Good afternoon. 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 that 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..

Hello, everyone, and thank you for joining us for the CarParts.com Third Quarter 2023 Conference Call. I'd like to start by welcoming the investors and others who are attending this meeting remotely.

Joining me today from the company 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 the risks and uncertainties associated with the business.

For a discussion of material risks and other important factors that could affect results, please refer to the CarParts.com annual report on Form 10-K and 10-Q 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 it over to David..

Thank you, Tina, and thank you to all our stakeholders for joining us. Today, we reported our 15th consecutive quarter of year-over-year growth with $167 million in revenue, up 1% from the prior year period of $165 million. And on a 2-year stack, revenues for the quarter are up 17%.

Adjusted EBITDA was $3 million, and we repurchased another 245,000 shares during the quarter. The $67 million in cash on our balance sheet at the end of the quarter demonstrates the resilience of our business, given the challenging economic environment.

We generated strong unit growth in the quarter, even with a softening consumer who is choosing to defer nonessential purchases. As a result, we experienced price deflation in the most recent quarter, which muted our net revenue growth.

However, we believe that as consumer confidence rebounds, we will be well positioned to support them with the parts and resources they need. On our last earnings call, we discussed our six strategic priorities that range from table stakes to industry disruption.

We believe by focusing on these growth levers, we can profitably reach $1 billion in company revenues and beyond. E-commerce fundamentals, digital transformation, assortment and catalog, marketing and customer experience, innovation, supply chain and logistics. Let me briefly touch on each of these. First, e-commerce fundamentals.

Over the last few months, we have made impactful changes to our current website, including search improvements that give more accurate results to our customers. Within the first month of implementing these changes, we generated an incremental $250,000 in revenues.

Currently, we are upgrading and modernizing our website platform, which will allow us to add features that include continuous improvements in search results, cross-sell and upsell capabilities, loyalty programs, VIN lookup and more.

These enhancements are aimed to make the digital experience as seamless and simple as walking up to the counter at an auto parts store. We expect the platform modernization to be completed by the end of Q1 2024 and subsequent improvements to follow. We also completed the successful launch of our mobile app.

To date, we have over 70,000 downloads and $2 million of revenue. We believe that building a direct relationship with the 80% of our customers that use their mobile phones will reduce our reliance on search engine and performance marketing.

By engaging with customers through the app, we will have a cost-effective way to promote our brands and products, while incentivizing repeat purchases. Second, digital transformation. We continue to leverage our new ERP by retiring old systems, migrating to the cloud and upgrading critical infrastructures.

These initiatives fundamentally change the way we execute by removing roadblocks and legacy technology paving the way for a multibillion-dollar scalable infrastructure. Consequently, we have kicked off an upgrade and cloud migration of both our order management system and proprietary catalog.

These are substantial upgrades, and we expect them to take approximately 24 months. Once complete, we will not only have access to more features and functionality but also save up to $1 million in free cash flow per year. Third, assortment and catalog.

We're evolving from our inception as a collision parts retailer to establish ourselves as the go-to destination for all automotive repair and maintenance requirements. This transformation will enable us to expand our market share and grow our repeat customer base.

To achieve this, we are incorporating additional brands, categories and products, all while upholding our promise of a carefully curated assortment. Our ongoing focus remains on maximizing gross profit dollars with both national brands and our house-branded products. Fourth, marketing and customer experience.

I want to emphasize that at CarParts, the customer is at the center of everything we do. With over 1/3 of our e-commerce revenues coming from repeat customers, we continue to make considerable inroads at building a direct relationship with them and moving us away from a dependency on search and paid channels.

In the spirit of growing our community and meeting our customers where they are, we have recently launched our first Podcast called, In the Garage by CarParts.com, which is now available on all platforms, including Spotify and YouTube. Our YouTube channel continues to grow with both educational and instructional videos.

The objective is clear, to remove the stress from a historically burdensome process. We aim to do this by building a hub for consumers to learn about their vehicles' maintenance and repair needs with links to purchase products directly from our website or app and how-to videos that empower them to tackle easy jobs.

Next, with a 105-year heritage and ethos deeply rooted in the automotive industry and the quintessential garage staple, we're excited to announce the return of JC Whitney. If you head to jcwhitney.com, you will find our new lifestyle-driven website where we are reengaging with the community through content, events and collaborations.

Feel free to sign up for the inaugural edition of our new magazine that is a homage to the iconic catalog, and this is just the beginning. We expect to have more updates over the next year with a full brand strategy around our crown jewel trademark.

At the intersection of our assortment and marketing priorities, we will also be reducing the number of house brands on our website. This will allow us to focus our capital, resources and efforts on building JC Whitney, which we believe will result in a more efficient marketing spend and accelerated growth. Next, innovation.

Our Do-It-For-Me pilot is performing in line with expectations with continued strong customer NPS score. Our current e-commerce strategic priorities align perfectly with the next set of enhancements for this integration.

The upgrades to search results, including cross-sell, upsell and VIN lookup, will be catalyst to the next iteration of this offering. In other areas of the business, we are exploring multiple ways to disrupt the industry.

Blending generative AI, proprietary language models and natural language processing with decades of customer data in our proprietary catalog will become central to building a competitive moat around our business.

Over time, we believe these technologies will allow us to run on a lower fixed operating expense ratio and get us the operating leverage we need to increase free cash flow. And finally, supply chain and logistics. There is a certain level of customer expectation when it comes to delivery speed.

With fast shipping becoming more of the norm, paired with the reality that our customers need their part to get back on their journey, we have been very focused on improving the speed of click to delivery, and I'm happy to announce that our customers are getting our parts faster than they have at any point in our company history.

For more details on our supply chain and logistics, I would like to turn it over to Michael..

Thank you, David. I'm happy to announce that there have been several other improvements that the team has been working on to increase efficiency, reduce costs and improve the customer satisfaction. We recently closed our return center in Peru and now have decentralized returns across the network.

This has resulted in improved processing and lower returns costs. With our original Las Vegas lease expiring, we have chosen to move our Nevada warehouse to a brand new larger location, which will almost double our footprint within the Las Vegas metro.

This building will serve as our West Coast flagship and will carry between 80% to 90% of our assortment. It will feature a state-of-the-art pic module and extensive conveyance that will allow for a significant reduction in operating costs due to pic efficiency in both our conveyable and non-conveyable assortment.

This newly expanded assortment will allow us to reduce last mile transportation costs compared to our current shipment topology. We expect this building to begin operating in Q2 2024. From a CapEx standpoint, we expect to deploy approximately $7 million with an ROI in excess of 30% in the form of lower transportation costs and higher sales.

We have also made considerable progress on process optimization, inventory placement and technology investments. Let me give you a brief update on each of these. First, process optimization. We continue to make progress on reducing inefficiencies while streamlining existing processes.

Our labor costs continue to trend downward, and our year-to-date year-over-year improvement in labor costs as a percent of revenue is now down almost 60 basis points. Second, inventory placement. While we have always optimized inventory placement, the global supply chain shock led to suboptimal inventory placement across the network.

Now that supply chain issues have abated, we are fully optimizing placement within our current network. This will serve to mitigate last mile transportation costs and lower click-to-deliver times across the network. And third, supply chain technology investments.

We recently installed our first network Cubiscan machine, which will allow for more accurate dimensions to leverage our proprietary carbonization tools. Combining this with a recently completed audit to optimize our box assortment, we will reduce the amount of air shipping in each package.

These implementations long term will further give us greater control of our last mile costs. Over time, we think that the investments we are making will result in a minimum of 100 basis points improvements from current levels that should flow to the bottom line.

As always, I want to thank our fulfillment center team members for their commitment to safety, hard work and their incredible performance this year. I will now turn it over to Ryan..

Thank you, Michael Q3 marked our 15th consecutive quarter of year-over-year growth with revenues of $167 million, up 1% from $165 million in the third quarter. We still expect full year revenues to be up in the low single digits year-over-year, while remaining free cash flow positive and maintaining a robust balance sheet.

Gross profit for the quarter was $54.8 million, down slightly from the $56.1 million in the prior year. Gross margin was 32.9% of sales versus 34.1% in the prior year as we continue to experience higher outbound transportation costs and a shift in product mix.

GAAP net loss for the quarter was $2.5 million compared to a net loss of $0.9 million in the prior year. We reported adjusted EBITDA of $3 million, down from $6.3 million in the prior year period. This was driven by higher outbound freight costs, increased performance marketing spend and the economic impact of consumer spending patterns.

However, this was partially offset by improvements in warehouse fulfillment costs. Digital transformation should impact our cash and operating expense over the next 18 to 24 months by approximately $1 million to $2 million, which consists of overlapping software and maintenance expense.

To clarify, this is because we'll be paying for the new systems that we are implementing while also maintaining the old systems we're upgrading.

But as David mentioned, we believe we can save up to $1 million per year once we upgrade our infrastructure and move to the cloud, which we believe will provide an immediate ROI once implemented and allow us to execute much more efficiently in the years ahead. Turning to the balance sheet.

We ended the quarter with $67 million of cash and no revolver debt, up from $16.7 million of cash from the prior year period. For the quarter, we generated $808,000 of interest income.

In the current economic environment, our significant cash position continues to highlight the resilience of our business model, and we are proud of our relentless dedication to financial discipline. We believe we have ample liquidity and have no intention or need to raise capital at current valuations.

The inventory balance at quarter end was $124 million. With pandemic-related supply chain disruptions behind us, we can carry less inventory both on hand and in transit, which reduces some of our working capital requirements.

However, you can expect us to continue building inventory through the remainder of the year as we prepare for our peak selling season, which occurs late Q1 and continues through Q2. We are also maintaining a disciplined capital allocation program, which includes continuing our current share repurchase plan if and when it is prudent.

With that said, during the third quarter, we repurchased 245,000 shares for approximately $1.1 million. Under the current share repurchase program, we have approximately $27.4 million remaining of the $30 million authorization that extends through July 2024.

We believe that our company is incredibly valuable, and the impact of our strategic priorities will compound our value over time through multiple cycles. As we look to the remainder of the year, we will continue balancing financial prudence with opportunistically returning capital to shareholders.

I would like to now turn it over to David for final remarks..

Thank you, both. At CarParts.com, we put the customer at the center of everything we do, focusing on strategic priorities that we believe are making our company significantly more valuable and that will benefit our stakeholders for years to come.

Our journey is powered by digital transformation to create a best-in-class mobile experience, a growing curated assortment, fulfillment network expansion and harnessing advanced data science and AI. Thank you to the entire CarParts team. We're proud of your hard work and your investment in our company's long-term success.

Working alongside you every day is what makes us so tremendously excited for our future. We could not do this without you. Thank you to everyone who's joined us today. And as we say at CarParts.com, get after it. We'll now turn it over to the operator to open it up for questions..

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

Hi. Good afternoon, guys..

Hi, how it’s going?.

Good. Good. Ryan, I want to start with guidance. So you said you're still expecting low single-digit revenue growth this year. Previously, I guess, last quarter, you said 3% to 5%. So are we talking the same thing there? Or has there been a change in share..

Yes. I think last time, we said low to mid, and I think we've narrowed it just to low to kind of give you guys a little bit more color..

And then maybe can you talk about trends within the quarter, kind of month-to-month on sales? And then also how much was ad spend up in the quarter? And did that trend similarly to sales in the quarter?.

Sure. Yes. So for the month of October, we were actually up in units, but down slightly in dollars due to the deflation that David mentioned. But I think for us, as we've always said, we're going to focus on maximizing gross profit dollars net of variable costs.

And in that respect, we were running similar gross profit dollars, but higher variable contribution margin than prior year. I think overall, for marketing, I believe we were sequentially down on marketing, but up slightly from a year ago.

We're still pretty confident in these marketing efforts as we go through the remainder of the year, and we look to hit that low single-digit growth rate for the full year..

And just on gross margin, it's the weakest it's been in several years here.

I guess can you talk through the freight versus mix? And what exactly within mix was negative in the quarter? And then on the freight side, can you talk about when the FedEx surcharges went in place here versus last year or if there's something else on the outbound side?.

Sure. Yes. So freight surcharges kicked in this month, so a little bit later than last year, where they kicked in at the end of September. For the mix -- for gross margin, it was predominantly freight. I mean almost the whole amount. Mix, there was a slight shift in mix. So we went from 13% branded to 16% branded.

And as you know, branded generally has a similar gross margin dollar profile, but a lower gross margin percentage profile. So as an example, you'll have $100 branded item with 25% margins that makes 25 gross profit dollars.

As a correlator, you might have a private label item that sells for $50 with 50% gross profit margins also for 25 gross profit dollars. So for us, the way we look at it internally, we're pretty agnostic to the $25 versus $25. But from a gross margin percentage basis, it can compress margins..

And Ryan, it's David. If I can jump in, I guess, I'll give you a couple of data points. Q3, we saw significant unit growth. We just got impacted by price compression and mostly deflation. So what we're seeing is we have deflation on the top line, and we have a small amount of inflation on outbound transportation.

So our cost per package was up somewhere between 2% to 3%, but then we're seeing deflation on the top line. So as a percentage, we're getting hit from the two sides. That's what's driving the decline in gross margin. So I'd say the majority of it is transportation driven. It's not mix driven..

Helpful. Thanks guys. Good luck..

Thank you One moment for our next question. Our next question comes from the line of Darren Aftahi from ROTH MKM..

First one, can you just kind of talk about the app in the context of kind of the longer-term benefits of search marketing and kind of how you plan to attack that?.

Hi, guys. Thanks for taking my questions. Yes, of course. And it's David, Darren. So I think for us, app is probably one of the most transformational initiative that we worked on over the last couple of years. Historically, the majority of our customers find us on Google.

And so we rely heavily on search engine optimization and performance marketing on Google. And so over time, what we're trying to do is get our customers to come to CarParts.com directly so that we don't have to spend this much money on Google or performance marketing.

So having that direct connection, the direct line with our customer, that's the game-changing part where we don't have to reacquire them when they want to make a purchase. So today, about 80% of our traffic is already on mobile. What we're trying to do is get that mobile traffic to go from searching on Google to directly on the app.

So repeat purchase, push notifications, maintenance, VIP subscription, like everything we can do to move away from search engine into direct marketing that has a huge impact on the P&L.

And I think over time, what you'll see is our marketing spend should come down probably somewhere between 100 and 200 basis points, and that should flow to the bottom line..

That's helpful. And then just one more on this new Vegas facility. The $7 million in CapEx, I guess, how is that going to hit the balance sheet and cash flow statement? And then Mike, I think you talked about cost reduction as a result of moving facilities.

Can you just kind of dive into that a little bit more?.

Sure. This is Ryan. I'll take the first part of the question. That $7 million is going to basically be almost all CapEx. You may have a little bit run through OpEx as we get that facility set up, but the majority of it is going to racks, conveyance, order pickers and hard items, so you'll see that in the cash flow statement, not running through OpEx..

Yes. Darren, on the lower costs, so we're down around 60 basis points year-over-year with our current process improvement. Vegas with the pic module and other capabilities we're putting in will allow us over the long term to lower our cost profile within that building.

And we'll continue to make improvements throughout the rest of the network as we have..

Great.

Ryan, could you guys clarify the $7 million wins that are actually going to hit the P&L or hit the balance sheet and the cash flow statement?.

It depends. We actually just approved the invoices for some of this literally today before we took this call. So I think you might see a small amount hit this year and the majority of the remainder hit Q1..

Okay. Great. Thank you..

Thank you. One moment for our next question. Our next question comes from the line of Tom Forte from D.A. Davidson..

Hi. Good afternoon. This is [Sharon G.] on for Tom. I had two questions.

For the first one, how, if at all, are you guys impacted by the automotive labor strikes? Like, for example, we would think the production disruption would result in consumers holding on to their used cars which should be a positive for you?.

Yes. I mean in short term, probably very little impact. But long term, yes, I agree with you. I think -- and not to get political, but if you're going to raise the cost of labor, I expect new car prices to go up.

So if you combine new car prices to go up as well as the cost of capital with interest rates being as high as they are today, I think it's going to make it more difficult for American consumers to buy a new car, and there's going to be an incentive for them to hold on to their vehicle longer.

And this is where a company like CarParts.com becomes a good destination to maintain your car, keep it running longer, both for upgrades, but also replacement. So long term, I think it should be an opportunity for us to capture more customers..

Thank you. And for my second question about your marketplace.

So how are your marketplace sales performing on Amazon and eBay? For example, does it help you that Amazon had two mega sales in one calendar year this year?.

Our marketplaces are performing relatively in line with their platform growth. The growth on Amazon as a whole and Amazon just reported earnings has slowed down. For us, the biggest opportunity is to capture customers on e-com, which is CarParts.com. And for Q3, it was one of the fastest-growing channels.

So our overall unit growth was significant, and the growth on e-com, CarParts.com, was even higher than that. So over time, for us, we need to get the mix of CarParts.com revenue to be higher and the marketplace mix to be lower. Now it doesn't mean that marketplaces will decline.

It just means that they need to grow at a slower rate than e-com, and e-com has to accelerate as well as the app. So I don't know if Michael wants to add anything..

Yes. I mean longer term, we want to continue to drive business towards our e-com site. We do have very, very, very high mobile traffic as a percent of the overall business. So the app and driving it to e-commerce where we're going to get outsized growth. But eBay is an important partner of ours, and we're going to continue to grow with them.

And Amazon is an important partner, and we'll continue to grow with them. But we're going to continue to focus to drive e-com..

Thank you so much..

Thank you. One moment for our next question. Our next question comes from the line of Ryan Meyers from Lake Street..

Hi, guys. Thanks for taking my questions. First one for me. I'm just curious, what sort of signs are you waiting to see where you feel like the overall demand environment is beginning to improve? It sounds that unit growth is still strong, but it's kind of being offset by the price deflation.

Just curious what sort of things you guys are looking at and what you're paying attention to where you feel like that demand environment is improving?.

Ryan, it's David. Yes, I think there's a lot of conflicting signals out there. All the indicators I'm looking at, some of them point up and some of them point down. And it's really hard to tell what's happening.

I think, for me, when the environment changes or the macro changes or the Fed goes and trickles, touches interest rates, I think some companies kind of overreact. I think, for us, we try to keep just a long-term view. We have our vision, we have our strategy, we have our strategic priorities.

We've built some very solid capabilities, and we have a good kind of resource allocation plan. So I have no doubt that we're executing on the right road map with the right team and adequate resources. So for me, if we just continue executing and blocking and tackling, I think we can get to $1 billion in revenue and beyond.

We can do it profitably, and we can do it without raising additional capital..

Got it. That's helpful.

And then my other question, are there any levers that you guys can pull to help offset the negative impact of the price deflation that you're seeing?.

There's a lot of levers that we can pull, and all of them kind of are all connected. We have to deliver a great customer experience, we have to ship faster, we have to reach the customers where they are. And that's why we launched the Podcast. That's why we have the JC Whitney initiative. There's a lot of things that we can do.

I think one of the biggest levers we can pull right now is expanding our assortment. And to some extent, we've done a lot of that this year, but you're going to see more of that next year. Historically, we played just a very narrow set of categories.

And so in simple terms, I think we can sell more brands, more products, more categories, we can build a brand for our private label. And over time, all of these should drive growth. I mean right now, and just to be clear, we are seeing significant growth in units.

Again, we're just being impacted by deflation, but the business is growing, it's profitable. And we have a super solid balance sheet and no debt. So I think we're in a good spot. I think the economy and the deflation is kind of muting some of that growth. But overall, the business is doing good..

Great. Thanks for taking my question..

Thanks Ryan..

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