Auto parts retailer Advance Auto Parts (AAP +3.12%) stock spiked 5.2% by 11 a.m. today as the market continues to warm to the deep value opportunity in the stock. In fact, as I write, the stock is up more than 28% on the year.
Advance Auto Parts is finding favor
The case for buying the stock has remained the same and rests on the hope that its management can deliver operational performance, at least close to that of peers like AutoZone and O'Reilly Automotive.
As you can see below, its earnings before interest, taxation, depreciation, and amortization (EBITDA) margin is nowhere near its peers', which is why it trades on such a low price-to-sales ratio compared to them.
AAP EBITDA Margin (TTM) data by YCharts
While the end-market outlook isn't great -- 3M described a weak auto aftermarket entering 2026 -- the reality is this is largely a self-help story, and if CEO Shane O'Kelly's aggressive strategic restructuring improves profit margins, then the stock has considerable upside potential.
Strategic restructuring
O'Kelly's plans are significant, with over 700 locations already closed and stores opened in areas where Advance Auto has a leadership position. Moreover, the ongoing opening of much larger market hub stores offers a solution to the perennial challenge and opportunity for auto parts retailers: how to manage inventory to get the right parts available to customers, ideally on a same-day basis.
Image source: Getty Images.
Doing that is the holy grail of keeping customers loyal, as is the kind of initiative that the company launched yesterday. Namely, a loyalty program rewarding its DIY customers.
There's no guarantee O'Kelly will succeed, but his restructuring is the most fundamental approach taken yet, and value investors are increasingly willing to give the company the benefit of the doubt.
