David Hay — Friday POW!: Advance Auto Parts (AAP) — paving the path to profitability
"Value trap or opportunity?" — a multi-year retail turnaround entering the "let's see if it's working" phase, with the next earnings report the key catalyst.
One-line take: This week's POW! is Advance Auto Parts (AAP) — "value trap or asymmetric upside?" A multi-year turnaround under CEO Shane O'Kelly (ex-HD Supply): phase one plugged solvency risk (the $1.5B WorldPac sale, $1.2B after tax); phase two stabilized the business — closed 500+ company stores + ~200 independents, cut distribution centers from 38 to ~16, built "Market Hubs," and delivered AAP's first positive full-year comps after three years of declines with adjusted operating margin +200bps to 2.5%. Now in the "let's see if it's working" phase: the next earnings report must show comp acceleration, margin progress toward 3.8–4.5% FY26 guidance (vs a 10–12% history), and $160M FCF. AAP trades at a deep discount to AutoZone/O'Reilly (14–18%+ margins) because margins are still 2–4% — so, as with all Haymaker turnarounds, P/S is the key metric and a re-rating could double the stock (12–24 mo). Risk-aware: it's run from the lows then eased $70→$59 — take a partial position / dollar-cost-average; "an investment, not a trade."
1. Stocks & names mentioned
| Ticker | Name | Research | View | What he said | At |
|---|
| AAP | Advance Auto Parts | QT · SA · STK · FA | Positive | Pick of the Week — a multi-year turnaround (CEO Shane O'Kelly, ex-HD Supply) entering the "let's see if it's working" phase. Phase 1: WorldPac sale ($1.5B / $1.2B after-tax) fixed solvency; Phase 2: 500+ stores + ~200 independents closed, 38→~16 DCs, Market Hubs, first positive full-year comps in 3 years (+1.1% Q4), adj. op margin +200bps to 2.5%. Upcoming earnings is the catalyst — wants comp acceleration, margin toward 3.8–4.5% FY26 guide (vs 10–12% historically), $160M FCF. Deep discount to AZO/ORLY because margins are still 2–4%; on P/S (the turnaround metric) the stock "could easily surge 100%, or more" over 12–24 mo. Run-up then eased $70→$59 — partial position / DCA; "an investment, not a trade." | read |
| AZO | AutoZone | QT · SA · STK · FA | Neutral | Peer benchmark — cited (with O'Reilly) as the high-margin comparison: AZO/ORLY run 14–18%+ operating margins vs AAP's 2–4%, the gap AAP must close for the re-rating. Not a call on AZO itself. | read |
| ORLY | O'Reilly Automotive | QT · SA · STK · FA | Neutral | Peer benchmark — the other 14–18%+-margin auto-parts comp AAP is measured against. The margin gap is the re-rating opportunity, not a call on ORLY. | read |
References only (not tickers): WorldPac (the divested wholesale-parts business), HD Supply / Home Depot (O'Kelly's prior role), and Jim Cramer (the humility jibe). The image-only Buy List / Trims-Holds are not text-readable, so portfolio.json is unchanged.
2. Talking points
"Value trap or opportunity?" — the framing
- "You might be reading this and thinking we're crazy" given AAP's dismal chart — but "under the hood" is a turnaround that "could be a double in the coming 12 months… if they can get it right," with the multiple re-rating "in a hurry" if they do.
The downfall — why the stock collapsed
- Shares peaked in 2022, then slid on years of declining same-store sales, revenue contraction, and margin pressure in a competitive industry.
The turnaround structure — a three-year plan
- New CEO Shane O'Kelly (ex-HD Supply) launched a multi-year plan: simplify the business, close underperforming stores, optimize the supply chain / build market hubs, and expand margins.
Phase one — fix solvency first
- O'Kelly sold the WorldPac wholesale-parts business for $1.5B ($1.2B after tax): a cash injection to "stave off solvency risk" (the first thing to address in any turnaround) and a way to focus on the retail storefront.
Phase two — stabilize
- The 2027 plan's targets — stop comp declines, improve margins, simplify — "which they've done." The early years were bumpy (the stock nearly tripled off the lows in 2025 then fell back — "the nature of the beast in turnarounds").
Store rationalization, then growth
- Closed 500+ company-owned stores and ~200 independents (2024–early 2025), removing low-productivity drag; then shifted to growth — 30 new stores in 2025, 100+ more planned through 2027, including larger "Market Hubs."
Supply chain — "a big deal"
- Consolidated distribution from 38 legacy DCs to ~16 modern ones; Market Hubs carry far more SKUs for faster/same-day delivery. Result: better availability, ~10-minute delivery-metric improvement, higher in-stock rates — all feeding margin improvement.
It's working so far — the 2025 results
- First positive full-year comps after three years of declines; adjusted operating margin +200bps to 2.5%; Q4 +1.1% comps with stronger margins; balance sheet improved on WorldPac proceeds + cost actions. The "stabilization phase" is complete.
The three metrics to watch in the next report
- Comps: must show acceleration ("a must") to confirm the sales decline is over.
- Operating margin: sequential progress toward 3.8–4.5% FY26 guidance (vs a 10–12% history) — proof the cost savings reach the bottom line.
- Cash flow: from negative to a projected $160M FCF this year — "the heart of any business" and the marker the hard part is over.
Valuation — the P/S re-rating
- AAP trades at a deep discount to AZO/ORLY (14–18%+ margins) because its margins are still 2–4%. On P/S — "usually the most critical valuation metric" for turnarounds — the upside is impressive; a re-rating could double the stock or more over 12–24 months, with new 52-week highs possible in 2–3 quarters if comps and FCF improve.
Technicals and the conclusion
- "Not a technical story," but the chart has broken its downtrend (crucial for a turnaround). Swing-high targets: $65.20 (52-wk high), $70 (pre-Summer-2025), then ~$90 (March-2024 highs) on real improvement.
- The groundwork is laid for a big re-rating, and Haymaker is "coming in during the 3rd or 4th innings," not the start. But it's run up then eased $70→$59 — take a partial position / dollar-cost-average; the risk-averse can wait for clarity or a 10–20% correction. Humility over a crystal ball. An investment, not a trade.
3. In plain English
AAP — Advance Auto Parts Positive
Advance Auto Parts is a national auto-parts retailer that fell on hard times — sales at existing stores shrank for years and the stock collapsed from its 2022 peak. A new CEO (Shane O'Kelly, who ran Home Depot's supply business) is roughly three years into fixing it. First he sold off a side business (WorldPac) for $1.5B to make sure the company wouldn't run out of money. Then he shrank it to health: closing more than 500 weak stores, slashing the number of warehouses from 38 to about 16 modern ones, and building bigger "hub" locations that stock more parts and deliver faster. The early payoff is showing — 2025 was the first year in three that same-store sales grew again, and profit margins started to climb.
The bet now is that the recovery accelerates. The key tell is the next earnings report: Haymaker wants to see sales growth speeding up, profit margins inching toward the 3.8–4.5% the company is guiding to (it used to earn 10–12%), and the company finally generating cash (about $160M projected this year) instead of burning it. The opportunity comes from the gap to rivals: AutoZone and O'Reilly earn 14–18%+ margins while AAP earns 2–4%, which is exactly why AAP is so cheap. Because earnings are temporarily tiny, Haymaker again uses price-to-sales (not P/E) to value the turnaround — and on that basis the stock could double or more over the next 12–24 months if the plan keeps working. It's risky and has already bounced around (recently easing from $70 to $59), so the advice is to buy gradually (dollar-cost-average) a partial position — "an investment, not a trade."
Summary derived from the paid Haymaker newsletter (text in transcript.txt) for personal study. Not investment advice. © Haymaker / David Hay for source material.