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CarParts.com Reports Q3 Results: Strength in Premium Brands and Strategic Growth Plans

In a recent conference call, CarParts.com shared its strategic focus on increasing customer acquisition and enhancing financial performance. The company’s initiatives aim to reduce reliance on search engines and paid marketing, driving repeat purchases through in-app buying options.

Expanding Product Lines and Wholesale Opportunities

The firm is also making strides in diversifying its product assortment, particularly in categories that attract more affluent customers. In Q3, CarParts.com concentrated on three specific areas, all showcasing promising early results. Notably, sales from its OE premium brands surged by 24% year-over-year, while European brands gained 23% in the same timeframe. Additionally, excluding the impact of a recent move in Las Vegas, wholesale commercial sales experienced mid-single-digit growth. Together, these three segments represented about 5% of overall business for the quarter, with expectations for rapid growth as the product lineup continues to expand, ultimately enhancing the customer profile and bolstering EBITDA margins. The company plans to share more comprehensive updates in future calls.

New Market Engagements and Growth Initiatives

Excitingly, CarParts.com announced the launch of its eBay store in Canada, featuring a complete range of mechanical parts. By leveraging its extensive catalog capabilities, the company is optimistic about capturing additional revenue in this new global market. Initial results have been encouraging, indicating potential for significant contributions to top-line growth. Meanwhile, progress is also being made on Amazon. The company has recently piloted a program that utilizes Amazon’s fulfillment network, offering private-label products with fast delivery options. Although still in the early stages, results from testing have shown a double-digit increase in sales for the selected products.

Addressing Rising Freight Costs and Enhancing Logistics

Despite facing challenges with elevated freight costs, which accounted for approximately 19.3% of sales in the third quarter, CarParts.com is actively working to optimize logistics and reduce expenses. The company has decommissioned its old Las Vegas facility and is excited about the efficiencies expected from its new fully operational location. This facility is shipping over 20% of network volume, which aligns with initial targets. Innovations such as an AI-powered PIC Module are anticipated to improve gross margins through reduced freight expenses while also lowering operating costs.

Financial Overview: Navigating Challenges and Forecasting Future Growth

Ryan Lockwood — Chief Financial Officer

During the Q3 period, CarParts.com reported revenues of $144.8 million, marking a slight increase from the previous quarter but a 13% decrease compared to $166.9 million during the same time last year. This decline stems from several factors, including strategic price increases aimed at attracting high-value customers, a tough consumer market, and impacts from the CrowdStrike issue and recent hurricanes. The gross profit for the quarter stood at $51 million, down approximately 7% year-over-year.

The gross margin improved to 35.2%, rising from 32.9% a year ago and 33.5% sequentially. This enhancement comes from higher prices and lower product costs, despite the burden of increased freight expenses. The GAAP net loss for the quarter was $10 million, a significant shift from a net loss of $2.5 million the previous year, largely due to increased marketing investments and reduced revenue. The adjusted EBITDA loss was $1.2 million, compared to a gain of $3 million in the prior year, driven by decreased sales amidst extra operational expenses, including brand awareness and digital transformation costs.

Financial Position and 2024 Outlook

As of the end of the quarter, CarParts.com had $38 million in cash and no debt, along with a $345,000 interest income reported. With strong cash reserves and an untapped credit line, the company remains poised to support its evolving business strategy. Inventory at the quarter’s close totaled $97 million, and management is satisfied with improved efficiency, although moderate increases are anticipated in preparation for the upcoming peak season.

Looking ahead to 2024, CarParts.com has adjusted its revenue guidance, lowering expectations by $5 million to a new forecast range of $595 million to $600 million due to ongoing hurricane impacts. However, the company has tightened its gross margin outlook to a range of 33% to 34%.

CEO’s Vision for Future Growth

David Meniane — Chief Executive Officer

“As we work to position CarParts.com as a leading market player, we’re turning the focus on improving every aspect of our business, from customer experience and product offerings to operational efficiencies,” stated Meniane. He expressed optimism about seeing continued enhancements in the years ahead as the company targets higher-value customers with improved economic metrics. The CEO highlighted the promising initial outcomes from recent investments, including the redesigned website and expanded warehouse capabilities in Las Vegas.

With expectations of higher free cash flow in 2025, driven by improvements in operational efficiency and customer engagement, CarParts.com is adamant about achieving sustainable positive adjusted EBITDA going forward. The company expresses gratitude to its global team for their dedication throughout this transition.

Questions & Answers:

Operator

Thank you. [Operator instructions] Please stand by while we compile the Q&A roster. Our first question comes from Ryan Sigdahl of Craig-Hallum Capital Group.

Ryan Sigdahl — Analyst

Good afternoon, David and Ryan. I want to start by examining the revenue and its sequential growth. Typically, sales decline from Q2 to Q3 due to seasonality, and with the price increases you’ve implemented, it seems counterintuitive there would be an acceleration. Could you elaborate on that?

David Meniane — Chief Executive Officer

Sure, let’s discuss that.

CarParts.com CEO Discusses Growth Strategies Amid Increased Operating Expenses

Strong Performance Mostly Due to Operational Improvements

David Meniane — Chief Executive Officer

Hi, Ryan. It’s David. We are experiencing a notable uptick, with Q3 performance surpassing Q2 for the first time. This growth primarily stems from effective inventory management, pricing strategies, and various marketing initiatives. The launch of our new website has also contributed significantly. Our focus has been on continuous execution across all areas.

While we aimed for even greater growth, our current efforts are concentrated on foundational tasks.

Addressing Rising Operating Expenses

Ryan Sigdahl — Analyst

Looking at your operational efficiency, the gross margin has improved, yet we notice operating expenses rose significantly—about $5 million over our expectations. The increase in freight costs seems to be a consistent challenge, so how much of this is a systemic issue versus under control? What other factors contributed to this spike?

David Meniane — Chief Executive Officer

When examining operating expenses, we found around $2.2 million attributed to atypical items. Without these, we would have recorded a profit.

The bulk of our expenses relates to brand marketing, significant investments, and transitioning to our new facility in Las Vegas. Additionally, we reinvested some of our increased margin into performance marketing. This quarter, competition for performance marketing increased, largely driven by softer consumer demand and rival retailers vying for the same customers. Being an election year has added pressure, leading us to allocate approximately 100 basis points more in marketing expenses, affecting our gross margin.

Balancing Price Cuts with Marketing Investments

Ryan Sigdahl — Analyst

Do you see the current trade-off as beneficial? Leaning into performance marketing while also adjusting prices to counterbalance these costs?

David Meniane — Chief Executive Officer

This balance is critical; reducing prices may drive short-term sales, but increasing marketing spend can yield long-term customer loyalty. We have a solid repeat purchase rate, indicating the value of acquiring a customer who will continue to return.

A noteworthy example is our mobile app, launched last year, which has achieved 550,000 organic downloads. It now generates about 8% of our revenue, totaling $25 million. Users of the app show higher conversion rates and average order values. Thus, investing in marketing now is a strategic move to attract customers we can market to in the future, especially during peak seasons.

Exploring New Revenue Streams

Ryan Sigdahl — Analyst

Another area of interest is your expansion into adjacent markets with Tires, Canada, and Amazon. What is the current status of your efforts to upsell customers through protection plans and memberships?

David Meniane — Chief Executive Officer

I’m glad you highlighted this. Our challenges with performance marketing and freight costs tie closely into these expansion efforts. As an e-commerce player, our two main profitability drivers are performance marketing and freight costs. We see significant potential in leveraging traffic from CarParts.com and our mobile app, which collectively attract around 100 million users annually.

We serve 3 to 4 million customers who order each year. The key now is generating additional, high-margin revenue from these users. Opportunities such as product protection, shipping protection, and loyalty programs are promising avenues. Having recently revamped our website, we can quickly roll out new features. Our introduction of product protection and similar initiatives marks just the beginning of tapping into this potential for increased profitability.

Ryan Sigdahl — Analyst

Thank you, guys. I’ll hand it over to the others. Good luck.

David Meniane — Chief Executive Officer

Thank you, Ryan.

Operator

Thank you. [Operator instructions] At this time, I’m showing no further questions. This concludes today’s conference call. [Operator signoff]

Duration: 0 minutes

Call Participants:

Tina Mirfarsi — Vice President, Global Communications and Culture

David Meniane — Chief Executive Officer

Ryan Lockwood — Chief Financial Officer

Ryan Sigdahl — Analyst

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