Advance Auto Parts Aktie

Welcome to the Advance Auto Parts Third Quarter 2026 Earnings Conference Call. I would now like to turn it over to Lavesh Hemnani, Vice President, Investor Relations.

Good morning, and thank you for participating in today's call. I'm joined by Shane O’Kelly, President and Chief Executive Officer; and Ryan Grimsland, Executive Vice President and Chief Financial Officer. During today's call, we will be referencing slides, which have been posted to our Investor Relations website.

Before we begin, please be advised that management's remarks today will contain forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements regarding initiatives, plans, projections, goals, guidance and expectations for the future. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information can be found under forward-looking statements in our earnings release and risk factors in our most recent Form 10-K and subsequent filings made with the SEC.

Shane will begin today's call with an update on the business and progress on our strategic priorities. Later, Ryan will discuss results for the third quarter and revised guidance for full year 2026. Following management's prepared remarks, we will open the line for questions.

Now let me turn the call over to our CEO, Shane O’Kelly.

Thank you, Lavesh, and good morning, everyone. I want to begin by thanking our frontline team for their continued dedication to serving our customers. During the third quarter, the operating environment remained volatile. And while sales performance was below our expectations, our trend stabilized following the late Q2 slowdown and improved meaningfully as the quarter progressed. Consumer spending continued to be influenced by stretched household budgets, elevated energy costs and persistent inflation.

In Q3, comparable sales declined by approximately 1%, including a decline of approximately 2% during the first 8 weeks before turning positive in the final 4 weeks. Looking at performance by channel. As we discussed last quarter, there was a larger-than-anticipated slowdown in DIY sales in the final 4 weeks of Q2 that weighed on our overall results. During that final period of Q2, DIY sales declined nearly 7%, marking the channel's low point for the year.

Performance improved sequentially through Q3 as our teams intensified their focus on in-store service execution. We saw positive signs of improved customer experience with Net Promoter Scores exceeding 80, up from the high 70s range last quarter, while attachment rates increased to the mid-30% range from approximately 30% previously. Alongside these improvements, DIY declines narrowed from mid-single-digit levels at the beginning of the quarter to low single-digit levels in the final 4 weeks. In the Pro channel, comparable sales increased in the low single-digit range with positive performance in each month and growth accelerating to approximately 3% during the final 4 weeks. Main Street Pro continues to be the primary driver of Pro growth and market share, and we remain excited about the opportunity ahead.

Moving to profitability. We delivered an adjusted operating margin of 4.5% for the third quarter and have generated $109 million of year-to-date free cash flow. These results reflect the continued progress of our productivity initiatives despite the headwinds created by volatile demand and in the inflationary cost environment. Looking at the balance of the year, we have updated our guidance to reflect typical fourth quarter seasonality associated with the business. We expect to finish the year with approximately 1% comparable sales growth and have also reaffirmed the midpoint of our prior adjusted operating margin guidance range. We remain on track to deliver 2 consecutive years of annual comparable sales growth and more than 350 basis points of operating margin expansion since announcing our strategic plan at the end of 2024.

The strong profitability is also translating to solid cash generation. And as a result, we have raised full year free cash flow guidance to approximately $150 million, implying more than $400 million of year-over-year growth in 2026. Our initiatives are supporting stronger cash generation in a soft demand environment, and we expect to stay focused on driving operational improvements across the business while building a stronger foundation for sustainable, profitable long-term growth.

Let's turn to an update on our strategic initiatives, which we believe can support stronger sales growth, continued margin expansion and improved cash generation. Let's begin with assortment availability. The merchandising team remains focused on expanding our parts catalog and increasing SKU coverage across our network. Our AI-enabled assortment tools continue to improve our ability to align inventory with local demand and allocate the right parts to each store. At the same time, we are working to simplify catalog access to enable our store teams to serve customers more efficiently. We continue to deepen relationships with existing vendors and add new partners to expand assortment while securing competitive product costs.

Through disciplined cost management and merchandising actions, we have maintained product margins despite inflationary supply chain costs, supporting nearly 100 basis points of year-to-date gross margin expansion. We are putting added emphasis on assortment planning for our new Market Hub network. These locations are gaining traction with field teams and customers who are recognizing the benefits of more reliable product availability. The square footage allocated to backroom hard parts in these market hub locations is more than 5x compared to the average store, which helps us significantly improve availability for our customers.

We also remain on track to complete the rollout of our centralized pricing and promotion platform. This tool is expected to provide more localized pricing insights and better visibility into customer behavior and transaction trends. We expect to strengthen the execution around seasonal promotions and drive stronger partnership between merchandising and field teams to access market growth opportunities.

Turning to supply chain productivity. Our distribution center productivity initiatives remain on track. We have identified key process improvements and expect to implement the changes across all our DCs in stages through the middle of next year. We expect these changes to support margin expansion next year through lower handling costs, improved shipment accuracy and shorter lead times. Transportation optimization is another significant opportunity within our supply chain productivity efforts. By consolidating volume with fewer carriers, we expect to generate more than 20 basis points in cost savings even in a flattish sales environment. These savings represent just the first phase of a broader opportunity to improve transportation productivity and margins over time.

We continue to improve how we allocate products across our network of stores and market hubs and as part of this work during the third quarter, we formed a dedicated team to develop a multiyear road map for inventory planning and allocation across the network. We believe this effort will support stronger working capital efficiency and stronger cash generation in the future. I also want to provide an update on the development of our Market Hub network. Year-to-date, we have opened 13 Market hubs, bringing the network to 46 locations. We remain on track to open 15 to 20 market hubs this year, extending Market Hub coverage to more than 70% of our store network. We are making steady progress towards our goal of operating 60 market hubs by mid next year, which will provide faster same-day parts availability for most of our U.S. store network.

Next, store execution and DIY. Our field leaders remain focused on foundational training and proactive customer engagement to improve service execution in stores. These efforts are contributing to stronger customer interactions, larger basket sizes and improved sales productivity. DIY units per transaction grew in the low single-digit range during Q3, supporting average ticket growth that exceeded same SKU inflation and helping offset some of the transaction pressure in the business. While meaningful opportunity remains, the improvement in these operating metrics gives us confidence that stronger execution can support improved sales performance over time.

Earlier this year, we evaluated store team member activities to better understand which tasks create the most value for customers and where productivity can be improved. We are using the findings to modernize our workforce management tools to improve how we allocate labor and drive additional productivity. We are also investing in technology to improve team member productivity and enhance customer service. Earlier this year, we introduced Zebra devices to streamline store operations and inventory management.

During Q3, we deployed RELIASCAN across most of our stores. RELIASCAN is a new modernized check engine diagnostic tool, which is offered as a free service to our customers. This tool helps team members identify potential vehicle issues and recommend the appropriate parts, improving both service efficiency and customer experience. With these tools, we are empowering our teams to deliver better customer service, which is expected to translate into stronger transaction performance over time.

Finally, I want to provide an update on the Pro channel. Over the last year, we have made a deliberate pivot to gain share across Main Street Pros, our largest Pro segment, representing approximately 80% of total Pro sales. Main Street remained the primary driver of Pro growth during Q3 with comparable sales outperforming total Pro growth by approximately 100 basis points. This growth is being fueled by new customer acquisition and movement of existing customers toward higher weekly spending tiers. We believe these results reflect the combination of improved parts availability, consistent delivery times under 40 minutes and strong execution by our field team. Going forward, we are initiating new work streams to enhance our segmentation of Main Street customer accounts, and we are reorganizing service territories to capture additional growth opportunities.

To conclude, I want to reiterate that our strategic plan is driving positive change across the organization. The improvement in our operating metrics indicates progress on building a stronger foundation for sustainable growth. We remain cognizant of the macro pressures impacting the customer spending in the near term, while we also ensure our teams deliver strong customer service and progress on our strategic efforts.

I will now hand the call over to Ryan to discuss our Q3 results and full year guidance. Ryan?

Thank you, Shane, and good morning, everyone. I want to begin by thanking our frontline associates for their commitment to improving service execution in our stores. We reported net sales of $2 billion for the third quarter, including a comparable sales decline of 1.2%. Pro channel sales increased in the low single-digit range during Q3, with Main Street growth outpacing overall results and strengthening throughout the quarter. The optimization of our national account portfolio represented an approximately 50 basis point headwind to total company sales and a 100 basis point headwind to Pro sales.

The consistency in Pro performance was more than offset by a low single-digit decline in DIY as persistent inflation and higher gas prices continue to impact household spending. Moving to the cadence of sales. Our performance improved meaningfully as the quarter progressed following the softer trends experienced earlier in the summer. In late Q2, comparable sales had declined approximately 3%, primarily driven by a 7% decline in DIY sales.

Moving into Q3, in the first 8 weeks, comparable sales declined approximately 2%, including DIY down more than 4%. In the final 4 weeks, sales growth turned positive with DIY declines narrowing to a low single-digit range. Our 2-year sales trend also accelerated as the quarter progressed, alongside improving customer experience and engagement metrics, which we believe reflects stronger execution across the business. Transaction performance was the primary driver of the acceleration within the quarter as our field teams intensified their focus on service and supporting increasingly value-conscious customers. For the quarter, average ticket was positive and included same SKU inflation of approximately 4%, which was consistent with Q2 and largely driven by increased commodity costs and market-related price adjustments.

Turning to category performance. Results were strongest in maintenance and failure categories, including motor oil, batteries, fluids, filters and wipers. Hard parts categories, including engine and undercar, remained soft as value-conscious consumers continue to defer larger repair projects. Pivoting to margins. Adjusted gross profit was $899 million or 44.7% of net sales for Q3, resulting in 16 basis points of contraction compared to the same period last year. As experienced last quarter, the combination of lower DIY sales mix, higher fuel costs and supply chain expense deleverage accounted for approximately 40 basis points of pressure.

In addition, an unfavorable mix shift to lower-margin categories, particularly into motor oil and away from hard parts categories drove approximately 20 basis points of product mix headwind. LIFO expense came in at $11 million compared to $33 million in the same period last year. The benefit of lower LIFO expense was partially offset by the reversal of warehousing benefits associated with our inventory actions last year. On a net basis, this added approximately 40 basis points to gross margin, which is relatively consistent with last quarter. Shifting to expenses.

Adjusted SG&A was $808 million or 40.2% of net sales, resulting in approximately 25 basis points of year-over-year leverage. Expenses declined approximately 2%, reflecting our disciplined expense management even in a volatile sales environment. Adjusted operating income came in at $91 million or 4.5% of net sales for Q3, resulting in approximately 10 basis points of year-over-year margin expansion. Excluding the benefit of IEEPA refunds from last quarter's results, our Q3 2026 adjusted operating margin rate is one of our strongest margin quarters since we began executing the strategic plan 2 years ago. Adjusted diluted earnings per share was $0.79 compared to $0.92 in the prior year period.

The Q3 adjusted effective tax rate of 29% was above our expectations, primarily reflecting an adjustment related to finalization of prior year tax return and lower tax credit benefits following the expiration of the Work Opportunity Tax Credit program.

Moving to cash flows. Year-to-date, we have generated $109 million of free cash flow, which is a significant expansion in cash generation compared to an outflow of approximately $280 million last year. The improvement reflects stronger profitability and working capital management, lower cash costs related to last year's store optimization activity and tariff refunds. Our balance sheet continues to be in a solid position. We ended the quarter with a cash balance of approximately $3.1 billion and net debt leverage of 2.2x, well within our targeted range of 2 to 2.5x. Turning to full year 2026 guidance.

Let's start with net sales. For the full year, net sales are projected at approximately $8.5 billion. We have revised full year comparable sales guidance to approximately 1%. While we are encouraged by the recovery in sales compared to the softer trends experienced during the summer, weather and year-end consumer spending patterns during Q4 could create some variability in performance through the balance of the quarter. As a reminder, Q4 last year included an extra week, which generated $132 million in sales, which will not repeat this year. Excluding the impact of the extra week from last year's results, we expect Q4 2026 net sales to grow around 1% year-over-year. During the quarter, we will also cycle through approximately 50 basis points of markdown headwinds from the front room transition activity last year, and our forecast assumes same SKU inflation in the 3.5% to 4% range.

Moving to margins. We have narrowed full year adjusted operating income margin guidance to a range of 4% to 4.3%. This range reaffirms the midpoint of our prior guidance range and continues to imply more than 150 basis points of operating margin expansion compared to last year. We continue to expect full year gross margin of approximately 45%, implying over 100 basis points of expansion. For the fourth quarter, we expect gross margin in the mid-44% range and below Q3 levels. This expectation reflects typical business seasonality and continuation of the sales mix and supply chain headwinds experienced over the last 2 quarters.

Regarding LIFO charges, we now expect full year expenses of $50 million, which is approximately $10 million higher than our prior expectations, driven by the impact of high commodity costs flowing through inventory. For SG&A, we expect full year expenses to decline in the low single-digit range year-over-year, contributing between 20 to 40 basis points of leverage. This is largely due to cycling of approximately $90 million in nonrecurring expenses from 2025, including approximately $50 million related to the extra week last year. Excluding the impact of the extra week from last year's results, we expect fourth quarter SG&A to grow in the mid-single-digit range year-over-year.

While this implies a step-up in SG&A growth compared to our year-to-date trend, it is consistent with our expectations from the beginning of the year. The increase is primarily driven by higher occupancy and rent expenses for new stores and market hubs. In addition, our SG&A forecast includes higher real estate taxes, general inflation in insurance and lease costs, along with higher fuel costs for our delivery fleet compared to last year.

Moving to other items and guidance. We have revised adjusted diluted EPS guidance to a range of $2.75 to $3.10. The revised EPS outlook includes $5 million in additional interest income from the increase in benchmark interest rates. For the full year, we now expect approximately $105 million of interest income, slightly offset by a higher tax rate of approximately 28% based on year-to-date trends. We continue to plan for pretax interest expense of approximately $210 million for the full year. Shifting to cash flow. We continue to expect 2026 capital expenditures of approximately $300 million with spending allocated to new stores and greenfield market hub growth, store infrastructure upgrades and strategic investments.

We have reaffirmed our store and Market Hub opening plans for the year. Through the third quarter, we have opened 18 new stores and 13 market hubs. For the year, we continue to plan for 30 to 35 new stores and 15 to 20 Market Hub openings. We have raised our full year 2026 free cash flow guidance to approximately $150 million, implying more than $400 million of year-over-year growth, driven by stronger profitability and disciplined working capital management. As part of our broader productivity efforts, we are undertaking additional actions to improve our ability to generate cash flow. This includes simplification of sales collection processes and effective management of vendor payables through improved inventory ordering and allocation practices. We expect these actions to strengthen the foundation of the business and position us to generate stronger free cash flow over time.

To conclude, I want to thank our frontline associates for their continued focus on customer service in the quarter. Their efforts are supporting improved conversion, while our Pro team continues to drive share gains across Main Street.

I will now hand the call back to Shane.

Thank you, Ryan. We exited Q3 with improving sales trends, stronger customer metrics and continued progress on productivity. I'd like to close by thanking the Advance team for their hard work during the quarter. Thank you. Operator, we can now open the line for questions.

[Operator Instructions] Your first question comes from Greg Melich with Evercore.

I appreciate the color on the improvement in trends. I wanted to dig deeper into inflation and tariffs and sort of the dynamic between the 2. So it sounds like same SKU inflation 400 bps in 3Q and you expect it to stay there in 4Q and into next year? And what level of tariff -- effective tariff rates do you expect as part of that?

Yes. Thanks, Greg. I'll jump in here on this one. So I think our implied guide for Q4, we expect inflation roughly around 3.5% going forward. I think on a 2-year basis, those are consistent trends for us and the industry. We had 4%, obviously, in Q3, but I think roughly around 3.5%. Next year, first half probably continues in a similar trajectory. I think there's some of the cost -- underlying costs, commodity costs will still be in there.

So we'll see that at least for the first half. But a lot to play out over the next couple of months, but at least seen some of that pressure. I think we'll update in February what we think on a full year basis. The cost also just around commodity cost is really the incremental inflation that we saw in the quarter. And right now, we expect that to kind of continue through Q4 and probably into the first part of next year.

Got it. That's it motor oil was 100 bps. Is that a fair estimate?

Yes, that's it. Yes, about 100 bps from motor oil. Really, that's the big area.

Great. And then just a follow-up on tariffs. I know you had last quarter, are we now done with any IEEPA rebates that's fully done? Or is there still something flowing through?

Yes. The bulk of it was there was very immaterial in Q3. I think like $600,000, we gotten that we're pretty much done. I think the work that we have left to do is working with our vendor partners, the tariff refunds they've got, and that's ongoing work that we're working with our vendors on. But our direct tariffs, we took most of that in Q2. That was about [indiscernible]

Your next question comes from Michael Lasser with UBS.

For those of us who have been watching Advanced Auto Parts for a long time, we have seen ebbs and flows on the DIY traffic side. There's been a lot of actions taken to try and improve the performance like the loyalty program, new branding campaigns and yet it still seems to be a challenge and perhaps even the Achilles heel of the business. So, you've been at this for a little while. Where do you think you can improve the performance in traffic? Because while you're doing a better job with the stores or the customers you're getting, that traffic decline seems to be where there's a bit of a challenge right now.

Michael, thank you for the question. And before I jump into it, I want to thank our team, and we'll go to your question. I've been traveling extensively, most recently in Kansas, Kansas City, Buffalo, Rochester. And one of the elements that helps with DIY is the engagement and excitement that comes from our team. And I see that every time I'm in the stores. We're seeing that importantly as it relates to conversion and think about that in terms of our Net Promoter Score.

We think about that in terms of our attachment rate and think about that in terms of the breadth of products that we're selling. So I know that when we get team members into our stores, we are doing better than we have in the past as it relates to creating those sales. So as it goes to awareness, we do have the programs that you mentioned. The loyalty program has been a success for us. Advance for the good parts is well received. From here, we'll continue to build on that with what we're doing on assortment availability, what we're doing as it relates to our web experience, what we're doing in terms of training for our team members, what we're doing in terms of working with our vendors, broadly engaging across our network to make sure that people know that when they come to Advance, we're going to have the parts that they need.

Additionally, we've been working with paid search, which we think is an important dimension of how we can engage with the DIY customer, how we optimize the different terms, the geography in terms of where we do that. We think that will contribute to our success as well. Your point is correct in that traffic was down, but we feel better about where it's going to go in the future. We feel good about DIY. We feel good about the assortment and in particular, as I'm sure we'll get to through the call, what we're doing with Main Street Pro.

Yes. And Michael, I'll just add what we really like seeing in the quarter was the improvement in our comp trend in DIY was all driven by transaction improvement. So a lot of things we're doing, we started to see really start to resonate with you. I know the industry has been down. The consumer has been pressured. So traffic is down more industry-wide, but we feel like the actions we're taking, while they're kind of a follow to pro actions we've been taking, we're starting to see some traction there. We still have a ways to go. We like the rollout of RELIASCAN. That has been received really well and getting us another capability in our stores where our team members can drive great service for the customers that walk in.

I'm sure one just quick one. The thing that has factored in is where the consumer is on their sort of relative sense of well-being. We play in the low to middle income household. Those families have been stressed, the inflationary pressures, energy costs, they're through the tax refund that they had earlier in the year. So how they respond here in the coming months, I think, will play a role as well. But we'll continue to do the things that we just mentioned to be prepared when they do come in the stores.

Understood. My quick follow-up question is, Advance's experience is a bit different than what we're seeing from some of the other players in the sector where their SG&A per store costs are rising significantly. Obviously, Advance's SG&A expenses were down year-over-year in the most recent quarter. How sustainable is that? And what risk does it create moving into next year at some capture -- recapture of investment needs to be made in order to ensure that the quality of the customer experience that Advance is offering is consistent with the other players in the space.

Yes. Good question, Michael. I'll just start. Know that as it relates to where we sit today, that's come through some discipline and rigor on SG&A. That's come from looking where we have productivity opportunities that may have been previously explored by our competition that still yield benefit for us. So if there's things that we can do on the productivity front that creates that cost savings, that hasn't come at the expense of how we think about investment, how we think about training, how we think about opening up our market hubs, how we think about investing in inventory.

So I don't want anyone to construe that we're not making the efforts and investments in the front line, in the stores to create a foundation for growth. And so all of those things are going on as it relates to how we're thinking about things.

Yes. I'll add a couple of things. So if you think about Q4, Q4, if you back out the 53rd week, our SG&A is actually going to be up, grow year-over-year mid-single-digit growth. And that's our investment in our market hubs, new stores in key markets, wages, frontline team members. We are investing in the front line where the customer interacts with us. We are finding opportunities in productivity in noncustomer-facing areas. Indirect spend, we've talked about in the past, we continue to drive savings there as contracts come up for renewal, we negotiate them.

We have RFPs ongoing where that spend is not customer-facing, that's where we're driving opportunities and more productivity, and we're investing in key markets and new capabilities. I think the other thing is, as we go into next year, just think about SG&A still being disciplined. We're probably growing at the rate of sales, so somewhere around that as we think about next year. And to give you an example of the investments we are making and why we're able to shift tasking hours to selling hours.

When I first got here and Shane first got here, we look at competitors and they had things like Zebra devices and associates being able to walk in the aisles and leverage technology like that. We didn't have that at Advance Auto Parts at the time. We have that now. Every store has Zebra devices. We continue to invest in that technology. That helps drive out some of the tasking hours in our stores to be more customer-facing selling and drive productivity there. And we have more to come going into next year around that as Tony continues to drive that shift from tasking to selling. So we're excited about that. I would think you'd expect SG&A going forward to grow around the same rate of sales as we continue to find other productivity.

Your next question comes from Simeon Gutman with Morgan Stanley.

My first question is how do you navigate rising supplier pricing or cost of goods with your goals of driving margin savings through category management and promotional savings?

Yes. Thanks, Simeon. Just around rising costs and other things that come in, commodity pressure, we've been able to handle some of that. I think we haven't passed all of that along. Some of that, I think, is, I would call it kind of temporary until kind of the Iran war and other things kind of subside and maybe things get to a more reasonable state. Also, one thing to keep in mind is the industry is fairly rational around pricing, and we've seen that continue. We will be a rational player in this industry and continue to move price when we can.

Our goal is that we remain competitive from a pricing standpoint. We're continuing to execute that plan. So as the pricing industry evolves or what's out there, we'll continue to maintain that strategy. So far, traditionally, has been able to pass along those prices. Right now, we're not fully passing them along. So it's putting some pressure on gross margin. But some of those costs that are in there, we think are more transitory and temporary and at some point, will subside. I do think some of those right now will continue into next year in some form, but still a lot to play out the rest of the year.

Last thing I'll just build on that. We're in the Apex show earlier this week, meeting with suppliers. We continue to get a lot of excitement from the supplier community, supporting advances come back. Bruce Starnes, who leads our merchandising efforts is still pushing through as it relates to the different forms and dimensions that go into our contracts to make sure we're capturing best prices and minimizing cost inflation wherever possible.

And sometimes that includes where we will pivot to one supplier over another, trying to be more agile in that regard than we've been in the past. So coming off of that show, feel good around the support we're getting with vendors. And by the way, relaying them as well that we need to be competitively positioned vis-a-vis our competition.

Okay. And a follow-up. The release says that transformation is beginning to gain traction on the surface, it looks like it's more expressed through margins so far than sales, which is fair. Can you talk about -- is there a holdback to it? Is it hubs? Is it process? Is it systems? Is there something that you need to get this moving more meaningfully on the top line?

Yes. I think if you look at the prepared remarks across the key dimensions, I think the industry runs on assortment availability. I think that's the most critical component. But do you have it is the first question that every customer asks. We're making strides there. We've added 100,000 SKUs year-to-date. We will continue to drive gap closures in our assortment and think about that in terms of adding products across nodes. I think the Market Hub plays a very important role here.

So we'll be 60 by mid-2027 is where we'll sit as it relates to market hubs. So 70% coverage by the end of the year. Think about that as 85,000 SKUs available same day. So continued effort there. By the way, we've got AI work on the assortment side of the house to make sure we're scanning across the landscape of what relative availability looks like, both with us relative to where we were and what's available elsewhere. So that's one. On supply chain, we've just finished the consolidation of the 15 DCs. So transportation comes online.

So we -- those contracts have been bid out. So we'll see those benefits coming next year. But internal process improvement in supply chain. So keep in mind, if you're a DC that just picked up the volume from a closed DC, you may potentially have hundreds of stores that you now have to route. You have to make sure the assortment is reflective of what those stores need. So now the optimization that occurs on everything from yard management to put away, to pick, to outbound to accuracy, all those are underway.

And what we've got going on with our supply chain leadership team feel good about. And then on the growth side, you heard Michael's question on DIY, certainly want to be leaning in there, but also very excited about Main Street Pro. Our growth accelerated there to where we're in the low to mid-single digits. And we think that's an area we can win and look forward to.

Your next question comes from Steve Forbes with Guggenheim Securities.

Shane, maybe just a follow-up on the Market Hub operations. I was curious if you can maybe just set the stage here in terms of what are the operational sort of -- what do the operations look like today? Like are all 46 locations assisting with same-day order fulfillment? How often are those delivery runs occurring to each store within the trade area? And then I think it would be helpful if you can maybe contextualize the investments you're making behind the field teams to ensure they can actually drive share and ROI.

Okay. Thanks, Steve. Good to hear from you. Market Hubs. So think about it as 85,000 SKUs. When we first started, the most important thing was to look at the radius of supported stores to make sure that we could get there same day but do so effectively. So same-day service isn't as helpful to you if you got to order by 8 and you don't get it until 4. So we've looked at that to make sure that you can get not just product same day, but multiple times inside of the same day.

So route refinement in terms of how often we go from the market hub to the supported stores and how far that geography is in terms of time has been an area that we're refining. We continue to refine how we pick inside of a Market Hub to speed how quickly those orders get ready, how quickly our team members can find them accurately. So a lot of efforts going on in the back of the house there. And by the way, inclusive of that is how we rack a Market Hub and how many SKUs we can put in there. We've got 85,000 in there today. We want to make sure as we think about, is that the right number? Can it be higher? Which SKUs do we have in there? So lots of continued optimization.

Remember, this is a brand-new node for us that when Ryan and I came to the company didn't exist. So lots of continued effort underway there to be better for that same-day service. In terms of what we're doing on the store side to be ready, think about that in terms of what we're doing on labor. So this is both in terms of how labor gets allocated and then what activities people spend their time doing. We have a lot of tasks that got sent to the stores and didn't necessarily come in the right sequence or didn't appreciate what the other activities, e.g., taking care of customers needed to occur in the store. So we have a control tower now.

We're streamlining comms down to the stores to make sure that their selling time is preserved and that the tasks that they need to do are ones that they need to be doing and not ones that can be done elsewhere or not at all. We want to make sure we've got training, onboarding. We want to make sure that in terms of leadership engagement and I think about that in terms of what our DMs do and rely on them every day, a lot of activities going on there. So Tony Hurst leading our store efforts and feel good about how he's bringing discipline and rigor and process to the stores that will set us up for success going forward.

That's helpful. And then maybe just a quick follow-up. Obviously, great to see the free cash flow improvements. So with that, curious if you can maybe give us a preview on 2027 in terms of how you're thinking about planning for growth capital, both in terms of CapEx plans, right? And I think you already sort of commented expense to grow in line with sales.

Yes. Obviously, a little premature. We'll come back in February to talk more about it, but just to give you some thoughts around next year. CapEx will be at or higher than what we're doing today. We've got 4 market hubs we're building out next year. We've got -- by the way, on market hubs, we're going to have 70% coverage by the end of the year. And the majority of our stores will be covered by the middle of next year. I mean we're really excited about that. But we'll continue to invest in those market hubs. We're going to open up more new stores, and we'll provide guidance in February around that as we continue to grow that channel.

So I expect the CapEx to be focused more than probably this year and focused on stores, market hubs, technology within the stores, really driving that customer experience, more parts availability. That's where we're focused. This is a parts business, and we're going to have more parts closer to the customer, and that's part of the supply chain investments we're making around market hubs, the new stores, inventory assortment, technology capabilities in our stores to drive greater selling hours versus tasking. That's where our CapEx is going to be going next year. So expect that to be up. Free cash flow, obviously, not going to guide to that just yet, but we don't expect to go backwards next year. So I would expect we continue to invest in the stores, continue to invest in the business and our initiatives and still maintain positive free cash flow.

Your next question comes from Brian Nagel with Oppenheimer.

So the first question I have is you discussed in the prepared remarks the acceleration in business, acceleration in sales growth through the quarter. I just wonder if you could go a little more detail kind of what underpinned that? Was it more something was happening specifically in Advance? Or was it more of an industry dynamic? And then has that uptick in sales growth persisted here into the final quarter of the year?

Yes, Brian, I'll jump in first here. So the improvement in Q3, I think it was a combination of both improving industry trends, but then better store service execution, absolutely saw it in the stores. We also shifted and improved our value messaging to the consumer. And I think we talked about that in Q2 that we were a little bit behind on that as we saw the consumer really gravitating towards that and others in the industry doing that. So we improved our value messaging. And then we've made a lot of progress on our initiatives in the stores and across merchandising as well.

The fundamentals of this industry still remains strong. We see consumers cannot delay spending on maintenance too long. So I think some of those maintenance categories, they definitely outperformed in Q3, and we saw some of that delayed spending return. And that's just this part of the industry. They can only put it off so long. So we did see a lot of improvement coming from our initiatives, but we also think that there are some industry trends that helped as well.

Coming into Q4, on the DIY side, it's a little bouncy. This is early in Q4. It's a little bouncy. You had hurricane overlap, everything else. So overall, kind of flattish. But the trend in Pro continues to accelerate, low to mid-single digits on the Pro side and really think about Main Street continuing to drive that. I mean we still have 100 basis points of headwind from national accounts on our Pro business and to see the Main Street continue to accelerate into the quarter. It just indicates the things we're doing around inventory assortment availability, the service in our stores, just really excited to see what we're doing on the Pro side and seeing those initiatives come to life.

That's very, very helpful. Second question I have, so just step back from Las Vegas, the ATEC show, you spoke with a number of your competitors and companies within the space. And what I'm hearing, I think most people are hearing is there is a kind of a renewed source of inflation now, particularly on the commodity side. So I guess the question I want to ask just make sure we hear from advance, is that obviously, you're seeing this. I mean, to what extent is this being passed along to consumers? What do you think the duration of that is? And then also from an input cost, how should we think about just this inflation now and maybe the extra pressures putting upon the operations of Advance going into the balance of this year and even into '27?

Yes, Brian, I'll just take that on kind of the number side of it. Shane talk a little bit about what he's hearing from the vendors at Apex because we had a lot of good conversations while we were out there. But just from an inflationary standpoint, first, our philosophy around pricing hasn't changed. We're going to remain competitive. It did put some pressure. Mainly this is commodity. So we had about 100 basis points really related to oil in the quarter from inflation increase.

So we did pass along some pricing. It didn't offset completely the costs that we're seeing just yet. But we expect some of those costs to be somewhat transitory. And as things settle down, we'd expect some of those costs to come down because they are commodity-based. The overall cost in our structure, we did see a mix and cost pressure impact on gross margins. Think of supply chain was about 20 basis points just from those costs that are in there, whether that's fuel or that's surcharges at the ports. We did see DIY mix had about 20 basis points. And then the product piece where you see product costs mainly in commodity areas was about 20 basis points.

So all in, we had about 60 basis points of pressure. About 40 of that is really driven by some of these extra costs, whether that's supply chain, surcharge, extra kind of costs and fuel. The fuel component of it was about 5 basis points in Q3. The rest of those charges came from really kind of surcharges, import freight type costs. We expect about 10 basis points of fuel impact in Q4, but we still expect overall, you'll see some supply chain pressure in those costs. I do think that will carry into the first part of next year. I don't think that's going to go away that fast. So I would expect a little bit of that carrying in some form into the first half of '27. But obviously, we'll lap that in the second half of 2027 as well.

Just a word on -- I think energy is an area that everybody is watching as it relates to inflation, and we met with all the oil companies. For Group 1s and Group 2s, I think that's where Ryan alluded to, you might see some moderation, maybe even decreases. I think the tricky piece for us is a lot of our motor oil products use a Group II base stock, and that's not as readily available. And so that could be something, as Ryan said, that's sustained for a bit. So we'll keep an eye on it.

But reiterating, as Ryan said, key for us, we are a fast follower as it relates to price. And so we look at what goes on in the market. We look at where the market clearing pricing is, and that's where we price. We're not looking to lead the market higher. We're not looking to lead the market lower. We're a rational actor competing in the industry, and that's how we think about where we price.

Your next question comes from Michael Baker with D.A. Davidson.

If I could, I know we're not giving 2027 guidance, but you've given a couple of pieces. And in the past, you said 100 basis points of margin expansion. Now you're saying SG&A about flat. So can we still get 100 basis points? I suppose it would all have to come from gross margin and particularly based on what you just said about some first half pressures from higher energy costs in the first half. Does that make 100 basis points difficult next year?

Yes, Michael, I appreciate that. I mean we absolutely -- the 100 basis points framework is really driven out of our pillars, merchandising initiatives, SG&A, labor productivity, supply chain specifically. And we expect that to continue into next year. I think a couple of things to think about as you're building that 100 basis points. So yes, those initiatives that we have in there, we believe will drive the 100 basis points.

But a couple of things. One, next year, we won't have 30 basis points of favorability from IEEPA refund. So that's something -- I know you guys are already thinking about that, but that's something we'll cycle over. I do think we've got about 50 basis points of headwind from inflationary fuel costs or just deleveraging on weaker sales that's been impacting this year. I think in some form, that's going to continue into next year. So I think the 100 basis points, absolutely, we've got initiatives in play, probably more think about what's the base you build that off of going into next year. You've got IEFA tariff refunds that won't cycle. You've got some continued pressure.

So think of maybe like the second half of this year being more of a good proxy to build 100 basis points off of as you think about next year. Obviously, we'll give more from a guidance in February. But relative to what we're doing to drive the 100 basis points, we like the initiatives we've got in place. And just think of transportation, and we're going to see already 20 basis points of impact from the work we've done on transportation and supply chain. And we still have merchandising initiatives that will come forward next year as that merchanting continues to drive productivity in our categories. So we like what we're seeing there from our initiative perspective, just probably more thinking about the base that you're building off of for next year around how that 100 basis points shows up.

Okay. That makes sense. If I could ask one more. You talked about tariffs before. And so you've got your refunds, but vendors are getting refunds. Are you seeing them pass those on to you? And then what is your general plan in terms of what to do with any lower cost you get on things outside of commodity? Does that generally flow to the bottom line? I know historically, it does, but are you seeing others take price down actually? Or just wondering how you think that those refunds flow through for you guys and relative to your competitors?

I'll just jump in on kind of the cost and commodity pressure piece, and then I'll also let Shane weigh in a little bit just on the conversations we're having with the vendors around the tariff refunds. So commodity -- one thing, obviously, we have a pricing strategy. So we'll be competitively priced in our industry. These prices tend to be a little stickier in our industry. So it would be interesting to see how this plays out if those commodity costs do come down. I think in oil, though, they do move up and down more than any other.

Category. So in most categories, they tend to be sticky. In oil, though, they tend to move down a little bit with the change in commodity costs. So that probably moves more than any other category in our industry. So you might see some movement there. But obviously, we'll just wait to see how the industry plays out and where prices are. We'll remain competitive regardless. But as far as the conversations around AEPAariff refunds, those are ongoing conversations we have with the vendors and work with them. And so I don't know if there's anything you want to mention.

So we spent a lot of time recently at Apex and just in general, talking to the vendors and making sure that we're getting competitive pricing. We just had a situation with one vendor where we secured a significant reduction in terms of where we're buying the product. Some of that could be where they secured value from their tariff refunds or it could just be as we go through our PLR process. So we know that if there's an opportunity for us to source at a lower price, we're going to push for that. whether that comes from being bid competitively against another vendor or just comes from them being able to provide some of their tariff refunds to us.

So we always want to be cost position in terms of where we buy at a competitive position. And then as it relates to where that money goes, again, we're a fast follower on the pricing side in a rational market where we want to be priced competitively is how we think about it. So we're not going to lead lower or lead higher, but we'll go where it goes. I think commodities do tend to have some fluctuation that can go up and down. But as a reminder, where we're able to improve our margins, we'll do that. And by the way, where we're able to also use the monies to invest in the business on all the different things around our 3 pillars, whether that's getting market hubs or stores or inventory positioning. So those monies that we can secure that can help us accelerate what we're doing with our comeback, we can do that as well.

Your next question comes from Zack Fadem with Wells Fargo.

Can you talk about the P&L impact from shifting your mix more to a Main Street Pro versus a larger or regional Pro? How much has your mix shifted since you started this process? And then how do you compare the gross margin and operating margin difference between the 2 for you?

Yes. So we haven't specifically called out that, but the shift from national accounts to Main Street Pro, obviously, is a benefit. There's a little bit of a DIY headwind offset. So think of while we've seen some benefit from the Pro mix shift, we've also seen some offset because it's -- we've shifted higher in Pro and DIY has come down. So they kind of net themselves out a little bit, but definitely a higher quality productive sale from a Main Street Pro customer versus the national account, just the flow-through is a little bit better.

So we did mix higher a little bit, but that's offset a little bit by the DIY pressure that we get there. But we like the profitability. We like the service levels, the ability to serve the Main Street. We like the growth that we see in that space, and that's helping drive some of our free cash flow as well.

Yes. Zack, Shane. A couple of quick things there. We're 50-50 Pro DIY is a good way to think about the business. And you can think about Main Street as about -- it's about 80% of the Pro business. So that can help you triangulate a bit about what it looks like in aggregate. And then just relay an anecdote, when you saw a Pro customer in South Carolina, growing its business using our TechNet program, geographically proximate to one of our stores.

And so as you think about that relationship where we provide services that give them benefits that they couldn't get that help them look more like a scale player and referring to TechNet here where they can offer a nationwide warranty program for repairs, even if the customer wants their car fixed several states away kind of thing. And so those types of programs that we offer, the connectivity that comes from our outside sales team, and we have hundreds of men and women visiting shops every day, building relationships, we think that's a great place for us to be and a place where we're doing well. And so we're going to continue to put emphasis there as we go forward.

And Ryan, you mentioned Q4 gross margin implied mid-44% range, which would be up a little year-over-year. You talked about the 60 basis points from mix and energy from Q3 that likely drifts into Q4. In terms of other moving parts we should keep in mind, you talked about LIFO. What about capitalized cost? And when we come through all of the noise, and there's a lot of it, where would you say your core margin is ex oil today?

So LIFO will have a little bit of an offset from warehouse capitalization. So LIFO is a tailwind. It will be offset by warehouse capitalization costs. So kind of almost net neutral on that. We will have some of the pressure coming in supply chain and other areas. Oil is about 20 basis points in Q3. Expect that to be kind of similar into Q4. But it will -- we've obviously moved some pricing on that in that space. So it's not as big of a drag, but it is a mix drag. Those are lower-margin categories and also been high-performing sales categories for us. So I'd expect that to continue into Q4 as well.

Your last question comes from Steven Zaccone with Citi.

I wanted to follow up on Zacks question here about the Main Street Pro. You cited 80% penetration. Where does that go longer term? Like where is the opportunity? And then the drag from national accounts, 100 bps in the fourth quarter, is that still the right way to think about the potential drag as we look to 2027?

Let's talk about where it goes. There are hundreds of thousands of shops in the United States, 2 bays, 3 bays, 4 bays, 1 location, 2 locations. So we still have customers that we can go visit today that we're not getting their business and say, "Hey, let's talk about what Advanced Auto Parts can do for you." And as we customize our offering and our efforts towards those accounts, there's a success that comes from bringing them on board into the portfolio. So that's really important.

The second thing is you think about where we sit on the call list. So we may have a customer who's buying, I don't know, call it, $500 a week from us that and it may be from one particular category that we expose them to, hey, here's our offering in another category and here's why the price quality and service are all what you're looking for. And so we can move up that call list over time to where they might buy $1,000 a week or $2,000 a week or more than that. So there's 2 levers that we can pull as it relates to what we do in Main Street. And having the right focus on that is important. And so that's where I feel good about where we're going there in terms of growing the business on both of those.

As far as 100 basis points, most of that is this year. The early part of Q1, you'll have a little bit of overlap. But for the most part, we will have cycled most of the major decisions. I mean this mix is -- we're right where the industry is at from a mix standpoint. We like this spot, and we'll continue to focus on mainstream. But we like those national accounts in our portfolio. I think we're in a good place right now. But I would expect that overhang, that headwind to kind of diminish the early part of Q1 and then not be there.

Okay. The follow-up, there's a lot of questions here about margins and SG&A. What I was curious on when you think about the SG&A productivity that you've seen, are we at the point in the business that these sort of savings you get from a productivity standpoint, you really start to -- need to reinvest that in the business to sort of see the acceleration in the top line? Or is there a point where you can still see some of these productivity savings net flow to the bottom line?

Well, we'll continue to see some -- we'll be disciplined. We'll still see some productivity go to the bottom line, but we are investing, and we're investing in the front line. We're investing in key markets. We're investing in market hub expansion. We're investing in new stores. We're investing in capabilities within the stores. The idea of shifting tasking to selling hours and being more productive with our hours in the stores, that's the area we're investing in our SG&A.

So we're finding opportunities along the way. We'll still have some next year. I'll give you one example. Today, we operate in 3 cloud providers. That's a change. That's a high-cost situation there. So we will structure and streamline that, and that will drive some technology savings as well. So we're finding opportunities in different areas. across many of our back-office functions and teams, and we'll drive productivity there so we can invest in the front line. And that's -- if you look at the service levels, being above 80 on NPS, our time to serve our Pro is continuing to expand, investing in trucks, investing in technology in our stores, our attachment rates continuing to go up mid-30s. That doesn't come from cutting costs necessarily in the stores. That comes from leaning in there.

Yes. I'll just add what Ryan and his finance team do is they put a lot of rigor on looking at the relative return across the investment. So think about what we're doing with assortment or supply chain stores, Pro. We look at the different initiatives and we say, "Hey, what's the return that's going to come from that? What's the investment? What's the timing, what's the difficulty?" And that, I think, is a dimension that will help us as well.

This concludes our Q&A session, and we'll pass it back to Shane for closing remarks.

Great. Thank you very much. I want to thank everybody. I want to thank our team for what they're doing. I want to reiterate that I and on behalf of everybody at Advance, we're excited about our future. We know what we need to fix as a company. We're looking at assortment. We're looking at supply chain. We're looking at our stores. We're looking at Pro. We're making progress in each of these areas. We look forward to coming back to you in the new year, updating you on what we're doing for the -- what we've done for the remainder of this quarter and what we're going to do in 2027. So thanks for joining us today, and we'll see you soon. Take care.

This concludes today's call. Thank you for attending. You may now disconnect.

Welcome to the Advance Auto Parts Second Quarter 2026 Earnings Conference Call. I would now like to turn it over to Lavesh Hemnani, Vice President, Investor Relations.

Good morning, and thank you for participating in today's call. I'm joined by Shane O’Kelly, President and Chief Executive Officer; and Ryan Grimsland, Executive Vice President and Chief Financial Officer. During today's call, we will be referencing slides which have been posted to our Investor Relations website. Before we begin, please be advised that management's remarks today will contain forward-looking statements.

All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements regarding initiatives, plans, projections, goals, guidance, and expectations for the future. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information can be found under forward-looking statements in our earnings release and risk factors in our most recent Form 10-K and subsequent filings made with the SEC. Shane will begin today's call with an update on the business and products on our strategic priorities for 2026.

Later, Ryan will discuss results for the second quarter and provide an update on the guidance for full year 2026. Following management's prepared remarks, we will open the line for questions. Now let me turn over the call to our CEO, Shane O’Kelly. Shane?

Thank you, Lavish, and good morning, everyone. I would like to start by expressing my appreciation for our frontline team for their hard work and dedication to serving our customers. During the second quarter, the team navigated a volatile demand environment, which contributed to a slight decline in comparable sales. This included low single-digit sales growth in the Pro channel, which performed in line with our expectations. Within Pro, the Main Street business continued to outpace overall growth supporting share gains in that segment. .

In the DIY channel, sales declined more than we anticipated, particularly during the last 4 weeks as tighter household budgets weighed on consumer spending during the quarter. Against this backdrop, the Advanced team continued to prioritize actions across our strategic initiatives, which contributed to solid profitability in Q2 with an adjusted operating margin of 5.6%. Excluding the benefit of IEEPA refunds received in the quarter, adjusted operating income margin expanded by nearly 130 basis points to 4.3%.

We maintained focus on executing actions within our control, which has translated to sequential improvement in core operational KPIs, including NPS, time to serve and attachment rates. The second is an inflection point for advance with the return to positive free cash flow as we generated $120 million year-to-date compared to an outflow of cash during the last 2 years. During the quarter, we also repurchased approximately $30 million of outstanding debt, which along with improved profitability supported further deleveraging of the balance sheet while we continue to allocate more capital to investments to grow the business.

Based on our first half performance and updated projections for the remainder of the year, we are reaffirming our full year sales, operating margin and free cash flow guidance. This includes comparable sales growth in the 1% to 2% range, which considers continued spending pressure in the DIY channel offset by ongoing strength in the Pro channel along with higher same-SKU inflation due to increased commodity costs.

We are also implementing a focused action plan aimed at strengthening execution across our operational KPIs and driving higher customer engagement to deliver better transaction performance in the second half compared to trends during Q2. Our margin outlook balances the tailwind from recent tariff refunds with incremental headwinds stemming from shifts in channel mix and increased commodity costs. We will continue to prior to the efforts to make progress on our strategic objectives as we work to create long-term value for our shareholders.

Let's turn to an update on our strategic priorities for 2026. Our strategy remains unchanged and is built on 3 pillars: merchandising, supply chain and store operations, 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 in our journey towards a medium-term 7% adjusted operating margin target.

Let's begin with merchandising. We are focused on ensuring reliable product availability to enhance customer service and drive growth in unit sales per transaction. Our new assortment framework launched last year is helping us increase the breadth of products we carry in each store and broadening availability across our network of DCs, hubs and stores.

Halfway through this year, we have added approximately 80,000 new SKUs to our German catalog building upon the 100,000 new SKUs we introduced last year. Through comprehensive category reviews, we are strengthening relationships with existing vendors and identifying opportunities to improve margins while also partnering with new vendors to further expand our selection of parts.

In the near term, our merchandising team is refining communication within the DIY channel to enhance brand awareness and deliver value-driven offerings aimed at increasing customer engagement. We are collaborating with vendors on targeted media campaigns, leveraging advanced rewards, providing store incentives and optimizing online paid search to stimulate transaction growth and improve conversion in stores.

Moving to an update regarding our pricing and permissions management initiatives. We are on schedule to complete the full deployment of a new pricing framework for both DIY and Pro segments by year-end. Our pricing philosophy remains unchanged. We aim to offer everyday competitive prices and operate rationally in the market. The new framework is expected to enhance visibility of competitive pricing actions and enables the execution of precise market-based pricing strategies.

The early results from the Pro channel have shown an increase in team member and customer confidence, which we expect to support efforts to grow share among main street Pros. Alongside the implementation of more sophisticated pricing models we are also improving discipline around the management of store-based promotional activities. We expect to offer everyday competitive prices, along with seasonally relevant promotions and plan to deploy marketing dollars on offers that yield and improvement in sales or profitability.

On a year-to-date basis, our merchandising initiatives have contributed approximately 100 basis points to product margin expansion. We anticipate building upon this growth in the second half of the year to support our margin in movement goals for the year.

Turning to supply chain. In the second quarter, we completed our distribution center consolidation. This initiative commenced more than 2 years ago when we operated nearly 40 DCs across the United States, utilizing multiple warehouse management systems. As of today, we operate 15 DCs supported by a unified warehouse system, marking a key milestone in our efforts to enhance asset productivity throughout our supply chain.

Along with consolidating our DC network, we also launched market hubs that improved same-day parts availability for our customers. Areas equipped with market hub locations consistently outperformed those without market hubs, which reaffirms the strategic value of these locations. Year-to-date, we have opened 5 market hubs, bringing the total to 38 locations. Our real estate team has done a great job in expanding our capabilities, and I am pleased to share that we are accelerating the pace of market hub openings for this year.

We now plan to open 15 to 20 market hub locations this year and remain on track to achieve our goal of operating 60 locations by mid-2027. Regarding DC productivity, our team is concentrating on key process improvements aimed at streamlining and standardizing operations within our distribution centers. We anticipate that these actions will yield greater operational efficiency and facilitate improved product flow into and out of the DCs. During the second quarter, we completed 25% of the identified process improvements and remain on track to systematically implement the remaining process changes by mid-2027.

These actions are aimed at increasing labor productivity within our DCs and provide visibility into cost reductions per unit shipped is expected to contribute to margin expansion starting next year.

Our strategy is focused on minimizing redundant product handling, improving shipment accuracy, reducing inventory lead times and transitioning to a more variable cost structure. For example, we have now standardized the DC receiving process across our facilities, eliminating a significant number of variations, which is expected to deliver better productivity through higher processing volumes per labor hour.

Another critical component of supply chain productivity is transversion optimization. We are currently rebidding all of our carrier contracts, and we expect to consolidate our volume with 70% fewer carriers. This initiative is expected to generate tens of millions of dollars in cost savings, which will support margin expansion in 2027. Collectively, the DC process changes and transportation additives are expected to enhance our ability to operate a more scalable supply chain. Next, I will conclude with an update on our third strategic pillar, store operations.

In our stores, we are holding teams accountable for service execution and measuring the effectiveness of our initiatives through clearly identified KPIs as we strive to increase labor utilization. The second quarter provided further evidence of progress on our store-based initiatives. NPS or Net Promoter Scores have improved nearly 80 points from the high 60-point range in the same period last year. which suggests that our service enhancements are resonating with customers. In-store attachment rates have improved to nearly 30% in from the mid high 20% range in the same period last year, which contributes to unit share gains and average time to deliver pro orders consistently back below 40 minutes during each week in Q2, which is improving reliability for our Pro customers.

In addition to measuring progress through these KPIs, we are also identifying opportunities to better prioritize store tasks investing in technology to drive operational efficiencies and enhancing training content to further elevate customer service. These actions will help us strengthen execution across our primary KPIs in the near term while our store and merchandising teams partner to drive higher customer engagement and improve conversion in the second half of the year.

During the second quarter, we also completed an independent evaluation of store task execution with the objective of updating our store labor standards that were previously unchanged for over a decade. This activity follows the rollout of our store operating model last year, which determined the allocation of resources such as trucks and drivers based on market demand factors.

The study examined time allocated to routine store responsibilities, including picking or stocking products, receiving shipments from distribution centers and assisting customers with product installations such as batteries and wipers. We expect to use the findings to identify that deliver the highest value to our customers and simultaneously highlight nonvalue-added activities that can be reduced to enhance productivity.

The next phase of this initiative involves updating our labor allocation systems to align with the newly developed labor standards. We anticipate beginning this implementation later this year, which will enable us to further improve NPS and drive productivity in the years to come.

To conclude, I want to reiterate that our strategic plan is unchanged. Our KPIs are improving, and we have returned to positive free cash flow. We are cognizant of the external macro pressures impacting consumer spending in the near term. We are implementing a focused action plan to support the business in the second half while we actively manage the execution of our strategic initiatives throughout the year.

I will now hand the call over to Ryan to discuss our Q2 financial performance. Ryan?

Thank you, Shane, and good morning, everyone. I want to begin by thanking our frontline associates for their commitment to serving our customers. For the second quarter, we reported net sales of $2 billion with a slight decline in comparable sales. The Pro channel delivered low single-digit growth, which was in line with our expectations. The strength in Pro was more than offset by a decline in DIY sales in the low single-digit range as constrained household budgets impacted spending during the quarter.

We also experienced milder summer weather in several of our markets, which drove an underperformance in weather-sensitive categories, such as cooling and climate control and fluids and chemicals. In our view, the combination of a larger than anticipated deceleration in DIY spending with deferral in large ticket projects, a reduction in discretionary spending compared to last year and weather-related drivers during Q2 accounted for approximately 100 to 150 basis points of comp headwind in the quarter.

Turning to the cadence of sales. During the first 8 weeks of Q2, comparable sales grew by approximately 1%, including a low single-digit growth in Pro and flattish DIY sales. In the final 4 weeks, comp growth moderated in both channels as we cycle through difficult comparisons from last year. Also this time frame coincided with price changes to reflect movements in commodity costs, which further stretch consumer budgets.

In this period, the Pro channel delivered positive comparable sales growth, but DIY volumes slowed further, driving most of the shortfall in sales for the quarter. For the quarter, average ticket was positive and included same SKU inflation of approximately 4%. The sequential step-up in inflation from approximately 3% last quarter was driven by market-related price adjustments and increases in commodity costs, which impacted motor oil and other petroleum products.

Our team remains committed to enhancing customer service, and these efforts continue to support growth in units per transaction, which grew on both a 1- and 2-year basis, helping partially offset lower transaction volumes.

Diving deeper into category performance. Within DIY, sales were stronger in maintenance and failure categories, such as filters, motor oil and batteries, while hard parts categories lagged, likely indicating selective spending behavior and deferral of larger projects. On the other hand, in the pro channel, our hard parts business, including brakes and undercar continue to outperform, supported by an improvement in parts availability and consistency in delivery times.

We maintained our strategic focus on growing share across Main Street Pros, which represents the largest portion of our addressable market. The Pro team carried the momentum from Q1 and with transaction performance for this segment outpacing the overall enterprise. The Main Street Pro comp exceeded our total Pro comp by more than 200 basis points, helping offset the headwind created by the optimization of national accounts.

Moving to margins. Adjusted gross profit was $924 million or 46.2% of net sales, resulting in approximately 240 basis points of gross margin expansion in Q2 compared to the same period last year. Tariff refunds contributed $26 million in gross margin, accounting for 130 basis points of year-over-year change. The balance 110 basis points of margin expansion was primarily driven by an improvement in product margin and included 2 incremental cost drivers in the quarter. First, a channel mix shift due to the slowdown in DIY sales resulted in a headwind of approximately 20 basis points. Second, supply chain expenses, including higher freight and fuel costs drove approximately 20 basis points of deleverage due to the lower-than-expected sales volume.

These headwinds were offset by approximately 40 basis points of tailwind from immaterial LIFO and warehousing expenses in the quarter, compared to a headwind in the same period last year. Excluding the benefit of the IEEPA refunds, we generated a gross margin of approximately 45% for the first half of 2026, highlighting the progress across our merchandising strategies.

Shifting to expenses. Adjusted SG&A was $812 million or 40.6% of net sales, driving 15 basis points of leverage compared to last year. Expenses were down approximately 1% year-over-year, reflecting our focus on labor productivity through simplification of store tasks and management of resource allocation along with reinvestment of savings from indirect spend optimization.

Adjusted operating income came in at $112 million or 5.6% of net sales, resulting in approximately 260 basis points of year-over-year margin expansion. Adjusted diluted earnings per share was $1.03 compared to $0.69 during the second quarter last year. We generated $120 million of free cash flow year-to-date, marking a significant improvement from an outflow of $201 million last year. The improvement in free cash flow was driven by improved profitability and working capital management, a reduction in cash expenses related to our store optimization activity last year and the receipt of tariff refunds.

Our balance sheet continues to be in a solid position as we ended the quarter with a cash balance of approximately $3.1 billion. During the quarter, we utilized approximately $30 million of cash to repurchase a portion of our 2028 senior notes. And we ended the quarter with a net debt leverage of 2.1x compared to 2.4x last quarter, which is in line with our targeted range of 2.0 to 2.5x. We remain committed to repaying debt at or before maturity.

Turning to full year guidance. Let's start with net sales. For the full year, net sales are projected at approximately $8.5 billion, including comparable sales growth in the 1% to 2% range. Based on product cost inflation experienced during Q2, we now expect full year same SKU inflation of approximately 3% and implying second half inflation of approximately 3%, consistent with the first half of 2026. The step down in inflation compared to the second quarter reflects the comparison against last year's tariff-driven price adjustments.

Based on revised inflation expectations, along with our focused action plan to increase customer engagement, range of comparable sales growth guidance assumes a recovery in transaction volumes compared to the second quarter. Regarding Q3, trends during the first 4 weeks of the quarter are tracking slightly ahead of trends in the final weeks of Q2 and have accelerated on a 2-year basis.

As a reminder, these first 4 weeks of Q3 represent our most difficult comparisons last year. And our comparisons begin to ease significantly over the next 8 weeks. Moving to margins, we have reaffirmed full year adjusted upteen 3.8% to 4.5%, resulting in 130 to 200 basis points of year-over-year margin expansion. We expect full year gross margin to expand in the range of 110 to 150 basis points to approximately 45%. Most of this margin expansion is expected to be driven by the merchandising initiatives related to strategic vendor sourcing and optimization of pricing and promotions. We expect that the benefits from these merchandising initiatives to be partially offset by investments in supply chain productivity.

As I discussed earlier, we had some moving items within gross margin in Q2. These items have also been factored into our full year guidance. During the second quarter, we received substantially all the AEP refund claims by us. These refunds equate to approximately 30 basis points of gross margin contribution for the full year. However, this benefit is being fully offset by the from changes in sales mix compared to our prior forecast and the incremental impact of higher shipping, freight and fuel costs in the supply chain.

We will continue to work closely with our vendor partners to navigate the Alvin geopolitical landscape to mitigate potential supply or cost pressure. Regarding SG&A, we expect reported full year expenses to be down year-over-year, contributing between 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, new store and market hub 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 dedicate more time to serving customers.

Moving to other item guidance. We have raised adjusted diluted EPS guidance to a range of $2.60 to $3.30. The revised EPS outlook includes approximately $100 million of interest income, which is an increase of $20 million compared to our previous expectations based on trends through Q2. We continue to plan for pretax interest expense of approximately $210 million for the full year. The recent debt repurchase does not have a material impact on guidance. The benefit of higher interest income is being partially offset by a slight increase in tax expectations for the year.

Shifting to cash flow. We continue to expect 2026 capital expenditures of approximately $300 million, with spending allocated to new stores and greenfield market hub growth, store infrastructure upgrades and strategic investments. scheduled for this year. Our revised guidance includes 30 to 35 new store openings this year with 6 stores opened in the first half of 2026. For market hubs, our guidance now assumes 15 to 20 market hubs this year, which exceeds our prior expectations. We opened 5 market hubs in the first half of 2026 and currently plan to open 9 market hubs during Q3. We are reaffirming our full year free cash flow guidance of approximately $100 million.

Our guidance includes a flow-through of tariff refunds received during the second quarter and time for certain general operating expenses planned for the balance of the year. The change in free cash flow trend compared to our year-to-date trend of $120 million does not reflect any change in underlying operational progress of the business.

To conclude, I want to thank our frontline associates for the continued improvement in the quality of service provided to our customers. Their efforts are supporting improved conversion, NPS and attachment rates while our protein continues to drive share gains across the Main Street Pro.

I will now hand the call back to Shane.

Thank you, Ryan. I'd like to close by thanking the Advanced team for staying focused on elevating our customer experience and driving operational productivity, which we believe will position us well to create long-term value for our shareholders. Thank you. Operator, we can now open the line for questions.

[Operator Instructions] Your first question comes from the line of Steve Forbes from Guggenheim Securities.

Brian, Shane, I wanted to maybe dig to customer segmentation and whether you're seeing transaction growth among your largest up and down the street customers. And maybe any comments you can provide that help book conviction around sort of sustainable transaction comp into the out year here as you reap the benefits of the strategic priorities.

Yes. Steve, thank you for the question. And let me just begin by thanking our team. Important to recognize what they're doing each and every day. So great question. Let's unpack Pro. Think about it in terms of Main Street and think about it in terms of national accounts. We are excited by what we're seeing with Main Street. So the growth there, 200 basis points above what we're seeing in total Pro, and that's inclusive of transactions.

What we're doing with Main Street, we're getting real traction. And think about this as in the trenches, seeing a local shop at somebody with 2 or 3 bays and that's where both our connectivity, our reputation and really the quality of what our -- both our outside and inside Al's team members can do is being a difference.

Know that inside our Pro numbers, we have national account headwinds. And Ryan can unpack the numbers a little bit, but the way I think about it is we're starting to lap that. And remember, this is us saying hey, where do we want to be in the Pro segment? Where do we have a right to win? Where is our profitability more attractive? All of that points to Main Street. So national accounts waning, and we're starting to see that diminish over time. So given the success we've had with Main Street given how we're situated to compete with Main Street. We feel good about that both in what you've seen here and what we think we can do for the future.

Yes, Steve, I'll add a couple of things. Well, just think about the main -- I'll hit on the Main Street and the national accounts. The national account pressure will be about half of what it was in the first half in the second half. So we are starting to lap there will still be some pressure there, but it will be about half of what we've seen in the first half of the year. So that will help a little bit on the trends there.

On the Main Street Pro, we're not just seeing accounts that we've had for a while, continue to shop with us, buy more transactions, we're seeing accounts on Main Street that hadn't shopped much with us before, start to give us some of their business. And that's a good sign that our assortment is getting there, the service level is improving.

A couple of things to note on live that we're making the right moves here. By the end of the year, 70% of our stores will have a market hub, and we're bringing more parts closer to the customer. and that allows us to reach other main street pros and provide a better level of service to them. So we're excited about the market hub acceleration we're able to do here. We still think by the middle of next year, all stores will be in a market hub being able to accelerate a few more in this year.

By the way, we're going to open up 9 in Q3. So that acceleration is going to be impactful, bringing more parts closer to the customer. The other thing is our assortment work that we're doing, and we still have opportunity to improve that assortment for the Pro customer, make sure we got the right coverage, but the work we have done is starting to resonate. We're going to continue to do that. We see opportunity to continue to improve that coverage and be more relevant for our Pro customers.

A couple of just last additions and then look forward to your follow-up. If you look at how we played in the Pro space over the years, we have a TechNet program, which has been very successful and included in that is a warranty program. So you say, Steve, you own a small shop somewhere and you fix their car and the customer drives 3 states away and needs to get that original work repaired. They could do that through an unrelated shop through our warranty program and get that paid for.

We have programs like MotoVisuals, MotoLogic that help break down what's going on in vehicles, our credit programs, our tools and equipment programs our ability to work with your account as you grow. And so there's a number of things that we do with Main Street I'm going to use the word that's specialized or even bespoke relative to what else is out there that helps our level of attractiveness and build that partnership.

Most recently, and this is just sort of coming out now with Anthony Solanas and our Pro team is owning the mile where he's using both our CRM software, the partnership between the outside sales team member, which is called CAM and our insight sales team members to CPP to really focus on customers who are geographically proximate to our stores.

Now on the plus side, our aggregate total time to serve is under 40 minutes. And we think that's a key threshold. But now you think about focusing on customers that are very close to the store, and I'm thinking 1, 2, 3 miles, we'll be well under 40 minutes there, and that's a further point of differentiation. So look for us to continue to do that. But net-net, we feel good about what we can do with Main Street Pro.

I appreciate that. And maybe just a quick follow-up, given the commentary around hub growth. I know the transition here was the greenfield growth, I believe, this year over repurpose footage right of the distribution footprint. So can you talk about how those greenfield hubs are performing relative to the original cohort of hubs that were more repurpose footage. And if that sort of performance sort of supports the acceleration that you're referencing here into the back half?

Yes. I'll jump in here and Shane can add color. But the greenfield market hubs, the actual store because there's a store within the market out, they actually are performing a little bit better than the other one. And I'll give you just a background on the other ones. The non-greenfield were actually conversions of old, we call them blue but Carquest DC smaller DCs that we converted, they weren't necessarily in prime retail locations. But they did service the market.

They do service the mark or part. So the hub runs help the market. The greenfield ones tend to be in a better retail location area where we can get more retail sales out of that hub as well. So from a volume standpoint, they tend to do a little bit better on the greenfield side than the conversions just because of the nature of the retail business we generate from them. And also, the conversions those still supplied some parts of the market through what we call PDQ.

So there was still some service level. It wasn't as strong or as efficient as the mark hubs are. So when we put a greenfield in place, that is a lot of parts going to that market that weren't there before. So they tend to perform a little bit better than the conversions.

I just add that the market hub paradigm for us is a key part of how we're going to grow, not just with Pro, but with DIY. And so we're accelerating what we're doing there. And as Ryan touched on, we'll open 9 in Q3. We're sitting at 38 currently. We want to be at 50 by the end of the year. As a reminder, think about these as having 70,000, 80,000 SKUs, sometimes a little bit more. being able to get parts same day to a radius of stores in 50-plus stores.

So that really changes our ability to compete for parts that people want that day. And so we're going to continue it. We're going to refine it, and we'll talk more about what we'll do as we get to the 50 going forward.

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

So this may be a slight repeat from the prior question. I missed some of the prepared remarks. But thinking about the core driver of do-it-for-me, if there's temporal pressure in the economy, like gas prices, I would expect DIY to be more sensitive, not DIFM. So can you talk about the trajectory you're on with core DIFM improvements? And how much of this quarter was more macro or it could be like strategy just taking some time to take hold.

Yes, I'll talk about Q2 and then the Q3 trend. So the deceleration we saw in our P7 the last period of the months we were running about flattish on Day and low single-digit positive Pro for the first 8 weeks. We saw really DIY decelerate towards the end of the quarter. That was really the bulk of the lower performance of what we expected. DIFM, while slight deceleration was still positive during that time period. I think it was more just a reflection of a little bit of macro pressure there. But the Pro was still positive in the quarter and in the final 4 weeks still positive. .

Those -- the momentum in Pro has continued into Q3. We like what we're seeing there. On the DIY side, we've seen a little bit of an acceleration from the trend we saw in -- and on a 2-year basis, we've seen some good acceleration. More importantly, on the trends in Q3, we're seeing transaction growth improve. So the transaction -- transactions have improved versus our Q2 trend where we exited Q2. So some positive things there that give us confidence in our guide for the rest of the year.

And then a quick follow-up. And again, I apologize if you said this already, but merchandising success or excellence, I forget the terminology for some of the gross margin initiatives. I guess ex tariffs, if I got this right, the margin may have come in a little bit, I guess, worse than we expected. I don't know if that's right or wrong. Some of that, I assume, was deleverage of distribution expense? Or was there any slowdown in just the merchandising success strategy during the quarter? .

Actually, good question. I mean the rate was impacted a little bit by mix here. So you got about 20 basis points of mix impact from DIY, the lower volumes that we anticipated. And then you had about 20 basis points, it's fuel surcharge, just things that were flowing through. So those are really the 2 that impacted us that drove it down. It still was like a 44.9%, so close to the 45%. So able to manage close to 45% the merchandising initiatives still cost out really strong and provided great value for us. I mean, 110 basis points year-over-year if you back out the tariff impact on margins. So the real slight decrease versus our expectation in the quarter was driven by fuel supply chain expenses in the channel mix. .

Your next question comes from the line of Steven Zaccone from Citi.

I want to follow up on the second half here. So clearly, the decision to reiterate the same-store sales guidance, it does look like the second quarter still missed expectations. So maybe just help us understand some of the phenomenons that can help in the back half. The lost sales due to weather, do you expect them to come back? And then any help on the third quarter versus the fourth quarter because it seems like you got some work to do and the compares get a bit tougher in the second half of the year. .

Stephen, it's Shane. I'll start and then Ryan can unpack it further. So just big picture. We catered to the lower and mid-tier consumers. And you see this not just in our numbers, but I think you see it broadly in our market and others. That's been a very stressed consumer. And so from a macro perspective, they've struggled. They've struggled as fuel prices have risen, and those budgets have continued to get tighter as they've gone through.

And you saw that, by the way, in our Q2. And if you look at the last 4 weeks of our Q2, we were probably a little slower pivoting to value given that the consumer said, "Hey, this is what's really important to me. So as we look at Q3 and Q4, we're taking a series of actions to be more attractive and to maintain and improve conversion for those consumers as they come and visit us.

So here's what's going on with that. So we've got our Advanced Rewards program. That's been recently launched. We'll continue to reach out to that cohort of customers. We're doing work with paid search optimization to make sure both in terms of what keywords we're using, what geography of customers talking to and how we get them in there. We're going to continue to promote our good parts campaign.

We're simplifying tasks inside of stores and communications so that when a customer does come in, that experience is as positive as it can be. And by the way, I've seen an uptick in feedback that I personally get from customers about what they're seeing in our stores. We know that value is are important. We've got Argos, which is our private brand of oil, and we're now expanding across a broader line of products that we think will be attractive.

We also know that and this is a good part of what we do from an assortment perspective is good, better and best. And so in the past, when the consumer is healthier, they'll say, "Hey, tell me more about the better and the best", now they want to learn a little bit more about tell me about the better or tell me about the good. We've got those products in. So that speaks to what we're doing on conversion. That speaks on what we're doing with units per transaction. So we have a series of activities geared towards rekindling what's going on with the DIY customer to do as well as we can. On the Pro side, you heard some of that with how we respond to Steve's earlier comments, but we really like what we're doing with Main Street Pro. We're going to continue to push in there.

Yes. And Steven, I'll just be a little specific around what's driving the back half comp performance expectations. So all that Shane talked about, we think, will help with that. And we're actually seeing on a 2-year basis, that accelerated a little bit. And you mentioned difficult compares in the back half. The real difficult compare is, it tends to ease as we go throughout the back half of the year. One thing also to note is we had about 50 basis points of impact last year in Q4 due to product transitions. We won't be cycling that in Q4 this year. .

It was related to First brand groups and other product transitions in our front room that had an impact last year. We won't have that this year. So that's kind of a tailwind cycle over, but we're focused on Pro. Pro will continue to outperform. We're seeing those trends continue and that will be a driver. We still think there will be DIY channel pressure more than we originally thought, even though trends have improved after the last 4 weeks of the quarter into Q3, we still are expecting that DIY will be pressured in the back half. But to Shane's point, we think we have a really compelling value offering within our product set and our categories.

We have good, better, best. And that Argos expansion couldn't -- to other categories couldn't come out of time, I think, for the consumer. It's a good value offering across many different categories now. I think our efforts to increase customer engagement will be good. One other thing to note in the back half, we've got a 3% inflation expectation, that's really due to kind of the commodity price oil prices that are going in. That's about 100 basis points higher than we originally planned.

I appreciate all that detail. My follow-up is the prior commentary, 7% operating target on a medium-term basis, I think next year, 27% was expected to at least 100 basis points of expansion. Do you still think that's a reasonable target in light of some of these weaker DIY trends and maybe cost inflation across the business?

Yes. I mean we're still focused on 7% of medium-term target. The 100 basis points next year, that's where we're at today, which is a little too premature to give specific guidance for next year. But I'll tell you what Ryan is doing in supply chain because the bulk of this year is supply chain planning, driving improvements, understanding the timing of benefits we'll get from supply chain and also our store optimization work and what we're doing there. And both Ron and Tony have been digging in. What Ryan is doing, he's about 25% of the way through really looking at the productivity in different areas.

Think of our receiving capabilities, our inbound or outbound, and that team has been hard at work. It's giving us more confidence in the value unlock in supply chain. We're not ready to necessarily give what that guidance will be for next year, still working through the planning, but the work he's uncovered year-to-date. It's just continuing to confirm for us that there's opportunity there. So we're still 100 basis points for next year still makes sense for us, but we're not ready to give more specific guidance.

And let me build. I think 7% is that right target. We're in a very complicated geopolitical situation that's impacting the concert. So the consumers stressed but think a little bit longer term, I think we're going to be permanent in this state of affairs. If you think longer term, the backdrop of the industry that we're in remains very attractive. So think about that in terms of number of vehicles on the road. Think about that in terms of how old they are.

Think about that in terms of what the penetration of electric vehicles has been or now a prevalence of a hybrid vehicle that has an engine. Think about that in terms of miles driven. Think about that in terms of cost of a new car. People -- new cars are pushing $50,000. People are keeping their cars longer and want to fix them. Think about the total TAM. It's a $160 billion market. It's fragmented.

So the idea that all of those backdrop fundamentals for the longer term, just think beyond the immediate pressing concerns of the consumer. Those are all good things for us as we compete in the market. And so that's why keeping that target the same is appropriate.

Your next question comes from the line of Bret Jordan from Jefferies.

How should we think about working capital, I guess, accounts payable to inventory and what your factoring costs are looking like now that your leverage ratio has come down a little bit.

Yes. Well, our coverage actually improved a little bit. I think -- we would expect that to continue to improve over the medium, long term here. We are making some investments, obviously, in working capital related to our assortment work, but we're also finding productivity. So overall, we'll see improvement in our working capital. We'll see improvement in our coverage. We have great conversations with vendors to work through that, but that's going to be over the medium term. But we did see -- we have seen improvement in our coverage ratio.

Obviously, the banks versus -- with our vendors, they obviously provide rates to them. We don't get involved in that, but we know they've kind of stabilized for sure. There's -- obviously, the external rate so far has been under pressure as well. But it has stabilized since we put in the transaction last year. And so -- what I've heard anecdotally is just that the difference is starting to converge, but it's, I think, about where it's been for a while stabilizing a really volatile rate environment. which is good for our vendors. They want stability.

I think one of the key points that happened in Q2 was rating agencies, both Moody's and S&P, stabilized our outlook, which is just a demonstration of the improved balance sheet that we have. It's in a solid position. The free cash flow returning to positive free cash flow. That's the first time in 2 years. this company has gone to a positive free cash flow.

So I think from a balance sheet standpoint, improving supply chain finance, very stable. The banks are supportive of the program. I think the transaction really helps bridge us to investment grade.

And then on the commercial business, ex the national account cutbacks, are you gaining share, if you think of retaining share of the up and down the street business, I mean, sort of adjusting for same-SKU inflation and looking at that 200 basis point comp ahead of Pro. Do you think that's a share gain indicator or just holding share?

I think it's a hole and then potentially in some markets, again, is how I think about it. A lot of noise going on as we transition the mix of the national accounts to the Main Street, but as I -- personally, when I visit accounts, the consensus on improving time to serve, improving the assortment thinking about what we're doing with TechNet and other promotions, I think, gives us confidence about what we're doing going forward.

Yes. The Main Street, Brett, larger addressable TAM, I mean you know this, but we're really excited about larger transactions there for us. So the transactions are stronger for us in the main street. So I think maybe it's a hold in gain in certain areas. We're excited about what we're doing on the Main Street Pro. .

Your next question comes from the line of Maksim Rakhlenko from TD Cowen.

Great. So first, can you just help bridge gross margin for both 3Q and 4Q, the key puts and takes that we should be considering, and then just any help triangulating to final outcomes compared to 2Q? .

Yes, absolutely. A couple of things. You think about the -- the back half of the year, we are expecting -- it does include headwinds from higher freight fuel costs, some channel mix headwinds. So DIY coming down, you'll have a little bit of a mix pressure on we still expect elevated freight and fuel costs that will be in our margins.

Looking at kind of Q2 is our guidepost or operating income. These cost items drove approximately 30 to 40 basis points of headwind One thing to keep in mind, we are cycling a 53rd week. So in Q4 operating margins, that's approximately 20 basis points of headwind in the Q4 operating margins. So EBIT margin guide for the second half is 3% to 4%, with the high end, consistent with last year, excluding the 53rd week.

The gross margin specifically, we're assuming a margin range of 44% to 45% and with Q3 higher than Q4, just due to seasonality and the mix that we sell, we don't expect any material tariff refunds inflows coming in the back half of the year. So just a thought on that. on SG&A, if you're thinking about operating income and the flow-through there. We expect those dollars to be relatively flat to last year in Q3, including more store openings, the decline in Q4 year-over-year is really due to that extra week. So that extra week of SG&A. So in general, it will be -- exclude that at a low single-digit increase.

And then so you guys repurchased a little bit of debt this quarter for the first time in a while. If you remain on track to hit your guide for this year, should we see further repurchases ahead? And then will it be a similar magnitude or potentially those step up? And then just bigger picture, can you update us on conversations with the rating agencies, and any sort of goalpost that we should consider as you will get back to investment grade?

Yes. So a couple of things on that. We're always going to be opportunistic with excess cash that we can't deploy or don't feel like we can deploy into the business. So the way our capital priorities go, we're going to deploy cash into the business to continue to drive this come back, improve the business operations.

When we have excess cash beyond that, if we find economic benefits to retiring debt before maturity, we'll deploy it towards that. We have no plans at this time, but we're always looking at the market, so we'll look to do that at or before maturity is our plan. And if we have excess cash that we're confident in, we'll do that. But again, I'm excited about the fact that, this is the first time in a long time, we've been able to use excess cash.

And our cash balance continuing to be a positive for us on the bunch sheet. We've got $3.1 billion of cash, we are an excess cash position relative to our obligation. So if we can deploy that to the business, we will, if not, we'll continue to deploy and delever the balance sheet.

As far as the rating agencies are concerned, we've had very constructive dialogue. We're excited about the stable outlook. Just a reminder, to get to investment grade with Moody's about 3 jumps, and S&P, it's 2 jumps. So this is a journey that we're on. It's been positive conversations. I think the free cash flow -- returning to positive free cash flow beginning to delever the balance sheet are all good indicators that I hope they will see as positives. But we have dialogue with them regularly. We're working towards getting back to investment grade, but it is a little bit of a journey.

Your next question comes from the line of Kate McShane from Goldman Sachs.

This is Mark Jordan on for Kate McShane. As you think about your focus on Main Street customers, is there a way to quantify how much of that AFM comp is coming right now from existing customers? How much is coming from new customers? And I guess, if we think about the time it takes to win a new account, is there a lag or what is the lag between opening new market hub and maybe signing up a new Pro account?

Yes, good question. On the plus side, most customers know who we are, and we will commonly get some sort of business from them within the Pro world, there's a hierarchy where you want to be first call. You want to be the guy that the customer says, "Hey, I'm ordering auto parts today and advance is going to be the first call. And by the way, the questions that go around how you earn that is, do you have the part, yes or no? When can I get it, time to serve. And then sometimes, hey, what's my cost going to be? .

And so as we improve in each of those areas, our ability to get first call customers or earn our way in the first call improves. And we haven't sort of unpacked that number specifically other than to say that we're very focused on it, and opening market hub certainly helps.

In my experience, when you go into somebody where you're not first call, it's not a question of, hey, I make 1 visit, and then the customer says, "Great, you're here, and so now I'm going to switch. So it usually takes a series of visits over a period of weeks, where you have to both demonstrate the value proposition and earn that right. And usually, it comes in the form of, okay, I'm going to give you guys this category, I'm going to give you this set of orders and then how do you perform and you earn your way in.

It's a trust-based business. It's a relationship-based business. And if I go back to some of the things that we talked about before, whether it's our TechNet program or the quality of our CAMS, our outside sales team member. We've got the right constituent parts to go to go make that happen. And now the market hubs become a further enabler of that. But it's not an immediate process, but we feel good in terms of where Main Street Pro sits today.

We feel good in terms of how we're migrating through some of our national account business, and we feel good about where we're going forward with our Own The Mile program our use of CRM, our value plays for our Pro customers. The quality of our inside sales team in our stores, our CPPs, our reputation, Advance, has long been known for being in the Pro universe.

And just to add, the mix between new and existing, it's a mix of both. We're seeing growth in both. .

And one follow-up, if I could. You mentioned the same-SKU inflation you're seeing on motor oil and other lubricants. Can you just talk about how your Argos line is positioned relative to the competitors there?

Yes. So we like the name. We like the people that we source the product from. We like the performance within -- in the category. Argos is actually our highest unit selling motor oil. And by the way, we represent very high-quality prominent brands, and by the way, proud to sell those as well. But as the consumer says, value is really important to me. they know the quality we put into the product, but the idea that it comes with affordability, reliability, sustainability, it really resonates with them and resonates with our team. And so it's an easy product for our store team members to sell.

Our final question comes from the line of Michael Lasser from UBS.

It seems like your guidance is basically saying, hey, at the low end, we could do a flat comp. And part of that is you're going to see more like-for-like inflation in the back half of the year, the comparisons get a little easier. But on the other hand, it does seem like the business is becoming more volatile. You had spoken about some volatility coming into the second quarter and some volatility coming out of the second quarter. So how does that influence your perspective on the back half said another way, was there any thought to lowering the comp outlook for the back half, just to be a little bit more conservative? .

Yes, I appreciate it, Michael. Just talk a little bit about the trends. When we entered into Q2, we did talk a little bit about the DIY slow down a little bit of pressure there, softness in, but even then the first 8 weeks was kind of in line with our expectations. We were tracking around a 1 comp for the first 8 weeks and DIY was roughly flat, Pro positive low single digits. It was really the last 4 weeks. And I think in that last 4 weeks, we had 1 unique weather impact in our areas. If you look at our store footprint, the average temperature was actually down year-over-year. That's one.

I think the DIY really pivoted the value. And I'd just say, I don't want to belabor this, but I think we were slower to pivot our messaging to that. I think we've got a great value offering, and we've pivoted going forward to make sure that the customer sees that but the last 4 weeks really was an indicator of the health of the business. I think I was -- when we see the trends coming in Q3, those Q3 trends have accelerated and more particularly in transactions, and from a 2-year basis, we are in line with what the guide would imply, which is roughly a 3% 2-year stack. And that's what we're expecting going forward. So we're not expecting a deviation from that kind of 2-year trend and where we're tracking today to be within our guidance range.

Sorry, Ryan. My follow-up question is on the path moving forward. You have articulated a lot of confidence that over time, there are idiosyncratic drivers to improve Advanced Auto Parts profitability especially from all the actions that have already been made. So are you still of the view that next year, there could be more margin expansion as the fruits of those initiatives take place. And if the overall environment for the aftermarket remains more challenging next year, to what degree does that potentially offset the idiosyncratic gains and profitability that you are expecting in 2027.

Yes, I appreciate it, Mike. I'll just talk about -- we talked about at least 100 basis points next year, and we still have confidence in that -- and a lot of the work that Ron has been doing because this year has been about supply chain stores, planning, getting into the hood and he's making his way through supply chain it's given us more confidence in the unlocking will have going forward. We're not ready yet to give specifics on that.

We'll update later in the year on that. But honestly, we're getting more confidence as Ryan is working through that. And then Tony, on the store side, we're seeing a shift in making sure that our labor hours are as productive as possible serving our customers. less tasking, focus on the customer, driving productivity there. We're seeing that and we're getting more confidence in the actions that we're going to be able to take there. So we're more confident.

I think 10 -- at least 100 basis points is still a target that we have for next year. You talked about if the current pressures, and it's really around DIY, maybe some freight pressures.

One, on the DIY of that persistent may be a little bit of pressure, and we saw that in Q2. We had 20 basis points of mix pressure. But yes, we still delivered our underlying margin growth of over 110 basis points if you exclude Arif. So the business is still driving operating income growth, gross margin growth even despite some of those headwinds in those trends. And expect that to continue. If that were to continue, we'd expect to be able to mitigate that next year.

Michael, it's Shane. Thanks for the questions. If I come back to the big picture and you're on the big picture, good industry. By the way, if you look at how we're running the business, we're willing to make the tough calls. We're using KPIs to track how we're doing. We're being transparent about it. We're being disciplined in the execution. We're not happy with how Q2 came out.

We're putting in a series of initiatives to help us as we think about what we can do with DIY and what we can sustain with Pro -- but even in the tough moments, you can point to and find evidence of improvements in areas that are critical for our continued advancement improvement for our turnaround for our comeback. And you can think about that in terms of NPS. That's -- we rolled that out.

And our initial numbers were rough. And we've talked about the journey from the 60s to the 80s. That's meaningful. That's a customer saying, "Hey, I had a better experience than what I had last time. When you think about things about attachment rate. And if you look at our market hub openings, look at what we're doing with the assortment, look at the DC consolidation.

We literally just finished the DC consolidation. So I don't want to say we're nascent in the journey because we've been at it for a minute, but we are making improvements and getting better every day on the things that we can control. And we're staying at it in terms of being rational actors and putting in plans to make that improvement continue in the future.

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

Thanks, everybody, for joining the call. I want to thank the team members at Advance. It's their hard work that's making the progress on some of the KPIs that I mentioned, and it's their hard work that's helping us as we go through Q3. We look forward to talking to everybody at the end of the quarter, and we appreciate you following the company. Take care. .

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

Welcome to the Advance Auto Parts First Quarter 2026 Earnings Conference Call. I would now like to turn it over to Lavesh Hemnani, Vice President, Investor Relations.

Good morning, and thank you for participating in today's call. I'm joined by Shane O'Kelly, President and Chief Executive Officer, and Ryan Grimsland, Executive Vice President and Chief Financial Officer. During today's call, we will be referencing slides which have been posted to our Investor Relations website.

Before we begin, please be advised that management's remarks today will contain forward-looking statements. All statements, other than statements of historical fact are forward-looking statements, including, but not limited to, statements regarding initiatives, plans, projections, goals, guidance and expectations for the future. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information can be found under forward-looking statements in our earnings release and risk factors in our most recent Form 10-K and subsequent filings made with the SEC.

Shane will begin today's call with an update on the business and progress on our strategic priorities for 2026. Later, Ryan will discuss results for the first quarter and guidance for the year. Following management's prepared remarks, we will open the line for questions. Now let me turn the call over to our CEO, 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?

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.

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

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.

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.

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?

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.

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

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?

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.

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.

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?

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.

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

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?

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.

Steve, I'll just add, it's interesting to -- if you triangulate different data points of 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.

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?

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?

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.

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.

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

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?

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.

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.

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.

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.

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.

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

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?

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.

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.

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.

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

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?

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.

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.

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?

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.

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

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.

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.

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.

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?

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.

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

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.

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

Good morning, everyone. I am Michael Lasser, the hardline, broadline and food retail analyst from UBS. I could not be more excited to have my friends from Advance Auto Parts with us. This is a special session because this is the first fireside chat that the leaders of Advance Auto Parts have done since they joined the organization 2.5 years ago. It's been an incredible journey that these folks have led this organization on. So there is a lot to talk about.

I'm pleased to be joined to my immediate left by Shane O'Kelly, who really needs no introduction, but he is the Chief Executive Officer of Advance Auto Parts. And then Ryan Grimsland is to his left, he the Chief Financial Officer. Lavesh Hemnani is somewhere around in the audience. He leads the Investor Relations function, does a great job.

So, as I mentioned, AAP has been on a journey, not just in the last 2.5 years, but really for the last 20 years. And where I want to start this conversation, Shane, is give us a sense of what the last 2.5 years has been like. We were just talking in years -- I was saying, well, for all of us in the audience, it feels like every year, 10 years, you were saying for you the last 20 months has been like 20 minutes. Give us a sense for why.

Yes. Good morning, ladies and gentlemen. Great to be here. Great to share our story. And never been more excited about where we're going with the company. I was in the U.S. Army and my first military unit had a motto a mantra of deeds, not words. And so it's auspicious and fitting that we're doing our first fireside chat here today after 2.5 years because we've been focusing on the deeds of getting the company to a solid foundational footing in our first 2.5 years. And we've been engaged in consequential decisive, meaningful transformational initiatives in those early days.

For example, we sold Worldpac. And by the way, not just the sales process, but managing the TSA subsequently, big move. We made the decision to consolidate our DC network. And in the world of retail and distribution, there are a few moves bigger than that. When I got to the company, we had 50 inclusive of Worldpac. We'll now sit at 16. We made the decision to cut headcount in headquarters. We made the decision to invest in our front line. We made the decision to introduce a new node in our network called a market hub. We made the decision to rejuvenate our new store opening capability, which had fallen by the wayside. We made the decision to go to the capital markets and raised $2 billion to ensure that we had continuity with supply chain financing.

So as you think about actions to get a company in good stead. We had to be decisive in those early years with these huge actions. And we're really pleased with the progress in each. And as a result of which we're now focused on our strategy, which we put quite simply as the right parts in the right place with the right service. And going forward, that's where we're now driving the business. We put these transformational moves behind us to now focus on being an auto parts supplier. And as we do that each day, we get better. And as we get better, we earn our place in the market.

And as you look back, it's been -- there's been internal challenges and external challenges. What unexpected challenges have you faced? And most importantly, are you where you are today, where you thought you were going to be when you started this journey?

So we feel great about where the company sits today. I think worth noting that for the first time in three years, so this eclipses our arrival, we've now returned the company to a positive comp and positive operating income profitability. So that's a big step to legitimize what you're doing and to tell folks, hey, we've come through these tough stages to get to where we are today. So that's a huge marker put on the wall.

In terms of things that we want to continue to do, we've consolidated the DCs. So a good next step is to now better optimize what occurs inside the four walls. That's what we're focused on. But that's part of our three pillars of our strategy. If you think about what we've done with our stores, we've introduced a new operating model. We can now better refine what we're doing with labor and truck allocation. So there are clear things that we're doing today to continue our trajectory.

And by the way, if you look at our guidance, we want to be at a 1.5% comp and a 4.1% operating income. Those are the things that help get us there. But those are now inside the bounds of what traditional auto parts companies would be doing day in and day out and beyond the scope of where we were doing things like consolidating the DC network or by the way, I didn't mention before closing stores. We exited entire markets. We left the state of California, for example. We parsed the number of independents that we work with. So we reduced that number. So we've done those types of things to now be in the business every day getting better to hit the guidance that we just talked about.

Very helpful. And I didn't give Shane enough do with his background. Shane has been -- he spent a long time at McKinsey. He mentioned he was in the military. He spent time at The Home Depot, leadership in the oil and gas industry. So you've seen a lot. Is it fair that we characterize over the last 20 months, there's just been heroic and heavy lifting at Advance, all the factors that you've mentioned. And at this point, it really comes down to execution. And everything you've seen throughout your tenure within the business world would suggest and tell me if this is fair, that what separates one organization from another is the consistency and degree of execution, and that's where you have looked to get Advance to at this point?

Indeed. And I would further describe it as you need to be able to do decisive things. So sometimes to get to consistency, companies are unwilling to do tough things. And so we've demonstrated that we can do that.

To get the consistency of your strategy has to be understandable. It has to be relevant to the industry and the condition and the state of where you're at. And then you got to have good people to drive that consistency forward and create those processes. And so we've talked about the decisive actions. We've touched on the strategy, the right parts, the right place, the right service. We haven't touched on people where we've now got leaders in seats who are statured and capable in the tasks that we're asking them to do and starting to now put forth the results that we're looking for. So that's been a key part of our focus in the last 12 months.

And like you said, in the fourth quarter, there were some changes to the operating model. Can you provide a sense of what those changes have looked like? How are they going to empower those at the store level to execute on a day-in-day basis and drive the performance of the business?

Yes. I'll come at this question a couple of ways. First, in our industry, in our business, there are three fundamental questions that determine whether or not you get the sale. The first is, do you have the part? And by the way, as we get the tariffs, Ryan will unpack elasticities and things like that. But by and large, if you have the part, you're in the game. Second is when can I get it? For the Pro customer, this means getting it to their shop expeditiously, and I'm going to come to that. And then what's the price. And so that last one, you have to sort of to be within the bumper. So we're looking to be able to successfully address those questions each and every day at our 4,200 stores and enable our 800 independents to be able to do the same.

Okay. So how do you make that happen? First, in some of the other organizations I've been in, being able to replicate consistent process across your stores is really important. And that's where our operating model. The idea that we have clarity in how we do things across the company is important. And inside of retail, labor is an absolute critical component of that. And Ryan has done a wonderful job measuring labor and directing what our targets need to look like. And by the way, as we go forward this year, we're further segmenting it to make sure we're not looking at things in terms of averages, but at the unique -- at the individual store level, if you're high and you're low, the average might be good, but the experience wouldn't be the same. So we're doing that.

Second, in terms of asset allocation, delivery vehicles are really important for us. We run thousands of drivers every day out to Pro customers. And in general, inside of retail, if you have extra assets, you're going to be remiss about or disinterested in giving them to somebody else. You want to keep them for your own benefit. What we want to do is get our vehicles to where they're used most effectively. So that's -- those are two components.

There are a lot of incremental components beyond that, how we onboard, how we train, how we greet, how we solve customers' problems. There's activities going on in each of those. But we're seeing progress, and I'll give you a very key indicator of that, time to serve. We were, call it, 50 minutes, north of 50 minutes in aggregate in terms of how of it took us to get a part to a Pro. We've taken 10 minutes off of that. That's a function of looking at how you manage labor. That's a function of how you look at how you manage your delivery vehicles.

So now think about that going on across other Pro activities to include the assortment that goes into the store, to include the level of expertise to include when an outside salesperson visits, to include how our inside counter pros interact, by the way, also in terms of how we manage our DIY customers and solve their problems.

So at every turn inside the store, we're looking at their processes. We're trying to simplify the activities they have to do to be able to be engaged with the customer, and we're seeing success in terms of time to serve. By the way, we've also introduced NPS, which we're working through. We've introduced a new loyalty program to help with our DIY customers. So lots of activities geared towards returning to positive growth.

And, a, your enthusiasm and excitement is infectious. We're all excited about this. Who would have thought taking 10 minutes out of time to serve would be so exciting, but it really is. So, b, is it a function of continuous improvement and really consistency in that execution at this point? And if you had to put -- lay this out on a scale, where are you in the first couple of innings of generating this consistency in execution and improvement with a long runway to go?

Yes, I would say we're in the mid-innings. So if you think about the initial innings, we're doing those decisive actions. By the way, also identifying the things that needed to be done, getting the leaders in the seats, getting the strategy and the key actions by each of those pillar areas, the right parts, right place, right service. so that we can go about them.

So we have demonstrable wins in each of them. And so if I think about merchandising, where how we source from our vendors and the costs we pay, that has been a key activity. We've had notable benefit in order to the margins from that, but there's still more to go so that every vendor going through a PLR process knows what to expect. By the way, there are also contingent activities that needed to be in place. So, for example, if you're a vendor and I say, Michael, I want the best price inclusive of transportation, you say, Shane, but I'm shipping to 38 DCs and some of them you want a UPS shipment, some of them you want an LTL shipment. Some of them you want a truckload shipment. I can't really do that.

Now when I say we're at 16 DCs, and we'll take truckloads, please, you can now factor that into your cost, which then helps us get to our cost. So that's another example of how we're getting from what had been the initial innings, which is let's have good merchants who know what a PLR is, and we call our vendors to the table to start having these discussions to now we're doing it as a matter of routine and now doing it with better operational capabilities elsewhere in the business to create value. So I'm going to call it mid-innings. We've got lots of great things ahead for 2026, and we feel very good about the guidance that we've put out.

And you highlighted the benefits from going from so many DCs to a base of 16 DCs, the consolidation of the relationships that you have with vendors is going to be a big one. What other types of benefits do you see? And are they still in the early stages?

We could pull out a long list here.

We've got time, Shane. Well, let's just get it going.

Let's hit a few. Let's talk about assortment. So this is a great industry. I think everybody should know that if you're covering other sectors, if you're new to auto parts, it's a fantastic industry. The U.S. car park is large in terms of the complexity of parts that's going up, in terms of how long people are keeping their cars is going up, in terms of how far they drive going up. So you have all these fundamentals that are robust. By the way, it's still a fragmented industry. Even if you add up the large players, you only get to a minority type share. So it's great to be doing this in an industry where the backdrop is so positive.

Now back to that large car park, who's going to have the parts? How do you know what you put in Florida where they might be driving a lot of Kias and Hyundais versus what you put in Kansas City, where there might be a lot of Ford F-150s. You have to know which cars are driving in your geographies, you have to know what the failure rates of those components are. And then you have to know the age of the vehicle in terms of whether or not you want to have that immediately available or you want to have it at an upstream node in your supply chain. So we've added 100,000 SKUs into our system. We've engaged Palantir. So I know AI is very in vogue. And we view AI as a chance for us to get to a level playing field that without it, we'd have to sort of excuse me, we'd have to grind our way there. But AI is a chance for us, if you think about it, instead of building land lines, if we can go straight to cell phone towers, let's do that.

On assortment management, if our methodology wasn't as robust and we can now use AI to catch up and have the key parts at that Florida store, that's a good example of where we're doing that. We feel really good about that. We're using AI and pricing, which is another -- we operate in a rational industry, and I think that's really important. So back to the great industry fundamentals, including rational behavior.

But having said that, the complexity of how individual SKUs are priced in markets where maybe we can be a little bit higher to skim or maybe we're a little bit lower based on the number of competitors in a particular geography. So we can do that in terms of that geography -- in those geographies on pricing.

In terms of stores, we talked about the operating model on the DC side, getting to productivity is really important. And productivity is measured in lines per hour. So what we found as we were consolidating the DCs, it's very difficult to simultaneously optimize what's going on in the four walls of a DC if you're also tapping the DC leader on the shoulder and saying, listen, Michael, I need you to take over 300 stores from a DC we just closed down the street. And by the way, they have some different products and different routes. Can you do that? We focused on being able to absorb that volume.

Now you've got it absorbed. Let's focus inside your 4 walls in terms of where you put your conveyor systems, how you pick, how you put away, how you think about relotting those types of activities. So those are just a few. Ryan, I don't know if you want to jump in on any others. But across every sort of area of the business, we're now beyond the big muscle movers to now starting to say, hey, we're an auto parts distributor and retailer, and we're getting better at these things.

So you break up our three pillars. And this is a lot of the focus here, which is merchandising excellence in supply chain optimization and then store optimization. In merchandise and excellence, I think we're mid- to late innings there. We've had a lot of big success in driving gross profit. In fact, this year, gross profit rate will be around 45%. It's a big milestone for us in our three-year journey that we had.

Supply chain, maybe when we think about optimizing inside the box, early innings. We had to change to get down to the consolidation. The productivity unlock comes out to the investments we're making this year. But we did get -- even when we were consolidating, we got 5% improvement in lines per hour during all of that. So a lot of good work that was happening. But now it's really getting in there, and we've got Ron who's in place now really driving the right productivity in those boxes.

On the store side, from an innings perspective, we've done a lot to help them. The right parts, the right place is all the work that Shane talks about, the work with Palantir to get the assortments right, the service level in those stores. That's an unlock that I think is early innings because we've got to invest in technology. We just rolled out Zebra devices in all of our stores. There's a technology unlock that will happen this year with that type of capability. We won't have to buy RF guns off Craig's list any longer or eBay. We've got new technology come to the stores. We've got to do upgrade our POS. That's going to take some time. Those don't happen overnight. So we want to unlock the tasking work the store employees are doing today. And that's going to take some technology. It's going to take some process improvement in the stores. With Tony there, having done this at multiple retailers is really going to be an unlock for us.

You only worked together for 20 months and they're finishing each other's sentences. It's pretty incredible. There was a lot to unpack from what you had just mentioned. That was great and very helpful. Before we do unpack all of that, I want to pivot to something that you mentioned, Shane, which is there's been a lot that -- it's a great industry. There has obviously been a lot that's been happening in the industry. Tariffs have been top of mind. And then more recently, the IEEPA rollback has been very in focus, so can you give us a sense of how you see that impacting what happens in the aftermarket? Are prices going to roll back? What's done is done? How do you see this playing out either.

So I'll ask Ryan to do the tariff impact in terms of ups and downs. But my sense, rational industry that probably doesn't roll back would be my guess...

And there's been a lot of factors that have contributed to the cost increases not just tariffs that have influenced this over the last few years, right?

Yes. So, mainly the initial tariffs, we finalized negotiation on that with most of our vendors. So those are in. And for the most part, price and inflation has been able to help mitigate that cost increase. And it's a very inelastic industry, as you know, able to pass on a lot of that cost increase in the form of price. And we saw that inflation last year. We expect inflation to remain the same that we got about 2% to 3% this year. We expect that to happen.

On IEEPA, a smaller portion of our product is direct. So from a refund standpoint, while this is still very fluid, we're not expecting it to be very material for us. However, for our vendors, as this starts to unfold, we'll work with them. It's very constructive dialogue with them, and we'll see. But to me, it's a little early, somewhat fluid right now on what that would look like. But I think Shane brings up a good point. It's a very rational industry. Prices tend to stick here. So depending on how this plays out, then we'll be able to get a better sense of what that impact might be. I wouldn't expect that prices would roll back necessarily. But what it might do is stabilize them.

Got you, right. Very helpful. And obviously, the market investors have been having a watchful eye on what's been happening geopolitically and then the impact that it's had on the price of oil. So, the obvious question is, how are you thinking about as gasoline prices increase, the potential impact it will have either on the demand side for the auto aftermarket or this is a bit more cost intensive from an input standpoint. How could it?

A couple of thoughts. The good news about what we needed to do, Ryan and I have enough to focus on internally. That doesn't make it easier when there's lots of things going on in the external world, but we've got knitting internally to focus on that we've been focused on that creates value. And so I think that's important.

I previously ran an oil and gas distribution company. My sense on the United States is the...

$4. $4.

Magic number. It also depends on how you boil the frog. America responds better, e.g., less negative impact economically if the oil price increases gradually versus if there's a sudden shock. But at $4, I think people start to say, hey, I might curtail miles driven is kind of -- and by the way, it's got to get there. How it gets to, we touched on and how long it stays there, if it's just there for a brief period of time.

But beyond that, back to the first part, we have enough to do internally to get better that even with headwinds and tailwinds, there are things that we're doing inside of the company that make us a more effective organization.

We haven't seen any price increases yet from this. I think it's still too early on the gas going up. But most -- there's a lot of contracts that we have in this industry that have a commodity element to it. So if this prolongs, that could add some pressure. But like we said, the industry is fairly rational from a price standpoint. So if that leaps in might be a price.

And so if you think about where -- beyond what happens with the consumer, oil goes into how we move our stuff around. There's an interesting sort of set of forces where we're having the discussion with the vendor now that says, hey, we've only got 16 DCs to ship to. So let's think about that.

Also, we're shipping from our stores from those DCs. We're looking and we're rebidding all of our freight contracts so that we have fewer, better capable carriers because we have fewer DCs that we're pushing out to for our own replenishment to our own stores.

So, obviously, oil can impact those contracts. It's not a huge component of it. But just know that simultaneously, we're looking to get to a lower position relatively because we hadn't done that. And we would have -- with our 50 different DCs, you'd have a myriad of carriers who are working either inbound or outbound.

Got you. I want to reiterate a few points that you made. One, this is a great industry. Two, there's a path for advance independent of what happens with the industry. And three, the persistence around these elevated energy prices will matter a lot.

Putting those factors aside, how do you see the outlook for the aftermarket over the next year or so, one of the debates is industry has experienced the benefit from passing along some like-for-like inflation. Maybe that starts to fade. Does that result in slower growth for the industry? Maybe on the other side, there could be less deferred maintenance, and that would drive an offset. How do you see this playing out?

Yes. Again, I think the pricing in this industry is a lot like an extension ladder. Once it locks up at a higher level, it really doesn't go back. The other thing that's interesting is -- for our customer, the car is the linchpin for everything they do. And by the way, they're often in an economically in one of the lower spend cohorts in aggregate. So they might have one car for the family. That car is how they get to work, it's how they get the church, they get the kids activities. If that thing is not running, they're getting it fixed.

And so I don't necessarily see demand curtailing. I don't necessarily see pricing going down. It's inelastic in that regard. And so we're optimistic based on our forecast for this year in terms of maybe you talk about our guidance and how you want to reaffirm that. But we're looking for 2026 to be a good year for us.

There's always inflation, the natural inflation that comes in. So the ability for this industry to pass along that inflation and price is better than most. And so I would expect inflation to continue to come into the market in a more reasonable way going forward. And I do think the car park is increasing. Miles driven has increased. So from a current projected forecast going forward, the industry will still stay healthy, right? The inflation might not be as high when you have tariffs coming in, et cetera, but it's still going to be persistent, right? It's going to be there.

And we're very comfortable with our guidance that we've put out for the year.

Very helpful. The car is to your customer is to the Bloomberg or Factset for this customer base.

Yes, that's right.

Last question on the industry. Artificial intelligence and technology has been a hot topic not only for this community, but really across the economy as an operator and a leader of a business, you are at the forefront of trying to understand these issues. How do you see this impacting your organization? How do you think it impacts the aftermarket? We're starting to see things like autonomous vehicles and other changes to the car park that could have an influence longer term? How are you thinking about this?

I think the big one is ADAS. And just -- that's the automated driving or maybe you can just -- I'm doing advanced detection. Yes. So if you buy a new car today, you're going to have between at least 10, 14, 16 different systems that help you do things, blind spot monitoring, automated cruise control, automatic braking, all these products that need calibration and fixing. And so there's a nice pro growth dimension coming from that because if you get your car aligned, if you change your windshield, if you bang your bumper, these systems have to get recalibrated and you can't do it yourself.

So I do think there's some interesting trends that people aren't necessarily giving credit for, but everybody thinks about electric vehicles as a big technological shift. And it's important to note that these systems that cars have are very expensive to fix and replace. They may break down less often, but they're very expensive tickets. We have a robust parts and equipment business. So we not only sell those types of calibration equipment, but we'll train you on how to use it. And so that's a great way. We constantly have people coming through learning how to use that equipment because they can charge for it because otherwise, you're going to the dealership to get that change.

But let's talk to this technology in the industry. So electric vehicles adoption rate, I think, has actually waned as a percentage. I don't care about it anymore. I call it 1-plus percent of the aggregate fleet that's in the U.S. as the incentives go away and as people realize that they're stuck with a big paper weight after they've owned the vehicle for a number of years, I think you see the rise of a hybrid, so an engine and a battery component. Americans have range anxiety, and we like to drive. And the number of charging stations relative to gas stations, it's something like 14:1, something like that. So electric vehicles have not proved to be the bogeyman for our part of the industry that perhaps people thought when they first came out. So I think that's out there. So hybrids are great. Because I got an engine?

Two different systems to fix.

Lots of things to fix. So I think that's important. I do think as it relates to technology in the industry, though, it's what are we doing internally to adopt technology to be more effective and how can we take advantage of changes in technology to make sure that we're getting our due. And so we talked about some of the things we're doing in AI. We talked about things we're doing in terms of Zebra devices, and we're looking at things in terms of how we route software, how we manage labor.

I think there are a lot of areas of a business where AI can be applicable that in the past, you'd have to have a lot of tracking systems and come at it from a very granular bottom-up perspective.

Well, one other thing is these cars that need as much electronical equipment they actually come now with two batteries. So there's a lot of things that happen to. So, one, you've got [Audio Gap] Industry is going to change, but whatever happens, advanced -- and the auto aftermarket should be there to support the changes in the industry.

And I'd just add to that, for -- to be where we are, and to have come through what we've come through. We're now in a position where we're going to be a participant. And we're excited by that. We are genuinely excited that we've come through these tough things, and we're now in a position where if you think about where we're going to go from a profitability perspective, that's a marked improvement from where we were just a couple of years ago.

And it's interesting because as these cars become more complicated to fix, that's going to push more demand to the commercial segment of the market, which has been an area of strength indeed for Advance. What is underlying that strength? How are you looking at Advance has been a little bit more discerning around some of the profitability characteristics around its customer relationships. How are you seeing this unfold now?

That was a well said nuanced comment. So we've long had a right to win in Pro. It has been a staple part of Advance's portfolio. It stems from how we run our outside sales team members and the level of training we provide them and the capabilities we expect from them. It stems from software programs that we put in place behind them to include sales software that says, I'm going to Michael Shop and every shop like yours is buying these products, but you're not. So I know I can have a good conversation around a product that's relevant for you versus talking about the sports or the weather.

We have TechNet, which is a point of distinction where we offer a comprehensive suite of programs to a Pro shop to include warranty service so they can repair a car in one state, single shop. It can be your parent shop. And you can fix a car in Georgia and the guy or gal can have an issue with it, and we'll warranty that repair in Florida. And we provide the warranty, we provide the labor rates. We provide tools like MotoLogic that enable them to see and show customers the breakdown of what's going on in an engine so that the customer can understand the part.

So, outside sales, software programs, tools and equipment that we talked about, our commercial parts pros where we have them at a separate counter in every store. So we're -- we feel very good about our capabilities to compete in the Pro segment and look for us to do that. In fact, in Q4, we had a 4% comp in Pro. And notably, that includes a slight waning of some national account business, which means our Main Street business was growing above that. And Main Street, we think is a sweet spot for the Pro business, both in terms of the number of shops and the margin profile of selling to those shops.

And the Pro business is an area where you can effectuate a lot of the outcomes. You can have the right part at the right place at the right time. You can focus on having effective relationships. At times, it can be more challenging on the DIY side. You can't force a consumer to come to your store over someone else's store. How do you think about the pacing of improvement in the DIY customer? What's happening with the DIY customer today? And then I have one follow-up.

Yes, I'll invite Ryan to jump in. But a couple of things that are important. First, in the wake of closing stores, we're #1 or #2 in terms of store density in 75% of our markets. So that matters. If you're a consumer, you got to drive somewhere, you want to be able to drive to an advanced auto part. So that's an important component. Second, we've improved the assortment in the store. So it's more likely that we're going to have a part that you're looking for. Third, we've introduced a new rewards program. So Advance Rewards. We've enhanced some things that really used to be frustrating to customers such as combining coupons and things like that. We're improving our web experience. So we know that a lot of journeys begin online in some form or fashion. We have a really good mobile app, which I think increasingly, that becomes the starting part of the journey. So there's just a handful of things.

Last I'll say is we're measuring NPS, and we're getting that feedback directly down to stores every single day. So you know exactly who gave you a five in terms of our survey, and we also send each store the Google results. So you know exactly where you're doing. I'll say that when I read those feedback comments, the thing that impacts the consumers' experience more than anything else is how they were made to feel by the team member when they walk in the door.

So our standard is we should get you inside of 10 seconds of your arrival, and we should come out behind the counter and say, Michael, what are you looking for today? Because even in instances where we don't have the part or the customer doesn't buy from us, if they were made to feel good when they shopped with us, that they tell other folks. And by the way, when we get a complete transaction, they tell everybody. In instances where we disaffect them, they tell folks about that, too.

You make investors feel good. So we understand that. Go ahead. Yes, sorry, Ryan.

No, no, no. I got and I follow this.

I know -- it's very hard to follow. I glossed over something that I think is important. One of the questions that came up in the wake of the fourth quarter was the benefit that Advance had received from closing stores and transferring sales. The point you just made a minute ago, Shane, was important in that the market needs to consider that, but it also needs to consider the fact that there was a headwind from some customer decision choices you made such that maybe those have to be a bit of an offset. It won't be as hard of a challenge. Is that...

That's a correct way. I'll unpack that for a second. We have been going through our portfolio and how we go to market and making adjustments. And we think we're taking a much more balanced approach to that portfolio of where we lean in, that's customer portfolio.

On the Pro side, you have national accounts, regional accounts, Main Street accounts. I think in the past, we focused real heavily on national accounts, slightly lower margin profile, higher cost to serve, and we've alienated some of the Main Street. we have shifted that priority to balanced approach. And in some respects, we walked away from some business on the national account side because it just wasn't profitable to the levels that we'd like, the higher cost to serve, and we'd like to use those resources to fulfill on the Main Street side.

And so that does create a little bit of a headwind for us. So there's a mix impact in our Pro numbers. So if you think Q4, we did like roughly a 4% comp in Pro. Main Street outperformed that because you have this headwind of national accounts, right? So think about our core Main Street business outperforming the gap which you'd see to our peers on the Pro side wouldn't be quite as large as it looks like, just given there's some shifting in that portfolio.

And when does that stop being a headwind?

By the end of this year, the big chunks are done. and we'll have cycled most of that by the end of the year.

Got you. Where I want to spend the last few minutes of our time together, even though I could do this all day, is on the profitability. And I think the team deserves a lot of credit because you have not been afraid to make some pivots when that call has been necessary. You set out a long-term operating margin of 7%. You are still committed to that. It's just the time frame may be a little different than what you had originally thought. So if you could unpack that and give us a sense of what's changed, what's been in your mindset to say we still think there's a lot of opportunity to improve the profitability. It just may take a little bit longer.

Just I'll have one sense and Ryan has the details. April 2 came along and then...

We haven't even been a year removed from the duration date. It's hard to believe.

And so managing that. And then by the way, we -- the global stage in terms of conflicts -- so again, we have enough to do internally that we can do things to make the company better, but the time line gets impacted a little bit based on what's going on.

And we still think -- you said long term, we still think it's a medium-term target. I think it's still a good target for us to go after. There is some timing element to it. So one, as we made adjustments throughout the year, whether that's related to tariffs, but also supply chain and how much productivity we get initially from it when we're doing the consolidation or on the store side, 99% of our transactions, it's an engagement with a frontline associate. We're really cautious about the impacts we have there. And to get the right productivity out of our stores is important, but it's also important we maintain a good interaction with our customers. So, the timing of that, getting new leaders in that are focused on those things, I think this year is going to be really telling around what is the achievability time line for that because we're investing a lot in supply chain and getting productivity. When will we get that productivity, we'll learn more this year.

On the store side, how soon do we get productivity out of how does the technology come along that enables the productivity we want to get out of there I think on merchandising excellence, significant progress, and we're really happy with that. Getting to a 45% gross profit rate by the end of this year is just really good work by our merchandising team. I think the other pillars are the ones that we need that investment and the time line to mature this year before we can kind of say when we're going to get that 7%.

On that 45%, do you have good line of sight? Is that -- what could drive potential upside there? You've got a private label launch this year that probably provides some help to it, although the work that's been done on the supply chain side. Can you help dimension these different pieces?

Yes. A lot of good work already done and baked on the margin expansion. Still some more to do, but a good chunk of that. Last year, when we started last year, we were just starting out. We did a lot of work. We'll finish up this year and be in a good place, but a good portion of our gross profit expansion, we've already baked with contracts with the vendors on strategic sourcing. We're engaging on strategic business planning with our vendors. Those are really fruitful.

So we feel more confident in that rate and the time line to get to there. Upside, downside, I think within our guidance range really accounts for that on the gross profit rate. And I think that's where you'll see the positive upside, downside is really in that gross profit rate. I think we want to give our supply chain teams time to really drive the right productivity within those facilities. We've got investment going in there. So that's not where we're going to look to try to get upside.

One of the themes we've heard from all of the participants in the aftermarket is that costs of doing business have risen health care, wages, liability expense. Shane, you've mentioned a couple of times that Advance is in a good position because it controls its destiny, got some idiosyncratic drivers. How do you think about these rising costs as an influence on your ability to achieve some of your expectations?

So Ryan has done a great job here that he can describe. We know that there are dimensions that aren't mitigatable, health care benefits. And we got to take care of our people and make sure our associates feel like this is a great place to work and that they can have a career there. So there are some things where we are -- we bob along in the current like everybody else does. But what he's done is gone across our G&A and found other opportunities that have mitigated what would otherwise just be up and to the right.

Yes. We did a big indirect spend initiative went after a ton of expense there. Just to give you an example, we have like three cloud providers. Most companies have three cloud providers. So we'll transition into one, and that will be some cost savings. But we've had a lot of inefficiencies in our SG&A, and we've been able to get some of that and fund it. So we've seen general liability go up. That's an industry issue. We've seen that. But we've been able to find savings in other areas through our indirect spend that have been able to mitigate some of those costs as well. Health care is another one. We've seen general health care costs go up, but we hadn't RFP a lot of those programs for a while. So we were able to go get some cost out that we were able to mitigate that.

But I think the key point really here is we've got 60,000 associates. We want to make sure they do have the right benefit and career here. The very first investment that we made it was $100 million into our frontline associates. So we're really keen on where SG&A is going and making sure it's going to the right use. It's going to our frontline associates. It's going to our stores. That's where the interactions with our customers happen.

Very helpful. Shane, another way you have pivoted and to your credit, and you've been very flexible is to say, listen, we're just trying to do a little bit better every day. That seems to be the mantra with which you're operating, which is probably what we could all do in our day-to-day basis. But if this doesn't go as you thought it would, what would be that factor that interrupts with your ability to do a little bit better each day?

I don't see anything that gets in the way of doing a little bit better each day. And I think the idea that we've done the really tough stuff. I think if you'd ask me that question, and said, hey, Shane, can you consolidate the supply chain? Can you really get an NSO capability going? Can you really extract value from the vendors? In those early days, when you haven't sat across from somebody and said, listen, I want a 10% price decrease, that's where you'd say the tough stuff could impede what we're trying to do.

Now it's just around being in the industry. So really, unless the industry fundamentals change radically, we've got a right to be here. And we feel -- again, we're eye open. I've never felt better about where this company is going because now we're doing the basics that in the prior years, we had to be doing these huge structural shifts.

Now we're just in the business every day. We're focused on merchandising. We're focused on supply chain. We're focused on stores, and we've got really good leaders who understand their craft in those respective areas. So they're going to start unlocking value in those areas beyond the muscle movers that we've done already. So we think it's a great time to be at Advance. We're excited by it. We think 2026 is going to be a great year for us. And we certainly appreciate you guys covering us and/or investing in us. So good to be here.

And two of those leaders are sitting on the stage today. So -- and we thank you very much for being here guys. Please join me in thanking you.

Appreciate it. Thank you.

Welcome to the Advance Auto Parts Fourth Quarter and Full Year 2025 Earnings Conference Call.

I would now like to turn it over to Lavesh Hemnani, Vice President of Investor Relations.

Good morning, and thank you for participating in today's call. I'm joined by Shane O�Kelly, President and Chief Executive Officer; and Ryan Grimsland, Executive Vice President and Chief Financial Officer.

During today's call, we will be referencing slides which have been posted to the Investor Relations website. Before we begin, please be advised that management's remarks today will contain forward-looking statements. All statements other than statements of historical fact, are forward-looking statements, including, but not limited to, statements regarding initiatives, plans, projections, goals, guidance and expectations for the future. Actual results could differ materially from those projected or implied by the forward-looking statements.

Additional information can be found under forward-looking statements in our earnings release and risk factors in our most recent Form 10-K and subsequent filings made with the SEC. Shane will begin today's call with an update on the business and our strategic priorities. Later, Ryan will discuss results for the fourth quarter and full year 2025 and provide guidance for 2026. Following management's prepared remarks, we will open the line for questions.

Now let me turn the call over to our CEO, Shane O�Kelly.

Thank you, Lavesh, and good morning, everyone. I want to begin today's call by thanking our frontline team for all of their hard work in 2025. During the year, we laid the foundation to build a better future for the company and create long-term value for our shareholders. We are undergoing a significant transformation focused on the fundamentals of selling auto parts through initiatives guided by the voice of our customer. These efforts are beginning to improve our competitive position and are translating to stronger financial performance.

In 2025, we returned to positive comparable sales growth after three consecutive years of negative results. We also expanded adjusted operating income margin by over 200 basis points from near breakeven levels while also navigating a volatile external environment. Our journey has just begun, and the early progress is being recognized by vendor partners, customers and team members.

During 2026, we will continue to execute actions aimed at enhancing parts availability and customer service by building on the foundation established in 2025. We expect these efforts to deliver stronger financial performance in 2026, including an acceleration in comparable sales growth to the 1% to 2% range and expansion in adjusted operating income margin to the 3.8% to 4.5% range and a return to positive free cash flow.

We expect to generate approximately $100 million in free cash flow in 2026 while allocating more capital to strategic projects and store investments. The progress made by our team in 2025 has created positive momentum that we are carrying into this year, and I am confident in our ability to succeed in 2026. Before I provide an overview of our strategic priorities for this year, let's recap 2025. We entered the year with a renewed emphasis on the blended box and establishing advance as a consistent, reliable auto parts provider for both Pro and DIY customers. Our team is already driving results through comprehensive actions taken last year.

For example, number one, we rationalized our asset footprint by exiting underperforming locations, including over 500 corporate stores and 200 independents. We achieved this with minimal disruption to our day-to-day operations and saved approximately $70 million in operating costs. Number two, we expanded our assortment by 100,000 new SKUs, we improved store availability to the high 90% range from the low 90% range at the start of 2025, and we also reduced product costs by more than 70 basis points. Number three, we increased our average speed of delivery to Pro customers by cutting more than 10 minutes in delivery time from an average of over 50 minutes at the start of 2025.

Number four, we moved with speed to substantially complete the consolidation of our distribution center network. We now operate 16 distribution centers in the U.S. compared to nearly 40 DCs at the end of 2023. And number five, we opened 14 new market hubs and now operate 33 market hub locations. We also opened 35 new stores to further enhance density in our strongest markets and we invested nearly $90 million in store infrastructure upgrades at more than 1,600 stores.

Throughout the year, we also navigated a series of external challenges, including a volatile tariff and consumer spending environment. We maintain focus on executing actions to improve availability and service. This enabled us to deliver positive performance in the Pro channel, which strengthened throughout the year. We are progressing on our strategic plan with a stronger balance sheet, having proactively accessed the capital markets during 2025.

As we move forward, we will continue to prioritize actions within our control to improve operational performance. In recent months, we have also strengthened key leadership positions through internal promotions and the addition of talented external expertise. These include Anthony Sarlanis, former Regional Vice President of our Northeast operations. He was promoted to Senior Vice President of the Pro business. He has been with Advance for over 15 years and brings more than two decades of automotive experience to the role.

Kunal Das, our former Chief Data Officer, now promoted to Chief Technology Officer, His team has led the development of proprietary AI tools to improve our day-to-day execution. Ron Gilbert, Ron joined Advance in December as Senior Vice President of Supply Chain. He brings more than 20 years of experience in supply chain logistics with a track record of delivering operational efficiencies in complex supply chain systems. And Tony Hurst. Tony joined Advance in January as Senior Vice President of U.S. Stores. He brings more than 25 years of field leadership and store transformation experience across Pro and DIY with a proven record of simplifying work for the frontline.

The caliber of our leadership team reinforces my confidence in our ability to grow transaction volumes through strong customer service and to deliver greater productivity in our store and distribution center operations. Since late 2023, we have acted decisively to stabilize the business, conduct a comprehensive review of operational productivity, sell noncore assets and develop a strategic plan.

To date, this team has delivered approximately 500 basis points of adjusted operating margin expansion. We continue to believe that our goal of 7% adjusted operating income margin with a mid-40% gross margin or appropriate medium-term targets for the company. As a reminder, about half of our identified margin opportunity is tied to merchandising excellence with the balance being driven by supply chain and store operations. I am pleased with the progress being made in unlocking this margin opportunity.

We concluded 2025 with an adjusted operating income margin of 2.5%. And for 2026, we are targeting an additional 130 to 200 basis points of expansion to the 3.8% to 4.5% range. This guidance includes an approximate 45% gross margin rate, which showcases success against our initiatives on the path to a 7% operating margin target. Our goal is to deliver consistent progress on our plan to narrow our margin gap to the industry. We currently believe that we can deliver at least another 100 basis points of margin expansion in 2027, which would mark the third straight year of 100 basis points or more of expansion.

Although this pace would imply an outcome below our previous target of achieving 7% in 2027, it is important to note that this is not the result of any change to the execution of our strategic plan, rather, we are being prudent about two factors as we consider the expected time frame for achieving our goals.

First, initiatives across our three strategic pillars are progressing at varying rates. We have made strong progress in merchandising and completed the consolidation of distribution centers. We are now in the early stages of implementing supply chain and store labor productivity initiatives. I'm excited to welcome new leaders overseeing the implementation of these activities. We expect our investments in 2026 to enable further margin expansion in 2027 and beyond.

And second, top line momentum has lagged original expectations. Our pace of same-store sales growth has been impacted in part by external economic factors that have resulted in a softer consumer spending environment. While we are pleased with the strong positive comps in our Pro business including traction with Main Street Pros, we still have a lot of opportunity ahead as we continue to improve availability and service metrics.

I want to reiterate, I am pleased with the progress being made on our strategic plan. I remain confident in the ability of our team to deliver against our operational and financial goals. Our quality of execution is improving, and we expect 2026 to be a pivotal year on the path of long-term value creation.

Next, let's turn to an update on our strategic plan. As I've indicated previously, our strategy is unchanged and built on three pillars that are supported by targeted initiatives to deliver long-term profitable growth.

Turning to our key priorities for 2026, which build on the foundational improvements achieved in 2025. Merchandising excellence is expected to be the largest contributor of margin expansion during the year, and our four merchandising initiatives for the year include: first, in 2025, we began repositioning Advance as a trusted long-term growth partner. Our focus on operational excellence and streamlining legacy processes has signaled to the vendors that advances here for the long term.

In 2026, we expect to further deepen our vendor partnerships to jointly grow our businesses. We are doing this through strategic business planning, exploring supply consolidation, eliminating non-value-add supply chain costs, engaging and training opportunities for the field and collaborating on joint marketing efforts. We expect this to translate to better cost opportunities and stronger part margins in the year.

Second, in 2025, our pricing decisions were made largely in reaction to new tariff programs. However, we still focused on offering compelling value to our customers through fewer, bigger and bolder promotions. During 2026, we expect to deploy a new pricing matrix which provides our team better intelligence of market-based pricing by channel and by SKU. Our goal is to offer competitive pricing while continuing to operate rationally in the marketplace. We expect the combination of smarter pricing supplemented with seasonally relevant promotions to drive stronger customer engagement and support repeat purchases.

Third, 2025 was an important year for our assortment. We address product gaps and also improve brand coverage and application job [ funds ] for parts in our stores. We did this by using a specialized data-driven approach, as well as improving internal processes and incorporating feedback from customers to develop a new assortment framework that was fully rolled out to all stores last year. This work has expanded parts coverage for brands we carried previously and also enabled us to introduce new brands. Our success with the brake category is a great example of this.

Entering 2025, we were running negative comps and brakes and we finished the year with strong positive comp growth, showing how deep vendor relationships, targeted SKU placements and thorough market planning can help win market share. While we moved fast in 2025 to address parts coverage, we believe we have additional opportunities to amplify our efforts.

In 2026, we plan to invest in systems that help us dynamically balance inventory across the network to support stronger financial returns on inventory. We will also continue to expand the universe of parts carried in our network and optimized the presentation of SKUs in our stores. This includes accessing opportunities to provide more value for our customers. We are excited to launch our new owned oil and fluids brand, ARGOS. As a 94-year-old company, we are pleased to back our legacy with a new own brand in a top maintenance category.

This brand was born out of extensive research. Customers ranked affordability, reliability and strength as top product attributes they value. ARGOS offers engine protection and performance comparable to national brands at a price that provides meaningful savings, which will be valued by both Pro and DIY customers. And fourth, earlier this month, we modernized our DIY loyalty program with the launch of Advance Rewards to replace the prior Speed Perks program, approximately 60% of our DIY transactions are driven by our loyal customer base of approximately 16 million active members.

The new program now provides a refreshed tiered point structure that rewards customers as they spend more with us. With Advanced rewards, members will be able to experience exclusive vendor offers, bonus points promotions, sweepstakes and other exciting new features. Based on customer feedback, we discontinued unproductive offers like fuel rewards and enhance the flexibility to redeem coupons, which are very frequently used for purchases in key maintenance categories. The new Advanced Rewards also gives us more tools to engage with our customers which we believe will help drive transaction growth in the DIY channel.

Turning to supply chain. We are on track to complete the consolidation of our distribution centers and expect to operate a total of 15 DCs in the U.S. by the end of this year. We believe our DC network is well positioned to support strong service levels and the continued growth of our multi-echelon network. Consolidating DCs is a difficult undertaking and we've done so without major disruption to our 4,000-plus store network.

Over the past 2 years, we have gone from operating 38 DCs in the U.S. to 16 DCs currently. And I want to thank our supply chain team for their efforts over the last 2 years. Throughout 2026, we are going to be focused on simplifying and standardizing DC operations along with testing and launching labor performance and transportation management tools. We expect our supply chain productivity initiatives to support gross margin expansion in 2027 and beyond.

While consolidating the DCs over the past 2 years, we have also accelerated our pace of market hub openings, which serve as an additional distribution node in our network with the retail storefront. A market hub typically carries between 75,000 and 85,000 SKUs and expand same-day parts availability for a service area of about 60 to 90 stores. At the end of 2025, we had 33 market hubs, and we currently plan to add 10 to 15 market hubs in 2026. Most of these openings will be greenfield buildings serving as new points of distribution in markets where they open. We believe that this strategic expansion will enhance our ability to provide additional hard parts coverage in the previously underserved regions while creating incremental opportunities to gain market share.

Next, I will provide an update on key priorities for store operations. We are elevating the experience for our team members through training and simplification of tasks. We have launched targeted programs to provide customized short duration training that combines product knowledge and sales behaviors to better serve customers. Our analysis shows a positive correlation in sales performance for stores following the completion of the training programs.

We are also beginning to simplify store tasks and streamline communication with stores to help our team members prioritize only the most critical activities. We are investing in industry-leading tools like Zebra devices to increase team member efficiency while allocating payroll hours to support market-specific customer needs. In addition to these resources, we are continuing to allocate capital to store infrastructure upgrades as part of a multiyear asset management plan.

In 2026, we plan to upgrade more than 1,000 stores. We are also improving service standards in our stores. We launched our new store operating model across all stores in Q4. We believe that this operating model supports better allocation of labor hours and vehicles while strengthening collaboration between our customer-facing outside sales team and our internal store teams. To drive consistency and service, our teams are being held accountable to two primary metrics.

The first one is NPS, which strives for continuous improvement in customer service and the second is time to serve where we target under 40 minutes for delivery time for Pro orders. With the right training, service standards and clear metrics for tracking performance, we expect to improve labor utilization and grow our business. While it is still early in the implementation of newer operating standards in our stores, we are seeing signs of improved performance.

For example, our efforts to gain share across Main Street Pro is translating to stronger positive comps in that segment. Within DIY, our focus on selling behaviors is driving greater unit productivity with a sequential acceleration in DIY units per transaction in Q4. While we still have considerable work ahead of us, we are pleased with the direction in which we are moving. We believe that an improvement in service standards will also support enhanced productivity of new stores. In 2026, we plan to open 40 to 45 stores and 10 to 15 market hubs as we march towards our goal of opening more than 100 new distribution points over the next 2 years.

In closing, I want to recognize the Advanced team once again for their hard work and commitment to delivering progress. We remain focused on prioritizing actions to drive sustained improvement over the long term.

I'll now hand the call over to Ryan to discuss our financials. Ryan?

Thank you, Shane, and good morning, everyone. I want to begin by thanking our frontline associates for their commitment to serving our customers and delivering a strong finish to 2025. For the fourth quarter, net sales from continuing operations were approximately $2 billion, which declined 1% compared to last year. This is mainly attributable to the store optimization activity completed in Q1 of 2025.

Comparable sales grew 1.1% in the fourth quarter. Following a softer start to the quarter, transactions improved during the last 8 weeks resulted in positive comparable sales growth over that time frame. In fact, outside of weather-related comparisons, our business has been averaging low single-digit positive comps over the last 6 months, reflecting operational stability as we execute our strategic plan.

Brakes, under car components and engine management led performance, indicating progress in improving coverage and availability of hard parts. Ticket was positive for the quarter and driven by a combination of better unit productivity and higher average prices. Our frontline team has been focused on providing complete job solutions to our customers and I want to thank them as their efforts have translated to an acceleration in units per transaction on a 1- and 2-year basis.

Overall, average ticket was still below expectations due to some discrete factors. First, same SKU inflation came in just under 3%. This was about 100 basis points lighter than expected due to successful tariff-related negotiations, which were still underway at the start of the quarter. And second, during Q4, we accelerated the transition of some front-room assortment to introduce new brands following recent supplier changes and to support the planned launch of our new own brand, ARGOS. These transitions led to a higher-than-expected markdown headwind of about 50 basis points, which impacted comps. This activity has been completed. It is not expected to impact Q1 results.

Looking at channel performance, our Pro business grew by nearly 4% during the quarter, with sales strengthening throughout the quarter on both a 1- and 2-year basis. Trends in DIY remain volatile, leading to a low single-digit percent decline in comps. We believe this is largely a continuation of the market trends we have experienced all year. Our core consumer group has been adjusting purchasing habits in response to rising prices.

Moving to margins. Adjusted gross profit from continuing operations was $873 million or 44.2% of net sales resulting in nearly 530 basis points of gross margin expansion compared to the same period last year. During the quarter, we cycled through approximately 280 basis points of atypical margin headwinds related to our restructuring activity last year. The balance of margin expansion was driven by savings associated with our footprint optimization activity and benefits from our strategic sourcing initiatives.

Additionally, LIFO expense came in at $56 million for the quarter, which was lower than previously expected. Adjusted SG&A from continuing operations was $800 million or 40.5% of net sales, resulting in nearly 340 basis points leverage. This was consistent with expectations for a high single-digit percent expense decline and driven by a reduction in stores compared to last year.

As a result, adjusted operating income from continuing operations was $73 million or 3.7% of net sales resulting in nearly 870 basis points of year-over-year operating margin expansion. Our Q4 results also include an extra operating week, which contributed $132 million in net sales and $9 million in adjusted operating income. Adjusted diluted earnings per share from continuing operations for the quarter was $0.86 compared to a loss of $1.18 last year. The extra week added $0.08 to fourth quarter EPS.

Moving to an update on full year 2025 results. Net sales from continuing operations declined 5% to $8.6 billion, primarily due to store optimization activity that was completed during Q1 2025. Comparable sales grew just under 1% for the year, marking our return to positive comparable sales growth. Both channels improved compared to last year. Our Pro business grew in the low single-digit range, while DIY declined in the low single-digit range. Same SKU inflation contributed about 140 basis points to ticket growth for the year.

Adjusted gross profit from continuing operations was $3.8 billion or 43.9% of net sales resulting in about 165 basis points of gross margin expansion compared to last year. During the year, we cycled through approximately 90 basis points of atypical margin headwinds related to our restructuring activity from last year. Adjusted SG&A from continuing operations was $3.6 billion or 41.4% of net sales resulting in about 50 basis points of leverage, driven by operating fewer stores compared to last year.

As a result, adjusted operating income from continuing operations was $216 million or 2.5% of net sales, resulted in 210 basis points of year-over-year operating margin expansion. Adjusted diluted earnings per share from continuing operations was $2.26 for the full year 2025 compared with a loss of $0.29 for full year 2024. We ended the year with free cash flow of negative $298 million, which included approximately $140 million in cash expenses associated with our store optimization activity.

The remaining outflow of approximately $160 million impacted our ability to generate positive free cash flow. About half of the variance compared to our expectations was related to a combination of Q4 business performance, timing of certain cash obligations and the delay in receipt of tax refunds. The other half was associated with variances relative to our expectations for timing of certain inventory payables that drove approximately $80 million of cash outflow and reduced our payables balance at the end of the year. Separately, we also lowered the usage of our supplier financing program to $2.5 billion from $2.7 billion last quarter.

We entered 2026 with a solid balance sheet, including more than $3 billion in cash and $1 billion undrawn revolving facility, which is more than sufficient to support approximately $2.5 billion in supplier financing payables over the long term. Our net debt leverage improved to 2.4x at the end of the year compared to 2.6x last quarter and is in line with our targeted range of 2 to 2.5x.

Turning to 2026 guidance. We expect net sales to decline slightly year-over-year, mainly driven by two nonrecurring items from 2025. First, we generated $51 million in liquidation sales in Q1 last year. And second, Q4 included an extra week, which generated $132 million in net sales. In aggregate, both items drive over 200 basis points of headwind to sales growth. Excluding these nonrecurring items, we expect underlying net sales to grow in the range of approximately 1% to 2%. This includes comparable sales growth of 1% to 2% and about 10 to 20 basis points of pressure related to sales normalization at independent locations following a reduction in locations last year.

We expect positive comp growth in each quarter with a stronger first half owing to easier comparisons. Same-SKU inflation is currently planned in the 2% to 3% range for the full year and assumes no change in the current tariff environment. 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 gradual improvement in transactions with initiatives focused on enhancing availability and service levels. We are excited to get back on the path of consistently delivering positive comparable sales growth and expect our strategic plan to ultimately position us to gain market share in the future.

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 are forecasting gross margin expansion in the range of 110 to 150 basis points to approximately 45%. This margin expansion includes about 20 basis points of year-over-year favorability from cycling nonrecurring items from 2025. The balance of the expansion is expected to be driven by merchandising initiatives related to strategic vendor sourcing and optimization of pricing and promotions.

The benefits from merchandising initiatives will be partially offset by investments to improve productivity in our supply chain operations following completion of the consolidation phase of our DC network. Based on the progress of our initiatives, we expect gross margin rate to build throughout the year. Starting with Q1 gross margin in the 44% to 45% range. Regarding SG&A, we expect reported full year expenses to be down year-over-year, contributing 20 to 50 basis points of leverage. Specifically regarding Q1, SG&A expense is planned to be down in the 3% to 4% range as we cycle through the store closure activity from last year.

Full year 2025 SG&A expense included about $90 million of nonrecurring items that support liquidation sales in the extra week, which is expected to drive about 20 basis points of favorability in 2026. Adjusting for the nonrecurring expense, SG&A is planned to be higher year-over-year with modest leverage driven by positive comp sales growth. We expect to deploy savings generated from better in-store task management, better resource allocation and a reduction in indirect spending to fund general wage inflation, store opening expenses and strategic labor investments in priority markets.

As Shane indicated, we have completed the rollout of our new store operating model, which has enabled us to position labor and truck resources based on volume. As we move forward, we will continue to look for opportunities to further optimize payroll hours to enable our team members to dedicate more time to customer service by minimizing time spent on tasking.

Moving to other items in our guidance. We expect adjusted diluted EPS in the range of $2.40 to $3.10. Pretax interest expense for full year 2026 is planned at approximately $210 million, which is expected to be partially offset by interest income of approximately $80 million. 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.

Finally, with respect to cash flow, we expect to generate approximately $100 million in free cash flow for the year, supported by stronger comp sales and profitability. Our free cash flow guidance includes modest carryover spending of $10 million to $20 million related to our store optimization activity.

To conclude, I want to thank the frontline team for their contributions, which supported solid financial results in 2025. During 2026, we expect our initiatives to provide added financial momentum to narrow our operating margin gap to the industry.

I will now hand the call back to Shane.

Thank you, Ryan. During 2026, we are building on the foundation established last year with a clear focus on executing our strategy to deliver improved operational performance. I'd like to close by thanking the Advanced Auto Parts team for all of their hard work and commitment to serving our customers. Thank you.

Operator, we can now open the line for questions.

[Operator Instructions] And our first question today comes from Chris Horvers from JPMorgan.

Thanks, and good morning, guys. So my first question is, why is your inflation so much lower than what your peers have reported specifically Zone and O�Reilly. One could interpret this two ways: a, where you're pricing below the market, which I don't think that's what's happening, or perhaps simply your prices were too high before all this inflation came in and when you came into the company and you were forced to narrow the gap. I guess it could also be sourcing differences, but again, sort of the market price, market price. So if you could help us out there.

Yes, Chris, I appreciate that. It's Ryan. So our SKU inflation, I think, is consistent with peers, but we have some -- if you look at '25, we have some comparison issues, we were wrapping some price investments that we made in the prior year. that wrapped in. So in '25, we still have reported around 3% for Q3 and Q4, which I think is somewhat consistent with them. It was a little bit lower than we expected going in Q4, really it had to do with -- we're still negotiating some of the tariffs. So that wrap the 1.4% inflation in 2025 is really impacted by the ramp of price investments we made in the prior year.

Just to add, you mentioned, first, are we pricing below the market and your hypothesis is that we're not. That's not our strategy. We're -- it's a competitive market, but a rational market, and we participate in that way. we are using AI to do better with our promotions as to when we do a promotion and on what products and where we do it. So that can help us a bit, but we're a rational player in the market.

We monitor our pricing relative to everyone else and we want to make sure we're competitive every day. We're not doing anything inconsistent with that.

And then my follow-up question is on the decision to reduce your supply chain financing in the fourth quarter, I guess, one of the hallmarks of this industry is that the vendors finance essentially all of the inventory. So what drove that decision? Was there anything on the other side because your free cash flow did come in lower than expected because of the reasons that you laid out, Ryan, was there any sort of push from the other side because of the free cash flow dynamics? Or is it something to do with perhaps the sort of the margin versus rate negotiation that's implicit in these arrangements.

Yes, good question. So about half that change in free cash flow from anticipation was due to lower the payables, as we mentioned earlier, and not -- we're always going to look to see if it makes sense from an economic standpoint to reduce supply chain finance, but only when it makes sense, we're really happy with our program. Especially after the structure we put in place this past summer. It's a very stable program, significant capacity in that program. But it was more about leveling the payables based on the new purchases that we have based on the sourcing of those and the negotiations we've had.

As a reminder, this past year, we've had 500 stores we've closed. We accelerated purchases on inventory for -- ahead of the tariffs. We accelerated our assortment work into our top 50 DMAs. So a lot of moving pieces. On top of that, the merchant organization has been transitioning and working through many PLRs with different vendors as we've executed our strategic sourcing work and [ we've ] yielded really good progress on the margin side.

All of that mixes differently sometimes from a payables balance. And I think it's more about the mix of our purchases and where the true payables balance should be that caused a reduction in Q4. And we'll continue to look for opportunities there if it makes economic sense in our P&L to do that. But we're still sitting close to 80% of our COGS is on supply chain finance. We think right now, where we are with our vendors we're in a good position, [ 2.4 ] to 2.6 is the right target range to ebb and flow on supply chain finance.

Last point there. Just on a big picture level. We had our annual conference accelerate down in Orlando this year. Then I would submit that our vendor relations are the best they've ever been. I continually meet with senior leaders from vendors who are behind our comeback and supporting us and the degree to which we're now working on innovative programs to help us grow. Feel great about the vendor community and Advanced Auto Parts.

The next question comes from Seth Sigman from Barclays.

Nice progress. I wanted to ask first about the real estate. Can you talk about the impact that the store closings had on comps and margins in 2025? And then guess how are you thinking about the opportunity to optimize the store portfolio further from here? And maybe just in general, what are you seeing in terms of the gap in performance across the store base?

Yes, a good question. The liquidation impact was about $51 million on the year. So we've kind of talked the bridge to walk that back off of there to give you a sense of what that looks like. So a little bit of an impact there. We also cycled over that -- we had some liquidation impact in '24 in Q4 as well that had a little bit of a drag on that. No further closures we expect. So growing our new stores. We're significantly growing those new stores.

Yes. So when I came to the company, we had multiple real estate departments. Worldpac had a real estate department independent, supply chain stores. And so we were cohesive about how and where we thought about building out in a market and opening a store, you think about everything from construction or leases to fixtures to grand opening protocols, and so we've had a lot of effort going on. We've got a unified real estate program under a single leader.

In 25, we opened a total of 35 NSOs. This year, we'll do 40 to 45. And by the way, we're opening NSOs in both the U.S. and Canada. And as we do that, think about in the wake of the closures. We think store density is important. So in the wake of the closures, we're #1 or #2 in 75% of our markets. So we want to expand concentrically in those markets where we have existing density and move down the road to the next part of the market. And we think that's a good play because it leverages the existing store base, the outside sales, the Pro customer relationships, the DC connectivity. And so we're getting better at it, and we're pleased with where we're going.

And Seth, just to make sure we clarify the closing stores were not in our comp numbers that we reported out. They are in our year-over-year. So that's why just giving you the dollar impact versus the comp impact.

Was there a meaningful impact to the rest of the store base from closing those stores in terms of sales transfer?

Yes. Pro comps did benefit, but still positive even after the benefit. So we did have transfer sales from the Pro business that transferred to the new stores. Actually outperformed our original expectations going into that work, but still Pro was positive even if you back that out.

Okay. And my other follow-up was just thinking about the 7% margin target. The prior guidance was for a lot of the margin progression to be back-end weighted, and the annual gains would ramp really in the out years. Guidance now seems to imply bigger gains maybe upfront, and it's great that you're executing what you laid out for '25 and it seems like for '26 as well, but maybe more gradual margin gains going forward. I guess, what really drives that difference in the cadence? And I'm just wondering, is there any indication that maybe there's more reinvestment that's required here? Or is it just harder than you thought?

No, I appreciate the question. So I still think 7% is the right medium-term target, and we're actually pleased with the progress so far, especially in merchandising excellence and being able to get to a 45% gross profit margin really driven in large part by the work the merchandising organization has done.

And as a reminder, we talked about 500 basis points that we're going after here, and about half of that was merchandise and excellence. And that work started in earnest underway this past year. There is two other pieces. And when we talked about it kind of being back-end weighted a little bit there was in supply chain was the biggest one back-end weighted, and that's because we had to get through the consolidation work. So we're working on getting the consolidation of supply chain down.

We're now down to 16 DCs. We expect to be 15 by the end of next year. And once we get them consolidated, then we start working on the productivity within those boxes. And Ron on board is diving in. And so that takes a little bit of time to work through. And then they store operations pillar, those are the primary -- right now, '26 is a primary investment year for both of those supply chain and store operations that yield the benefit that will come out of it.

Yes. Just touching on the pillars. As Ryan mentioned, pleased with the progress. We're controlling what we could control and moving forward on all three of those areas: merchandising, supply chain and store operations. A lot of great stuff coming on the store side as it relates to labor productivity, task simplification. We're investing in store technology and think about that as servers and POS and Zebra devices. And then for many of our stores, just basic store appearance improvement. So we touched 1,600 stores last year. Think about that as paint, HVAC, parking lots, signage, racking, so feel good about that.

And we'll touch another 1,000 stores this year, so making a better environment for our team members and for our customers. So all of that goes into creating progress that I would just say it's been -- we're looking to be incrementally better every year in the business.

And since those two big pillars, the supply chain and store operations is a big investment year, a lot going on in those areas, '26 will really help inform what we really believe that cadence to be going forward, but we want to see '26 play out a little bit, so we can have a better informed perspective. And if you look at the bridge we put out around our guidance, we're being very specific. We know we have line of sight to those numbers. That's why we gave a little more detail on that bridge, and we want to be able to continue to do that as we march towards 7%.

The next question comes from Simeon Gutman from Morgan Stanley.

Nice job on the margin gain so far. My question -- first question is on margin. So thinking about the gross margin gains and even some of the SG&A leverage, can you talk about the execution risk in getting there? Do you have line of sight with the strategic sourcing. These are deals that are already made? Or is there a degree of which you have to execute in order to gain that level of gross margin throughout the year? Same question with SG&A. How do you both achieve this better service and availability with SG&A up so modestly for '26?

Yes, Simeon, Great. I'll start and let Shane chime in. On the merch side, we've got really good line of sight. We've made a lot of good progress this year. Some of that benefit is wrapping into next year. There's still some work to be done, but our merchandising organization led by Bruce Starnes has just done a phenomenal job this year executing against that. It's meeting expectations we had. So some of it is already baked going into the year. Some of it still work to be done.

In fact, some of those conversations are already starting to work on 2027. So the execution has been solid and we like seeing what's going on there. As far as the other two pillars we talked about, that's work that's being done this year, progress on the consolidation in supply chain has been great. And the reason I bring up supply chains, that's going to have a COGS benefit as well long term as we get more productive in that space.

Yes, I would just say it's a mix. There are vendor contracts that we've signed that will create benefits. So that's not just line of sight, but we think we can tuck that in the run rate. But then we have discussions with the vendor where we haven't signed it, but feel good about it. I would highlight Smriti's assortment work where last year, we improved backroom availability, and we made sure we had left in rights that were matching brands, and we had full kits for different products.

She's going to continue doing that. We're doing a better job as it relates to planograms and price changes. So there are certainly things that we have that we feel we can count on as it relates to going forward, but there are also things that we still have to achieve, but we have a plan against how we're going to go about it. And I'll just touch on it. You heard it from Ryan, we feel good about the leaders who sit in the seats. And from my perspective, we are done making changes on the core leadership team. And if you look at the executives that we now have in place, you'll see a mix, you see some internal promotions. You see some external hires, but they're each focused on those fundamentals in their particular area. And that gives me confidence around where we're going on your line of sight question.

And Simeon, just to talk about the SG&A question. So a lot of the SG&A reduction, one has come from the rationalization of our store footprint in DCs, but also indirect spend. We went through an initiative and really worked through in their expense. So an example would be we're able to mitigate not all, but a good portion of inflation seen in their general liabilities, our health insurance and also getting more productive in the spend. So the spend has not been all that productive.

We talked about reallocating our trucks to make sure they meet the right volume base. And we've talked about how we walked into a store and they've got three trucks, two of them haven't been started in months and don't start. They just need to get reallocated or reduced. So we found opportunities to reduce SG&A where it wasn't being productive. Now if you look on a like-for-like, so we move the cost of SG&A to support the liquidation sales, it's about $90 million.

We're actually slightly increasing SG&A next year, and we're investing in labor, we're investing in new stores, we're investing in training. We're investing in the service element and reduction of tasks within our stores. So if we can reduce the tasks that our associates are working on that are not productive and we could put more hours in front of a customer, that will be a benefit for us. So that's where we're investing SG&A next year.

Okay. Quick follow-up. The $100 million of free cash expected with the $300 million of CapEx, so roughly $400 million of operating cash. I'm sorry if I missed it, but can you just bridge your net income to get to that operating cash?

Yes. So we are increasing -- so it is net income and your operating cash flow, you're about spot on. You're doing the math right. It's about $350 million is operating income. Driven out of that. Payables working capital should be about neutral. What you would expect though, just given timing and seasonality of our free cash flow is our typical free cash flow seasonality, you'll see in Q1, a cash outflow. I think you'll see Q2 through Q4, you see the cash inflow.

nd then remember, there's like $10 million to $20 million of closure expenses that -- from our previous restructuring that will flow into next year. So that will be in there because we initially had said about $150 million of cash outflow for the strategic initiatives and store closures. About $10 million to $20 million is shifting over. we realized about $140 million this past year. So you see about $10 million to $20 million shifting. And that's really related to the leases and getting out of the old stores. But you should expect less volatility than we saw last year.

The next question comes from Scot Ciccarelli from Truist.

This is [ Shervin ] on for Scot. You mentioned external macro factors acting as a headwind to sales. Can you quantify the sales headwind from DIY in your guidance like outside of smarter pricing, are there other initiatives you are helping like you're taking to help materialize what I would think is pent-up demand from past maintenance deferrals?

Yes. So let me touch on -- Brian can talk about the numbers. But let me talk macro and what we're doing. So if you look at the health of the consumer, first, we're in a great industry, right, number of cars miles-driven age of fleet. So I think that's a good backdrop. But it has been interesting to watch the low-income consumer and to some degree, the mid-income consumer in recent weeks where there has been sort of negative general merchandise spending.

Now the good news is 90% of our industry is kind of break fix. And so that's helpful. But the overall consumer sentiment in those two tranches has been negative, and I think it's manifesting in general merchandising spend. Now for us on DIY, we have a number of key things going up. First, we changed and improved our loyalty program. We have 16 million members in Advanced Rewards, formerly Speed Perks. And we ditched parts of that program that were expensive for us that weren't creating loyalty or sales. And think about that as the fuel rewards component.

We also improved usability. And we issued coupons when you reach certain tiers and we made it easy for redemptions to occur. Second, we introduced our own brand of oil and performance fluids, ARGOS. Really excited about this. I spent a number of years in the oil business, and they understand both the quality of how you need to manufacture the products and how having your own brand can be very compelling. In the past, we had a different brand.

By the way, there were royalties for that brand. That brand was in other retailers. That brand is associated with the parent company that's in financial difficulty, so the idea that we move to our own brand that we can control, and we pulse the consumer in terms of what they wanted. They wanted the reliability, the value, the strength of the product. So that is going to be great.

By the way, combine that with our other private brands. We've got Carquest, we've got DieHard. So we have a great portfolio of private brands that are about half of our sales. We've got stuff going on in marketing. E-commerce, assortment improvements, training and store experience, all of these things geared towards having us do better with the DIY customer going forward.

And I'll just add a couple of data points as we think about it, both Pro and DIY, we expect to contribute positively to comp growth with Pro outpacing DIY. A couple of things as we think about trends going into the year, first, last year, we spent a lot of time focusing on the Pro in the assortment, right?

You are now seeing us start to do and execute initiatives that we believe will have a positive impact on DIY. Just coming out of the quarter into Q1, DIY trends have remained stable to what we saw in Q4 and Q1 specifically. And we did see improvement sequentially throughout the quarter in our comp performance. In fact, the last period of P13 in Q4 was our highest pro comp of the year. So some of the work that we're doing, the initiatives around assortment, we're seeing that take hold. So we're excited about the performance in Pro, but we also want to make traction on DIY in the year.

That's all helpful. And really quickly, you also mentioned on the call you could see another hundred basis points of operating income expansion in '27. Just curious what comp assumption that's on? Just trying to better understand the sales and earnings leverage relationship.

Yes, not necessarily giving guidance on the comp percent for that, but I would expect low single digits that we've given in the past.

The next question comes from Bret Jordan at Jefferies.

The private label strategy, given the fact you're rolling out ARGOS. Are you expecting to drive private label higher than that 50% of your sales mix?

No, Bret. I would say it should remain consistent. I mean with replacing a brand that we kind of considered to private label, so kind of within that, it may end up a little bit higher because we actually think this is a really good brand that can get some penetration. We think it's the right value offering in there. I think we'll be more competitive in that space. So maybe some minor movement, but we don't have any plans necessarily to significantly increase private penetration. We go category by category and what makes sense for the consumer and having the right assortment of brands for them.

Great. And then on market hubs, could you remind us how many of your hubs that you have today were converted Carquest DCs versus Greenfield? And maybe what the pipeline of Greenfield looks like? I think you said you're going to add 10, but maybe give us some sort of feeling as far as timing and what these things look like physically.

Yes. Bret, more than 20 of our market hubs are conversions. So a good portion of them. We just started opening up our first Greenfield this year. Really excited about the Greenfield. Going forward, the majority of those market hubs will be Greenfield locations.

Okay. And I guess when you think about the pipeline, which you have for identified properties and sort of you talked about 75,000 to 85,000 SKUs, what do we think about for like a square footage and what kind of capital goes into this box?

Yes. The market hubs on average are roughly $2 million, but that does vary depending on whether that's like a build or a lease or takeover so varies. But right now, they average about $2 million for a market hub from CapEx standpoint.

The next question comes from Kate McShane of Goldman Sachs.

This is Mark Jordan on for Kate McShane. As we think about the comp guidance of 1% to 2% for the year, can you break down how you think about ticket and transactions? Because I think if we look at the expectations for same SKU inflation to be 2% to 3%, I think that suggests either other impacts to ticket or some transaction pressure in the year?

Yes. I mean, for the most part, the DIY transactions, we'd expect to be pressured and continued Obviously, there's inflation embedded in this. So we talked about inflation. So there is a negative DIY transaction, not inconsistent with what we've seen in 2025, but we'd like to see and continue to drive positive transactions. We want to drive transaction growth in the Pro as well. But I would expect that this is a slightly low single-digit transaction and inflation driving it positive. So really, the pressure is on the DIY side there. Nothing significantly different from the trends that we see today.

Okay. Perfect. And then as you think about the cadence through the year, obviously, first half is stronger to the inflation benefits. But how should we think about maybe some tailwinds from the recent weather events. Are you seeing anything quarter-to-date on transactions that maybe looks encouraging?

So, I mean, it's -- the weather is interesting. We are seeing weather category is positive. But then also, there's the offset of those categories that are impacted negatively by weather. So it's been fairly neutral so far. Our current trends within the quarter are within our guidance. So we are seeing some good performance there. Failure items like batteries, those are doing well, but maintenance items, cooler weathers that has an impact.

We do expect trends to improve as weather kind of normalizes. The Northeast, Mid-Atlantic, those have been impacted by the storms. I'd say prior to Storm burn, if you guys remember Stormburn, big deal, we did have an initial buildup of sales. But post the storm, a portion of our stores were closed. So there's that mix. So you got to get past the store closures and you see some of the weather rebound. But right now, we're tracking in line with our guidance range.

Our final question today will come from Zach Fadem of Wells Fargo.

I want to make sure I understand your vendor finance commentary is. It sounds like you're taking suppliers off the program and generating better gross margins from those vendors, but that also translates to a weaker free cash flow due to the impact of payables. So first of all, is that right? And is that the game plan going forward from here?

Yes. No impact to gross margin just yet. We don't have a specific target or game plan to go do that. We like our supply chain finance program. Our vendors like it. It's very stable after what we've done this past year with the new structure.

This is more of -- it is a lever and an option that we could pull as we're talking to vendors, and we evaluate that, but we would evaluate any other negotiation. The supply chain finance program is stable. It's in place. We like it, but there's no concerted effort that says we are going to reduce it any further. The vendors like that program. If they do come off the program, we would fully expect a positive improvement to our cost of goods, right?

Because they're paying to be on the program, we would want a positive impact for us. That's an investment of working capital. And so we do the math. We want to make sure it makes economic sense to our P&L. If we do move them off that program at a greater rate, it would be -- we would expect a P&L positive impact from it. But right now, we think it's stable and the program at 2.5, so anywhere between 2.4 and 2.6 based on payables throughout the year is where we expect it to be. There's nothing in the works right now that would indicate a difference in approach.

Got it. And then a couple of clarifications or housekeeping items. First of all, any expectation for LIFO capitalized inventory costs in Q1 in '26? Same thing with restructuring costs in Q1 or '26. And it also sounds like pro comps benefited in '25 from store closures. Any quantification there as we think about '26?

Yes. So I'll hit the first one on LIFO. On LIFO, in '25, we had about 40 basis points of headwind. In '26 in our guidance, it's in our guidance, we expect about 50 basis points of headwind. And in Q1, specifically, we're expecting about $30 million of headwind related to LIFO.

Now the warehouse capitalization cost in there, we expect to be flat as we expect inventory to be roughly flat year-over-year, so I don't expect an impact on that. But LIFO expense, the '26, which is in our guidance, about 50 basis points of headwind that we'll see.

On the other one, we haven't quantified externally what it is. What I'd just say is that we did get Pro transfer sales in our comps this past year. Pro would still have been positive net of that transfer sales. So we like how the team executed moving those accounts to the new sister stores. They did a great job in maintaining the service levels of those Pro customers and actually overdelivered our expectation on it, and they're servicing those Pros really strongly. I think the initiatives we have, the new assortment, the service level improvement really helps drive our Pro comps even above that. And we like how that's positioning us during the year.

This concludes today's Q&A session and go back to CEO, Shane O�Kelly for any closing comments.

Thank you, everybody, for participating in today's call. More importantly, thank you to all of the Advanced Auto Parts team members. It's their hard work that we rely on to deliver the results. We appreciate everything that they do. We look forward to sharing our Q1 results in May and stay tuned for those when they come. Thanks, everybody. Take care. Bye-bye.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.

Hello, and welcome, everyone, to the Advance Auto Parts Third quarter 2025 Earnings Conference Call. I would now like to turn this over to Lavesh Hemnani, Vice President, Investor Relations.

Good morning, and thank you for participating in today's call. I'm joined by Shane O’Kelly, President and Chief Executive Officer; and Ryan Grimsland, Executive Vice President and Chief Financial Officer. During today's call, we will be referencing slides which have been posted to our Investor Relations website.

Before we begin, please be advised that management's remarks today will contain forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements regarding initiatives, plans, projections, guidance and expectations for the future. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information can be found under forward-looking statements in our earnings release and risk factors in our most recent Form 10-K and subsequent filings made with the SEC.

Shane will begin today's call with an update on the business and our strategic priorities. Later, Ryan will discuss results for the third quarter and provide an update on full year guidance. Following management's prepared remarks, we will open the line for questions.

Now let me turn the call over to our CEO, Shane O’Kelly. Shane?

Thank you, Lavesh, and good morning, everyone. I want to take a moment to acknowledge and thank the team for their hard work and dedication. Their unwavering focus on delivering exceptional customer service and advancing our strategic priorities helped us achieve our strongest quarter in over two years.

For the third quarter, we reported comparable sales growth of 3% with both Pro and DIY channels delivering growth. Adjusted operating margin expanded by 370 basis points year-over-year to 4.4%, demonstrating progress on the execution of our strategic plan.

During the quarter, we also strengthened our balance sheet by proactively reorganizing our debt capital structure. We raised nearly $2 billion in cash, which provides enhanced liquidity for the business as well as a path to return to an investment-grade credit rating in the future.

As anticipated, tariff-related price increases have accelerated in the auto aftermarket. And in our view, the industry has been responding rationally by adjusting prices in response to rising product costs. We saw some variability in performance as prices moved higher during the quarter, although on a 2-year basis, both transaction and unit trends were relatively stable. As we look to the balance of the year, we believe there is potential for temporary volatility in sales trends as consumers manage household budgets in an inflationary backdrop. Our teams are prepared to navigate in this dynamic environment and provide consistent high-quality service to our customers.

The long-term fundamental drivers of the industry remain healthy. More than 90% of our sales are driven by maintenance and break/fix repair, which gives us confidence for the long term.

Based on our performance to date and expectations for the remainder of Q4, we have updated our full year guidance. We have reaffirmed the midpoint of our prior comparable sales growth and adjusted operating margin guidance which implies approximately 200 basis points of margin expansion for the year.

I want to recognize the team for their tremendous effort in delivering operational stability and maintaining focus on our turnaround priorities. We still have considerable work ahead of us and the initiatives underlying our strategic pillars continue to build through 2026. We remain committed to the steady execution of our plan to expand margins and create long-term value for shareholders. The Advance team is prioritizing actions to successfully execute the basics of selling auto parts while strategically utilizing innovative technological assets to position the company for the future.

Our technology team has designed a multiyear road map to support the effective execution of our plan. These include using generative AI content and deploying AI-based applications in routine processes and providing sharp analytical data for our teams to improve service levels. Some of the areas where we are leveraging these applications include processes within merchandising to power our SKU placement decisions and within our supply chain to determine optimum demand forecasting for millions of SKU combinations in our network. These are just a couple of examples, among other projects where we believe we will collectively establish a foundation for stronger execution across fundamental retail operations.

Next, let's turn to an update of our strategic plan. To recap, our turnaround goals are built on three pillars, each supported by targeted initiatives that we believe will position us to deliver profitable growth. I will share updates on the progress we have made within each pillar and then Ryan will discuss our financial performance.

Let's begin with merchandising. Throughout the year, we have taken deliberate and strategic actions to position Advance as a trusted long-term growth partner for our vendors. With a sense of urgency, we have streamlined legacy processes reduced complexities in order management, restructured our distribution center footprint and prioritized operational excellence to enhance the overall vendor experience.

Our vendor community is reacting positively to the bold decisive actions we've made such as exiting underperforming markets and investing in new stores and market hubs. They are actively engaging in strategic business planning, exploring supply consolidation opportunities and collaborating on joint marketing efforts to support our transformation. This alignment has already begun to deliver improved product margins, and we expect additional cost benefits in the future. I am proud of the team's progress, especially given the added complexities of navigating a new tariff environment.

Another key priority for the company has been enhancing the availability of hard parts we are pleased to report the successful completion of the rollout of our new assortment framework across our top 50 DMAs, which cover approximately 70% of our sales. We achieved this ahead of schedule by leveraging proprietary assortment planning tools that have significantly improved our ability to make data-driven decisions and quickly adapt SKU requirements to meet specific market needs. We expect this initiative to deliver incremental growth over and above the initial 50 basis point uplift as these markets mature over the next 12 to 18 months.

Along with refreshing our store assortment, we have also improved DC stocking programs to drive greater effectiveness in store replenishment processes for each market. These activities have enabled us to achieve our store availability target and ensure improved depth of hard parts in stores and distribution centers.

With this major milestone accomplished, we are now focused on improving the speed at which we bring new parts to market to expand our breadth of coverage. We have already introduced tens of thousands of new SKUs into our network this year, and our work has uncovered additional opportunities to enhance our responsiveness to market demand signals increasing the breadth of hard parts coverage will enable us to further improve service levels for our Pro customers.

Moving to pricing and promotion management. As a company, our goal is to offer competitive pricing supplemented with seasonally relevant promotions to engage customers and drive repeat purchases. We are in the initial stages of testing a new AI-powered pricing matrix to inform pricing decisions for SKUs within the DIY and Pro channels. Separately, we have also built guidelines for field discounting programs to take advantage of select market growth opportunities. In this regard, we are adopting a fundamental retail approach by installing a centralized price management system for segmenting categories, markets, SKUs and customer channels. Consistent with prior expectations, we expect this initiative to deliver a larger benefit in 2026 and beyond.

Turning to supply chain. Our U.S. distribution center consolidation plan is progressing on schedule, and we expect to end the year with 16 DCs in the U.S. which is a significant reduction from 38 DCs just two years ago. We will enter the next phase of consolidation in 2026 and as part of our planning process, we are evaluating our operational capabilities across the network. DC productivity measured through product lines per hour has improved in the mid-single-digit percentage range compared to last year, and our team is putting incremental focus on execution of key functions in our DCs. These include product picking, packing and routing to drive additional productivity. We believe our current DC network is well positioned to support strong service levels and the continued growth of our multi-echelon network.

A key element of this growth is opening new market hubs. Approximately 75% of our stores are in markets where we have the #1 or #2 position based on store density. Our team has made great strides in accelerating market hub openings, which is enabling us to capitalize in markets of strength. During Q3, we opened 6 locations and concluded the quarter with 28 market hubs. We now expect to open a total of 14 market hubs this year, including 10 conversions and 4 greenfield locations. With these openings, we expect to end the year with 33 locations.

A market hub typically carries between 75,000 to 85,000 SKUs, expanding same-day parts availability for a service area of about 60 to 90 stores. Thus far in Q4, we have opened one greenfield location in the Atlanta area, built from the ground up. This facility is poised to serve as a model for future hub development. We are particularly enthusiastic about the opportunities presented by greenfield openings as these facilities enable us to establish new points of distribution within designated market areas. This strategic expansion not only enhances our ability to provide additional hard parts coverage in previously underserved regions, but it also creates incremental opportunities to gain market share. We will continue to open new market hubs in 2026 and stay on the path to opening 60 market hubs by mid-2027.

Moving to store operations. As we've previously communicated throughout the year, we have been testing a refreshed store operating model designed to enhance productivity and ensure the delivery of consistent high-quality service to our customers. I would like to thank our frontline team for their collaboration and adaptability during the testing phase as we work to identify a more effective path forward. We are now prepared to launch this model in Q4 as part of the first phase of the rollout with full implementation anticipated during the first half of 2026. This updated operating model enables us to improve driver and store team labor hours, along with vehicle allocations, aligning them more effectively with demand patterns to better serve our customers.

We expect this model to provide three key benefits. First, it will enable us to instill greater confidence in our Pro customers while strengthening our reputation as a trusted and reliable parts provider in the aftermarket; second, it strengthens the collaboration between our customer-facing outside sales team and our internal store teams who play a critical role in efficiently procuring and delivering parts; and third, from an economic standpoint, this model should support greater transaction velocity, improved labor utilization and enable us to compete more effectively. The introduction of this new operating model, combined with the expansion of new store locations and our delivery commitment of 30 to 40 minutes naturally positions us to accelerate growth in each Pro account.

Our team is putting added emphasis on strengthening relationships with Main Street and regional accounts. The Main Street customer group represents our single largest opportunity for higher margin market share in the Pro channel to further boost our sales within this cohort, we are providing our account managers with enhanced visibility on customer data and additional training resources to increase our transaction volumes.

For our national accounts, we are actively collaborating with them to optimize parts availability in specific categories by market, which will enable us to improve service levels.

Shifting to DIY. As we refocus on the core fundamentals of selling auto parts and work to execute each initiative, we have asked our store team members to embrace significant changes. The fact that our team members are committed to supporting our customers and the sequential improvement in DIY transactions on both a 1-year and 2-year basis is a testament to their customer-focused mindset. As a management team, we have launched a renewed effort to simplify store tasks and streamline communication to the stores to improve the experience for our team. This initiative is being managed through a centralized execution team, which oversees weekly communications and provides organizational visibility in the tasks being assigned to the stores. By prioritizing only the most critical activities we expect to drive further operational efficiency, we believe this new level of operational discipline will create additional capacity within our stores, allowing teams to dedicate more time to training and customer service.

Separately to monitor the performance in our stores, we have also launched a new Net Promoter Score or NPS metric that is collected through customer transactions. In addition to providing visibility into the impact of strategic actions being executed by the stores, the data is used by store and district managers to drive targeted service improvements. We expect to focus on operational discipline, along with our ongoing effort to upgrade store infrastructure to enhance the overall experience for team members and for our customers.

We continue to upgrade HVAC systems, roofing, parking lots and signage in our stores as part of a multiyear asset management plan. Year-to-date, we have invested about $50 million in store upgrades, which is more than double the total CapEx allocated to these projects last year. To date, we have updated more than 1,400 stores compared to 440 stores upgraded in all of 2024. In addition to these critical store upgrades, we are also building a pipeline of new store openings for the future and continue to target at least 100 new store openings over the next two years.

To wrap up my section, I want to once again recognize the team for their hard work and for the progress achieved thus far. We remain focused on prioritizing actions to deliver sustained improvement in our turnaround. I will now hand the call over to Ryan to discuss our financials. Ryan?

Thank you, Shane, and good morning, everyone. I want to begin by thanking our frontline associates for their commitment to serving our customers and delivering strong Q3 results. For the third quarter, net sales from continuing operations were $2 billion, which declined 5% compared to last year. This decline was mainly attributable to the store optimization activity that was completed during Q1.

Comparable sales grew 3% during the quarter with positive weekly performance throughout the quarter. Sales trends were strongest during the first 4 weeks, followed by a moderation during the last 8 weeks. From a category perspective, brakes, undercar components and engine management led performance. We have made significant progress in improving our coverage and availability of hard parts, which is helping us deliver better service to customers.

For the quarter, ticket was positive and largely driven by tariff-related price adjustments that expanded throughout the quarter. Our industry has been reacting rationally to rising product costs, and we have been adjusting prices in response to market dynamics. In aggregate, same-SKU inflation was about 3% in Q3 compared to about 2% last quarter. Transactions were down but improved sequentially as we cycle through discrete events from last year. On a 2-year basis, transactions and unit productivity were relatively stable to last quarter, reflecting the team's continued focus on delivering consistent, high-quality service.

Now let's look at channel performance. Pro comps grew by just over 4% as we cycled through the softness from last year. On a 2-year basis, the Pro channel recorded its fifth consecutive quarter of positive performance and relatively consistent 2-year trends in each month. Our DIY channel delivered positive low single-digit comps in the quarter and improved sequentially on a 2-year basis.

Moving to margins. Adjusted gross profit from continuing operations was $913 million, or 44.8% of net sales, resulting in gross margin expansion of about 260 basis points compared to last year. The year-over-year margin expansion was driven by savings associated with our footprint optimization activity completed in March and reduction in product costs, driven by our strategic sourcing initiatives. I want to recognize the merchandising team for their solid execution this year. They have been able to secure competitive product costs while managing prices in a higher tariff environment to offset incremental cost pressures which is yielding stronger merchandise margins.

During the quarter, we cycled through approximately 70 basis points of atypical margin headwinds from last year. We also experienced a benefit of approximately 50 basis points related to capitalized inventory costs driven by our strategic decision to carry more inventory through the year.

Regarding product costs, as previously anticipated, we expected LIFO expenses to move higher due to cost inflation. This resulted in total LIFO expenses of $33 million for Q3.

Shifting to operating expenses. Adjusted SG&A from continuing operations was $823 million or 40.4% of net sales and was consistent with our expectations. The year-over-year reduction in SG&A expense is primarily related to operating fewer stores compared to last year. As a result, adjusted operating income from continuing operations was $90 million or 4.4% of net sales, resulting in about 370 basis points of year-over-year operating margin expansion, our strongest operating margin in over two years.

Adjusted diluted earnings per share from continuing operations was $0.92 compared with a loss of $0.05 last year. Year-to-date, free cash flow is negative $277 million, largely driven by payments for inventory purchased in Q3 last year, which is in line with our typical cadence for managing payables. Also, during the quarter, we spent an additional $20 million on cash costs related to our store optimization activity for a total of approximately $130 million incurred through the year.

Looking at year-to-date free cash flow more closely, we have only seen a modest change in operating cash flow between Q2 and Q3, which shows the stability of our operational execution, while we continue to allocate higher CapEx to strategic investments.

Turning to an update on full year guidance. Starting with net sales. We expect net sales of $8.55 billion to $8.6 billion including comparable sales growth between 0.7% to 1.3%. Q4 is typically our most volatile quarter of the year, and our guidance includes trends through the first three weeks, which have started off soft.

While the Pro channel continues to track positive, the DIY channel is seeing pressure with more week-to-week variability in transactions. We believe this is being driven primarily by adjustments in consumer purchasing habits in response to rising prices. Same SKU inflation is expected to move higher compared to Q3, and we remain cautious in our planning assumptions based on recent trends.

In addition, I want to highlight two sales-related items that are unique to Q4. First, last year, in Q4, we generated $74 million in nonrecurring liquidation sales related to our store optimization activity. And second, we expect between $100 million to $120 million in sales from the 53rd week. As a reminder, neither of these items impact comparable sales growth.

Moving to margins. We expect adjusted operating income margin between 2.4% to 2.6% reaffirming the midpoint of our prior guidance range. Given the typical seasonality of the business through the end of the year, we expect Q4 gross margin to moderate compared to Q3. We are planning for Q4 gross margin slightly below 44%, which includes the benefit of higher capitalized inventory costs continuing through the end of the year as inventory levels are expected to be higher than previously planned. Strong coverage of parts across our network is critical for our long-term success, and we are working to ensure we provide our customers access to the right depth and breadth of parts.

However, this inventory benefit is expected to be offset by higher than previously planned LIFO expenses that is driving 80 to 100 basis points of added pressure. We currently estimate total fourth quarter LIFO expense of approximately $70 million based on cost trends through Q3.

For SG&A, we expect Q4 expense dollars to decline in the high single-digit range compared to last year which is in line with prior expectations. As a reminder, we are also lapping approximately 280 basis points of atypical margin headwinds, which will drive favorability in the year-over-year operating margin expansion.

Moving to the other items in our guidance. We have updated our adjusted EPS guidance to a range of $1.75 and $1.85, which includes slightly higher interest income compared to prior expectations. For Q4, our interest expense is expected to move higher due to a full quarter impact of the debt refinancing transaction that was completed in Q3.

For capital expenditures, we have revised our target to approximately $250 million for the year compared to the prior expectations of approximately $300 million. About half of the change is associated with the allocation of spend between PP&E and other assets on our balance sheet, which is a net neutral from a free cash flow perspective. The balance of the CapEx reduction is related to a shift in timing of projected spend from Q4 into next year as we continue to execute initiatives across our three strategic pillars.

Regarding free cash flow, we have revised our expectations to a range of negative $90 million to $80 million for the year. As I indicated earlier, we expect to carry higher than previously planned inventory through the end of the year. This is being driven by our strategic decision to improve the depth and breadth of assortment across our network and to support new store growth. Despite the higher inventory, we expect positive working capital contribution in the fourth quarter which is in line with our planning assumption at the start of the year. We continue to expect full year cash expenses of approximately $150 million related to our store optimization activity. Adjusting for this spend, our core free cash flow would have been positive for the year, which gives us confidence in our ability to deliver positive free cash flow in 2026 and beyond.

In summary, we are pleased with our year-to-date financial performance and remain on track to end the year with solid margin expansion after two consecutive years of decline. We have enhanced our liquidity position to fuel our turnaround and the team is doing a commendable job by staying nimble in a dynamic macro backdrop.

Before moving to your questions, I want to address our recent industry concerns stemming from the bankruptcy proceedings of a supplier. In our view, this is an isolated situation and not a broader concern regarding the health of the aftermarket industry. Over the last 12 to 18 months, our merchant team has worked to diversify our vendor base including consolidation of product lines, and we currently source less than 2% of our cost of goods from this supplier. Given the risk associated with the bankruptcy proceedings, we have recorded a noncash charge of $28 million to cost of sales in the third quarter. This charge reflects an estimate for future credit losses on certain other receivables due from the supplier and is recorded in our GAAP income statement. It does not impact adjusted results and full year guidance.

Following this charge, we have reserved against the risk associated with potential credit losses. We are maintaining a positive dialogue with the vendor and continue to work with them. We also source products from hundreds of other suppliers and maintain alternate sources of supply to minimize any disruption to our operations.

Separately, we have also heard market concerns related to our supply chain finance program and the aftermath of financial issues related to the supplier. We do not believe these concerns are applicable to us. I want to emphasize, Advance's suppliers continue to receive early payments on their confirmed invoices through our network of large reputable banks. As a reminder, earlier this summer, we raised nearly $2 billion in cash to support the operations of our supply chain finance program and asset-backed lending facility. Following the execution of the facility, our vendor programs continue to operate smoothly. We have a strong balance sheet and more than ample liquidity with over $3 billion in cash and have access to a $1 billion revolving credit facility that is currently undrawn.

In closing, I want to recognize the team once again for delivering our strongest financial results in over two years. This quarter was also our third straight quarter of delivering results in line with expectations. As we look ahead to next year, we expect to build on our recent performance to drive further progress across the business.

I will now hand the call back to Shane.

Thank you, Ryan. We believe we have the right strategy centered on core retail fundamentals, along with a talented team driving execution of our strategic initiatives. We appreciate your interest in Advanced Auto Parts and look forward to reconnecting in the new year. Thank you. Operator, we can now open the line for questions.

[Operator Instructions] Our first question today comes from Simeon Gutman from Morgan Stanley.

I want to ask first about elasticity of demand, the health of the consumer and then maybe even throwing something about weather. Can you put all together, because it sounds like your quarter started off strong and then deceled and now it sounds a little soft and it makes sense given prices come up, not just in this category, but across the board. But how much also is weather a factor? And then can you talk about the things you're doing, the internal initiatives, how you can see and measure progress in those outside of these variables?

Simeon, thanks for the question. I'll start and let me start with the consumer because I think it's important. In general, we're keeping an eye on the overall health of the low end, low to mid-end consumer where our -- that's where our customer base is. Broadly, you see some data points that suggest that they may be depressing their spend in aggregate across general merchandise. I think about that as the subprime auto market, the general consumer sentiment where discretionary spend is going, credit cards. And so that impacts how they spend.

The good news about our industry is the car is the linchpin of how they get to work and their social activities and much of what we sell is brake/fix and nondiscretionary. So I think that's important. But I do think consumers are adjusting their budgets in response to the inflationary environment. And I think the cost of some routine jobs has moved up a bit, which may make them reconsider some of their intervals in which they do maintenance with us. But I would describe it as a noisy situation for them, but long term, feel good about what's going on in our industry and what we're doing.

So to the second part of your question, then turn it over to Ryan for sort of the elasticity specifically. We've got a lot going on as it relates to what we're doing in our stores to create an environment that's positive for DIY. And what we found is we were over tasking our stores with a lot of tasks that took them away from being attentive to customers as they come in. And I got a great note actually last night, from a customer who said, "Hey, I came in your store, I was greeted right away. The -- our team member took the time to diagnose what their situation was, spent an additional 20 minutes going through what the options and then ultimately selling a part". And so we need to be there for our customers. And so freeing up their time so that each visit results in a more likely conversion to a transaction, that's what we're doing.

Ryan, on the specifics?

Yes. On the elasticity piece, it's still early for us to gauge exactly what the impact is on the consumer. But more broadly, we see the consumer impacted across retail. And more recently, we've heard from other retailers. How much of that is the government shutdown and that impact, how much of that is price -- inflation that you see in the industry. We're still trying to understand that. I think the industry is still trying to understand that, but we're watching it closely.

The one thing you did ask was how do we measure our initiatives in the midst of this stuff going on around us. And the way we do that is we take a very measured approach to that by looking at test versus control. So when we go out and roll out whether that's the assortment work or looking at our market hubs, you look at how these perform versus like stores that performed similarly in the past. And we're able to gauge the success of those and the traction of that, get learning from that before we roll out.

So we do testing control here around our initiatives before we start rolling things out more broadly, and that helps us better understand whether it's working, what is working, what's not working as we roll those things out. So that helps a little bit because the pricing piece is more macro across our store fleet, and we're able to isolate the discrete initiatives that we're putting in place.

Right. And my quick follow-up is on inventory. Shane, can you talk about where you are versus where you want to be? It sounds like you pivoted a little bit in '25, you bought more than I think you were expecting. You can clarify if that's the case. And why wouldn't that make sense to do in '26? I know you talked about driving free cash flow, but why would it make sense to invest more in inventory to drive the business?

Well, just as a reminder, we're doing our assortment rollout. So there's a lot of activities going on here. And we're pleased that we've got all 50 DMAs that we originally planned to do done. And if you think about that, there are hundreds of SKUs coming in and out of stores. And so we want to make sure that we've got the right amount of product going into those stores. Keep in mind also that in a tariff environment, we bought ahead. We wanted to make sure that we had the inventory we needed properly at the price pre-moves so that we could be in a good position. So we're focusing on having the part for our customer, which means investing to get it in our system, both at the DC and the store level.

Yes. And I'll just add, we're really focused on the breadth. I think the depth is one that we've been really hitting on and getting the right depth. But now it's the number of SKUs and making sure that we've got the right assortment at the different levels within the supply chain Echelon. So I think that inventory can come down and then some inventory investment will be needed, but that's more of a mix as we get the right depth and breadth for the consumers. So not a big investment needed going into next year. We've already made some pretty big investments. Now it's managing through that. We'll have some sell-through with that earlier buys that we made and the assortment work we've done, and that will afford us the ability to invest in the other areas of breadth that we need.

The next question comes from Chris Horvers from JPMorgan.

So my first question is on the inflation front. So can you talk about what did the exit look like on inflation in the quarter? Is it still your expectation we get to the higher end of the mid-single digits in the fourth quarter. And there's a big debate out there amongst investors when that inflation year-over-year inflation benefit peaks. One of your peers is saying it's in the fourth quarter. Another one of your peers are saying, "Hey, we turn inventory every 10 months". So it wouldn't be until the spring. So could you help us out with that mystery as well?

Yes. Absolutely, Chris. On the inflationary front, we finished Q3 just under 3%, so close to 3%. Q4, we expect it to be around 4%. But going into, say, Q1 of next year, we expect that to increased slightly, but not at the same rate of increase. And then by that point in time, I think we'll be getting more to a normalized state. Obviously, there's a lot that can play out. I mean we just had a China deal overnight that we still have to think through. So this thing is ever evolving.

But for the most part, we are substantially done with the negotiations with our vendors around that, a few left substantially done. And as those have gone into the system, the prices are going into the system. So I would expect there's some balance between what our peers are saying and somewhere in between there is probably where we reached the peak. But obviously, it's an evolving landscape. But we're thinking 4% in Q4 and then a slight increase in Q1 of next year.

Got it. That is super helpful. And then as we think about the path to the 7% operating margin, can you help us maybe on the linearity of that and as a part of the question, it's always hard to put a LIFO question into the call. But what is sort of the net LIFO headwind in '25 between LIFO and the capitalized inventory cost? And how do you think about the recapture of that next year? And then more broadly, that the linearity of the path to 7% by '27.

Just quickly, Chris, on the strategy, we think we've got the right strategy for the company. We've got the right focus areas and our goal is unchanged for 2027. Having said that, there's a lot of space between now and then and use the word linear. I would say turnarounds are nonlinear in terms of how things go. There's puts and takes. Some initiatives go faster, some go slower. Market receptivity. So we view '25 and '26 as building block years. And if you look at what's happened this year, I mean, just think about it, two quarters ago, we were closing stores, exiting California. We were going through the Worldpac TSA transitions, doing our assortment. This year, we'll go from 28 to 16 DCs. I mean these are huge muscle mover activities and '26 will feature a lot of building block tough things that we're doing to continue for. So we're really pleased with the products. I'm really pleased with the team, and we're focused on closing 2025 strong but as we go forward, 2026 is a building block here, and I would emphasize the nonlinear nature of turnarounds. As for LIFO, I'm going to go over to Ryan for that.

Chris, yes. So just to give you a net of warehouse capitalization costs, obviously, that netted out some of it. LIFO was still a headwind, it's roughly 60 to 80 basis points or we expect it to be by the end of the year, 60 to 80 basis points of headwind in 2025, hope that's helpful for you.

The next question comes from Bret Jordan from Jefferies.

One question on the working capital programs, it doesn't sound from channel checks like there's any contraction of availability. But have you seen any increase in risk spreads in the short term related to that particular supplier issue?

No. Actually, we haven't seen any change in the risk spreads there. Our supply chain finance program, if you're talking about this budget finance program rates they're getting, obviously, that's a decision between the banks and the vendor. But the work we did this summer create a lot of stability within that program, and it's been a very positive movement. We've had positive discussions with the banks around rates, not ready to provide any further information around that, but we haven't seen the spread increase. We've got positive discussions around probably the other side of that given the stability of this program now with the structure that we put in place, we're supporting that program with the cash and assets on our balance sheet, which provides a risk downward risk pressure for the banks for that program, kind of unique relative to the other programs in the industry right now as we're bridging ourselves back to investment grade.

Just to add in that, as Ryan said. So we're really pleased with how we've got supply chain financing setup with the capital raise we did with the cash support we provide for it. But as it relates to that vendor in particular, because I do think it's a one-off situation.

First, merchandising excellence is a key pillar for us. Bruce Starns and his team, they've introduced the PLR process and real rigor as it relates to how we develop plans and partnerships with vendors. And so they had engaged with this vendor long before these current circumstances and as a result of that, had started to move certain product categories OA to other vendors. And so COGS exposure pretty small 2%, maybe a little under 2%.

Now we're still in active dialogue with them. And so -- and we'll continue the relationship and wish them well. And if they come through, then I think there'll be continued relationships there. But in general, across merchandising and that emphasis we have alternative sources of supply is also a key tenant. So for anything we buy, we look to say, "Hey, where else would we buy it? Where else should we buy it?", and that would apply with this vendor as well.

Great. And then a quick question on the Atlanta hub greenfield. Could you give us color sort of as to the performance of stores in that market? I mean as you build the perfect hub, what's the outcome? And sort of what's the timing on developing further greenfield hubs like that one?

Yes. So great question. So it's open. So -- and by the way, our market hubs open with a store nested inside. As a reminder, 75,000 to 85,000 SKUs. In aggregate, we view it as a 100 basis point lift play for the supported stores. And then the market hub typically in and of itself drives as a store just because you have literally all that inventory sitting on site. So we really like what we're doing with the market hubs. We originally planned for [ 29 ] this year. The idea that we said this is a good thing we want to keep accelerating. So we'll get to [ 33 ]. We're now moving past the phase of where we were doing. We did some smaller DC conversions. We're moving past that phase to where we're now greenfielding and we've got 4 greenfield market hubs. You'll start to see that be more prominent in the opening paradigm. And there's a lot of excitement around that because instead of repurposing something, we can now specifically pick where we needed to best support the stores. So -- and our real estate team has been digging in to start identifying those sites, so it doesn't create a slower trajectory.

So 100 basis points is what we see as the network. We'll keep you apprised as to -- if that goes up or down and then more greenfields going forward and real estate looking to keep that tempo moving, [ 60 ] in mid-27 is where we want to be, and we'll keep you updated on that as well.

The next question comes from Steven Forbes from Guggenheim.

Just a follow-up question on gross margin. I think it was Chris' question. I think if you back out the LIFO charge in the quarter, you guys are sort of exceeding that mid-40% range that underpins the long-term guide here. So curious just -- if there is a takeaway for us today on some of the structural gains that you're capturing on the back of your initiatives or if that sort of mid-40-ish level is still where you guys see the business trending to over the next couple of years here?

Yes, it's a good question. I mean yes, in Q3 tends to be a little bit better rate as well just seasonality-wise. We'll see that come down a little bit in Q4. Our goals are still the same long term. We still like that spot long term, and we're making good progress. The merchant team has done an excellent job this year, making progress towards that. We still are on a journey. '25 and '26 are build years as we're building against that. So I wouldn't say it's perfectly linear. You can see that in our Q4, we're going to have some LIFO expense. It's going to have an impact on it. But net-net, we are happy with the progress we're making, still committed to that goal. We think that's a good strategic long-term play for us and where we want to be from a gross margin perspective.

And then just another follow-up on really sort of the comp message this morning. So we think about like-for-like inflation, same SKU inflation going to 4%, maybe 4.5% in the first quarter of next year. The guidance for the fourth quarter, the implied comp guide is 1% to 3%. And so what is the sort of takeaway today around transactions? Are you guys seeing weakness in pro transaction? Or is sort of the spread and moderation expected between same-SKU inflation and the consolidated comp, really just DIY related? Any sort of color on sort of comp complexion and message around that for the fourth quarter specifically.

Yes. I think in Q4, moderating both of them, both Pro and DIY, but we are seeing a little bit more on the DIY side. We kind of talked about some pressure we think the consumer is feeling right now and still trying to understand is the short term in nature? What could be some of the drivers? Is it price elasticity, I think we've heard in the industry, there's some questions around that as well, but more on the DIY side, but we're seeing moderation in both of them going in Q4. Also, Q4 is the most volatile quarter of the year. You've got a lot of weather that impacts that quarter. We see it every year from a seasonality standpoint. And when it's colder out there, people are less have to do their oil change. Just natural over seasonality. So we expect it to be a little volatile. We've seen a little softness. We've seen both moderate, but more pressure on the DIY side in the quarter. But still, all those scenarios play out within the guidance we just provided.

The next question comes from Michael Lasser from UBS.

To what extent did the decision to trade some margin for sales or vice versa impact the quarter, meaning you've foregone some lower-margin business that could have negatively impacted your sales, but boosted your gross margin, if you could quantify any of those actions in the third quarter and to the degree to which it might impact your fourth quarter, that would be super helpful.

Yes, Mike, I appreciate the question. So what we're doing from just a pricing standpoint, I just want to talk about our strategy around pricing. We are going to remain a competitively priced business here. We're not trying to be lower in the market. We're not trying to be higher in the market. So we're not trying to find ways to get margin out of that. So we're staying competitively priced. We like our pricing position. We think we are a fast follower in the market. So not trying to harvest margin not in the appropriate way. We're sticking to that strategy going forward. So we're not doing that. There are some areas of our business that we will look to make more profitable and look at certain accounts, et cetera, that we're working through. And I'll let Shane talk a little bit more about that. But we're going to stick to our strategy, which is we're going to be competitively priced in the market. We're a fast follower and that's what we're continuing to do.

Michael, just touching on the Pro side. We think our biggest opportunity is with Main Street. So those are smaller accounts. Typically, the margin is a little bit higher. We certainly appreciate our national account and larger customers, and we're working closely with them and we've got a series of initiatives. But we don't want that to come at the expense of seeing the small 2- or 3-bay garage at the end of the Main Street. And so we're making sure that our outside sales team members aren't skipping by those accounts, and we're making sure that as we interact with them, they understand the breadth of capabilities that we offer to include things like our TechNet services. And so as we do that, we're gaining traction. So that's something we will look to do going forward as a current emphasis as well.

My follow-up question is, Shane, you consecutively and repeatedly used the term "non-linear" to describe the path forward for Advance Auto Parts. How should we interpret that from a numbers perspective? Does that mean there'll be some quarters maybe when it's hot on the East Coast and there's outperformance in those markets that Advance can rip off a 3 comp and report several hundred basis points of gross margin expansion and then vice versa. The next quarter, it might be a flat to 1% and for less gross margin expansion. How would you characterize that nonlinearity that you would use to describe how the path forward might look over the next couple of years.

Yes. I think -- if you're okay, Michael, I'm going to talk about sort of tangible activities. So think about if you close a DC and you'd say, okay, if I'm going to combine this DC with that DC, there ought to be x dollars of value that comes from it. But when we start to do that process, we anticipate what the closure expenses will be, but we might take several hundred stores of replenishment from the old DC to the new DC and there's cost there. There's friction in terms of getting the routing set up, maybe there's particular products that the closing DC had that we need to get sourced. And so it's lumpy. It's not something where we say, okay, we can take the cost of the $100, we'll say it's $20 a month over the next 5 months. We may have more costs sooner. We may have costs that emerge at the end. Similarly, the benefits may not endure at the tempo that we've indicated.

So there's a sort of micro example. Now imagine you're undertaking big moves like that. across everything we do. Maybe there's a big software implementation that we want to do as part of routing. And so that might take months to implement and the months past that. As we do the assortment, we like the lift we've got. But reminder, we're changing out hard parts across the network and so some of these are slower term products. It takes time for it to infuse. We're going to Main Street customers. But the first time you walk in, if they're working with another supplier, they may be happy to see us, but maybe it takes 4 visits, 5 visits, 10 visits before they say, "Hey, we'll give you a try".

So discrete predictability on exactly what the cost will be and when the benefit comes is hard. And so we end up with fits and starts. There are periods where we've got benefit that comes at a quicker tempo. There are situations where we have costs that are less or more. And so that's why I emphasize the nonlinear part of it.

What we are pleased with, though, is when you look back over periods of time, you can see clear progress on those three strategic pillars. We think we've got the right pillars. We think we have the right subset of activities and we're setting against it. And if you know the strategy is right, if you know you've got the large muscle mover activities. And if you know the industry backdrop is a good one, then we're going to keep at it.

And Mike, I'll just add just tangible ones that have happened this year, big initiatives, we accelerated the assortment work as we saw [indiscernible]. So that's acceleration. But then on the store operating model, we paused to test longer and further to learn more than what we really -- so we knew when we roll it out, we've got the right operating model. Now that didn't go with our plan. And the stores and the teams had to overcome the challenges in productivity that we would have likewise had seen if we would have rolled it out earlier with the right model. So it's not perfectly linear because we're testing our way into things, and some are going to be delayed and we're purposely delaying them for the right reasons. And some of them will accelerate when we can. And so that's some of the nuance that we're talking about, less about weather, more about the initiatives, the rollout of those. And to Shane's point, when do we move up the call list with the Pro.

The next question comes from Michael Baker from D.A. Davidson and Co.

Maybe following up on Mike Lasser's question. You used the language a couple of times of 2025 and 2026 being build years. What does build years mean? I mean, does that mean in a way, obviously, margins are expanding already, but are you still investing more? And then the idea is that it really -- the margin expansion really kicks in more in 2027, is that the right way to interpret build year?

Yes. So by build year, it means we're still doing large-scale activities to set the company up for success. So let's do an example. So market hubs we didn't have any. And so we'll end the year with 33, but that's half of what we envision having by mid-2027. So there's going to be a ton of activity in the real estate team around making that happen. So that's a good example.

On our DC consolidation, we're continuing now as we move to the smaller network, how do we optimize that, how do we optimize our routing, how do we optimize our lines per hour. On our new store opening. We put out 30 NSOs, but we want to continue to amplify the number that we do for that. And so by the way, if you want to open a single store, you got to go prospect 10 sites. So there's huge activity going on in each of the pillars to get to more what that run rate will be longer term. And that's really what creates that nonlinear dimension.

Yes, I think it's the initiatives that we've laid out, the three pillars we've laid out was not a 2025 and done and then see the benefit, it is a 3-year plan that we've laid out. That strategy, unchanged. And we're going to continue to execute against that.

I think -- we just talked about the operating model being one in our stores that we're going to start rolling out in Q4, which we'll roll out into next year. And that's getting our assets right, the trucks in the right place, the hours to meet the demand in our stores. There's technology build. We're building different technology capabilities. Think of our pricing tools that are coming later this year and into next year. We're partnering with Palantir as part of some of the AI work that we're implementing. A lot of that technology takes time to build, and that will start building into next year as well.

So the build over the next two years is as we ramp up our strategy in these three pillars, it's not a 12 months and done, it is -- it's going to be a 2-year plan to really start to see the fruits of it.

Okay. That makes sense. And if I could ask one more follow-up and maybe not a fair question for you guys. So if not, feel free to pass, but for whatever it's worth, the consensus estimates aren't even close to a 7% margin in 2027. And are your conversations with investors or analysts, what do you think people are missing relative to your plan?

Well, I'll start, and I'll let Shane jump in. I'll just say the first thing is our strategy is unchanged. It's still our goal. But it is early. We're two quarters away from when we closed our stores. So we're still early in this turn and so I think there's a need to see proof points, and that's why we are giving more metrics and data around what we're seeing as we're going through this process. And to be two quarters past closing all of our stores and the decisions that we've made around accelerating the assortment work accelerating market hubs. We brought in -- we're opening more market hubs this year. We're trying to get proof points of how things are working. Now we have to show it in our numbers, and it's still to me early. But you'll have to ask everyone else why they don't believe in that goal. But I think to us, this is a build.

Yes. And again, I don't know what goes into any analyst specific assessment. But as leaders and as a company, we have to build a track record. We have to demonstrate what the say-do ratio is. And so early on, our pledge is we're focusing on auto parts. We're an auto parts retail. Second is we're trying to create a clear strategy that fits that and that's understandable externally. More importantly, it's understandable internally and by our customer. Third, we're being decisive in our approach in getting there. And we'll make tough decisions, and we'll do those things. Again, what would an auto parts retailer do to be successful in a particular situation. And then lastly, we'll be transparent. We'll share with you what our progress is. You guys have to then take all of that and say, "Hey, to what degree do I think that, that's going to occur or not" and then put it in the long-term perspective. But we'll be out here doing that each and every day. And notably, in our footprint. Now we're one or two in terms of store density, getting our stores better. That's really -- we're operating under the mantra of an inverted pyramid, which our customers come first. And then by the way, everything runs through the front line. And so we'll keep doing that and focusing on auto parts with decisive activities and hopefully, there'll be some closure in terms of what you guys think and what we're seeing, and we look forward to sharing that along the way.

That does conclude our Q&A session for today. So I'll hand back over to the CEO, Shane O’Kelly, for closing remarks.

We want to thank everybody. In particular, thank the men and women of Advance Auto Parts for what they're doing as we complete this turnaround journey, and we'll look forward to sharing additional updates on both the close out of the year and what we see for 2026 in our end of year call in February. So we appreciate you joining us today. Thanks very much. Take care. Bye-bye.

Thank you. This does conclude today's call. Thank you for joining. You may now disconnect your lines.