CarParts.com, Inc. (PRTS) Q4 2023 Earnings Call Transcript

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 Fourth Quarter and Fiscal Year-End 2024 Conference Call. I'd like to start by welcoming the investors and others who are attending this meeting remotely. 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 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 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 for the quarter and full year and then turn it over to Ryan to review our financial performance in more detail. I will then give a more detailed update on the economic environment and discuss our 2024 outlook before opening up the call for Q&A. In the fourth quarter of 2023, sales were $156 million, bringing our full year 2023 sales to a record-breaking $676 million, up 2% from the prior year and 16% on a 2-year stack. Adjusted EBITDA was $1 million for the quarter and $19.7 million for the full year 2023, and we repurchased another 726,000 shares during the quarter, bringing our total repurchases in the year to 1.2 million shares. We had $51 million in cash on our balance sheet and an untapped revolver of up to $75 million at the end of the year. Across the industry, due to the difficult macroeconomic environment, we saw sustained price deflation as some price-sensitive consumers are choosing to defer nonessential purchases. Despite the challenging operating environment, we continue to see strong unit growth of approximately 8% in the fourth quarter. We believe we are taking share from other online players, and as consumer confidence rebounds, we're well positioned to support the $389 billion automotive aftermarket and deliver long-term growth, both in volume and dollars. Over fiscal year 2023, our team surpassed several company records and reached significant achievements, including generating the highest sales volume and revenues in the company's history; launching our mobile app which now generates over 7% of our total e-commerce revenue; achieving 38% of total e-commerce revenue from repeat customers; recording our highest historical website traffic with over 100 million visits to CarParts.com over the year; and increasing revenue from the friction category which includes brakes and rotors, by over 40% from the prior year, which accounted for approximately 5% of total volume. These accomplishments are a testament to the value of our strategic growth drivers, the hard work of our talented CarParts.com team and our consistent focus on delivering results. As we previously outlined, our growth levers range from table stakes to industry disruption and we believe they will propel CarParts to reach over $1 billion in company revenues. Turning to a few highlights for 2023. First, we continue to make progress on supercharging our commerce experience and marketing strategy. In August of last year, we launched our mobile app on both iOS and Android and are excited that today, it has over 250,000 downloads and accounts for more than 7% of e-commerce revenue. With 80% of our customers using mobile phones to purchase their automotive parts, we're confident that over time, direct in-app purchases will reduce our reliance on search engines and performance marketing to create a cost-effective way to promote our brands and products while incentivizing repeat purchases. Additionally, we continue to build these direct and long-term relationships with current and prospective customers, thanks to our new podcast, In the Garage by CarParts.com and our YouTube channel featuring an expanding number of proprietary educational and instructional videos which to date have received hundreds of thousands of views. Historically, we focused our marketing investments on Google advertising but lagged in creating new video content on our channel, which is a focus for 2024. We can already share in the first 2 months of 2024, our YouTube views are up to 15 million, an increase of more than 10x on a year-over-year basis. We believe, over time, our own content push will help us acquire new customers, drive revenue and lower customer acquisition costs. That being said, during 2023, we prioritized our resources to focus on removing some roadblocks in our tech stack which prevented us from completing the rollout of some of the new capabilities we have slated for the year, but we expect to start accelerating progress this year. Overall, we're pleased to see CarParts.com becoming the destination for consumers to address their vehicle's maintenance and repair needs with links to purchase products directly from our website or mobile app and how-to videos that empower them to tackle easy jobs. Second, we invested in expanding our tech and product offerings. On the product offering side, we made significant investments in growing our third-party premium brands business across expanded price points to offset the competitive pressure from low-cost sellers on online marketplaces, some of which sell noncompliant replacement parts. This part of the business was up over 25% year-over-year and is now a profitable $100 million revenue business. While it does have a lower gross margin profile than our House Brands business, our strategy is to maximize for gross profit dollars. Expanding our product and price assortment on CarParts.com aims to capture a larger market share by catering to both premium and value shoppers, enhancing our competitiveness and positioning us for sustained growth. And third, we continue to upgrade our logistics and optimize for supply chain management. On the fulfillment side, we're on track with the move and opening of our new and larger semi-automated facility in Las Vegas, Nevada. As we shared last quarter, 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 pick module and extensive conveyance that will allow for a significant reduction in operating costs and the newly expanded assortment will also help to reduce last mile transportation costs to the West Coast. We expect this building to begin operating in Q2 2024, and once this building is open, it should drive operating leverage and growth in the form of process efficiencies and improved conversion for customers in the region. Those savings will slowly start ramping in the second half of 2024 and fully realized in 2025. Over time, we intend to continue expanding our footprint to get closer to our customers for faster delivery and lower transportation costs. We will remain financially disciplined and evaluate each node in the network based on the return on investment and the timing of the impact to the P&L. Now, I'll hand it over to Ryan for a financial update.

Thank you, David. In Q4, we reported our 16th consecutive quarter of year-over-year growth with revenues of $156.4 million, up 1.2% from $154.5 million last year. For the full year, CarParts generated $675.7 million in revenues, up 2.1% from 2022 and marking the highest sales ever in company history. Gross profit for the quarter was $51.6 million, flat compared to the prior year. For the full year, gross profit was $229.4 million, down slightly from the $230.9 million in 2022. Gross margin in the quarter was 33% of sales versus 33.4% in the prior year. For the full year, gross margin was 33.9% of sales versus 34.9% in the prior year as we experienced price compression, higher outbound transportation costs and a shift in product mix. GAAP net loss for the quarter was $6.1 million compared to $6.2 million in the prior year period. For the full year 2023, GAAP net loss was $8.2 million versus $1 million in the prior year. We reported adjusted EBITDA of $1 million in the quarter, down from $2.1 million in the prior year period. For the full year, we reported adjusted EBITDA of $19.7 million, down from $26.1 million. This was mostly driven by price compression and higher outbound freight costs. However, this was partially offset by improvements in warehouse fulfillment costs. Turning to the balance sheet; we ended the quarter with $51 million of cash and no revolver debt. We generated $700,000 of interest income in the fourth quarter and $2 million for the full year. Our significant cash position and untapped revolver continues to highlight the strength of our balance sheet. 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 $129 million versus $136 million in the prior year. We're also maintaining a disciplined capital allocation program which includes continuing our current share repurchase plan if and when it is prudent. As David indicated, we repurchased 726,000 shares in the quarter and 1.2 million shares throughout 2023. We have also renewed our share repurchase program through July of 2026, with $25 million remaining. For 2024 modeling purposes, as we mentioned in our previous call, we have a few items flowing through the income statement we want to specifically call out. First, we're continuing to make technology upgrade investments which consist of overlapping software and maintenance expense that will impact our fiscal year 2024 operating expenses by approximately $900,000. This is because we're paying for the new systems that we are implementing while also maintaining the old systems we're upgrading. Second, we have overlapping rent and related expenses from our new Las Vegas facility of approximately $2 million. Lastly, since January 2024, we've experienced deflation of approximately 8% and which we expect to anniversary as we enter the fourth quarter. For the full year 2024, we expect negative 2% to positive 2% revenue growth, driven primarily by 3 quarters of projected deflation masking mid to high single-digit unit growth. We also expect gross profit margins in the range of 31%, plus or minus 100 basis points. This reflects the previously discussed headwinds on margin due to changing consumer demand patterns and price compression. We believe that our company has a long runway for growth 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'll continue balancing financial prudence with opportunistically returning capital to shareholders.

Thank you, Ryan. Before we conclude, let me briefly touch on the current economic environment, the impact to our business and how we are approaching and tackling these challenges. 2024 started off slow due to a difficult macro and continued softness in consumer demand, price compression exacerbated by inclement weather in January. For the first quarter, our gross margin has been under significant pressure and we currently expect our year-over-year unit growth to be masked by deflation for a net revenue impact of down low to mid-single digits. We have seen some improvements in February with better volume and more efficient customer acquisition costs primarily driven by the commerce experience investments and marketing strategy initiatives I discussed earlier. We remain focused on growing volume, sales and capturing market share and we are always mindful of profitability and free cash flow. In light of these challenges, we have made the difficult but prudent decision to significantly reduce our cost structure, including the elimination of 150 global roles. We expect the impact of these changes as well as other cost reduction initiatives to partially offset the gross margin compression. On an annualized basis, we expect these reductions to add up to $10 million. And for fiscal 2024, the flow-through should be approximately $8 million with $700,000 in one-time charges. These decisions are not made lightly, but we want to stay agile, we want to protect shareholder value and realign to the reality of the environment. Our main focus for 2024 will be, number one, executing our e-commerce roadmap with new features to drive immediate sales growth, such as upsell, cross-sell as well as pushing adoption of our mobile app; number two, expanding product assortment to capture new markets and customers we have not serviced before; and number three, increasing marketing efforts to generate more brand awareness for CarParts.com and capture a wider customer base, including those who may be new to our brand. We believe these areas of focus will compound over time. In conclusion, we continue to believe the strategic priorities and areas of the business we're focusing on will lead to accelerated revenue growth while maximizing long-term shareholder value. We have proven in the past that we can grow and execute change management through difficult environments, and now is no different. In addition, we're supported by the strength of our balance sheet with ample cash and inventory as well as an undrawn facility with no long-term debt. These factors give us the confidence that we can overcome the current market pressures and that we will come out stronger on the other side. Thank you, everyone, for joining today's call. We'll now turn it over to the operator and open it up for questions.

Our first question comes from Ryan Sigdahl from Craig-Hallum Capital Group.

I wanted to start with gross margin. I guess, the price deflation has been ongoing all year. You guys have been holding steady in that 34-ish gross margin range for the past year, really, the last couple of years. I guess, what's substantially changing, I guess, or weakening for the guidance of the 30 to 32 because a lot of the one-time stuff feels like it's OpEx that you were calling out?

Sure. Thanks for your question. This is Ryan. Looking at gross margin sequentially, in the fourth quarter of last year, we began to observe a slight decline. Initially, we had strong gross margins at the start of the year. What I was trying to explain is that we're comparing ourselves against tough average selling price figures from the first three quarters, and we anticipate improved year-over-year gross margin comparisons in the latter half of the year. Generally, we have seen that inbound costs for goods have dropped by about 10%, which has influenced average selling prices across the market, including our competitors. However, our outbound freight costs with carriers have not decreased at the same rate, leading to some compression in our margins.

Any benefit from the freight side seems to involve FedEx and UPS competing by offering discounts to attract volume. Do you see any of that benefit in Q4, and is it assumed that freight conditions will deteriorate further in 2024?

Thanks for the question. This is Michael. There is competition out there, but we're very happy with our FedEx relationship and the cost profile it gets us. The way that we're going to reduce transportation costs over time is to get more units per shipment. And so that's why you'll hear us talk about upsell, cross-sell. The large contracts that were signed by most of the transportation carriers did increase their costs, and those costs are getting passed along to us. And so, we're going to have to get more things in fewer boxes to be able to meaningfully change the outbound transportation curve, which is what we're working on right now.

Then just last one for me. I guess, what initiatives are the focus areas for 2024? I guess, it feels like you have to deemphasize some of the things you're working on, whether it's technology, the do-it-for-me, JC Whitney relaunch, branding, etc. But can you walk through and kind of remind us the key focus and maybe what's going to get pushed out here with some of these cost reduction efforts?

Ryan, it's David. Looking at the situation, our results have not met our usual standards. In terms of volume, our growth in 2023 mirrored that of 2022. However, in 2022, we faced around 8% inflation while in 2023, we experienced 3% deflation. Thus, we're certainly dissatisfied with only 2% sales growth, and I take full responsibility for that. I am accountable for executing the roadmap, no matter the circumstances. I should mention that the current environment is challenging, something we anticipated. Four years ago, we conducted a capital raise and have been prioritizing financial discipline and cash preservation, knowing that tougher times could arrive. Aside from working capital adjustments, we've maintained our cash reserves. We have sufficient cash, inventory, and no long-term debt. Our balance sheet is solid, giving us the resources to navigate through this cycle. However, on the income statement, we must improve significantly. We do face obstacles, but our focus remains on growth. To specify, the three main areas are: first, enhancing the e-commerce experience and increasing app engagement to boost revenues and improve marketing efficiency. Second, expanding our product range to sell more to existing customers and introduce new categories and brands to attract new customers. Third, investing in marketing and branding to strengthen CarParts.com and JC Whitney. Given the current environment, we aim to remain lean and agile, especially after all the recent changes we've communicated. Thus, unless an initiative aligns with one of these three growth-focused areas, we won't be pursuing it this year.

Our next question comes from the line of Dillon Heslin from ROTH Capital Partners.

First, I wanted to clarify what you mentioned, David, about the cost reductions related to the headcount reduction. Regarding the 150 roles, what percentage is that spread across different areas? Is it within your distribution centers, or does it pertain to back office and corporate? Also, when you referred to the $10 million offset, is that your expected annual cost savings?

So I'll let Ryan take the second part. I'll take the first part. I think we're definitely seeing some headwinds on the gross margin due to the deflation. And we had to make the very difficult decision to realign our cost structure. So the reductions were substantial and across the board. So it impacted both corporate roles, frontline workers in the warehouse, also back office in Manila. Ballpark, you're looking at about 15% of corporate roles and about 10% of the frontline. And then, I'll let Ryan take the second part.

Sure. Just to reiterate, so it's going to be $10 million on an annualized basis. A lot of the cuts happened just recently, so you're looking at more of an $8 million flow-through for this 2024 fiscal year.

Can you discuss what aspects of the mobile app contributed to its growth in e-commerce? Which channels were effective for customer acquisition? Additionally, how flexible is your spending on this initiative? Can you increase or decrease it based on your sales performance and the marketplace conditions?

Yes, that's a great question. We are very pleased with the app; it is one of our major achievements for 2023. Currently, the app accounts for about 7% of our e-commerce revenues and continues to grow. Notably, all of our downloads, which exceed 250,000, have been organic and non-paid. Users discover the app through our website, where they see a pop-up that highlights its benefits and encourages downloads. The growth trend is still ongoing. Presently, we are observing a higher average selling price and a greater repeat purchase rate through the app. Over time, I believe our non-paid traffic will keep increasing, and we should start seeing improved efficiencies in our marketing. If we take a broader view for the next couple of years, our aim is to reduce our marketing spend by approximately 100 to 200 basis points, which should positively impact our bottom line. In our upcoming annual report, we will disclose that our marketing expenditure for the year was around 12.3%. We aim to reduce this to closer to 10%, with all savings contributing to the bottom line. We will continue to promote the app, striving to get its contribution to double digits. Moving forward, we commit to sharing our user metrics, their impact on e-commerce revenue, and other relevant statistics during each earnings call to inform financial modeling.

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

First one for me. I'm just curious as we think about the revenue guidance range; what would you need to see or what do you expect to see to, one, come in at the low end of that range? Or what would you expect to see to come in at the high end of that range? Is most of that just due to the price deflation or is there anything else there that we should be aware of?

I mean, I can take the first part, I guess. I'm not worried about volume growth and unit growth. The business is growing in units. We're shipping out more units than ever before. I think the difference would be the price compression, the deflation based on the competitive landscape. I don't know if you want to add anything?

Sure, this is Ryan. When we analyze the business, we always aim to manage it based on the contribution ratio. As we increase prices to maintain margins, we might see sales lean toward the lower end of the range. However, as we implement some of our significant initiatives, like upselling and cross-selling, enhancing search capabilities, and expanding our product assortment at various price points, we could move toward the higher end of the range. Additionally, we have to consider macroeconomic factors that are beyond our control, which adds a layer of uncertainty.

I believe that if I take a moment to reflect, this year poses challenges from a macro perspective, yet we still have 300 million cars on the road. The car fleet is aging, with more vehicles and increased mileage. Online penetration remains low, and we are among the largest players in a significant total addressable market. Over the next few years, we will gain market share. Sales will increase, and we will do this profitably as we continue to execute our plans.

And then if we think about the do-it-for-me offering, do you expect to see any sort of contribution from that initiative here in 2024?

Yes, I'm glad you asked. I think do-it-for-me to get it installed is it's a big opportunity and it aligns with our vision to remove the friction from auto repair, and that was always a long-term bet. And so right now, we have some headwinds in the economy. We're much leaner, we're much more agile. But over the next few quarters, what we're going to do is solely focus on the few things that we think will generate incremental revenue this year. So we have 3 big priorities right now. It's the e-comm experience in the app. It's the product offering expansion, and it's the marketing and branding. And so we're going to try to push the top line first right now and we'll revisit, do it from me later this year. But we want to be laser focused on immediate growth and anything that's going to generate incremental top-line revenue now.

Got it. Thank you for taking my questions.

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