00:03 Good afternoon, and welcome to CarParts.com First Quarter 2022 Conference Call. At this time, all participants will be in a listen-only mode. After the presentation, there will be a question-and-answer session. Please note, this call is being recorded.

00:19 I would now like to turn the conference over to your host Tina Mirfarsi, Vice President of Communications and Culture. Please go ahead..

00:35 Hello, everyone and thank you for joining the call today to discuss our first quarter 2022 results. Joining me today from the company are David Meniane, Chief Executive Officer; and Ryan Lockwood, Chief Financial Officer.

The prepared remarks and responses to your questions could contain certain forward-looking statements related to 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.

01:10 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 the 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. 01:40 And with that, I would now like to turn the call over to David..

one, our shareholders to be prudent, disciplined with every dollar we deploy; two, our customers to help them get back on the road with quality products at competitive prices; three, our team to invest in their safety, growth and personal development to ensure they have the tools and support they need to succeed and truly feel like owners in our business; four, last but not least our vendors, partners, communities and everyone who has been an integral part of the CarParts.com ecosystem for the last 25 years.

Our commitment to these stakeholders has always been unwavering and will never change. 03:43 Turning now to areas of focus. Our company is on solid ground, both operationally and financially. As we have plenty of growth runway ahead as we are still a small fish in a huge pond.

As a reminder, the total addressable market for aftermarket parts exceeds $300 billion and we are less than 1% of that amount. As we continue to execute on our mission, we think it's important to communicate the areas of focus you can expect from our leadership team. 04:12 Number one, outstanding customer service.

CarParts.com is made up of our employees, partners, shareholders and communities, but none of us are here without the customer. Our customer is and has to be at the core of everything we do, laser-focus on serving customers and building an incredible user experience is the secret to long lasting success.

Currently over one-third of our e-commerce revenues come from repeat customers. So we have a solid foundation from which to grow. Long-term, we see a huge opportunity to become the number one online destination for auto repair and maintenance. This opportunity starts and ends with our ability to satisfy and delight our valued customers.

If there is one takeaway from this call as to what you can expect [Technical Difficulty] from our leadership team, it is this. We will focus on the customer. 05:04 Number two, operational excellence, because how you do anything, is how you do everything.

As the business continues to grow, we see an opportunity to continue to leverage our operating model by doubling down on operational excellence, high performance and a winning mindset across the organization.

Focusing on driving results always raising the bar and aligning people, process and strategy with the needs of our customers remain a core principle for us. 05:31 Number three, financial discipline. Over the last several years, we have invested heavily for profitable growth and those investments are paying off.

We will continue to invest in foundational improvements for the business, as well as industry disruptive initiatives in the do-it-for-me space. In markets like these, we know that financial resilience remains key to long term success.

Profitable growth and free cash flow generation are timeless principles that serve companies in good times as well as in times of market uncertainty, and it is where we will focus our energy and resources. 06:06 Number four, innovation.

We're very proud of what we have built over the last few years and as we turn to the future, we will double down on innovation and positive disruption. How do we grow our total addressable market and turn more of our customers into repeat customers? The answer is, the do-it-for-me market.

We're very encouraged with the early progress we have made and we continue to make towards being able to offer transparent pricing and installation right on our website.

We expect various phases of these capabilities to be rolled out as we progress throughout the rest of the year and we look forward to discussing this progress with you on future calls. 06:43 With that, I'd like to turn it over to Ryan to discuss our financial results..

06:46 Thank you, David. In Q1, we generated revenue of $166 million, up 15% from the prior year period, resulting from our continued investment into our capacity, inventory position and warehouse distribution logistics that gets us closer to the customer. On a two-year stack, revenue increased 80%.

If you'll recall, Q1 of 2021 benefited from the inflow of pandemic-related federal stimulus funds, resulting in increased consumer spending. 07:18 Gross profit for the quarter was up 24% to a record $61 million with gross margins improving 280 basis points to 36.8% this year versus 34% last year in the same period.

The improved gross margin continues to reflect purchasing and freight savings being driven by our data science and supply chain teams. This sequential increase in margin also showcases the exceptional nature of our business in the face of rising inflation. 07:49 Net profit for the quarter was $2.1 million versus a loss of $2.7 million in Q1 of 2021.

Adjusted EBITDA in Q1 was a record $9.4 million or 5.7% of sales compared to $3.6 million or 2.5% of revenues in the prior year period. As we have stated on a number of prior calls, we have many levers that we can pull to improve profitability.

We drove the record results from better flow-through from higher gross margins and financial discipline, reflecting our increasing focus on cash and profits. 08:30 Turning to our balance sheet. At the quarter end, our cash position was $25 million and we were successful in purposefully building our inventory to a record $157.9 million.

As a reminder, we are currently carrying approximately $40 million or eight weeks of extra inventory to account for our longer lead times in the supply chain. As the supply chain normalizes, we expect this inventory to be converted to cash over time.

From an intermediate term perspective, we believe we can fully self-fund all growth initiatives needed to reach over $1 billion in sales. 09:09 For the first-four weeks of Q2, our robust inventory position is helping us against prior year stimulus. Additionally, we continue to see solid margin improvement year-over-year.

For fiscal year 2022 net revenues, we continue to project double-digit year-over-year growth with a strong correlation to the opening cadence of our new distribution centers, with our Texas DC expansion ramping up since the end of March and our Florida warehouse opening towards the end of Q2.

As we focus on profitable growth, we believe in our ability to continue to build our market share and execute on our mission. 09:45 And with that, I'd like to turn it back to David for a supply chain update and some closing remarks..

09:50 As Ryan indicated, we closed the quarter with another period of record inventory to support our sales growth. Our goal remains to be able to deliver to 80% to 90% of our customers in one day transit time. And we continue to be excited with our Texas expansion, which now is almost fully stocked and already doing outbound shipments.

As for our brand new Jacksonville, Florida facility, it is also on schedule and on budget and we are gradually building up inventory. We expect this facility to be operational in the later part of Q2. When Jacksonville is fully functional, we expect to be able to service 55% of our customers within one day and 98% and within 2 days transit time.

10:32 Q1 was another record for our company. This performance would not have been possible without the incredible dedication from all our teams here in the U.S. as well as overseas. As I look forward to the next evolution of our company, I am honored, humbled and excited to be working with such an amazing group of people.

As a significant shareholder myself, I look forward to serving our customers and building value by focusing on long-term sustainable and profitable growth. I'm grateful to have this opportunity to serve all stakeholders, who have a vested interest in our future.

11:06 Thank you again to all our team members for coming to work each day, ready to crush it, and as we say at CarParts.com get after it. And with that, I'll turn it over to the operator..

11:17 [Operator Instructions] Our first question comes from the line of Ryan Sigdahl from Craig-Hallum Capital. Your line is now open..

11:38 Great. Thank you..

11:39 Good afternoon, guys..

11:41 Hey. Good afternoon, Ryan.

Curious I think also, I don't think you mentioned, but I think gross margin was a record in the quarter, up nicely 300 bps basically year-over-year, was there anything unique or one-time in the quarter or do you think that level of gross margin is sustainable kind of run rate going forward with the initiatives you guys have?.

12:02 Yeah. I'm glad you asked. When we look at margin, I would really look at over several quarters and really the full year since this is how we look at it. So first, we maximize for gross profit dollars after marketing spend and fulfillment. So really, it's important to focus on the dollars and the service levels.

And then secondly, obviously, gross profit is post freight inbound and outbound, which in this market can add a lot of noise, but overall, we have an amazing data science team who takes these data points into account and they optimize for competitiveness and profitability..

12:34 And then maybe, Ryan just to clarify your margin statement on Q2, is that gross margins and EBITDA margins that you're referring to improving year-over-year?.

12:46 From my prepared remarks on gross margins improving year-over-year, I think the question for year-over-year –.

12:57 Is that solid margin improvement year-over-year in Q2? Just curious what margin you were referring to?.

13:01 Yes, solid margin improvement was both EBITDA and GP. Yes..

13:05 Got it. And then just on the supply chain, it sounds like you guys are navigating well with inventory results in the quarter, et cetera., but it sounds like increasingly kind of challenging export market out of China given COVID lockdowns port congestion, et cetera.

Can you elaborate and go in a little more detail, I guess what you guys are seeing and specifically what you guys are doing to mitigate that?.

13:29 Hey, Ryan. It's David. Yeah. Good question. I mean we've said it a couple of times, we've built really a lot of capabilities around supply chain with a dedicated team for demand planning and inbound logistics trade compliance. We've obviously accomplished something amazing over the last two years, considering what's happening in the world.

For us, it's an inventory-driven business and it's all about parts availability and speed to customer. So the highlight is, that we were able to build up inventory in this environment.

What we're focusing on really is getting the right part in the right location, in the right quantities and having that capability built in-house is really what separates us from some of the other online players..

14:13 And then Ryan maybe back to you, you said increasing focus on cash and profits.

Does that change in mindset impact the 20% to 25% long-term revenue CAGR you guys have talked about in the past?.

14:29 Yes. So that does not, you're always going to see a correlation between warehouse space in revenue capacity and again, the 20% to 25% is a CAGR. And on a two-year stack, we're still up 80%. So it's going to be in the long run the balance of thoughtful profitable growth..

14:50 Got it. Last one, David, maybe, back to you. So newly transitioned to CEO. Congratulations, by the way.

Anything you plan to do differently or prioritize as you think about the strategic roadmap kind of over the next several years?.

15:08 Yeah. Good question. I think in this environment, there is a lot of uncertainty. I think Ryan mentioned it profitable growth and free cash flow generation, overall financial discipline and resilience I think are critical. The other thing that I think, I bring to the table is laser focus on the customer.

It's really having the customer at the center of everything we do. So the way, we think about it is really focusing on solving their problems and addressing their needs and building a strategy and the financial plan on top of that, but it's really everything around the customer..

15:42 Great. Thanks guys. Good luck. I’ll turn it over to be others..

15:46 Thanks..

15:46 Thanks, Ryan..

15:49 Thank you. Our next question comes from the line of Ryan Meyers from Lake Street Capital. Your line is now open..

15:57 Hey, guys. Thanks for taking my questions. First one from me.

I was wondering, if you could just give us an update kind of on the demand environment that you think about sort of your end customers, we see some macro pressures out there whether it'd be inflation or just kind of overall macro uncertainty, are you guys still seeing your end customer purchasing a lot of products and still seeing pretty solid demand?.

16:17 Hey, Ryan. It's David. Yeah. The short answer is yes. Remember, it's a long tail business, and it's always at SKU level and every SKU and every category really has a different elasticity. Ultimately, it's a $300 billion market.

We cover less than 1% of that and so we just keep pushing forward and focus on bringing the inventory in the right location and the right quantities. I think what makes our business so unique is that we sell in need and not at wants.

So the majority of our customers, they need our parts to keep their cars on the road longer to take their kids to school or to go to work. So you're always going to have some pressure from the external environment, but ultimately if you need your car to live your life.

I think we're a great alternative because we offer high quality parts at very competitive prices..

17:09 Right. That makes sense. Next one for me.

And then what was the contribution of mechanical parts during the quarter and kind of how is that business tracking?.

17:19 Yeah. So hard parts for the quarter was about 29 and replacement parts was 66 and the balance was performance and accessories. So it's actually up on a year-over-year basis from mix by about 600 bps, so hard parts was 23% Q1 last year, it grew 29% of mix in Q1 of this year..

17:39 Okay. And did that higher contribution from hard parts contribute at all to the strong gross margin during the quarter..

17:46 Yeah. I think that for gross margin, it was a bit of a contributor as we've always mentioned hard parts does carry a higher gross margin as we mix into it, that's one of the drivers, you'll see long-term for us to increase our base profitability..

18:00 Okay. Good to know.

And then last one for me, just an update on the do-it-for-me offering and kind of how that's tracking right now in the Oregon market?.

18:07 Yes, David. We're very excited about the do-it-for-me initiative. I think for us it's really the opportunity to significantly expand the number of customers that we can reach.

For me, long term, the big opportunity is really to build that one stop destination for auto repair and maintenance and information and really have and become the go-to-platform both for do-it-yourself and do-it-for-me. Right now, we're making a lot of progress and we're seeing progress weekly.

To give you additional color, what we're working on is really the front end features as well as the back-end integrations with our partner. Our hope is really to show everyone the next evolution of that this year.

18:47 Now on the numbers side as far as contribution to the top line or the bottom line, the impact is going to be minimal this year, but over time, you should see this become a bigger portion of our business. Now from a resource standpoint, we're basically using our existing resources to build out that capability.

So again, the incremental spend is relatively low, but the opportunity is massive..

19:10 Great. Thanks guys..

19:12 Thank you..

19:15 Thank you. Our next question comes from the line of Thomas Forte from D.A. Davidson. Your line is now open..

19:20 Great. Thanks for taking my questions. So first one question and one follow-up. So first off, David congratulations of being named CEO.

Can you discuss your capital allocation priorities including investing in the business, buybacks and M&A?.

19:37 Yeah. Great question. I think right now, again, in this market with this much volatility, it's all focused on the current road map, it's profitable growth. It's free cash flow generation. I think long term what you see is that the companies that generate significant free cash flow are the best positioned to weather whatever is thrown at them.

That's why I called it out in my prepared remarks is obviously number one is focus on the customer, but number two, it's that financial discipline that gives us additional flexibility. 20:08 As far as the buyback question, I'll let Ryan answer that..

20:10 Sure. Yeah. I think in terms of buybacks, we think the stock is very undervalued at this level. However, as you know, all buyback programs are subject to Board approval..

20:20 Great.

And then for my follow-up question, you were asked before about installation, but I wanted to know two areas in particular, how should we think about your pricing power? And then how, if at all, we've been impacted by inflation at the blue collar and white collar labor line?.

20:38 Yeah. I think I think every retailer right now is facing some type of inflationary pressure and you mentioned a couple. I think for businesses like ours, it comes from multiple angles. What matters to us and how we think about it internally is, how do you turn it into an opportunity.

And so what we've done is, we've continued to invest in that vertically integrated supply chain and trying to connect the dots between the factories, whether it's overseas or in the United States and the customer. 21:10 The other thing too is, we've been aggressively investing in data science and building out the tools to dynamically adjust pricing.

And so what we have today is, we can adjust pricing across channels at SKU level, virtually in real time. So regardless of the forces that are being applied to our business, you mentioned blue collar labor or it could be inbound freight. We have the ability to react in real time.

Obviously, the business is highly complex and there is more than just cost of goods. There is customer acquisition cost and fulfillment cost and competitive landscape and inventory levels, but our system in the way we built it as we can take into account all of these variables and react in real time and that's what you saw in the margin in Q1.

That's why we're able to kind of flex the margin up or down depending on all those variables..

21:58 Great. Thank you, David. Thank you, Ryan..

22:01 Thanks..

22:03 Thank you. Our next question comes from the line of Darren Aftahi from ROTH Capital Partners. Your line is now open..

22:10 Hey, everyone. This is going Dillion (ph) on for Darren. Thanks for taking my questions. First one, I know you talked about a little bit of the stimulus impact last year that you had on Q1 and Q2.

It’s probably hard to quantify, but could you sort of talk about this quarter how big of an impact Grand Prairie had on sort of the year-over-year sales?.

22:35 Yeah. So I think obviously, we added more capacity since last year, but we've also built a great team. Without getting too granular, you can expect us every quarter to comp year-over-year and for a full-year comp over the prior year. So that's the way we look at it more on a longer-term basis. I don’t know if that answers your question..

22:55 Yeah, I mean like retailers also you sort of like a same-store sales metric.

Like is there a viable way to look at that for you guys?.

23:10 Yes. Or David, do you want to go..

23:11 Yeah, I can take that so, yeah, Dillion (ph) historically, yes. When it comes to a new DC, we can look at it on a same store basis. Now for an expansion, it's a little more difficult because it's the same building. It's the same core team and the assortment is just being expanded. But it's really within under the same roof.

So from a same-store basis, it's a little more difficult to quantify. Having said that, on the outbound side, we kind of turned on the expansion more towards the end of Q1. So as far as the same store like for January and February, there was very little, if you were to look at it this way..

23:48 Got it. That's helpful. Thank you. Also in terms of, if we look at OpEx, last year, it seemed pretty stable.

There is, in the low 50s, $58 million this quarter, is there anything in particular that's in the Q1 number, especially if that's related to marketing of some sort?.

24:13 So for OpEx, the thing to keep in mind, both for this quarter as well as for 2Q and going through the rest of the year, as we did open up Grand Prairie and Jacksonville and then Grand Prairie Texas is open but Jacksonville, we're still going to be opening and working through in Q2 and there will be a ramp up phase in Q3.

So obviously, when they're getting set up, that's a cost that's running through without offsetting revenues..

24:38 Got it. Thank you. That's it from me..

24:42 Thanks..

24:45 Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect..