Carparts.Com Inc

NASDAQ:PRTS

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon. [Operator Instructions] 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.

[Tina Mirfarsi, executive]

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

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, please refer to the CarParts.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.

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.

[David Meniane, executive]

Thank you, Tina, and thanks, everyone, for joining us today. I'd like to start with the most important takeaways from this quarter, before I turn it over to Ryan to review our financial performance in detail.

Last quarter, we discussed our emphasis on financial discipline by focusing on driving gross and net margins, accelerating efficiency and effectiveness to quickly deliver improved profitability and achieving a path to sustainable and profitable growth with strong long-term free cash flow.

In the second quarter, we made significant progress on gross margin and operating efficiencies, which reinforces our confidence that we're on the right track. We expect fiscal year 2024 to be a low watermark year as we execute on the changes we have been making. This should position us for a strong fiscal 2025 and beyond, and we are confident in our road map and our opportunity as a leading online retailer in a highly fragmented $400 billion auto parts market.

In the first half of the year, we updated our pricing and marketing acquisition strategies to target more profitable customers and generate higher gross margins. As a result, in the second quarter, we saw sequential margin improvement with product margins at 54%, up 210 basis points from Q1.

We expect Q3 to be sequentially higher. Combined with the cost reduction initiatives I'll discuss in a moment, we anticipate better unit economics on less volume. However, pricing actions and beginning to change the overall profile of our customers negatively impacted sales, which were down to $144 million from $177 million in the prior year period.

Our operational highlights for the quarter were as follows: we continued to optimize our product and price assortment to maximize the profitability of our e-commerce channel.

Our mobile app continues to drive strong momentum with over 450,000 downloads, more than double the number from the beginning of the year. In addition, in just 12 months after launching, mobile app sales accounted for 80% of our total e-commerce revenue. With approximately 80% of our customers shopping on mobile, over time, we expect direct in-app purchases to drive savings and advertising spend by reducing our reliance on search engines and performance marketing as well as incentivizing repeat purchases.

Second, we continue to invest in our marketing channels. We are making strides on building brand awareness and recognition of our leading digital-first and customer-centric automotive e-commerce strategy, which is critical to capturing our target high-value customer base.

In July, we launched our first ever comprehensive brand campaign. Our "Now That's My Speed" campaign, along with our new tagline, quality parts, price right is running across top social media platforms, YouTube and connected TV. This campaign highlights our customer value propositions, our extensive selection of over 1 million quality parts at competitive pricing and our hassle-free e-commerce solution.

We are committed to moving up the marketing funnel to establish CarParts.com as one of the most trusted and recognizable brands in the industry. Our goal is to become the go-to destination for all automotive repair and maintenance needs, capitalizing on our infrastructure, website traffic and customer lists.

We also want to welcome our new Chief Marketing Officer, Christina Thelin, who brings over 20 years of experience in marketing, with an extensive background in building global brands and award-winning campaigns across several Fortune 500 companies, including Google, Twitter, Visa and Procter & Gamble.

As CMO, Christina will lead our strategic marketing initiatives as we continue to expand our market presence, drive customer engagement and increase awareness for CarParts.com. We are confident that her strategic marketing vision and proven track record will help propel our company forward. we are thrilled to have her on the team.

And third, we made significant progress on the upgrade of our logistics and reduction of our freight costs. We've identified opportunities for pick, pack and shipping optimization that will drive reductions in freight costs and improve margins.

Combined with our product margin improvement, we believe we can continue to improve gross margin after freight in the third quarter. Higher gross margin percentage, combined with operational efficiencies should result in increased profitability for the company.

In June, our new Las Vegas fulfillment center became operational and is now shipping more than 10% of our network volume. As we exit the year, we expect this building to handle close to 20% of the company volume as we service the western part of the country.

The facilities assortment, paired with a state-of-the-art AI-powered PIC Module and extensive conveyance allows for a significant reduction in operating costs. This investment was made to drive operating leverage and growth in the form of process efficiencies and improved conversion for customers in the region. We expect those savings to start ramping in the second half of 2024, and fully realized in 2025.

I'll now turn the call over to Ryan to lead us through our financial results.

[Ryan Lockwood, executive]

Thank you, David. In Q2, we reported revenues of $144.3 million, down 18% from $177 million last year. The decline was driven primarily by deliberate price increases to drive gross margin expansion, combined with softer consumer demand.

Gross profit for the quarter was $48.4 million, down approximately 20% compared to the prior year. Gross margin was 33.5% of sales, down from 34.2% in the prior year period, and up sequentially from 32.4% last year. Gross margin improvement from increased prices and expanded brand margins related to our efforts in the quarter were offset by higher year-over-year freight costs.

As David mentioned, driving gross and net margin to strengthen financial discipline is the central part of our strategy, and we expect to see continued improvement in the quarters ahead.

GAAP net loss for the quarter was $8.7 million compared to a net loss of $0.7 million in the prior year period, primarily driven by lower flow-throughs from gross margin, combined with certain onetime costs.

We reported adjusted EBITDA loss of $0.1 million, down from $6.3 million in the prior year period, primarily due to costs related to the move and opening of our new Las Vegas facility, technology transformation costs as well as special project expenses related to our strategy refocus. The total amount of expenses outside of our normal operations was approximately $2.8 million in the quarter.

Turning to the balance sheet. We ended the quarter with $34 million of cash and no revolver debt. We generated $354,000 of interest income in the second quarter. Our significant cash position and untapped revolver continues to support our business plan as we finalize the opening of our new semi-automated Vegas fulfillment center, our free cash flow should improve. The inventory balance at quarter end was $109 million versus $114 million in the prior year.

Turning to our outlook for 2024. For the full year, we expect revenues at the low end of our guidance range of $600 million to $625 million, reflective of our gross margin improvement focus for the year. We remain in line with our previously stated gross profit margin guidance of 33% plus or minus 100 basis points.

[David Meniane, executive]

Thanks, Ryan. As we've outlined, we are positioning CarParts for the future through our work to balance gross margin expansion and revenue. These improvements span our entire business, from customer-facing improvements to enhance product assortment and process changes that are making us more efficient across every operating group at the company.

We are forging a path that we expect will result in achieving sustainable and significantly positive adjusted EBITDA next year, while working towards achieving a 6% to 8% adjusted EBITDA margin and enhanced free cash flow generation in the medium term.

We expect to emerge from this period of transition strongly positioned to capture the tremendous and growing opportunity in front of us within a highly fragmented and underserved $400 billion automotive aftermarket. Our customers are excited by our offering, and our business is becoming more efficient, highly differentiated, scalable and difficult to replicate. We remain firmly focused on becoming the go-to destination for all automotive repair and maintenance needs.

I would like to thank each and every person across our global teams for their hard work and commitment as we continue to execute on our transformation. Thank you, everyone, for joining today's call. We'll now turn it over to the operator and open it up for your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Ryan Sigdahl from Craig-Hallum Capital Group.

[Ryan Sigdahl, analyst]

I want to start with guidance. So Q2 is normally seasonally strongest quarter from a volume standpoint or a revenue standpoint. Even at the low end of your guidance range and implies sequentially, revenue will be up in the back half Q3, Q4. On average, I guess, relative to Q2. So I guess what gives you that confidence given it seems you guys are prioritizing margin over price and volume here?

[Ryan Lockwood, executive]

Yes. I think we're going to end up trying to run, it's a little bit unconventional, I guess, period given prior seasons, but we do think that we can run a little bit flattish through the whole back half comparable to Q2. And I think what gives us the confidence is a lot of the things that David mentioned, we have a lot of projects that are back loaded coming out essentially every month from now until the end of the year. And we think a lot of those are going to give us a tailwind on revenues.

[Ryan Sigdahl, analyst]

Can you maybe elaborate or give us a little more time frame, on what those specific projects are?

[David Meniane, executive]

Yes. Ryan, it's David. We have a number of things on the e-commerce road map and the mobile app. We have some stuff around search. We have upsell, cross-sell. We have several fee income initiatives. And at the same time, it's combined with kind of a more fully comprehensive marketing road map. We just launched our campaign, which is showing early signs of positive progress. At the same time, we have assortment expansion. So we have a very aggressive road map, but I think we have -- we definitely have the confidence that we can hit the numbers.

[Ryan Sigdahl, analyst]

Then just switching over to the Vegas DC, with that transition, I guess any quantifiable metrics you can share on efficiency gains, leveraging technology more in on that facility, but anything you can share kind of old versus new there?

[Michael Huffaker, executive]

Yes, this is Michael. So we're in early days of the building. We've been open for about 2 weeks thus far, and we are meeting our weekly ramp-up plan to take the building to full entitlement. Over the course of next year, we would expect to get about $2 million in efficiency savings out of this building comparably over the previous. So we will spend the rest of this year ramping up and optimizing the building, and then we expect $2 million in savings for 2025.

[Ryan Sigdahl, analyst]

Great. Ryan, and then I believe you mentioned increased profitability in the company, starting in Q2, Ryan or David, I don't remember who said in the prepared remarks. If I take $2.8 million of the nonrecurring costs, add that back to EBITDA in Q2, doesn't look like you guys did that in your reconciliation. I guess what's the relative benchmark for improvement? Is it quarter-over-quarter, year-over-year, just help us think about kind of the EBITDA and profitability ramp through the rest of the year?

[Ryan Lockwood, executive]

Thanks, Ryan. I think what we're really alluding to is we believe that we'll have gross margin expansion. So what happens is we really saw some pretty good sequential gross margin expansion through sequentially every month through Q2, and we expect that to continue through the remainder of the year. So we think that Q3 gross margin should be higher than Q2.

I think for full EBITDA through the remainder of the year, we're working hard to try and maximize that, but it's obviously going to be contingent on certain of the projects, as David mentioned, launching, and then us capturing that profitability as well as balancing some of this improvement with these investments that it takes to get these projects launched.

[Ryan Sigdahl, analyst]

Last one for me. Ryan, you previously said $30 million of cash exiting the year estimated. Any update to that now?

[Ryan Lockwood, executive]

That sounds about right. I would say $25 million to $35 million of cash to exit the year dependent on inventory.

[Operator]

Our next question comes from the line of Ryan Peters from Lake Street Capital Markets.

[Unknown Analyst]

First 1 for me, just kind of a follow-up on the first question that Ryan had asked about hitting the guidance, can you maybe talk about what you've seen here in Q3 so far and what some of these initiatives, how they've played out? And if you've seen, in fact, some of that bucking that sequential -- or sorry, that seasonal trend that you guys have seen in the past? Just kind of talk about what you've seen so far here in Q3?

[Ryan Lockwood, executive]

Yes. So far in Q3, it's actually a little tricky. We had some -- a little bit of a headwind because we're moving Vegas, which was planned and expected. So when we move inventory from one location to another, it becomes non-saleable temporarily while it's on the truck and in the containers until it gets unloaded. And so that makes the read on the current quarter a little tough. And like everyone you're probably talking to in your other calls. We were impacted by CrowdStrike as well as a lot of our vendors that we work with, FedEx, for example, I believe, is 1 of them.

And we don't really know how many customers were impacted. So despite that, we still feel on track for the quarter. The most recent week, which -- that we just completed, which is pretty clean is on track. So we feel good about the quarter. But the read so far on P7 is a little bit behind, but a little bit of that was planned.

[David Meniane, executive]

Yes. And if I can add to that, it's David, Ryan. I think, like if you take a step back and you look at the margin profile that we started with at the beginning of the year, that's not a margin profile that we were comfortable with. And so -- and some of it is macro related to our customer base, but there's definitely some variables that are within our control. And so what I'm happy about is that we took significant action around pricing, promotions and discounts, warehouse operations and overall cost structure, which we've talked about on the last call.

So the good news is we acted quickly, and we made significant progress. So for me, the evidence points that I'm looking at is Q2 was better gross margin than Q1. We expect Q3 to be better gross margin than Q2. There's some noise in the P&L in Q2 because of onetime cost and the Vegas move, but once we cycle through these expenses, I think the P&L is going to be much cleaner. And I have full confidence that next year, both top line and bottom line will look significantly better. So it's definitely -- it's a transition year for us, but I think we have visibility on much better numbers in the next 6 months.

[Unknown Analyst]

Okay. Got it. And then thinking about some of the more price-sensitive segments that have been a drag on the business in the past like lighting and mirrors, I think you guys have called out. I mean, have you seen any changes there in the demand environment at all? Or is it still some of those customers are trading down for more inferior type products?

[David Meniane, executive]

Yes, that's a great question. Historically, our customer was definitely the price-sensitive, lower income, discount-seeking customer. And part of the exercise that we're going through is kind of a very deep segmentation trying to focus on the customer base that has a higher propensity for returning, more profitable, more efficient marketing spend.

And so we're shooting on lower volume, but more profitable customers. We haven't seen a change from Q1 to Q2. The environment is still quite tough. So if you look at our top line, I'd say -- some of it is not specific to CarParts.com, it's more macro in that customer base. And some of it is intentional raising prices, less reliance on discounts and promotions.

Now the good news is if you combine that with all the initiatives around operational efficiency, it should trickle down to the bottom line. Now obviously, it's going to take a couple of quarters, but I think long term, like focusing on that customer that is more profitable for us is going to pay off.

[Operator]

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