Key Market Outlook(s) and Pick(s)

On Thursday, I joined Stuart Varney on Fox Business “Varney & Co” to discuss markets, the Fed, Pfizer, PayPal, and more. Thanks to Stuart and Peyton Jennings for having me on:

On Wednesday, I joined David Asman on Fox Business “Varney & Co” to discuss markets, the Fed, Santa, Papa John’s, Hormel, and more. Thanks to Stuart, David, and Peyton Jennings for having me on:
 

Advance Auto Parts Update
 

The AAP turnaround continues to gain traction, delivering its strongest quarterly performance in more than two years with comp sales up 3.0% and adjusted operating margins reaching 4.4% (+368 bps YoY).

New CEO Shane O’Kelly, who took the helm just over two years ago, is proving to be exactly the caliber of leader this long-struggling business needed after years of mismanagement and false starts.

While the market remains blinded by recency bias surrounding AAP’s seemingly never-ending multi-decade turnaround, and maybe because aftermarket auto parts aren’t as “sexy” as AI, that lack of glamour is exactly what creates the opportunity. What will be “sexy” is the operating leverage that gets unlocked as store level execution improves and supply chain efficiencies take hold, clearing the path for normalized earnings power that the market still refuses to give AAP credit for.

Until then, we’re happy to sit on our hands and wait as the turnaround unfolds.

A few weeks ago, O’Kelly and CFO Ryan Grimsland gave an excellent high-level update on the turnaround’s progress and fielded investor questions at the Gabelli Funds 49th Annual Automotive Aftermarket Symposium. For anyone wanting to understand the key levers being pulled and why we have such strong conviction in this management team, the discussion is well worth the time:

Q3 Earnings Breakdown
 

 

 

 

 

 

 

 

 

 

 

 

 

10 Key Points

1) AAP delivered $2.04B in revenue (-5% YoY), beating consensus by ~$13M, with the decline driven primarily by operating fewer stores after this year’s footprint optimization that closed ~700 underperforming locations. Adjusted earnings of $0.92 beat expectations by $0.18 and compare to a loss of $0.05 in the same period last year.

2) Comparable same store sales grew 3% for the quarter, landing at the high end of management’s low single digit guidance and accelerating from last quarter’s 0.1% on positive contributions from both the Pro and DIY channels.

3) The Pro channel delivered just over 4% comp growth in Q3, marking its 5th straight quarter of positive performance on a two year basis. Trends remain positive in Q4 so far, with the new strategy gaining traction as store availability has improved to 96-97% from the prior low 90% range and time to serve has fallen by more than 10 minutes. The main street customer group, the highest margin segment within Pro, still represents the single largest opportunity.

4) The DIY channel delivered positive low single digit comps during the quarter, showing sequential improvement in transactions on both a 1 year and 2 year basis. Moving into Q4, management has seen more pressure on the consumer and some volatility in week to week transactions, but remains confident in the long term outlook given the non-discretionary nature of the business, with ~90% of sales tied to repair and maintenance.

5) The market hub strategy continued to progress, with management now expecting to open 14 new market hubs this year compared to prior expectations of 10. They are still targeting ~60 market hubs by mid 2027 and expect to end the year at 33. These hubs carry 75 to 80k SKUs and provide same day parts availability to a service area of 60 to 90 stores, which has driven a ~100 bps comp sales uplift to supported locations so far and creates incremental opportunities to gain market share. In addition, management expects to have 16 distribution centers by year end compared to 38 just 2 years ago, as well as open 30 new stores for the full year and still target at least 100 new openings over the next 2 years.

6) AAP has invested ~$50M in store upgrades year to date, which include improved HVAC systems, roofing, parking lots, and signage, and is more than double the total capex allocated to these projects last year. These upgrades cover more than 1400 store locations year to date compared to just 440 in all of 2024. Management expects capex to total $250M for the full year, lower than the prior $300M guidance due to a timing shift into 2026.

7) Adjusted gross margins came in at 44.8% for the quarter, up ~260 bps from last year’s 42.3%. Adjusted operating margins, the most important metric in the AAP turnaround, came in at 4.4%, up 368 bps YoY and the strongest quarterly performance in more than two years. Management remains confident in the 2027 target of 7% adjusted operating margins, with street consensus still forecasting just ~4.8% for 2027, a number we expect to move higher as it becomes obvious.

8) Year to date free cash flow stands at an outflow of $277M, which includes ~$130M of cash charges related to restructuring activities. Management expects full year free cash flow to be an outflow between $80M and $90M, which includes ~$150M of cash charges. Backing these out, AAP would have delivered positive free cash flow for the year, giving management confidence in the ability to generate positive free cash flow in 2026 and beyond.

9) Management narrowed and reaffirmed the midpoint of full year guidance, now expecting net sales of $8.55 to $8.6B compared to prior guidance of $8.4 to $8.6B. Comp sales growth is expected to be 0.7% to 1.3%, and adjusted operating margin is projected to be between 2.4% and 2.6%, which implies more than 200 bps of annual margin expansion in the first year of the turnaround plan.

10) Management views First Brands as a one off situation rather than a broader concern for the aftermarket industry. AAP currently sources less than 2% of cost of goods from the supplier, with plenty of alternative options among the hundreds of vendors they already work with. Management recorded a noncash charge of $28M in cost of sales during the quarter to account for future credit losses on receivables from First Brands, and this will not affect full year guidance.

Earnings Call Highlights
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Etsy Update
 

 

Q3 Earnings Breakdown
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10 Key Points

1) Etsy delivered Q3 revenue of $678M, up 6.1% YoY and ahead of street consensus by ~$21M, driven by a 12.7% increase in seller services revenue to $210M, while marketplace revenue declined 1.7% YoY to $468.1M. Etsy’s take rate of 24.9% came in ahead of prior guidance, expanding by 220 bps YoY and 90 bps sequentially.

2) Consolidated GMS came in at $2.72B, up 0.9% YoY and above the top end of management’s prior $2.6 to $2.7B guidance range. Etsy marketplace GMS totaled $2.43B, ahead of expectations and down 2.4% YoY but improving by ~300 bps sequentially. GMS per active buyer on a TTM basis was $121, down 1.6% YoY but improving sequentially and continuing to show signs of stabilization.

3) Depop continues to be a bright spot, with GMS of $292.1M up 39.4% YoY, a ~400 bps acceleration from last quarter, driven by 59% GMS growth in the US. Depop active sellers climbed 40.8% YoY to ~3M, and active buyers rose 38.8% to ~6.6M. Depop is now tracking toward an annualized run rate of $1B+, and management continues to see significant opportunity to scale it into a multibillion dollar asset, launching the brand’s largest ever campaign during the quarter to further raise US awareness.

4) Earlier in the quarter, Etsy signed a partnership with OpenAI to become the first live partner within ChatGPT’s instant checkout. This gives Etsy an early foothold in the fast growing agentic commerce channel, with initial results looking promising. Early data suggests these buyers have higher purchase intent than traditional search, driving higher conversion rates and a noticeable spike in purchases from this traffic, albeit off a small base.

5) The Etsy app now accounts for ~46% of total GMS, up from 42.8% last year, with app based GMS growing 5% YoY and outperforming non app GMS by 13 percentage points. The app continues to drive higher engagement and purchase frequency, with app users generating 5x more visits, viewing 3x more pages per visit, and being 1.5x more likely to convert.

6) Consolidated adjusted EBITDA margins came in at 25.4% for the quarter, in line with management’s prior ~25% guidance but below last year’s 27.7%. The margin pressure is primarily tied to increased marketing investment at Depop, while the Etsy marketplace continues to post margins just shy of 30%. Consolidated marketing spend increased 6% YoY to $208M, or 30.7% of revenue, and is expected to remain elevated into the first half of 2026.

7) Management repurchased 2.1M shares during the quarter for a total of ~$120M at an average price of $57.14. Over the past three years, Etsy has reduced its share count by ~21.5% through $2.47B in buybacks, making our slice of the pie that much bigger without putting up any additional capital. The current repurchase program still has $356.5M remaining, ~6.6% of the total market cap, leaving plenty of dry powder for continued buybacks, supported by $1.6B of cash on the balance sheet.
 

8) Etsy announced that longtime CEO Josh Silverman will step down after more than eight years and transition to executive chair through the end of 2026. Kruti Patel Goyal will assume the CEO role at the start of 2026. She has been with Etsy for more than 15 years, spent two years as Depop’s CEO where GMS and the buyer base nearly doubled, and most recently served as Etsy’s president and chief growth officer.

9) Etsy generated $205M in free cash flow during the quarter, bringing TTM free cash flow to $635M, ~12% of market cap, and converting ~83% of adjusted EBITDA into free cash flow.

10) Management guided Q4 GMS to $3.5 to $3.65B, with the midpoint implying further sequential improvement in the combined Etsy marketplace and Depop YoY growth rate despite an “uncertain” consumer backdrop. The Q4 take rate is expected to be ~24.5%, with adjusted EBITDA margins under pressure at ~24%, driven primarily by the significant sequential increase in Depop brand marketing during the holiday season.

Earnings Call Highlights

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Market

The CNN “Fear and Greed Index” ticked up to 31 this week from 26 last week. You can learn how this indicator is calculated and how it works here: (Video Explanation)
 

The NAAIM (National Association of Active Investment Managers Index) (Video Explanation) ticked up to 98.57% this week from 89.92% equity exposure last week.
 

Our podcast|videocast will be out sometime today. We have a lot of great data to cover this week.  Each week, we have a segment called “Ask Me Anything (AMA)” where we answer questions sent in by our audience. If you have a question for this week’s episode, please send it in at the contact form here.

*Opinion, Not Advice. See Terms

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