Good afternoon. [Operator Instructions] Please note, 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 First Quarter conference call. Joining me today 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 risks and uncertainties associated with the business..

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 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 the call over to David. .

Thank you, Tina, and thank you all for joining us. I will begin with some highlights from the quarter, provide an update on the economic environment, and then turn it over to Ryan to review our financial performance in more detail before opening it up for Q&A..

Our performance so far this year has been disappointing and does not meet our standards. We're facing headwinds in key categories and certain customer segments are being impacted by a deteriorating economic outlook. We need to maintain financial discipline and do a better job on both gross and net margins..

Now we have several variables within our control, such as pricing optimization, marketing, last mile transportation costs and product expansion where we have opportunities for margin improvements. Over the last few years, we have made significant investments in infrastructure and operating capabilities.

We now need to focus on efficiency and effectiveness to quickly deliver improvements in profitability..

The ultimate measure of success for our company is long-term free cash flow, and over the last few quarters, we've made insufficient progress. In the first quarter of 2024, our sales reached $166 million, down 5% from the prior year period. We experienced significant weather impact in January and the first half of February.

And our more price-sensitive segments underperformed throughout the quarter..

This decline was primarily driven by acute pressure in lighting and mirrors attributable to a flood of nondepartmental transportation, compliance, low-cost and low-quality parts from overseas, which are often illegal.

These 2 categories account for approximately 1/4 of our revenue and represent the vast majority of our year-over-year decline, masking the strength in other categories, particularly in large replacement parts where we have a competitive advantage.

The current environment also has put significant pressure on low price and discount seeking customers, which are becoming more scarce and more expensive to acquire and service..

To maintain financial discipline, we made the decision to both adjust pricing and reduce our customer acquisition spend on the subset of customers. We're focusing our efforts on targeting consumers that want quality parts at competitive prices. This is a more profitable customer base, which gives us a higher gross margin profile.

Due to these efforts, we began to see gross margin improvement in the back half of Q1 and our momentum has continued during the month of April..

In Q1, we also implemented aggressive cost savings initiatives that are expected to provide up to $8 million in cost reductions in 2024 and $10 million on an annualized basis.

Combined with our pricing and customer acquisition adjustments, we expect to see better unit economics on less volume, which will result in a more efficient and profitable business over time..

Adjusted EBITDA for the quarter was approximately $1.1 million, excluding transition costs. These costs include related to moving to our new semi-automated larger facility in Las Vegas, Nevada, as well as costs related to rightsizing our workforce. Ryan will talk about the implications of these changes on our 2024 outlook..

Now I want to emphasize that we're targeting gross profit dollars to remain within the range we had previously forecasted. Our strong balance sheet provides us with same power, and we're very comfortable with our capital position at this time..

one, the development of our digital first and customer-centric automotive e-commerce and mobile app strategy; two, the expansion of our proprietary portfolio with premium products and services to capture new markets and customers; and three, generating more brand awareness for CarParts.com and capturing a wider customer base..

Before going into some highlights for the quarter, I wanted to announce that we published an updated investor deck today that describes the CarParts.com investment opportunities and defines each one of these strategic drivers in more detail. The presentation is available at carparts.com/investor..

Next, I'd like to cover our main highlights for the quarter. First, we made big moves to supercharge our e-commerce and mobile app experience and ensure CarParts.com is the stress-free destination of choice for consumers to address their vehicles maintenance and repair needs..

Our mobile app, which successfully launched last summer on both iOS and Android continues to grow with over 350,000 total downloads. Mobile app revenue currently accounts for 8% of our e-commerce revenue compared to 0% in Q3 of last year..

With 80% of our customers shopping on mobile, we expect direct in-app purchases to drive savings for us, and reduce our reliance on search engines and performance marketing to promote our brands and products while also incentivizing repeat purchases. We believe this will lower our marketing spend and drive increased profitability over time..

We also launched our first machine learning powered product recommendation engine built on top of our proprietary fitment data. Over time, we expect this to increase units per order, which will make freight more efficient and drive higher gross margin..

A few weeks ago, we also introduced the first of several fee income initiative to drive incremental high-margin dollars. Our new parts and shipping protection offerings are both live and ramping up. Over time, we expect those 2 initiatives to generate incremental gross profit dollars at an annualized rate of approximately $2 million..

Second, we're optimizing our product and price assortment to capture market share by catering to more premium shoppers, enhancing our competitiveness and positioning us for sustained growth.

In this quarter, we continue to optimize our product mix and expanded our inventory by adding new SKUs aiming to attract more customers, enhance our profit margins and increase overall revenue. For context, most new products we add have a revenue-generating capacity that can last up to 20 years and compound over time..

We are also launching several of our product lines under the JC Whitney brand in Q2 and Q3 of this year. These products are focused on providing higher quality products at an enhanced price point and a higher gross margin profile.

Over time, we believe we can increase gross margin by upgrading our products from an unbranded private label business to a branded model, leveraging the legacy of our JC Whitney brand..

Third, we continue to invest in our marketing channels to improve brand awareness and grow our customer base while reducing customer acquisition costs. We continue to attract and strengthen our relationships with customers with new content on our own channels..

Our YouTube channel continues to grow with an expanding number of proprietary educational and instructional talks and videos to help attract customers who tend to be less price sensitive.

Over time, our own content push will not only foster an automotive community but help us acquire new customers on lower acquisition costs and decrease our reliance on third-party advertisers to make our business more profitable..

Before I turn the call over to Ryan to discuss quarterly financials and details, I want to provide an update on our ongoing efforts to optimize our logistics and supply chain management. We are on track to begin operations at our new and larger semi-automated facility in Las Vegas, Nevada in this quarter.

This investment was made to drive improve customer experience as well as operating leverage in the form of process efficiencies, and we expect those savings to start ramping up in the second half of 2024 and fully realized in 2025..

The new West Coast flagship will feature a state-of-the-art AI-powered PIC Module, an extensive conveyance that will allow us for increased gross margin through lower freight costs due to expanded retail assortment as well as a significant reduction in operating costs..

I'll now hand it over to Ryan for a financial update. .

Thank you, David. In Q1, we reported revenues of $166.3 million, down 5% from $175.5 million last year. Gross profit for the quarter was $53.9 million, down approximately 14% compared to the prior year. Gross margin was 32.4% of sales, down from 35.6% in the prior year due to the higher freight costs and pricing compression..

GAAP net loss for the quarter was $6.5 million compared to net income of $1.1 million in the prior year period. We reported adjusted EBITDA of $1.1 million versus $9.4 million in the prior year period.

This adjusts for certain short-term expenses, including $483,000 of transition-related costs to our recent workforce reduction and $471,000 in overlapping rent and related expenses from our new Las Vegas facility..

These strategic investments and other cost reduction initiatives allow us to respond appropriately to the retail environment and ensure long-term value creation for our shareholders. On an annualized basis, we expect our cost reduction initiatives to equal $10 million. For fiscal 2024, the flow-through should be approximately $8 million..

Turning to the balance sheet. We ended the quarter with $46 million of cash and no revolver debt. We generated $437,000 of interest income in the first quarter. Our cash position and untapped revolver continues to support our business plan..

The inventory balance at the quarter end was $120 million versus $136 million in the prior year. As a reminder, we account for our inventory on a FIFO basis. Therefore, some of the benefit we expect to see as we improve sourcing will be delayed until we sell through the existing higher cost FIFO layers..

Turning to our outlook for 2024. In the months of March and April, we saw improvements in gross margin above the top end of our previous guidance, which was offset by lower revenue. For the full year, we are still targeting gross profit dollars inside the range of our previous guidance.

However, as we focus on our more profitable channels and segments, sales will be lower year-over-year at a higher gross margin percent than previously guided..

Financial discipline is part of our DNA. And given the evolving market dynamics, we are doubling down on opportunities for margin expansion around pricing optimization, marketing, supply chain, technology and fee income.

In the short term, we will spend the rest of fiscal 2024 focused on improving efficiency and profitability to significantly increase adjusted EBITDA in 2025 and 2026..

By continuing the efforts around our 3 strategic pillars and efficiency, we believe we can achieve adjusted EBITDA growth next year. As we look to the medium term, we are working towards achieving a 6% to 8% adjusted EBITDA margin as well as increasing our free cash flow generation..

For the full year 2024, we revised our revenue guidance down to $600 million to $625 million to reflect our focus on margin improvement. Our previous guidance had been for a range of $662 million to $668 million..

We revised our gross profit margin guidance up to 33%, plus or minus 100 basis points, which will partially offset lower expected sales. Our previous guidance was 31%, plus or minus 100 basis points..

The outlined guidance change is relatively neutral from a gross profit dollar perspective.

We believe the strategy of optimizing around transactions at a higher gross margin will help us achieve our medium-term profitability target, by making us more efficient through handling less packages, fewer customer service requests and lower reverse logistic costs. .

Overall, we believe that the impact of our strategic priorities and focus on attracting higher value customers will restore adjusted EBITDA and profitability growth. We are well positioned to capture the tremendous and growing opportunity in a highly fragmented and underserved $400 billion aftermarket auto parts industry..

We continue to build a world-class organization, center around the needs of our customers, and we believe we will create long-term value and benefit our stakeholders for years to come. We will continue balancing financial prudence with opportunistically returning capital to shareholders through the remainder of the year..

Thank you, everyone, for joining today's call. We will now turn it over to the operator and open it up for your questions. .

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

Curious within the guidance, previously, you were assuming $100 million of branded drop-ship revenue.

Curious what that assumption is now?.

Mix probably won't change that much from the branded to private label side in the short term.

And I think over the long term, there's a lot of moving parts because you have the investments we're making in JC Whitney, which is going to be beneficial for private label, but we are going to continue to bring in new branded SKUs to attack different segments that we've never attached to before. .

On the private label topic, I guess, curious how many new SKUs you've added there year-to-date and what categories those are focused on?.

So year-to-date, we've added about 7,000 SKUs and the product mix is about 65/35 PL1 to PL2 -- sorry, our PL1 is our collision business and our PL2 is our mechanical business. .

Good. Then just moving over to the medium term EBITDA margin target, 6% to 8%, you're previously 8% to 10%. I guess given everything you guys are focused on and from a cost optimization and improving margins and less revenue but higher margin, et cetera, et cetera. I guess I'm surprised to see the margin target over the medium term come lower.

So can you talk through the puts and takes on that 200 bps?.

Yes, I can take that one. Ryan, it's David. No, listen, I think just taking a step back just on Q1, it's definitely in line with our expectations. But for me, it's disappointing. I'm not satisfied with lower sales and lower margin. And I said it last time, and I'll say it again, it's 100% on me..

I think regardless of the macro, we need to find a way to win. The 6% to 8% is really a medium-term target. What we want to emphasize is our kind of short-term focus on margin expansion and profitability. We have some opportunities on gross margin and freight. We have some opportunities on the marketing side.

We have some opportunities on labor with efficiencies and productivity improvements..

I think long term, this business can be extremely profitable and generate a ton of free cash flow. What we're trying to do is put out an achievable but reasonable target that's in the medium term, and I think 6% to 8% is a good checkpoint. .

Very good. One last quick one for me, if you're willing to comment.

Do you expect to stay EBITDA positive in '24 and/or free cash flow positive?.

Yes. So for EBITDA, there's a lot of moving parts. I think that some of it's going to depend on where we end up on both sides of the guidance. And then as far as the free cash flow, we're going to be negative free cash flow predominantly to making some large investments in Las Vegas..

So I think big picture taking a step back, cash at the end of the year, you're going to be about $25 million to $35 million ending cash balance, and that kind of depends on how much inventory we end the year with. So that would be between like $110 million to $120 million of inventory on the balance sheet would give you the change there. .

Yes. And if I can add something. The other thing that we're working in terms of making the business more efficient is definitely on the income statement side with margin and free cash flow.

But I think on the balance sheet side, as we think about optimizing the business, we're going to be looking to rationalize inventory, increase terms and making sure that at the end of the year, we have as much cash as possible and run the business as lean as possible. .

Sorry. Maybe one more if I can sneak it in, related.

What CapEx was $7 million and change in Q1? What's the expected total for the year, including the Vegas move?.

Yes. So total for the year, you're looking at like $6 million to $7 million for Vegas, and $9 million to $10 million just for normal CapEx. .

Our next question comes from the line of Ryan Meyers from Lake Street Capital Markets. .

First one for me.

What's your level of confidence that you're still going to be able to take price and still see demand for those respective products?.

So I think that goes exactly to the new change in guidance. We have been taking price and we're seeing above the prior range levels of margin, and there was definitely an offset. We are seeing a little bit less demand.

And it goes to a strategy as far as how many units we actually touch and ship out, how many customers are we helping, which does flow to different efficiencies at the warehouse on shipping out, on call center, on people calling in, on our returns, processes, how much comes back..

So it is better all around for us to be a little bit more expensive than where we were before and have a little bit better margin but touch less units. So from a -- this is part of, I think, our strategy to hit that medium-term guidance over time. .

Yes, and if I could add one thing. I think what's important is if you look at our customer base and call it, last year, we had about 7 million customers place orders on CarParts.com.

If you go one level down and do some segmentation, there is a subset of customer that comes back more than once, spends more money and does not rely on coupons and discounts..

And there is a subset of customers that is typically on the lower end. They tend to be the bargain hunting or discount seeking. And what we're trying to do is really focus our efforts on the customer that comes back and spends more, which is less expensive to acquire and more profitable over time..

So what we end up with is a slightly smaller customer base, but much higher flow-through and much higher profitability. So ultimately, our ability to take prices up is important. But really, it's to the extent that we can maximize flow-through and free cash flow. And that's kind of what we're ultimately focusing on.

We think that the best way to generate value for shareholders is maximizing free cash flow. .

Got it. That makes sense. And then the $8 million in cost savings that you expect to see in 2024, I just want to make sure I understand it correctly.

Is that going to be spread both across cost of goods as well as operating expenses? Or is that $8 million just what we're going to see with the kind of shifting product mix? Or is there anything else in operating expenses? Just a good understanding of that would be helpful. .

No, that would be purely OpEx. .

At this time, there are no further questions. This concludes today's conference call. Thank you for participating. You may now all disconnect..