We’ve described 2024 as a challenging year for essentials-based retail, including the auto parts sector. After a booming 2021–2023 fueled by an aging vehicle population (PARC), increased miles driven, ample consumer cash, and inflation-driven price increases without resistance, the second half of 2023 became more difficult. AutoZone and O’Reilly intensified competition in the commercial/DIFM segment (roughly half the industry's volume. This has put significant pressure on Advance Auto Parts, leading to market share losses, declining profitability, reduced cash flow, halted expansion, asset sales, and management turnover.
This week, Advance reported disappointing Q3 2024 results, announcing plans to close 727 stores (roughly 15% of its locations) and 21 distribution centers by mid-2025, alongside a $500 million cost-cutting initiative. The closures include exiting the Western U.S., notably California, Arizona, and Nevada, as shown in their presentation (below).
While the West represents less than 5% of visits, Los Angeles had been a key focus area, including the acquisition of Pep Boys’ 109 locations in 2021.
On the decision to exit these markets, Advance Auto Parts CEO Shane O’Kelly stated, “We expect to collaborate with landlords to exit leased store locations in a reasonable manner to manage the obligations on our balance sheet.”
Florida is a significant and highly penetrated market for Advance, as shown above. However, despite its importance to the company, Advance has lost market share in the state, while O’Reilly and AutoZone have increased their average visits per location and expanded their footprint. As such, Florida will be a key barometer for any potential turnaround for Advance.
In terms of operating metrics and financials, Advance reported a -2.3% decline in comparable sales, with operating profit essentially flat. Year-to-date cash generation (free cash flow) totaled $28 million on $7.1 billion in revenue, reflecting the operational challenges facing the business. Capital expenditures for the year are projected at just $200 million, significantly lower than O’Reilly’s nearly $1 billion. Retail sales per location for Advance stand at $1.77 million on a trailing twelve-month (TTM) basis, compared to O’Reilly’s $2.65 million. Comp transactions declined more sharply than sales, with the DIY segment down mid-single digits.
Regarding the closure plans, Advance will shutter 523 company-operated stores and 204 independently owned locations. (Advance also owns the CARQUEST brand; these locations will be sold or rebranded as Advance Auto stores.) A histogram analysis of Advance's 4,200 locations (based on Placer data from April to August, excluding winter and hurricane seasons) reveals a skewed distribution, with 250 locations performing well below average and only 42% (1,800 locations) exceeding the average.
By contrast, O’Reilly’s visits histogram shows a much larger number of locations above average (26,600), with a tighter standard deviation—10% lower than Advance’s—indicating stronger site selection, store operations, and selling.
Advance disclosed that the stores marked for closure generate less than $1 million in annual sales, compared to $1.84 million for retained stores, and are unprofitable. This highlights the underperformance in Advance's portfolio relative to competitors.
Despite high competitive intensity, the auto parts retail industry remains highly fragmented, as highlighted in O’Reilly’s August investor presentation below. While Advance faces significant challenges, its scale provides advantages over smaller competitors, which account for 47% of the industry and are likely in even worse shape. This dynamic suggests further industry consolidation is on the horizon. Much of O’Reilly’s and AutoZone’s recent efforts have focused on expanding their commercial/DIFM business, a segment where Advance over-indexes at roughly 65% of its revenue compared to about 50% for the broader industry. However, this focus will intensify competition, making it increasingly difficult for Advance to gain share and maintain profitability in the commercial segment, where we expect consolidation to accelerate.
Advance’s key shortcomings in recent years have been in service and delivery speed to commercial accounts, which are critical for quickly turning shop bays—a process reliant on having parts in stock and delivered promptly. Addressing these issues is especially challenging during retrenchment, as it works against the positive network effects of growth and expansion. To counter this, Advance plans to densify within its remaining markets, adding 100 locations annually. However, this strategy hinges on a successful turnaround in profitability and cash generation, as Advance is likely limited to self-funding its initiatives going forward.
