Q2 2020 Carparts.Com Inc Earnings Call
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Welcome to the car parts Dotcom second quarter 2020 conference call.
On the call from the company, our Love Peaker, Chief Executive Officer, and they didn't then young.
Chief operating officer in Chief Financial Officer by now everyone should have access to the second quarter 2020 earnings release, which went out today at approximately four or five PM eastern time.
If you have not viewed the release it is available in the Investor Relations section.
On the car parts Dotcom website, a car parts dot com Ford flush investor.
This call will be available for replay via the webcast our classic car parts Dot Com Ford flush investor.
Before we begin we would like to remind everyone that the prepared remarks contain certain forward looking statements within the meaning of the federal Securities laws and management May take additional forward looking statements in response to your questions.
The forward looking statements include but are not limited to statements regarding future events or future operating and financial results.
Financial expectations expected growth in strategies key operating metrics in current business indicators capital needs and deployment liquidity product offerings customers suppliers competitors, the impact of tariffs and our tariff mitigation efforts and the potential impact of krona virus on our supply chain and operating results.
The forward looking statements are based on current information.
And expectations.
Our subject to uncertainties and changes in circumstances and do not constitute guarantees of future performance. The forward looking statements involve several factors that could cause actual results to differ materially from those statements.
We refer all of you to the risk factors contained in the car parts Dot Coms annual report on form 10-K, and quarterly reports on form 10-Q filed with the Securities and Exchange Commission for a detailed discussion on the factors that could cause actual results to differ materially from those projected in any forward looking statement.
Carhartt stock comp assumes no obligation to nor does it intend to update or revise any forward looking projections.
That may be made in today's release or call or to update or revise his reasons actual results could differ materially from those anticipated.
Any forward looking statements, even if new information becomes available in the future.
Please note that on todays call. In addition to discussing GAAP financial results and the outlook for the company non-GAAP financial measures such as adjusted EBITDA will be discussed.
An explanation of car parts Dot coms use of non-GAAP financial measures in this call and the reconciliation between GAAP and non-GAAP measures required by SEC regulation G is included in the car parts Dotcom press release issued today.
Which again can be found on the Investor Relations section of the company's website.
Non-GAAP information is not a substitute for any performance measure derived in accordance with gap and such non-GAAP measure.
It has limitations, which are detailed in companies press release with that I'd now like to turn the call over to CEO, let's peaker.
Thank you operator, and good afternoon, everyone.
I'm proud to announce I'm flattered record breaking quarter in terms of sales and gross profit marking another period of significant growth for our company.
Additionally, we drove exceptional year over year bottom line improvements in both net income and adjusted EBITDA.
Accelerated momentum was assessed on seven chasing ecommerce demand tailwinds points to the continued success of our strategy and the resilience of our business and also to flags that countless operational improvements we have made over the past 18 months.
As we continue to navigate the effects of that pandemic the health unsafe standby team remains our top priority.
Our frontline teams in our distribution centers have access to personal protective equipment at here at the strict social distancing and sanitation standards. Meanwhile, our corporate and contact center teams are still working efficiently and productively from home.
We're incredibly grateful for our teams flexibility and hard work over these past few months.
One of the leading indicators of our business as miles driven which in June who are down 20% from prequalified levels.
However, our miles driven improved as the quarter went on from down as much of 60% in April so now down 20% compared to people that levels. So turns are moving into right direction.
Despite these challenges that DIY autoparts markets has performed exceptionally well, especially online.
We believe consumers have gone increasingly comfortable buying their autopart online.
Industry reports show that overall ecommerce penetration for a total retail sales reached 28% for Q2 compared to 17% in Q1, while autoparts remains largely underpenetrated online in mid single digits.
We believe that the industry will continue to experience a shift online and we're well positioned to take advantage of this new demand over the long term as we continue to execute our strategy.
Over the last 18 months, we began building the foundation for a modern and scalable ecommerce companies.
While the current have predicted that pandemic, we have plans for significant growth and a shift from offline to online.
Starting in Q1 and continuing into Q2, they investments were made in our technology marketing and supply chain last year, we're clear differentiators and our ability to execute.
Between our expanded distribution footprint improved sites, Steve and faster shipping times, we believe that were creating sticky customer relationships, that's will prove to be resilience overtime.
Well look forward to delighting, our customers and believe that this larger and more loyal customer base, along with significant new customer acquisition will lead the continued growth.
Now moving onto a key operational updates for the quarter first and foremost following our sales growth and inclusion in the Russell 2000 Index, we decided that we needed then you name that reflected the Techforward company that we have become.
As many of you likely saw last month, we announced that we have rebounded from two car part dotcom.
This development marks the culmination of our efforts to consolidate our web sites over the past few quarters and will enable us to optimize how where perceived than positions in the markets as well as how we allocate our marketing dollars.
In addition to being a best in class Autopart seller. This name change aligns with our positioning as a leading ecommerce and technology company.
As we've highlighted on Pts conference calls, we have made significant investments in creating more efficient backend operations and optimizing our users digital experience so internally developed software and our proprietary catalog.
Yes, so much more than an auto parts company now.
We often use analogy that we inherited blockbuster and were now building Netflix.
On the site consolidation sides were happy to announce that were now officially down to one website car parts dotcom.
In one brand with one site allows us to be more efficient with our marketing and improve our brand presence both online and offline.
We have recently increased our efforts in upper funnel marketing strategy designed to introduce our brand to a broader audience. Both through our NASCAR partnership was driver Michael Mcdowell answer various TV commercials.
Before I pass the call to David to review, our financial results for the quarter I want to welcome Mancil due to our board of directors.
Nancy the CEO and co founder of MPOG, leading digital display software company used by Fortune 500 companies and show was named one of Forbes 30 under 30 and fortunes time, most promising woman entrepreneurs.
She brings in months technology and ecommerce experience to the board and were thrilled to welcome her to the car part of Dotcom team.
With that I'll turn it over to David the walk through our financials and other operational highlights David.
Thanks live.
With more consumers buying their parts online our team is more focused than ever on operational excellence and financial discipline as we continue to expand our ecommerce business as Larry mentioned Q2 marks another set of company records with our highest net sales ever which increased 61% to 118.9 million compared to 73.
The point 7 million last year, the increase was primarily driven by triple digit growth in revenues from car parts stuck on.
Gross profit for the quarter nearly doubled to accompany record of 40.8 million versus 21.8 million last year with gross margin of 480 basis points to 34.3% versus 29.5% last year.
It's also marks our sixth consecutive quarter of gross margin expansion. The increase in margin is partially due to product mix as well as leveraging long term strategic partnerships to buy premium branded products directly from the manufacturers and remove steps in the supply chain.
Total net income from the quarter improved significantly to 1.6 million compared to a net loss of 1.5 million in Q2 2019.
Adjusted EBITDA in Q2 increased four times, the 5.6 million compared to 1.4 million in Q2 of 2019, the strong increased stems from all the investments and improvements made over the past 18 months in all areas of our business, including operations technology marketing supply chain.
Customer service and much more for the month of July our net sales continued to remain strong with year over year growth over 60%, even while the entire country has begun using the stayed home restrictions why we typically don't provide any guidance given the current uncertainty caused by covert 19, we are providing these these insights so.
Turning to the balance sheet at fiscal quarter end June 27, 2020, we had a cash balance of 24.9 million compared to just 2.3 million at the end of 2019. The strong increase was primarily driven by higher cash flow from operations and working capital improvements.
The final call out on our balance sheet is the conversion of our preferred shares on June 19th 2020, our outstanding series, a convertible preferred stock automatically converted into 2.62 million common shares. These securities had been outstanding since 2013, and we want to thank our founders for helping the company back then when it needed to.
Capital.
Although we're very proud of these results in the improvements we've made to the business. We still have much work to do our most immediate area of focus will continue to be optimize their inventory to keep up with the increase in consumer demand.
During the second quarter customers were placing orders at such high volumes that we couldn't replenish inventory in time due to our longer lead times.
Even with most of the United States opening up and even stay at home orders are demand continues to be strong demand is simply outpacing our supply and unlike other industries were one product can be substituted for another in auto parts you either have it or you don't.
Our inventory levels have already started coming back up and we have experienced minimal supply chain disruptions to covert 19. Additionally, as we continue to expand our product offering we have begun to diversify our supply chain geographically with new partnerships in India Korea and Mexico.
With the continued growth in our business. We also decided to accelerate the timing of our additional supply chain investments as we strive to get closer to our customers and increased our footprint as we recently announced we will be opening a new distribution center in Grand Prairie, Texas. Later this year. This opening will at 210000 square feet of warehouse capacity.
And provide us with the ability to deliver to 61% of the country in one day with that I'll turn the call back over to lift.
As David mentioned were very proud of our strong second quarter performance and the momentum we have sustained throughout 2020.
Our work over the past 18 months to optimize our supply chain marketing and technology capabilities as paying off and we're continuing to drive further improvements in these areas.
Across our business were actively expanding our teams both in the us and abroad, including at our contact center in the Philippines.
As always we'll remain financially disciplined and be extremely mindful in our capital allocation decisions.
As always we want to thank our warehouse associates for their hard work as well as all of our team members for their support and commitment to the new car part dotcom.
That will open up the call for questions operator.
At this time, we will be conducting a question and answer session.
If you would like to ask the question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Q.
He may press pound, if you'd like to remove your question from the Q1 moment. Please while we pull for questions.
Our first question comes from Brian fiddle with Craig Hallum Capital. Your line is now open.
Good afternoon, David Lab, and congrats on the impressive results.
Hey, Ryan how are you.
Doing well guys.
Just want to start on the monthly sales cadence. If you would you could break that down within the quarter and then you noted supply chain constraints. If you could also.
Comment on those kind of within the quarter. If you saw a greater impacting the in anymore.
So as far as breaking the sales monthly for during the quarter, we don't really do that Ryan.
If you look at the entire quarter, we feel really good about the performance also for July.
Year over year sales are up more than 60%, that's total topline as far as supply chain disruption, we didnt really face any.
Our suppliers in Taiwan and China.
I didn't really see anything past Chinese new year.
So nothing more than a week or two.
Good.
Then just on.
Operating margin expansion in the quarter. Despite you may get ramped up some marketing spend.
How should we think about operating leverage going forward versus reinvestment.
In the business.
Yes, so it's definitely a good question and something we think about.
All the time, obviously, we don't really manage the business in quarters and those of the shareholders that Noah I understand that where operators first.
The long term objective is really to build a sustainable and profitable business. So that means managing your opex.
As revenues grow some of our operating expenses are variable some of them more fixed. So there is in my opinion as sales continued to grow there is going to be some operating leverage that we do have some investments to make in technology marketing supply chain.
We're really focused on spending the money where it makes the most dense and obviously, we give a priority to anything that has a positive ROI annual train whether areas that are less efficient.
And then just last question for you and then I'll turn it over to keep the others. How is the GQ Whitney rebranding going and then also SKU expansion.
Any more detailed or would be helpful. Thanks.
Yes, so from a SKU expansion perspective on where in the process right now of.
Adding mechanical parts. So it's about 10000 new skews.
That should land.
Sometime in Q4, and those will be launched the under different brand names, we're working on some of that right now.
The JC Whitney goes so JC Whitney its going to be our brand for performance and accessories.
And we have our first set of products that we already.
Quarter than that should be landing.
At the end of this quarter early Q4.
So we'll have some funder flares and the few other products that were coming out with so the JC Whitney is going to be reserve, specifically for performance and accessories.
Maybe just a quick follow up if I may.
Private label collision parts that you have today, which is a core part of your business.
Are those staying under the brands. They currently have or what's the plants there.
Right now staying under the same brands, but.
That may change.
Okay. Good enough, thanks, guys and good luck.
Thanks.
Thank you.
As a reminder, ladies and gentlemen that Star then one to ask the question.
Our next question comes from Gary Prestopino with Barrington Research. Your line is now open.
Hey, Rob, let David How're you doing.
Good how are you doing very well just great. Thanks.
A couple of questions here, usually you would you would call out what the of private label sales. The growth was in the percentage shift from Q O Q2 to Q2 last year. This year could you are you still willing to give that information out.
Yes. So this information is included in the in the Q.
The way to think about it is now the majority of the business is private label or what we call. Our house brands, So right moving forward or kind of not really going to call. It out in the prepared remarks, but it'll be in the queue.
But for Q2, 80% was our private label and 13% was branded and thus compared to 79% private label last year and 21% Brandy.
Okay.
So there last last quarter you guys you were at about 91% oriented I believe so that is there something in the categorization that you've changed there.
No. There so there's two two variables to look at here, obviously, the nails or just the growth was exponential so our inventory position took a hit during the quarter. So private private label is the in stock position is lower your sales take a hit on private label. So we make it up on the brand aside the other thing that we've been working on a.
We did enter into some long term strategic partnerships with a lot of premium brands. So we are now able to sell premium branded product on core plus stock comp at margins that are very similar to our our private label.
So there are a lot of opportunities on the branded side that we just didn't have before.
Okay. So thats good news on the branded side, Okay very helpful. Other yes, very good a couple other questions here.
I noticed that your shares outstanding really jump the new converted that the convert NIS 2.6 million shares.
But you're now showing 47 million shares so is that all just options in the money that up coming into play here.
Yes. Thank I think the number is slightly lower on a fully diluted basis, I think you're pretty close yes, youre correct. If you remember.
So most of the executive team 18 out of 20 members on the executive team are new to the business.
Last year, when we all join the company just didnt have cash so.
Part of our compensation includes performance based options and shares and ask the company continues to perform.
The team will invest some of these options so thats part of the increasing share count.
Okay, and then just a couple of more and then I'll turn it over and somebody else can go as far as your your excess capacity now across your core DC, where are you are you basically almost kind of maxed out in the sense.
So if you look at the three Dcs that our operational right, So Lasalle Vegas, and Virginia, where basically operating at full steam.
So we definitely need and Grand Prairie, Texas to keep up with the growth that will give us an additional 35% footprint.
So thats receiving capacity and outbound capacity at the same time, so that should give us a little boost that keep up with what's going on in the marketplace and that'll come Onstream in December right.
It might be sooner early Q4 is what we're targeting.
Okay and then one last question in terms of what you said you had some problems with the inventory you had some stock outs.
As of that nature, how do you treat the customer in that regard. So you keep a customer satisfied I mean do you view.
Backorder at for them, we give them some kind of a discount what do you do to entice the customer to stick stick with what they ordered.
No. So we have because of the long lead times, it's pretty difficult to ER.
To do like a back order for our customer and it's very difficult for us to get visibility into what inventory is on water. So usually what we'll do as when were starting to run low on inventory, we start pulling it down from all of our marketing channels. So.
There is there's very little chance of a customer, placing an order of a skew thats out of stock.
All right. So they just they you just say that you don't have the part that yes, they certainly don't see it's.
Okay all right. Thank you.
Thank you.
Our next question comes from Stephen Brent Center with a deal investments your line is now.
Good afternoon gentlemen.
You had mentioned maintenance parts on the previous call.
Where are you out with that today.
Yeah, So thats part of our mechanical offering as well so will have breaks and some other things that's going to be a Q4 Q1 initiative.
Okay, and you had mentioned some partnerships I guess, maybe in China or other areas to bring in I guess more inventory.
That really happen or is that in the works.
On a lot of data has already happened then it's more of a.
Diversification of our supply chain. So historically most of our parts came from Taiwan, and China and now we've diversified a little bit and the small percentage of our business now comes from.
India Korea in Mexico.
Okay very good thank you Jim.
Thank you.
Our next question comes from Eric Beder with FCC Research. Your line is now open.
Eric.
Eric Your line is open please check your mute.
And our next question comes from.
Gary Prestopino with Barrington Research your line is open.
I just wanted to ask a follow up you guys mentioned, you are making some investments and fulfillment.
And those some other things for growth could you maybe just go into is that the Grand Prairie.
Texas.
Do you see that you're investing in one other things are you doing.
That's the majority of it but we're constantly making investments in the other disease.
Worst kind of holding ourselves up to higher escalate. So when a container comes in we want to receive it faster and when an order comes and we want to ship it out faster. So that includes making some small investments in the DC to reorganize the flow and make sure that we can shut off the orders as quickly as possible and our ultimate goal just to add to that does when measure.
Clicks to delivery and the ultimate goal for us on where were going to go over the next call at several years as one day click to delivery, which means that the season, we'll have to get the order out within 12 hours and then we'll have to be at close enough to the customer in order to get that delivery. The next day.
So so as you refine your processes here and you cut down on your web sites in oil are you really.
Where you want to be and then just a matter of you've got to fine tune. It and then obviously you got to add more distribution and more of a skews.
Yes, so in terms of web sites were already there. So we're at one website that's car part dotcom.
In terms of fulfillment capabilities.
They still have a lot of work that are there.
Yeah.
And when you're saying a lot of workflow, but I'm going to press you on this but I mean, what what exactly is there. Besides like you said opening up a new DC and all out as it it's just a better execution.
Yeah, I mean, theres automation that that can go into Dcs that can speed up how quickly the order gets out of the DC.
So we're looking at some of that.
Wait we have to evaluate our fulfillment network was for the season.
Pretty easy to to order skews, but.
You know as we kind of open up and think about more Dcs, we have to start thinking about you know the would do a hub and spoke model the will want to touch skews multiple times. So there's just a lot of work when you throw in the around our fulfillment capabilities.
As we continue to grow.
Okay that helps thank you.
Thank you.
Ladies and gentlemen. This concludes today's conference call. You May now disconnect at this time. Thank you for your participation.
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