Executive Summary / Key Takeaways

• Valvoline Inc. has successfully transitioned to a pure-play automotive preventive maintenance provider, demonstrating consistent system-wide same-store sales growth and accelerating network expansion towards a 3,500+ store target.
• Recent financial performance shows solid top-line growth driven by same-store sales (mix of ticket and transaction) and new unit additions, though profitability margins in the near term are impacted by strategic investments in technology and the effects of refranchising.
• The company is strategically leveraging refranchising and acquisitions, including the planned Breeze Autocare purchase, to accelerate network growth in a capital-efficient manner, expecting double-digit new store additions from refranchised markets by year-end FY25.
• Investments in operational technology (ERP, HRIS, cloud marketing data) and talent development are foundational to scaling the business, enhancing customer experience, and driving efficiency, positioning Valvoline for future leverage despite causing some SG&A deleverage in FY25.
• Management has reaffirmed its full-year FY25 guidance, projecting 5-7% system-wide SSS growth, 160-185 net new store additions, and $450M-$470M in Adjusted EBITDA, signaling confidence in its resilient business model and strategic execution despite macro uncertainties and near-term investment impacts.

The Pure-Play Pivot: Setting the Stage for Accelerated Growth

Valvoline Inc. (NYSE:VVV) has undergone a significant transformation, pivoting from a diversified lubricants and chemicals company to a focused leader in automotive preventive maintenance. This strategic shift, highlighted by the sale of its Global Products segment in March 2023, has sharpened its focus on the quick, easy, trusted service delivered through its extensive network of Valvoline Instant Oil Change (VIOC) and Great Canadian Oil Change centers. Operating through a mix of company-owned and franchised locations, Valvoline positions itself as a convenient, reliable alternative in the fragmented automotive maintenance market, holding approximately 5% of the overall do-it-for-me oil change market share.

The company's business model is built on a foundation of operational excellence and a commitment to customer experience, evidenced by its 4.7 out of 5 stars customer rating based on over a million recent surveys. This is supported by investments in operational technology, including a new ERP system implemented in January 2024, a new HRIS system rolled out in Q2 FY25, and the transition of its customer and marketing database to the cloud. While the ERP and HRIS implementations have contributed to a material weakness in internal controls over financial reporting, management is actively engaged in remediation efforts expected to be completed in fiscal 2025. These technology investments, along with robust training programs like the 270-hour technician program and "BoomTown" sessions focused on enhancing service presentation, are designed to improve labor management, drive efficiency, personalize marketing, and ultimately support scaling the business towards its long-term goal of over 3,500 stores.

In the competitive landscape, Valvoline faces a mix of direct quick-lube rivals like Driven Brands (DRVN) and broader automotive service providers, as well as indirect competition from dealerships, independent repair shops, and even DIY options. While direct quick-lube competition remains consistent, Valvoline notes pockets of increased promotional activity from players outside the quick-lube segment, potentially impacting new customer acquisition from those channels. Valvoline differentiates itself through its powerful brand, superior customer service experience, strong franchise partnerships, and data-driven marketing capabilities. Its operational model, emphasizing speed (~15-minute oil changes) and convenience (stay-in-your-car), provides a distinct value proposition. Compared to larger, more diversified energy companies like Shell (SHEL), BP (BP), and ExxonMobil (XOM) who also have lubricant businesses, Valvoline's pure-play focus allows for higher profitability margins in its core retail segment (TTM EBITDA margin of 33.37% vs. SHEL's 16%, BP's 7%, XOM's 12% in their broader operations), though these comparisons are not strictly segment-to-segment. While these larger players benefit from scale and integrated supply chains, Valvoline's agility in retail execution and customer-centric approach provide a competitive edge in its niche. Driven Brands, also retail-focused, has shown faster recent revenue growth through acquisitions, but Valvoline emphasizes the stability and efficiency of its compounding SSS and organic/franchise unit growth model.

Performance Reflecting Strategy and Investment

Valvoline's recent financial performance underscores its strategic direction and the impact of ongoing investments. For the three months ended March 31, 2025 (Q2 FY25), net revenues increased 4% year-over-year to $403.2 million, and for the six months ended March 31, 2025 (H1 FY25), revenues grew 7.3% to $817.5 million. This growth was primarily fueled by system-wide same-store sales (SSS) growth of 5.8% in Q2 and 6.9% in H1, coupled with the addition of 150 net new stores over the prior year. The SSS performance reflected a healthy balance, with approximately one-third of the Q2 comp driven by transactions and two-thirds by ticket, influenced by premiumization, net pricing, and continued non-oil change revenue (NOCR) service penetration.

Gross profit saw increases of 2.9% in Q2 ($150.5 million) and 8.0% in H1 ($303.4 million), driven by volume expansion and service mix improvements. However, gross profit margin saw a slight decline in Q2 (37.3% vs. 37.6% prior year) primarily due to higher store operating expenses, including depreciation from new store growth, and the impact of refranchising. H1 gross margin saw a modest improvement (37.1% vs. 36.9%), benefiting from labor efficiency.

Selling, general and administrative (SG&A) expenses increased significantly, up $14.0 million in Q2 and $22.3 million in H1, reflecting planned investments in technology, talent, and advertising to support growth and scale. These investments, combined with the impact of refranchising (which shifts company-operated store profit to lower-margin franchise fee income), contributed to a slight decline in Adjusted EBITDA in Q2 ($104.4 million vs. $105.1 million prior year). However, for H1, Adjusted EBITDA grew to $207.2 million, an increase of $11.9 million, as strong gross profit expansion from operational performance more than offset the investment and refranchising impacts. The six months ended March 31, 2025, also saw a significant increase in other income, net, largely due to a $74.2 million gain on the sale of operations from a refranchising transaction.

From a liquidity perspective, Valvoline ended March 31, 2025, with $61.9 million in cash and cash equivalents and total debt of $1075.7 million, resulting in a net debt of approximately $1.01 billion. Cash flows from operating activities for continuing operations were $93.2 million for H1 FY25, a modest increase year-over-year, influenced by higher earnings, lower interest payments, and working capital dynamics. Free cash flow from continuing operations was $12.2 million for H1 FY25, a decrease from $4.9 million in the prior year, primarily due to higher capital expenditures supporting store growth ($105.4 million in H1 FY25 vs. $87.2 million prior year) and the impact of refranchising.

The company's capital allocation priorities remain focused on funding profitable growth, maintaining its target leverage ratio (2.5x-3.5x adjusted EBITDA), and returning capital to shareholders. Share repurchases, totaling $59.8 million year-to-date through Q2 FY25, were paused in anticipation of funding the Breeze Autocare acquisition.

Strategic Acceleration and Future Outlook

Valvoline's strategic initiatives are clearly aimed at accelerating growth and enhancing long-term shareholder value. The company is aggressively expanding its retail footprint, targeting 160 to 185 net new store additions in fiscal year 2025 and aiming to reach 250 new stores per year by fiscal 2027, on its path to a 3,500+ store network. This growth is fueled by both company-operated expansion and a significant push in franchisee development.

A key component of this acceleration strategy is refranchising. By converting company-owned stores in certain markets to franchise operations, Valvoline partners with well-capitalized operators committed to faster new unit development than the company might achieve on its own in those specific areas. Transactions completed in late FY24 (Las Vegas, Denver) and early FY25 (Central/West Texas) are already showing momentum, with double-digit new store additions expected from these refranchised markets by the end of FY25. While these transactions create near-term headwinds for reported revenue and EBITDA comparisons, they are viewed as capital-efficient moves that drive faster market share gains and deliver attractive long-term shareholder returns.

Further accelerating network growth is the planned acquisition of Breeze Autocare, which operates nearly 200 stores under the Oil Changers brand, primarily in California, Texas, and the Midwest. This $625 million acquisition, expected to close in the second half of fiscal 2025 (pending FTC regulatory approval, which issued a Second Request in April 2025), will significantly expand Valvoline's presence in strategic geographies and is anticipated to be accretive to top-line, profit, and cash flow.

Beyond unit growth, Valvoline is focused on increasing revenue per visit through service expansion. Non-Oil Change Revenue (NOCR) penetration continues to be a significant contributor to ticket growth, driven by effective training and process execution that educates customers on needed services. While the pace of NOCR contribution is expected to moderate as the company laps prior year initiatives, it remains a positive driver. The fleet business also continues its strong growth trajectory, outpacing consumer business growth with a CAGR exceeding 14% over the past three years, benefiting from investments in B2B sales and a service proposition tailored to fleet needs.

Management has reaffirmed its full-year fiscal 2025 guidance, projecting system-wide SSS growth of 5% to 7%, 160 to 185 net store additions, and Adjusted EBITDA between $450 million and $470 million. This guidance reflects the underlying strength of the business and the expected benefits from strategic initiatives, even as FY25 is characterized as a "reset year" due to significant investments in technology and talent necessary for future scaling. The guidance implies that the underlying business, adjusted for the impact of refranchising, is expected to deliver 10% to 14% top-line growth. The quarterly cadence is expected to see a higher SSS comp in Q1 FY25 due to lapping factors, with potential for a quarter below the full-year range depending on external events. Seasonality is expected to result in 40-45% of Adjusted EBITDA in the first half and 55-60% in the second half.

Risks and Considerations

While the outlook is positive, investors should consider several factors. The material weakness in internal controls, though actively being remediated, highlights integration challenges following the Global Products sale and system implementations. While management asserts no material misstatements have occurred, the risk remains until remediation is complete. The planned Breeze Autocare acquisition faces regulatory review, and the timing and outcome of the FTC process are not fully controlled by Valvoline.

Potential impacts from tariffs, particularly on ancillary products and construction materials, are being monitored, though management expects minimal net impact in FY25 due to mitigation strategies. Changes in waste oil collection reimbursement and potential fluctuations in crude oil prices could also influence product costs and margins, although historical trends suggest these impacts are often offset over time. The competitive environment, while fragmented, could see increased promotional activity from other automotive service providers, potentially affecting Valvoline's ability to acquire new customers from those channels. Finally, while the business has shown resilience, a significant downturn in the macro economy could theoretically impact consumer driving habits or maintenance deferral, although management has not seen evidence of this to date.

Conclusion

Valvoline Inc. is executing a clear strategy focused on leveraging its core strengths in automotive preventive maintenance to drive accelerated growth. The company's pivot to a pure-play model, combined with strategic investments in its network, technology, and talent, positions it to capture market share in a resilient industry. Despite near-term impacts from refranchising and necessary technology investments, the reaffirmed FY25 guidance signals confidence in the underlying business momentum and the path towards significant network expansion and long-term value creation. The focus on operational excellence, customer experience, and capital-efficient growth through strategic partnerships and acquisitions underpins the investment thesis. While risks such as control deficiencies and regulatory hurdles for acquisitions warrant monitoring, Valvoline's differentiated service model and strategic initiatives appear well-aligned to deliver continued profitable growth in the years ahead.