Q2 2023 CarParts.com Inc Earnings Call
Okay.
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 I would now like to turn the conference over to our host.
Peter do you foresee senior Vice President of Global Communications and culture. Please go ahead.
Okay.
Hello, everyone and thank you for joining us for the car Park Dot Com second 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 Mignon, Chief Executive Officer, Ryan Lockwood, Chief Financial Officer, and Michael Baker, Chief Operating Officer.
Before I turn it over to David to start the meeting I have some important disclosures there.
The prepared remarks and responses to your questions could come from 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 the risks and uncertainties associated with the business.
For a discussion of the material risks and other important factors that could affect results. Please refer to the car Park Dotcom annual report on Form 10-K, and 10-Qs filed with the SEC.
Both of which can be found on the Investor relations website on.
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 Parc Dotcom press release issued today with that I would now like to turn the call over to David.
Yeah.
Okay.
Thank you Tina and good afternoon, everyone and thank you for joining us.
Today, we reported $177 million of sales up slightly from the $176 million, we generated last year in the second quarter, marking our 14th consecutive quarter of year over year growth and the highest sales level for any quarter in our company's history.
On a two year stack revenue for the quarter are up 12%.
Adjusted EBITDA was $6 3 million.
We also repurchased 250000 shares during the quarter.
$79 million in cash on our balance sheet at the end of the quarter is a testament to the strong unit economics.
And cash generating capabilities of our business.
And we're also happy to announce the launch of our new mobile App now available on both iOS and Android.
When it comes to customer purchase pattern, we have seen a rise in the usage of our buy now pay later offering and while some customers are choosing to defer their less urgent repair we believe that they will return to the market is inevitable once consumer confidence rebounds at.
At that point, we will be ready to meet their needs. Thanks to our infrastructure mobile first customer experience and diversified assortment.
We remain steadfast in focusing on building a world class company dedicated to providing customers the best digital.
<unk> to help them with their auto repair and maintenance needs.
On our last earnings call, we shared some of our accomplishments from the last four years, but we believe there are still opportunities for improvement and transformation. This fall into six strategic pillars that range from table Stakes for industry disruption.
We believe by putting focus on these areas, we will profitably grow to a $1 billion company and beyond.
Number one e-commerce fundamental number two digital transformation number three assortment and catalog number for marketing and customer experience number five innovation and number six supply chain and logistics.
Me briefly touch on each of these.
First e-commerce fundamentals as a direct to consumer company, we want to ensure that our website provides a user friendly experience, making it easy for customers to navigate the site find the product and or resources, they need and complete purchases. In addition, with approximately 80% of our customers shopping on their phone we have.
Launched a mobile app on both iOS and Android.
By offering another seamless shopping platform, we expect to reduce our customer acquisition costs and reliance on search engines and paid channels over time.
Our initiatives in the pipeline include improved search result, adding cross sell and up sell capabilities loyalty program, then look up and more.
Second digital transformation, we recently kicked off the modernization of some critical backend system, which will allow us to grow our business more efficiently last year, we successfully completed our ERP migration and retired all system with zero business interruption.
Looking ahead, we are focusing on fully migrating to the cloud and upgrading critical infrastructure. These are just a few of our digital transformation initiatives addressing roadblock legacy technology debt and paving the way for a multibillion dollar scalable infrastructure.
Third assortment and catalog with the goal of capturing a bigger share of wallet over time, we are constantly looking at ways to grow our assortment. As an example, we made a deliberate deliberate decision to expand our national brand assortment, which is now running at a $100 million revenue.
Right.
Hard to under $50 million in 2021 on.
On the catalog side, we are investing in proven industry standards that will enhance our proprietary catalog to increase sales through product recommendation and improve our customer experience. In addition, we have continued to build strong relationships with our branded partners and with a segment of our customers willing to pay a higher average selling price we have.
An incremental increase in revenue and gross profit dollars.
Fourth marketing and customer experience 60.
16 months ago, we decided to put the customer at the center of everything we do.
And our intention is not just to sell more parts, but to be drivers go to resource for valuable information about their vehicle, such as recall and maintenance notification, which recently hit customer inboxes.
Now if you had to our Youtube page you will see that we just launched our first theory, a professional installation videos it kicked off with the most popular vehicle in America. The Ford F 150, with detailed videos, explaining the top 50 repair and maintenance jobs with links to our website for park and tool.
This is the first step of expanding brand awareness as part of our new marketing strategy that will include podcasts community event sponsorship social media campaign and more.
We believe that building a direct relationship with our customers align with our new effort to reduce our dependency on pay channels. Instead, it positioned carpark dot com as an authority in the industry, increasing customer loyalty and ultimately organic and direct traffic as a reminder, currently over one third of our E Commerce revenue.
Come from repeat customers.
Next innovation and do it for me in previous quarters, we gained a tremendous amount of data from the large number of I get it installed bookings now we're using that information to continue developing the program to create an even more refined customer journey.
Over the last six months, we have virtually doubled our net promoter score and over the next year or do it for me customers will see an even more personalized experience tailored to their specific needs.
And finally supply chain logistics, we have made dramatic improvements in service levels and are now shipping faster than ever before there have been several other supply chain improvements as we work hard to increase efficiencies.
<unk> cost and improve customer satisfaction and for more details I'd like to turn it over to Michael.
Thank you David.
I am pleased to announce that in Q2, we set a record for highest number of units in a single quarter. We did this while operating at our best safety levels ever our fastest quick ship ever and we had a significantly lower cost profile quarter over quarter and year over year.
Over time, we will continue to make self funded investments that have a high return with a direct impact to our bottom line from technology and process improvement to development and training last quarter, we discuss key areas of opportunity and let me give you a brief update on them.
Number one labor planning demand wave management and process optimization in order to increase pick efficiency, we rolled out a brand new labor planning process order flow management process and still logic process. These combined with various smaller projects allowed us to improve our labor costs in the warehouses by 50 bps.
Number two warehouse top allergy and inventory placement, we have adjusted our inventory placement and service scope logic in order to decrease click to delivery time, and overall transportation cost while also lowering labor cost number three supply chain technology investments, we continue investing in supply chain technology that makes our Soc.
It's safer and more efficient, while allowing our customers to get their parts faster for example, our Jacksonville facility is only 15 months old but already have.
<unk> used this newer technology, resulting in the fulfillment center scaling faster to meet the car Park <unk> Dot Com network standard before I turn it over to Ryan I would like to thank our fulfillment center team members for their hard work. The success of these initiatives is only possible with their support we appreciate their commitment to making our vision, a reality and enhancing our customers.
Variance.
Thank you Michael as David mentioned Q2 was our highest sales quarter in company history, we generated revenue of $177 million up slightly from the prior year period, making it our 14th consecutive quarter of year over year growth.
This is also our toughest quarter can be on a nominal basis. Despite that for the full year 2023, we still expect revenues to be up 3% to 5% year over year, while remaining free cash flow positive and maintaining a robust balance sheet.
Gross profit for the quarter was $60 4 million down slightly from the $61 9 million in the prior year gross margin was 34, 2% of sales down from $35. One in the prior year, primarily driven by higher outbound transportation costs and product mix gap.
GAAP net loss for the quarter was <unk> 7 million compared to $4 1 million of net income in the prior year. As a reminder, last year's Q2 had a significant onetime pickup related to stock based compensation, we reported adjusted EBITDA of $6 3 million down from $8 3 million in the prior year period. This was driven by higher freight costs.
Increased performance marketing spend and the economic impact on consumer spending patterns. However, this was partially offset by improvements in warehouse fulfillment costs.
Turning to the balance sheet, we ended the quarter with $79 million of cash and no revolver debt up from $15 million of cash in the prior year period for the quarter, we generated over half a million dollars of interest income.
Every capital allocation decision start with balancing growth and profitability to maximize cash flow generation.
Our significant cash position highlights the resilience of our business model and we are proud of our relentless dedication to financial discipline.
We believe we have ample liquidity and have no intention or need to raise capital at current valuations.
Inventory balance at quarter end was $114 million as the supply chain issues continued to ease, we're becoming more efficient and having the parts our customers need.
As lead times revert to normal we can carry less inventory, both on hand, and in transit, which reduces some of our working capital requirements.
We have not seen an impact from the conflict at the port with the transportation carriers.
During the second quarter, we repurchased 250000 shares for approximately $1.05 million.
Under the current share repurchase program, we have approximately $28 5 million remaining of the $30 million authorization that extends through July 2024.
We believe that our company is incredibly valuable and our key strategic pillars will compound our value overtime through multiple cycles.
As we look to the remainder of the year, we will continue balancing financial prudence with Opportunistically returning capital to shareholders.
Thank you both Carpark dotcom has never been better positioned than it is today as we continue to build a world class organization focused on our strategic pillars. We believe we are creating a foundation that is making our company significantly more valuable and will benefit our stakeholders for years to come.
Thank you to the entire car Park team, we're proud of your hard work and your investment in our company's long term success.
Working alongside you everyday is what makes us so tremendously excited for our future we could not do this without you.
Thank you for everyone, who has joined US today and as we set up our dot com get after it.
I'll now turn it over to the operator and open it up for questions.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, please standby, while we compile the Q&A roster.
Our first question comes from the line of Ryan Meyers from Lake Street capital markets.
Hey, guys. Thanks for taking my questions first one for me here just wondering if you can talk about what youre seeing so far here in Q3, and you are kind of level of confidence in the improvement here in the second half.
Maybe if you have seen.
Some improvement in your core customer I know last quarter, you guys were kind of impacted by down sort of trading down to lower quality products, just kind of walk us through that dynamic and if you've seen any sort of improvement there.
Hey, Ryan It's David Yes, Yes, I can tell you a little more about what we're seeing on the competitive landscape.
And I guess two parts number one I think we're seeing the brick and mortar players are they are growing their <unk> business, but DIY do it yourself is definitely a drag.
I think on the DIY side also a portion of that growth is coming from batteries fluids and wipers, which historically we've not played in.
But obviously, we see an opportunity which would fall under our assortment strategy strategic pillar.
Right now what we're seeing is the environment with putting a ton of pressure on some of our competition, though in our partners and we're seeing to online players showing significant pressure.
You have one of the large warehouse distributors that just went through chapter 11.
And on our side, where we had unit growth. We have positive unit economics, we have free cash flow, we have close to $80 million in cash and no debt I think we are well positioned to kind of.
The uptick now looking to the future the backdrop that we're seeing if you still have an aging car fleet you still have more cars. The number of miles driven is climbing online penetration is going to grow and we have a whole strategy to capture additional market share. So.
Short term there is some pressure due to the macro but long term I think we're really well positioned.
Great. That's helpful. And then how should we think about sort of the traditional seasonality, especially on the margin side.
As some of these new initiatives start to come through I mean should we expect sort of a normal seasonal pattern.
Or how should we think about that.
I think a normal seasonal pattern is reasonable the one part that we don't have full visibility on yet is the holiday freight surcharge every year has started a month early so I think when I started.
Back in 2020. It was in November then it became October then it became September so we could see a holiday surcharges early as this month. So that we don't have visibility on but once it starts we expect it to run through the duration of the remainder of the year otherwise as far as some of the investments we're going to make some of that will actually go through.
Tax and not run through Opex.
Okay got it thanks for taking my questions. Thanks.
Thank you one moment far next question.
Our next question comes from the line of Ryan Macdonald from Craig Hallum Capital Group.
Hey, good afternoon guys.
Hey, good afternoon.
I'm curious because you went through a lot of really positive operational improvement.
A lot of things that have happened.
Things that are still to come but curious how much of those you think are in the financials because as I look at Q.
Q2 numbers gross margin EBITDA margin down sequentially down year over year, and get the freight pressure and get that but I guess.
How much of that good things are included in that versus Delta com versus are those headwinds just I guess too much to overcome.
I think that Theres, a big misconception given all the things we fixed that the improvement in the business that we're in the bottom of the ninth I would really categorize. This overall turnaround of the company really is closer to the bottom of the second and I think that as David laid out with the strategic pillars Theres still a lot of things, we can do and in some cases.
Not even innovation, it's just table Stakes. One example is e-commerce.
I think table stakes to have an app, which we only just launched a couple of weeks ago. I think it's table Stakes to have upsell cross sell so when you think about all the things we need to improve or fix there's still just a lot going on.
When we take a step back and look at the business, obviously <unk> had some pressure, but when we look at all of the strategic pillars over a multiyear period, we think thats, where youll see value really getting driven I'll, let David elaborate yes, I think if there's one thing I can add is if you look at if you look at the future in terms of driving EBITDA margin or free cash flow.
Number of areas, where we have opportunities number one on transportation as we get closer to customers.
Number two on marketing spend.
Our marketing spend runs in the low teens and to Ryan's point, we didn't have an app up until a few weeks ago. So there is definitely some opportunities there at least call. It 100 to 200 basis points.
Michael has done an exceptional job on the fulfillment side, but you still have some opportunities there and over time as we grow sales with the strategic initiatives and growing the assortments. There are some opportunities to get some leverage on fixed opex at least 100 basis points, though.
We're seeing the pressure from the macro but if you look at it in over the next call. It three to five years theres plenty of opportunities for us to increase net margin and none of them are a moon shot it just requires blocking and tackling and just that execution that we've been focusing on.
And then switching over to marketing you guys mentioned, an increase in performance marketing and overall AD spend in the quarter curious I guess the strategy, there and if youre seeing a change in consumer.
Our ability to acquire direct to consumers versus having to.
Effectively go through Google I imagine.
Yes, and historically performance marketing.
Google site Hasnt been the pillar of the strategy, that's kind of what were known for.
I think over time, what you're going to see is a lot.
To drive organic traffic and direct traffic around branding and customer experience, we called out a number of things in the prepared remarks, but I think for us over the next three years, the marketing branding and customer experience is probably one of the things I'm most excited about.
There is a lot of things that most companies do that we don't do.
Terms of what we spend on Google. It is what it is but long term, we can drive content marketing retention marketing building our brand for our private label better customer experience. The App for US is is game changer to drive repeat purchase with push notifications maintenance and recall. So there is a ton that we can do on the marketing side and again, if youre spending low.
Teams like there is a big opportunity to shave off at least 200 basis points.
Yeah.
Yes.
Maybe on that last point, just curious how much you think the App I guess, where you think it will drive the biggest benefit.
And retention marketing and then maybe just user experience overall, but.
Where do you see the biggest benefit there.
If you think about it our mobile traffic is about 80%. So that's kind of the many total addressable market for us if.
If we can get 10, 20 or 30% of our purchases to go through the App. That's the customer that we don't have to re acquire through paid channels.
The other thing too is and we've talked about this in the past we want to move away from just selling the parts and we want to deliver value and information for the customers. If we can do this in a direct manner. So think maintenance notification to recall notifications or special pricing or special events. The App is our direct link between our company and the customer.
So long term in terms of driving down marketing spend I think the app is going to be one of the key drivers on top of it.
Improving branding and customer experience.
Great. Thanks, David Brian Michael I appreciate it guys. Thank you.
Thank you one moment for our next question.
Our next question comes from the line of Thomas Forte from D. A Davidson <unk> company.
Great. Thanks, I'm going to ask both my questions at the same time, so you sort of touched on this in your prepared remarks, but can you talk about the efforts you're undertaking the lower fulfillment costs beyond lowering ship miles by adding new fulfillment centers.
Then the second question is.
It's a hot topic I guess for 'twenty, three but can you talk about.
To what extent, you're leveraging artificial intelligence and if you don't want to talk about artificial intelligence can you talk about to what extent youre leveraging automation had a.
Car parts.
Hey, Tom Thanks for the question this is Michael.
Our overall efforts within.
The fulfillment network to reduce overall costs are just continued process patent optimizations, we spent a lot of time.
<unk> the flow of goods in and out of the building and we spent a lot of time.
Getting rid of extraneous passed an extra touches within the network and we're going to continue to do that through the back half of the year.
We have done a full reconciliation of all our process paths in the building and we.
We were just spending too much time walking to work too many times doing redundant work within the building and so we've eliminated that to really get the team's far more efficient in the associates are responding well to it as far as automation in buildings.
We will continue automation has many different facets right that's everything from more conveyance.
The more sophisticated systems, we use in our Jacksonville warehouse and will make intelligent investments in automation, where it makes.
Other than the roof safer or faster or better and so that's what we're going to continue to focus on as far as further AI I'll hand that over to David answered that yes, Tom and not to give away the secret sauce on the AI, but want to make it clear because I think most companies fall into two camps the people.
That are scared of AI and the people that embrace AI and for US were in the second camp, We think artificial intelligence is a huge opportunity.
We're very good at transformation, we're very good at embracing and leveraging new technology.
So we have a lot of things that we're working on that involves not only generative AI, but language models proprietary language models.
Natural language processing, whether it's for catalog or marketing or Assortments, we're big believers in AI and I think that over the next three to five years, it's going to be one of the biggest opportunities for companies of our size.
Great. Thanks for taking my questions I appreciate it.
Thank you one moment for our next question.
Our next question comes from the line of Darren <unk> from Roth and km.
Hey, guys. Thanks for taking my questions. Two if I may 1st can you just kind of characterize.
The health of the consumers on car parts, maybe since the beginning of the year till now and how that's changed either good bad indifferent.
Yes, I think the consumer has been relatively pressured first quarter early wasn't as bad and I think the consumer has been under increased pressure throughout the year.
When you look at tax refunds, we all know that those came in a little bit lighter than expected. This year and we did experience some of that at the beginning of Q2.
Think as we go through the remainder of the year, we're hopeful that consumers will get some relief, but obviously its a challenging time for everyone. We're seeing as we mentioned in the last call a bit of a trade down on.
For example, lights or certain deferral items like bumpers, where in some cases people completely differ or they may go to marketplaces and buy.
Non.
Approved lower quality item that is good enough to solve their problem, but I think that generally speaking at least historically and the environment. In this industry people don't like having a car with hot air conditioning or a window that doesn't roll up. So it creates this pent up demand I think that we are very well positioned to capture.
This demand is coming out of any kind of recession or challenging economic environment might be in because people once they have money in their pocket what to fix all of these things they generally don't want to keep them broken.
Great. Thanks, and then.
In order to kind of hit that 3% to 5%.
Topline growth.
Is there anything in the operating expenses.
That moves around I E. Do you have to lean into that Opex line in order to get.
To that 3% to 5% or you feel pretty pretty confident based on.
You spend patterns the first half of the year.
Brian I think that what you've seen for the first six months is going to be relatively similar to the back half.
Past six months from an Opex perspective, a lot of the growth is going to be driven by those six pillars that David mentioned, which is things like increasing assortment.
Utilizing all the marketing channels that are available to us doing a better job of improving customer experience and many of these are either just a reallocation of resources or in some cases, some might be a capital expenditure, but that wouldn't flow through opex.
Got it thanks, guys. Thanks.
Thanks.
Thank you one moment far next question.
Our next question comes from the line of Ryan signal from Craig Hallum Capital Group.
Hey, guys just one follow up for me accounts.
Accounts payable was up pretty substantially sequentially here.
I guess is that timing related or is there something structural that you've improved from our vendor terms or something else to be aware of there.
So <unk> is actually flat on a year over year basis, Theres always going to be a little bit of seasonality on a sequential basis, what really improved was our inventory efficiency.
AP relatively flat year over year, but inventory significantly down and Thats, what drove the increase in AP leverage.
Thank you.
Thanks.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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