ADVANCE AUTO PARTS INC (AAP)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended January 3, 2026 (filed with the SEC on February 13, 2026) which the Company refers to as the “2025 Form 10-K”), and the Company’s unaudited condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report. The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full year. Consistent with the previous fiscal year, the Company’s first quarter of the year contained sixteen weeks. The Company’s remaining three quarters each consist of twelve weeks.

First Quarter Fiscal 2026 Management Overview

The Company’s financial results for the first quarter of 2026 includes:

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Net sales during the first quarter of fiscal 2026 were $2.6 billion, an increase of 1.2% compared with the first quarter of fiscal 2025. Comparable store sales increased by 3.5%.

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Gross profit margin for the first quarter of 2026 was 45.1% of net sales, an increase of 221 basis points compared with the first quarter of fiscal 2025.

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Selling, general and administrative expenses, exclusive of restructuring and related expenses for the first quarter of fiscal 2026 were 41.3% of net sales, a decrease of 216 basis points compared with the first quarter of fiscal 2025.

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The Company generated a diluted earnings per share of $0.39 during the first quarter of fiscal 2026, compared with a diluted earnings per share of $0.40 for the comparable period of 2025.

Business and Risks Update

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.

On February 20, 2026, the U.S. Supreme Court overturned certain U.S. tariffs imposed under the International Emergency Economic Powers ("IEEPA") Act. During fiscal 2025, the Company incurred product costs directly related to the IEEPA tariffs. Tariffs directly paid by the Company are subject to direct refund via the IEEPA tariff refund process. Given the significant uncertainty around the recovery of tariffs that were previously paid, the Company has not recognized any amounts related to IEEPA tariff recoveries within its condensed consolidated financial statements as of April 25, 2026. The Company will continue to assess the recoverability of these tariffs, and will recognize any recoveries when realized or realizable, the amounts of which could be material to the Company’s condensed consolidated financial statements.

The recent geopolitical events in the Middle East have caused significant disruption in the normal flow of oil, refined petroleum products and related commodities, which has increased the price of oil and non-petroleum products. Although the length and impact of these events are highly unpredictable, they could lead to market disruptions, including significant volatility in prices, supply, credit and capital market, consumer behavior and supply chain disruptions. These items, along with actual or perceived weakness in the economic and business climate, could have an adverse impact on our financial condition and results of operations in future periods.

Industry Update

Operating within the automotive aftermarket industry, the Company is influenced by a number of general macroeconomic factors, many of which are similar to those affecting the overall retail industry. In addition to the “Business and Risk Update” section

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included within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, these factors include, but are not limited to:

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Significant changes in U.S trade policies, including the global trade tariffs

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Inflationary pressures, including logistics and labor

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Global supply chain disruptions

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Cost of fuel

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Changes in the number of miles driven

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Unemployment rates

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Interest rates

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Consumer confidence and purchasing power

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Competition

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Changes in new car sales

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Economic and geopolitical uncertainty

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Foreign currency exchange volatility

While these factors tend to fluctuate, the Company remains confident in the long-term growth prospects for the automotive parts industry.

Stores

The key factors used in selecting sites and market locations in which the Company operates include population, demographics, traffic count, vehicle profile, number and strength of competitors’ stores and the cost of real estate. During the sixteen weeks ended April 25, 2026, four stores were opened and one store was closed, resulting in a total of 4,308 stores as of the end of the first fiscal quarter compared with a total of 4,305 stores as of January 3, 2026.

Results of Operations

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(1)
Represents favorable (unfavorable) year over year change.

Note: Sums may not equal totals due to rounding.

Net Sales

For the sixteen weeks ended April 25, 2026, net sales increased 1.2% and comparable store sales increased 3.5% compared with the same period in 2025. Net sales increased due to higher average sales prices, partially offset by lower transaction volume and the reduction in sales resulting from store closures during the sixteen weeks ended April 19, 2025 associated with our 2024 Restructuring Plan.

The Company calculates comparable store sales based on the change in store or branch sales starting once a location has been open for approximately one year and by including e-commerce sales and excluding sales fulfilled by distribution centers to independently owned Carquest locations. The Company includes sales from relocated stores in comparable store sales from the original date of opening. Comparable store sales is intended only as supplemental information and is not a substitute for Net sales presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Gross Profit

For the sixteen weeks ended April 25, 2026 and April 19, 2025, gross profit was $1.2 billion, or 45.1% of net sales, and $1.1 billion, or 42.9% of net sales, respectively. The increase in gross profit as a percentage of net sales compared to the prior comparative period was driven by expansion in product margin and the impact of lower margin liquidation sales related to our 2024 Restructuring Plan, which negatively impacted gross profit margin in the sixteen weeks ended April 19, 2025.

Selling, General and Administrative Expenses, Exclusive of Restructuring and Related Expenses

For the sixteen weeks ended April 25, 2026, SG&A expenses, exclusive of restructuring and related expenses, were $1.1 billion, or 41.3% of net sales, compared with $1.1 billion, or 43.4% of net sales, for the sixteen weeks ended April 19, 2025. Overall SG&A expenses decreased in the sixteen weeks ended April 25, 2026, as compared to prior comparative periods, as a result of operating costs eliminated for stores closed during the sixteen weeks ended April 19, 2025 as a result of our 2024 Restructuring Plan.

Restructuring and Related Expenses

For the sixteen weeks ended April 25, 2026, restructuring and related expenses were $32 million, or 1.2% of net sales, compared to $118 million, or 4.6% of net sales, in the prior year comparable period. The decrease in expenses as compared to the same period in fiscal 2025, relates to timing of the Company’s 2024 Restructuring Plan which was announced during the fourth quarter of fiscal 2024, with the majority of costs being incurred by the end of first quarter of fiscal 2025 following the closure of all stores under the Plan. Substantially all of the costs under the restructuring plans have been incurred as of April 25, 2026. The Company estimates that it will incur additional expenses of approximately $20 million to $30 million through the remainder of fiscal 2026 related to the active restructuring plans. See Note 11. Restructuring, of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1.

Interest Expense

For the sixteen weeks ended April 25, 2026, interest expense increased as compared to the same periods in fiscal 2025, due to an increase in the principal amount of interest bearing long-term debt from the debt issuance completed in the third quarter of fiscal 2025.

Other Income, Net

For the sixteen weeks ended April 25, 2026, other income, net increased as compared to the same period in fiscal 2025, due to higher interest income earned from higher cash and cash equivalent balances held due to the net proceeds received from the issuance of $1.95 billion in Senior Unsecured Notes in the third quarter of fiscal 2025. This was partially offset by lower interest rates and a reduction in income recognized from the transition services (“TSA Services”) agreement with Worldpac.

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Income Tax Expense (Benefit)

For the sixteen weeks ended April 25, 2026, the Company’s provision for income taxes reflected an expense of $11 million compared with an income tax benefit of $155 million for the same period in 2025. The income tax benefit in fiscal 2025 resulted from a net discrete tax benefit in the first quarter of fiscal 2025 of $126 million, related to an internal legal entity restructuring event completed in the fiscal year treated as a taxable stock disposition for U.S. federal income tax purposes. As a result, the Company recognized a capital loss deduction which was utilized against capital gain income.

Liquidity and Capital Resources

Overview

The Company’s principal sources of liquidity are cash and cash equivalents and borrowing availability under the ABL facility. The Company’s primary cash requirements necessary to maintain the Company’s current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, funding of initiatives and other operational priorities, such as restructuring and asset optimization plans. In addition, cash is required to pay the Company’s dividends and to pay interest and principle on the Company’s long-term debt when due. The following table presents selected financial information related to the Company’s liquidity (in millions):

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and related notes that appear elsewhere in this Annual Report. The Company’s discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as the Company’s plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the section titled “Part I. Item 1A. Risk Factors” of this Annual Report. The discussion of the Company’s financial condition and changes in the Company’s results of operations, liquidity and capital resources for the fiscal year ended December 28, 2024 (“2024”) compared with the fiscal year ended December 30, 2023 (“2023”) has been omitted from this Form 10-K, but are included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for 2024, filed with the Securities and Exchange Commission (“SEC”) on February 26, 2025. Amounts are presented in millions, except per share data, unless otherwise stated.

Management Overview

The Company's results from continuing operations for the fiscal year ended January 3, 2026 included the benefit of one additional week (the "53rd week") as compared to the fiscal year ended December 28, 2024, which contained 52 weeks. A high-level summary of the Company’s financial results and other highlights from 2025 includes:

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Net sales from continuing operations during fiscal 2025 were $8.6 billion, a decrease of 5.4% 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%.

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Gross profit margin from continuing operations for fiscal 2025 was 43.4% of net sales, an increase of 592 basis points compared with fiscal 2024, primarily due to the adverse impact on gross profit margin in fiscal 2024 from inventory-related charges under the 2024 Restructuring Plan.

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Operating loss from continuing operations for 2025 was $43 million, an improvement of $670 million as compared to fiscal 2024. As a percentage of net sales, operating loss was (0.5)%, an improvement of 734 basis points compared with fiscal 2024. This change was primarily attributable to lower restructuring and related expenses in fiscal 2025 compared to 2024, including inventory-related charges related to the 2024 Restructuring Plan.

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Cash flows used in operating activities from continuing operations was $46 million during fiscal 2025, a decrease of 132.6% compared with fiscal 2024, primarily attributable to a reduction in our accounts payable and cash charges related to the 2024 Restructuring Plan.

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Diluted earnings per share (“Diluted EPS”) from continuing operations resulted in earnings of $1.13 during 2025 compared with a loss of $9.80 in 2024.

Refer to “Results of Operations” and “Liquidity and Capital Resources” of this Annual Report for further details on the Company’s results.

Business and Risk Update

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. To achieve these improvements, the Company has undertaken planned strategic actions to help build a foundation for long-term success across the organization, which include:

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Completion of the optimization of our U.S. asset footprint under the 2024 Restructuring Plan;

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Issuance of $1.95 billion in Senior Unsecured Notes (as defined below) and redemption of the Company's 5.90% Senior Notes due March 9, 2026;

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Termination of the Company's prior revolving credit facility (the "2021 Credit Agreement"), which was replaced by a new asset-based loan revolving credit facility (the "ABL Facility");

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Performed an assessment and began initiatives to improve the productivity of all assets, including Company-owned stores and Carquest Independents;

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Reducing costs to remain competitive while reinvesting in the frontline;

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Making organizational changes to position the Company for success;

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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; and

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Finalization of the sale of Worldpac in fiscal 2024 and the subsequent finalization of customary working capital adjustments in January 2026.

In the third quarter of fiscal 2025, one of the Company’s vendors, a leading auto parts supplier for the automotive aftermarket industry, filed voluntary petitions for Chapter 11 bankruptcy protection with the U.S. Bankruptcy Court for the Southern District of Texas. The vendor has secured short-term financing through a debtor-in-possession (“DIP”) loan, however, Chapter 11 proceedings carry inherent risks with respect to a company’s ability to continue operations and maintain adequate liquidity to satisfy current and future obligations. As a result of these events, the Company recorded a non-cash charge of $28 million to cost of sales in the third quarter of fiscal 2025, reflecting estimated future credit losses on certain vendor receivables due from the vendor. The estimate was developed utilizing a probability weighted cash-flow model adjusted for risks associated with credit risk deterioration for companies that enter Chapter 11 bankruptcy proceedings. The Company may continue to source some products from the vendor, but such purchases are not material to the Company.

In early fiscal 2025, new global trade tariffs were imposed on imports to the U.S., including additional tariffs on various countries from which the Company directly or indirectly imports and/or sources merchandise, including Canada, China and Mexico, among others. Since the initial announcement in the first quarter of fiscal 2025, 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. In response to the tariffs, certain of our suppliers have increased prices. However, the impact of such increases to-date has not been material to the Company’s business, financial condition and results of operations, in-part as a result of certain price increases being passed-through to our customers.

On November 1, 2024, the Company completed the sale of the Worldpac business for net proceeds of approximately $1.44 billion (excluding the impact of taxes) after transaction costs and application of the final working capital adjustment recorded in the fourth quarter of fiscal 2025. On November 13, 2024, the Company’s Board of Directors approved the 2024 Restructuring Plan which is designed to improve the Company’s profitability and growth potential and streamline its operations. This plan is supplemental to other ongoing initiatives to simplify the Company's business and improve profitable growth and included, among other items, certain store and independent location closures, streamlining product assortment and headcount reductions and organizational design changes to align the Company’s workforce to the expected needs of the Company's business. The Company is also pursuing efficiencies in procurement, pricing and professional and outside services, in addition to operational efficiencies. Refer to "Liquidity and Capital Resources" herein and Note 3. Restructuring, of the Notes to the Consolidated Financial Statements of this Annual Report for further details.

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Industry Update

Operating within the automotive aftermarket industry, the Company is influenced by a number of general macroeconomic factors, many of which are similar to those affecting the overall retail industry. In addition to the “Business and Risk Update” section included within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, these factors include, but are not limited to:

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Inflationary pressures, including logistics and labor

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Global trade tariffs

•
Global supply chain disruptions

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Cost of fuel

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Miles driven

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Unemployment rates

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Interest rates

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Consumer confidence and purchasing power

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Competition

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Changes in new car sales

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Economic and geopolitical uncertainty

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Increased foreign currency exchange volatility

While these factors tend to fluctuate, the Company remains confident in the long-term growth prospects for the automotive parts industry.

Results of Operations

The following table sets forth certain of the Company’s operating data from continuing operations expressed as a percentage of net sales for the periods indicated:

(1) Represents favorable (unfavorable) year over year change

(2) Cost of sales in fiscal 2024 includes $431 million of inventory-related charges attributable to the location closures and streamlining product assortment resulting from the 2024 Restructuring Plan.

Note: Table amounts may not foot due to rounding.

Net Sales

For the fifty-three weeks ended January 3, 2026, net sales decreased 5.4% and comparable store sales increased 0.8% compared with the fifty-two weeks ended December 28, 2024. The decline in net sales as compared with the prior period, was due to lower sales as a result of store closures executed under the 2024 Restructuring Plan, partially offset by the impact of the 53rd week.

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Comparable store sales for the fourth quarter and year ended January 3, 2026 excludes net sales for the 53rd week. For example, our comparable sales results for 2025 compares weeks 1 through 52 in fiscal 2025, to the 52-week period reported for fiscal 2024. The Company calculates comparable store sales based on the change in store sales starting once a location has been open for approximately one year and by including e-commerce sales and excluding sales fulfilled by distribution centers to independently owned Carquest locations. The Company includes sales from relocated stores in comparable store sales from the original date of opening. Closed stores are not includ

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