Q1 2023 CarParts.com Inc. Earnings Call

Speaker 1: Good afternoon. At this time, all participants will be in a listen only mode. After the presentation, there will be a question and answer session. Please note, this call is being recorded.

Speaker 1: I would not like to pass the conference over to our host, Tina Mirfarsci, Senior Vice President of Global Communications and Culture. Please go ahead.

Speaker 2: Hello, everyone, and thank you for joining us for the carparts.com first quarter 2023 conference call. I'd like to start by welcoming the investors and others who are attending this meeting remotely. Joining me today from the company are David Minion.

Speaker 2: Chief Executive Officer, Ryan Lockwood, Chief Financial Officer, and Michael Huffaker, Chief Operating Officer.

Speaker 2: Before I turn it over to David to start the meeting, I have some important disclosures. The prepared remarks and responses to your questions could contain certain forward-looking statements related to the business under the Federal Security's laws.

Speaker 2: Actual results may differ materially from those contained in or implied by these forward-looking statements due to the risks and uncertainties associated with the business. For a discussion of the material risks and other important factors that could affect the results, please refer to the carparts.com annual report on Form 10K.

Speaker 2: and 10Qs filed with the SEC, both of which can be found on the investor relations website.

Speaker 2: press release issued today. And with that, I would now like to turn the call over to David.

Speaker 3: Thank you, Tina, and good afternoon everyone, and thank you for joining us. Today we reported $175 million of sales, our 13th consecutive quarter of year-over-year growth, up 6% from the prior year. On a two-year stack, revenues for the quarter are up 20%.

Speaker 3: Adjusted EBITDA was $9.4 million. I'm entering my fifth year here at CarParts.com, and when I take a step back to look at what our team has accomplished, it is a stounding. Over the last four years, our company underwent a full transformation, which has significantly improved sales and adjusted EBITDA.

Speaker 3: Comparing 2018 to our trailing 12 months, we have seen meaningful improvements across key financial and operational metrics. Specifically, 1. We increased revenues by an impressive 132%, from $289 million to $671 million. This growth was driven by a relentless focus on technology, inventory forecasting, supply chain, and data science. 2. We nearly tripled gross profit, from $79 million to a record $232 million.

Speaker 3: Growth margin also increased from 27 to 35%. These increases were a result of finding and fixing gaps in the fundamentals of the business, including cost optimization, inbound and outbound freight management, improved global sourcing, assortment planning and overall supply chain execution.

Speaker 3: 3. Also, gross profit per employee more than doubled, from $75,000 to $152,000. We did this by realigning our resources and controlling costs, all while creating a culture of high performance and excellence.

Speaker 3: Four, on the profitability side, we are particularly proud of the significant increase in EBITDAS, which has grown by a remarkable 333%, from $6 million to $26 million, almost quintupling. This reflects both our commitment to maintaining a disciplined approach and our commitment

Speaker 3: to expand management and our focus on driving profitable growth.

Speaker 3: Five, we have more than doubled book value per share from $0.94 to $2.02 by reducing liabilities and improving the efficiency of our assets.

Speaker 3: Six, our cash position has also significantly improved increasing by nearly 25 times, from $2 million to $49 million.

Speaker 3: 7. Trade letters of credit and preferred stock outstanding have been reduced from $17.5 million to zero today.

Speaker 3: 8. Visitors to Carparts.com have more than tripled from 28 million to 100 million.

Speaker 3: 10, our warehouse footprint has doubled. We now have five fulfillment centers which allow us to reach over 98% of our customers in two days transit time. 11, recently and based on input from our employees, CarPars.com was named one of Los Angeles business journals best places to work for the third year in a row. Our Manila office was awarded best workplaces Asia. These are just a few acknowledgements of not only the results we have delivered, but of the extraordinary culture we have built, fostering a shared mentality of open-mindedness.

Speaker 3: 12. In addition, we published our first corporate social responsibility report. The report is an outstanding reflection of the company and our commitment to our people in communities, the planet, and ethics and governance. 13. Lastly, our company's board of director is stronger and more diverse than ever. The better we reflect our company's customer base, we have put a greater focus on diversity of ethnicity, gender, and age, or the wide range of business experience, and technical expertise.

Speaker 3: There is no denying that no matter how you look at it, what the team has accomplished over the last four years is truly remarkable. Our commitment to our customers, shareholders and employees remains unwavering. As we look ahead, we believe we can continue to drive growth, profitability and shareholder returns by consistently focusing on the following four areas. Outstanding customer service. Every decision we make at Carparts.com starts with the customer. By leveraging our two-step distribution, we are reaching our customers faster than ever while passing on savings to them.

Speaker 3: We're happy with the foundation we have built and are optimistic about what comes next. We have gained tremendous amount of data from our Get It Installed bookings and are using that information to continue developing the program and ultimately help solve our customers' repair needs. I do want to point out that none of these initiatives materially impact the bottom line or deviate us away from our focus on financial discipline. Operational excellence. Every day we are working towards ways to optimize business processes and systems to increase efficiency, reduce costs, and improve customer satisfaction.

Speaker 3: To give you more color, I would like to turn it over to Michael, who will provide further details on our operating initiatives. Go ahead, Michael.

Speaker 3: Thank you, David. First, a quick update on our Jacksonville, Florida, Fulfillment Center. It has now been up and running for one full year, and it is meeting network service levels and its share of the company volume. Overall, we have a well-positioned and effective distribution network that exceeds 1 million square feet. I believe we can still improve on our operating leverage by continuing the progress.

Speaker 4: of deficiency.

Speaker 4: We continue to be impressed with the commitment of our operational teams and till associates and their dedication to our customers.

Speaker 4: There are always opportunities for further improvement and greater leverage on our fixed assets will be a key focus over the next 24 months.

Speaker 3: Thank you, Michael. In Q1, we generate revenue of $175 million, up 5.7% from $166 million in the prior year period. For the 2nd quarter, like most retailers, we're facing a tougher comparable year over year sales. However, the auto parts industry has historically shown to be more resilient than discretionary retail. And we expect the 2nd quarter to be relatively in line with the 1st quarter on a nominal basis. For the full year 2023, we still expect revenues to grow by mid-single digits while remaining free cash flow positive and maintaining a robust balance sheet.

Speaker 3: As mentioned before, we continue to balance growth and profitability to maximize cash flow generation. By leveraging our vertically integrated supply chain, we're providing high quality parts that are significantly less expensive than brick and mortar retailers and believe this value proposition will help customers who might be feeling financial pressure.

Speaker 3: As David mentioned, our buy now, pay later options have met customers' needs of flexibility.

Speaker 3: usage of these payment methods is increasing, reinforcing our view that this is a tougher environment for our customers. While some customers are choosing to defer their repairs, we believe that their return to market is inevitable once consumer confidence rebounds. At that point, we are well positioned to meet their demands, thanks for our infrastructure, mobile first customer experience, and diversify the sortment.

Speaker 3: Gross profit for the quarter was $62.6 million, up from $61.2 million in the prior year. Gross margin was 35.6% of sales, down from 36.8% in the prior year, mostly reflecting higher freight in the current period. Gap net income for the quarter was $1.1 million compared to $2.1 million in the prior year. For the first quarter, we reported adjusted EBITDA of $9.4 million, essentially flat year over year. This was driven by a lower gross margin year over year due to higher freight charges. Q1 of 2022 benefited from approximately 120 basis points.

Speaker 3: of lower than usual freight charges. Turning to the balance sheet, we ended the quarter with $49 million of cash and no revolver debt. Our significant cash position highlights the resilience of our business model, and we're very proud of the dedication of our entire organization has to financial discipline.

Speaker 3: Q1 2023 marks our 13th consecutive quarter of growth, all while building up a robust balance sheet as we continue to focus on flexibility, profitability, and free cash flow generation. In addition, we continue to make investments in the business by putting our customers and team members at the center of our strategy. We believe that doing this will benefit our shareholders in the years to come as we gain market share and grow the intrinsic value of our company. How none of this would be possible without the incredible work and commitment from everyone on our global team. You come to work every day ready to seize each new opportunity. We are grateful and honored to lead such an amazing organization.

Speaker 1: Thank you. As a reminder to ask questions, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Thomas Forte from DA Davidson. Great, thanks. I have one question and one follow-up. For my first question, David and Ryan, I'd appreciate your thoughts regarding the online penetration for the auto parts category and what gives you confidence it will increase at a fast rate going forward.

Speaker 3: Hey Tom, it's David. Good question. You know, I think right now what we're seeing is the online penetration for auto parts is somewhere between 4 and 5%. Now obviously that's on a $300 billion market that's growing. You know, the brick and mortar seem to be doing well, especially in the professional segment and the B2B. That seems to be what's going on.

Speaker 3: I think the industry is large. I think it's growing. What we need to do is just become a destination. We need to grow our assortment. We need to shift faster. We need to deliver an outstanding customer experience. And we need to get our customers to come back. So that's how we think about the business and the industry, and that's what we're executing again.

Speaker 5: Great, thank you for that David. So for my follow-up question, I'd appreciate your current thoughts on the competitive landscape. You talked a little there about offline and online, but if you could talk about the competitive landscape offline and online, and then given the news that a former car parts executive was named head of an online competitor.

Speaker 5: Great. Thank you for that, David. So for my follow-up question, I'd appreciate your current thoughts on the competitive landscape. You talked a little there about offline and online, but if you could talk about the competitive landscape offline online, and then given the news that are former car parts executives, I was named head of an online competitor. Thanks.

Speaker 3: Yeah, good question. You know, listen, Tom, at Carpide's order, I'll say we're focused on our teams, we're focused on our customers, we're focused on our shareholders, and really building an exceptional business. We have a lot of initiatives that we're working on. We're happy about our past success, but we're also happy about our prospects. And, you know, as far as, you know, the lead question, which is really what you're trying to get.

Speaker 1: Our next question goes from the line of Ryan Sigdal from Craig Hallem Capital Group.

Speaker 6: Good afternoon guys. I want to start with, can you talk to your monthly trends in the quarter and then also include April and curious within March if weather had any impact on your business?

Speaker 6: Normally Q2 is a little higher than Q1, and then last quarter you commented, you're today that the business that receives are up high single digits. You reported 6% for the quarter, implies kind of a D cell in March, and then your Q2 commentary, I guess, implies kind of that continuing. I think there's a few different factors. The major one, which we call that a little bit in preparation marks, is the consumer is definitely getting squeezed. So we see an increase in Vine Outcalator as one example, but as another example, we are seeing some attrition at the lower end of our consumer base, towards what we would call less reputable product on marketplaces that we just won't sell. So obviously we're a public company, we have certain quality standards.

Speaker 6: DOT approved product, things that we believe are safe for a family to drive in. But so we can't really necessarily go, continue to go down market for that lower end of the consumer. Our focus really is on now capturing consumers that are trying to shift away from say brick and mortar, which is more expensive, and they still want a quality part, but maybe don't want to pay 100% more for it.

Speaker 6: Then just moving over to marketing, commented in the press release, reduction in marketing. I guess where you see the most efficiencies there and then you think those reductions are sustainable going forward. Yes, go ahead, David. Yeah, good question. Yeah, we're definitely, we've been a lot more disciplined about where we allocate, you know, dollars. And I think we talked about this.

Speaker 3: on our marketplace's customer, which seemed to be reacting really well. And so we tone down the marketing spend on e-commerce. Now, obviously it sits skew level, it's category by category, but to your point, we spent less in queue one of this year than we did last year. But, Twitter, look, whether or not even.

Speaker 6: Last one, and I'll turn it over to the other. It's just the comment done free cash flow, just clarification there. Is it positive going forward and playing Q2, 3, 4 are positive free cash flow or positive for the year inclusive of the 30 million you generated in Q1? Yeah, so when I think of free cash flow, I generally am not thinking about working capital.

Speaker 6: actual real free cash flow for the year. And then from a working capital basis net net, you're probably looking at 10. Because as I mentioned in the call, we've burned off quite a bit of inventory, but we need to reinvest around 20 million to get ready for next year's peak season. As far as cadence goes, Q4 is generally burning cash just because margins are tighter and revenue is a little bit lower.

Speaker 6: But, you know, Q1, Q2, Q3 should be free casual positive.

Speaker 1: Thank you. Good luck guys. Thank you. One moment for our next question.

Speaker 1: Our next question comes from the line of Dylan Heslin from Roth MKM. Hey, thanks for taking the question. First, I want to start with some of the commentary on QQ revenue being sort of in line with one Qonomally.

Speaker 1: So if that's roughly flat, you're over your growth. Like what sort of... I suck, I suck, I suck...

Speaker 2: things are you working on or what gives you confidence you can get back up to your sort of mid single digit, I guess goalposts that you've laid out just given the second half of the year is typically a bit softer seasonally for your business.

Speaker 3: Yeah, good question, Ryan. I think we're doing a lot of things right, and between the supply chain, the technology investments and the team that we built, obviously our customer is not immune to inflation, and we're seeing some pressure from the macro. Now, Q1 was a record first quarter for us.

Speaker 3: We really focused on building out kind of the balance sheet. But, you know, to your point, we do have a couple of things that we're working on to kind of re-accelerate that for, you know, number one, it's early, but we're expanding our sortment to adjacent categories. We're making some technology investments to make our website more user friendly and improve conversion. We have a number of marketing initiatives that are currently in the works.

Speaker 3: around social media, we just launched a series of instructional videos on YouTube. So there's a number of things that we're working on that we think will drive additional growth. And obviously the...

Speaker 3: The goal is still to grow for the full year still to generate some free cash flow and be disciplined about our growth, but generate, protect the balance sheet. Great, thank you. And as a follow up, could you sort of provide an update on EVs and so your initiatives with electric vehicles, maybe what percentage of sales?

Speaker 7: in the quarter came from ED.

Speaker 3: Yeah, I mean, I can give you kind of some high level data right now. Our customer basis, our customer base is around 3% EV drivers. So that kind of reflects our level of sales. Now over time, as we get more customers that drive EVs, our assortment will expand and our sales coming from EV parts will grow.

Speaker 6: So, today it's around 3%. One call-out, at least from what we've looked at internally, on mixed percentage, over 90% of our sales are agnostic to the powertrain. So, if you think about a Tesla, it still has headlights, door handles, air conditioning compressor, things like that.

Speaker 6: As we shift the ED, you shouldn't see that much changing anything.

Speaker 6: you shouldn't see that much change in anything. Thank you.

Speaker 1: Thank you. One moment for our next question. Our next question comes in the line of Ryan Myers from Lake Street Capital Markets.

Speaker 6: Hey guys, thanks for taking my questions. I know that you talked a little bit last quarter about the number of bookings. Do it for me offering, had doubled. Just curious how you saw that here in Q1, how that business is progressing, and then maybe if you expect to see any sort of contribution here in 2023 from that.

Speaker 6: Yeah, let me pull up that number for you for GIFM. I think for us, the way we look at it is always been a test and learn. So what we're trying to do is add new capabilities, find out customer pain points, solve the customer pain points, and iterate on what can we do.

Speaker 6: to improve that customer experience. So we have a lot of things in the pipe that are very exciting, and I'll keep you guys up to date as we roll them out. Bookings, total bookings for Q1 was about 2,268.

Speaker 6: the pipe that are very exciting and I'll keep you guys up to date as we roll them out. The total bookings for Q1 was about 2,268.

Speaker 6: And then I know David, you kind of talked about this a little bit. Ryan, you also did as well. You know, you said you're going to be adding about $20 million more in inventory. But you know, now that you guys have this pretty sizable cash balance, you know, where are some of the biggest areas that you think you can reinvest in the business? Ryan A.

Speaker 3: Yes, definitely a lot of different areas. Now, we're trying to be very disciplined and play defense with the balance sheet. So, for me, we need an offensive mindset around growth, top line and bottom line and free cash flow. But as far as the environment is concerned, we want to make sure that we maintain kind of a healthy balance sheet just to make sure that we're ready in case.

Speaker 3: the market changes around us, but yeah, definitely investments around assortment, technology, and marketing, but what we're doing is we're making sure that all these investments are self-funded. So we want to flow the majority of the investments from the P&L and not use our cash too much. So the cash should be used for inventory.

Speaker 3: But as far as the rest of the investments, they should come from the PNL and they should be self-funded. Got it, make sense. Thanks, guys. Thank you. One moment for our next question. Again.

Speaker 5: So the first follow-up question is I was wondering if you had a specific return on investment capital target of your investments.

Speaker 5: And then would appreciate your current thoughts on capital allocation, including buybacks.

Speaker 6: And then I'd also love to hear your current thoughts on strategic M&A. And then I have another question after those. Sure. So, I mean, I think the historical ROI from when we've opened DCs has been very, very, very high in the 20 or 30% range.

Speaker 6: Obviously, I think anything over mid to high teams is a good ROI, but obviously it always has to be risk adjusted. For me, coming from the buy side, it's not just a regular ROI. Capital is limited, so you have to always compare what are your options. Is it going to be a front-end investment? Is it going to be optimizing the warehouse? Is it going to be something that lowers your return rate?

Speaker 6: And so we actually stack rank all of our potential projects and then the executives come through and chime in and then David does a final I guess prioritization of where we're gonna spend our money for the year as far as buybacks You know, we think the stock is very undervalued here, but obviously any repurchases are subject to board approval And then I think I'll let David take that last part. Yeah, you know, I think MNA is always in you know, it's an interesting conversation

Speaker 3: on the business. We want to block and tackle. You know, today we're in a spot where we're free cash flow positive, we're debt free, we have a positive unit economics and about a third of our ecom revenues come from repeat customers. So there's plenty of opportunities for us to improve that and grow the business even more.

Speaker 3: So, for me, M&A is interesting, but more of a distraction in this environment.

Speaker 5: I love your high-level thoughts in your marketplace sales. When I look at Amazon in particular they seem to be doing things that are kind of unusual for Amazon. They're managing expenses tightly, things of that nature. So again you may not have to explain what's Amazon with eBay but at a high level can you comment on your marketplace sales.

Speaker 3: Yeah, I mean, if you look at the breakdown which we break out in the queue, you know, for Q1, 2023 Q1, so our marketplace of sales were about 35%. So historically, it's hovered around about a third of our business. I think for me, the way we think about our business, it's more of an omnichannel play, which is built on top of the infrastructure for sourcing, for private label, for logistic and supply chain. And so we sell...

Speaker 3: on investment, they're aggressively marketing auto parts and so we benefit from that. Now long term there's an opportunity to grow e-comm and there's also an opportunity to grow our B2B channel and phone channels but today the marketplaces are aggressively investing in customer acquisition and so we benefit from that and so that's a great thing. We can take the customer wherever they shop.

Speaker 3: And so in a difficult environment, we see some customers trading down and looking for just more aggressive pricing. And so marketplaces are a good opportunity for us.

Speaker 1: Great. Thank you, David. Thank you, Ron. Thanks. Thank you. One moment for our next question.

Speaker 6: Our next question comes from the line of Ryan Sigdahl from Craig Hallam Capital Group. Hey guys, just one follow-up, kind of as you've been talking, just a lot of cautiousness, I guess, seemingly in the near term on the consumer. I guess, what do you think is deviating your consumer relative to the consumer?

Speaker 6: the big land-based peers. I mean O'Reilly had more constructive commentary and sales were growing faster, which is an anomaly relative to you guys for the last couple of years. So curious what you think is going on there and then customer or I guess business related. Sure. So I think O'Reilly, their commentary was actually that the DIY was a little bit slower.

Speaker 6: and then their B2B commercial business was what was holding up, and they had some commentary that that's what's doing well. I don't have proof, but my thought would be that their customers are taking business from dealerships as people try and save money. Also, we do know for a fact that a lot of jobbers and smaller wholesal distributors were very stressed from the overall environment and have gone out of business. So we think that more of a share gain. Learn about global change in a single- year response plan.

Speaker 8: this as a market.

Speaker 9: Yes.

Speaker 1: Thanks, guys. Thanks. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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