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Key Takeaways Advance Auto is returning to selective expansion, with 30 to 35 new stores planned for fiscal 2026.Main Street Pro sales are gaining traction, aided by broader assortment, market hubs and faster delivery.Distribution efficiencies and merchandising gains are lifting margins, while DIY weakness remains a concern. Advance Auto Parts, Inc.’s (AAP - Free Report) selective expansion, stronger Main Street Pro sales, distribution efficiencies and improving product margins support profitability. However, weaker DIY demand, inflation, national-account challenges and elevated capital spending could constrain near-term sales growth, margins and cash flow.

Let’s dig deeper and see why this Zacks Rank #3 (Hold) stock is worth retaining in your portfolio.

Selective Expansion, Margin Improvement Aid Advance AutoAfter completing planned location closures in the first quarter of 2025, Advance Auto is returning to selective expansion. It plans 30 to 35 new store openings in fiscal 2026 and uses population, vehicle profiles, competition and real-estate economics in site selection. This supports measured network growth after the footprint reset.

Advance Auto continues to gain traction with Main Street Pro customers, its preferred professional segment. In the second quarter of fiscal 2026, Pro sales grew at a low-single-digit rate, while Main Street Pro comparable sales exceeded total Pro growth by more than 200 basis points. The growth is coming from both existing accounts and customers that previously gave Advance Auto limited business. Broader assortment, market hubs and delivery times below 40 minutes are helping the company compete for first-call status.

Advance Auto completed its distribution-center consolidation in the second quarter of fiscal 2026 and now operates 15 DCs on one warehouse system. The company opened five market hubs in the first half, reaching 38, and raised fiscal 2026 hub-opening plans to 15 to 20 from 10 to 15. It still targets 60 hubs by mid-2027. About 25% of identified DC process changes are complete, with the remainder planned by mid-2027. It also expects to consolidate volume with 70% fewer carriers, generating tens of millions of dollars in transportation savings that support margin expansion in 2027.

Strategic sourcing, better assortment and tighter pricing are improving product economics. Adjusted gross margin rose 240 bps year over year to 46.2% in the second quarter of 2026, including a 130-bps benefit from tariff refunds. Merchandising initiatives added around 100 bps to product margins in the first half, with further gains expected. Full-year adjusted operating margin is expected to expand 130-200 bps, while gross margin is guided near 45%, supporting the medium-term 7% operating margin target.

Reduced Consumer Budget, Higher Capital Requirement Ail AAPTighter household budgets reduced DIY spending in the second quarter of fiscal 2026. DIY sales declined at a low-single-digit rate, with weaker large-ticket projects and discretionary purchases contributing to a 100 to 150 basis-point drag on comparable sales together with milder weather. The company still expects full-year comparable sales growth of 1% to 2%, but that outlook assumes transaction volumes recover from second-quarter levels. If value-focused behavior persists, DIY traffic and mix could continue to constrain sales growth and profitability.

Cost inflation remains another important pressure on AAP’s profitability. Higher oil and commodity prices are pressuring margins, and elevated freight and fuel costs are expected to continue affecting margins during the second half. These costs are particularly challenging because the company is simultaneously trying to maintain competitive pricing. The company expects gross margin of approximately 44-45% in the second half, with freight, fuel and channel mix acting as offsets to merchandising gains.

Although Main Street Pro is performing well, AAP continues to face headwinds from national accounts. The company is transitioning its Pro mix toward Main Street customers, creating some noise in reported results. Main Street is viewed as a larger addressable opportunity, but winning these customers is relationship-driven and can take weeks of repeated interactions before AAP becomes the customer’s first call. This means the benefits from market hubs, better assortment and improved service may take time to fully translate into revenues. While the company remains confident in the strategy, the transition creates near-term uncertainty around Pro growth and the pace at which share gains can offset national-account weakness.

Advance Auto still expects about $300 million of capital expenditures in fiscal 2026. Although free cash flow reached $120 million through the second quarter, the company maintained full-year guidance of about $100 million because of planned operating expenses and timing. Spending on stores, market hubs and infrastructure therefore continues to constrain near-term cash generation.

Price Performance, Valuation and Estimates  AAP has underperformed the Zacks Automotive - Retail and Wholesale – Parts industry in the last six months. Its shares have lost 19.7% compared to the industry’s decline of 9.7%. 

Image Source: Zacks Investment Research

From a valuation perspective, AAP appears undervalued. Going by its price/sales ratio, the company is trading at a forward sales multiple of 0.3, lower than the industry’s 3.33. 

Image Source: Zacks Investment Research

 
The Zacks Consensus Estimate for AAP’s 2026 and 2027 EPS has improved 3 cents and fallen 14 cents, respectively, in the past 30 days.

Image Source: Zacks Investment Research

Stocks to ConsiderSome better-ranked stocks in the auto space are China Yuchai International Limited (CYD - Free Report) and Garrett Motion Inc. (GTX - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for CYD’s 2026 sales and earnings implies year-over-year growth of 58.6% and 68.6%, respectively.

The Zacks Consensus Estimate for GTX’s 2026 sales and earnings implies year-over-year growth of 7.2% and 25.7%, respectively. The EPS estimate for 2026 and 2027 has improved 5 cents and 4 cents, respectively, over the past 30 days.

3 Under-the-Radar Earnings Surprises Could Signal a New TrendAdvance Auto Parts NYSE: AAP reported second-quarter 2026 net sales of $2 billion as comparable sales declined slightly, with growth in its professional customer business offset by a larger-than-expected drop in do-it-yourself sales. The company reaffirmed its full-year sales, operating-margin and free-cash-flow outlook while raising its adjusted earnings-per-share guidance.

President and Chief Executive Officer Shane O’Kelly said demand conditions were volatile during the quarter. The Pro channel posted low-single-digit sales growth, including continued outperformance from its Main Street Pro business, while DIY sales fell in the low-double-digit range.

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From Rust to Riches: 2 Auto Parts Names Built for 2026“Within Pro, the Main Street business continued to outpace overall growth, supporting share gains in that segment,” O’Kelly said. He added that tighter household budgets weighed on DIY consumer spending, particularly in the final four weeks of the quarter.

Sales trends and customer demand Executive Vice President and Chief Financial Officer Ryan Grimsland said comparable sales rose about 1% during the first eight weeks of the quarter, when Pro sales grew at a low-single-digit rate and DIY sales were roughly flat. Trends weakened in the final four weeks as the company faced difficult comparisons, price increases tied to commodity costs and softer DIY volumes.

Advance Auto Parts is A Great Risk/Reward Play If EPS DeliversManagement estimated that reduced DIY spending, deferred large-ticket projects, lower discretionary spending and milder weather together created a 100- to 150-basis-point comparable-sales headwind during the quarter. Weather-sensitive categories including cooling and climate control products, fluids and chemicals underperformed.

Average ticket increased during the quarter, aided by approximately 4% same-SKU inflation, up from about 3% in the first quarter. Grimsland attributed the acceleration to market pricing actions and higher commodity costs, including those affecting motor oil and other petroleum products.

In DIY, maintenance and failure categories such as filters, motor oil and batteries performed better than hard-parts categories, which management said could reflect more selective spending and the deferral of larger projects. In Pro, hard parts including brakes and undercar components outperformed as parts availability and delivery consistency improved.

Main Street Pro comparable sales exceeded total Pro comparable sales by more than 200 basis points, helping offset pressure from the company’s optimization of national accounts. Grimsland said national-account pressure in the second half is expected to be about half the level seen in the first half as the company begins lapping those changes.

Margins improve, aided by tariff refunds Adjusted gross profit was $924 million, or 46.2% of net sales, representing about 240 basis points of year-over-year gross-margin expansion. Tariff refunds contributed $26 million, or 130 basis points, to gross margin.

Excluding tariff refunds, the company’s margin improvement was primarily driven by product-margin gains. Management said the merchandising initiatives contributed approximately 100 basis points to product-margin expansion year to date.

However, Advance Auto Parts faced about 20 basis points of pressure from sales mix as DIY sales declined and another 20 basis points of deleverage from supply-chain expenses, including freight and fuel costs. These headwinds were offset by roughly 40 basis points of favorable LIFO and warehousing costs compared with the prior year.

Adjusted selling, general and administrative expense declined about 1% from a year earlier to $812 million, or 40.6% of sales. The company said store-task simplification, labor productivity initiatives and indirect-spend management helped reduce expenses while allowing reinvestment in priority areas.

Adjusted operating income was $112 million, representing an adjusted operating margin of 5.6%, up about 260 basis points from the prior-year period. Excluding the benefit from IEEPA tariff refunds, O’Kelly said adjusted operating margin expanded nearly 130 basis points to 4.3%.

Adjusted diluted earnings per share rose to $1.03 from $0.69 a year earlier.

Cash flow, debt and full-year outlook The company generated $120 million in free cash flow year to date, compared with an outflow of $201 million in the prior-year period. Grimsland said the improvement reflected higher profitability, working-capital management, reduced cash spending tied to last year’s store optimization actions and tariff refunds.

Advance Auto Parts ended the quarter with approximately $3.1 billion in cash and used about $30 million to repurchase a portion of its 2028 senior notes. Net debt leverage fell to 2.1 times from 2.4 times in the prior quarter, within the company’s 2.0- to 2.5-times target range.

The company reaffirmed its 2026 outlook for approximately $8.5 billion in net sales, comparable-sales growth of 1% to 2%, adjusted operating margin of 3.8% to 4.5%, capital expenditures of about $300 million and free cash flow of about $100 million. It now expects full-year same-SKU inflation of approximately 3%.

Advance Auto Parts raised adjusted diluted EPS guidance to a range of $2.60 to $3.30, citing an expected $100 million of interest income, up $20 million from prior expectations. The company continues to plan for approximately $210 million of pretax interest expense.

For the second half, Grimsland said gross margin is expected to range from 44% to 45%, with third-quarter gross margin higher than fourth-quarter levels because of seasonal product mix. The outlook assumes continued pressure from freight, fuel and channel mix, while management does not expect material additional tariff refunds in the second half.

Supply chain and store initiatives Advance Auto Parts completed its distribution-center consolidation in the second quarter, reducing its network from nearly 40 distribution centers to 15 facilities supported by a unified warehouse system. The company also opened five market hubs year to date, bringing its total to 38, and increased its full-year market-hub opening plan to 15 to 20 locations.

Management expects to open nine market hubs in the third quarter and remains on track to operate 60 locations by mid-2027. O’Kelly said market-hub markets consistently outperform areas without hubs, and the locations improve same-day parts availability.

The company has completed 25% of identified distribution-center process improvements and expects to finish the remaining actions by mid-2027. It is also rebidding carrier contracts and expects to reduce the number of transportation providers by 70%, an effort management said could generate tens of millions of dollars in savings beginning in 2027.

At the store level, net promoter scores improved to nearly 80 points from the high-60-point range a year earlier, while attachment rates improved to nearly 30% from the mid-to-high 20% range. Average Pro delivery time remained below 40 minutes each week during the second quarter.

O’Kelly said the company is implementing a focused action plan for the second half that includes targeted DIY marketing, Advance Rewards engagement, paid-search optimization, store incentives and expanded value offerings, including its ARGOS private-brand products.

About Advance Auto Parts (NYSE:AAP)Advance Auto Parts, Inc NYSE: AAP is a leading distributor of automotive aftermarket parts, accessories, and maintenance items. The company operates a network of stores and distribution centers across North America, serving both do-it-yourself (DIY) customers and professional service providers. Advance Auto Parts focuses on offering a comprehensive selection of replacement parts, batteries, engine components, and performance products for cars and light trucks.

The company's product portfolio includes engine oils and lubricants, cooling system components, brake and suspension parts, filters, belts, hoses, and diagnostic tools.

This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to [email protected].

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