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 1% compared to last year. This included comparable sales growth of 3.5%, which was offset by 2 points of headwind created from cycling $51 million in liquidation sales related to the store optimization activity that was completed in Q1 last year. Next, 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, although 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 transition 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 2-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 has created 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 single-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 3%, and 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 1- and 2-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 3% 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 5% compared to year-end 2025 and 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 2.4x compared to last quarter and in line with our targeted range of 2x to 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 1% to 2% 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 2% to 3% 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 to 200 basis points of year-over-year margin expansion. We expect gross margin expansion in the range of 110 to 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 to 50 basis points of leverage.

This is largely due to cycling of approximately $90 million in nonrecurring 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 to deploy 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 tasking 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 pretax interest expense of approximately $210 million, partially offset by pretax 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 to 45 new stores and 10 to 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.

Shane O?Kelly: Thank you, Ryan. I'd like to close by thanking the Advanced team for building momentum against our strategic priorities. We are strengthening the business by enhancing the customers' 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.

Operator: [Operator Instructions] Your first question comes from the line of Steven Zaccone from Citi.

Steven Zaccone: Congrats on the strong results. I wanted to just start with the same-store sales outlook for the year. Obviously, you maintained it [indiscernible] had such a strong print here in the first quarter. Just help us think about the cadence of the year. Is there really any change? You mentioned some near-term demand variability, I think, was your comment. So just -- what are you seeing in the near term? Anything to think about for the second quarter would be helpful as well.

Ryan Grimsland: Yes. Thanks, Stephen. This is Ryan. So in Q2, we expect comps to moderate a little bit from Q1, and that's consistent with how we planned earlier in the year. We expect comps in line with our guidance range, so still in that ballpark. We also don't expect any major tax refund tailwinds going into it. We begin lapping inflation kind of in the second half of Q2, think of last year's inflationary events. We are monitoring kind of like potential increased volatility in consumer spend as we go through the quarter.

For Q3, Q4, there's really no change to expectations for comps that are in line with the low end of our full year guidance, which is what we expected. A couple of things just to think about from a quarter and where we see things going right now in the quarter, there is this difference -- we call it a shoulder period between tax rate funds and kind of peak driving. And I think as we get past Memorial Day, that's peak driving season. And so just knowing consumer household budgets are pressured right now.

That will be a really good indicator for us to see how that plays out, but really getting past Memorial Day is really when that peak driving season takes off. So for now, we're kind of keeping guidance where we had, Q2 kind of consistent with where we planned in the back half of the year. One thing to remember about the back half of the year from an inflationary standpoint, is that we're cycling over inflation. So we called out 2% to 3% inflation on the year, the first half of the year being more towards the high end of that, the back half of the year being more in the lower end of that from an inflationary impact.

Steven Zaccone: Okay. Great. Then the follow-up I had is just on the DIFM side, how do we think about some of the moving pieces now with Main Street accounts? And then winding down some of the national account business as we think about tailwinds and headwinds through the balance of the year?

Ryan Grimsland: So yes, it's a good one on that one. From a national account standpoint, probably Q1 is going to be the largest headwind from some of the actions we've taken, that will start to kind of reduce over time. It will still be pressure in the back half of the year because there were actions we took in the back half of the year. But Q1 is probably the largest headwind.

You start to see the Main Street's performance and the overall Pro get more in line and then especially going into next year, but we'll still have pressure throughout the year, but Q1 probably being the largest pressure, and we'll start to see that moderate throughout the year, but there will still be some. We're really excited about the work the team is doing on the Main Street side. It's a larger addressable market. A higher margin profile. The team has done a phenomenal job getting out there and providing the right service level, getting the right assortment of parts in our stores to meet the needs of the Main Street Pro.

So we're excited about the momentum there and what we're doing.

Operator: Your next question comes from the line of Simeon Gutman from Morgan Stanley.

Simeon Gutman: So you're growing above inflation, and that's the first time in a bit, which is a good progress. Can you talk about -- I know -- I think it sounds like that's happening in both DIY and do-it-for-me. Is it specific to certain categories? Is it specific to certain geographies? Can you share spreads, if you're willing to, of different geography and different categories so we can get a sense of how broad it is?

Ryan Grimsland: Yes. From an inflationary standpoint, that's pretty much across the board. I think from a transactional piece, there are some differences and nuanced differences geographically. Some of that is how much of that is consumer pressure in different areas. We are seeing better performance in the Northeast and Mid-Atlantic, some of the key markets. But it's been broad-based improvement -- is not a significant deviation. Some of that is weather in the quarter as well that's impacted different geographies. So for the most part, from an assortment and availability and in-stock, we feel really good about that across all of our geographies. We really like the service levels improvement across all geographies.

The things we're doing are hitting broad-based in all geographies, and we like the momentum we're building there. There are other things that impact differences like weather within those areas that may cause some deviation. But for the most part, it's kind of broad based -- inflation's impact is really universal across all those areas.

Shane O?Kelly: Simeon, it's Shane. A couple of adds to Ryan's point. First, on the Pro side, our time to serve our Main Street focus. We really like what we're doing there. We like how we're using technology to help our sales team members be effective when they're in with the Small Pro. And then on DIY, a couple of things. Brakes has been a great category for us. We really like what's occurring there. And we're thrilled with the ARGOS launch.

So as a reminder, that's our brand of what originally started with motor oil, great receptivity and now expanding across hydraulics, performance chem, antifreeze, washer fluid, add to that, the assortment moves Ryan referred to, also refreshing POGs and we see that being manifested in our NPS improvement. So we like what we're doing across both Pro and DIY. And we're -- and I want to thank the team, in particular, you mentioned it upfront, a 3.5% comp, that's our best comp in 5 years, and that's a function of hard work going on out in the field every day.

Simeon Gutman: And so just as a follow-up, so this is looking out a bit far. But as you think about the curve of '26 and then even into '27, right now, you are lapping really good SG&A efficiency. There was some easy compare on gross margin. But as you lap into next year, does the cost structure start to go back up and more meaningfully? And then the ability to continue on gross margin, meaning if we continue in comps of this 3% to 4% range. And I don't know if that's the right number or not, is that enough to drive the continued margin expansion that you expect over, call it, the medium term?

Ryan Grimsland: So a couple of things around our build going into next year. This year, the large portion of the margin expansion is really coming from Merch initiatives that's been underway. This year, we are building supply chain productivity initiatives and the time line of that in our stores as well. And I think that's more of a next year type of productivity lift, which -- what were early signs that we're seeing, we're feeling really good about our ability to continue to drive productivity in those areas in future years. This year has really been focused on the merchant initiatives.

So that's been the first one that got going and Ron coming in and looking at our supply chain network, especially after we just consolidated down. Now we're in the buildings, driving productivity, building out those initiatives and plans -- this year, we're really going to be able to assess the timing of when that will come, but we feel good about being able to drive productivity in those out years, particularly in those two areas that we're now just building those plans on. So feel good about that trajectory going in next year.

And the SG&A piece, the similar inflationary growth is going to take place in the SG&A, but we've done a lot of work on indirect spend and they're repositioning some of the spend that we have in SG&A to be more effective to drive productivity. So we'll always be strategic around those investments, where they go in SG&A. And I think we do have a good runway on productivity.

Operator: Your next question comes from the line of Steve Forbes from Guggenheim Securities.

Steven Forbes: Maybe just a follow-up to start on the new assortment framework, Merchandising initiatives. Curious if you could just update on the percentage of sales covered and the associated comp lift. It almost feels like you're articulating an improvement in the lift that you're capturing from the Merchandising initiatives versus the original 50 basis point framework. So I would love to just hear you talk about what you're seeing in the stores inclusive of ARGOS and the broader merchandising strategy?

Ryan Grimsland: Yes. Sure, Steve. I'll start, let Shane jump in with some additional color on it. But from an assortment work, the majority of the assortment work really is related to background hard parts. And so when we rolled that out this past year in 2025, we did see a benefit in those markets. We saw a lift, especially in the hard parts. And we actually see a build over time in that because with hard parts that you're really focusing on the Pro, it does take a little bit of time for them to recognize the availability and the inventory and to start moving up that call list.

So we saw incremental improvement in our performance over that period of time. And that's -- and we'll continue to see that. So we like what we're seeing there. The service level also is starting to come along and improve. And the team has done a great job improved service levels in the field, getting our time to serve down, and improving NPS that's really going to help drive incremental as well. And from an assortment, so just think about it, a lot of background parts is really what we're focused on.

Shane talked a little bit about some of the resets like wash and wax, more front room and get the right assortment in there, and we continue to work on that area. So there is some update, but more focused on the backroom and certainly in our Pro, and it's showing up in our Main Street Pro performance, where the sales teams out there driving sales and they're starting to recognize our availability.

Shane O?Kelly: Steve, I'll just add, it's interesting to -- if you triangulate different data points of how things are going. Obviously, the sales numbers, which you guys have. But I recently went to a vendor conference, one of the prominent ones in the industry and think sort of hundreds of companies there with their respective leaders. And the feedback as to what they see around the assortment moves we're making in terms of adding parts, the speed with which we do that, how we order parts, which parts we're putting and where we're putting them across the nodes in the network, overwhelmingly positive.

And that endorsements, both in terms of the actual parts we're ordering, the processes we're putting in place the talent that we have in the positions to do that. So it gives me a lot of confidence in our strategy on merchandising when you're getting the validation from suppliers they're pretty candid with their feedback if we're not getting it right. And so we're definitely on the right path on the assortment framework, and we're going to continue to do it as we go forward.

Steven Forbes: And then just a quick follow-up, maybe on the back of Simeon's question. Third quarter in a row here, mid-40s gross margin profile and even stronger, right, if you sort of adjust for LIFO, Shane, I believe you talked about sort of the identification of key process improvement opportunities within the supply chain that should build into 2027 and beyond. So are you sort of giving us early [indiscernible] here on a potential change in the margin contributions behind the 7% adjusted EBITDA target? Or should we view those sort of supply chain opportunities as a funding mechanism for reinvestment to the value proposition?

Shane O?Kelly: So I'm going to do a couple of big picture points. We're focusing on controlling that we can control. We've got a strategy that we like with three pillars, and we want to be better each day, each month, each quarter, each year. That's what we're looking to do as a company. In supply chain, Ryan touched on this. When I came to the company, we had 50 DCs of all shapes and sizes. If we sell Worldpac, we go from 58 to 38, 38 then to 28, 28 to 16. We're at 16, maybe it's 15. We're kind of doing some work.

But when you're doing those consolidations and you're asking DCs to take on huge swaths of new stores, like hey, take these 100 stores, 200 stores, it's very hard to tune what goes on inside the four walls. And so we've got a great supply chain leader with Ron coming on board. And I spent -- I just spent time with them in a D.C. And he's already strong at work. He's brought in great team members to work from -- but we go receiving. And he's basically identified that we have different receiving methodologies across our DCs and beyond just some accommodations to where conveyors might be and things like that. But we're just -- we're structurally different.

And the first thing he's doing is, he's bringing rigor to that process to be more similar across the DCs and correspondingly to be more productive on inbound. Now you think about doing inbound and put away, think about [indiscernible], think about outbound, think about going step by step through a DC, and we think there's value there that will go to those margins. As to our broader time line, Ryan?

Ryan Grimsland: Yes. So Steve, you mentioned we changed anything. We're not pivoting from what we originally said. I'll just lay that out here. We talked about 500 basis points really being stuff we control that we can go get about half of that would come from merchandising initiatives and is that pillar that we talked about. And that's been underway, and we're seeing the benefit of that. You're seeing our gross margin rate around 45%, and we expect to finish the year around 45%. And we talked about this year being a build year for stores and supply chain, in particular, and getting a better understanding of the timing and sequencing of the productivity we can get out of that.

So half of the 500 basis points was Merch, that's coming. It's in place. We're continuing to work that. Supply chain, not yet there. And Shane talked about the consolidation piece. Now that we've got all our stores running out of these DCs getting productive and processes within those buildings now so we can drive that productivity within the building is what we're doing. And so building out those plants to, this is a build year investing some into supply chain to get the productivity, laying out those time lines, get into better assessment of when we'll start to see those benefits.

That's what this year has always been about, and that will help us provide a better outlook as we get through the year on what that gross margin profile looks like benefiting from supply chain productivity in the out-year.

Shane O?Kelly: And I'm just going to put one more point on the question because it's a good one. We're also really happy with the market hubs. So we don't have this node, didn't exist, and we saw the need for hard parts availability, more hard parts, same-day availability, and so we started building them. And we closed the year at 33. We're going to do 10 to 15 this year.

And so as we add them, the radius that we're able to support in terms of how frequently we get to stores goes up as we add new market hubs, customers become accustomed to getting that availability -- we continue to tune how product goes from a DC to a market hub and then flows out to the stores. So this is a great initiative for the company. We're going to continue to build them, and that's one more contributor to efficiency and parts availability.

Operator: Your next question comes from the line of Michael Lasser from UBS.

Michael Lasser: Seeing there's an argument out there that says at this point in the transformation, AAP just has a lot of -- for lack of a better, beta to the fundal performance of the overall aftermarket for when trends are good, AAP is going to see some outsized gains and then trends are not as good, it may take an even bigger step back. How would you respond to that? And at what point do you think you will see less dependence on the overall state of the aftermarket and have more control over AAP's destiny?

Shane O?Kelly: Michael, thanks for the question. I think we have a lot of control over our destiny. And as you look at our strategy, we've picked things that we can work on to be better that ultimately will go to your beta comment. Think about the assortment. We control what we buy and where we put it and we're making great progress. You think about service. We benchmark and realized we got to be at 40 minutes in terms of when we go see a Pro customer. We know that when a DIY customer comes in that if you come out from behind the counter and greet them, they have a better experience, attach goes up, at a higher ticket.

So that's a good piece. We know we need to be measuring things like NPS and providing that feedback. And so we're doing all of the things that I think good aftermarket auto parts companies should be doing. And by the way, we're cognizant of what we sort of put out as commitments, and we know it's important for all the people who contribute that data that they can have confidence that we're going to do what we say that we're going to do. And I was recently in stores and starting to see -- the combination of these initiatives come to light. And I'll just touch on an example, I was up in New York.

And they're seeing -- they've got their labor optimized with their delivery vehicles, so they're making the deliveries on time. They've got more hard parts in the back room, so they're saying yes to a Pro customer. They've got a refreshed front room that's inviting for a DIY customer. They've got new servers in the store for uptime reliability. They've got Zebra devices with our AIM advanced inventory management software so they could do cycle counts more quickly. We've got our balance sheet in great stead. We've got $3 billion of cash so that we can go forward. We've got the right leaders in the seat. We've got our relationship with our independents and the footprint there on good stead.

So at every turn, we're making strides to be better and do what we say what we're going to do. And I think that's ultimately what contributes to a normalized beta.

Michael Lasser: Understood. And I was less talking about the stock price and more so just the fundamental performance of the business, but your answer really addressed that. My follow-up question is there has been some focus on Ryan's point around the shoulder periods being a little softer. The market is incurring that as a signal or a message that maybe quarter-to-date has started off a little slow. So a, is that a fair interpretation of the comment and b, how much did that play into your vision just to reiterate the full year guide even with what was a very strong first quarter performance.

Ryan Grimsland: Yes. Thanks, Michael. Appreciate it. So it's more of -- I think right now, the trends are in line with how we plan kind of right now the low end of the guide, that period between tax refunds and Memorial Day and peak driving is always kind of a different volume period. And so getting a sense of consumer behavior and will they drive less miles because budgets are pressure. It's more -- we're going to learn that this summer when they get to peak driving. I mean we don't know if they're driving less miles or not, if the budgets are pressuring the consumer or not in that respect. And remember, our business less than 10% of its [indiscernible].

This is a needs-based business. And so the cars need to start. They have to stop. You got to get about your business. The family needs the car to move -- and so overall, this industry tends to fare well that how the consumer will adjust their driving their miles driven. That's yet to be seen. It's more of, hey, there's uncertainty around the consumer, and we want to see how that plays out during our peak driving season, which that's when this industry sees the benefit. And so that's -- it's more of just a let's see what happens with the consumer when we get into that period of time.

The shoulder period is just -- it's hard to gauge that between tax refunds and that period of time. We're in line with what we had planned.

Shane O?Kelly: Yes. I'll just say we feel good about where we are. And we're back to that data. We're cognizant of the say do, coming off a great quarter. We'll obviously be working hard and staying on strategy, and always appreciative of what our team members are doing.

Ryan Grimsland: The other thing on that, just think of the Pro business. We're watching the Pro business and the Main Street Pro continues to outperform overall Pro. And so the fundamentals that we see in our business and the initiatives, the impact it's having, those trends are continuing.

Operator: Your next question comes from the line of Max Rakhlenko from TD Cowen.

Maksim Rakhlenko: Great. So first, just on gross margin, can you speak to the shape of the year and the key puts and takes that we should consider as we keep in mind the strong 1Q outperformance and you guys reiterated the full year?

Ryan Grimsland: Sure, Max. I appreciate it. So from a margin standpoint, Q1, the performance gives us confidence in our guidance range. Q2 and Q3 seasonally higher margin periods for us. So expect that to tick up a little bit. Expect EBIT margin around the high end of our full year guidance for Q2 and Q3. So operating income, expect that margin to be towards the high end of our guidance. The full year guidance, roughly 45% on gross profit. I expect gross margin around 45%, Q2 and Q3. In Q4, there's a mix of business where you'll see that come down a little bit. It's really mix driven.

So Q2, Q3, more towards the higher end and Q4 comes down a little bit just because of mix. But that's how we'd expect the rest of the year to go.

Maksim Rakhlenko: Got it. That's helpful. And then can you just discuss how the mix of your DIFM accounts has evolved from a year ago, as we think about up down the street, regional and national. And then how do you think it evolves further over the medium term? And then, Ryan, can you discuss the gross margin benefit that you are seeing from the improved mix of DIFM accounts. You sort of highlighted it a little bit earlier, but just any more color there.

Ryan Grimsland: Yes. So I won't give a specific mix of the business, but it's mixing higher to Main Street than it was before. National accounts still was not the majority of our business. Main Street still has always been a larger portion of our business but it's significantly outperforming the national accounts because of our rationalization, optimization of that business. They are both good Pro accounts to have in our portfolio. We just probably over-indexed a little too much on the national side, a better margin profile on the Main Street, and that's also a larger addressable market. So we want to make sure our resource is going to where there's a large addressable market.

On the margin side, -- there's a little bit of benefit from a mix piece, but Pro is growing at a faster rate than DIY as well. So that also mixes in a different way because the DIY is higher margin profile. So net-net, it's slightly favorable from a margin mix standpoint, just it's offset a little bit by the DIY, the mixing them in our portfolio.

Operator: Your next question comes from the line of Zachary Fadem from Wells Fargo.

Zachary Fadem: So with 35 market hubs, I think about half of them are a year in now. Maybe you could share the performance of the regions with a market hub versus the regions without a market hub and how the lift from a market hub tends to build from initial opening to 1 to 2 years in terms of maturity?

Ryan Grimsland: Yes. Thanks, Zack. Actually, so they're still performing and we've said about 100 basis points better than markets without that ecosystem. Greenfield still a little early for us, but we like what we're seeing out of our greenfield. And just as a reminder, when we did the consolidation, we converted a lot of the old smaller DCs into those market hubs. So only 4 of the 35 are actually greenfields, where we're actually selecting the site and opening those. And we like what we're seeing there. It's still early in that. The parts availability does build over time from a benefit to the market, and we're seeing that.

So right now, on average, 100 basis point lift, if you've got this versus markets that don't have it. But we like what we're seeing and that impact in the Pro business and having those parts closer to the customer that time and that speed, we really like the market hub network, and we want to continue to push forward.

Shane O?Kelly: So I have consistently heard from Pro customers about the positive impact of the market hubs. I've also heard it from our independents -- and so if you think about how we would manage this situation in the past, you'd be dependent on the DC. And that's an expensive tick and a much more time-consuming route to get it to a customer. And often you don't end up within a time window that they consider to be acceptable. I'm particularly excited by the next chapter of what we do with our market hubs. They increased time to serve.

And then as we think about greenfields, are really happy with our real estate team in how and where they're selecting where we put these sites. So as we're very thoughtful about where we put them and think about a radius of sort of 50, 50-plus stores now getting supported from that market hub it really changes the game in terms of what they can do. So we're ending this next phase, 10 to 15 is what we're going to do this year. We've committed to 60 in 2027. We'll revisit and then re-announce to you guys what we think our goal will be from there.

Zachary Fadem: Got it. And then two-part question on inflation. You're at 3%. This compares to some of your peers running at about 5% to 6%. Considering those differences, could you talk about your like-for-like pricing versus peers and whether you're running at a discount or if you were previously at a premium and now in line? And then second on just inflation as a whole. We've seen some changes in the environment, oil prices, freight rates that has an impact on vendor financing metals. When you look to the second half of the year and you see the impact of these items, do you think there could be another round of inflationary pricing in the back half?

Ryan Grimsland: Yes. Thanks Zach. So a two-part question. On the first one, from just the CDI, we measure that our strategy hasn't changed from a pricing standpoint. We want to be a competitive priced company every single day. We are not trying to be the low-price in the market. It's a very rational industry, and we're maintaining that posture. So our prices, we look at. We want to make sure that we are competitive [indiscernible], but not trying to go above price. So that strategy hasn't changed. And that directly impacts our inflation, like-for-like SKUs, what price we put out there is just to be competitive every day. From a fuel prices and what went on out there.

So a couple of things. So from an SG&A standpoint, we've seen a little bit of increase in transportation costs, et cetera, not necessarily material. We saw some -- we feel like we've also in our guidance, assume some increase in SG&A, transportation type expenses, some up in COGS from a supply chain cost perspective. As far as product costs are concerned, it's still a little early for us to understand the impact there. I think the good news is this is a very rational industry. We'll continue to partner with our vendors on mitigating any costs that might come up there. And the inelastic nature of our industry is helpful in working through that.

So our inflationary guidance for the rest of the year does not assume any significant cost increase from a product standpoint. But we do feel like it's a rational industry, and we'll work with our vendors to mitigate those costs.

Operator: And your last question comes from the line of Brian Nagel from Oppenheimer.

Brian Nagel: So I want a little bit repetitive, but I just want to understand, if you look at the comps from Q4 to Q1, there was a nice step-up in growth. As you look back on that, look, some of that, I guess, the tailwinds, better tailwinds to this sector are pretty well documented now. But how much of that step up in Q4 to Q1, do you contribute to the underlying repositioning efforts at Advance? And maybe some of those efforts really start to take hold better versus where would likely improve to industry tailwinds.

Shane O?Kelly: Yes. Great question. Thanks for asking it. I think there's a lot going on here. So first, we're putting a ton of effort in parts availability and in customer service. And I think that's enabling us to participate in that positive macro environment, that was helped by higher tax refunds. So -- and in the past, we might not have been able to participate because of the service and the parts. So definitely making a difference there. And we really do this as the first quarter since we embarked on the transformation that we delivered growth that's roughly in line with the market. So that's what we want to do. We want to continue to do that.

Now while the consumers receive higher tax refund checks, there is a correlation between tax refunds and seasonality in auto parts. Now it's less clear it in the sector or other consumer categories who saw disproportionate benefit. But what we're seeing from surveys from several sources is that the consumer did put money to auto parts and other areas, but also to savings in debt reduction. So back to sort of big picture, positive signs that our initiatives are working. Our NPS score has improved. Our time to serve continues to track under 40 minutes. We're getting traction with Main Street Pro. They're outperforming, growing units per traction, units per transaction highlights the benefit of parts of availability.

ARGOS is doing well. Advance Rewards. I didn't touch on that today. So a lot of work ahead. But we would not be in the position to capture the demand tailwind in Q1 without the foundation that was laid between Q4 and Q1 as you alluded to.

Ryan Grimsland: And Brian, I'll add to that in Q4 last year, we talked about the comp maybe even a little lower than we expected. And that's because we still make decisive actions here to get things right. We made some product moves within our store. It created some disruption in Q4, but it set us up as Shane mentioned, to have the right assortment going into the year. And so doing that in Q4 and a lower volume time period, we wanted to accelerate some of that. So a lot of what Shane talked about what decisions we made to accelerate some of that in Q4, so we could set up to capitalize on it in Q1.

Brian Nagel: That's very helpful. I appreciate all that color. Second question, different topic. I don't think you've mentioned yet, like others have started talking more about potential tariff refunds. So I guess the question is, do you have any commentary there? Your efforts to apply to these refunds and the insights to when and if these refunds may come?

Ryan Grimsland: Yes. I mean we've looked at it. We do work on it, and we've done work on it, but nothing as of now to report on it. I mean it's something that I think everyone that's impacted, we're following the process. And as soon as we have more information, we'll share that out. But we are following the process and like everyone else interested in how that plays out.

Operator: And that ends our question-and-answer session. I will now turn the call back over to Shane O'Kelly for some closing remarks.

Shane O?Kelly: Ladies and gentlemen, thank you very much for joining us on our call. We're proud to have put forth our best comp in 5 years. We look forward to staying on strategy most importantly, thanking the men and women from Advance Auto Parts for their hard work, and we look forward to chatting with you for our next quarterly call in August. Thank you. Have a get day. Bye-bye.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.