Q2 2022 Carparts.Com Inc Earnings Call
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Good afternoon and welcome.
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For 2020.
I'll add there's strong support Vince will be in a listen only mode. After the presentation.
<unk> and answer session. Please.
Call is being recorded.
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But for the communications and cold.
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Hello, everyone. Thank you for joining the call today to discuss our second quarter 2022 result, joining.
Joining me today from the company are David Mignon, Chief Executive Officer, and Ryan Lockwood, Chief Financial Officer.
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 risks and uncertainties associated with the business.
For a discussion of the material risks.
And after that could affect results.
Please refer to the car parts Dotcom annual report on Form 10-K, and 10-Q as filed with the SEC both of which can be found on the 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 car parts Dot Com press release issued today.
With that I would now like to turn the call over to David.
Thank you Tina and good afternoon, everyone as reported in today's release for Q2 2000.
22, our team achieved record sales of $176 million up 12% year over year and adjusted EBITDA of $8 3 million. This represents our 10th consecutive quarter of double digit year over year revenue growth and a 44% increase on a two year stack. We're also excited.
Cited to announce our new $150 million five year credit facility with our partners at Jpmorgan Chase.
Our leadership.
Continued executing on the four areas of focus.
Outstanding customer service operational excellence financial discipline and innovation.
Number one outstanding customer service as a reminder, over one third of our e-commerce revenues come from repeat customers.
As we think about capital and resource allocation, we see a significant opportunity to increase our focus and efforts on customer centric initiatives.
Our entire team is fully committed to simplifying and removing the stress from vehicle care by redefining ourselves from a parts company to a customer oriented company with an unparalleled digital first experience.
Number two operational excellence as the business continues to grow and evolve we see opportunities for our teams to collaborate and improved performance by systematically removing inefficiencies and improving.
Focusing on driving results is key for us as evidenced with our year to date results and our ability to simultaneously opened two distribution centers in this environment, we're always raising the bar in aligning people process and strategy with the needs of our customers, which is part of our DNA.
Number three financial discipline over the last three and a half years, we have invested in building a scalable foundation, which we are now leveraging our management team strongly believes that financial resilience and disciplined capital allocation will be key to our success in times of market uncertainty.
<unk> growth and free cash flow generation are more important than ever and it's where we will focus our energy and resources. Our team remains committed to being prudent and intentional with every dollar we deploy our business model is rooted in positive unit economics, even after fulfillment and customer acquisition.
This will help create an exceptional company for our shareholders to own for the long term and number four innovation as we think about the future. We are committed to growing our addressable market and turning more of our customers into repeat customers the opportunity to do it for me customer who relies on outside help to complete a repair or.
Maintenance job.
In the spirit of simplifying and removing the stress from vehicle care, we have been working on expanding our offering to include the ability for our customers to find the trusted local mechanics to assist with their repair and we're excited to report that we have already completed hundreds of successful bookings. We recently launched a new experience on our website, which is live in certain test Mark.
With this newly built functionality some of our customers have the option to book an appointment with a certified mechanic of their choice directly on car parts Dot com with full transparency of the installation price Orion will now discuss our financial results and a quick operational update thanks.
David.
In Q2, we generated revenue of $176 million up 12% from the prior year period, resulting from the great execution by our entire team on a two year stack revenue increased 44%. If youll recall Q2 of 2021 benefited from the inflow of pandemic related federal stimulus funds, resulting.
And an increased consumer spending.
Gross profit for the quarter was a record $62 million up 16% with gross margins, improving 120 basis points to 35% this year versus 33, 9% in the same year period the.
The improved gross margin continues to reflect purchasing and freight savings being driven by our data science and supply chain teams.
Net income for the quarter was $4 1 million versus $2 1 million in Q2 of 2021 and adjusted EBITDA. In Q2 was $8 3 million flat to last year, reflecting the impact of self funding, our new Jacksonville distribution center, including rent and startup expenses.
Turning to our balance sheet as David indicated we entered into a $75 million credit facility with the ability to accordion to $150 million. We believe the terms are attractive and that it further reinforces that we have enough liquidity to grow without tapping the capital markets.
We appreciate the support of our partners at Jpmorgan Chase, who have been with us for many years at the end of Q2, our facility was undrawn.
At quarter end, our cash position was $15 million and we were successful in building our inventory to $163 million. As a reminder, we are currently carrying approximately $40 million or eight extra weeks of inventory to account for longer lead times in the supply chain.
Overtime as the supply chain normalizes, we expect this inventory to be converted back to cash we will likely work down some of that safety stock as we focus on free cash flow and further reinforcing our balance sheet.
Our goal remains to be able to deliver to 80% to 90% of our customers in one day transit time, and we continue to be pleased with our Texas expansion, which is now fully stocked.
Also recently opened our brand New Jacksonville, Florida distribution Center that includes new best in class technology tools that overtime should drive operational efficiencies.
Despite what we're seeing in the broader macro environment, we continue to optimize the business towards a balance of growth and profitability.
For the first four weeks of Q3, our robust inventory position is helping us against prior year comparisons.
For net revenues in the back half of 2022, we continue to project double digit year over year growth and with that I'd like to turn it back to David for some closing remarks. Thank.
Thank you Ryan we're excited to build a trusted and disruptive platform, where we can help our customers solve their auto repair and maintenance needs. Our goal is to become the number one destination for customers that need help fixing their vehicles Q2 was another record for our company and this performance would not have been possible without the incredible dedication from all.
Our teams across the globe as we look forward to the next evolution of our company. We are honored humbled and excited to be working with such an amazing group of people. Thank you again to all our team members for coming to work every day ready to crush it and as we said <unk> dot com get after it I'll now turn it over to the operator to open it up for questions.
As a reminder to ask a question Thats star one on your telephone please standby.
Thank you Sir.
Our first question is from the line of Victoria.
From D a davidson.
Couple of questions. There congrats on the performance in the quarter of the first question I had can you talk about your gross margin performance.
What were the contributing factors it looks like you had gross margin expansion versus last year.
Yes, Thanks, Tom obviously, we feel very good about how gross margins trending out both up nominally sequentially and year over year, we continue to leverage our data science team to basically optimize for price as well as leaning on our vertically integrated supply chain, which I think gives us a benefit over some.
Of our competitors who have.
Worse ability to stay in stock compared to us.
Great and then second can you talk about.
Where you are now.
And you talked a little in your prepared remarks, but where are you now in your do it for me efforts.
And when can we expect that to start to meaningfully contribute to your revenue.
Yes, Hi, Tom It's David I think if you think about auto repair in general.
You have the time at least my experience has been its complex and stressful and the long term vision is really to make auto care simple and stress free and I think the do it for me opportunity as part of that obviously, it's a big project, it's a big endeavor, but we're very excited about the progress.
The great thing is that it expands the total addressable market, but more importantly, it gives our customer a new option depending on what type of repair they want to do now as of today like we called it out in the prepared remarks, we've done hundreds of successful bookings we have the experience that is now live on the website in certain markets now it's just the beginning but in the last three months.
We've made a big push to get this going Super proud of the efforts of the team I don't expect it to meaningfully contribute to the topline yet we're really focusing on the customer experience, but over time and especially over the long run I think this is a game changer for our company.
Great. So last question and thanks for taking my question, so with the expansion of Grand Prairie, Texas Fulfillment center seemingly behind you in the opening of the Jacksonville and how should we think about your plans for additional fulfillment center square footage over the next 12 months.
Yeah. Good question I think short term.
This environment, we're really focusing on free cash flow and profitable growth. So we really want to get the maximum amount of the current network before investing in the new building.
Right now at least internally the focus is on operational efficiencies and leveraging some of the tools the new tools and software that we're implementing in Jacksonville.
Really learning and focusing on driving the most out of what we have in the network now medium term, obviously as we called out many times before we're going to open. Another DC. The goal is always to provide the best level of customer service and that means one day shipping to 80% to 90%, but again right now as far as the main focus is free cash flow and operational efficiencies.
And getting most out of the current network.
Okay, and then one quick point of clarification, then Serra Grande Prairie.
Pension and Jacksonville, what percent operational are there the 100% or they.
How close to a 100% are they.
So Texas is pretty full right now the team has done a great job on the installation and the staffing the training.
It wasn't expansion Jacksonville, it's almost full right now.
Again, we got the labor we started shipping I think that for 2023 peak season, it should really help us when life during the quarter.
What I'm most excited about Tom is really for the second half of the year that is Ryan called it out in his prepared remarks, we're really targeting double digit year over year growth.
But at the same time kind of balancing that growth and profitability.
Thank you David Thank you Ryan Thank you.
Thank you. Our next question comes from the line of Austin veteran from Roth Capital Partners.
Okay.
Hello <unk>.
Yes.
Hey, Darrin, our coffee out will confuse them.
<unk> talked about my colleague anyway, Hey, guys hope you're well.
Good afternoon.
Likewise, three if I may so.
I think I just heard you say.
Tom's question that Jacksonville at almost full I guess, how contributory was at top line wise.
To the to the business.
Yes, that's a good question Darrin I think.
The challenge with the same store metric like this for an online retailer is that for US we're always focusing on on delivery speed and so were constantly optimizing for shipping times and transportation costs. So if youre looking at it on a same store basis, it's kind of difficult to quantify.
Okay fair enough.
I know that inventory ticked up but its sort of slowed on the margins. So I guess that I have.
<unk> said that your context about generating cash could you just kind of shed some light about container pricing logistics supply chain.
Where you see things I know theres been some consternation with Covid and in Asia, but like just kind of where are we have we plateaued in terms of.
<unk>.
That monkey wrenches system.
Inventory levels maybe.
Paul from here Plateau. This just any kind of color would be great.
Yes, I think we're definitely seeing some signs of improvement now whether it's short term or long term, it's hard to say I think we've built some great capabilities in house now to the inventory question and we've always called it out it's always a game of parts availability and having the inventory in stock close to the customer.
The past two years to navigate the supply chain disruption, we have to build this extra safety stock and we have been carrying that extra eight weeks or call it about $40 million now.
As I said because of the signs of improvement over time, I think that youre going to see this inventory level come down and converted back to cash now it is a little more complicated than just giving you a number because it's at the SKU level at the vendor level.
But I think over the next call. It six to 12 months youre going to see some of that inventory we brought back the cash.
In us carrying less inventory to support this level of business.
Great and just last one from me on the do it for me.
How much like what are the sort of marketing.
Where youre getting.
And like how much cost was there in the quarter related to that.
Yes. So two part question. So the number one is the source of customers right now with our existing customer base.
On <unk> Dot Com I think we built a fantastic destination for auto repair we have over 100 million visitors.
On our website on top of that we have a pretty robust E mail list with millions of customers and again as we called out about one third of our revenues on e-commerce come from repeat customers. So there's plenty of opportunities for us too.
To offer this service to our current customers.
So I think right now at least for phase one we're okay with targeting the current customer now the second part of your question is in terms of.
Extra cost I don't think we're spending any incremental dollars to make this work what we're doing is really re prioritizing our efforts around the do it for me initiatives. So we have a technology team we have a marketing team we think that the do it for me opportunity is going to be a game changer. So it's just a matter of.
Allocating more resources and more capacity to that which is how we were able to push out this new phase of the of the initiative in the last three months, we've made significant improvement.
As reflected by the several hundred bookings I think that's going to get better. So right now the whole team is really focused on making this phase of success.
Great. Thanks, guys.
Thank you. Our next question comes from Brian Lee.
Our capital.
Just one for me just wondering if you could give us an update on the mechanical parts business during the quarter and kind of how that's tracking and how that contribution in the Logan.
Hey, yes, I do have that numbers so for mechanical we are at heart.
<unk> was 27% replacement parts was 67% and performance was six.
So it's basically flat year over year.
Our hair down sequential, but I wouldn't read too much into the minor fluctuations over the long run the goal is still to be at that.
Call it 45% to 50% mechanical 45% to 50% collision and that last 5% to 10% performance successors, that's the target long term goal.
Alright makes sense next one for me have you seen any labor challenges ramping up either in the distribution centers in Grand Prairie or Jacksonville.
Yes, I think every every retailer and anyone in the industrial warehouse space is always competing for talent.
We're always looking to number one have a safe environment building a great culture.
Right values diversity inclusion and equality, so we're constantly investing in that.
We've also done a good job at setting a compensation structure that incentivize this performance, where we do.
Gain sharing and.
Referral bonuses retention bonuses I think theres a lot of different things that you can do but ultimately I think that our warehouse associates are bought into the vision. They are bought into the business that we're trying to build and really a big part of the culture.
For us, we always see ourselves as a supply chain company <unk> and the warehouse teams are really the heart of our company.
Got it makes sense.
And then last one for me just kind of touching on the do it for me offering.
Pretty pretty helpful to hear some of the positive commentary on that what sort of feedback have you guys gotten from not only just your customers but.
Mechanics that you have partnered with whether it's adding customers that they wouldn't have thought that they would've gotten just kind of walk us through that the partnership with mechanics youre using for the DFM operating our offering.
Yes.
This phase of the initiative, we really partnered with mechanics that are already pre bought in to the fact that the customer is going to bring in the parts. So part of making the initiative a success at least for this phase is to have a pre selection of mechanics that already know that customers are going to come in and the scheduling is transparent and the zip codes and the part names.
Categories that were focusing on so theres been a lot of communication upfront so that theres no surprises at the mechanic now obviously.
A new experience that no one has done it before so still working out the kinks, but overall the feedback has been great.
And frankly I'm excited about the feedback from the customer because it gives them an alternative if they don't feel comfortable doing the repair themselves. They have this option and also targeting another subset of customers that maybe doesn't feel like doing the repair themselves. So for us expanding that addressable market is what excites me the most.
Yeah.
Got it thanks guys.
Okay.
Our next Shang.
From Craig Hallum.
Curious.
On the gross margin so.
Really solid this quarter, but as you think about kind of all the cost inflation and the moving pieces between how much cargo containers cost coming from China.
So on and so forth.
With FIFO accounting anything to be aware of kind of as we model gross margin going forward or is Q1 Q2, good run rates.
As you look about them.
And the cost structure in your inventory.
Sure Yeah. Thanks, Ryan obviously, we can always say this but when we think about gross margins EBITDA margins, we always relates to take a step back and look at it over multiple quarters and the full year. So that being said, we do feel still very good about the margin for the remainder of the year for Q2, we were obviously up sequentially.
And year over year on a nominal basis as far as container pressures go we are mostly hedged so and our hedges are at very attractive rates. So I think we feel very comfortable there as well as far as the <unk>.
Remainder of the year and then obviously next year I think.
Going back to our history over the last three years no matter what has happened we've generally done a great job working through it. So I think whatever kind of pressures the environment might throw at us in 2023, I am pretty confident our team can handle it.
Could you talk about profitable growth big focus or increased focus at least in the near term when we look at kind of the seasonally softer back half of the year. You think you can still stay profitable if youre willing to comment on that.
As far as profitability, absolutely, it's a laser focus to balance that back half growth with profitability. So we do believe we will be profitable in the back half.
Just to clarify are you talking EBITDA or net income.
EBIT adjusted EBIT margin and nominal.
Great.
Thanks, David maybe a question for you.
Some of these tech companies that are starting to lay off people. Some good talent out there and I've seen you kind of go with open arms.
We're asking them if they want to come come work for car parts. I guess have you seen any success with that and then also you mentioned a little bit but talk through kind of your retention of your existing.
Our employee base.
Yes, I think listen we've made significant investments in building our culture.
We're a culture that rewards disciplined excellence and high performance.
Our turnover has been significantly lower than some of our competitors.
<unk> been pretty public in our will to hire great talent.
For me, we're trying to build an exceptional business and that starts with hiring the best people hiring training developing and retaining.
So we've had good success.
Obviously, if there's a good talent out there and critical roles, yes, we want it.
So if this is going to be a commercial for a car parts dot com I would go to <unk> dot com slash career, and if you have an exceptional friend and youre willing to work extremely hard to build an exceptional business I think we can be a great destination.
[laughter] never Miss an opportunity I like it.
Maybe just.
Last question for me is.
As you shift into the do it for me business can you talk through the mechanics, a little bit of that I guess, how you see the puts takes from one marketing that and I realize it's not as much this year, but kind of as you look to next year marketing that product selling that product and then how that flows through kind of flow through from a P&L from a revenue standpoint margin standpoint.
Hey, Brian .
Maybe I'll take that one so for me I always think about <unk> in two phases. So right now we are in this short term phase, where we're focused on the customer experience and really if you think about it there is no place that customers can go that they trust to get their car repaired a single destination. If you have a car and warranty you go to the dealership, but thats a very small <unk>.
<unk> actual regular people. So our goal is to get it right for the customer and take that stress out of car repair and that's the phase. We're in obviously once we get this nailed down then the next phase is to scale the offerings scale the market scale, the bookings and with that obviously comes marketing.
Good Thanks, guys. Good luck nice quarter. Thanks.
Thanks, Brian appreciate it.
Thank you today's conference call.
Thank you.
Got it.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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