Title: Friday POW! — Advance Auto Parts (AAP): Paving The Path to Profitability Show: Haymaker — Friday POW! (Pick of the Week) Author: David Hay — The Haymaker Team (research/idea: Daniel Bustamante) Date: 2026-05-01 URL: https://haymaker.substack.com/p/friday-pow-bbc Length: written post (PAID), no timestamps Note: Full article body, lightly cleaned. The bottom "Buy List" and "Trims/Holds" lists render as images and are not captured. --- Our thanks to regular Team Haymaker contributor Daniel Bustamante for his excellent work and research on this Pick of the Week! edition. Paving The Path to Profitability Key Points: - Value trap or opportunity? A turnaround with the potential for large upside in the coming quarters. - The path has been paved in prior years for this turnaround and we're now in the next phase of seeing the results - The name is Advance Auto Parts — value trap or asymmetric upside with a potential re-rating if they can get this right? You might be reading this and thinking we're crazy to look at this name given its dismal price chart, but before you write this off, let's have a look under the hood on what could be a double in the coming 12 months ... again, if they can get it right, and if they do the re-rating in the multiple comes in a hurry. The story of Advance Auto Parts is that of a strategic turnaround which started a few years ago with their new CEO Shane O'Kelly — previously CEO for HD (Home Depot) Supply for three years. While this name is a bit on the riskier side, it's encouraging that same-store sale comps have come back along with margins, which is why we believe we're going to see a significant re-rating. To us, this makes AAP quite compelling on a long-term basis given how much upside there could be if the revamp works. However, we concede this one has run a lot this year; therefore, establishing a partial position is advisable. More risk-averse investors could even wait to see if it doesn't correct further (it has eased from $70 to $59). Let's dive into a quick backstory of the downfall that led to the turnaround because understanding what Shane O'Kelly and the team have faced is a major factor in what we as investors (and the market at large) want to see going forward. And, the earnings release coming up is a key catalyst for how the story will play out. Shares of AAP peaked in 2022 and the market price has been on a slippery slope since then due to a number of factors, including: - Declining comparable store sales for several years. - Revenue contraction (e.g., negative growth in recent periods). - Margin pressure and operational challenges in a competitive industry. It's important for investors to understand that this is a multi-year turnaround (often called a three-year plan), with heavy focus on: - Simplifying the business - Closing underperforming stores (hundreds closed) - Supply-chain optimization and market hubs - Margin expansion and cost control In his first year, O'Kelly launched this strategy with the sale of AAP's wholesale parts business, WorldPac, for $1.5 billion ($1.2 billion after taxes), which served two key purposes: - A cash injection to stave-off solvency risk (very key) - To focus on the retail store front business In turnarounds, the first critical area investors want to address is solvency risk. So, we need a full picture of the runway for the CEO and team to implement their plan of action, and obviously plugging "the first hole" via a cash injection is required. That was phase one. Phase two consisted of their 2027 turnaround plan and target of stopping same-store sales declines, improving margins, and simplifying the business, which they've done. Why is this important now? Well, the first few years were bumpy as investors watched these numbers closely to see if the plan was working, hence the large swings in the equity. In 2025, it nearly tripled from the lows, then subsequently fell back. Again, this is the nature of the beast in turnarounds: there are many bumps on the way back to a growth phase; aka, the hockey-stick or re-rating of the equity. To be clear, we think AAP is close to achieving this in the next two to four quarters given we're coming in a bit later in this turn. So what have they done so far in this plan and why does it matter? Closing Unprofitable Stores/Opening New Ones - Closed over 500 company-owned, underperforming stores and ~200 independent locations (mostly in 2024 and early 2025). - This removed drag from low-productivity stores and reduced operating costs. - After completing the major closure phase, the company shifted to growth mode: opening new stores (30 in 2025, with plans for at least 100 more through 2027), including larger "Market Hubs." Improve the Supply Chain (A Big Deal!) - Major consolidation of the distribution network: reducing from 38 legacy distribution centers down to a more efficient 12-16 larger, modern facilities (they ended 2025 near 16 DCs). - Building Market Hubs — larger facilities that carry significantly more SKUs and enable faster/same-day delivery to surrounding stores. - Result: Improved parts availability, reduced delivery times (company has reported 10-minute improvement in key metrics), and higher "in-stock" rates. All of this matters for a simple reason in ANY business: margin improvement. The cost savings from store closures that were previously a drag help with growing margins, as do cost savings through refining the supply chain (which was obviously bloated). All of this is targeted at producing positive FCF in 2026, driven by same-store sale increases (a key metric with the upcoming earnings report). And it's working so far. 2025 Results: First positive full-year comparable store sales growth after three years of declines. Adjusted operating margin expanded by over 200 basis points (to 2.5%). Q4 2025 showed continued momentum with +1.1% comps and stronger margins. Balance sheet improved thanks to Worldpac proceeds and cost actions. All of this constituted the now-completed "stabilization phase", so at this point we're in the "Let's see if it's working" phase. As mentioned earlier, we're going to start to get that data in the upcoming earnings release. What we specifically want to see are a few key metrics (and this is really critical here because of the asymmetric upside for a significant re-rating), namely: - Comparable Comps (Same-store sales): Needs to show acceleration and improvement as it will signal that the sales decline is over. This is a must. - Operating Margin: Sequential progress toward the 3.8 - 4.5% full-year 2026 guidance showing us that their turnaround plan/cost savings is hitting the bottom line. (Note: in the past, its operating margins were in the 10 - 12% range.) - Cash Flow: AAP has been negative of late, but this year they're projected to hit $160 million in FCF. As we all know, this is the heart of any business and in a turnaround it's the key marker that the "hard part" is over. Are there other metrics to be considered? Yes, but these are the key ones we see at this point, primarily because the prior groundwork they put in with these closures and supply-chain fixes created the "hard part" for investors; now we get to assess their efficacy. AAP currently trades at a deep discount to peers because its operating margins are still very low (2 - 4% range in 2026 guidance) compared to peers (Auto Zone & O'Reilly) 14 - 18%+ but this is where the "magic" can happen on their re-rating. If comps and FCF improve, then this can move pretty quickly to new 52-week highs in the next two to three quarters. And if FCF stabilizes and margins continue to really expand, in the next 12 - 24 months we may see AAP's share price double… or more. As you can see from the below graphic of its price/sales and P/E ratios, it looks middling on the latter; but on the former, the upside is impressive. This disparity is due to the aforementioned profit-margin collapse. With turnaround stories, the price/sales ratio is usually the most critical valuation metric. This implies AAP's stock price could easily surge 100%, or more. This potential for a substantial uprating of the price-to-sales ratios makes AAP appealing to us. The Technicals Normally, we talk about technicals and price as the last portion of our weekly stock picks, and we'd normally dive into them more here, but this is not a technical story. Hence, the emphasis in this analysis on the turnaround aspect. However, the chart still plays a role. $65.20 is the 52-week high from last year and prior to the Summer of 2025 the equity traded to $70/share. Those are two reasonable swing highs that we could see if this earnings report shows us improvement. However, if it does show improvement, we could test the March 2024 highs again near $90. While this is obviously not the multi-year upside range expansion (i.e., breakout) we are such big fans of, it is nevertheless very encouraging that the chart clearly reveals a broken downtrend. With turnarounds, that's a crucial development. Conclusion We wouldn't call this a "high-risk, high-reward" play, but it is a situation where the groundwork has been laid for a re-rating of the equity in a big way, which makes it appealing. Importantly, we're not coming in during the initial turnaround phase (which is key); rather, we're coming in during the 3rd or 4th innings and there's still a lot of baseball to play. So this boils down to whether or not we think these changes have made an impact (which they have) and then, to the final question, to what effect has the impact of that been? If it is extremely positive… hold on, because we're going to fly faster than the market thinks! Yet, as we noted earlier, risk-intolerant investors may want to hold off for now, either for greater clarity on AAP's revival or for a 10 - 20% share price correction. This situation could be an excellent opportunity to pursue a gradual dollar-cost-averaging accumulation process. Doing so is a tacit admission that none of us has a crystal ball… not even (especially) Jim Cramer. When it comes to succeeding in the financial markets, one of the most important personality traits is humility. The Haymaker Team