Q1 2025 CarParts.com Inc Earnings Call

Speaker Change: Good afternoon. At this time, all participants will be in listen only mode. Please note, this call is being recorded. I would now like to pass the conference over to our host. Ryan Lockwood, Chief Financial Officer, please go ahead.

Speaker Change: Hello everyone, and thank you for joining us for the carparts.com first quarter 2025 conference call. Joining me today is David Meniane, Chief Executive Officer.

Speaker Change: Before I turn it over to David to start the call, I have some important disclosures. The prepared remarks could contain certain forward-looking statements related to the business under the federal security 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.

Speaker Change: For a discussion of the material risks and other important factors that could affect results, please refer to the carparast.com annual report on Form 10K and the quarterly reports on Form 10Q, each as filed with the SEC, both of which can be found on our Investurations website.

Speaker Change: On the call, both GAP and non-GAAP financial measures will be discussed. A reconciliation of GAP to non-GAAP financial measures is provided in the Carpress.com press release issue today. With that, I would now like to turn the call over to David.

Thank you Ryan and thanks everyone for joining us today.

Speaker Change: At the outset, let me say that today we are not going to take questions related to our strategic alternatives process beyond what we announced on March 5th. That process is ongoing and being overseen by our Board of Directors with the assistance of financial and legal advisors.

Now Turning to Terrace

Speaker Change: While the current headlines are broadly known, the final rates and applications have not been finalized yet. Our internal team, including leaders from trade compliance, procurement, forecasting, merchandising, and pricing, are focused on navigating and helping us make decisions.

Speaker Change: Specific to our exposure, less than one quarter of our private label products are imported from China, and approximately two-thirds from Taiwan. Over time, we believe tariffs will raise part prices in the market.

Speaker Change: Historically, tariffs increases have benefited on industry as used car values are expected to rise faster than the vehicle repair cost.

Speaker Change: Our team is working on mitigating tariff impacts through a variety of actions, including pre-buying extra inventory prior to the main tariff implementation, potential cost concessions from vendor partnerships, dynamic pricing adjustments, and identifying supply chain and operating expenses optimization.

Speaker Change: Over the last several weeks, our team conducted a comprehensive review of every product at the vendor level, assessing tariff exposure based on country of origin, material composition, and other relevant factors.

Speaker Change: For product source from Taiwan, the majority of our purchases are currently subject to tariffs of approximately 25%.

Speaker Change: For products from China, current tear rates range from 55% to 145%.

Speaker Change: But we are strongly encouraged by the joint announcement made yesterday between the US

Speaker Change: and China Government and look forward to reviewing the details as it relates to its impact on our products and supply chain. We will be monitoring in real time any changes in trade policy or regulations.

Turning to 2025 Performance

In the first two months, we saw soft consumer demand.

Speaker Change: Very bad weather in many parts of the country on a relative basis, and our company was not immune.

Speaker Change: In addition, we experienced a significant increase in cost per click rates on search engines, which we believe is a response to the growth of AI models taking share from traditional search while at the same time selling prices for parts online fell as retailers tried to capture as much demand as possible.

Speaker Change: While our top line and operating expenses came in line with our expectations, the growth margin compression and advertising spend climate put significant pressure on our profitability in the first quarter. This reinforces how critical it is for us to continue upgrading our customer base with higher income and less price sensitive customers to diversify our acquisition mix.

Speaker Change: Re-aligning our business around products to target higher margin sales, adding high margin fee income, growing customer lifetime value with our mobile app, and increasing our focus on wholesale and other commercial opportunities.

Speaker Change: We continue to believe these are the right best as we counteract these external pressures.

Speaker Change: Our first quarter results were disappointing, especially as measured by our profitability. But behind the scenes, we made a lot of progress, and we're seeing momentum with our 2025 plan. For the first six weeks of the second quarter, we're seeing revenues up double digits year over year on sequentially lower marketing spend.

Speaker Change: Our focus on repeat customers, mobile app traffic, and high margin fee income are all paying off, and we're seeing record levels for all three. While early in the process, we're slowly changing our customer acquisition mix and margin profile to transform our company's profitability.

Speaker Change: As we continue to scale these initiatives and grow our assortment, we can leverage our supply chain and fulfillment network, increase operating leverage and return the business to strong profitable growth.

Speaker Change: On the wholesale side, we have onboarded over 700 new commercial customers and continue to leverage our catalog to target collision shops and mechanics in key markets.

Speaker Change: During the balance of this fiscal year, we will continue to focus on navigating a dynamic macroeconomic environment including tariffs and volatile prices.

Speaker Change: Given the uncertain environment, we are redoubling our focus on growth and profitability.

supported by a strong foundation already in place.

Speaker Change: We're confidence that our current investments will help unlock future opportunities and drive stronger financial performance.

Speaker Change: While certain investments will yield results sooner than others, we remain flexible, continuously refining our approach to achieve sustainable profitability. We have an important work ahead, and we will be laser focused on execution.

Speaker Change: Before covering our financial results, I want to reiterate some of the strategic initiatives that are starting to pay off.

Speaker Change: Number one, we have scaled and optimized our vertically integrated supply chain with tightly-controlled in-house and often proprietary capabilities leading to an attractive product margin in the mid-50s percent.

Speaker Change: We have extra capacity in our network which we can leverage as the business grows and drive more operating leverage.

Speaker Change: Number two, we continued investing in our fitment-based proprietary catalog. This catalog which was built and refined over the last 20 years serves a full assortment across collision, mechanical, private label, and branded products with the ability to build custom sets and kits.

Speaker Change: Today, our catalog contains 83,000 private label skews, 1.5 million premium branded skews, and continues to grow each year.

Speaker Change: Number three, we continue to be the second largest importer of aftermarket collision parts in the US and the world's number one seller on eBay Motors.

Speaker Change: As a reminder, our collision parts account for approximately two-third of our purchases and our primarily sourced from Taiwan, which is not currently subject to the same high tariffs imposed on products made in China.

Speaker Change: Number four, we fully re-platformed our CarParts.com website with a best-in-class mobile first.

Speaker Change: Fits Specific User Experience, which generates 100 million annual visits and serves 10 million customers with a new search, product recommendations, and fee income capabilities.

Speaker Change: Our best-in-class mobile app is well on the way to 1 million users and now accounts for over 10% of our e-commerce revenue and growing while allowing for long-term reduction our paid versus non-paid traffic mix and associated customer acquisition costs.

Speaker Change: 5. Our highly profitable wholesale business recently launched the same end-next-day last mile delivery in both the Texas and North Florida market, with a contribution margin up to three times higher than e-commerce.

Speaker Change: We are leveraging real-time integrations with shop management and estimating systems to drive profitable volume to this business.

Speaker Change: While the first months of the year presented their share of challenges, we made significant progress in key areas that positioned us well for future growth. I'll now turn it over to Ryan to review our financial results.

Thank you, David.

Ryan Lockwood: In the first quarter, we reported revenues of 147.4 million, down 11% from 166.3 million last year. The decline was primarily driven by inclement weather, softer consumer demand, and continued pressures in lighting and mirrors.

Ryan Lockwood: Gross profit for the quarter was 47.3 million, down 12% compared to prior year. Gross profit margin was 32.1%, down slightly from 32.4% in the prior year period. The decline in gross margin was primarily driven by increased outbound transportation costs.

Ryan Lockwood: GapNet loss for the quarter was 15.3 million compared to a loss of 6.5 million in the prior year period, primarily driven by lower gross margins and higher marketing costs.

Ryan Lockwood: For the first quarter, Adjusted EBITDA loss was 6.2 million, down from Adjusted EBITDA of 1.1 million in the prior year period, primarily due to soft consumer demand and increased competitive pressure in performance marketing.

Ryan Lockwood: Turning to the balance sheet, we ended the quarter with 38.5 million of cash and no revolver debt and we generated 0.3 million of interest income.

Ryan Lockwood: Earlier this year, in the face of uncertainty, we started proactively investing an inventory ahead of the terrorists to improve the continuity of our supply chain.

Ryan Lockwood: This works out to about two extra weeks of stock shift costs a good sold. As a reminder, our inventory has very low obsolescence risk and no risk of spoilage and our pre-frate margins are over 50%.

Ryan Lockwood: Our inventory balance was 94 million at quarter-end versus 90 million at the end of 2024. As of the end of the quarter, our cash position and untapped revolver continued to provide the necessary liquidity to support our business plan. I'll now turn it back over to David for final remarks.

David Meniane: Thank you, Ryan. Looking ahead, we are confident that the foundation and improvements across our business secured in the last 18 months have set us on the path to achieve long-term, sustainable, positive net income and adjusted EBITDA.

David Meniane: Our priorities in 2025 include one, continue to expend our product offering to attract new customers and increase average basket size.

David Meniane: Two, monetize or 100 million annual visits and customer list with high margin fee income. Three, scale our B2B offering with last mile transportation and higher touch sales in key markets.

David Meniane: 4. Grow our mobile app business to diversify our marketing mix and deliver greater customer lifetime value. 5. Maintain a strong balance sheet with a focus on managing cash flow in inventory levels while navigating the uncertainty of the tariff environment.

David Meniane: We are committed to maximizing long-term shareholder value as we focus on capturing the growing opportunity in front of us within the highly fragmented and underserved $400 billion Auto Parts Market.

David Meniane: I would like to thank our global team for their resilience, hard work and commitment as we continue to transform our business. Thank you everyone for joining today's call. We'll now turn it back over to the operator.

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