CarParts.com, Inc. (NASDAQ:PRTS) Q1 2024 Earnings Call Transcript May 7, 2024

CarParts.com, Inc. misses on earnings expectations. Reported EPS is $-0.11465 EPS, expectations were $-0.1. CarParts.com, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. At this time, all participants will be in a listen-only mode. After the presentation, there will be a question-and-answer session. Please note this call is being recorded. I would now like to pass the conference over to our host, Tina Mirfarsi, Senior Vice President of Global Communications and Culture. Please go ahead.

Tina Mirfarsi: Hello, everyone and thank you for joining us for the CarParts.com first quarter conference call. Joining me today are David Meniane, Chief Executive Officer; Ryan Lockwood, Chief Financial Officer; and Michael Huffaker, Chief Operating Officer. Before I turn it over to David to start the meeting, I have some important disclosures. The prepared remarks and responses to your questions could contain certain forward-looking statements related to the business under the federal securities laws. Actual results may differ materially from those contained in or implied by these forward-looking statements due to the risks and uncertainties associated with the business. For a discussion of the material risks and other important factors that could affect results, please refer to the CarParts.com annual report on Form 10-K and 10-Q as filed with the SEC, both of which can be found on our Investor Relations website.

On the call, both GAAP and non-GAAP financial measures will be discussed. A reconciliation of GAAP to non-GAAP financial measures is provided in the CarParts.com press release issued today. And with that, I would now like to turn the call over to David.

David Meniane: Thank you, Tina, and thank you all for joining us. I will begin with some highlights from the quarter, provide an update on the economic environment and then turn it over to Ryan to review our financial performance in more detail, before opening it up for Q&A. Our performance so far this year has been disappointing and does not meet our standards. We’re facing headwinds in key categories and certain customer segments are being impacted by a deteriorating economic outlook. We need to maintain financial discipline and do a better job on both gross and net margins. Now we have several variables within our control, such as pricing optimization, marketing, last-mile transportation costs and product expansion where we have opportunities for margin improvements.

Over the last few years, we have made significant investments in infrastructure and operating capabilities, we now need to focus on efficiency and effectiveness to quickly deliver improvements and profitability. The ultimate measure of success for our company is long-term free cash flow and over the last few quarters we've made insufficient progress. In the first quarter of 2024, our sales reached $166 million, down 5% from the prior year period. We experienced significant weather impact in January and the first half of February. And our more price-sensitive segments underperformed throughout the quarter. This decline was primarily driven by acute pressure in lighting and mirrors attributable to a flood of non-Department of Transportation, compliance, low cost and low quality parts from overseas, which are often illegal.

These two categories account for approximately one-quarter of our revenue and represent the vast majority of our year-over-year decline, masking the strength in other categories, particularly in large replacement parts, where we have a competitive advantage. The current environment also has put significant pressure on low price and discount seeking customers, which are becoming more scarce and more expensive to acquire and service. To maintain financial discipline, we made the decision to both adjust pricing and reduce our customer acquisition spend on the subset of customers. We’re focusing our efforts on targeting consumers that want quality parts at competitive prices. This is a more profitable customer base, which gives us a higher gross margin profile.

Due to these efforts, we began to see gross margin improvement in the back half of Q1 and our momentum has continued during the month of April. In Q1, we also implemented aggressive cost savings initiatives that are expected to provide up to $8 million in cost reductions in 2024 and $10 million on an annualized basis. Combined with our pricing and customer acquisition adjustments, we expect to see better unit economics on less volume, which will result in a more efficient and profitable business over time. Adjusted EBITDA for the quarter was approximately $1.1 million excluding transition costs. These costs include related to moving to our new semi-automated larger facility in Las Vegas Nevada as well as costs related to rightsizing our workforce.

Ryan will talk about the implications of these changes on our 2024 outlook. Now, I want to emphasize that we're targeting gross profit dollars to remain within the range we had previously forecasted. Our strong balance sheet provides us with staying power, and we're very comfortable with our capital position at this time. We are positioning CarParts.com for the short term and long term by focusing on: one, the development of our digital first and customer-centric automotive e-commerce and mobile app strategy. Two, the expansion of our proprietary portfolio with premium products and services to capture new markets and customers; and three, generating more brand awareness for CarParts.com and capturing a wider customer base. Before going into some highlights for the quarter, I wanted to announce that we published an updated investor deck today that describes the CarParts.com investment opportunities and defines each one of these strategic drivers in more detail.

The presentation is available at carparts.com/investor. Next, I'd like to cover our main highlights for the quarter. First, we made big moves to supercharge our e-commerce and mobile app experience and ensure CarParts.com is the stress-free destination of choice for consumers to address their vehicles maintenance and repair needs. Our mobile app, which successfully launched last summer on both iOS and Android continues to grow with over 350,000 total downloads. Mobile app revenue currently accounts for 8% of our e-commerce revenue compared to 0% in Q3 of last year. With 80% of our customers shopping on mobile, we expect direct in-app purchases to drive savings for us and reduce our reliance on search engine and performance marketing to promote our brands and products, while also incentivizing repeat purchases.

We believe this will lower our marketing spend and drive increased profitability over time. We also launched our first machine learning powered product recommendation engine built on top of our proprietary fitment data. Over time, we expect this to increase units per order, which will make freight more efficient and drive higher gross margin. A few weeks ago, we also introduced the first of several fee income initiatives to drive incremental high-margin dollars. Our new parts and shipping protection offerings are both live and ramping up. Over time, we expect those two initiatives to generate incremental gross profit dollars at an annualized rate of approximately $2 million. Second, we're optimizing our product and price assortment to capture market share by catering to more premium shoppers, enhancing our competitiveness and positioning us for sustained growth.

In this quarter, we continue to optimize our product mix and expanded our inventory by adding new SKUs, aiming to attract more customers, enhance our profit margins and increase overall revenue. For context, most new products we add have a revenue-generating capacity that can last up to 20 years and compound over time. We are also launching several of our product lines under the JC Whitney brand in Q2 and Q3 of this year. These products are focused on providing higher quality products at an enhanced price point and a higher gross margin profile. Over time, we believe we can increase gross margin by upgrading our products from an unbranded private label business to a branded model, leveraging the legacy of our JC Whitney brand. Third, we continue to invest in our marketing channels to improve brand awareness and grow our customer base while reducing customer acquisition costs.

We continue to attract and strengthen our relationships with customers with new content on our own channels. Our YouTube channel continues to grow with an expanding number of proprietary educational and instructional talks and videos to help attract customers who tend to be less price sensitive. Over time, our own content push will not only foster an automotive community but help us acquire new customers on lower acquisition costs and decrease our reliance on third-party advertisers to make our business more profitable. Before I turn the call over to Ryan to discuss quarterly financials and details, I want to provide an update on our ongoing efforts to optimize our logistics and supply chain management. We are on track to begin operations at our new and larger semi-automated facility in Las Vegas, Nevada in this quarter.

This investment was made to drive improve customer experience as well as operating leverage in the form of process efficiencies, and we expect those savings to start ramping up in the second half of 2024 and fully realized in 2025. The new West Coast flagship will feature a state-of-the-art AI-powered PIC module and extensive conveyance that will allow us for increased gross margin through lower freight costs due to expanded regional assortment, as well as a significant reduction in operating costs. I'll now hand it over to Ryan for a financial update.

Ryan Lockwood: Thank you, David. In Q1, we reported revenues of $166.3 million, down 5% from $175.5 million last year. Gross profit for the quarter was $53.9 million, down approximately 14% compared to the prior year. Gross margin was 32.4% of sales, down from 35.6% in the prior year due to the higher freight costs and pricing compression. GAAP net loss for the quarter was $6.5 million, compared to net income of $1.1 million in the prior year period. We reported adjusted EBITDA of $1.1 million versus $9.4 million in the prior year period. This adjusts for certain short-term expenses, including $483,000 of transition-related costs to our recent workforce reductions and $471,000 in overlapping rent and related expenses from our new Las Vegas facility.

These strategic investments and other cost-reduction initiatives allow us to respond appropriately to the retail environment and ensure long-term value creation for our shareholders. On an annualized basis, we expect our cost-reduction initiatives to equal $10 million. For fiscal 2024, the flow-through should be approximately $8 million. Turning to the balance sheet, we ended the quarter with $46 million of cash and no revolver debt. We generated $437,000 of interest income in the first quarter. Our cash position and untapped revolver continues to support our business plan. The inventory balance at the quarter end was $120 million versus $136 million in the prior year. As a reminder, we account for our inventory on a FIFO basis. Therefore, some of the benefit we expect to see as we improve sourcing will be delayed until we sell through the existing higher-cost FIFO layers.

Turning to our outlook for 2024. In the months of March and April, we saw improvements in gross margin above the top end of our previous guidance, which was offset by lower revenue. For the full year, we are still targeting gross profit dollars inside the range of our previous guidance. However, as we focus on our more profitable channels and segments, sales will be lower year-over-year at a higher gross margin percent than previously guided. Financial discipline is part of our DNA, and given the evolving market dynamics, we are doubling down on opportunities for margin expansion around pricing optimization, marketing, supply chain, technology and fee income. In the short term, we will spend the rest of fiscal 2024 focused on improving efficiency and profitability to significantly increase adjusted EBITDA in 2025 and 2026.

By continuing the efforts around our three strategic pillars and efficiency, we believe we can achieve adjusted EBITDA growth next year. As we look to the medium term, we are working towards achieving a 6% to 8% adjusted EBITDA margin, as well as increasing our free cash flow generation. For the full year 2024, we revised our revenue guidance down to $600 million to $625 million to reflect our focus on margin improvement. Our previous guidance had been for a range of $662 to $668. We revised our gross profit margin guidance up to 33% plus or minus 100 basis points, which will partially offset lower expected sales. Our previous guidance was 31% plus or minus 100 basis points. The outlined guidance change is relatively neutral from a gross profit dollar perspective.

We believe the strategy of optimizing around transactions at a higher gross margin will help us achieve our medium term profitability target by making us more efficient through handling less packages, fewer customer service requests, and lower reverse logistic costs. Overall, we believe that the impact of our strategic priorities and focus on attracting higher value customers will restore adjusted EBITDA and profitability growth. We are well positioned to capture the tremendous and growing opportunity in a highly fragmented and underserved $400 billion aftermarket auto parts industry. We continue to build a world-class organization centered around the needs of our customers, and we believe we will create long-term value and benefit our stakeholders for years to come.

We will continue balancing financial prudence with opportunistically returning capital to shareholders through the remainder of the year. Thank you, everyone, for joining today's call. We will now turn it over to the operator and open it up for your questions.

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