Q3 2020 Carparts.Com Inc Earnings Call
Welcome to the car parts that third quarter 2020 conference call.
On the call from the company I must Peaker, Chief Executive Officer, and be determined young Chief operating officer, and Chief Financial Officer by.
By now everyone should have access to the third quarter 2020 earnings release, which went out today at approximately nine o'clock PM Eastern time.
If you've not to eat the release it is available in the Investor Relations section of the car parts Dotcom website at car parts Dotcom fourth slashing bester.
This call will be available for replay via the webcast archived at car parts Dot Com sports much investor and also will be available through November 20, Threerd 2020 via telephone balance provided in the earnings release.
Before we begin I'd like to remind everyone that the prepared remarks contain certain forward looking statements within the meaning of the federal Securities laws and management may make additional forward looking statements in the spots to your questions. The forward looking statements include but are not limited to statements regarding future events, our future operating and financial results.
Total expectations expected growth and strategies key operating metrics and 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 Corona buyers on our supply chain and other.
Reading 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 list factors contained in car parts Dot Com annual report on form 10-K, and quarterly reports on form 10-Q filed with Securities and exchange can.
Mission for a detailed discussion on the fact that they can cause actual results to differ materially from those projected in any forward looking statement harp.
Our parts Dot Com assumes no obligation to nor does it intend to update or revise any forward looking projections that maybe made in today's release or call.
Or to update or revise the reasons actual results could differ materially from those anticipated in these 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 explanation of car parts Dot com.
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.
The company's website.
The non-GAAP information is not a substitute for any performance measure derived in accordance with GAAP in such non-GAAP measures have limitations, which are detailed in the company's press release with that I would now like to turn the call over to his CEO must peaker.
Thank you operator, and good morning, everyone. During the quarter, we continue to drive exceptional growth across our business well maintained our robust sales momentum and achieved a record level of gross margin.
Well continue to generate substantial year over year increases to our topline and bottom line then.
The investments we have made in our technology marketing and supply chain [laughter] positioned us as a best in class operator within the rapidly evolving E commerce environment.
The success, we have to they would not be possible without the hard work from our team and what do you mean committed to keeping them healthy and safe.
Corporate than the contact center teams are still working remotely and work closely following older common that safety and sanitation protocols for our distribution centers.
As we continue to address high levels of customer demand and fulfillment volumes were deeply grateful for our frontline and distribution center personnel.
Currently there are three major consumer behavior, Jake changes that are helping to propel our growth.
A shift from do it for me the D I y.
Secular shift from offline to online and more recently, our shift away from public transportation combined with the oldest car fleet the company has ever seen.
First we're seeing strong momentum in the D. I Y. Autopart segment with record numbers of consumers choosing to shop for their autoparts online.
This shift is driven by macroeconomic factors that we usually observed during uncertain economic conditions.
Consumers react by maintaining their existing vehicles right rather than purchase new vehicles.
Additionally, with availability of tools like Youtube that helped the mystify consumer repair it is easier than ever to save money by doing that he tear yourself instead of taking the car to the shop.
The second changing consumer behavior is a shift from offline to online.
Customers across many industries have been adopting online shopping.
The auto parts industry lags the other verticals in the online penetration by a wide margin.
Were still in low single digits compared to other categories that are closer to 30% online penetration.
We believe the shifting commerce will continue its acceleration as customers experience extended selection fast shipping and lower prices.
We believe we are the best positioned company in our category to take advantage of the shift with our focus on getting the right parts to the customers quickly through our unique distribution model that goes from the factory to the consumer.
We also believe that working sticky customer relationships that will prove to be resilient overtime.
Nobody is going to a blockbuster store after discovering Netflix.
Lastly miles driven continue to be below peak over the levels. However, they are trending in the right direction. According.
According to the latest data available from the U.S. Department of transportation, there are down 12% from this time last year, but have rebounded by 50% from where they started doing the laws of the pandemic in April.
As the country continues the opening and as consumers shift away from public and share transportation. We believe that these metrics will improve.
We saw similar trends play out in China, and we expect the U.S. mobility will follow.
We use these statistics and other other macroeconomic factors as indicators for our business, but they do not dictate our ability to execute well.
We delivered strong results in Q1 peak, all that well how's ground up 42% and immediately following the first stimulus package when discretionary income improved.
A stimulus and the additional benefits expired at the end of July we continued to see strong trends in our business. Our weekly sales demand was consistent throughout the third quarter. We also saw no significant difference in sales geographically based on location and shelter and place orders.
Our brick and mortar competitors were always open and reported record sales while at the same time with drove another quarter of triple digit revenue growth in our primary sales channel car Park dotcom.
Our strategy has proven resilient to large scale changes in both buying and driving behavior, which tells us that we have established a strong operational foundation from which to navigate these dynamic times.
At the product level, we have maintained our focus on higher margin private label parts or what we now call our house brands, which continue to make up the majority of our sales.
And as we mentioned last quarter were excited to begin ramping our hard parts business.
We recently kicked off our two drive brand and look forward to introducing expanded SKU offerings over the next several months under the dry.
Dr. shortstop and JC Whitney brand umbrella.
Overall, our performance this quarter demonstrates that we are continuing to operate from a position of strength with all the improvements we have implemented across our business over the past 18 months, we're well positioned to continue capitalizing on the significant expansion of the E commerce industry for auto parts.
With that I'll turn it over to David to walk through our financial and operational highlights.
Thanks, a lot.
As we continue to expand our ecommerce business, we remain committed to our three pillars of execution outstanding customer service operational excellence and financial discipline.
As I've mentioned the strong momentum in net sales continued in Q3, increasing 69% year over year to 117.4 million.
Increase was primarily driven by revenue growth from our flagship website car parts dotcom, which continues to be our fastest growing channel and grew 105% year over year.
Gross profit in Q3 more than doubled year over year, reaching a company record of 43.1 million gross margins expanded 620 basis points to 36.7%, making this our seventh consecutive quarter of gross margin expansion.
The increase was primarily due to product mix channel mix and logistics optimization.
Total net income for the quarter improved to $1.4 million compared to a net loss of 1.4 million in Q3 2019.
Adjusted EBITDA in Q3 increased nearly four times to 5.1 million compared to last year. The strong increase stems from higher sales as well as the consistent improvements in operations technology marketing supply chain customer service and other key areas of our business now turning to the balance sheet at five.
Fiscal quarter end September 26, 2020, we had a cash balance of $59 million compared to 2.3 at the end of 2019 as we successfully completed a $60 million public offering that was three times oversubscribed. The offering closed on August 18, and we want to welcome our new long term focus shareholders, but also want to thank.
Many of our existing shareholders for participating.
On the liability side, we paid down $12 million of liabilities tied to our credit facility, which represents virtually all of our debt outside of leases as a reminder, our ABL facility with JP Morgan Chase allows us to flex up to $40 million, depending on inventory levels.
Our company now has a clean capital structure and ample liquidity to support our long term growth initiatives, our supply chain and inventory investments will be key drivers to our long term strategy of right part right time right place.
From an operational perspective, Q3 was very strong from a demand standpoint, and our network continue to operate at full capacity, both from an inbound and outbound perspective.
From an inventory standpoint, with the buys we placed in Q2, our replacement parts, one stronger position, but our hard parts inventory continue to lag due to the longer lead times, we expect our inventory position to continue improving over the over the next two quarters.
Now briefly touching on our footprint, our new Texas distribution center build out and ramp up has been right on schedule. We are happy to announce that we are now receiving seven days a week and have already shipped over 10000 packages quarter to date, we expect Texas outbound volume to grow as more inventory has received were thankful to the city of Grand Prairie for one.
Coming to us and look forward to being part of this amazing community and creating jobs in warehouse operations technology and customer service.
Our results this quarter validate the strength and resilience of our strategy and our teams even in this uncertain macro environment. We're proud of the strong foundation, we have built and will remain focused on building a long lasting exceptional company with that I'll turn the call back over to Jeff.
As parting thoughts for today's call I want to highlight a few points that make our business unique.
In terms of our unit economics were profitable on nearly every transaction, we make even when factoring in customer acquisition and fulfillment costs. We have continued to increase sales and improve our margins, even without a new stimulus package or extended unemployment benefits.
We believe we have built a robust business that can thrive in any market condition, especially in the recessionary environment.
Our business was already growing Pico, but as a result of the operational improvements we have made across our technology marketing and supply chain the.
The heightened demand environment that emerged from the pandemic was the result of three broader transatlantic above.
Shifted YY shift from offline to online and more personal mobility.
Turns that we were in a prime position to capitalize on this.
This provides us with plenty of growth to capture for years to come while the overall E. Commerce industry has of course benefitted from pandemic related Tailwinds, we believe that the subsequent changes in consumer shopping habits for auto parts are here to stay well.
Well already retained roughly one third of our customers and expect us to grow as more consumers experience, a convenience and benefits of fast shipping low prices and a wider selection than almost any other auto retailer across.
Across our organization, we have made exceptional progress in establishing carpark dotcom as a modern and scalable ecommerce company.
As we look to the fourth quarter and our trajectory into 2021 will work to further optimize both our backend and our customer facing operations will continue to focus on expanding our inventory and fulfillment capabilities, while remaining financially disciplined when deploying capital to areas of our business in order to generate the strongest returns.
With that we'll open up the call for questions operator.
At this time, we'll be conducting question session. If you want to ask a question. Please press star one on your telephone keypad.
Affirmation tone, indicating your line is in the queue.
You May press pound, if you would like to remove your question from Q1 moment. Please while we poll for questions.
Our first question comes online Siegel with Craig Hallum capital.
Your line is now open.
Great. Good morning, guys and congrats on the results and continued business improvements.
Thanks Aaron.
Curious on business trends in October or post quarter end and how revenue margins are performed and then secondly, if you could comment if revenue growth on a year over year basis has remained similar decline accelerated you're at 69% growth in our Q3, just directionally any commentary would be helpful.
Hey, Ryan its David So I know last quarter, we provided some minor indication is of intra quarter sales because there was a lot of uncertainty in the market as a general rule, it's not really a practice we believe in so we're really trying to focus on executing our plan and we're following our internal rules of success and.
The quarter will report our results. So ultimately what we're doing is taking a long term view and trying to build the business that will be proud to own decades from now but I.
I wouldn't really feel comfortable giving out kind of intra quarter data right now.
Alright.
Just thinking about kind of the margins both near term.
Spend on you mentioned a lot of personnel tech distribution fulfillment et cetera, et cetera can you walk through how you think about kind of the main levers on the cost side and margins in the near term over the next several quarters generally and then also as you look out a few years kind of where the main levers are in the model as the business scales.
Yes, great question. So if you look at our income statement today.
Ballpark about two thirds of our Opex is variable expenses, so fulfillment and customer acquisition cost and credit card fees now on the fixed opex side, we still have some technology that we have to address before getting into the.
At the level that we feel comfortable that I think overtime, we are going to get leverage in our Opex short term, we do have a new DC and we have some technology in catalog investments that we have to make to catch up but I think as far as long term we.
We do see an opportunity to grow sales at a much faster pace than fixed expenses, but short term again, we have some investments to make.
And then maybe just a follow up those investments you think those need to accelerate from where we are today or do you think you can.
Generally hold now there is some seasonality, but generally hold kind of this level and then see more of that operating leverage or is there a need to accelerate that spend.
No I don't I don't think we're going to try to stay disciplined and obviously, we want to keep growing the company and we want to keep the momentum going but we want to do that at a profitable.
So, it's a balance of being profitable and growing the business and managing the investments.
On a quarterly or semi annual basis. So we're just trying to stay disciplined and and rollout the investments on.
On a cadence that we think we can handle from a cash flow standpoint and profitability standpoint.
Then just one on giving a little more detail, but on the underlying metrics, but what percent of E. Commerce traffic mix is paid versus free and then how does that compare versus the prior quarter prior year some historical comps.
Yes, so last year, we were about 80% page.
20% free where much more diversified so.
For the share where were targeting 50 50 splits as we exit the year and we're on pace for that and then next year, we expect that to slips.
Slips and be about 60, 40, maybe 70 30.
Free versus paid.
Great last one for me then I'll turn it over to the others.
Any commentary you can give.
On the.
The pace of sales growth in states regions, where you had one to two day shipping and then now one day shipping on kind of the initial other Texas did that make a difference.
Yes, so it definitely makes a difference and again.
We think we're uniquely positioned in that we are selling a needs based product and so speed to customer is very important we're not selling kind of discretionary accessories and things like that where a customer can wait we are selling something that a customer needs pretty quickly.
So we had a theory that getting closer to the customer will prove out to increase sales and that theory is proving out right now no Texas shipped.
Shipped over 10000 packages already and we're getting the.
The majority of those packages to customers within Texas in one day and so we're seeing pretty good results. It. It is going to take time to ramp up 'cause. It only has a few million dollars worth of inventory in there, but as it ramps we expect to continue to see this trend.
Great. Thanks, guys. Good luck.
Thank you. Our next question comes from Darren Aftahi with Roth Capital Partners. Your line is now open.
Hey, guys. Thanks for taking my questions. Congrats I hope, you're well I'm just following up on the.
See in Texas. The 10000 units you just give us some more color on.
When it officially kind of was lit.
And then kind of where you are from a capacity perspective and perhaps.
How quickly that facility can ramp over the coming two quarters and kind of what your expectation is for full capacity.
Vision. Thanks.
Hey, Darren it's David So yes, the rollout is basically on schedule you know the way we do it as we start really really small so we start receiving a couple of containers and then turn on.
The sales right now it's still at call it 10% to 15% capacity.
Most of the labor right now is scheduled to receive the inventory more than ship it out.
So we're receiving 24 seven but we're not really turning on all the sales because the inventory just isn't there yet.
You know for US the schedule is really to keep receiving until the end of the year and have it that color between 65, and 80% capacity from a footprint standpoint by the end of the year.
Got it great.
More by me you called out investment in Tech.
Could you just be a little bit more specific.
What exactly and technology, you need to invest in and what's kind of the timeframe for that that investment and then if you would mind sharing the indirect.
Channel sales in the quarter that be helpful.
Yes, so I'll I'll I'll I'll tell you a little bit about the investments and tax so a lot of our back end systems are home grown and and the really old.
So a big one is our ERP. So we use great plains, which nobody really uses anymore. So.
So that's the first thing that we need to kind of upgrade and get what the times. So.
That's a big investment for next year and then there are a few other systems.
Upgrading for us.
I will have a purchasing system will have a forecasting system. So just a few systems.
On the backend we need to upgrade.
And then I'll, let David answer the second question.
So I think your question Darren was on the wholesale as a percentage of revenue is that correct correct.
Correct.
So for Q3, we were at 5.8% of the sales were wholesale.
Right and then if I could just squeeze one more in.
So given you've launched Texas.
I know you don't probably want to talk about 2021 like how do we think about the wiring or stack.
New D.C.'s as we go out 12 months from now is that part of the conversation or.
Take your time with Texas, and then see how that rolls out.
So we just completed the network study.
To determine what are the optimal locations to open disease in order to hit 90% of our customers in one day.
I think as we kind of let Texas roll out and as we see sales come in in Q1, we're.
We're going to start thinking about where that will go next.
Great. Thank you.
Thank you. Our next question comes from Elliot Wilbur will be the A. Davidson Your line is open.
Great. Thank you so impressive gross margin during the quarter.
Spoke about the channel mix and product mix.
As a part of it I guess any more color you could share specifically on the gross margin.
And then kind of how we should think about gross margin going forward into the December quarter. Thanks.
Hi, it's Steven So I'm actually glad you asked I think.
When looking at margin, it's really best to look over the course of several quarters and.
At least really the full year, because that's how we manage it internally that's how we look at the business we.
I've always said that we'd like margin in the mid Thirtys, but to your point, it's going to fluctuate up or down based on channel mix and product mix.
I do want to call out that for Q3, which is the quarter that we're talking about.
We did make some a couple of opportunistic buys of a branded inventory and we sold through that inventory, which gave us extra margin.
So I wouldn't really consider that a recurring thing and then in addition, I think we saw a slight decline in our return rate, but obviously that will fluctuate quarter over quarter I think in general again, we try to have more of a long term view and we're looking at creating a business that will be proud to own a decade from now so.
It will fluctuate a little bit up or down based on channel mix and product mix.
Okay, great. Thank you.
Thank you good when somebody wants to ask a question at this time. Please press Star then one are you touched on telephone.
Our next question comes from Eric Beder with FCC Research Your line is open.
Good morning.
Hey, Eric.
Hi.
Could you talk a little bit just last fall for the last question. What are you seeing now that you are getting bigger in.
In terms of better deals from your branded products.
Our partners.
Yes, I'm not so sure it's about us getting bigger I think.
The fact that we have our own fulfillment and we can buy inventory put her in R&D she's.
And distributor to the consumer and then also give brands sort.
Sort of the awareness that they're looking for that our competitors can't really give them.
I think thats, what allows us to to get deals.
Im not so sure it's about us getting bigger, but we have been successful.
In going direct with a lot of the brands.
A lot of the big brands and something that we haven't done before and so we'll continue down that path to to extract better margin and also to allow us to.
To get a better utilization of our of our warehouses.
We've spent the last few years looking at mailed the product that comes from your private label versus branded.
Is it becoming less of a difference in terms of margin going forward that we should be thinking about as you heard incorporate this.
Branded products your own warehouses and capture some of that.
Gross margin in overall operating margin.
Yeah, there is still a difference between private label and branded so we.
We still can't get acquired to the same level as private label, but we are getting closer so before.
If you looked at our our PML last year and you compare the private label on brand that the gap in margin was call. It 2000 deps.
Now, it's probably closer to five to 700 Deps difference in margin.
Okay, and what has been the response, you've been ramping up the amount of skews for JC Whitney and you roll that out what has been the response and the customer base to disease, when you and I guess to the other two branded.
Private label products that you've been rolling out.
Yeah. So we've been doing it kind of slow for now.
But so far the response has been good I mean, we saw that the response when we switched our fuel tanks to a different brand. So replacement doesn't really have brands right. That's just what we decided to call the product years ago, and so when we switched our brands with to see an uptick but will have a long way to go to build awareness for.
All of these brands on.
To translate to the consumer what it actually means when they buy these branded products, so where things like warranty and.
Well, we'll be offering other things.
To stand behind the product, but we do have to build awareness for all of our brands.
And to build on that last question could you talk a little bit about what you've been doing increasing in terms of marketing.
I know you've been doing some more stuff with NASCAR and you've been doing some more.
Elynx could you kind of give us a little bit run through what you're seeing and what is working on in the last few quarters and what you see going forward with it.
Yes, NASCAR, we're very happy with our partnership as Michael Mcdowell and front our motor sports.
The customer and that is very good and their customers and NASCAR customer is very closely tied to what our customer looks like.
So we like that partnership and it's been working the season is over so we did our last race.
A couple of weeks ago, and so we're looking forward to the next season will.
Also been doing a lot of TV.
You know as you know TV.
Well, we're very opportunistic in terms of our buys for TV and as a lot of companies that in the travel industry pulled out.
We were able to get some really low cpms.
And we have a way to measure TV now and so we're seeing really good results from TV were pulled out doing.
During the election cycle, because the cpms or getting kind of high before coming back in at the end of this week now that the election is over so some really good results. There in terms of driving that are to site traffic and we'll continue down that path.
And if I can add to that Erik I think you know on the upper funnel starts and the TV, It's a great opportunity for us to build the brand for car parts Dotcom long term. So if you think about the business last year. Our house brands in Q3, Q4 were up 15% year over year, and then pre pandemic they were up 41% year over year.
So in Q3, we had 69% growth despite no stimulus or an extended unemployment benefits in August or September. So we are seeing long.
Long term a dramatic shift of consumers going from offline to online very similar to other industries and with the number of cars on the road going up and number of miles driven going up we're really empowering drivers to shop in a new way and by premium quality brands in a fast convenient way at a very attractive price and part of the upper funnel marketing efforts.
Is really to to to give that message to consumers. So that people can understand that there is a different way to shop for auto parts.
Great. Thank you good luck for the holiday season.
Thanks.
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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