Welcome to the CarParts.com Second Quarter 2021 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 2021 earnings release, which went out today at approximately 4:01 p.m. Eastern Time.

If you have not viewed the release, it is available in the Investor Relations section of the company’s website at carparts.com/investor. This call will be available for the replay via the webcast achieved at carparts.com/investor.

Before we begin, we would like to remind everyone that the prepared remarks contain certain 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, our 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 in that constituent, 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 CarParts.com 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 could 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 calls to update or revise the reasons actual results could differ materially from those anticipated in these forward-looking statements even if no information becomes available in the future.

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

An explanation of CarParts.com’s 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 website.

The non-GAAP information is not a substitute for any performance measures derived in accordance with GAAP and such non-GAAP measures have limitations, which are detailed in the 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. I would like to thank all the team members of CarParts.com for their hard work and dedication. Revenues in the quarter climbed 32.5% from Q2 last year to a company record $157.5 million. This was the sixth consecutive quarter of year-over-year growth.

As online penetration grows, we continue to take share. And during the quarter, we ramped up our new Grand Prairie facility to better serve continuing levels of high demand. This allows us to pull back on marketing spend and achieve a company-record adjusted EBITDA of $8.3 million.

As we have stated before, marketing spend is just one of the many levers we can pull to achieve our long-term target of eight to 10% adjusted EBITDA margin. As sales continue to grow, we are confident in our ability to increase profitability over time.

As a reminder, we believe our focus on right parts, right time, right place will allow us to achieve a CAGR of 20 to 25% top-line growth over the long term. Let me give you a quick update on each of the three pillars of our strategy. Right part means ensuring our customers can find a complete solution that fit their vehicle on our website.

We completed the rollout of our new search technology that makes it easier and faster for our customers to find parts and get back on the road. We also completed the rollout of sales force and are very excited with the results, allowing for increased scalability with more self-service tools that simplify the entire customer journey.

As you know, our strategy has been to focus on stock ship house brands, but our model is flexible enough to adapt to changes in the environment.

As we continue to experience extremely strong levels of demand for our products, we were able to leverage our vertically integrated supply chain to serve our customers as well as supplement our offering with branded inventory from our partners.

Right time is getting our customers back on the road quickly by expanding our footprint and fulfillment capabilities. Our Grand Prairie facility in Texas is almost full, and we are excited about getting our newly contracted extended space in the building operational.

As previously announced, we’ll be extending the space by 156,000 square feet to a total of 366,000 as well as opening up a new 180,000-square-foot facility in Jacksonville, Florida.

This will give us over 1.2 million square feet in warehouse distribution capacity and gives us the ability to reach 99% of the country in two days and 55% in one day transit time. We expect the Grand Prairie expansion to be operational in Q1 of 2022 and the Jacksonville warehouse to be operational by the end of Q2 2022.

We’re also evaluating different options for automation to be implemented throughout the distribution network to help us increase capacity and boost operational efficiencies. Right place means empowering our customers to choose how they want to repair and maintain their vehicle.

Whether they do it yourselves or do it from a customer, we’re committed to offering them the resources, tools, and turnkey solutions and services to get them back on the road. During the quarter, we worked on improving our mobile mechanic data to identify existing customers that will be interested in specific repairs based on products purchased.

And while still early in the testing, we received great feedback. I will now turn it over to David to provide some financial highlights..

Thanks, Lev. I, too, would like to thank the team for working through one of the most difficult environments that anyone has ever seen. And through it all, the team was able to deliver significant top-line growth, record profitability, and continued execution of our mission of getting drivers back on the road.

We generated record revenues of $157.5 million up 32.5% versus prior year of $118.9. The increase was primarily driven by continued strong demand, the expanded capacity coming from our Texas distribution center, and the additional product offering of branded inventory from our partner network.

Gross profit was also a record $53.3 million, up 30.7% from prior year. Gross margin was 33.9% versus 34.3% in the prior year. The difference was in part due to a shift in mix in branded products, which typically carry a higher selling price but lower gross margin percentage as well as continued pressure from inbound and outbound freight.

As we’ve stated before, we optimized for gross profit dollars after customer acquisition and fulfillment costs. And we continue to believe that in the long term, we can achieve adjusted EBITDA in the eight to 10% range given all the levers we have at our disposal.

Total net income from the quarter was $2.1 million, compared to $1.6 million in Q2 of last year. The increase was driven primarily by significant sales growth. We also delivered substantially higher adjusted EBITDA in Q2 with a record $8.3 million, up 48% from $5.6 million last year. Now turning to our balance sheet.

At the quarter end, our cash position was $33.1 million as we continue to build our inventory position. Now as a reminder, our ABL remains undrawn with $30 million of potential availability and the option to flex up to $40 million of capacity. We’re also announcing a share repurchase program of up to $30 million.

The program gives us a flexible way to return value to our shareholders when we see unwarranted volatility in our stock, and we intend to be opportunistic with repurchases.

An important driver to our decision-making will, of course, be the potential ROI of any dollar spent, whether it’s an investment into our shares, inventory, supply chain, or technology. We’re incredibly proud of the accomplishments achieved by the team over the last few years, and we’re excited about delivering on our strategy in the years ahead.

We remain committed to our philosophy of financial discipline. We will only deploy capital where we see opportunities to accelerate our growth, while earning a significant return on investment. With that, I’ll turn the call back over to Lev..

Thanks, David. During the quarter, we made significant progress in branding CarParts.com with partnerships that highly overlap with our customer base, such as NASCAR and Daytona 500 winner Michael McDowell, Professional Fight League, Major League Fishing, and our YouTube influencer campaign with Donut Media.

In closing, new and used cars remain in short supply with rising prices, reducing affordability for many drivers. As a result, the average age of cars on the road has increased as well as miles driven requiring more maintenance and repairs.

We’re committed to our mission of getting drivers back on the road through our strategy of right part, right time, right place, and delivering superior returns for our long-term shareholders. And with that, I would like to hand it over to the operator to open it up for questions..

Thank you. [Operator instructions] Our first question comes from Thomas Forte of D.A. Davidson. Your line is open..

Great. One question and one follow-up, and congrats on the quarter. So I think as the year progressed, you’ve talked about your ability to fully inventory your new Grand Prairie, Texas fulfillment center. I think last quarter, you indicated that it was fully functional to the extent that every item you’ve added inventory in, you were able to get out.

But I think you’re in the process of fully stocking the fulfillment center in general.

So my first question is, can you give us an update on that progress?.

Hi, Tom. It’s David. Great question. Yes. I think we’ve built an incredible team, and we’re virtually full in Texas. I think it’s a testament to our – the data science team, the forecasting process, the logistics team. I think even in this environment, we were able to have a record quarter on outbound and still increase inventory position.

The DC is basically full. It’s fully operational. We did a great job managing the vendors overseas, the partners domestically, and we feel really good about where we are and even more excited about the expansion next door..

Excellent. Thank you for that. So for my follow-up.

On the do-it-for-me opportunity, is this something that could meaningfully affect your sales and profit in – later in ‘21 and ‘22? How should we think about the time line? And then generally speaking, do you think the margin opportunity is any different for the do-it-for-me opportunity than it is for your core do-it-yourself opportunity?.

Yes. Thanks, Tom. I think in terms of when it will meaningfully impact results, I wouldn’t bake anything in this year. We’re still kind of analyzing every customer interaction, making sure we get it right and we get it perfect. And we also like to under-promise and over-deliver.

So we’re really going to start cranking on this toward the beginning of next year. So I wouldn’t bake anything in for this year.

In terms of margin opportunity, I think margins are very similar regardless of whether it’s a DIY customer or the do it for me customer because what we’re trying to do is we’re trying to solve a problem, and we want to be agnostic to how the customer wants to install the part.

So whether the customer buys it, then they bring it to a shop or they buy it then they do the repair themselves or we ship it to a shop or the shop buys it, I think, to us, we’re really agnostic to that channel. We just want to sell more parts, and the margin profile will be very similar..

Great. Thank you, Lev. Thank you, David. Great quarter..

Thanks..

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

Hey. Yes. This is Dylan on for Darren. Thanks for taking my questions. First one for me. Talked about Grand Prairie being virtually slowly operational.

I mean, how long was that live during the quarter? Did it just reach there toward maybe the end of June? And then sort of is the – are you still seeing enough demand there? I know you guys mentioned in the past that you’re basically capping out on the inventory.

So, I mean, are you still seeing that same, I guess, demand outstripping your ability to get inventory in there?.

Yes. We feel really good about where we are. We’re operating at full capacity. On the outbound side, we were virtually at full capacity during the whole quarter. There’s continued demand out there, and we’re focusing on fulfilling that demand. Obviously, we have long-term targets of growth of, call it, 20 or 25% compounded.

So there’s a lot of investments that we’re making around brand awareness, customer experience, logistics, technology, but we feel very good about where we are today..

Got it. And then as a follow-up, talked about being able to pull back on marketing spend a little bit in this quarter.

Just curious, were you seeing just not enough ROI? Were marketing channels too expensive? Or was it more of there’s a potential to get better – I mean, more customers in the funnel, longer term, if you hold off the marketing now until you get both the Grand Prairie and Jacksonville up and running early next year?.

So we really have more demand than we could handle in the quarter. And so for us, marketing spend is dynamic. It’s really at SKU level and really at the region level. And so what we’ll look at is not only the ROI we generate, but also what is a service level to the customer.

And so when we can’t meet certain service levels, when we’re operating at full capacity and we can get packages out, we want to make sure that we still deliver an outstanding customer experience so that customer keeps coming back more and more. So that’s really what drove the pullback on the marketing spend.

We just had way too much demand, and we didn’t want to sacrifice service levels to acquire new customers and then just deliver a bad customer experience..

Got it. One last quick one, if I may.

Could you share what percentage of sales were direct e-commerce versus some of your third-party partners?.

Yes. So for 2021 second quarter, e-comm was about 58%. Marketplaces was about 36%. And then our off-line business was about 6%, and everything adds up to $157.5 million..

Great. Appreciate it. Thank you..

Thank you. [Operator instructions] Our next question comes from Ryan Sigdahl of Craig-Hallum Capital. Your line is open..

Good afternoon, guys. Congrats on the strong results..

Thanks, Ryan..

Curious – really nice operating leverage in the quarter despite challenging freight environment. Curious how you think about investment in the business over the next several quarters and years versus flowing through the operating leverage going forward..

Yes. Ryan, it’s David. Great question. I think as we continue to build an exceptional business, it’s amazing to see how the business scales once you grow the sales. Obviously, this quarter, we had some great opportunities on marketing spend, but that’s just one of the levers that we can pull.

If you look at the long-term model, there’s basically three levers, and none of these are moon shots. So you’ve got channel mix around e-comm. You got product mix around mechanical parts. You got efficiencies around marketing spend. And then you have basically your fixed Open that will grow at a slower pace.

I think we’ve been very good over the last two and a half years that’s kind of pacing the OpEx and the investments to stay disciplined and continue to self-fund those investments. Financial discipline is a big one for us. So obviously, there’s investments that we need to make, and everything is made on a case-by-case basis.

We look at the ROI, but there’s plenty of opportunities to accelerate the growth and earn a significant return on investment, whether it’s marketing, technology, logistics. Now we’re starting to look at automation. So we’ve had a great two and a half years, but I’m even more excited about what comes next. The business is just incredible.

It’s a huge opportunity. Great market. Lots of cars on the road, and what we’re building, no one else is doing. We’re leading from the front, and I couldn’t be more excited today..

Great. You mentioned product mix, mechanical.

Can you talk about that category expansion, how that’s going and the opportunity, how many more SKUs you have coming this year and next?.

Yes. So that’s going extremely well. If you look at the product mix, the engine parts or hard parts mechanical was the fastest-growing segment of our business. Historically, we were 70-30. But if you look at it on a dollar basis, which is how we manage it, last year, mechanical parts was about $30 million and this year was $42 million.

So that’s going faster than any other segment. Obviously, there’s still a lot of work to do. The space is big. It’s a $250 billion addressable market, and we’re just scratching the surface. But I think we have a good foundation. We’re still building out the team. We’re still making those investments around customer experience.

But I think mechanical parts as well as EV parts is probably one of the biggest opportunities we have for the next decade. And, David, just for clarification on that, is that comparing branded and private label last year versus both this year as well, presumably, with greater growth coming from the private label parts? It’s both.

We’re starting to move away from differentiating private label versus branded. What we’re trying to do is leverage both our data and catalog piece and our supply chain. There’s opportunities on both. Now one thing to remember is that sometimes the margin percentage is lower on a branded part, but the selling price is significantly higher.

So the way we run the business and manage it internally is we maximize for gross profit dollars after customer acquisition cost and fulfillment. And there’s opportunities both on private label and branded. Ultimately, we’re trying to solve the customer problem and generate as much dollars as possible, and that’s what we’re doing..

And then in states where you have one-day shipping versus two-day shipping today, are you able to bifurcate those on sales growth and if either we’re growing faster in the quarter?.

Yes. Not to get too granular in terms of state by state. But what I can tell you is that shipping expectation, which is how long the customer is expected to wait for the part once they place the order has a huge impact on conversion. And obviously, it’s common sense. The faster you can fill the order, the more likely you are to close the sale.

And over time, as we get closer to the customer, obviously, it’s a two for one. You’re going to get more capacity for storage and more capacity for outbound, but you also get the freight savings and an opportunity to convert at a higher rate..

And I’ll just add one more to that, Ryan. We are operating at capacity. And so if you’re going to add more capacity to your existing network, you’re not going to add it in the same state as you are. So regardless, we want to get closer to the customer.

But regardless of that value proposition, we need to open more distribution centers just to add more capacity to our network. So we don’t really analyze it state by state. I mean, we have that analysis, but it doesn’t really play into the equation of opening more DCs because we already know that we need to expand capacity..

One more for me, and then I’ll hop back in the queue.

But can you talk through further DC expansion, how you think about it as well as really – and if you can quantify it or at least where the heavy lifting will come in from Q3, Q4 versus Q1 on Jack – or the Texas expansion as well as the Florida opening?.

Yes. Obviously, we’re happy about the last three DCs. All three exceeded expectation, and we got to full capacity quickly. The financing that we have on the CapEx is extremely attractive. So a lot of times, we get a very fast return on investment. The key is just to stop the DC with the right inventory.

Right now, we just took possession of the DC expansion in Texas. And we’re – we’ve already laid it out. We have the layout. We’ve already placed the opening orders, and we’re already starting to build up the team. For Jacksonville, we’re scheduled to take possession in Q4, but we’ve already started the work and started ordering the inventory.

So right now, everything is on track. Everything is on budget, and I couldn’t be more excited..

Fantastic. Nicely done, guys. I’ll hop back in the queue. Good luck..

Thanks..

Thank you. Ladies and gentlemen, I’m showing no further questions at this time. Ladies and gentlemen this does conclude today’s conference. Thank you all for participating. You may now disconnect..