Shane O’Kelly readily admits he’s a car guy. He used to own a Porsche 911 that he’d drive around the Road Atlanta track. He drives an Audi to work and admits to owning a Honda Odyssey minivan, primarily because of his three kids and two dogs. During a June weekend, he watched on television the 24 Hours of LeMans and the Iowa Corn 350 NASCAR Cup race, won by Ryan Blaney, who drives a Ford sponsored by Advance Auto Parts, where O’Kelly is the CEO.
“I will drive anything,” says O’Kelly. “I will watch anybody who races. For me, driving is relaxing.”
His current drive, however, may be the toughest road that O’Kelly has traveled. He joined Advance in September 2023 with a mandate to get it back to receiving the checkered flag. Since 2022, Raleigh’s only Fortune 500 company’s stock has declined more than 70%, dramatically underperforming the market and competitors AutoZone, up more than 40% during the same time period, and O’Reilly Automotive, up nearly 50%.
Profits have fallen over the past two years, while same-store sales, a key barometer of a retailer’s health, fell 0.3% during the most recent fiscal year. Formerly based in Roanoke, Virginia, Advance moved to Raleigh after its $2 billion purchase of General Parts in 2014. The deal expanded Advance’s revenue by $2.9 billion, but the company has spent the last decade unsuccessfully trying to merge two separate distribution systems.
With Advance performing so poorly, the company’s board changed leaders, with Tom Greco stepping down after seven years as CEO. Earlier this year, two activist hedge funds successfully pressured management to add three preferred directors to the board, a move applauded by O’Kelly.
O’Kelly, who had been CEO of Home Depot’s HD Supply subsidiary for nearly three years, is steering the company through the first steps of a reorganization. In November, he announced a plan to cut $150 million in costs, including reducing staff at the North Hills headquarters, and to explore options for its Canadian stores and Worldpac parts business. He’s brought in more than a half-dozen new executives, including a new chief financial officer from home improvement chain Lowe’s and a new chief merchant from Target.
He also set in motion a plan to consolidate the company’s two distribution systems and placed a new focus on securing more business from neighborhood repair shops, which already account for about 60% of sales. Advance has also adjusted prices where they were higher than competitors. O’Kelly is visiting many of the chain’s 4,700-plus stores to see what needs a small tune-up and what needs an engine rebuild.
Happier staffers
“He’s impressive, and everything he’s announced so far sounds good on paper, so I am hoping that the execution follows,” says Phillip Blee, an analyst at William Blair who has a “market perform” rating on the company. “It will be interesting to see how things shape up over the next year or so.”
Advance’s stock price, after surging earlier this year, is barely changed from when O’Kelly started. Net profit slipped by
$8 million to $40 million in the first quarter of the fiscal year, while same-store sales were down 0.2%.
Kelly views a better customer experience as crucial for the turnaround. To that end, Advance has raised compensation for hourly team members by an average of 8%, which has helped reduce turnover by 18% in recent months.
“I prefer being in the stores,” says O’Kelly. “We don’t sell anything in the headquarters, and with every visit, I see something in terms of what’s working and what’s not working or get an idea for something we could do. I see things from our customers’ eyes.”
Advance faces two rivals with much stronger reputations with investors because of their more consistent performance. Memphis-based AutoZone has 7,140 locations, and Springfield, Missouri-based O’Reilly has about 6,100. AutoZone has a market capitalization of more than $50 billion while O’Reilly’s valuation tops $60 billion. Advance’s market cap was $3.8 billion in mid-July.
Advance Stores opened in 1932 in Roanoke and Lynchburg, Virginia, and originally sold auto and home supplies. Six years later, it entered North Carolina with a store in Winston-Salem. The company didn’t focus exclusively on auto parts until the 1970s. The name was changed to Advance Auto Parks in 1974.
In October 2013, the company agreed to pay $2 billion for Genuine Parts International, the Raleigh-based owner of the Worldpac and Carquest auto parts brands. It was among the Triangle’s largest and best-known private companies after significant growth led by founder Temple Sloan, who also was a key investor in the Highwoods Properties real estate business.
The headquarters for the combined company moved to Raleigh in 2018, with the state chipping in $9.3 million in financial incentives after Advance pledged to create 435 jobs.
But the acquisition has led to many of the company’s current issues. Carquest’s distribution centers were generally smaller than those operated by Advance and as a result sometimes ran out of parts faster. That meant unfilled orders at the stores, which aggravates shoppers.
Greco, a former Frito-Lay North America CEO, earned initial kudos at the company he joined in 2016. Advance was the fourth-best performing stock in the S&P 500 in 2018. It purchased Sears’ DieHard battery brand for $200 million in 2020. But revenue growth slowed from 8.8% in 2021 to 1.4% in 2022 and 1.2% last year. In comparison, AutoZone’s annual revenue gained 16%, 11% and 7% over the past three years.
In May 2023, Advance’s shares declined 35% in a single day after it announced a gloomy outlook and cut the quarterly dividend from $1.50 to 25 cents. A few months earlier, Greco had said he would retire at the end of the year, a change that accelerated with the new CEO’s hiring.
Commanding authority
O’Kelly grew up in rural, upstate New York, where he says getting your driver’s license meant freedom because it was “seven miles for milk and 20 miles for a movie.” His first car was a 1982 Toyota Celica Supra. He graduated from West Point in 1990 with a degree in mathematical economics and served seven years as an infantry officer in the U.S. Army. During his service, he graduated from both Airborne and Ranger schools and served as a rifle platoon leader and company commander. He later earned a Harvard MBA and worked for consulting firm McKinsey.
His military experience and a decade working at Home Depot shaped his management strategies. Both focused on training and preparing the front line for any task. Home Depot founders Bernie Marcus and Arthur Blank were known to regularly visit stores, wearing orange aprons. “You have to be able to follow before you can lead and you have to listen before you can talk,” O’Kelly says. “And don’t ask people to do anything you wouldn’t be prepared to do yourself.”
Advance has a good shot at reviving its fortunes, O’Kelly says. Only 90 million of the 286 million vehicles in operation in the U.S. are less than six years old, according to S&P Global Mobility. With electric vehicle sales taking off at a slower pace than expected, many consumers are spending more money keeping their aging Fords, Toyotas and other brands in tiptop shape. “We’re in a situation where for want of architecting the right path forward, we can participate in the industry’s upside and be in a better position from a performance perspective,” says O’Kelly.
Cutting 400 mostly white-collar workers as part of the cost-cutting effort was “really hard to do, never easy. But that helped provide the funding needed to make the investment in the field. And it also signaled that we genuinely view the field as the most important part of the organization,” the CEO says.
Visiting stores and distribution centers prompted O’Kelly to notice some issues affecting Advance’s performance. For example, sales software would often reboot and be down for several hours, causing stores to lose sales. He also noticed many store workers were spending an inordinate amount of time on paperwork and receiving new parts for restocking shelves. The company is now addressing its point-of-sale system, and changing the training for core employees. “I’ve looked to have a field-first orientation in terms of how we do things and how we think about where the priority should be,” he says.
Bradley Wells, a district manager for Advance in Alabama overseeing 13 stores, says O’Kelly has shown greater interest in listening to rank-and-file workers. “He’s turned the focus to a bottom-up standpoint instead of a top-down, and he’s very much attuned to the stores,” says Wells, who has been with the company for seven years after 17 years at Walmart. “He’s been in the stores more than I have seen leaders in the past. He has excellent communication with the field.”
While no decision has been made on whether Worldpac and Carquest fit in the overall enterprise, O’Kelly says it’s important to review the businesses when “the overall performance has been less than what everybody expects. [Then] you take stock of each part of the business and say, ‘How does that fit? If it doesn’t fit, what would I do with it?’”
Jefferies analyst Bret Jordan says a sale of Worldpac “should unlock the next level of the turnaround story” by simplifying Advance’s supply chain and providing cash for other investments.
The company’s smaller distribution warehouses are being converted into “market hubs,” which will receive parts from the larger regional warehouses. Raymond James analyst Bobby Griffin says the unified distribution system likely won’t be completed until 2026. “We have learned from other retail turnarounds, major supply chain changes and culture revamps take time and are very challenging,” he says.
As far as adding new stores, O’Kelly wants to grow where Advance already has a large presence. “Look for us to broaden depth where we have it,” he says. “That stems from having strong talent and a reputation in the market.”
Earlier this year, New York hedge funds Third Point and Saddle Point bought a combined 8% stake in Advance because they viewed its shares as undervalued. In March, they struck a deal with the company to add three new board members whom O’Kelly says have deep industry expertise: former O’Reilly executive Tom Seboldt, former Walmart supply chain executive Gregory Smith and Brent Windom, who had been CEO of Uni-Select, a Canadian auto parts distributor acquired last year by a larger peer, Chicago-based LKQ. Advance shares have declined 15% since that agreement.
Advance is projecting revenue of about $11.4 billion this year, barely higher than the $11.3 billion reported in 2023. But Wall Street analysts, on average, project revenue growth of 2.5% next year, while profits should surge 20% because of O’Kelly’s various initiatives.
“It’s still early days, and it’s going to be a long process, particularly around the efforts to revamp the distribution network, but we have been encouraged by the team’s initiatives to improve its inventory position, right size the cost structure, streamline and focus on the core business,” says William Blair analyst Blee. “The plan has a lot of potential, but there isn’t a lot of visibility yet into the timeline around when we can expect a more significant inflection.”
That visibility, O’Kelly hopes, is right around the next corner of his drive. ■