CarParts.com Q4 2023 Earnings Call Transcript

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March 7, 2024

Key Takeaways

  • Record-high FY2023 sales of $676 million, up 2% year-over-year with 8% Q4 unit growth, supported by 1.2 million share repurchases and a strong cash position of $51 million.
  • Gross profit margin contracted to 33.9% for full year 2023 (from 34.9% in 2022) and adjusted EBITDA declined to $19.7 million due to sustained price deflation and higher outbound freight costs.
  • Fiscal 2024 guidance forecasts flat to slight revenue change (-2% to +2%) and lower gross margins around 31%, with mid- to high-single-digit unit growth masked by ongoing deflation.
  • The mobile app surpassed 250,000 downloads and now contributes over 7% of e-commerce revenue, while proprietary content efforts drove YouTube views to 15 million in early 2024.
  • A new semi-automated fulfillment center in Las Vegas will begin operating in Q2 2024, aiming to cut operating and last-mile transportation costs and improve logistical efficiency.
AI Generated. May Contain Errors.
Earnings Conference Call
CarParts.com Q4 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

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 Mefarsi, Senior Vice President of Global Communications and Culture.

Operator

Please go ahead.

Speaker 1

Hello, everyone, and thank you for joining us for the carparts.com 4th 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 Mignon, 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.

Speaker 1

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 dotcomannualreport on Form 10 ks 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.

Speaker 2

Thank you, Tina, and thank you all for joining us. I will begin 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 and A. In the Q4 of 2023, sales were $156,000,000 bringing our full year 2023 sales to a record breaking $676,000,000 up 2% from the prior year and 16% on a 2 year stack. Adjusted EBITDA was $1,000,000 for the quarter $19,700,000 for the full year 2023 and we repurchased another 726,000 shares during the quarter, bringing our total repurchases in the year to 1,200,000 shares.

Speaker 2

We had $51,000,000 in cash on our balance sheet and an untapped revolver of up to $75,000,000 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 non essential purchases. Despite the challenging operating environment, we continue to see strong unit growth of approximately 8% in the Q4. We believe we are taking share from other online players and as consumer confidence rebounds, we're well positioned to support the $389,000,000,000 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 number 1, generating the highest sales volume and revenues in the company's history number 2, launching our mobile app, which now generates over 7% of our total e commerce revenue.

Speaker 2

Number 3, achieving 38% of total e commerce revenue from repeat customers. Number 4, recording our highest historical website traffic with over 100,000,000 visits to carparts.com over the year. And number 5, 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 Car Parts to reach over $1,000,000,000 in company revenues.

Speaker 2

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, inthegaragebycarparts.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.

Speaker 2

Historically, we focused our marketing investments on Google advertising, but lagged in creating new video content on our own channel, which is a focus for 2024. We can already share in the 1st 2 months of 2024, our YouTube views are up to 15,000,000, an increase of more than 10 times 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 vehicles 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.

Speaker 2

2nd, we invested in expanding our tech and product offerings. On the product offering side, we made significant investments in growing our 3rd party premium brands business across expanded price points to offset the competitive pressure from low cost sellers on online marketplaces, some of which sell non compliant replacement parts. This part of the business was up over 25% year over year and is now a profitable $100,000,000 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.

Speaker 2

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 90% 80% to 90% of our assortment. It will feature a state of the art PIC module and extensive conveyance that will allow for a significant reduction in operating costs 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 improve conversion for customers in the region.

Speaker 2

Those savings will slowly start ramping in the second half of twenty twenty four and fully realize 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 and L. Now I'll hand it over to Ryan for a financial update. Thank you, David.

Speaker 2

In Q4, we reported our 16th consecutive quarter of year over year growth with revenues of $156,400,000 up 1.2% from $154,500,000 last year. For the full year, Carprax generated $675,700,000 in revenues, up 2.1% from 2022 and marking the highest sales ever in company history. Gross profit for the quarter was 51,600,000 dollars flat compared to the prior year. For the full year, gross profit was $229,400,000 down slightly from the $230,900,000 in 2022. Gross margin in the quarter was 33 percent of sales versus 33.4% in the prior year.

Speaker 2

For the full year, gross margin was 33.9 percent 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 $6,100,000 compared to $6,200,000 in the prior year period. For the full year 2023, GAAP net loss was $8,200,000 versus $1,000,000 in the prior year. We reported adjusted EBITDA of $1,000,000 in the quarter, down from $2,100,000 in the prior year period. For the full year, we reported adjusted EBITDA of $19,700,000 down from $26,100,000 This was mostly driven by price compression and higher outbound freight costs.

Speaker 2

However, this was partially offset by improvements in warehouse fulfillment costs. Turning to the balance sheet. We ended the quarter with $51,000,000 of cash and no revolver debt. We generated $700,000 of interest income in the 4th quarter $2,000,000 for the full year. Our significant cash position and untapped revolver continues to highlight the strength of our balance sheet.

Speaker 2

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 $129,000,000 versus $136,000,000 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 1,200,000 shares throughout 2023. We have also renewed our share repurchase program through July of 2026 with $25,000,000 remaining.

Speaker 2

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 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. 2nd, we have overlapping rent and related expenses from our new Las Vegas facility of approximately $2,000,000 Lastly, since January 2024, we've experienced deflation of approximately 8%, which we expect to anniversary as we enter the Q4. 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 percent plus or minus 100 basis points.

Speaker 2

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. I would like to now turn it over to David for final remarks. Thank you, Ryan.

Speaker 2

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 Q1, 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.

Speaker 2

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 $10,000,000 and for fiscal 2024, the flow through should be approximately $8,000,000 with $700,000 in one time charges. These decisions are not made likely, 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 1, 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.

Speaker 2

Number 2, expanding product assortment to capture new markets and customers we have not serviced before. And number 3, 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.

Speaker 2

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.

Operator

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

Speaker 3

Hey, good afternoon guys.

Speaker 2

Hey, Ryan. How are you?

Speaker 3

Good. Good, good.

Speaker 2

I want

Speaker 3

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 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.

Speaker 2

Sure. Thanks for that question. This is Ryan. So for gross margin, if you kind of look sequentially, Q4 last year, we started you started to see a little bit of a decline. And what happened was we had pretty strong gross margins in the beginning of the year.

Speaker 2

And what we're looking at and what I was trying to articulate is we're lapping some pretty tough average selling price comps here in the first call it 3 quarters and we expect to have better year over year gross margin comps going into the back half. So overall, what has happened is when you look at the deflation, inbound cost of goods are down about 10%, which overall on a market basis, including our competitors, has lowered average selling prices. But our outbound freight costs with our carriers hasn't gone down a commensurate amount and that's where you're seeing the compression.

Speaker 3

Any benefit from on the freight side, it seemed like FedEx and UPS were fighting a little bit offering some discounts etcetera to fight for volume. I guess you guys see any of that benefit in Q4 and I guess the presumption is freight continues to get worse in 2024?

Speaker 4

Thanks for the question. This is Michael.

Speaker 2

There is competition out there,

Speaker 4

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 upsellcross 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

Speaker 3

now. Got it. Then just last one for me. I guess what initiatives are the focus areas for 2024? I guess feels like you have to deemphasize some of the things you're working on, whether it's technology to do it for me, JC Whitney relaunch, branding, etcetera.

Speaker 3

But 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?

Speaker 2

Yes. Hey, Ryan, it's David. I think if I take a step back, this is definitely not the results that we're accustomed to delivering. From a volume standpoint, we did about the same growth in 2023 that we did in 2022. The only difference is that in 2022, we had about 8% of inflation and in 2023, we had 3% of deflation.

Speaker 2

So we're definitely not satisfied with 2% sales growth and obviously that's 100% on me. I'm responsible for the execution of the roadmap regardless of the environment. So I can also say that this is a difficult environment is something that we were 100% ready for. 4 years ago, if you remember, we did a capital raise and we've been focused on financial discipline and cash preservation because we were quite aware that one day things would get tougher. And so outside of working capital changes, we basically preserved all that cash.

Speaker 2

And so we have cash, we have inventory, we have no long term debt. So on the balance sheet side, we have everything we need to push through the cycle. On the income statement side, we definitely need to do significantly better. So we have some headwinds, but we're focused on growth. And so if I were to specifically call out the three things, it's really number 1, the e commerce experience and pushing the app engagement.

Speaker 2

That's going to grow the top line and that's also going to make marketing spend more efficient. Number 2, it's expanding our product offering. It's selling more to our current customers and also adding new categories, new brands to capture some new customers. And number 3, it's marketing and branding and really building a brand for carparts.com and J. C.

Speaker 2

Whitney. And right now in this environment, we're really trying to stay lean and agile, especially after all the changes that we just announced. And so unless it's in one of those 3 categories that's focused specifically on growth, we're not going to be tackling it this year.

Speaker 3

Helpful. Thanks guys. Good luck.

Speaker 2

Thanks.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Dylan Heslin from Roth Capital Partners.

Speaker 5

Hey, thanks for taking my question. First, wanted to just clarify what you mentioned, David, about the cost reductions on the head force reduction. So 150 rolls, about how what percentage of that is sort of spread like where is that spread? Is it in your distribution centers? Is it sort of back office and corporate?

Speaker 5

And then when you talked about the offset of $10,000,000 is that your annual expected cost savings?

Speaker 2

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.

Speaker 2

A 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 $10,000,000 on an annualized basis. A lot of the cuts happened just recently.

Speaker 2

So you're looking at more of 8,000,000 dollars flow through for this 2024 fiscal year.

Speaker 5

Okay, perfect. Helpful. And then as a follow-up, can you talk a little bit about what worked with the mobile app in helping that grow as a percentage of e commerce? What are some of the channels that helped you with that customer acquisition? And then is there how flexible is your spend on that?

Speaker 5

Are you able to add to it or pull back based on sort of what you see with both your sales and also just the marketplace?

Speaker 2

Yes, great question. So obviously, we're very happy with the app. It's probably one of our biggest accomplishment for 2023. So right now, it's about 7% of e com revenues and growing. What we're seeing is that so all of the downloads and we have over 250,000 downloads were non paid organic.

Speaker 2

So it's people that come through our website. They get a pop up and they talk about the benefits of the app and they download it. So and it's still growing. So what we're seeing right now is on the app we have a higher average selling price and we have a higher purchase repeat purchase rate. So over time what I think you're going to see is our non paid traffic is going to continue to grow and we should start seeing some efficiencies in marketing.

Speaker 2

So if I look at it like taking a step back over the next couple of years, our objective is to get our marketing spend lower by about 100 basis points to 200 basis points and this should flow through to the bottom line. So in the Q in the K that you're going to see released later today, I think we called out that our marketing spend was about 12.3% for the year. The goal is to get closer to 10% and all of that to flow through the bottom line. So we're going to keep pushing the app and over time we want to get this to double digits. And so I think we're going to make it a point to announce the numbers at every earnings call moving forward.

Speaker 2

How many users we have? What percentage of e com revenue and any other metrics that we think are relevant to financial modeling.

Speaker 5

Great. Thank you. Appreciate you taking my questions.

Speaker 2

Thanks, Tom.

Operator

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

Speaker 2

Street. Hey guys, thanks

Speaker 6

for taking my question. 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 1, 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?

Speaker 2

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.

Speaker 2

I don't know if you want to add anything. Sure. This is Ryan. I think when we look at the business, what we've always tried to do was manage it from a dollars contribution ratio basis. So as we push price to try and maintain margin, there's a possibility you could see sales start to hit the lower end of the range.

Speaker 2

Or on the other side, as we some of our great investments that we're working on such as upsell and cross sell, improved search, increased assortment at various price points. As these things all hit, I think you see us go towards the higher end of the range. And then of course, there's the macro portion, which is outside of our control in some ways that makes it an uncertainty. I think for me, like if I take a step back and obviously this year is challenging from a macro standpoint, but the backdrop is still 300,000,000 cars on the road. It's an aging car fleet.

Speaker 2

There's more cars on the road, more miles being driven. The online penetration is still low and we're one of the strongest, one of the biggest players in a huge TAM. So over the next couple of years, we're going to take market share, sales are going to grow, we're going to do it profitably and we're just going to push through and execute.

Speaker 6

Got it. That's helpful. 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?

Speaker 2

Yes, I'm glad you asked. I think do it for me, the get it installed is it's a big opportunity and it aligns with our vision to remove the friction from auto repair. Now it was always a long term bet. And so right now we have some headwinds in the economy. We're much leaner.

Speaker 2

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 com experience and 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 for me later this year.

Speaker 2

But we want to be laser focused on immediate growth and anything that's going to generate incremental top line revenue now.

Speaker 6

Got it. Thank you for taking my questions.

Operator

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

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