Good afternoon and welcome to the Second 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. Tina Mirfarsi, Vice President of Communications and Culture. Please go ahead.

Hello, everyone, and thank you for joining the call today to discuss our second 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. 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. And with that, I would now like to turn the call over to David.

Thank you, Tina, and good afternoon, everyone. As reported in today's release for Q2 2022, our team achieved record sales of $176 million, up 12% year-over-year, and adjusted EBITDA of $8.3 million. This represents our 10th consecutive quarter of double-digit year-over-year revenue growth and a 44% increase on a two-year stack. We're also excited to announce our new $150 million, five-year credit facility with our partners at JPMorgan Chase. Our leadership has continued executing on the four areas of focus; outstanding customer service, operational excellence, financial discipline, and innovation. Number one, outstanding customer service. As a reminder, over one-third of our e-commerce revenues come from repeat customers. As we consider capital and resource allocation, we see a significant opportunity to increase our focus on customer-centric initiatives. Our entire team is fully committed to simplifying and removing the stress from vehicle care by redefining ourselves from a parts company to a customer-oriented company with an unparalleled digital-first experience. Number two, operational excellence. As the business continues to grow and evolve, we see opportunities for our teams to collaborate and improve performance by systematically removing inefficiencies. Focusing on driving results is key for us, as evidenced by our year-to-date results and our ability to simultaneously open two distribution centers in this environment. We're always raising the bar and aligning people, processes, and strategies with the needs of our customers, which is part of our DNA. Number three, financial discipline. Over the last three and a half years, we have invested in building a scalable foundation, which we are now leveraging. Our management team strongly believes that financial resilience and disciplined capital allocation will be key to our success in times of market uncertainty. Profitable growth and free cash flow generation are more important than ever, and it's where we will focus our energy and resources. Our team remains committed to being prudent and intentional with every dollar we deploy. Our business model is rooted in positive unit economics, even after fulfillment and customer acquisition. This will help create an exceptional company for our shareholders to own for the long-term. And number four, innovation. As we think about the future, we are committed to growing our addressable market and turning more of our customers into repeat customers. The opportunity lies in the do-it-for-me customer who relies on outside help to complete the repair or maintenance job. In the spirit of simplifying and removing the stress from vehicle care, we have been working on expanding our offering to include the ability for our customers to find a trusted local mechanic to assist with their repair. We're excited to report that we have already completed hundreds of successful bookings. We recently launched a new experience on our website, which is live in certain test markets. With this newly built functionality, some of our customers now have the option to book an appointment with a certified mechanic of their choice directly on CarParts.com, with full transparency of the installation price. Now, Ryan will discuss our financial results and a quick operational update.

Thanks, David. In Q2, we generated revenue of $176 million, up 12% from the prior year period, resulting from the great execution by our entire team. On a two-year stacked basis, revenue increased 44%. If you'll recall, Q2 of 2021 benefited from the inflow of pandemic-related federal stimulus funds, which resulted in increased consumer spending. Gross profit for the quarter was a record $62 million, up 16%, with gross margins improving 120 basis points to 35% this year versus 33.9% in the same year period. The improved gross margin continues to reflect purchasing and savings driven by our data science and supply chain teams. Net income for the quarter was $4.1 million compared to $2.1 million in Q2 of 2021, and adjusted EBITDA in Q2 was $8.3 million, flat to last year, reflecting the impact of self-funding our new Jacksonville distribution center, including rent and startup expenses. Turning to our balance sheet, as David indicated, we entered into a $75 million credit facility with the ability to grow to $150 million. We believe the terms are attractive and that it further reinforces that we have enough liquidity to grow without tapping the capital markets. We appreciate the support of our partners at JP Morgan Chase, who have been with us for many years. At the end of Q2, our facility was undrawn. At quarter end, our cash position was $15 million, and we successfully built our inventory to $163 million. As a reminder, we are currently carrying approximately $40 million or eight extra weeks of inventory to account for longer lead times in the supply chain. Over time, as the supply chain normalizes, we expect this inventory to be converted back to cash. We will also likely work down some of that safety stock as we focus on free cash flow and further reinforcing our balance sheet. 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 pleased with our Texas expansion, which is now fully stocked. We also recently opened our brand new Jacksonville, Florida distribution center that includes new best-in-class technology tools, which should drive operational efficiencies over time. Despite what we're seeing in the broader macro environment, we continue to optimize the business towards a balance of growth and profitability. For the first four weeks of Q3, our robust inventory position is helping us against prior year comparisons. For net revenues in the back half of 2022, we continue to project double-digit year-over-year growth. And with that, I'd like to turn it back to David for some closing remarks.

Thank you, Ryan. We're excited to build a trusted and disruptive platform where we can help our customers solve their auto repair and maintenance needs. Our goal is to become the number one destination for customers needing help fixing their vehicles. Q2 was another record for the company, and this performance would not have been possible without the incredible dedication from all our teams across the globe. As we look forward to the next evolution of our company, we are honored, humbled, and excited to be working with such an amazing group of people. Thank you again to all our team members for coming to work every day, ready to succeed. As we say at CarParts.com, get after it. I'll now turn it over to the operator to open it up for questions.

Our first question comes from Victoria James from D.A. Davidson.

Congrats on the performance in the quarter. The first question I had is can you talk about your gross margin performance? What were the contributing factors? Looks like you had gross margin expansion versus last year?

Yes, thanks, Tom. Obviously, we feel very good about how gross margins are turning out, both up nominally, sequentially, and year-over-year. We continue to leverage our data science team to optimize for price and lean on our vertically integrated supply chain, which gives us a benefit over some of our competitors who have a worse ability to stay in stock compared to us.

Great. Can you discuss your current status with your do-it-for-me efforts? When can we expect that to start making a significant impact on your revenue?

Yes, hi, Tom. It's David. I think if you think about auto repair in general, my experience has been it is complex and stressful. The long-term vision is really to make auto care simple and stress-free. I think that do-it-for-me, the opportunity is part of that. It's a big project and endeavor, but we're very excited about the progress. The great thing is that it expands the total addressable market. More importantly, it gives our customers a new option depending on what type of repair they want to do. As of today, as we called out in the prepared remarks, we've completed hundreds of successful bookings. The experience is now live on the website in certain markets. It's just the beginning, but in the last three months, we've made a big push to get this going. I'm super proud of the team's efforts. I don't expect it to meaningfully contribute to the topline in the near term, but over time, especially in the long run, I think this is a game changer for our company.

Great. So, for my last question, thank you for taking it. With the expansion of the Grand Prairie, Texas fulfillment center seemingly behind you and the opening of Jacksonville, how should we consider your plans for additional fulfillment center square footage over the next 12 months?

Yes, good question. I think short-term, in this environment, we're really focusing on free cash flow and profitable growth. We want to get the maximum out of the current network before investing in new buildings. Right now, our internal focus is on operational efficiencies and leveraging new tools and software that we're implementing in Jacksonville. We're really learning and focusing on driving the most out of what we have in the network. Now, medium term, as we've called out many times, we are going to open another distribution center. The goal is always to provide the best level of customer service, meaning one-day shipping to 80% to 90%. But again, our main focus right now is free cash flow and operational efficiencies.

Got you. And then one quick point of clarification, so Grand Prairie expansion in Jacksonville, what percent operational are they, are they 100% or how close to 100% are they?

Well, Texas is pretty far right now. The team has done a great job with the installation, staffing, and training; it was an expansion. Jacksonville is almost full right now. We got the labor, and we started shipping. For the 2023 peak season, it should really help us. It went live during the quarter. What I'm most excited about is that as Ryan mentioned in his prepared remarks, we're really targeting double-digit year-over-year growth in the second half of the year, while balancing that growth with profitability.

Thank you, David. Thank you, Ryan.

Thanks, Tom.

Thank you.

Thank you. Our next question comes from the line of Austin Vetterick from ROTH Capital Partners.

Hello.

Hey.

Hey, it's Darren Aftahi. A little confusing. Thanks for the call anyway. Hey, guys, hope you're well.

Hey Darren, good to hear from you.

Likewise. Three, if I may. So, I think I just heard you say to Tom's question that Jacksonville's almost full. I guess, how contributory was it topline-wise to the business?

Yes, that's a good question, Darren. The challenge with same-store metrics like this for an online retailer is that for us, you're always focusing on delivery speed, and we're constantly optimizing for shipping times and transportation costs. If you're looking at it on a same-store basis, it's kind of difficult to quantify.

Okay, fair enough. I noticed inventory ticked up, but it has sort of slowed on the margin. So, having said that, given your context about generating cash, could you shed some light about container pricing, logistics, supply chain, and kind of where you see things? I know there's been some consternation with COVID in Asia, but just kind of where we are. Have we plateaued in terms of that system, and do inventory levels maybe fall from here, plateau, just any kind of color would be great.

Yes, I think we're definitely seeing some signs of improvement. Now, whether it's short-term or long-term, it's hard to say. I think we've built some great capabilities in-house. Now, to the inventory question, as we've always pointed out, it's a game of parts availability and having the inventory in stock close to the customer. In the past two years, to navigate the supply chain disruption, we had to build this extra safety stock and we have been carrying that extra eight weeks or about $40 million. As I said, because of the signs of improvement, over time, I think you're going to see this inventory level come down and be converted back to cash. Now, it is a little more complicated than just giving you a number because it's at the SKU level and the vendor level. I think over the next six to twelve months, you're going to see some of that inventory revert back to cash, and us carrying less inventory to support this level of business.

Great. And just last one for me. On the do-it-for-me initiative, how much marketing are you getting, and what is your source? Where are you getting the customers from? How much cost was there in the order related to that?

Yes, so two-part question. Firstly, the source of customers right now is our existing customer base. On CarParts.com, I think we've built a fantastic destination for auto repair. We have over 100 million visitors on our website. We have a robust email list with millions of customers. As we pointed out, about one-third of our revenues on e-commerce come from repeat customers. So, there's plenty of opportunities for us to offer this service to our current customers. For Phase 1, we're okay with targeting the current customer base. The second part of your question is about extra cost. I don't think we're spending any incremental dollars to make this work. We are really reprioritizing our efforts around the do-it-for-me initiative. We have a technology team and a marketing team, and we think this opportunity will be a game changer. We're reallocating resources and capacity to push out this new phase of the initiative in the last three months. We've made significant improvements, reflected by the several hundred bookings. I think that this will continue to improve. The whole team is focused on making this phase a success.

Great. Thanks, guys.

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

Just one from me. Just wondering if you could give us an update on the mechanical parts business during the quarter, and kind of how that is tracking and how those contributions have been looking?

Hey, yes, I do have that number. For mechanical parts, hard parts were 27%, replacement parts were 67%, and performance was 6%. So, it has been basically flat year-over-year, a little down sequentially, but I wouldn't read too much into the minor fluctuations. Over the long run, the goal is still to be at around 45% to 50% mechanical, 45% to 50% collision, and the last 5% to 10% performance accessories—that's our long-term target.

Right, makes sense. Next one for me. Have you seen any labor challenges ramping up at either the distribution centers in Grand Prairie or Jacksonville?

Yes, I think every retailer and anyone in the industrial warehouse space is always competing for talent. We're constantly looking to create a safe environment, build a great culture based on values like diversity, inclusion, and equality. We've done a good job setting a compensation structure that incentivizes performance, including gain sharing and referral bonuses, retention bonuses, and more. I think our warehouse associates are very integrated into our vision and mission, and they feel like an important part of our culture.

Got it, makes sense. And then the last one for me, touching on the do-it-for-me offering, it was helpful to hear some of the positive commentary on that. What sort of feedback have you guys gotten not only from customers but from the mechanics you have partnered with? Have they added customers that they wouldn't have serviced before? Can you walk us through the partnership with those mechanics you're using for the do-it-for-me offering?

Yes, for this phase of the initiative, we really partnered with mechanics that are already pre-bought into the fact that they know customers will bring in the parts. A big part of making this initiative a success is having a pre-selection of mechanics that understand the customer is going to come in. The scheduling and trends are transparent, including the zip codes and part names we focus on. There has been a lot of upfront communication to prevent surprises at the mechanics. This new experience is a first in the market, so we're still working out the kinks, but overall, the feedback has been great. Customers appreciate the alternative; if they don’t feel comfortable doing the repair themselves, they have this option, which targets another subset of customers that might not want to do the repair themselves. For us, expanding that addressable market is what excites me the most.

Got it. Thanks, guys.

Ryan Sigdahl from Craig-Hallum.

Curious about the gross margins, really solid this quarter, but as you think about the cost inflation and the moving pieces, particularly regarding how much cargo containers cost coming from China, with FIFO accounting, anything to be aware of as we model gross margin going forward, or are Q1 and Q2 good run rates as you look at the movement in the cost structure in your inventory?

Sure, yes, thanks, Ryan. When we think about gross margins and EBITDA margins, we really take a step back and look at it over multiple quarters and throughout the full year. That being said, we still feel very good about the margins for the remainder of the year. For Q2, we were obviously up sequentially and year-over-year on a nominal basis. As far as container pressures go, we are mostly hedged, and our hedges are at very attractive rates. So, I think we feel comfortable regarding that for the remainder of the year. Looking back at our history over the last three years, no matter what has happened, we generally do a great job working through these pressures. I’m confident our team can handle whatever challenges the market throws at us in 2023.

Good. You talked about profitable growth; that's a big focus, or at least an increased focus in the near term. When we look at the seasonally softer back half of the year, do you think you can still stay profitable? If you're willing to comment on that?

As far as profitability, absolutely. It's a laser focus to balance growth in the back half with profitability. We do believe we will be profitable in the back half.

Just to clarify, are you talking adjusted EBITDA or net income?

Adjusted EBITDA margin and nominal?

Great. Thanks. And David, maybe a question for you: I've seen some tech-forward companies that are starting to lay off people, and there is some good talent out there. I've seen you kind of open arms, embracing them if they want to come work for CarParts. Have you seen any success with that? Can you also talk through your retention of your existing employee base?

Yes, we've made significant investments in building a culture. We have a culture that rewards discipline, excellence, and high performance. Our turnover has been significantly lower than some of our competitors. I have been very public about our willingness to hire. For me, we’re trying to build an exceptional business, and that starts with hiring the best people: hiring, training, developing, and retaining. So far, we have had good success. If there’s good talent out there, yes, we want it. I would say this is a call to action for CarParts.com: if you have exceptional friends who want to work hard to build something great, we can be an excellent destination.

Don't miss an opportunity; I like it. Maybe the last question for me is as you shift into the do-it-for-me initiative, can you talk through the mechanics of that a little? What are some of the incentives or marketing strategies that will support that? I recognize it’s not as relevant this year, but as you look to next year, how will that be marketed, sold, and how will that flow through from a P&L, particularly from a revenue and margin standpoint?

Ryan, maybe I'll take that one. For me, I always think about the do-it-for-me initiative in two phases. We're currently in a short-term phase focusing on the customer experience. When you consider it, there's no place that customers can go that they trust to get their car repaired all in one destination. If you have a car in warranty, you go to the dealership, but that’s a small fraction of the market. Our goal is to get it right for the customer and alleviate the stress of car repair. That’s the phase we’re currently in. Once we nail that down, the next phase will be scaling the offering, marketing, and increasing bookings, which would also come along with significant marketing efforts.

Good. Thanks, guys, and good luck. Nice quarter.

Thanks, Ryan. I appreciate it.

Thank you. This concludes the conference call.