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Here's Why You Should Retain Advance Auto Stock in Your Portfolio Now

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Key Takeaways

  • Advance Auto Parts completed store optimization and plans over 100 new openings to drive expansion.
  • AAP is consolidating its supply chain, closing legacy DCs and targeting 60 market hubs by mid-2027.
  • Advance Auto expects margin gains, helped by lower SG&A and a new operating model rolling out through 2026.

Advance Auto Parts, Inc. (AAP - Free Report) operates in the U.S. automotive aftermarket industry and is primarily engaged in selling replacement parts (excluding tires), accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles, light and heavy-duty trucks. It is set to gain from its efforts to consolidate the supply chain and updated operating model. However, its stretched balance sheet and pressure in DIY segment remain a concern.

Let’s see why you should retain this Zacks Rank #3 (Hold) stock in your portfolio.

Store Footprint Optimization, Lower Operating Costs Aid AAP

In March 2025, the company achieved a key strategic milestone by completing its store footprint optimization program. Now, about 75% of its stores are located in markets where it holds the number one or two position in terms of store density. Building on this foundation, the company has launched a bold new phase of expansion, aiming to strengthen its presence in these high-potential regions and capture a larger share of the more than $150 billion total addressable market. Over the next two years, it plans to open more than 100 new stores and expects to further accelerate growth in the future.

Efforts to consolidate its supply chain into a single unified network bode well. This strategic move will involve implementing a warehouse management system across all major distribution centers (DCs) and converting smaller legacy DCs into market hubs. The company is on track to close 12 in 2025 to end the year with 16 DCs. By 2026-end, the company plans to expand its network with 12 large DCs. It is targeting to open 60 market hubs by mid-2027 and remains on track to open 14 market hubs this year.

Adjusted operating income from continuing operations reached $90 million in the third quarter of 2025, reflecting roughly a 370-basis-point improvement from the prior year, driven by lower SG&A expenses. AAP expects adjusted operating margin for 2025 in the range of 2.4-2.6% compared to the operating loss incurred in 2024. For the full-year 2027, it expects an adjusted operating margin of approximately 7%. Upbeat forecast for operating margin sparks optimism.

The company is set to launch its updated operating model in the fourth quarter, with full deployment expected in the first half of 2026. This model optimizes driver and store labor hours and improves vehicle allocation to better match demand. It is designed to boost customer confidence, enhance coordination between sales and store teams, and deliver economic benefits through faster transactions, improved labor efficiency, and stronger competitiveness. Alongside new store openings and a 30-40-minute delivery commitment, the model is expected to accelerate growth across professional accounts.

High Debt & Rising Capital Expenditure to Ail Advance Auto

AAP’s stretched balance sheet remains a concern. The company’s long-term debt increased to $3.4 billion as of October 4, 2025, from $1.8 billion as of December 28, 2024. It has a long-term debt to capital ratio of 0.61 compared to the auto sector’s 0.18. High leverage reduces the firm’s financial flexibility. 

The company's DIY segment is facing pressure due to financial strain on consumers, leading to fewer discretionary purchases. While the automotive industry remains resilient because essential maintenance is unavoidable, the short-term challenges are reflected in weaker DIY sales trends.

AAP is increasing its capital expenditure to support business growth, expand new stores, and enhance its supply chain and merchandising projects for better inventory availability. Investments will also address store and technology updates, focusing on essential maintenance like roofing, HVAC and system upgrades. In 2025, the company anticipates spending around $250 million in capital expenditure, up from $180.8 million in 2024. Higher expenditure may limit near-term cash flow.

Price competition remains a concern for Advance Auto, as it competes with national and regional automotive retailers, such as AutoZone, O’Reilly Automotive, Pep Boys and CSK Auto Corporation. It is also facing incursion from online competition and increasing parts quality/complexity.

Stocks to Consider

Some better-ranked stocks in the auto space are General Motors Company (GM - Free Report) , OPENLANE, Inc. (KAR - Free Report) and Garrett Motion Inc. (GTX - Free Report) , each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for GM’s 2025 and 2026 EPS has improved 4 cents and 11 cents, respectively, in the past seven days.

The Zacks Consensus Estimate for KAR’s 2025 sales and earnings implies year-over-year growth of 9.4% and 48.2%, respectively. EPS estimates for 2025 and 2026 have improved 9 cents and 11 cents, respectively, in the past 30 days.

The Zacks Consensus Estimate for GTX’s 2025 sales and earnings implies year-over-year growth of 2.6% and 16.7%, respectively. EPS estimates for 2025 and 2026 have improved 11 cents and 25 cents, respectively, in the past 30 days. 

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