US Aging Fleet And Urban Trends Will Sustain Demand

Key Takeaways

• Supply chain improvements and technology adoption are expected to lower costs, expand margins, and increase earnings over time.
  
• Focus on growing commercial business and refreshing stores aims to drive stable, recurring revenue and better customer loyalty.
  
• Persistent margin pressure, execution risks, negative cash flow, and structural industry changes threaten profitability, future growth, and financial stability if not strategically addressed.

Catalysts

Engages in the provision of automotive aftermarket parts in the United States and internationally.

• The continued aging of the U.S. vehicle fleet and the fact that over 90% of Advance Auto Parts' business is tied to nondiscretionary maintenance and repair creates a structurally high baseline for long-term demand, supporting steady or rising revenue growth as vehicles require more frequent parts replacement.
  
• Increasing vehicle miles traveled (VMT), combined with ongoing suburbanization and urban commuting trends, is expected to drive elevated parts wear and tear and create a sustained volume tailwind for both the DIY and especially the DIFM (Pro/commercial) segment-bolstering comparable sales and overall net sales over time.
  
• Acceleration of supply chain optimization-such as the consolidation of distribution centers, market hub rollout, and adoption of advanced technologies (e.g., AI for assortment planning)-should drive reduced operational costs and improved inventory turnover, facilitating operating margin expansion and improved net earnings as initiatives ramp through 2026–2027.
  
• Strategic initiatives focused on expanding main street/commercial customer relationships, improving service speed, and increasing in-store SKU coverage are unlocking higher share within the "Pro" segment-positioning Advance Auto Parts to gain high-value, recurring revenue streams that enhance sales growth and earnings stability.
  
• Ongoing investments to refresh the retail store base and enhance the in-store customer experience-including significant catch-up maintenance CapEx-are aimed at sustaining DIY traffic, increasing loyalty, and supporting topline recovery, which should aid in revenue stabilization and margin improvement as the turnaround plan progresses.

Advance Auto Parts Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Advance Auto Parts's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -6.8% today to 3.3% in 3 years time.
• Analysts expect earnings to reach $300.1 million (and earnings per share of $4.91) by about August 2028, up from $-596.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $400 million in earnings, and the most bearish expecting $146 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.0x on those 2028 earnings, up from -5.7x today. This future PE is lower than the current PE for the US Specialty Retail industry at 19.0x.
• Analysts expect the number of shares outstanding to grow by 1.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.37%, as per the Simply Wall St company report.

Advance Auto Parts Future Earnings Per Share Growth

Risks

• The company faces significant exposure to tariffs, with approximately 40% of cost of goods sold subject to tariffs at a blended rate of about 30%, and management openly acknowledges that the impact is expected to be more pronounced in the near
• and medium-term; this creates sustained gross margin headwinds and increases risk to long-term profitability as persistent trade tensions or escalations could worsen the cost structure.
  
• Advance Auto Parts is in the early phases of a multi-year turnaround and explicitly describes many initiatives as "nonlinear," with visibility into the timing and magnitude of operational or margin improvements remaining limited and heavily dependent on successful execution and negotiation; this creates uncertainty for the pace and scale of top-line and margin growth, directly impacting earnings trajectory and investor confidence.
  
• The company recently undertook a major debt capital restructuring-including a $1.95 billion senior notes offering and a $1 billion new asset-backed revolving credit facility-to support supply chain financing and manage vendor relationships, but future operating cash flows are still forecast to be negative this year and rising interest expense is already weighing on earnings-with leverage management and regaining investment-grade credit status remaining a risk factor for net income and future financial flexibility.
  
• There is ongoing underperformance and uncertainty in the DIY segment, with management highlighting cautious consumer behavior, the potential elasticity risk from continued price inflation and tariffs, and pressure on lower/middle income cohorts; a prolonged consumer downturn or inability to reignite DIY growth could dampen revenue growth and compress net margins given the channel's contribution to the business mix.
  
• Secular headwinds-including the accelerating adoption of electric vehicles (EVs) with fewer traditional maintenance needs, growth of e-commerce direct-to-consumer auto parts sales, and increasing complexity of proprietary vehicle technology-stand to erode Advance Auto Parts' addressable market over the long term, putting pressure on future revenue, market share, and ultimately, earnings capacity if the company cannot evolve fast enough to counteract these industry shifts.

Valuation

• The analysts have a consensus price target of $52.6 for Advance Auto Parts based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $30.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.0 billion, earnings will come to $300.1 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $56.32, the analyst price target of $52.6 is 7.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.