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Advance Auto Parts Update (AAP)

Q2 Earnings Breakdown

10 Key Points

1) AAP delivered $2.01 billion in revenues during the quarter, landing at the high end of prior guidance and beating consensus by ~$33 million. Most importantly, this was driven by positive comp sales of +0.1%, an improvement from (0.6%) in Q1 and also at the high end of guidance. Adjusted EPS came in well ahead of expectations at $0.69 versus the Street’s $0.54.

2) Management continues to deliver on the profitability front, returning the business to overall profitability in the quarter with adjusted gross margins rising to 43.8%, up 16 bps YoY. The most important metric in the turnaround, adjusted operating margins, expanded to 3%, up 19 bps YoY. For the full year, management continues to expect adjusted operating margins between 2% and 3%, with the company on track to reach its 7% target by FY2027, implying ~ $630 million in EBIT. For context, the last three times AAP generated operating income in the ~$600M range were 2018 ($617M), 2019 ($679M), and 2022 ($670M). In those years, when the share count was HIGHER than it is today, EPS came in at $5.75, $6.87, and $7.70, with the stock trading as high as $186.10, $182.60, and $244.50. The market still doesn’t buy this and continues to treat AAP as a show me story, with consensus only pricing in ~4.75% operating margins for 2027. That ignores the proven winner that is CEO Shane O’Kelly, whose track record at HD Supply speaks for itself. We will side with O’Kelly all day long and believe the market will eventually be forced to catch up.

3) The Pro business, the biggest overall driver of AAP’s underlying performance, continues to show strength with positive comp growth in the low single digits during the quarter and mid single digit growth on a two year basis. Pro customers are showing increased confidence in AAP, as evidenced by sustained sales growth from both Main Street Pro accounts and large national customers.

4) While still early in turning around the DIY side of the business, management remains encouraged by emerging signs of stabilization in the segment, with Q2 DIY comp sales stable compared to Q1 and on a two year basis showing improvement. Management has not yet seen any significant shifts in consumer spending, as the quarter ended on a strong note with DIY delivering positive results and that momentum carrying into the first 4 weeks of Q3.

5) The supply chain transformation continues to run ahead of schedule. Management has already closed or converted 9 DCs this year and remains on track to finish with 16, down from the inefficiently run 38 prior to the program’s start. The other key driver of the transformation is market hubs, which stock 75–85k SKUs and provide same day parts availability for up to 90 stores. Management is on track to open 10 hubs this year and reach 60 by mid 2027. Most importantly, stores served by the new hub strategy continue to see an average comp sales uplift of ~100 bps, which management believes has the potential to drive even stronger sales growth over the long run.

6) Management continues to work on tariff mitigation strategies, while prioritizing profit dollar expansion, with ~40% of COGS exposed to tariffs at a blended rate of ~30%. Most importantly, more than 90% of AAP’s business remains NONDISCRETIONARY, keeping the company well positioned to navigate a higher product cost environment.

7) Management is making great progress on the merchandising front, completing 2/3 of product line reviews and expecting to finish over the next few months, which should deliver ~50 bps of annualized cost reductions beginning in the second half. This process has also enabled AAP to add more than 60,000 new SKUs to the network, nearly tripling from last year, and improve the key store availability KPI to the mid-90s %, up 100 bps from Q1 and from the low-90s % in the same period last year. At the same time, the company has continued rolling out its new assortment framework, now live in the top 30 DMAs and on track to be completed across the top 50 DMAs (~70% of sales) by the end of Q3, well ahead of the original 12–18 month timeline that extended into 2026. Most importantly, the framework continues to deliver an average comp uplift of ~50 basis points.

8) During the quarter, management proactively reorganized the debt capital structure, completing a $1.95 billion senior note offering split into two equal tranches, maturing in 2030 and 2033. They also entered a new $1 billion asset-backed revolving credit facility to replace the prior $1 billion revolver. The additional liquidity provides flexibility for the supply chain financing program, and management views the reorganization as a bridge to re-attain investment-grade credit rating, a material unlock for the business.

9) Management continues to allocate substantial capex to refresh the store footprint, already investing ~3x more in maintenance Capex than in all of 2024. The spending has been applied to more than 1,000 stores as part of a multiyear plan to enhance the in-store experience for both customers and store teams. For context, the previous model relied on a break-fix approach for many years, with 80% of HVAC systems beyond useful life, over 50% of roofs aging out, and more than half of parking lots in need of replacement.

10) For full-year guidance, management reiterated net sales of $8.4–8.6 billion, comp store sales of 0.5–1.5%, and adjusted operating margins of 2–3%. Management did, however, adjust EPS guidance to reflect higher interest expense from the recent debt offering, bringing the target range to $1.20–$2.20 per share versus the prior $1.50–$2.50. Free cash flow is still expected to be negative $85 million to negative $25 million, reflecting positive operating cash flow through the end of the year, offset by ~$150 million in cash expenses related to the store optimization project.

Earnings Call Highlights

ETSY Update

Q2 Earnings Breakdown

(Click on image to enlarge)

10 Key Points

1) Etsy reported Q2 revenue of $673 million, up 3.8% YoY and ~$25 million above consensus. The upside was largely driven by a significantly higher take rate of 24%, expanding over 200 bps YoY and exceeding prior guidance, supported by a 15.3% YoY increase in seller services revenue. For Q3, management expects further take rate growth, guiding to 24.5% for the quarter.

2) Consolidated gross merchandise sales (GMS) for the quarter came in at $2.8 billion, down 4.8% YoY but showing sequential improvement versus Q1’s 6.5% decline and outperforming prior guidance that had anticipated a similar drop to Q1. Excluding Reverb, Q2 GMS was $2.7 billion, down just 2.6% YoY compared to a 6.2% decline in Q1 on the same basis. Stabilizing the core Etsy marketplace remains the top priority, with GMS trends improving 350 bps sequentially and posting positive YoY comparisons in May and June.

3) Depop continues to post strong results, with GMS of $250 million during the quarter, up 35.3% YoY and reaching an annualized run rate of $1 billion in GMS for the first time. Growth was led by a 54% increase in the US, making Depop the fastest-growing player in the large online fashion resale market by a wide margin. Management believes the company still has significant runway, with overall awareness remaining low and plans for accelerated investment in the marketplace in the back half of the year.

4) Management views the Etsy app as a key driver of the overall flywheel, with app users showing significantly higher lifetime value, stronger loyalty, higher retention rates, and greater GMS per buyer. App GMS once again outpaced non-app GMS during Q2 and now represents ~45% of total GMS, up more than 300 bps YoY. Download rates remain strong, and monthly active users are up 7% compared to last year.

5) Management continues to refine its marketing approach, shifting spend away from linear TV toward higher-ROI channels and personalization. Consolidated marketing spend rose ~16% YoY to $212 million, including a nearly 50% sequential increase in creator and influencer programs. Most importantly, the ramped-up spend is translating into results: Q2 GMS from owned marketing channels (email, push notifications) grew ~33% YoY. Personalization now accounts for ~40% of messages (vs. ~27% in Q4 2024), driving higher conversion, visits, and GMS, with management expecting near-total personalization by year-end.

6) During Q2, management reactivated 6.5 million buyers, up ~2.8% YoY. New buyers totaled 4.8 million, down ~14.5% YoY, while TTM habitual buyers reached 6.1 million at quarter-end, down ~12.2% YoY. Active seller count remained flat sequentially at 5.4 million, but the new seller setup fee has proven successful, with a higher percentage of current active sellers making a sale in the past 12 months and an improvement in the number of new sellers completing a sale YoY during Q2.

7) Management repurchased a total of $335 million worth of shares during the quarter at an average price of $52.34, reducing the share count by 6.4 million.

8) Free cash flow generated during the quarter totaled $90 million, a conversion rate of ~82% of adjusted EBITDA on a TTM basis and bringing TTM free cash flow to $635 million, implying a free cash flow yield of ~10%. Management continues to expect healthy free cash flow for the full year thanks to the asset-light business model, supported by a sound balance sheet with $1.5 billion in cash and just ~$3 billion in convertible debt, including the $700 million issued in June.

9) On June 2, management completed the $105 million all-cash sale of Reverb, the music marketplace acquired in 2019 for $275 million. The deal resulted in a $102 million impairment charge, but the business had long been a drag on growth and profitability, with limited room for improvement. Management was happy to exit, valuing the business at a mid-teens EBITDA multiple.

10) Management noted continued strength in consumer spending across all cohorts, with no major impact yet from tariffs or trade announcements. Spending stabilized in May and June and has held steady, giving management confidence to guide for further improvement in Q3. Consolidated GMS is expected at $2.6–$2.7 billion, with the midpoint implying sequential growth acceleration, a 24.5% take rate, and a 25% adjusted EBITDA margin.

Morningstar Analyst Note

Earnings Call Highlights

General Market

The CNN “Fear and Greed Index” ticked down to 54 this week from 59 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 down to 85.66% this week from 96.25% equity exposure last week.

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