ADVANCE AUTO PARTS INC

Advance Auto Parts, Inc. operates in the automotive aftermarket parts industry in North America, serving both professional installers and do-it-yourself customers. The Company's business is somewhat seasonal, with the highest sales usually occurring in the spring and summer months, and the fourth quarter is generally the most volatile as weather and spending trade-offs typically influence professional and DIY sales. The Company is influenced by general macroeconomic factors including inflationary pressures, global trade tariffs, global supply chain disruptions, cost of fuel, miles driven, unemployment rates, interest rates, consumer confidence and purchasing power, competition, changes in new car sales, economic and geopolitical uncertainty, and increased foreign currency exchange volatility.

The Company's primary competitors are both national and regional chains of automotive parts stores, including AutoZone, Inc., NAPA, O'Reilly Automotive, Inc. and Auto Plus, internet-based retailers, discount stores and mass merchandisers that carry automotive products, wholesalers or jobbers stores, independently-owned stores, and automobile dealers that supply parts. The Company believes that chains of automotive parts stores with multiple locations have competitive advantages in customer service, marketing, inventory selection, purchasing and distribution compared with independent retailers and jobbers. Following the completion of the store footprint optimization portion of the 2024 Restructuring Plan, the Company had the highest or second highest market share by store count in approximately 75% of its markets.

The Company generates revenue by offering a broad selection of brand names, original equipment manufacturer and owned brand automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy-duty trucks. Professional sales represented approximately 50% of sales in each of fiscal years 2025, 2024 and 2023. DIY customers are primarily served through the Company's stores, but can also order online to pick up merchandise at a nearby store or have their purchases shipped directly to them. The Company also serves 809 independently-owned Carquest stores with shipments directly from distribution centers.

The Company's product categories include Parts & Batteries, Accessories & Chemicals, and Engine Maintenance. Parts & Batteries includes batteries and battery accessories, belts and hoses, brakes and brake pads, chassis parts, climate control parts, clutches and drive shafts, engines and engine parts, exhaust systems and parts, hub assemblies, ignition components and wire, radiators and cooling parts, starters and alternators, and steering and alignment parts. Accessories & Chemicals includes air conditioning chemicals and accessories, air fresheners, antifreeze and washer fluid, electrical wire and fuses, electronics, floor mats, seat covers and interior accessories, hand and specialty tools, lighting, performance parts, sealants, adhesives and compounds, tire repair accessories, vent shades, mirrors and exterior accessories, and washes, waxes and cleaning supplies. Engine Maintenance includes air filters, fuel and oil additives, fuel filters, grease and lubricants, motor oil, oil filters, part cleaners and treatments, transmission fluid, and wiper blades.

The Company provides customers with quality products that are often offered at a good, better or best recommendation, differentiated by price and quality. The Company accepts customer returns for many new, core and warranty products, and customer returns have historically been immaterial. The Company also provides a variety of services at its stores free of charge to customers, including battery and wiper installation, check engine light scanning, electrical system testing, oil and battery recycling, and loaner tool programs.

In November 2024, the Company completed the sale of the Worldpac business for net proceeds of approximately $1.44 billion ¹ after transaction costs, the final working capital adjustment recorded in the fourth quarter of fiscal 2025 and excluding the impact of taxes. On November 13, 2024, the Company's Board of Directors approved a restructuring and asset optimization plan designed to improve the Company's profitability and growth potential and streamline its operations. During fiscal 2025, 39 stores were opened and 522 were closed, resulting in a total of 4,305 stores as of January 3, 2026 compared with a total of 4,788 stores as of December 28, 2024. On August 4, 2025, the Company issued $975 million ² in aggregate principal amount of 7.000% Senior Notes due 2030 and $975 million ³ in aggregate principal amount of 7.375% Senior Notes due 2033. The Company utilized a portion of the net proceeds to redeem in full its outstanding $300 million ⁴ in aggregate principal amount of 5.90% Senior Notes due 2026. The Company's Board of Directors has declared a quarterly cash dividend since 2006, and during fiscal 2025 the Company paid $60 million ⁵ in dividends. As of January 3, 2026, the Company had $0.9 billion ⁶ remaining available for repurchases of shares under the share repurchase program.

Net sales from continuing operations during fiscal 2025 were $8.6 billion ⁷, a decrease of 5.4% ⁸ compared with fiscal 2024, driven by lower sales as a result of store closures executed under the 2024 Restructuring Plan, partially offset by the impact of the 53rd week. Comparable store sales increased 0.8% ⁹. Gross profit margin from continuing operations for fiscal 2025 was 43.4% ¹⁰ of net sales, an increase of 592 basis points ¹¹ compared with fiscal 2024. Operating loss from continuing operations for 2025 was $43 million ¹², an improvement of $670 million ¹³ as compared to fiscal 2024. Diluted earnings per share from continuing operations resulted in earnings of $1.13 ¹⁴ during 2025 compared with a loss of $9.80 ¹⁵ in 2024. Cash flows used in operating activities from continuing operations was $46 million ¹⁶ during fiscal 2025, a decrease of 132.6% ¹⁷ compared with fiscal 2024.

The Company estimates that it will incur additional expenses of approximately $30 million to $40 million ¹⁸ through fiscal 2026, substantially all of which is expected to be cash expenses, primarily composed of lease and termination costs associated with closed stores and closed distribution center leases. In 2026, the Company currently anticipates that the Company's capital expenditures related to such investments will be approximately $300 million ¹⁹, reflecting continued investment in store infrastructure upgrades and the growth of our store and market hub footprint, but this amount may vary depending on business conditions and other factors.

The Company is executing supply chain initiatives to drive efficiency, improve inventory availability and establish a scalable foundation to support merchandising precision and profitable growth. The redesign is intended to leverage current assets and operate fewer, more productive distribution centers that focus on replenishment and move more parts closer to the customer. To achieve this plan, the Company is in the process of converting certain distribution centers and stores into market hubs, and opening new market hubs. As of January 3, 2026, the Company operated 19 distribution centers, including 3 in Canada, ranging in size from approximately 70,000 to 943,000 square feet with total square footage of approximately 7.2 million, and also operated 33 market hub locations.

The Company continues to make progress on the various elements of its business plan, which is focused on improving the customer experience, margin expansion, and driving consistent execution for both professional and DIY customers. The Company has undertaken planned strategic actions to help build a foundation for long-term success across the organization, which include completion of the optimization of our U.S. asset footprint under the 2024 Restructuring Plan, performing an assessment and beginning initiatives to improve the productivity of all assets, including Company-owned stores and Carquest Independents, reducing costs to remain competitive while reinvesting in the frontline, making organizational changes to position the Company for success, and consolidating the Company's supply chain and converting distribution centers and stores to market hubs to create economies of scale, improve service and parts availability and optimize transportation routes.

The Company's primary capital requirements have been the funding of the Company's investments in information technology, supply chain, e-commerce, new greenfield store and distribution center sites and enhancements and/or major renovation projects of existing stores. The Company leases approximately 80% of the Company's stores. The Company's capital expenditures were $252 million ²⁰ in 2025, an increase of $71 million ²¹ from 2024, driven by increased capital spending for store renovations.

The Company's Board of Directors has declared a quarterly cash dividend since 2006. Any payments of dividends in the future will be at the discretion of the Company's Board of Directors and will depend upon the Company's results of operations, cash flows, capital requirements and other factors deemed relevant by the Company's Board of Directors. The Company's new ABL Facility has certain restrictions that may limit the Company's ability to increase the amount of the Company's cash dividends above its current levels. As of January 3, 2026, the Company had $0.9 billion ²² remaining available for repurchases of shares under the share repurchase program. Share repurchases are generally permitted under the Company's ABL Facility; however, under certain circumstances, the Company's ability to repurchase shares may be restricted.

The Company is exposed to risks from an unstable global economic and geopolitical landscape. During fiscal 2025, new global trade tariffs were imposed on imports to the U.S., including tariffs on imports from various countries from which the Company directly or indirectly imports and/or sources merchandise, including Canada, China and Mexico, among others. Various modifications and delays to the U.S. tariffs have been announced and further changes are expected to be made in the future, which may include additional sector-based tariffs or other measures. The ultimate impact of tariffs on the Company's business will depend on several factors, including whether additional or incremental U.S. tariffs or other measures are announced, revised, or rescinded, to what extent other countries implement tariffs or other measures in response, and the overall magnitude and duration of these items.

The Company's reliance on suppliers, including freight carriers and other third parties in the Company's global supply chain, subjects it to various risks and uncertainties. The Company sources the products it sells from a wide variety of domestic and international suppliers, and places significant reliance upon various third parties to transport, store and distribute those products. The Company's financial results depend on it securing acceptable terms with its suppliers for, among other things, the price of merchandise the Company purchases from them, funding for various forms of promotional programs, payment terms and provisions covering returns and factory warranties. If suppliers increase prices charged to the Company for products, including transportation and distribution, as a result of factors such as tariffs, heightened trade compliance and sanctions enforcement, inflation or the cost of participating in vendor financing programs, it may negatively impact the Company's results.

The Company faces material risks from its significant level of indebtedness, which as of January 3, 2026 totaled $3,412 million ²³ in long-term debt, and could restrict operations, limit ability to obtain additional financing, and require a substantial portion of cash flow to service debt. The Company is exposed to risks from global trade tariffs imposed during fiscal 2025 on imports from Canada, China, and Mexico, among others, which may impact product cost, pricing, and supply chains. The Company's reliance on suppliers subjects it to risks including price increases, supply disruptions, and the financial instability of key vendors, as evidenced by a $28 million ²⁴ non-cash charge for expected future credit losses on vendor receivables from a vendor that filed for Chapter 11 bankruptcy. The Company's restructuring efforts under the 2024 Restructuring Plan, which incurred $159 million ²⁵ and $680 million ²⁶ in expenses in fiscal 2025 and 2024 respectively, may not achieve expected cost reductions or benefits. The Company also faces risks from the potential inability to successfully implement its business strategy, including initiatives across merchandising, supply chain and store operations, which could adversely affect business, financial condition, and results of operations.

Management's message emphasizes the Company's progress on its multi-year strategic plan focused on improving the customer experience, margin expansion, and driving consistent execution for both professional and DIY customers. Key themes include the completion of the optimization of the U.S. asset footprint under the 2024 Restructuring Plan, the issuance of $1.95 billion ²⁷ in Senior Unsecured Notes and redemption of the Company's 5.90% Senior Notes due March 9, 2026, the termination of the prior revolving credit facility and replacement by a new asset-based loan revolving credit facility, performing an assessment and beginning initiatives to improve the productivity of all assets, reducing costs to remain competitive while reinvesting in the frontline, making organizational changes to position the Company for success, consolidating the Company's supply chain and converting distribution centers and stores to market hubs, and finalization of the sale of Worldpac in fiscal 2024 and the subsequent finalization of customary working capital adjustments in January 2026. Management also noted that the Company estimates it will incur additional expenses of approximately $30 million to $40 million ²⁸ through fiscal 2026, primarily related to costs associated with closed stores for the termination and exit of certain leases.