Good day and thank you for standing by. Welcome to the CarParts First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Lev Peker, CEO. Please go ahead..

Thank you, operator, and good afternoon everyone. During the quarter, we saw robust sales that reinforced our confidence in achieving our long-term goal of 20% to 25% compounded top-line growth. For new investors, we encourage you reviewing our investor deck available on our Investor Relations page of car park.com.

Revenues and gross profit for the quarter were up 65% compared to last year as we set another record in both. We're excited about our future as the fastest growing retailer in the sector and the best-positioned company to disrupt the auto parts industry with our two-step direct-to-consumer model.

Our focus remains on our mission of helping people get back on the road through our strategy of right parts, right time, right place. Right part means ensuring our customers can find a complete solution that fit their vehicle.

During the quarter, we made tremendous progress with new technology that improves the search capabilities on our website and we continue to expand it to the mechanical parts market with more products and more inventory.

As we progressed through the second and third quarter, we feel great about our hard parts inventory position and look forward to helping customers get back on the road during this peak mechanical repair season. Our proprietary catalog is constantly expanding and we continue to add new products as well as new applications, sets and kits.

We think having the right parts to solve the customers' problem is the main reason more than 30% of our revenue comes from repeat purchases on a one-year look back. Right time means getting the customers back on the road quickly. We're happy to report that our Texas facility is now 60% full and we expect it to reach full inventory capacity this year.

The added capacity was a significant driver of our year-over-year as well as sequential growth. The success we achieved is a testament to our data science inventory forecasting and global sourcing teams. By optimizing the assortment in Texas, we were able to increase our sales capabilities despite the facility still being in the ramp up stages.

Additionally, our warehouse operations team works tirelessly to fulfill an unprecedented amount of customer orders across our entire network. Right place means empowering our customers to choose how they want to repair and maintain their vehicles.

Whether they are do-it-yourself or do it for the customer, we're committed to offering them the resources, tools and turnkey solutions and services to get them back on the road. We'll continue to refine the experience our users are having with our mobile mechanic partners by carefully analyzing each interaction.

Our goal is to have a seamless experience and ultimately expand our pool of potential customers. The analogy we use internally is that Netflix started by mailing you the DVDs, but eventually evolved in delivering a complete turnkey solution straight to your TV and changing the way people consume content.

Over the next few years, we also expect to evolve from a parts only supplier to delivering turnkey solutions that disrupt the auto repair industry. We recently completed a survey of our existing customers and found that roughly one out of every seven buys parts from us and takes it to a repair shop to be fixed.

Helping customers find that repair shop and/or mobile mechanic option is a natural evolution of our business as we seek to disrupt the $300 billion do-it-for-me and do-it-yourself automotive aftermarket. I will now turn it over to David..

As Lev briefly touched on, Q1 was another record quarter for revenue, making it our fifth consecutive quarter of significant year-over-year growth. We generated revenues of $144.8 million, up 65% from prior year sales of $87.8 million.

The increase was primarily driven by growth across all channels and supported by increased capacity from our Grand Prairie distribution center. Gross profit grew significantly to $49.2 million, up 65% year-over-year. Gross margin was up 10 basis points year-over-year to 34% primarily driven by mix offset by inbound and outbound freight.

Total net loss for the quarter was $2.7 million compared to a net loss of $1 million in Q1, 2020 mostly driven by increased non-cash charges.

Adjusted EBITDA in Q1 was $3.6 million, down from $4.3 million last year with the decrease driven primarily by the continued ramp of our Texas DC adverse weather and targeted investments in brand awareness campaigns that did not exist in the prior year quarter.

As we've mentioned before, we don't manage our business quarter to quarter and we're working hard to create an infrastructure that can support a topline CAGR of 20% to 25% and we continue to believe in the long run, we can achieve 8% to 10% EBITDA margin.

As a reminder, we have visibility into all the levers that will give us the operating leverage to achieve those margins and none of them are moonshots. Turning to our balance sheet. At the quarter end, our cash position improved to $45.9 million from $35.8 million, driven by working capital improvements.

Our inventory also grew $8.6 million to $97.9 million at the end of the quarter. Our credit facility remains undrawn with $30 million of potential availability with the option to flex up to $40 million of capacity based on current inventory levels. On the supply chain side, our now expanding network is operating at full outbound capacity.

And we're excited to announce we're in discussion to expand our Texas warehouse with the space next door. We'll be adding 156,000 square feet of space making Grand Prairie one of our largest facilities. This expansion will allow us to continue to grow our assortment of parts as well as overall sales.

We're committed to growing our footprint in a financially disciplined manner to get closer to our customers and increase inventory availability. This location will also include a world-class will call and return center for customers in the region.

On the marketing side, we continue to focus on building brand awareness for our flagship site carparts.com with partnerships with NASCAR, Professional Fighters League, Two-Car Garage on Motor Trend, Donut Media on YouTube, and a new national TV campaign with Daytona 500 winner, Michael McDonnell, and Front Row Motorsports.

We will of course, be disciplined in our investment philosophy, deploy capital only where we see opportunities to accelerate our growth and where we believe we can earn a significant return on investment.

Now lastly, Lev and I would like to send a huge thank you to all our frontline teams that have worked relentlessly to continue serving our customers in such a difficult environment. Their hard work and commitment to CarParts.com has been incredible and we could not have had this such an amazing quarter without each and every one of them.

With that, I'll turn the call back over to Lev..

Thanks, David. In the past few months, average new car prices have crossed the $40,000 mark for the first time ever. As both the used and new car market becomes less affordable, drivers are keeping their cars longer, which result in increased maintenance and repairs.

We believe robust used market with tight supply and the prohibitively high cost of new cars will act as a tailwind for our business for years to come. And as I have mentioned previously, we're uniquely positioned to serve the growing EV market as 90% of our products are agnostic to the powertrain, gas, electric or hybrid.

Finally, before I close the call, I'd like to welcome Henry Maier to our Board of Directors. Henry is a 35-year veteran at FedEx Corporation, where he currently serves as President and CEO of the FedEx Ground operating units.

Our industry is ripe for disruption and we're going to continue to leverage our proprietary catalog, global supply chain as well as technology and marketing capabilities. We believe our investments in delighting the customer will allow us to become the number one trusted destination for auto maintenance and repair.

And with that, I'd like to hand over to the operator to open it up for questions..

[Operator Instructions] Our first question comes from the line of Tom Forte from D. A. Davidson. Your line is now open..

So one question and one follow-up, so for my initial question, last quarter you had talked about the supply chain challenges that were holding back your ability to fully ramp the Grand Prairie Texas fulfillment center.

So can you clarify, are you 100% fully ramped now?.

Hi, Tom it's David great question. Yes, we have a great supply chain team and we're very proud of what we've accomplished over the last three months. I think every retailer is feeling the impact. Right now our Texas facility is operating at full outbound capacity, but it's not full. We're about 60% full.

So props to the team for being able to receive additional inventory as well as ship record numbers on the outbound side. I think what we're very excited about is that we were able to improve that inventory position. We had $98 million of inventory on the books at the end of the quarter and we're going to keep pushing..

Excellent and then for my follow-up question, I wanted to ask you the one that I thought would be most interesting over the next 12 months. So there is a lot of press about the chip shortages for new cars.

When we think about the negative impact that could have on new car manufacturing and then the assumption that that's going to force consumers to keep their current cars longer, how might that affect your business over the next 12 months?.

Yes, I think it's definitely a tailwind for us and as the fleet gets older and people are maintaining and keeping their vehicles longer, it's definitely a tailwind for us. And I think it's going to go beyond 12 months.

I think it's going to be a tailwind for a long time to go, because we've been selling a lot of new cars over the last seven years or so and they are now entering our sweet spot. So as the fleet gets older and as people keep their cars longer, it's definitely going to be a tailwind for us for a while to go..

Excellent, all right. So - one last question, last quarter you talked about an initiative your mobile mechanic, which I believe is in beta.

Can you give us an update on that and then what signs it would take for you to expand the effort out of beta?.

Yes, we're constantly looking and we're analyzing every interaction we have with our customers. We want to make sure that we do it the right way and with the right partners. So we're going to keep it on beta at least until the end of the year and then start expanding it from there..

Our next question comes from the line of Darren Aftahi from ROTH Capital Partner. Your line is now open..

Good afternoon and thanks for taking my question and nice work on the results. A couple if I may.

If you look at the rev number for the quarter and your comments about 50% capacity on the last call, like is this sort of fair to assume about $25 million of sales came from Texas in the quarter?.

Hey Darren, it's David. Yes, it's safe to assume that. Last year the network was running at full capacity and revenue capacity is about 120. So all of that incremental sales came from the additional DC, which is obviously why we're very excited about expanding it even more and taking the space next door..

So you kind of took the words out of mouth for my second question, but I'm just curious if you had full capacity, like, what are you seeing, I mean obviously there's demand, but what are you seeing specifically that's causing you to expand so quickly? And then as a derivative I know in the past you guys have talked about maybe having another locale and the geography maybe up in the Northeast, like how quickly would you kind of add-on to DC capacity in non-Texas geographies?.

Yes, it's a great question. Obviously, we're very happy about the last three DCs and how they turned out. I think all three exceeded expectations and got to full capacity very quickly. We accomplished pretty much everything we wanted. It's kind of a two-for-one, you're closer to the customer and you can hold more inventory.

Ultimately, we want the customers to get their parts faster and I think it's a testament to the business that we're building. The way to think about it is the more inventory we carry, the more customers we can get back on the road. As far as our supply chain decisions what we've shown is that we know where to put the DCs.

We know what inventory to put in there and ultimately that by shipping faster to the customers we can be more competitive. So the ultimate goal is always to get to 80%, 80% to 90% of the population within one day. Texas is just one step in the whole equation. And you can expect more DCs and we started looking already for the next one.

We're constantly trying to be one step ahead, and as soon as we have something to announce you can expect the press release from us..

And then I guess my last one, you guys made some commentary about improvement in search.

Can you just talk about like in the life cycle, since you kind of added the data science team and invested into that, like when you look at the user interface and product of the website, like where are areas of improvement are you thinking kind of happen in the next six to 12 months? Thanks..

Yes, I think it's going to be everywhere is the answer. We're constantly trying to get customers to the right parts, that's one of our pillars. And so, the experience is going to continuously evolve to make sure that the customers can find the right parts for their vehicle. It's a little bit easier in collision than it is in mechanical parts.

So our next challenge is to make that experience as seamless as possible in mechanical parts. Because there are a lot of variances and, the customer can't really understand the differences between the different brands. So we're trying to make it easier for them, again, all in an effort to make sure that they get the right parts for their vehicle..

Our next question comes from the line of Scot Ciccarelli from RBC Capital Markets. Your line is now open..

Hey guys, Scot Ciccarelli. I guess I had a follow-up on the inventory as well.

It seems like a couple of months ago, you guys were very concerned about inventory flow, and I guess I'm trying to reconcile your 65% top-line growth with the inventory constraints you kind of intimated a couple of months ago? So I guess I'm just wondering like did - were you able to source better, was it a function of better execution on your side et cetera? If you can just kind of help connect those dots that would be great?.

Scot, it's David, great question. I think it's a combination of everything.

Again, we have a great team, and the team that comes from the sourcing, the logistics, the forecasting, selecting the containers, leveraging our relationships with ocean carriers, overseas vendors as well as domestic vendors so prioritizing what SKUs we bring in and focusing our efforts on bringing in the SKUs that will turn quickly.

Both on the private brand side and the other premium brands that we don't own, we're 60% full. So the warehouse isn't full, but we're operating at full capacity. So again like amazing execution from the team and working together in a coordinated effort to leverage our supply chain..

And then, so how quickly, maybe one of the other follow-up then David is how quickly can you adjust your inventory orders? I mean, because we do know that the whole supply chains are backed up, right? So how quickly can you adjust those orders as your AI systems are able to identify kind of where you're seeing the most demand?.

Yes, we adjust in semi real time, so we place buys throughout the week and weekly. Now the lead times are longer in our industry. So on the replacement parts, it's usually three, four months, on mechanical sometimes longer, but we do have some great relationships with premium brands. We're able to source domestically.

I think we've done a pretty good job at trying to diversify our supply chain, so we're leveraging new partnerships, we're leveraging existing partnerships, but we're constantly reacting in real time and trying to pivot as we get new information..

And then just to clarify, so you know, the comments - sorry this is Lev. So the comments we made last quarter about filling the DC. So when we open the new DC, we order to a certain level of sales and I think when we were talking about last quarter, we were talking about actually filling the DC.

But the sales were coming in faster than we were anticipating. So that's why we're not actually able to make it full and that's why we're getting the expansion, and now we're placing bigger buys so that the DC can get fuller, but it was more related to how full the DC is, not that it's not operating at full capacity..

And then finally, like how much of a contributor was mechanical parts in the quarter? I know that's at least a future initiative.

But I'm just wondering how material that might have been in the quarter?.

Yes, so for Q1, and remember it's not particularly the season for mechanical parts, but it's about 23% of our sales for Q1. So if you look at the nonperformance and accessories piece of our business, it was bigger than historically and again over time we're trying to get that mix closer to 50/50. Right now it's about 75/25.

But all the initiatives that we have are underway. The assortment is expanding both on the stock-ship and dropship side. So, we're pretty confident that over time we're going to get to the number that we want..

Our next question comes from the line of Ryan Sigdahl from Craig-Hallum Capital. Your line is now open..

Curious how you view the difference and I guess focus internally on driving more website traffic versus improving inventory selection and really conversion on that.

Do you think you need more eyeballs on the website or just more inventory and better conversion?.

I think it's both, right. It never hurts to have more traffic and you're always optimizing for conversion and average order value. We're doing a lot of things around selling the job, making sure that the customer can buy tools that they need in order to do the job.

If they need two of something that we're selling them as a set, building kits, understanding really the pain points for customers and what it is that they need to buy together. And so merchandising is going to continue to evolve in order to make sure that we satisfy every customer's needs.

So we're always optimizing for conversion on EUV and we're always trying to get more eyeballs on the site..

Then as far as seasonality goes, normally stronger in the first half, just the industry, you guys, inventory is getting bigger you're filling capacity.

I guess you think you can more than offset industry seasonality this year on a revenue basis and growth throughout the year?.

Yes, I think again. I think, first half is definitely the strongest for us just like it is for the rest of the industry, but it's mostly because of Q4. So if you look at our last year, we pretty much have slow driving all the way through, so Q2, Q3 and Q4. So, we kind of expect to be selling at capacity the whole time..

Yes, I think, and if I can add to that, Ryan. I think the seasonality is on the background of a company that's going extremely fast.

I think in over the last two years, we've made a ton of investments and those investments are starting to pay off, not just in talent, in supply chain, in inventory and brand awareness, whether it's the mechanical stuff or the EV stuff. We have a great team, and we have positive unit economics.

So overall, we're pretty excited about the state of the business..

Great, one more from me. We've seen pretty nice acceleration across the industry. AutoZone, O'Reilly, many of the brick and mortar, big box stores with stimulus checks reopening et cetera.

Have you guys seen any change in your business more recently, March, April, even into May here, kind of as those have seen an acceleration or do you think it's an overall industry acceleration? Thanks..

Yes, I think, so great question, I think we feel really good about Q2. If you look at the current business, we have more inventory. We have more capacity both inbound and outbound. You look at inventory on the balance sheet it was $98 million, which is the highest in company history. That combined with the expansion next door in Texas.

So you have a great team, you have a lot of investments in the supply chain. We're finally starting to get some brand awareness. So we feel really good about Q2..

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