Q1 2024 CarParts.com Inc Earnings Call

May 7, 2024

Operator: I would now like to pass the conference over to our host, Tina Mirfarsi, Senior Vice President of Global Communications and Culture. Please go ahead.

I would now like to pass the conference over to our host Tina Mirror Farsi Senior Vice President of Global Communications and culture. Please go ahead.

Speaker Change: Hello, everyone and thank you for joining us for the car parts Dot Com first quarter conference call.

Tina Mirfarsi: Hello everyone, and thank you for joining us for the CarParts.com first quarter conference call. Joining me today are David Meniane, Chief Executive Officer, Ryan Lockwood, Chief Financial Officer, and Michael Huffaker, Chief Operating Officer.

Speaker Change: <unk> me today are David Mignon, Chief Executive Officer, Brian Lockwood, Chief Financial Officer, and Michael Huff Baker, Chief operating officer.

Speaker Change: Before I turn it over to David to start the meeting I have some important disclosures.

Tina Mirfarsi: 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 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 other important factors that could affect results.

Speaker Change: Their prepared remarks and responses to your questions could contain certain forward looking statements related to the business under the federal Securities laws.

Speaker Change: 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.

David Meniane: For a discussion of the material risks and other important factors that could affect results. Please.

Tina Mirfarsi: Please refer to the carparts.com annual report on Form 10-K and 10-Q as filed with the SEC, both of which can be found on our 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 carparts.com press release issued today. And with that, I would now like to turn the call over to David. Thank you, Tina.

David Meniane: Please refer to the car parts Dot Com annual report on Form 10-K, and 10-Qs as filed with the SEC both of which can be found on our Investor Relations website.

Speaker Change: 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 and with that I would now like to turn the call over to David.

David Meniane: Thank you, Tina, and thank you all for joining us. I will begin with some highlights from the quarter, provide an update on the economic environment, and then turn it over to Ryan to review our financial performance in more detail before opening it up for Q&A. Our performance so far this year has been disappointing and does not meet our standard. We're facing headwinds in key categories, and certain customer segments are being impacted by a deteriorating economic outlook.

David: Thank you Tina and thank you all for joining us.

David: We'll begin with some highlights from the quarter provide an update on the economic environment, and then turn it over to Ryan to review our financial performance in more detail before opening it up for Q&A.

David: Our performance so far this year has been disappointing and does not meet our standards, we're facing headwinds in key categories and certain customer segments are being impacted by the deteriorating economic outlook.

David Meniane: We need to maintain financial discipline and do a better job on both gross and net margin. Now, we have several variables within our control, such as pricing optimization, marketing, last mile transportation costs, and product expansion, where we have opportunities for margin improvement. Over the last few years, we have made significant investments in infrastructure and operating capabilities. We now need to focus on efficiency and effectiveness to quickly deliver improvements in profitability. The ultimate measure of success for our company is long-term free cash flow. And over the last few quarters, we've made insufficient progress.

David: We need to maintain financial discipline and do a better job on both gross and net margins.

David: Now we have several variables within our control such as pricing optimization marketing last mile transportation costs and product expansion, while we have opportunities for margin improvement.

David: Over the last few years, we have made significant investments in infrastructure and operating capabilities, we now need to focus on efficiency and effectiveness to quickly deliver improvements in profitability.

David: Ultimate measure of success for our company is long term free cash flow and over the last few quarters, we've made insufficient progress.

David Meniane: In the first quarter of 2024, our sales reached $166 million, down 5% from the prior year period. We experienced significant weather impact in January, and the first half of February, and our more price-sensitive segments underperformed throughout the quarter. This decline was primarily driven by acute pressure in lighting and mirrors, attributable to a flood of non-Department of Transportation-compliant, low-cost, and low-quality parts from overseas, which are often illegal.

Speaker Change: In the first quarter of 2024, our sales reached $166 million.

Speaker Change: Down 5% from the prior year period, we experienced significant weather impact in January.

Speaker Change: And the first half of February and.

Speaker Change: In our more price sensitive segments underperformed throughout the quarter.

Speaker Change: This decline was primarily driven by acute pressure in lighting and mirrors attributable to a flood of non department of transportation compliant low cost and low quality parts from overseas, which are often illegal.

David Meniane: These two categories account for approximately one quarter of our revenue and represent the vast majority of our year-over-year decline, masking the strength in other categories, particularly in large replacement parts, where we have a competitive advantage. The current environment also has put significant pressure on low price and discount seeking customers, which are becoming more scarce and more expensive to acquire and service. To maintain financial discipline, we made the decision to both adjust pricing and reduce our customer acquisition spend on this subset of customers.

Speaker Change: These two categories account for approximately one quarter of our revenue and represent the vast majority of our year over year decline.

Speaker Change: I'm asking the strength in other categories, particularly in large replacement parts, where we have a competitive advantage.

Speaker Change: The current environment also has put significant pressure on low price and discount seeking customers, which are becoming more scarce and more expensive to acquire and service.

Speaker Change: To maintain financial discipline, we made the decision to both adjusted pricing and reduce our customer acquisition spend on this subset of customers, we're focusing our efforts on targeting consumers that want quality parts at competitive prices. This is a more profitable customer base, which gives us a higher gross margin profile.

David Meniane: We're focusing our efforts on targeting consumers that want quality parts at competitive prices. This is a more profitable customer base, which gives us a higher gross margin profile. Due to these efforts, we began to see gross margin improvement in the back half of Q1, and our momentum has continued during the month of April. In Q1, we also implemented aggressive cost savings initiatives. They're expected to provide up to $8 million in cost reductions in 2024 and $10 million on an annual like basis.

Speaker Change: Due to these efforts we began to see gross margin improvement in the back half of Q1 and our momentum has continued during the month of April.

Speaker Change: In Q1, we also implemented aggressive cost savings initiatives that are expected to provide up to $8 million in cost reductions in 2024 and $10 million on an annualized basis.

David Meniane: Combined with our pricing and customer acquisition adjustments, we expect to see better unit economics on less volume, which will result in a more efficient and profitable business over time. Adjusted EBITDA for the quarter was approximately $1.1 million excluding transition costs.

Speaker Change: Combined with our pricing and customer acquisition adjustments, we expect to see better unit economics on less volume, which will result in a more efficient and profitable business over time.

Speaker Change: Adjusted EBITDA for the quarter was approximately $1 $1 million excluding transition costs. These costs include related to moving to our new semi automated larger facility in Las Vegas, Nevada, as well as cost related to right sizing our workforce.

David Meniane: These costs include costs related to moving to our new semi-automated larger facility in Las Vegas, Nevada, as well as costs related to right-sizing our workforce. Ryan will talk about the implications of these changes on our 2024 outlook. Now, I want to emphasize that we're targeting gross profit dollars to remain within the range we had previously forecasted. Our strong balance sheet provides us with staying power, and we're very comfortable with our capital position at this time.

Speaker Change: Brian will talk about the implications of these changes on our 2020 for outlook.

Speaker Change: Now I want to emphasize that we're targeting gross profit dollars to remain within the range. We had previously forecasted our strong balance sheet provides us with staying power and we're very comfortable with our capital position at this time.

David Meniane: We are positioning carparts.com for the short-term and long-term by focusing on, one, the development of our digital-first and customer-centric automotive e-commerce and mobile app strategy. Two, the expansion of our proprietary portfolio with premium products and services to capture new markets and customers. And three, generating more brand awareness for carparts.com and capturing a wider customer base. Before going into some highlights for the quarter, I wanted to announce that we published an updated investor deck today that describes the carparts.com investment opportunities and defines each one of these strategic drivers in more detail. The presentation is available at carparts.com slash investor. Next, I'd like to cover our main highlights for the board.

Speaker Change: We are positioning car parks dot com for the short term and long term by focusing on one the development of our digital first and customer centric automotive E Commerce and mobile App strategy.

Speaker Change: Two the expansion of our proprietary portfolio with premium products and services to capture new markets and customers and three generating more brand awareness for <unk> dot com and capturing a wider customer base.

Speaker Change: Before going into some highlights for the quarter I wanted to announce that we published an updated investor deck today that describes the carpark dot com investment opportunities and defines each one of these strategic drivers in more detail.

Speaker Change: The presentation is available at <unk> Dot Com slash investor.

Speaker Change: Next I'd like to cover our main highlights for the quarter.

David Meniane: First, we make big moves to supercharge our e-commerce and mobile app experience, and ensure CarParts.com is the stress-free destination of choice for consumers to address their vehicle's maintenance and repair needs. Our mobile app, which successfully launched last summer on both iOS and Android, continues to grow, with over 350,000 total downloads. Mobile app revenue currently accounts for 8% of our e-commerce revenue compared to 0% in Q3 of last year.

Speaker Change: First we made big moves to supercharge, our e-commerce, and mobile App experience and ensure a car parks dot com is the stress free destination of choice for consumers to address their vehicles maintenance and repair needs.

Speaker Change: Our mobile App, which successfully launched last summer on both iOS and Android continues to grow with over 350000 total downloads.

Speaker Change: Mobile App revenue currently accounts for 8% of our e-commerce revenue compared to zero percent in Q3 of last year.

David Meniane: With 80% of our customers shopping on mobile, we expect direct in-app purchases to drive savings for us and reduce our reliance on search engines and performance marketing to promote our brands and products while also incentivizing repeat purchases. We believe this will lower our marketing spend and drive increased profitability over time. We have also launched our first machine learning-powered product recommendation engine built on top of our proprietary fitment data.

Speaker Change: With 80% of our customers shopping on mobile we expect direct in App purchases to drive savings for us and reduce our reliance on search engine and performance marketing to promote our brands and products, while also incentivising repeat purchases.

Speaker Change: We believe this will lower our marketing spend and drive increased profitability over time.

Speaker Change: We also launched our first machine learning powered product recommendation engine built on top of our proprietary fitment data.

David Meniane: Over time, we expect this to increase units per order, which will make freight more efficient and drive higher gross margins. A few weeks ago, we also introduced the first of several fee income initiatives to drive incremental high-margin dollars. Our new parts and shipping protection offerings are both live and ramping up.

Speaker Change: Overtime, we expect this to increase units per order, which will make freight more efficient and drive higher gross margin.

Speaker Change: A few weeks ago. We also introduced the first of several fee income initiatives to drive incremental high margin dollars are new parts and shipping protection offerings are both live and ramping up over time, we expect those two initiatives to generate incremental gross profit dollars at an annualized rate of approximately two.

David Meniane: Over time, we expect those two initiatives to generate incremental gross profit dollars at an annualized rate of approximately $2 million. Second, we're optimizing our product and price assortment to capture market share by catering to more premium shoppers, enhancing our competitiveness and positioning us for sustained growth. In this quarter, we continued to optimize our product mix and expanded our inventory by adding new SKUs, aiming to attract more customers, enhance our profit margin, and increase overall revenue.

Speaker Change: Yeah.

Speaker Change: Second we are optimizing our product and price assortment to capture market share by catering to more premium shoppers enhancing our competitiveness and positioning us for sustained growth.

Speaker Change: In this quarter, we continued to optimize our product mix and expanded our inventory by adding new skus aiming to attract more customers enhance our profit margins and increased overall revenue.

David Meniane: For context, most new products we add have a revenue generating capacity that can last up to 20 years and compound over time. We are also launching several of our product lines under the J.C. Whitney brand in Q2 and Q3 of this year. These products are focused on providing higher quality products at an enhanced price point and a higher gross margin profile. Over time, we believe we can increase gross margin by upgrading our products from an unbranded private label business to a branded model, leveraging the legacy of our J.C. Whitney brand.

Speaker Change: For context, most new products, we add a revenue generating capacity that can last up to 20 years and compound over time.

Speaker Change: We are also launching several of our product lines under the JC Whitney brand in Q2 at Q3 of this year. These products are focused on providing higher quality products at an enhanced price point at a higher gross margin profile over time, we believe we can increase gross margin by upgrading our products from an <unk>.

Speaker Change: Branded private label business to a branded model leveraging the legacy of our JC Whitney brand.

David Meniane: Third, we continue to invest in our marketing channels to improve brand awareness and grow our customer base while reducing customer acquisition costs. We continue to attract and strengthen our relationships with customers with new content on our own channels. Our YouTube channel continues to grow with an expanding number of proprietary educational and instructional talks and videos to help attract customers who tend to be less price sensitive.

Speaker Change: Third we continue to invest in our marketing channels to improve brand awareness and grow our customer base, while reducing customer acquisition costs.

Speaker Change: We continue to attract and strengthen our relationships with customers with new content on our own channels. Our Youtube channel continues to grow with an expanding number of proprietary educational and instructional talks and videos to help attract customers who tend to be less price sensitive.

David Meniane: Over time, our own content push will not only foster an automotive community, but help us acquire new customers on lower acquisition costs and decrease our reliance on third-party advertisers to make our business more profitable. Before I turn the call over to Ryan to discuss quarterly financials in detail, I want to provide an update on our ongoing efforts to optimize our logistics and supply chain management. We are on track to begin operations at our new and larger semi-automated facility in Las Vegas, Nevada in this quarter.

Speaker Change: Over time, our own content push will not only foster and automotive community, but help us acquire new customers on lower acquisition costs and decrease our reliance on third party advertisers to make our business more profitable.

Speaker Change: Before I turn the call over to Ryan to discuss quarterly financials in detail I want to provide an update on our ongoing efforts to optimize our logistics and supply chain management.

Ryan: We are on track to begin operations at our new and larger semi automated facility in Las Vegas, Nevada in this quarter. This investment was made to drive improved customer experience as well as operating leverage in the form of process efficiencies and we expect those savings to start ramping up in the second half of 2024.

David Meniane: This investment was made to drive improved customer experience as well as operating leverage in the form of process efficiencies. And we expect those savings to start ramping up in the second half of 2024 and fully realized in 2025. The new West Coast flagship will feature a state-of-the-art AI-powered PIC module and extensive conveyance that will allow us for increased gross margin through lower freight costs due to expanded regional assortment, as well as a significant reduction in operating costs. I'll now hand it over to Ryan for a financial update.

Speaker Change: And fully realized in 2025, the new West Coast flagship will feature a state of the art AI powered pick module and extensive can vans that will allow us for increased gross margin through lower freight costs due to expanded regional assortment as well as a significant reduction in operating costs.

Speaker Change: I'll now hand, it over to Ryan for a financial update.

Ryan Lockwood: Thank you, David. In Q1, we reported revenues of $166.3 million, down 5% from $175.5 million last year. Gross profit for the quarter was $53.9 million, down approximately 14% compared to the prior year. Gross margin was 32.4% of sales, down from 35.6% in the prior year due to the higher freight costs and pricing compression. Gap net loss for the quarter was $6.5 million compared to net income of $1.1 million in the prior year period.

Ryan: Thank you David in Q1, we reported revenues of $166 3 million down 5% from $175 $5 million last year gross profit for the quarter was $53 9 million down approximately 14% compared to the prior year gross margin was 32, 4% of sales down from 35, 6% in the <unk>.

Speaker Change: Our year due to the higher freight costs and pricing compression.

Speaker Change: GAAP net loss for the quarter was $6 5 million compared to net income of $1 1 million in the prior year period.

Ryan Lockwood: We reported adjusted EBITDA of $1.1 million versus $9.4 million in the prior year period. This adjusts for certain short-term expenses, including $483,000 of transition-related costs to our recent workforce reduction and $471,000 in overlapping rent and related expenses from our new Las Vegas facility. These strategic investments and other cost reduction initiatives allow us to respond appropriately to the retail environment and ensure long-term value creation for our shareholders. On an annualized basis, we expect our cost reduction initiatives to equal $10 million.

Speaker Change: We reported adjusted EBITDA of $1 1 million versus $9 4 million in the prior year period. This adjusts for certain short term expenses, including 483000 of transition related costs to our recent workforce reductions and 471000 overlapping rent and related expenses from our new Las Vegas facility.

Speaker Change: These strategic investments and other cost reduction initiatives allow us to respond appropriately to the retail environment and ensure long term value accretion for our shareholders.

Ryan Lockwood: On an annualized basis, we expect our cost reduction initiatives to equaled $10 million for fiscal 2020 for the flow through should be approximately $8 million.

Ryan Lockwood: For fiscal 2024, the flow-through should be approximately $8 million. Turning to the balance sheet, we ended the quarter with $46 million of cash and no revolver debt. We generated $437,000 of interest income in the first quarter.

Speaker Change: Turning to the balance sheet, we ended the quarter with $46 million of cash and no revolver debt. We generated 437000 of interest income in the first quarter, our cash position and untapped revolver continues to support our business plan.

Ryan Lockwood: Our cash position and untapped revolver continues to support our business. The inventory balance at the quarter end was $120 million versus $136 million in the prior year. As a reminder, we account for our inventory on a FIFO basis. Therefore, some of the benefit we expect to see as we improve sourcing will be delayed until we sell through the existing higher cost FIFO layer, turning to our outlook for 2024. In the months of March and April, we saw improvements in gross margin above the top end of our previous guidance, which was offset by lower revenue.

Speaker Change: Inventory balance at the quarter end was $120 million versus 136 million in the prior year. As a reminder, we account for our inventory on a FIFO basis. Therefore, some of the benefit we expect to see as we improve sourcing will be delayed until we sell through the existing higher cost FIFO layers.

Speaker Change: Turning to our outlook for 2024.

Speaker Change: In the months of March and April we saw improvements in gross margin above the top end of our previous guidance, which was offset by lower revenue for the full year. We are still targeting gross profit dollars inside the range of our previous guidance. However, as we focus on our more profitable channels and segments sales will be lower year over year at one <unk>.

Ryan Lockwood: For the full year, we are still targeting gross profit dollars inside the range of our previous guidance. However, as we focus on our more profitable channels and segments, sales will be lower year over year at a higher gross margin percent than previously guided. Financial discipline is part of our DNA, and given the evolving market dynamics, we are doubling down on opportunities for margin expansion around pricing optimization, marketing, supply chain, technology, and fee income.

Ryan Lockwood: Higher gross margin percent than previously guided.

Ryan Lockwood: Financial discipline is part of our DNA and given the evolving market dynamics, we are doubling down on opportunities for margin expansion around pricing optimization marketing supply chain technology and fee income in the short term, we will spend the rest of fiscal 2024 focused on improving efficiency.

Ryan Lockwood: In the short term, we will spend the rest of fiscal 2024 focused on improving efficiency and profitability to significantly increase adjusted EBITDA in 2025 and 2026. By continuing the efforts around our three strategic pillars and efficiency, we believe we can achieve adjusted EBITDA growth next year. As we look to the medium term, we are working towards achieving a 6% to 8% adjusted EBITDA margin, as well as increasing our free cash flow generation, for the full year 2024.

Speaker Change: And profitability to significantly increase adjusted EBITDA in 2025 and 2026 by.

Speaker Change: By continuing the efforts around our three strategic pillars and efficiency. We believe we can achieve adjusted EBITDA growth next year as we look to the medium term, we are working towards achieving a 6% to 8% adjusted EBITDA margin as well as increasing our free cash flow generation.

Ryan Lockwood: For the full year 2024.

Ryan Lockwood: We revised our revenue guidance down to $600 million to $625 million to reflect our focus on margin improvement. Our previous guidance had been for a range of 662 to 660. We revised our gross profit margin guidance, to 33% plus or minus 100 basis costs, which will partially offset lower expected sales. Our previous guidance was 31% plus or minus 100 basis. The outlined guidance change is relatively neutral from a gross profit dollar perspective.

Ryan Lockwood: We revised our revenue guidance down to 600 million to $625 million to reflect our focus on margin improvement our previous guidance had been for a range of $6 62 to 668.

Ryan Lockwood: We revise our gross profit margin guidance up to 33% plus or minus 100 basis points.

Speaker Change: Which will partially offset lower expected sales our previous guidance was 31% plus or minus 100 basis points.

Ryan Lockwood: Outlined guidance change is relatively neutral from a gross profit dollar perspective, we.

Ryan Lockwood: We believe the strategy of optimizing around transactions at a higher gross margin will help us achieve our medium-term profitability target by making us more efficient through handling less packages, fewer customer service requests, and lower reverse logistic costs.

Speaker Change: We believe this strategy of optimizing around transactions at a higher gross margin will help us achieve our medium term profitability target by making us more efficient through handling less packages fewer customer service requests.

Speaker Change: And lower reverse logistic costs.

Ryan Lockwood: Overall, we believe that the impact of our strategic priorities and focus on attracting higher value customers will restore adjusted EBITDA and profitability growth. We are well positioned to capture the tremendous and growing opportunity in a highly fragmented and underserved $400 billion aftermarket auto parts industry. We continue to build a world-class organization centered around the needs of our customers, and we believe we will create long-term value and benefit our stakeholders for years to come.

Speaker Change: We continued to build a world class organization centered around the needs of our customers and we believe we will create long term value and benefit our stakeholders for years to come we will continue balancing financial prudence with Opportunistically returning capital to shareholders through the remainder of the year. Thank you everyone for joining today's call we will now.

Ryan Lockwood: We will continue balancing financial prudence with opportunistically returning capital to shareholders through the remainder of the year. Thank you, everyone, for joining today's call. We will now turn it over to the operator and open it up for your questions.

Ryan Lockwood: Turn it over to the operator and open it up for your questions.

Operator: Thank you. As a reminder to ask a question, please press star 1 1 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 Ryan Sigdahl from Craig Hallam Capital Group.

Speaker Change: Thank you.

Ryan Lockwood: 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.

Operator: Ladies standby, while we compile the Q&A roster.

Operator: Yes.

Operator: Our first question comes from the line of Ryan Macdonald from Craig Hallum Capital Group.

Ryan Ronald Sigdahl: Hey, good afternoon guys.

Ryan Ronald Sigdahl: Hey, good, good. Curious within the guidance. Previously, we're assuming 100 million of branded dropship revenue. Curious what that assumption is now.

Ryan Ronald Sigdahl: Hey, Ryan how are you.

Ryan Ronald Sigdahl: Good good curious within the guidance previously you were assuming a 100 million of branded drop ship revenue I'm curious what that assumption is now.

David Meniane: Mixed probably won't change that much from the branded to private label side in the short term and I think over the long term if there's a lot of moving parts because you have the investments we're making in J.C. Whitney which is going to be beneficial for private label but we are going to continue to bring in new branded SKUs to attack different segments that we've never attached to before. On the private label topic, I guess, curious how many new SKUs you've added there, year-to-date, and what categories those are focused on?

Ryan Ronald Sigdahl: Mixed probably won't change that much from branded to private label side in the short term and I think over the long term. If there is a lot of moving parts because you have the investments, we're making in JC Whitney which is going to be beneficial for private label, but we are going to continue to bring in new branded skus.

David Meniane: To attack different segments that we've never touched before.

David Meniane: On the private label topic, I guess, curious how many new SKUs you've added there, year-to-date, and what categories those are focused on? So, year-to-date, we've added about 7,000 SKUs, and the product mix is about 6535 PL1 to PL2. Sorry, our PL1 is our collision business, and our PL2 is our mechanical business. Good.

David Meniane: On the private label topic, I guess curious how many new skus you've added there year to date and what categories. Those are focused on.

David Meniane: So year to date, we've added about 7000 skus.

David Meniane: And the product mix is about 65, 35, PL ones appeal to you.

David Meniane: <unk>, sorry, <unk> as our collision business and our <unk> is our mechanical business.

Ryan Ronald Sigdahl: Then just moving over to the medium term, even down margin target 68% you were previously 8 to 10%. I guess given everything you guys are focused on and, Cost Optimization and Improving Margins. Less revenue but higher margin, etc, etc. I guess I'm surprised to see the margin target over the medium term come lower. So can you talk to the puts takes on that 200 bps?

David Meniane: Good then just moving over to the medium term EBITDA margin target.

Ryan Ronald Sigdahl: 6% to 8% you are previously 810% I guess given everything.

Ryan Ronald Sigdahl: You guys are focused on and from our cost optimization, and improving margins and less revenue, but higher margin et cetera, et cetera, I guess im surprised to see the margin target over the medium term come lower so can you talk through the puts takes on that 200 bps.

David Meniane: Yeah, I can take that one. Hi, Ryan, David.

Speaker Change: Yes, I can take that one highlighting David.

Speaker Change: I think just taking a step back just on Q1.

Speaker Change: Definitely in line with our expectations, but for me it's disappointing.

David Meniane: No, listen, I think just taking a step back just on Q1, you know, it's definitely in line with our expectations. But for me, it's disappointing. I'm not satisfied with lower sales and lower margin. And I said it last time and I'll say it again, it's 100% on me.

David Meniane: Im.

David Meniane: Not satisfied with lower sales and lower margin and I said, it last time and I'll say it again, it's a 100% on me.

David Meniane: I think regardless of the macro, we need to find a way to win. The 6% to 8% is really a medium-term target. What we want to emphasize is our kind of short-term focus on margin expansion and profitability. We have some opportunities on gross margin and freight. We have some opportunities on the marketing side. We have some opportunities on labor with efficiencies and productivity improvements. I think long-term, this business can be extremely profitable and generate a ton of free cash flow. What we're trying to do is put out an achievable but reasonable target that's in the medium-term. And I think 6% to 8% is a good checkpoint.

David Meniane: Regardless of the macro we need to find a way to win.

David Meniane: 6% to 8% is really a medium term targets.

David Meniane: What we want to emphasize is our on a short term focus on margin expansion and profitability. We have some opportunities on gross margin and freight we have some opportunities on the marketing side, we have some opportunities on labor with efficiencies and productivity improvements I think long term this business can be extremely.

David Meniane: <unk> and generate a ton of free cash flow.

David Meniane: What we're trying to do is put out are achievable, but reasonable target. That's in the medium term and I think 6% to 8% is a good checkpoint.

David Meniane: Very good. One last quick one for me, if you're willing to comment, do you expect to stay EBITDA positive in 24 and free and or free cash flow positive?

Speaker Change: One last quick one from me if youre willing to comment do you expect to stay EBITDA positive in 'twenty, four and free cash and our free cash flow positive.

Ryan Lockwood: Yeah, so for EBITDA, you know, there's a lot of moving parts. I think that, you know, some of it's going to depend on where we end up on both sides of the guidance.

David Meniane: Yes.

David Meniane: For EBITDA, there's a lot of moving parts I think that some of it's going to depend on where we end up on both sides of the guidance.

Ryan Lockwood: And then as far as the free cash flow, you know, we're going to be negative free cash flow predominantly because we're making some large investments in Las Vegas. So, you know, I think big picture taking a step back, cash at the end of the year, you're going to be about $25 million to $35 million ending cash balance. And that kind of depends on how much inventory we end the year with. So that would be between like $110 to $120 of inventory on the balance sheet would give you the change there. Yeah. And if I can add something, the other thing that we're working

Ryan Lockwood: And then as far as the free cash flow.

Ryan Lockwood: We are going to be negative free cash flow predominantly because making some large investments in Las Vegas.

Ryan Lockwood: So I think big picture, taking a step back cash at the end of the year youre going to be about 25% to $35 million ending cash balance and that kind of depends on how much inventory. We ended the year with so that would be between like 110 to 120 of inventory.

Ryan Lockwood: On the balance sheet would give you the change there, yes, and if I can add something the other thing that we're working in terms of making the business more efficient is definitely on the income statement side with margin and free cash flow, but I think on the balance sheet side as we think about optimizing the business.

David Meniane: Yeah, and if I can add something, the other thing that we're working in terms of making the business more efficient is definitely on the income statement side with margin and free cash flow. But I think on the balance sheet side, as we think about optimizing the business, we're going to be looking to rationalize inventory, increase terms and making sure that, you know,

David Meniane: Going to be looking to rationalize inventory increased turns and making sure that at the end of the year, we have as much cash as possible and run the business as lean as possible.

Ryan Lockwood: Sorry, maybe one more if I can sneak it in related what CapEx was 7 million and changing Q1. What's the expected total for the year including the Vegas? Yeah, so total for the year, you're looking at like $6-7 million for Vegas and $9-10 million just for normal cutback.

Speaker Change: Sorry, maybe one more if I can sneak it in related Capex was $7 million and change in Q1, what's the expected total for the year, including the Vegas move.

Ryan Lockwood: So total total for the year Youre looking it looks like $6 million to $7 million for Vegas, and $9 million to $10 million just for normal capex.

Ryan Ronald Sigdahl: Thank you guys. I'll turn it over to the others. Good luck.

Speaker Change: Thanks, guys I'll turn it over to the others.

Ryan Lockwood: Okay.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Ryan Meyers from Lake Street Capital Markets.

Speaker Change: Thank you one moment for our next question.

Operator: Our next question comes from the line of Ryan Meyers from Lake Street capital markets.

Ryan Robert Meyers: Hey guys, thanks for taking my questions. First one for me, you know, what's your level of confidence that you're still going to be able to take price and still see demand for those respective products?

Ryan Robert Meyers: Hey, guys. Thanks for taking my questions first.

Ryan Robert Meyers: First one for me whats your level of confidence that youre still going to be able to take price and still see demand for those respective products.

Ryan Robert Meyers: So I think that goes exactly to the new change in guidance, we have been taking price and we're seeing.

David Meniane: Above the prior range levels of margin and there was definitely an offset we are seeing a little bit less demand and it goes to our strategy as far as how many units, we actually touch and ship out how many customers are we helping which does flow to different efficiencies at the warehouse on shipping out.

David Meniane: On call center on people, calling in on a returns processes. How much comes back. So it is better all around for us to be a little bit more expensive than where we were before and have a little bit better margin, but touch less units. So from a this is part of I think our strategy to hit that medium term guidance overtime.

David Meniane: Yeah, and Ryan, if I could add one thing. I think what's important is if you look at our customer base, and call it last year, we had about 7 million customers place orders on carparts.com. If you go one level down and do some segmentation, there is a subset of customer that comes back more than once, spends more money, and does not rely on coupons and discounts. And there is a subset of customer that is typically on the lower end, they tend to be the bargain hunting or discount seeking.

Speaker Change: Yeah, and Rod if I could add one thing I think what's important because if you look at our customer base in call. It last year, we had about 7 million customers place orders on car parts Dot Com. If you go one level down and do some segmentation. There is a subset of customer that comes back more than one spends more.

David Meniane: Our money and does not rely on coupons and discounts and there is a subset of customer that is typically on the lower end they tend to be the bargain hunting or discount seeking and what we're trying to do is really focus our efforts on the customer that comes back and spend more which is less expensive to acquire and more profitable over time.

David Meniane: And what we're trying to do is really focus our efforts on the customer that comes back and spends more, which is less expensive to acquire and more profitable over time. So what we end up with is a slightly smaller customer base, but much higher flow through and much higher profitability. So ultimately, our ability to pick prices up is important. But really, it's to the extent that we can maximize flow through and free cash flow. That's kind of what we're ultimately focusing on. We think that the best way to generate value for shareholders is maximizing free cash flow.

David Meniane: So what we end up with is a slightly smaller customer base, but much higher flow through and much higher profitability. So ultimately our ability to take prices up is important but really it's to the extent that we can maximize flow through and free cash flow and thats kind of what we're ultimately focusing on we think that the best way to generate.

David Meniane: Ali for shareholders is maximizing free cash flow.

Ryan Robert Meyers: Got it, that makes sense. And then the 8 million dollars in cost savings that you expect to see in 2024, I just want to make sure I understand it correctly, is that going to be spread both across cost of goods as well as operating expenses or is that 8 million just what we're going to see with the kind of shipping product mix or is there anything else in operating expenses? Just a good understanding of that would be helpful.

Speaker Change: Got it that makes sense.

Ryan Robert Meyers: And then the $8 million in cost savings that you expect to see in 2024, I just want to make sure I understand it correctly is that going to be spread both across cost of goods as well as operating expenses or is that $8 million is what we're going to see.

Ryan Robert Meyers: With the kind of shifting product mix or is there anything else in operating expenses.

Ryan Robert Meyers: Good understanding of that would be helpful that.

Ryan Robert Meyers: That would be purely in opex.

Ryan Robert Meyers: Okay.

Speaker Change: Got it that's it for me thanks for taking my questions.

Speaker Change: Thank you at this time there are no further questions.

Speaker Change: This concludes today's conference call. Thank you for participating you may now all disconnect.

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Ryan Lockwood: No, that would be purely an opex. Okay. Got it. That's it for me.

Speaker Change: 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 pass the conference over to our host Tina Mirror Farsi.

Ryan Robert Meyers: Thanks for taking my questions. Thanks. Thank you. At this time, there are no further questions. This concludes today's conference call. Thank you for participating. You may now all disconnect. Please see the complete disclaimer at https://sites.google.com or in the description of this video.

Ryan Robert Meyers: Senior Vice President of Global Communications and co Chair. Please go ahead.

Operator: Thank you. At this time, there are no further questions. This concludes today's conference call. Thank you for participating. You may now all disconnect. Please see the complete disclaimer at https://sites.google.com or at https://sites.google.com, ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? Good afternoon.

Speaker Change: Hello, everyone and thank you for joining us for the car parts Dot Com first quarter conference call. Joining me today are David Mignon, Chief Executive Officer, Brian Lockwood, Chief Financial Officer, and Michael have Baker, Chief operating officer.

Operator: 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 pass the conference over to our host, Tina Mirfarsi. Senior Vice President of Global Communications and Culture. Please go ahead.

Speaker Change: Before I turn it over to David to start the meeting I have some important disclosures.

Tina Mirfarsi: The prepared remarks and responses to your question could contain certain forward looking statements related to the business under the federal Securities laws.

Operator: 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.

Operator: For a discussion of the material risks and other important factors that could affect results.

Tina Mirfarsi: Please refer to the car parts Dot Com annual report on Form 10-K, and 10-Qs as filed with the SEC both of which can be found on our Investor Relations website.

Operator: 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 and with that I would now like to turn the call over to David.

David Meniane: Thank you Tina and thank you all for joining us.

David Meniane: Thank you, Tina, and thank you all for joining us. I will begin with some highlights from the quarter, provide an update on the economic environment, and then turn it over to Ryan to review our financial performance in more detail before opening it up for Q&A. Our performance so far this year has been disappointing and does not meet our standards. We're facing headwinds in key categories, and certain customer segments are being impacted by a deteriorating economic outlook.

David Meniane: I will begin with some highlights from the quarter provide an update on the economic environment, and then turn it over to Ryan to review our financial performance in more detail before opening it up for Q&A.

David Meniane: Our performance so far this year has been disappointing and does not meet our standards, we're facing headwinds in key categories and certain customer segments are being impacted by the deteriorating economic outlook.

David Meniane: We need to maintain financial discipline and do a better job on both gross and net margin. Now we have several variables within our control such as pricing optimization, marketing, last mile transportation costs, and product expansion where we have opportunities for margin improvement. Over the last few years, we have made significant investments in infrastructure and operating capabilities. We now need to focus on efficiency and effectiveness to quickly deliver improvements in profitability. The ultimate measure of success for our company is long-term free cash flow. And over the last few quarters, we've made insufficient progress.

David Meniane: We need to maintain financial discipline and do a better job on both gross and net margins.

David Meniane: Now we have several variables within our control such as pricing optimization marketing last mile transportation cost and product expansion, while we have opportunities for margin improvement.

David Meniane: Over the last few years, we have made significant investments in infrastructure and operating capabilities, we now need to focus on efficiency and effectiveness to quickly deliver improvements in profitability.

David Meniane: Ultimate measure of success for our company is long term free cash flow and over the last few quarters, we've made insufficient progress.

David Meniane: In the first quarter of 2024, our sales reached $166 million, down 5% from the prior year period. We experienced significant weather impact in January, and the first half of February, and our more price-sensitive segments underperformed throughout the quarter. This decline was primarily driven by acute pressure in lighting and mirrors attributable to a flood of non-Department of Transportation-compliant, low-cost, and low-quality parts from overseas, which are often illegal.

David Meniane: In the first quarter of 2024, our sales reached $166 million down 5% from the prior year period, we experienced significant weather impact in January.

David Meniane: And the first half of February.

David Meniane: And our more price sensitive segments underperformed throughout the quarter.

David Meniane: This decline was primarily driven by acute pressure in lighting and mirrors attributable to a flood of non department of transportation compliant low cost and low quality parts from overseas, which are often illegal.

David Meniane: These two categories account for approximately one quarter of our revenue and represent the vast majority of our year over year decline, masking the strength in other categories, particularly in large replacement parts, where we have a competitive advantage. The current environment also has put significant pressure on low price and discount seeking customers, which are becoming more scarce and more expensive to acquire and service. To maintain financial discipline, we made the decision to both adjust pricing and reduce our customer acquisition spend on this subset of customers.

David Meniane: These two categories account for approximately one quarter of our revenue and represent the vast majority of our year over year decline.

David Meniane: Masking the strength in other categories, particularly in large replacement parts, where we have a competitive advantage.

David Meniane: The current environment also has put significant pressure on low price and discount seeking customers, which are becoming more scarce and more expensive to acquire and service.

David Meniane: To maintain financial discipline, we made the decision to both adjusted pricing and reduce our customer acquisition spend on this subset of customers, we're focusing our efforts on targeting consumers that want quality parts at competitive prices. This is a more profitable customer base, which gives us a higher gross margin profile due to.

David Meniane: We're focusing our efforts on targeting consumers that want quality parts at competitive prices. This is a more profitable customer base, which gives us a higher gross margin profile. Due to these efforts, we began to see gross margin improvement in the back half of Q1, and our momentum has continued during the month of April. In Q1, we also implemented a corrective cost savings initiative. They're expected to provide up to $8 million in cost reductions in 2024 and $10 million on an annual life basis.

David Meniane: These efforts, we began to see gross margin improvement in the back half of Q1 and our momentum has continued during the month of April.

David Meniane: In Q1, we also implemented aggressive cost savings initiatives that are expected to provide up to $8 million in cost reductions in 2024 and $10 million on an annualized basis.

David Meniane: Adjusted EBITDA for the quarter was approximately $1 $1 million excluding transition costs. These costs include related to moving to our new semi automated larger facility in Las Vegas, Nevada, as well as costs related to right sizing our workforce.

David Meniane: These costs include related to moving to our new semi-automated, larger facility in Las Vegas, Nevada, as well as costs related to right-sizing our workforce. Ryan will talk about the implications of these changes on our 2024 Outlook. Now, I want to emphasize that we're targeting gross profit dollars to remain within the range we had previously forecasted. Our strong balance sheet provides us with staying power, and we're very comfortable with our capital position at this time.

David Meniane: Brian will talk about the implications of these changes on our 2020 for outlook.

David Meniane: Now I want to emphasize that we're targeting gross profit dollars to remain within the range. We had previously forecasted our strong balance sheet provides us with staying power and we're very comfortable with our capital position at this time.

David Meniane: We are positioning Carpark dot com for the short term and long term by focusing on one the development of our digital first and customer centric automotive E Commerce and mobile App strategy.

David Meniane: Two the expansion of our proprietary portfolio with premium products and services to capture new markets and customers and three generating more brand awareness for Carpark dot com and capturing a wider customer base.

David Meniane: Before going into some highlights for the quarter I wanted to announce that we published an updated investor deck today that describes the carpark dot com investment opportunity and defines each one of these strategic drivers in more detail.

David Meniane: The presentation is available at <unk> Dot Com slash investor.

David Meniane: Next I'd like to cover our main highlights for the quarter.

David Meniane: First, we make big moves to supercharge our e-commerce and mobile app experience and ensure CarParts.com is the stress-free destination of choice for consumers to address their vehicle's maintenance and repair needs. Our mobile app, which successfully launched last summer on both iOS and Android, continues to grow, with over 350,000 total downloads. Mobile app revenue currently accounts for 8% of our e-commerce revenue, compared to 0% in Q3 of last year. With 80% of our customers shopping on mobile, we expect direct in-app purchases to drive savings for us and reduce our reliance on search engines and performance marketing to promote our brands and products while also incentivizing repeat purchases. We believe this will lower our marketing spend and drive increased profitability over time. We also launched our first machine learning powered product recommendation engine built on top of our proprietary Fitment data.

David Meniane: First we made big moves to supercharge, our e-commerce, and mobile App experience and ensure our car parks Dot com is the stress free destination of choice for consumers to address their vehicles maintenance and repair needs.

David Meniane: Our mobile App, which successfully launched last summer on both iOS and Android continues to grow with over 350000 total downloads.

David Meniane: Mobile App revenue currently accounts for 8% of our e-commerce revenue compared to zero percent in Q3 of last year.

David Meniane: With 80% of our customers shopping on mobile we expect direct in App purchases to drive savings for us and reduce our reliance on search engine and performance marketing to promote our brands and products, while also incentivising repeat purchases.

David Meniane: We believe this will lower our marketing spend and drive increased profitability over time.

David Meniane: We also launched our first machine learning powered product recommendation engine built on top of our proprietary fitment data.

David Meniane: Over time, we expect this to increase units per order, which will make freight more efficient and drive higher gross margins. A few weeks ago, we also introduced the first of several fee income initiatives to drive incremental high margin dollars. Our new parts and shipping protection offerings are both live and ramping up.

David Meniane: Overtime, we expect this to increased units per order, which will make freight more efficient and drive higher gross margin.

David Meniane: A few weeks ago. We also introduced the first of several fee income initiatives to drive incremental high margin dollars are new parts and shipping protection offerings are both live and ramping up over time, we expect those two initiatives to generate incremental gross profit dollars at an annualized rate of approximately two.

David Meniane: Over time, we expect those two initiatives to generate incremental gross profit dollars at an annualized rate of approximately two million dollars. Second, we're optimizing our product and price assortment to capture market share by catering to more premium shoppers, enhancing our competitiveness and positioning us for sustained growth. In this quarter, we continue to optimize our product mix and expanded our inventory by adding new SKUs, aiming to attract more customers, enhance our profit margin, and increase overall revenue.

David Meniane: Million.

David Meniane: Okay.

David Meniane: Second we are optimizing our product and price assortment to capture market share by catering to more premium shoppers enhancing our competitiveness and positioning us for sustained growth.

David Meniane: In this quarter, we continued to optimize our product mix and expanded our inventory by adding new skus aiming to attract more customers enhance our profit margins and increased overall revenue.

David Meniane: For context, most new products, we add have a revenue generating capacity that can last up to 20 years and compound over time.

David Meniane: We are also launching several of our product lines under the JC Whitney brand in Q2 at Q3 of this year. These products are focused on providing higher quality products at an enhanced price point at a higher gross margin profile over time, we believe we can increase gross margin by upgrading our products from an <unk>.

David Meniane: Branded private label business to a branded model leveraging the legacy of our JC Whitney Brian.

David Meniane: Third we continue to invest in our marketing channels to improve brand awareness and grow our customer base, while reducing customer acquisition costs.

David Meniane: Okay.

David Meniane: We continue to attract and strengthen our relationships with customers with new content on our own channels. Our Youtube channel continues to grow with an expanding number of proprietary educational and instructional talks and videos to help attract customers who tend to be less price sensitive.

David Meniane: Over time, our own content push will not only foster an automotive community but help us acquire new customers on lower acquisition costs and decrease our reliance on third party advertisers to make our business more profitable. Before I turn the call over to Ryan to discuss quarterly financials in detail, I want to provide an update on our ongoing efforts to optimize our logistics and supply chain management. We are on track to begin operations at our new and larger semi-automated facility in Las Vegas, Nevada in this quarter.

David Meniane: Over time, our own content push will not only foster and automotive community, but help us acquire new customers on lower acquisition costs and decrease our reliance on third party advertisers to make our business more profitable.

David Meniane: Before I turn the call over to Ryan to discuss quarterly financials in detail I want to provide an update on our ongoing efforts to optimize our logistics and supply chain management.

David Meniane: We are on track to begin operations at our new and larger semi automated facility in Las Vegas, Nevada in this quarter. This investment was made to drive improved customer experience as well as operating leverage in the form of process efficiencies and we expect those savings to start ramping up in the second half of 2024.

Ryan Lockwood: And fully realized in 2025, the new West Coast flagship will feature a state of the art AI powered pick module and extensive can vans that will allow us for increased gross margin through lower freight cost due to expanded regional assortment as well as a significant reduction in operating costs I'll now hand, it over to <unk>.

David Meniane: Ryan for a financial update.

Ryan Lockwood: Thank you David in Q1, we reported revenues of $166 3 million down 5% from $175 5 million last year gross profit for the quarter was $53 9 million down approximately 14% compared to the prior year.

Ryan Lockwood: <unk> margin was 32, 4% of sales down from 35, 6% in the prior year due to the higher freight costs and pricing compression.

Ryan Lockwood: GAAP net loss for the quarter was $6 5 million compared to net income of $1 1 million in the prior year period.

Ryan Lockwood: We reported adjusted EBITDA of $1.1 million versus $9.4 million in the prior year period. This adjusts for certain short-term expenses, including $483,000 of transition-related costs to our recent workforce reductions and $471,000 in overlapping rent and related expenses from our new Las Vegas facility. These strategic investments and other cost reduction initiatives allow us to respond appropriately to the retail environment and ensure long-term value creation for our shareholders. On an annualized basis, we expect our cost reduction initiatives to equal $10 million.

Ryan Lockwood: We reported adjusted EBITDA of $1 1 million versus $9 4 million in the prior year period. This suggest for certain short term expenses, including 483000 of transition related costs to our recent workforce reductions and 471000 and overlapping rent and related expenses from our new Las Vegas facility.

Ryan Lockwood: These strategic investments and other cost reduction initiatives allow us to respond appropriately to the retail environment and ensure long term value creation for our shareholders on.

Ryan Lockwood: On an annualized basis, we expect our cost reduction initiatives to equaled $10 million for fiscal 2020 for the flow through should be approximately $8 million.

Ryan Lockwood: For fiscal 2024, the flow through should be approximately $8 million. Turning to the balance sheet, we ended the quarter with $46 million of cash and no revolver debt. We generated $437,000 of interest income in the first quarter.

Ryan Lockwood: Turning to the balance sheet, we ended the quarter with $46 million of cash and no revolver debt. We generated 437000 of interest income in the first quarter, our cash position and untapped revolver continues to support our business plan.

Ryan Lockwood: Our cash position and untapped revolver continues to support our business. The inventory balance at the quarter end was $120 million versus $136 million in the prior year. As a reminder, we account for our inventory on a FIFO-based... Therefore, some of the benefit we expect to see as we improve sourcing will be delayed until we sell through the existing higher cost FIFO layer, turning to our outlook for 2024. In the months of March and April, we saw improvements in gross margin above the top end of our previous guidance, which was offset by lower revenue.

Ryan Lockwood: The inventory balance at the quarter end was $120 million versus 136 million in the prior year. As a reminder, we account for our inventory on a FIFO basis. Therefore, some of the benefit we expect to see as we improve sourcing will be delayed until we sell through the existing higher cost FIFO layers.

Ryan Lockwood: Turning to our outlook for 2024.

Ryan Lockwood: In the months of March and April we saw improvements in gross margin above the top end of our previous guidance, which was offset by lower revenue for the full year. We are still targeting gross profit dollars inside the range of our previous guidance. However, as we focus on our more profitable channels and segments sales will be lower year over year at.

Ryan Lockwood: Our higher gross margin percent and previously guided.

Ryan Lockwood: Profitability to significantly increase adjusted EBITDA in 2025 and 2026.

Ryan Lockwood: By continuing the efforts around our three strategic pillars and efficiency. We believe we can achieve adjusted EBITDA growth next year as we look to the medium term, we are working towards achieving a 6% to 8% adjusted EBITDA margin as well as increasing our free cash flow generation.

Ryan Lockwood: For the full year 2024.

Ryan Lockwood: We revised our revenue guidance down to $600 million to $625 million to reflect our focus on margin improvement. Our previous guidance had been for a range of 662 to 660, we revise our gross profit margin guidance up to 33% plus or minus 100 basis costs, which will partially offset lower expected sales. Our previous guidance was 31% plus or minus 100 basis. The outlined guidance change is relatively neutral from a gross profit dollar perspective.

Ryan Lockwood: We revised our revenue guidance down to 600 million to $625 million to reflect our focus on margin improvement our previous guidance had been for a range of $6 62 to 668.

Ryan Lockwood: We revise our gross profit margin guidance up to 33% plus or minus 100 basis points, which will partially offset lower expected sales in our previous guidance was 31% plus or minus 100 basis points.

Ryan Lockwood: The outlined guidance change is relatively neutral from a gross profit dollar perspective, we believe this strategy of optimizing around transactions at a higher gross margin will help us achieve our medium term profitability target by making us more efficient through handling less packages fewer customer service requests and low.

Ryan Lockwood: For reverse logistic costs.

Ryan Lockwood: We continue to build a world class organization centered around the needs of our customers and we believe we will create long term value and benefit our stakeholders for years to come we will continue balancing financial prudence with Opportunistically returning capital to shareholders through the remainder of the year. Thank you everyone for joining today's call we will now.

Ryan Lockwood: We will continue balancing financial prudence with opportunistically returning capital to shareholders through the remainder of the year. Thank you everyone for joining today's call. We will now turn it over to the operator and open it up for your questions.

Speaker Change: I'll turn it over to the operator and open it up for your questions.

Speaker Change: Thank you 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.

Operator: Yes.

Ryan Ronald Sigdahl: Our first question comes from the line of Ryan <unk> from Craig Hallum Capital Group.

Ryan Ronald Sigdahl: Hey, good afternoon guys.

Ryan Ronald Sigdahl: Hey, Ryan, how are you? Good, good. Curious, within the guidance, previously, we're assuming 100 million of branded dropship revenue. Curious what that assumption is now?

Ryan Ronald Sigdahl: Hey, Ryan how are you.

Ryan Ronald Sigdahl: Good good curious within the guidance previously you were assuming a 100 million of branded drop ship revenue I'm curious what that assumption is now.

David Meniane: Mick's probably won't change that much from the branded to private label side in the short term and I think over the long term if there's a lot of moving parts because you have the investments we're making in JC Whitney which is going to be beneficial for private label but we are going to continue to bring in new branded SKUs to attack different segments that we've never attached to before. On the private label topic, I guess, curious how many new SKUs you've added there, year-to-date, and what categories those are focused on?

Ryan Ronald Sigdahl: Mixed probably won't change that much from branded to private label side in the short term and I think over the long term.

David Meniane: There is a lot of moving parts because you have the investments, we're making in JC Whitney which is going to be beneficial for private label, but we are going to continue to bring in new branded skus to attack different segments that we've never attached it before.

David Meniane: On the private label topic, I guess curious how many new SKUs you've added there year-to-date and what categories those are focused on? So year-to-date, we've added about 7,000 SKUs And the product mix is about 65-35 PL1 to PL2 Sorry, our PL1 is our collision business and our PL2 is our mechanical business Good.

David Meniane: On the private label topic, I guess curious how many new skus you've added there year to date and what categories. Those are focused on.

David Meniane: So year to date, we've added about 7000 skus.

David Meniane: And the product mix is about 65 35 P L ones appeal to you.

David Meniane: <unk> is our collision business and our <unk> is our mechanical business.

Ryan Ronald Sigdahl: Then just moving over to the medium term, even down margin target, 68%, you were previously 8 to 10%. I guess given everything you guys are focused on and, Cost Optimization and Improving Margins. Less revenue, but higher margin, etc, etc. I guess I'm surprised to see the margin target over the medium term come lower. So can you talk through the puts takes on that 200 bps?

David Meniane: Good then just moving over to the medium term EBITDA margin target.

Ryan Ronald Sigdahl: 6% to 8% you are previously 810% I guess given everything.

Ryan Ronald Sigdahl: You guys are focused on and from a cost optimization and improving margins and less revenue, but higher margin et cetera, et cetera, I guess I'm surprised to see the margin target over the medium term come lower so can you talk through the puts takes on that 200 bps.

David Meniane: Yeah, I can take that one. Hi, Ryan, David.

Speaker Change: Yes, I can take that one hi, Ryan David No listen I think just taking a step back just on Q1.

Speaker Change: Definitely in line with our expectations, but for me it's.

David Meniane: Disappointing.

Speaker Change: I'm <unk>.

David Meniane: I'm not satisfied with lower sales and lower margin and I said, it last time and I'll say it again it is a 100% on me.

David Meniane: Regardless of the macro we need to find a way to win the <unk>.

David Meniane: 6% to 8% is really a medium term target.

David Meniane: What we want to emphasize is our kind of short term focus on margin expansion and profitability. We have some opportunities on gross margin and freight we have some opportunities on the marketing side, we have some opportunities on our labor with efficiencies and productivity improvements I think long term this business can be extremely prop.

David Meniane: Ratable and generate a ton of free cash flow.

David Meniane: What we're trying to do is.

David Meniane: Put out are achievable, but reasonable target that's in the medium term and I think 6% to 8% is a good checkpoint.

David Meniane: Very good. One last quick one for me if you're willing to comment. Do you expect to stay EBITDA positive in 24 and or free cash flow positive?

Speaker Change: One last quick one from me if youre willing to comment do you expect to stay EBITDA positive in 'twenty, four and free cash and our free cash flow positive.

Ryan Lockwood: Yeah, so for EBITDA, you know, there's a lot of moving parts. I think that, you know, some of it's going to depend on where we end up on both sides of the guidance.

Speaker Change: Yes, so for EBITDA, there's a lot of moving parts I think that somebody is going to depend on where we end up on both sides of the guidance.

Ryan Lockwood: And then as far as the free cash flow.

Ryan Lockwood: And then as far as the free cash flow, you know, we're going to be negative free cash flow predominantly because we're making some large investments in Las Vegas. So, you know, I think big picture taking a step back, cash at the end of the year, you're going to be about $25 to $35 million ending cash balance, and that kind of depends on how much inventory we end the year with. So that would be between like 110 to 120 of inventory on the balance sheet would give you the change there. Yeah, and if I can add something, the other thing that we're

Ryan Lockwood: We are going to be negative free cash flow predominantly because making some large investments in Las Vegas.

Ryan Lockwood: So I think big picture, taking a step back cash at the end of the year youre going to be about 25% to $35 million ending cash balance and that kind of depends on how much inventory. We end the year with so that would be between like 110 to 120 of inventory.

David Meniane: We're going to be looking to rationalize inventory increased turns and making sure that at the end of the year, we have as much cash as possible and run the business as lean as possible.

Ryan Lockwood: Sorry, maybe one more if I can sneak it in related what CapEx was 7 million and changing Q1. What's the expected total for the year including the Vegas? Yeah, so total for the year, you're looking at like $6 to $7 million for Vegas and $9 to $10 million just for normal cutback.

Speaker Change: Sorry, maybe one more if I can sneak it in related what Capex was $7 million and change in Q1, what is the expected total for the year, including the Vegas move.

Ryan Lockwood: So total total for the year Youre looking it looks like $6 million to $7 million for Vegas, and $9 million to $10 million just for normal capex.

Ryan Ronald Sigdahl: Thank you guys. I'll turn it over to the others. Good luck.

Speaker Change: Thank you guys I'll turn it over to the others.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Ryan Meyers from Lake Street Capital Markets.

Speaker Change: Thank you one moment for our next question.

Operator: Our next question comes from the line of Ryan Meyers from Lake Street capital markets.

Ryan Robert Meyers: Hey, guys. Thanks for taking my questions first.

Ryan Robert Meyers: First one for me whats your level of confidence that youre still going to be able to take price still see demand for those respective products.

David Meniane: So I think that goes exactly to the new change in guidance. We have been taking price and we're seeing, you know, above the prior range levels of margin and there was definitely an offset. We are seeing a little bit less demand and it goes to a strategy as far as how many units we actually touch and ship out, how many customers are we helping, which does flow to different efficiencies at the warehouse, on shipping out, on call center, on people calling in, on our returns, processes, how much comes back.

Ryan Robert Meyers: So I think that goes exactly to the new change in guidance, we have been taking price and we're seeing.

David Meniane: On call center on people, calling in on a returns processes. How much comes back. So it is better all around for us to be a little bit more expensive than where we were before and have a little bit better margin, but touch less units. So from all this is part of I think our strategy to hit that medium term guidance overtime.

David Meniane: So it is better all around for us to be a little bit more expensive than where we were before and have a little bit better margin but touch less units. So this is part of, I think, our strategy to hit that medium-term guidance over time. Yeah, and Ryan, if I could add one thing, I think what's important is if you look at, you know, our customer base and, you know, call it last year, we had about 7 million customers place orders on carparts.com.

Ryan Lockwood: Yeah, and Rod if I could add one thing I think what's important because if you look at our customer base in call. It last year, we had about 7 million customers place orders on <unk> Dot Com. If you go one level down and do some segmentation. There is a subset of customer that comes back more than one spends more.

David Meniane: If you go one level down and do some segmentation, there is a subset of customer that comes back more than once, spends more money, and does not rely on coupons and discounts. And there is a subset of customer that is typically on the lower end, you know, they tend to be the bargain hunting or discount seeking. And what we're trying to do is really focus our efforts on the customer that comes back and spends more, which is less expensive to acquire and more profitable over time.

David Meniane: So what we ended up with is a slightly smaller customer base, but much higher flow through and much higher profitability. So ultimately our ability to take prices up is important but really it's to the extent that we can maximize flow through and free cash flow and thats kind of what we're ultimately focusing on we think that the best way to generate.

David Meniane: So what we end up with is a slightly smaller customer base, but much higher flow through and much higher profitability. So ultimately, our ability to take prices up is important. But really, it's to the extent that we can maximize flow through and free cash flow. And that's kind of what we're ultimately focusing on. We think that the best way to generate value for shareholders is maximizing free cash flow.

David Meniane: Ali for shareholders is maximizing free cash flow.

Ryan Robert Meyers: Got it, that makes sense. And then the 8 million dollars in cost savings that you expect to see in 2024, I just want to make sure I understand it correctly, is that gonna be spread both across cost of goods as well as operating expenses or is that 8 million just what we're gonna see with the kind of shipping product mix or is there anything else in operating expenses? Just a good understanding of that would be helpful.

Speaker Change: Got it that makes sense.

Ryan Lockwood: No, that would be purely an opex. Okay. Got it. That's it for me. Thanks for taking my questions.

Ryan Lockwood: With the kind of shifting product mix or is there anything else in operating expenses.

Ryan Lockwood: Good understanding of that would be helpful that.

Ryan Lockwood: That would be purely in opex.

Ryan Lockwood: Okay.

Ryan Lockwood: Got it that's it for me thanks for taking my questions.

Operator: Thank you. At this time, there are no further questions. This concludes today's conference call. Thank you for participating. You may now all disconnect.

Speaker Change: Thank you at this time there are no further questions.

Operator: This concludes today's conference call. Thank you for participating you may now all disconnect.

Q1 2024 CarParts.com Inc Earnings Call

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