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, 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 Second 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. Their 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 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-Q 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. Good afternoon everyone and thank you for joining us. Today, we reported $177 million of sales, up slightly from the $176 million we generated last year in the second quarter, marking our 14th consecutive quarter of year-over-year growth and the highest sales level for any quarter in our company's history. On a two-year stack, revenues for the quarter are up 12%. Adjusted EBITDA was $6.3 million. We also repurchased 250,000 shares during the quarter. The $79 million in cash on our balance sheet at the end of the quarter is a testament to the strong unit economics and cash generating capabilities of our business. And we're also happy to announce the launch of our new mobile app now available on both iOS and Android. When it comes to customer purchase patterns, we have seen a rise in the usage of our Buy Now Pay Later offerings. And while some customers are choosing to defer their less urgent repairs, we believe that their return to market is inevitable once consumer confidence rebounds. At that point, we will be ready to meet their needs, thanks to our infrastructure, mobile-first customer experience and diversified assortment. We remain steadfast in focusing on building a world-class company dedicated to providing customers the best digital experience to help them with their auto repair and maintenance needs. On our last earnings call, we shared some of our accomplishments from the last four years, but we believe there are still opportunities for improvement and transformation. These fall into six strategic pillars that range from table stakes to industry disruption. We believe by putting focus on these areas, we will profitably grow to a $1 billion company and beyond. Number one, e-commerce fundamentals; number two, digital transformation; number three, assortment and catalog; number four, marketing and customer experience; number five, innovation; and number six, supply chain and logistics. Let me briefly touch on each of these. First, e-commerce fundamentals. As a direct-to-consumer company, we want to ensure that our website provides a user-friendly experience, making it easy for customers to navigate the site, find the product and/or resources they need and complete purchases. In addition, with approximately 80% of our customers shopping on their phone, we have launched a mobile app on both iOS and Android. By offering another seamless shopping platform, we expect to reduce our customer acquisition costs and reliance on search engines and pay channels over time. Other initiatives in the pipeline include improved search results adding cross-sell and upsell capabilities, loyalty programs, lookup and more. Second, digital transformation. We recently kicked off the modernization of some critical back-end systems which will allow us to grow our business more efficiently. Last year, we successfully completed our ERP migration and retired old systems with zero business interruption. Looking ahead, we are focusing on fully migrating to the cloud and upgrading critical infrastructure. These are just a few of our digital transformation initiatives addressing roadblocks, legacy technology debt and paving the way for a multibillion-dollar scalable infrastructure. Third, assortment and catalog. With the goal of capturing a bigger share of wallet over time, we are constantly looking at ways to grow our assortment. As an example, we made a deliberate decision to expand our national brand assortment, which is now running at a $100 million revenue run rate compared to under $50 million in 2021. On the catalog side, we are investing in proven industry standards that will enhance our proprietary catalog to increase sales through product recommendations and improve our customer experience. In addition, we have continued to build strong relationships with our branded partners and with a segment of our customers willing to pay a higher average selling price, we have seen an incremental increase in revenues and gross profit dollars. Fourth, marketing and customer experience. 16 months ago, we decided to put the customer at the center of everything we do. And our intention is not just to sell more parts, but to be drivers' go-to resource for valuable information about their vehicle such as recall and maintenance notifications, which recently hit customer inboxes. Now, if you head to our YouTube page, you will see that we just launched our first series of professional installation videos. It kicked off with the most popular vehicle in America, the Ford F-150 with detailed videos explaining the top 50 repair and maintenance jobs with links to our website for parts and tools. This is the first step of expanding brand awareness as part of our new marketing strategy that will include podcasts, community events, sponsorships, social media campaigns, and more. We believe that building a direct relationship with our customers aligns with our new effort to reduce our dependency on pay channels. Instead, it positions CarParts.com as an authority in the industry, increasing customer loyalty and ultimately, organic and direct traffic. As a reminder, currently, over one-third of our e-commerce revenue comes from repeat customers. Next, innovation and do-it-for-me. In previous quarters, we gained a tremendous amount of data from the large number of our gated installed bookings. Now, we're using that information to continue developing the program to create an even more refined customer journey. Over the last six months, we have virtually doubled our Net Promoter Score. And over the next year, our do-it-for-me customers will see an even more personalized experience tailored to their specific needs. And finally, supply chain logistics. We have made dramatic improvements in service levels and are now shipping faster than ever before. There have been several other supply chain improvements as we work hard to increase efficiency, reduce costs and improve customer satisfaction. And for more details, I'd like to turn it over to Michael.

Thank you, David. I am pleased to announce that in Q2, we set the record for highest number of units in a single quarter. We did this while operating at our best safety levels ever, our fastest click-to-ship ever, and we had a significantly lower cost profile quarter-over-quarter and year-over-year. Over time, we will continue to make self-funded investments that have a high return with a direct impact on our bottom line from technology and process improvements to development and training. Last quarter, we discussed key areas of opportunity and let me give you a brief update on them. Number one, labor planning, demand wave management and process optimization. In order to increase PIK efficiency, we rolled out a brand-new labor planning process, order flow management process, and Stowe logic process. These combined with various smaller projects allowed us to improve our labor costs in the warehouses by 50 basis points. Number two, warehouse topology and inventory placement, we have adjusted our inventory placement and service scope logic in order to decrease click-to-delivery times and overall transportation costs while also lowering labor costs. Number three, supply chain technology investments, we continue investing in supply chain technology that makes our associates safer and more efficient while allowing our customers to get their parts faster. For example, our Jacksonville facility is only 15 months old, but already half of our PIK utilize this newer technology, resulting in the fulfillment center scaling faster to meet the CarParts.com network standard. Before I turn it over to Ryan, I would like to thank our fulfillment center team members for their hard work. The success of these initiatives is only possible with their support. We appreciate their commitment to making our vision a reality and enhancing our customers' experience.

Thank you, Michael. As David mentioned, Q2 was our highest sales quarter in company history. We generated revenue of $177 million, up slightly from the prior year period, making our 14th consecutive quarter of year-over-year growth. This was also our toughest quarter to be on a nominal basis. Despite that, for the full year 2023, we still expect revenues to be up 3% to 5% year-over-year while remaining free cash flow positive and maintaining a robust balance sheet. Gross profit for the quarter was $60.4 million, down slightly from the $61.9 million in the prior year. Gross margin was 34.2% of sales, down from 35.1% in the prior year, primarily driven by higher outbound transportation costs and product mix. GAAP net loss for the quarter was $0.7 million compared to $4.1 million of net income in the prior year. As a reminder, last year's Q2 had a significant one-time pickup related to stock-based compensation. We reported adjusted EBITDA of $6.3 million, down from $8.3 million in the prior year period. This was driven by higher freight costs; increased performance marketing spend and the economic impact on consumer spending patterns. However, this was partially offset by improvements in warehouse fulfillment costs. Turning to the balance sheet, we ended the quarter with $79 million of cash and no revolver debt, up from $15 million of cash in the prior year period. For the quarter, we generated over $0.5 million of interest income. Every capital allocation decision starts with balancing growth and profitability to maximize cash flow generation. Our significant cash position highlights 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 $114 million as the supply chain issues continue to ease, we are becoming more efficient in having the parts our customers need. As lead-times revert to normal, we can carry less inventory both on hand and in transit, which reduces some of our working capital requirements. We have not seen any impact from the conflicts at the port with the transportation carriers. During the second quarter, we repurchased 250,000 shares for approximately $1.05 million. Under the current share repurchase program, we have approximately $28.5 million remaining of the $30 million authorization that extends through July 2024. We believe that our company is incredibly valuable and our key strategic pillars 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.

Thank you, both. CarParts.com has never been better positioned than it is today. As we continue to build a world-class organization focused on our strategic pillars, we believe we are creating a foundation that is making our company significantly more valuable and will benefit our stakeholders for years to come. 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 for 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 and open it up for questions.

Our first question comes from Ryan Meyers from Lake Street Capital Markets.

Hey guys. Thanks for taking my questions. First one for me here. Just wondering if you can talk about what you're seeing so far here in Q3 and your level of confidence in the improvement here in the second half? And maybe if you've seen some improvement in your core customer. I know last quarter; you guys were kind of impacted by them sort of trading down to lower quality products. Just kind of walk us through that dynamic and if you've seen any sort of improvement there?

Hey Ryan, it's David. I can share more about the competitive landscape we're observing. Firstly, brick-and-mortar players are expanding their B2B business, but the do-it-yourself segment is definitely a challenge. Part of that DIY growth is from batteries, fluids, and wipers, which we haven't typically offered, but we see it as an opportunity aligned with our strategic goals. Currently, the competitive environment is putting significant pressure on some of our competitors and partners. Two online competitors are facing notable difficulties, including one large warehouse distributor that filed for Chapter 11. On our end, we're experiencing unit growth and positive unit economics, with free cash flow and nearly $80 million in cash and no debt, positioning us well for future opportunities. Looking ahead, we're still seeing an aging car fleet and an increase in the number of cars and miles driven. Online market penetration is expected to grow, and we have a comprehensive strategy to gain additional market share. While there may be short-term pressures due to macroeconomic factors, I believe we are well-positioned for long-term success.

Great, that's helpful. And then how should we think about sort of the traditional seasonality, especially on the margin side, as some of these new initiatives start to come through? I mean should we expect sort of a normal seasonal pattern? Or how should we think about that?

Yes, I believe a typical seasonal pattern is likely. The one aspect we don’t fully understand yet is the holiday freight surcharge. It tends to start a month earlier each year, having shifted from November to October and now possibly to September. Therefore, we might see a holiday surcharge as soon as this month. We don’t have clarity on that yet. However, once it begins, we anticipate it to continue for the rest of the year. Additionally, some of the investments we plan to make will actually be reflected in our capital expenditures rather than operational expenses.

Okay, got it. Thanks for taking my questions.

Thanks.

Thank you. Our next question comes from the line of Ryan Sigdahl from Craig-Hallum Capital Group.

Hey, good afternoon guys.

Hey, good afternoon.

I'm curious about the numerous positive operational improvement initiatives you mentioned, as well as the achievements and what still lies ahead. How much of those improvements do you believe are reflected in the financials? Looking at the Q2 numbers, I noticed that gross margin and EBITDA margin have decreased both sequentially and year-over-year. I understand the freight pressures, but I'm wondering how much of the positive developments are accounted for in those figures, how much is yet to come, and whether the current challenges are just too significant to overcome.

I think that there's a big misconception given all the things we fixed that the improvement in the business that we're at the bottom of the ninth. I would really categorize this overall turnaround of the company really is closer to the bottom of the second. And I think that, as David laid out with the strategic pillars, there's still a lot of things we can do. And in some cases, it's not even innovation. It's just table stakes. One example is e-commerce it's, I think, table stakes to have an app, which we only just launched a couple of weeks ago. I think it's table stakes to have upsell cross-sell. So, when you think about all the things we need to improve or fix, there's still just a lot going on. When we take a step back and look at the business, obviously, Q2 had some pressure. But when we look at all of the strategic pillars over a multiyear period, that's where you'll see value really getting driven. I'll let David elaborate.

Yes, I think if there's one thing I can add is if you look at the future in terms of driving EBITDA margin or free cash flow, there's a number of areas where we have opportunities. Number one, on transportation as we get closer to customers. Number two, on marketing spend. Our marketing spend runs in the low teens. And to Ryan's point, we didn't have an app up until a few weeks ago. So, there's definitely some opportunities there, at least, call it, 100 to 200 basis points. Michael has done an exceptional job on the fulfillment side, but we still have some opportunities there. And over time, as we grow sales with the strategic initiatives and growing the assortment, there are some opportunities to get some leverage on fixed OpEx at least 100 basis points. So, we're seeing the pressure from the macro. But if you look at it over the next, call it, three to five years, there's plenty of opportunities for us to increase net margin. And none of them are a moon shot. It just requires blocking and tackling and just that execution that we've been focusing on.

And then switching over to marketing. You guys mentioned an increase in performance marketing and overall ad spend in the quarter. Curious, I guess, the strategy there and if you're seeing a change in consumer of your ability to acquire direct to consumers versus having to effectively go through Google I imagine?

Yes. And historically, performance marketing and the Google site have been the pillar of the strategy. That's kind of what we're known for. I think over time, what you're going to see is a lot to drive organic traffic and direct traffic around branding and customer experience. We called out a number of things in the prepared remarks, but I think for us over the next three years, marketing, branding and customer experience is probably one of the things I'm most excited about. There's a lot of things that most companies do that we don't do. In terms of what we spend on Google, it is what it is, but long-term, we can drive content marketing, retention marketing, building a brand for our private label, and better customer experience. The app for us is a game changer to drive repeat purchases with push notifications, maintenance and recall. So, there's a ton that we can do on the marketing side. And again, if you're spending low teens, like there's a big opportunity to shave off at least 200 basis points.

I'm curious about how you think the app will have the greatest impact, whether it will be more on retention marketing or enhancing the overall user experience. Where do you see the most significant benefit?

Our mobile traffic accounts for about 80%, which represents a significant portion of our total addressable market. If we can encourage 10%, 20%, or 30% of our purchases to be made through the app, that’s a customer we won’t have to reacquire through paid channels. Additionally, we aim to move beyond merely selling parts and instead provide value and information to our customers in a direct manner. This includes maintenance notifications, recall alerts, special pricing, and events; the app acts as a direct connection between our company and the customer. In the long run, we believe the app will play a crucial role in reducing marketing expenses while also enhancing our branding and customer experience.

Great. Thanks David, Ryan, Michael. Appreciate it guys.

Thank you.

Thank you. Our next question comes from the line of Thomas Forte from D.A. Davidson & Company.

Great. Thanks. I'm going to ask both my questions at the same time. So, you sort of touched on this in your prepared remarks, but can you talk about the efforts you're undertaking to lower fulfillment costs beyond lowering ship miles by adding new fulfillment centers? And then the second question is, it's a hot topic I guess, for 2023. But can you talk about to what extent you're leveraging artificial intelligence. And if you don't want to talk about artificial intelligence, can you talk about to what extent you're leveraging automation at CarParts? Thanks.

Thank you for your question, Thomas. This is Michael. Our efforts to reduce costs in the fulfillment network include discontinuing certain process pack optimizations. We have focused on optimizing the flow of goods in and out of the building, removing unnecessary pathways and redundant tasks within the network. We will continue this approach through the latter half of the year. We have thoroughly reviewed all process paths in our facilities, as we were spending excessive time on unproductive activities. By streamlining these processes, we have significantly improved team efficiency, and our associates have responded positively to these changes. Regarding automation in our buildings, we recognize that it encompasses a range of options, from enhanced conveyance systems to more advanced technologies implemented in our Jacksonville warehouse. We will make smart investments in automation that enhance safety and efficiency for our associates while ensuring quicker delivery of parts to our customers. That will remain our primary focus. Now, I’ll pass the question on AI over to David.

Yes, Tom, not to give away the secret thoughts on AI, but I want to make it clear because I think most companies fall into two camps, the people that are scared of AI and the people that embrace AI. And for us, we're in the second camp. We think artificial intelligence is a huge opportunity. We're very good at transformation. We're very good at embracing and leveraging new technology. So, we have a lot of things that we're working on that involves not only generative AI but language models, proprietary language models, natural language processing, whether it's for catalog or marketing or assortment. We're big believers in AI. And I think that over the next three to five years, it's going to be one of the biggest opportunities for companies of our size.

Great. Thanks for taking my questions. I appreciate it.

Thank you. Our next question comes from the line of Darren Aftahi from ROTH MKM.

Hey guys, thanks for taking my questions. Two, if I may. First, can you just kind of characterize the health of the consumers on CarParts maybe since the beginning of the year till now and how that's changed, either good, bad and different?

Yes, I think the consumer has been relatively pressured. First quarter, early wasn't as bad, and I think the consumer has been under increased pressure throughout the year. When you look at tax refunds, we all know that those came in a little bit lighter than expected this year, and we did experience some of that in the beginning of Q2. I think as we go through the remainder of the year, we're hopeful that consumers will get some relief. But obviously, it's a challenging time for everyone. We're seeing, as we mentioned in the last call, a bit of a trade down on for example, lights or certain deferrable items like bumpers, where, in some cases, people completely defer or they may go to marketplaces and buy non-DOT approved lower-quality items that are good enough to solve their problem. But I think that generally speaking, at least historically in this industry, people don't like having a car with hot air conditioning or a window that doesn't roll up. So, it creates this pent-up demand. I think that we are very well positioned to capture this demand coming out of any kind of recession or challenging economic environment that we might be in because people once they have money in their pocket, want to fix all these things. They generally don't want to keep them broken.

Great. Thanks. And then in order to kind of hit that 3% to 5% topline growth, is there anything in operating expenses that moves around, i.e., do you have to lean into that OpEx line in order to get to that 3% to 5%? Or do you feel pretty confident based on your spend patterns for the first half of the year?

This is Ryan. I believe that what we've observed in the first half will be quite similar in the second half from an operating expense perspective. Much of the growth will be supported by the six pillars that David mentioned, which include expanding our product range, leveraging all available marketing channels, and enhancing customer experience. A lot of these efforts are mainly about reallocating resources, though some may involve capital expenditures that won't impact operating expenses.

Got it. Thanks guys.

Thanks.

Thank you. Our next question comes from the line of Ryan Sigdahl from Craig-Hallum Capital Group.

Hey guys. Just one follow-up for me. Accounts payable was up pretty substantially sequentially here. I guess, is that timing related? Or is there something structural that you've improved from a vendor terms or something else to be aware of there?

Yes. So, AP is actually flat on a year-over-year basis. There's always going to be a little bit of seasonality on a sequential basis. What really improved was our inventory efficiency, so AP, relatively flat year-over-year, but inventory is significantly down, and that's what drove the increase in AP leverage.

Thank you.

Thanks.

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