CarParts.com (PRTS) has reported a sales decline of 5% in the first quarter of 2024, with revenues totaling $166 million. The aftermarket auto parts retailer attributes the drop to increased competition from non-compliant, low-cost parts, particularly in the lighting and mirrors categories. In response, the company has embarked on a series of initiatives aimed at improving margins through pricing optimization, marketing, and cost-saving measures.
These initiatives include the implementation of aggressive cost-saving measures projected to save up to $8 million in 2024 and $10 million annually. Additionally, CarParts.com is investing in its digital-first approach, launching a mobile app, and enhancing brand awareness. The company is also preparing to open a new semi-automated facility in Las Vegas, which is expected to enhance customer experience and contribute to cost savings.
Despite the current challenges, CarParts.com has revised its full-year revenue forecast to between $600 million and $625 million and is focusing on improving margins, with a medium-term goal of achieving a 6% to 8% adjusted EBITDA margin.
Key Takeaways
- CarParts.com's Q1 2024 sales fell to $166 million, a 5% decrease year-over-year.
- Cost-saving measures are anticipated to yield up to $8 million in savings in 2024.
- The company has revised its 2024 revenue guidance to $600-$625 million, with an improved gross profit margin guidance of 33% ± 100 basis points.
- Investments in digital strategy and customer experience are ongoing, including a new mobile app and a semi-automated Las Vegas facility.
- CarParts.com aims for a medium-term adjusted EBITDA margin of 6%-8% and remains focused on increasing free cash flow and adjusted EBITDA in the coming years.
Company Outlook
- Revised full-year 2024 revenue forecast to $600-$625 million.
- Medium-term goal set for a 6%-8% adjusted EBITDA margin.
- Gross profit margin guidance adjusted to 33% ± 100 basis points.
- Plans to remain EBITDA positive and free cash flow positive throughout 2024.
- Strategy to balance financial prudence with returning capital to shareholders.
Bearish Highlights
- Sales decline driven by competitive pressure from low-cost, non-compliant parts.
- Downward revision of revenue guidance indicates a cautious outlook for 2024.
Bullish Highlights
- Aggressive cost-saving measures expected to reduce operating expenses significantly.
- Investments in digital-first strategy and customer-centric initiatives to drive growth.
- New semi-automated facility in Las Vegas anticipated to improve customer service and efficiency.
Misses
- Q1 performance fell short of prior-year results, with a noticeable drop in sales.
Q&A Highlights
- Ryan Lockwood discussed financial expectations, including $6-$7 million in costs related to the new Las Vegas facility.
- Normal capital expenditures are projected to be $9-$10 million.
- The company expressed confidence in its pricing strategy and demand maintenance for its products.
- Emphasis on maximizing flow-through and free cash flow to enhance shareholder value.
InvestingPro Insights
CarParts.com (PRTS) is navigating a challenging market environment, as reflected in the company's recent sales decline. However, a deeper analysis using InvestingPro insights reveals several key financial metrics that could influence investor perceptions and the company's strategic decisions:
- The company's market capitalization currently stands at $65.71 million, which could be a factor in its competitive positioning and market influence.
- CarParts.com holds a Price to Earnings (P/E) ratio of -8.31, and an adjusted P/E ratio for the last twelve months as of Q4 2023 of -7.99, indicating that the market has concerns about its profitability in the near term.
- With a Price to Book ratio of 0.58 for the same period, the company's stock is trading below its book value, which might suggest that the stock is undervalued or that investors are not confident in the company's asset value.
InvestingPro Tips that may be particularly relevant in light of the article's content include:
1. CarParts.com maintains a stronger liquidity position, with cash holdings exceeding its debt, which may provide some stability in its operations and investment capacity.
2. The company is also characterized by high shareholder yield, which could be attractive to investors looking for returns in the form of buybacks or other shareholder distributions.
There are 13 additional InvestingPro Tips available, which could provide further insights into CarParts.com's financial health and stock performance. For those interested in a more comprehensive analysis, consider using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at https://www.investing.com/pro/PRTS.
Full transcript - US Auto Parts Network (NASDAQ:PRTS) Q1 2024:
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 Mirfarsi, Senior Vice President of Global Communications and Culture. Please go ahead.
Tina Mirfarsi: Hello, everyone and thank you for joining us for the CarParts.com first quarter conference call. 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.
David Meniane: Thank you, Tina, and thank you all for joining us. I will begin with some highlights from the quarter, provide an update on the economic environment and then turn it over to Ryan to review our financial performance in more detail, before opening it up for Q&A. Our performance so far this year has been disappointing and does not meet our standards. We’re facing headwinds in key categories and certain customer segments are being impacted by a deteriorating economic outlook. We need to maintain financial discipline and do a better job on both gross and net margins. Now we have several variables within our control, such as pricing optimization, marketing, last-mile transportation costs and product expansion where we have opportunities for margin improvements. Over the last few years, we have made significant investments in infrastructure and operating capabilities, we now need to focus on efficiency and effectiveness to quickly deliver improvements and profitability. The ultimate measure of success for our company is long-term free cash flow and over the last few quarters we've made insufficient progress. In the first quarter of 2024, our sales reached $166 million, down 5% from the prior year period. We experienced significant weather impact in January and the first half of February. And our more price-sensitive segments underperformed throughout the quarter. This decline was primarily driven by acute pressure in lighting and mirrors attributable to a flood of non-Department of Transportation, compliance, low cost and low quality parts from overseas, which are often illegal. These two categories account for approximately one-quarter of our revenue and represent the vast majority of our year-over-year decline, masking the strength in other categories, particularly in large replacement parts, where we have a competitive advantage. The current environment also has put significant pressure on low price and discount seeking customers, which are becoming more scarce and more expensive to acquire and service. To maintain financial discipline, we made the decision to both adjust pricing and reduce our customer acquisition spend on the subset of customers. We’re focusing our efforts on targeting consumers that want quality parts at competitive prices. This is a more profitable customer base, which gives us a higher gross margin profile. Due to these efforts, we began to see gross margin improvement in the back half of Q1 and our momentum has continued during the month of April. In Q1, we also implemented aggressive cost savings initiatives that are expected to provide up to $8 million in cost reductions in 2024 and $10 million on an annualized basis. Combined with our pricing and customer acquisition adjustments, we expect to see better unit economics on less volume, which will result in a more efficient and profitable business over time. Adjusted EBITDA for the quarter was approximately $1.1 million excluding transition costs. These costs include related to moving to our new semi-automated larger facility in Las Vegas Nevada as well as costs related to rightsizing our workforce. Ryan will talk about the implications of these changes on our 2024 outlook. Now, I want to emphasize that we're targeting gross profit dollars to remain within the range we had previously forecasted. Our strong balance sheet provides us with staying power, and we're very comfortable with our capital position at this time. We are positioning CarParts.com for the short term and long term by focusing on: one, the development of our digital first and customer-centric automotive e-commerce and mobile app strategy. Two, the expansion of our proprietary portfolio with premium products and services to capture new markets and customers; and three, generating more brand awareness for CarParts.com and capturing a wider customer base. Before going into some highlights for the quarter, I wanted to announce that we published an updated investor deck today that describes the CarParts.com investment opportunities and defines each one of these strategic drivers in more detail. The presentation is available at carparts.com/investor. Next, I'd like to cover our main highlights for the quarter. First, we made big moves to supercharge our e-commerce and mobile app experience and ensure CarParts.com is the stress-free destination of choice for consumers to address their vehicles maintenance and repair needs. Our mobile app, which successfully launched last summer on both iOS and Android continues to grow with over 350,000 total downloads. Mobile app revenue currently accounts for 8% of our e-commerce revenue compared to 0% in Q3 of last year. With 80% of our customers shopping on mobile, we expect direct in-app purchases to drive savings for us and reduce our reliance on search engine and performance marketing to promote our brands and products, while also incentivizing repeat purchases. We believe this will lower our marketing spend and drive increased profitability over time. We also launched our first machine learning powered product recommendation engine built on top of our proprietary fitment data. Over time, we expect this to increase units per order, which will make freight more efficient and drive higher gross margin. A few weeks ago, we also introduced the first of several fee income initiatives to drive incremental high-margin dollars. Our new parts and shipping protection offerings are both live and ramping up. Over time, we expect those two initiatives to generate incremental gross profit dollars at an annualized rate of approximately $2 million. Second, we're optimizing our product and price assortment to capture market share by catering to more premium shoppers, enhancing our competitiveness and positioning us for sustained growth. In this quarter, we continue to optimize our product mix and expanded our inventory by adding new SKUs, aiming to attract more customers, enhance our profit margins and increase overall revenue. For context, most new products we add have a revenue-generating capacity that can last up to 20 years and compound over time. We are also launching several of our product lines under the JC Whitney brand in Q2 and Q3 of this year. These products are focused on providing higher quality products at an enhanced price point and a higher gross margin profile. Over time, we believe we can increase gross margin by upgrading our products from an unbranded private label business to a branded model, leveraging the legacy of our JC Whitney brand. Third, we continue to invest in our marketing channels to improve brand awareness and grow our customer base while reducing customer acquisition costs. We continue to attract and strengthen our relationships with customers with new content on our own channels. Our YouTube channel continues to grow with an expanding number of proprietary educational and instructional talks and videos to help attract customers who tend to be less price sensitive. Over time, our own content push will not only foster an automotive community but help us acquire new customers on lower acquisition costs and decrease our reliance on third-party advertisers to make our business more profitable. Before I turn the call over to Ryan to discuss quarterly financials and details, I want to provide an update on our ongoing efforts to optimize our logistics and supply chain management. We are on track to begin operations at our new and larger semi-automated facility in Las Vegas, Nevada in this quarter. This investment was made to drive improve customer experience as well as operating leverage in the form of process efficiencies, and we expect those savings to start ramping up in the second half of 2024 and fully realized in 2025. The new West Coast flagship will feature a state-of-the-art AI-powered PIC module and extensive conveyance that will allow us for increased gross margin through lower freight costs due to expanded regional assortment, as well as a significant reduction in operating costs. I'll now hand it over to Ryan for a financial update.
Ryan Lockwood: Thank you, David. In Q1, we reported revenues of $166.3 million, down 5% from $175.5 million last year. Gross profit for the quarter was $53.9 million, down approximately 14% compared to the prior year. Gross margin was 32.4% of sales, down from 35.6% in the prior year due to the higher freight costs and pricing compression. GAAP net loss for the quarter was $6.5 million, compared to net income of $1.1 million in the prior year period. We reported adjusted EBITDA of $1.1 million versus $9.4 million in the prior year period. This adjusts for certain short-term expenses, including $483,000 of transition-related costs to our recent workforce reductions and $471,000 in overlapping rent and related expenses from our new Las Vegas facility. These strategic investments and other cost-reduction initiatives allow us to respond appropriately to the retail environment and ensure long-term value creation for our shareholders. On an annualized basis, we expect our cost-reduction initiatives to equal $10 million. For fiscal 2024, the flow-through should be approximately $8 million. Turning to the balance sheet, we ended the quarter with $46 million of cash and no revolver debt. We generated $437,000 of interest income in the first quarter. Our cash position and untapped revolver continues to support our business plan. The inventory balance at the quarter end was $120 million versus $136 million in the prior year. As a reminder, we account for our inventory on a FIFO basis. Therefore, some of the benefit we expect to see as we improve sourcing will be delayed until we sell through the existing higher-cost FIFO layers. Turning to our outlook for 2024. In the months of March and April, we saw improvements in gross margin above the top end of our previous guidance, which was offset by lower revenue. For the full year, we are still targeting gross profit dollars inside the range of our previous guidance. However, as we focus on our more profitable channels and segments, sales will be lower year-over-year at a higher gross margin percent than previously guided. Financial discipline is part of our DNA, and given the evolving market dynamics, we are doubling down on opportunities for margin expansion around pricing optimization, marketing, supply chain, technology and fee income. In the short term, we will spend the rest of fiscal 2024 focused on improving efficiency and profitability to significantly increase adjusted EBITDA in 2025 and 2026. By continuing the efforts around our three strategic pillars and efficiency, we believe we can achieve adjusted EBITDA growth next year. As we look to the medium term, we are working towards achieving a 6% to 8% adjusted EBITDA margin, as well as increasing our free cash flow generation. For the full year 2024, we revised our revenue guidance down to $600 million to $625 million to reflect our focus on margin improvement. Our previous guidance had been for a range of $662 to $668. We revised our gross profit margin guidance up to 33% plus or minus 100 basis points, which will partially offset lower expected sales. Our previous guidance was 31% plus or minus 100 basis points. The outlined guidance change is relatively neutral from a gross profit dollar perspective. We believe the strategy of optimizing around transactions at a higher gross margin will help us achieve our medium term profitability target by making us more efficient through handling less packages, fewer customer service requests, and lower reverse logistic costs. Overall, we believe that the impact of our strategic priorities and focus on attracting higher value customers will restore adjusted EBITDA and profitability growth. We are well positioned to capture the tremendous and growing opportunity in a highly fragmented and underserved $400 billion aftermarket auto parts industry. We continue to build a world-class organization centered around the needs of our customers, and we believe we will create long-term value and benefit our stakeholders for years to come. We will continue balancing financial prudence with opportunistically returning capital to shareholders through the remainder of the year. Thank you, everyone, for joining today's call. We will now turn it over to the operator and open it up for your questions.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Ryan Sigdahl from Craig-Hallum Capital Group.
Ryan Sigdah: Hey, good afternoon, guys.
Ryan Lockwood: Hey, Ryan. How are you?
Ryan Sigdah: Good. Curious within the guidance previously you were assuming $100 million of branded drop-ship revenue. Curious what that assumption is now?
Ryan Lockwood: Mix probably won't change that much from the branded to private label side in the short term. And I think over the long term there's a lot of moving parts because you have the investments we're making in JC Whitney which is going to be beneficial for private label. But we are going to continue to bring in new branded SKUs to attack different segments that we've never attached to it before.
Ryan Sigdah: On the private label topic I guess curious how many new SKUs you've added there year-to-date and what categories those are focused on.
Ryan Lockwood: So year-to-date we've added about 7,000 SKUs and the product mix is about 65-35 PL-1 to PL-2 -- PL-1 sorry PL-1 is our collision business and our appeal queues are mechanical business.
Ryan Sigdah: Good. Just moving over to the medium term EBITDA margin target at 60% you're previously 8% to 10% I guess given everything yes you guys are focused on and from a cost optimization and improving margins and less revenue but higher margin et cetera et cetera. I guess I'm surprised to see the margin target over the medium term come lower. So can you talk through the puts and takes on that 200 bps?
David Meniane: Yes I can take that one highlighting status. No listen I think just taking a step back just on Q1 you know it's definitely in line with our expectations. But for me it's disappointing. I am not satisfied with lower sales and lower margin. And I said it last time and I'll say it again it's 100% only. I think regardless of the macro we need to find a way to win. The 6% to 8% is really a medium term target. And what we want to emphasize is our kind of short term focus on margin expansion and profitability. We have some opportunities on gross margin and freight. We have some opportunities on the marketing side, we have some opportunities on labor with efficiencies and productivity improvements. I think long term this business can be extremely profitable and generate a ton of free cash flow. What we're trying to do is put out a achievable but reasonable target that's in the medium term. And I think 6% to 8% is a good Check Point.
Ryan Sigdah: Very good. One last quick one for me. If you're willing to comment do you expect to stay EBITDA positive in 2024 and free cash and or free cash flow positive?
Ryan Lockwood: Yes. So for EBITDA you know there's a lot of moving parts. I think that some of it's going to depend on where we end up on both sides of the guidance and then as far as the free cash flow we're going to be negative free cash flow predominantly can make some large investments in Las Vegas. So I think big picture taking a step back cash at the end of the year you're going to be about $25 million to $35 million ending cash balance. And that kind of depends on how much inventory we end the year with. So that would be between like $110 million to $120 million of inventory on the balance sheet would give you the change there.
David Meniane: Yes. And if I can add something. The other thing that we're working in terms of making the business more efficient is definitely on the income statement side with margin and free cash flow. But I think on the balance sheet side as we think about optimizing the business. We're going to be looking to rationalize inventory increase turns and making sure that at the end of the year we have as much cash as possible and run the business as lean as possible.
Ryan Sigdahl: Sorry maybe one more if I can sneak it in related what CapEx was $7 million in change in Q1? What's the expected total for the year including the Vegas move?
Ryan Lockwood: Yes. So total for the year you're looking it looks like $6 million to $7 million for Vegas and $9 million to $10 million just for normal CapEx.
Ryan Sigdahl: Thanks guys. I'll turn it over the others. Good luck.
Ryan Lockwood: Thanks.
Operator: Thank you. One moment for next question. Our next question comes from the line of Ryan Meyers from Lake Street Capital Markets.
Ryan Meyers: Hey, guys. Thanks for taking my questions. The first one for me what's your level of confidence that you're still going to be able to take price on and still see demand for those respective products?
Ryan Lockwood: So I think that goes exactly to the new change in guidance we have been taking price and we're seeing above the prior range levels of margin. And there was definitely an offset. We are seeing a little bit less demand and it goes to a strategy as far as how many units we actually touch and ship out how many customers are we helping, which does flow to different efficiencies at the warehouse on shipping out on call center on people calling in on our returns processes how much comes back. So it is better all around for us to be a little bit more expensive than where we were before and have a little bit better margin but touch less units. So from all this is part of, I think, our strategy to hit that medium term guidance over time.
David Meniane: Yes. And Ryan if I could add one other thing. I think what's important is if you look at our customer base and call it last year, we had about seven million customers place orders on CarParts.com. If you go one level down and do some segmentation, there is a subset of customer that comes back it more than once spends more money and does not rely on coupons and discounts. And there is a subset of customer that is typically on the lower end. They tend to be the bargain hunting or discount seeking. And what we're trying to do is really focus our efforts on the customer that comes back and spends more, which is less expensive to acquire and more profitable over time. So what we end up with is a slightly smaller customer base, but much higher flow-through and much higher profitability. So, ultimately, our ability to take prices up is important, but really it's to the extent that we can maximize flow through and free cash flow. And that's kind of what we're ultimately focusing on. We think that the best way to generate value for shareholders is maximizing free cash flow.
Ryan Meyers: Got it. That makes sense. And then the $8 million in cost savings that you expect to see in 2024. I just want to make sure I understand it correctly. Is that going to be spread both across cost of goods as well as operating expenses? Or is that $8 million just what we're going to see with the kind of shifting product mix? Or is there anything else and operating expenses? Just a good understanding of that would be helpful.
Ryan Lockwood: That would be purely an OpEx.
Ryan Meyers: Okay. Got it. That's it for me. Thanks for taking my questions.
David Meniane: Thanks.
Operator: Thank you. At this time there are no further questions. This concludes today's conference call. Thank you for participating. You may now all disconnect.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.