Welcome to the CarParts.com Second Quarter Conference Call. On the call from the company are Lev Peker, Chief Executive Officer and David Meniane, Chief Operating Officer and Chief Financial Officer. By now, everyone should have access to the second quarter 2020 earnings release, which went out today at approximately 4:05 p.m. Eastern Time.

If you have not viewed the release, it is available in the Investor Relations section of the CarParts.com Web site at CarParts.com/investor. This call will be available for replay via the webcast archieve at carparts.com/investor.

Before we begin, we would like to remind everyone that the prepared remarks contain certainly forward-looking statements within the meaning of the federal securities laws, and management may take additional forward looking statements in response to your questions.

The forward looking statements include, but are not limited to, statements regarding future events or future operating and financial results financial expectations, expected growth and strategies, key operating metrics and current business indicators, capital needs and deployment, liquidity, product offerings, customers, suppliers, competitors, the impact of tariffs and our tariff mitigation efforts and the potential impact of coronavirus on our supply chain and operating results.

The forward-looking statements are based on current information and expectations, are subject to uncertainties and changes in circumstances and do not constitute guarantees of future performance. The forward looking statements involve several factors that could cause actual results to differ materially from those statements.

We refer all of you to the risk factors contained in the CarParts.com’s annual report on form 10-K and quarterly reports on form 10-Q filed with the Securities and Exchange Commission for a detailed discussion on the factors that can cause actual results to differ materially from those projected in any forward looking statements.

CarParts.com assumes no obligation to nor does it intend to update or revise any forward looking projections that may be made in today's release, or call, or to update or revise the reasons, actual results could differ materially from those anticipated in any forward looking statements, even if new information becomes available in the future.

Please note that on today's call, in addition to discussing GAAP financial results and the outlook for the company, non-GAAP financial measures, such as adjusted EBITDA will be discussed.

An explanation of CarParts.com’d use of non-GAAP financial measures in this call and the reconciliation between GAAP and non-GAAP measures required by SEC regulation G is included in the CarParts.com press release issued today, which again can be found on the investor relations section of the company's Web site.

The non-GAAP information is not a substitute for any performance measure derived in accordance with GAAP and such non-GAAP measure has limitations, which are detailed in company's press release. With that, I would now like to turn the call over to CEO Lev Peker..

Thank you, operator and good afternoon, everyone. We're proud to announce we had a record breaking quarter in terms of sales and gross profit, marking another period of significant growth for our company. Additionally, we drove exceptional year-over-year bottom line improvements in both net income and adjusted EBITDA.

Our accelerated momentum was the system of increasing ecommerce demand tailwinds points to the continued success of our strategy and the resilience of our business, and also reflects the countless operational improvements we have made over the past 18 months.

As we continue to navigate the effects of the pandemic, the health and safety of our team remains our top priority. Our frontline teams in our distribution centers have access to personal protective equipment and adhere to strict social distancing and sanitation standards.

Meanwhile, our corporate and contact center teams are still working efficiently and productively from home. We're incredibly grateful for our team's flexibility and hard work over these past few months. One of the leading indicators of our business is miles driven, which in June were down 20% from pre-COVID levels.

However, miles driven improved as the quarter went on from down as much as 60% in April to now down 20% compared to pre-COVID levels, so terms are moving in the right direction. Despite these challenges, the DIY auto parts margin has performed exceptionally well, especially online.

We believe consumers have grown increasingly comparable buying their auto parts online. Industry reports show the overall ecommerce penetration for total retail sales reached 28% for Q2 compared to 17% in Q1, while auto parts remains largely under penetrated online in mid single digits.

We believe that the industry will continue to experience a shift online and we're well positioned to take advantage of this new demand over the long-term as we continue to execute our strategy. Over the last 18-months, we began building the foundation for a modern and scalable ecommerce company.

While we couldn't have predicted the pandemic, we have planned for significant growth and the shift from offline to online. Starting in Q1 and continuing into Q2, the investments were made in our technology, marketing and supply chain last year were clear differentiators in our ability to execute.

Between our expanded distribution footprint, improved site speed and faster shipping times, we believe that we’re creating sticky customer relationships that will prove to be resilient over time.

We'll look forward to delighting our customers and believe that this larger and more loyal customer base, along with significant new customer acquisitions, will lead to continued growth. Now moving onto key operational updates for the quarter.

First and foremost, following our sales growth and inclusion in the Russell 2000 Index, we decided that we needed a new name that reflected the tech-forward company that we have become. As many of you likely saw last month, we announced we have rebounded to CarParts.com.

This development marks the combination of our efforts to consolidate our Web sites over the past few quarters, and will enable us to optimize how we're perceived and positioned in the market, as well as how we allocate our marketing dollars.

In addition to being a best-in-class auto part seller, this name change aligns with our positioning as a leading ecommerce and technology company.

As we've highlighted on previous conference calls, we have made significant investments in creating more efficient backend operations and optimizing our users' digital experience, so we internally developed software and our proprietary catalog. We're so much more than an auto parts company now.

We often use the analogy that we inherited blockbuster and we're now building Netflix. On the site consolidation side, we're happy to announce that we're now officially down to one Web site, CarParts.com. Being one brand with one site allows us to be more efficient with our marketing and improve our brand presence both online and offline.

We have recently increased our efforts in upper funnel marketing strategy designed to introduce our brand to a broader audience, both through our NASCAR partnership with driver Michael McDowell and through various TV commercials.

Before I pass the call to David to review our financial results for the quarter, I want to welcome Nanxi Liu to our Board of Directors. Nanxi is a CEO and Co-Founder of Enplug, a leading digital display software company used by Fortune 500 companies, and she was named one of Forbes 30 Under 30 and Fortune’s 10 most promising women entrepreneurs.

She brings immense technology and e-commerce experience to the Board, and we're thrilled to welcome her to the carparts.com team. With that, I'll turn it over to David to walk through our financials and other operational highlights.

David?.

Thanks, Lev. With more consumers buying their parts online, our team is more focused than ever on operational excellence and financial discipline as we continue to expand our ecommerce business.

As Lev mentioned, Q2 marks another set of company record with our highest net sales ever, which increased 61% to $118.9 million compared to $73.7 million last year. The increase was primarily driven by triple-digit growth in revenues from CarParts.com.

Gross profits for the quarter nearly doubled to a company record of $40.8 million versus $21.8 million last year, with gross margin up 480 basis points to 34.3% versus 29.5% last year. This also marks our sixth consecutive quarter of gross margin expansion.

The increase in margin is partially due to product mix, as well as leveraging long-term strategic partnerships to buy premium branded products directly from the manufacturers and remove steps in the supply chain. Total net income from the quarter improved significantly to $1.6 million compared to a net loss of $1.5 million in Q2 2019.

Adjusted EBITDA in Q2 increased 4 times to $5.6 million compared to $1.4 million in Q2 of 2019. The strong increase stems from all the investments and improvements made over the past 18-months in all areas of our business, including operations, technology, marketing, supply chain, customer service, and much more.

For the month of July, our net sales continue to remain strong with year-over-year growth over 60% even while the entire country has begun using the stay at home restrictions. While we typically don't provide any guidance, given the current uncertainty caused by COVID-19, we are providing these insights. Turning to the balance sheet.

At fiscal quarter end June 27, 2020, we had a cash balance of $24.9 million compared to just $2.3 million at the end of 2019. The strong increase was primarily driven by higher cash flow from operations and working capital improvements. The final call out on our balance sheet is the conversion of our preferred shares.

On June 19, 2020, our outstanding Series A convertible preferred stock automatically converted into 2.62 million common shares. These securities have been outstanding since 2013 and we want to thank our founders for helping the company back then when it needed the capital.

Although, we're very proud of the results and the improvements we've made to the business, we still have much work to do. Our most immediate area of focus will continue to be optimize our inventories to keep up with the increase in consumer demand.

During the second quarter, customers were placing orders at such high volume that we couldn't replenish our inventory in time due to our longer lead times. Even with most of the United States opening up and even stay at home orders, our demand continues to be strong. Demand is simply outpacing our supply.

And unlike other industries where one product can be substituted for another, in auto parts you either have it or you don't. Our inventory levels have already started coming back up and we have experienced minimal supply chain disruptions to COVID-19.

Additionally, as we continue to expand our product offering, we have begun to diversify our supply chain geographically with new partnerships in India, Korea and Mexico.

With the continued growth in our business, we also decided to accelerate the timing of our additional supply chain investments, as we strive to get closer to our customers and increase our footprints. As we recently announced, we will be opening a new distribution center in Grand Prairie, Texas later this year.

This opening will add 210,000 square feet of warehouse capacity and provide us with the ability to deliver to 61% of the country in one day. With that, I'll turn the call back over to Lev..

As David mentioned, we're very proud of our strong second quarter performance and the momentum we have sustained throughout 2020. Our work over the past 18 months to optimize our supply chain, marketing and technology capabilities is paying off, and we're continuing to drive further improvements in these areas.

Across our business, we're actively expanding our teams, both in the U.S. and abroad, including at our contact center in the Philippines. As always, we'll remain financially disciplined and be extremely mindful in our capital allocation decisions.

As always, we want to thank our warehouse associates for their hard work, as well as all of our team members for their support and commitment to the new CarParts.com. With that, we'll open up the call for questions.

Operator?.

At this time, we will be conducting the question-and-answer session [Operator instructions]. Our first question comes from Ryan Sigdahl with Craig-Hallum Capital. Your line is now open..

First off, just want to start on the monthly sales cadence, if you would, if you could break that down within the quarter and then you noted supply chain constraints.

If you could also comment on those, kind of within the quarter if you saw a greater impact in any month?.

So, as far as breaking the sales monthly during the quarter, we don't really do that, Ryan. If you look at your entire quarter, we feel really good about the performance. Also for July, year-over-year sales are up more than 60% that's total top-line. As far as supply chain disruption, we didn't really face any.

Our suppliers in Taiwan and in China didn't really say anything past Chinese New Year. So, nothing more than a week or two..

Good. Then just on, nice operating margin expansion in the quarter, despite you guys ramped up some marketing spend.

How should we think about operating leverage going forward versus reinvestment in the business?.

So, it's definitely a good question and something we think about all the time. Obviously, we don't really manage the business in quarters. And those of the shareholders that know us, they understand that we’re operators first. The long-term objective is really to build a sustainable and profitable business. So that means managing your OpEx.

As revenues grow, some of our operating expenses are variable, some of them are fixed. So there is, in my opinion, as sales continue to grow there is going to be some operating leverage but we do have some investments to make in technology, marketing, supply chain. We're really focused on spending the money where it makes the most sense.

And obviously, we give a priority to anything that has a positive ROI and we'll trim other areas that are less efficient..

And then just last question for you and then I'll turn it over to the others. How is the JC Whitney rebranding going and then also SKU expansion? Just any more detail ther would be helpful? Thanks..

So from a skew extension perspective, we're in the process right now of adding mechanical parts. So it's about 10,000 new SKUs that should land sometime in Q4 and those will be launched under different brand names. We're working on some of that right now. As far as JC Whitney go.

So JC Whitney is going to be our brand for performance and accessories and we have our first set of products that we already ordered and that should be landing towards the end of this quarter or early Q4. So we have some thunder and a few other products that we're coming out with.

So, the JC Whitney is going to be reserved specifically for performance and accessories..

And then maybe just a quick follow-up, if I may. The private label collision parts that you have today, which is core part of your business.

Are those staying under the brands that they currently have or what's the plans there?.

Right now, staying under the same brands but that may change..

Okay. Good enough. Thanks guys and good luck..

Thanks..

Thank you [Operator Instructions]. Our next question comes from Gary Prestopino with Barrington Research. Your line is now open..

Couple of questions here. Usually you would call out what the private label sales, the growth was and the percentage shift from Q2 to Q2 last year this year.

Could you -- are you still willing to give that information out?.

Yes. So, this information is included in the Q. The way to think about it is now the majority of business is private label or what we call our house brands. So moving forward, we're kind of not really going to call it out in the prepared remarks but it'll be in the queue.

But for Q2, 80% was our private label and 13% was branded and that’s compared to 79% private label last year and 21% branded. .

Okay. So the last quarter you guys -- you were at about 91% branded, I believe.

So is there's something in the categorization that you changed there?.

No. So there's two variables to look at here. Obviously, the mills were just -- the growth was exponential, so our inventory positions took a hit during the quarter. So private label is, the in stock position is lower, your sales take a hit from private label, so we make it up on the branded side.

The other thing that we've been working on is we did enter into some long-term strategic partnerships with a lot of premium brands. So, we are now able to sell premium branded product on CarParts.com, at margins that are very similar to our private label. So, there are a lot of opportunities on the branded side that we just didn't have before..

Okay, so that's good news on the branded side. Okay, very good. A couple other questions here. I noticed that your shares outstanding really jumped and you converted that converted and it’s 2.6 million shares but you're now showing 47 million shares.

So, is that all just options in the money that have come into play here?.

Yes, I think the number is slightly lower. On a fully diluted basis, I think you're pretty close. Yes, you are correct. If you remember, most of the executive team, 18 out of 20 members on the exec team are new to the business. Last year when we all joined the company, we just didn't have cash.

So a part of our compensation includes performance based options and shares. And as the company continues to perform, the team will vest some of these options. So that's part of the increase in share count..

Okay. And then just a couple more and then I'll turn it over and somebody else can go. As far as your excess capacity now, of course your four DCs.

Where are you? Are you basically almost kind of maxed out in the sense?.

So, if you look at the three DCs that are operational, so LaSalle, Vegas and Virginia, we're basically operating at full steam. So we definitely needed Grand Prairie, Texas to kind of keep up with the growth. That will give us an additional plus 35% footprint, so that's receiving capacity and outbound capacity at the same time.

So that should give us a little boost to keep up with what's going on in the marketplace..

And that will come on stream in December, right?.

It might be sooner. Early in Q4 is what we’re targeting..

Okay. And then one last question. In terms of when you said you had some problems with inventory, you had some stock outs, things of that nature.

Dow do you treat the customer in that regard? So, you keep the customer satisfied? I mean, do you back order for them, you’ve give them some kind of a discount? What do you do to entice the customer to stick with what they ordered?.

No. So, we have -- because of the long lead times, it's pretty difficult to do like a back order for a customer. And it's very difficult for us to get visibility into what inventory is on water. So, usually what we do is when we're starting to run low on inventory, we start pulling it down from all of our marketing channels.

So, there's very little chance of a customer placing an order of a SKU that's out of stock..

All right.

So they just -- there you just say that you don’t have a part then?.

Yes, they don't see it..

Okay. All right. Thank you..

Thank you. Our next question comes from Stephen Branstetter with ABL Investments. Your line is now open..

Good afternoon, gentlemen. You had mentioned maintenance parts on the previous call.

Where are you at with that today?.

Yes. So that's part of our mechanical offering as well. So, we have breaks and some other things. So, it's going to be a Q4, Q1 initiative..

Okay. And you had mentioned some partnerships, I guess, maybe in China or other areas, to bring in, I guess, more inventory.

Has that already happened or is that in the works?.

No. A lot of that has already happened and it's more of a diversification of our supply chain. So historically most of our parts came from Taiwan and China and now we've diversified a little bit and a small percentage of our business now comes from India, Korea and Mexico..

Okay. Very good. Thank you, gentlemen..

Thank you. Our next question comes from Eric Beder with SCC Research. Your line is now open. Eric, your line is open. Please check your mute button. And our next question comes from Gary Prestopino with Barrington Research. Your line is open..

Yes. I just want to ask a follow up. You guys mentioned you were making some investments in fulfillment and some other things for growth.

Could you maybe just go into -- is that the Grand Prairie, Texas, DC that you're investing in? What are the things that you are doing?.

That's the majority of it but we're constantly making investments in the other DCs. We're kind of holding ourselves up to higher SLA. So when a container comes in we want to receive it faster and when an order comes in we want to ship it out faster.

So that includes making some small investments in the DCs that we organize the flow and make sure that we can ship off the orders as quickly as possible..

And our ultimate goal, just to add to that.

We measure click to delivery and the ultimate goal for us and where we're going to go over the next, call it, several years, is one day click to delivery, which means the DCs will have to get the order out within 12 hours and then we'll have to be close enough to the customer in order to get that delivery the next day..

So as you've refined your processes here and you cut down on your Web sites.

Are you really where you want to be and then it's just a matter of, you gotta fine tune it and then obviously you got to add more distribution and more SKUs?.

Yes. So, in terms of Web sites, we’re already there. So we're at one Web site that’s CarParts.com. In terms of fulfillment capabilities, we still have a lot of work to do there..

Okay. And when you stay in a lot of work, Lev, I don't mean to press you on this.

But I mean, what exactly is there besides like is that opening up a new DC and all that? Is it it's just a better execution?.

Yes. I mean, there's automation that can go into DCs that can speed up how quickly the order gets out of the DC. So, we're looking at some of that. We have to evaluate our fulfillment network with four DCs that’s pretty easy to order SKUs.

But as we kind of open up and think about more DCs, we have to start thinking about do we do how hub and spoke model? Do we want to touch SKUs multiple times? So, there's just a lot of work we need to do around our fulfillment capabilities as we continue to grow..

Okay, that helps. Thank you..

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect at this time. Thank you for your participation..