Q3 2021 Carparts.Com Inc Earnings Call
Welcome to the car Park Dot Com third quarter 2021 earnings conference call.
On the call from the company is last picker, the Chief Executive Officer, and Dave Minion, Chief Operating Officer, and Chief Financial Officer by now everyone should have access to the third quarter 2021 earnings release, which went out today at approximately four one P M Eastern standard time.
If you have not reviewed the release it is available in the Investor Relations section of the company's website at car parts Dot Com Slash investor call will be available for replay via the webcast archives at car Park Dotcom invest slash investor.
Before we begin we would like to remind everyone that the prepared remarks contain forward looking statements within the meaning of the federal security laws.
Management may make additional forward looking statements in response to your questions. The forward looking statements include but are not limited to statements regarding future events.
Our future operating and financial results financial expectations expected growth and strategies key operating metrics and current business indicators.
Capital needs and deployment liquidity product offering customers suppliers competitors, the impact of tariffs and our tariff mitigation efforts and the potential impact of Corona virus on our supply chain and operating results. The forward looking statements are based on current information and expectations are set.
Object to uncertainties and changes in.
Circumstances, and do not constitute guarantees of future performance are 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 car parts Dot Com annual report on Form 10-K, and quarterly reports on Form 10-Q filed with the security and Exchange Commission for a detailed discussion on the factors that can cause actual results to differ materially from those projected in any forward.
Looking statements Carpark Dot com 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 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 today's call. In addition to discussing GAAP financial results and the outlook of the company's non-GAAP financial measures such as adjusted EBITDA will be discussed an expectation of car parts dot com use of non-GAAP financial measures in this call and the.
<unk> between GAAP and non-GAAP measures required by the SEC regulation G is included in the car parts Dot Com press release issued today, which again can be found on the Investor Relations section of the company's website. The non-GAAP information is not a substitute or any performance measure.
Driven in accordance with GAAP and such non-GAAP measures have limitations, which are detailed in the company's press release with that I would like to turn the call over to CEO.
<unk>. Please go ahead.
Thank you operator, and good afternoon, everyone. As you saw in today's press release Carper of the Dot com achieved its seventh consecutive quarter of year over year growth with net sales up 21% from Q3 last year and 90% on a two year stack.
Online demand continues to exceed our outbound capacity and I want to thank the team for working both smarter and harder to navigate this extremely difficult environment.
We believe we're the best positioned company long term, so disrupting an industry with only single digit online penetration and a total addressable market of over $300 billion will.
We continue to expect 20% to 25% compounded topline growth and 8% to 10% EBITDA margins over the long term.
From the successful implementation of our strategy right part right time right place let.
Let me give you a quick update on each of the three pillars of our strategy.
Alright, part means ensuring our customers can find the exact solution that fits their vehicle on our website.
We're very excited that we have been able to continue to increase our inventory position and now have the highest level of inventory in company history, and feel very confident going into the rest of the year as well as heading into next year and we're excited about mechanical parts being the fastest growing segment of our business as well as entering next year with a newly built category management.
Function led by senior executives, who come to us from automotive retailers like GPC Napa as well as large traditional retailers like best buy.
Our direct sourcing strategy and vertically integrated supply chain or a considerable competitive advantage.
I am on the availability and the industry is tight at alliance on a local distributor can leave a drop ship or at the back of the line, forcing them to pay a higher price assuming the part that's even available disk.
A distributor is often choose to maximize profits from their limited inventory by shifting the resources to more profitable channels.
When we look at auto stock rates across the industry, we noticed a significant disparity in the haves and have nots, we believe that being a half through vertically integrated stock shipping delivers a superior value proposition.
Our vertically integrated business model of going straight from manufacturer to consumer is a key reason why we have been able to demonstrate 21% year over year top line growth this quarter.
We were able to offer products one other competitor is current.
I want to remind everyone that right now we're only limited by our capacity and there is a cadence to opening and expanding our distribution centers.
David will provide additional details in his supply chain update.
At the same time, we also remain focused on reducing the paradox of choice for our customers. We don't want to give consumers too many or too few choices and so our model is flexible enough to add branded products, where we have gaps in our private label assortment and to offer a full range of good better best products.
Over the last quarter. We have also built proprietary processes to help us identify gaps in our catalog and we expect to start expanding the range of choice for our customers even further this quarter.
Alright times means getting the customers back on the road as quickly as possible and to accomplish that will continue to work on getting closer to our customers and reducing delivery times.
With our new Florida facility opening in the first half of next year, we expect to be able to service, 55% of our customers with them at one day transit time, and 98% of our customers within two days.
Alright place means empowering our customers to choose how they want to repair and maintain their vehicles.
To have a more detailed update on our first quarter conference call, but I can tell you that we're working hard to build solutions that we believe will make booking in automotive repair as seamless and as simple as streaming a movie on Netflix.
I will now turn it over to David to provide some financial and operational highlights. Thanks.
Thanks, a lot.
As I've mentioned in the third quarter, we generated revenue of $142 million up 21% versus prior year of $117 million and 90% on a two year stack gross profit was up 10% to $47 million with gross profit margins at 33, 4%.
Gross profit margin had a slight impact due to a mix shift to drop ship parts as we fill gaps in our inventory.
As we have stated in the past, we're always focused on maximizing margin dollars after marketing spend and fulfillment expenses.
We're very proud of our supply chain logistics and data science teams ability to navigate the current environment and dynamically adjust pricing based on all of these external factors to protect margin dollars. Historically, our industry has enjoyed the ability to raise prices and maintain margins and even though the volatility of current circumstances has driven up costs fast.
Then we'd like to raise prices, we're confident that we can restore our normal margins despite container costs going from $7500 to $30000 inbound parts, increasing in cost by 10% to 15% and continuing pressure from freight surcharges margin only compressed 100 basis points since the start of the year.
The financial impact of gross profit from increased container cost and attention was about $1 $5 million. We strongly believe that these factors are temporary and as the global supply chain improves we expect to return to a more normalized gross margin.
Net loss for the quarter was $4 7 million versus income of $1. Four in Q3 2020. The decline was mostly due to an increase in noncash expenses.
Adjusted EBITDA in Q3 came in at $2 3 million versus prior year at $5. One a change which was primarily driven by the temporary issues mentioned higher labor costs and increased investments in the business.
Given the likelihood that the labor market will remain tight we will continue to invest in talent tools and technology to improve efficiencies in our fulfillment centers.
As we've mentioned before the timing of our investments into our business will vary from quarter to quarter and we continue to invest ahead of today's revenue. We are however, very encouraged with the progress that we've made in marketing branding as well as best in class personnel, both of which are helping to lay the foundation for significant levels of growth in the years ahead.
And we continue to believe that in the long run we will achieve 8% to 10% EBITDA margin.
Turning to our balance sheet at quarter end, our cash position was $21 million, primarily driven by an increase in inventory to 132 million a company record as we prepare for peak season. Thank you to our invest inventory forecasting team and global supply chain teams for this great achievement, especially in this challenging supply chain.
<unk> environment.
Our ABL remains untapped with $30 million of availability with the option to flex up to $40 million of capacity.
Now that we've covered some financial highlights I'd like to spend more time talking about our supply chain roadmap.
One of the critical components of our long term plan is our vertically integrated supply chain, we always say that our inventories are oxygen and this could not be more true than in the current environment, our strategy revolves around parts availability and speed to customer.
And because our parts of fits specific there is no substitution, having the right inventory in stock close to the customer is critical for the last three years, we've worked hard to expand our assortment increased parts availability and get parts to our customer faster by being closer to them.
With our Texas, and Florida warehouse expansions, we're taking another step to increase our capacity and reduce transit time long term our goal remains to cover 80% to 90% of the country in one day transit time.
One of our goals is also to rapidly connect the end consumer whether a do it yourself or do it for me with premium quality parts at competitive prices now today, we offer an assortment of replacement and mechanical parts, but over the long term, we intend on building a one stop product and service destination to get all drivers back on the road by leveraging.
Our technology, our data our inventory and our fulfillment capabilities.
Now moving on to the next topic recently, there has been a lot of talk around inflationary pressures on retailers now despite cost increases on raw materials as well as freight increases our supply chain makes car parts dot com uniquely position to offer competitive pricing by removing steps into the distribution chain.
Looking at current gross margins investors can see how we were able to pass on most of the transient costs and yet remain competitive in the marketplace. Our data science team has developed a lot of proprietary models to dynamically adjust pricing in real time and maintain margin dollars even in an inflationary environment over time, we feel very confident.
About hitting our margin targets by leveraging our channel mix and our own fulfillment network.
Another item in the news has been the flow of containers from overseas I'm sure. Most of you have seen the images on television of ships sitting idle outside of the port of La for weeks. Despite this and numerous other supply chain challenges. We're very excited that our teams were able to successfully buildup inventory.
We believe that even if the global supply chain continues to get worse, we will be able to continue to operate with minimal impact relative to our competitors because of our vertically integrated business model, we feel very comfortable not only with our current inventory position, but also our ability to source additional inventory globally by ending the quarter with the most.
Inventory on our books in company history, we believe that we will be able to meet customer demand through the rest of the year and through 2022.
Also while there are talks of container cost rising we're starting to see the tide change thanks to the incredible support of our Ocean carrier partners.
Now onto an update on our current expansion projects were excited to announce that our Texas expansion is going well. Some other racks are already up and we have a lot of inventory on the way we will spend the next few months building up inventory and expect the expansion to increase our capacity in Q1 2022.
In Jacksonville, Florida were also happy to announce that construction of the building was completed this week and racks and equipment are already on the way. We expect the first inbound container to hit in early Q1, and like our previous distribution center openings. We will first focus on receiving an increasing inventory position next increasing outbound capacity.
<unk> and finally, we expect it to contribute to sales in Q2 2022.
Investors, who have been following our new management team since 2019 will understand that our growth opportunities are directly correlated to our inventory holding an outbound capacity and that our shareholders can expect a stairstep cadence in sales as we continually reach operating capacity and expand our supply chain with additional distribution centers as.
We opened these fulfillment centers the expanded capacity will drive increased revenues.
As we expand our assortments and get closer to our customers increased capacity, we feel very confident in our ability to number one get our customers to keep coming back number to increase revenue and improve margin number three grow at a 20% to 25% compounded rate and get the 8% to 10% adjusted EBITDA margin over the long term.
Finally for our long term shareholders listening today know that we remain committed to our philosophy of financial discipline, we will only deploy capital, where we see opportunities to accelerate our growth, while earning a significant return on investment.
I would also like to thank all the team members at <unk> Dot Com I am truly grateful to collaborate with such a talented and hard working group of individuals each and every day your dedication to the mission of helping drivers get back on the road is inspirational and with that I'll turn it back to life.
Thanks, David I, just want to reiterate what David was just saying about the talent here. We're excited about building a world class team from Tech to data science to supply chain and category management.
As the supply chain challenges persist it will become increasingly obvious that being vertically integrated while retaining the ability to drop ship on an as needed basis will prove to be a more competitive model than a 100% virtual inventory or a 100% drop ship model. This is because we control our own destiny on sourcing and fulfillment.
We will continue to aggressively invest in vertically integrating our business going direct from manufacturer to consumer while at the same time, ensuring that we're giving customers a solid selection of premium parts.
Thank you for taking the time to join us for today's call and with that I would like to hand that over to the operator to open it up for questions.
Thank you if you have a question at this time. Please press Star then one on your Touchtone telephone if he would like to remove yourself from the queue. Please press the pound key our first question comes from the line of Ryan <unk> with Craig Hallum. Your line is open. Please go ahead.
Good afternoon guys.
Hey, Brian.
Curious on inventory nice to see the overall growth there and I'm talking about.
You guys are sourcing, but breaking that down one step further how do you feel at the SKU level of in stock inventory and where you guys sit going forward.
Hey, Ryan it's David listen, we feel really good about where we are I think right now in this environment more than ever it is really a game of parts availability, it's having the right inventory in the right location.
And our supply chain environment like this safety stock becomes more important so by design, we are really focusing on having more inventory on our books and ultimately our inventory turns three to four times faster than the industry average.
Some part names could be better, but we're in very good shape right now.
And then on all the external pressures with freight being one of them just cost inflation you went through a bunch of them, but how do you feel on gross margins in the quarter and then over the next several did things get better or worse throughout the quarter and then how should we think about kind of a run rate over the next several.
Yes, I think every retailer is really facing some inflationary pressure I think for us it comes from multiple angles, so raw materials inbound freight outbound freight.
I think what matters is what you do with it and how do you turn it into an opportunity. So we've been focused on building our team in house to manage that supply chain. We continue to build kind of that vertically integrated supply chain to connect the dots between the factory and the customer I think we've developed also unique ability to dynamically adjust pricing at the <unk>.
Level and still be competitive this year is really the perfect example.
In an environment like this we were able to continue importing the highlight is really building up that inventory and raise prices to protect margin dollars. So we feel good about where we are and I'll just add one more on.
I think if you think about who our customer as you know.
Historically, we serve DIY customer and so a lot of the inflation, you're seeing in the market as labor inflation and so for us that means that our customers have more money in their pockets, which gives them more buying power and so that's that's a big positive for us as well.
And on the dynamically adjusting the prices any way you can detailing that a little bit more if that you guys are doing more of that always doing that.
Kind of how your data science team is getting smarter and better.
So we're doing it more frequently now than we used to.
Historically, we would change <unk> two to three times, a week and our changing prices almost daily.
And again, it's done at the SKU level.
Pending on how much of the cost have gone up of the inbound freight outbound side.
Which do you see its shipping out of what packages going in so.
We're doing it on a daily basis now.
The thing that you have to way is that how quickly you raised prices has an impact on your marketing spend efficiency. So it's a fine balance between kind of just jacking up the prices all the way high and then marketing spend becomes inefficient because in the market. There is somebody that might be undercutting, you or even if not the customer may delay the <unk>.
So we're kind of constantly trying to increase prices.
1% to 2% seems to be the magic number of what we can go up every week or so so that's kind of what we're trying to stick to.
One more for me and then I'll turn it over to the others, but David you mentioned.
Cargo containers the cost of them Skyrocketing, let me quantify that down to how impactful that was gross margin.
Yes, I mean this quarter part of it was the cost of container or a part of it was kind of labor shortages impacting our ability to receive about $1 5 million is a good number.
For Q3.
Thanks, guys.
Thanks Ryan.
Thank you and our next question comes from the line of Darren <unk> with Roth Capital Partners. Your line is open. Please go ahead.
Hey, this is dillon on for Darren Thanks for taking my questions.
To start I know you mentioned that.
Demands deals sort of outs.
Paas D on the outbound side.
Could you help us understand sort of.
Some of the puts and takes with.
The sequential sales decline like how much of that.
Have been just some typical seasonality.
Versus potential.
Re normalization in e-commerce trends or is that just.
Julie just a fact of potential inventory limits from from just the buildup in supply chain constraints.
Hey, Dylan, it's David Yeah. Good question. So you are correct. Historically, if you compare Q3 to the first half of the year. There is some minor seasonality.
The other thing too to remember is that Q2 is really our peak season, and we run really beyond a 100% capacity and you can't really run a network over capacity over long periods of time, I think one factor that impacted us slightly is labor shortages in one of our markets one of our distribution centers.
As in Lasalle, Illinois, and we have a fantastic team over there in that DC, but we did feel the impact of of outbound capacity and I think thats, where the extension and in Texas and the new DC in Jacksonville becomes so valuable it kind of de risks the entire network.
And overall, we feel pretty good about going into our peak season.
Got it thank you.
And then on the inventory sourcing.
You talked about you know, having having a good amount for both <unk> and then into fiscal year 'twenty two I mean like how much visibility do you have into what I need a lot of work on data science since the new management team has taken over like how much visibility do you have into the skews that to make sure you're stocking the right skus as well.
I'm Chinese.
Yes, its David again, we have quite a bit of visibility I mean over the last two years. We've built a dedicated team just for inventory forecasting and data science and we manage the business at SKU level for every region. So that means every fulfillment center now obviously the supply chain can be a little unpredictable, but we're able.
To react in real time.
<unk> basically spent the last three years building out that capability.
We're also augmenting that capability now with artificial intelligence and machine learning algorithm to be even more accurate.
So it's definitely becoming a core competency of ours.
Yes.
And last one for me.
In terms of the original Grand Prairie.
Square footage was there.
That 100% full in terms of capacity for inventory.
Thank you.
Yes, the original in Grand Prairie, Texas is operating at full capacity and it's full.
Great. Thank you.
Thank you and again, ladies and gentlemen, if you have a question at this time. Please press Star then one and our next question comes from the line of Thomas Forte with D. A Davidson. Your line is open. Please go ahead.
Great. Thanks for taking my question, one question and one follow up.
You've talked in previous quarters about your ability to manage the supply chain by sourcing product outside of Asia.
Can you talk about.
Can you give an update on those efforts as far as what you're doing from a sourcing standpoint to maximize their inventory.
Yeah, Hey, Dan. This is love so were sourcing some of our products out of Europe now, we've got some products coming out of Spain, some product coming from Turkey.
Most parts on the collision side.
A lot of product is coming out of Taiwan. The majority of our product is out of Taiwan.
On the mechanical side, we are sourcing.
From China, but we're also starting to diversify that a little bit as well but.
The majority of our product comes from Taiwan, Some from Europe.
And then a small percentage out of China.
And then for my follow up question I appreciate all the commentary on the supply chain challenges.
Good reason for all of that but I wanted to talk about some of your growth initiatives you talked about the past few quarters in particular mobile mechanic.
That youre doing for customers is the do it for me customer rather than the do it yourself customer.
Yes, so we have.
We have a team dedicated now and this is love again.
A team dedicated now to the do it for me initiatives.
Right now it's kind of manual it's in one market that's in Texas.
And we're doing a few different things there mobile mechanic is one the other one is we're helping customers range.
<unk> months in getting quotes for them from their local shops. So theres a lot of a lot of work going on behind the scenes.
We will have a more substantive update for you on the next call as what kind of ramp up the efforts on the ramp up the team.
We will have a little bit more information to share with you guys on our next call.
The work is ongoing and there is now a team dedicated to kind of getting it done and youll see some changes on the website <unk>.
To reflect some of us as well in the coming months.
Great. Thanks for taking my questions.
Thanks.
Thank you.
This concludes today's question and answer session. This also does conclude today's conference call. Thank you for participating and you may now disconnect everyone have a great day.
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