CarParts.com, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the CarParts.com fourth quarter 2020 earnings release conference call. At this time, all participants are on the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today to Lev Peeker, CEO. Thank you. Please go ahead.

Thank you, Operator. On behalf of the entire CarParts.com management team, we would like to start by thanking our 1,900-plus team members for their hard work, dedication, and commitment to our mission of getting drivers back on the road. As you can see in today's release, in 2020, CarParts.com achieved record sales, gross profit, and adjusted EBITDA in almost a decade. Before we turn to our quarterly results, I'd like to take a moment to recap our journey over the last two years, as well as introduce the vision and long-term goals for our company. As many of you know, almost the entire management team joined during 2019. Our company was facing numerous challenges, but what we had were amazing frontline team members, valuable trademarks, an extensive catalog, global vendor relationships, and lots of historical customer data. We laid out our strategy of right part, right time, right place, and the mission of getting drivers back on the road. Right part means ensuring our customers can find a complete solution to fix their vehicle on our website. Our efforts to accomplish this included curating our proprietary catalog, creating a fast, mobile-friendly user experience, building world-class data science and inventory forecasting teams, and investing in our logistics and merchandising capabilities. These efforts resulted in the highest sales the company ever recorded in Q1 2020 before the COVID lockdown started. More recently, our flagship website, carparts.com, was named the fastest growing website in the industry by SimilarWeb. We also rolled out a dedicated electrical vehicle landing page to help customers find the parts they need for their EV or hybrid vehicle and highlight news and information about the EV market. As EVs and hybrids become a larger part of the market, we plan to be there for our customers every step of the way. However, we still have more to do in helping our customers get the right parts. At the end of 2020, we began expanding our mechanical parts offering. While global supply chain disruptions have slowed our rollout of these products, we're still excited by the initial customer reception and look forward to having these SKUs fully in stock in the second half of the year. The total addressable market for mechanical parts is significantly larger than collision and replacement parts. However, it currently only represents about one quarter of our revenues. This is a huge opportunity for us. By leveraging our existing core competencies and two-step distribution model, we believe we can build a competitive offering of premium mechanical items across a wide spectrum of the value chain. Like other industries, we can offer our customers premium products at value prices as well as the major brands they might be familiar with. Over time, we see CarParts.com becoming the number one trusted destination for customers thinking about repair and maintenance with the parts, tools, and solutions they need to get back on the road. Right time means getting the customers back on the road quickly. Obviously, quickly is a moving target, and our goal is to shorten the click-to-delivery time so that we can meet our customers' evolving expectations. Over the last two years, we have doubled our warehouse footprint to close to 1 million square feet of space, and our distribution and logistics operations are now led by a world-class team with experience from Walmart, Home Depot, and Amazon. Our average clip-to-ship times have gone from around 36 hours to now under 12 hours, and we continue to push relentlessly for continued improvement. In order to better customer experience, we heavily invested in optimizing last-mile delivery vending logic, and package selection by utilizing advanced data analytics and machine learning algorithms. Our inventory turns have also improved by over 40% while increasing inventory availability. As we navigate the current global supply chain disruption, we are feeling the impact on both inbound and outbound freight. Constraints on containers and ocean vessels have increased the cost of importing and slowed down the flow of inventory. As of today, our new Texas distribution center is up and running and staffed, but only about 50% full. On the outbound side, all carriers are running above full capacity, slowing down order fulfillment and adding costs. We expect this to get better over time as carriers add more capacity and our company adds regional partners. Our goal is to continue getting closer to our customers to get them the parts they need to get back on the road as quickly as possible. Right place means empowering our customers to choose how they want to repair and maintain their vehicle. Whether they're a do-it-yourself or do-it-for-me customer, we're committed to offering them the resources, tools, and turnkey solutions and services to get them back on the road. The total automotive aftermarket is approximately $300 billion. However, it's still very under-penetrated online compared to other verticals and industries. As consumers become more comfortable buying online, we anticipate continued growth acceleration. With right tools and solutions, and by leveraging our core competencies, we see a great opportunity to disrupt an industry that hasn't really evolved in decades. We understand that customers may or may not have a local mechanic they trust, but want a cost-competitive solution in an industry with limited pricing transparency. We also know some customers would prefer a Netflix-type experience, where they can order their repairs or maintain their vehicle and never leave their house. Whether we send a mobile mechanic to you or refer you to a trusted shop, CarParts.com will be there to solve the customer's needs, and we're working hard behind the scenes to bring this vision to reality. Today, CarParts.com is the fastest-growing website in the industry, and tomorrow, as we empower drivers with more tools around diagnostics, maintenance, and repair options, we believe we will continue to enhance our competitive moat and disrupt the industry. I'd now like to turn it over to David.

Thanks, Lev. And I, too, would like to thank the more than 1,900 team members at CarParts.com who worked through these challenging times to help get our customers back on the road. Revenues were a record $119.7 million in the fourth quarter and $443.9 million for the four-year 2020. That is up 90% and 58% year-over-year respectively. 89% of our sales were house brand products, and on a year-over-year basis, our e-commerce channel, CarParts.com, grew at twice the rate of online marketplaces. Gross margin was 34.8% for the quarter and 35% for the full year. That's up from 33.7% in Q4 of 2019 and 30% for the full year of 2019. The higher gross margin reflects the shift to more house brands and favorable channel and product mix, partially offset by higher inbound and outbound freight costs, as well as seasonal surcharges from our carriers. Net loss was 3.5 million in the fourth quarter compared to a loss of 25.1 in the prior year period. For the full year 2020, the net loss was 1.5 million compared to a net loss of 31.5 million in 2019. Now, if you recall, our prior year loss included a non-cash tax valuation allowance of $23 million. Adjusted EBITDA for the quarter was $1 million, down $700,000 from last year. The decline was partially due to approximately $1 million in startup expenses associated with the opening of our Texas distribution center, as well as increased receiving across the network. We would caution with reading too much into fourth quarter operating profitability, which seasonally is our slowest quarter of the year due to the increased receiving expense prior to the first quarter. When combined with the investments we made in our new distribution center and the global supply chain disruption, it can create some noise. For the year, adjusted EBITDA grew from 4.5 million in 2019 to 16 million in 2020. As indicated in the past, we don't manage our business in quarters, and instead, we'll continue to focus on our company mission, which ultimately should generate superior returns for our shareholders. On the balance sheet side, at year end, cash and inventory combined was 125.1 million, with net current assets at 67.4 million. We also ended the year with no outstanding debt or trade LCs on our line of credit, which, as a reminder, can be flexed up to $40 million, thereby giving us access to additional liquidity we can use to fund our operation. On the CapEx side, our total spend for 2020 was 9.7 million, including $1.6 million for our new Texas distribution center and $6.4 million of software development, of which a substantial portion was used to develop new customer-centric features, such as our completely revamped carparts.com front end, our new search technology, self-service returns, product options, and much more. I would like to now take a moment to elaborate on our financial long-term goals. We believe that over the long run, we can achieve top-line revenue growth at a CAGR of 20% to 25%, with 8 to 10% EBITDA margins. Now going from the top of the P&L to the bottom, we believe we can gain 100 to 200 basis points of gross margin through improving product and channel mix as well as getting closer to the customers. On the marketing and customer service side, we believe we can achieve 200 to 300 basis points of margin improvement by increasing our brand awareness and continuously improving our mix of free to pay traffic. Finally, We believe that in the out years of the plan, we can drive 200 to 300 basis points of operating leverage through efficiencies as well as improvements to our supply chain. Now, we're not interested in moonshot targets. Rather, we're looking to drive incremental improvements that we have long-term visibility on. Our plan is to continue building our company, optimizing whenever possible, but most importantly, investing in the business to drive growth through improved customer experience and a world-class supply chain. The last two years have been incredible for our team and long-term shareholders. Our balance sheet is at its strongest point in over a decade, and with five distribution centers as well as our ongoing expansion in new product categories such as mechanical parts and EV parts, we're excited about the long-term prospects. We remain committed to our core principles of operational excellence, financial discipline, and outstanding customer service. We will continue to leverage our positive unit economics offered by our house brands as well as make additional investments in supply chain, technology, data science, and machine learning, which we believe will, over time, solidify our competitive advantage. While the last two years were focused on building a foundation for the future, we're now entering the next chapter of our company's story. We're excited to continue leveraging our core competencies to offer the customers the tools, resources, and solutions they need. As the only public pure play e-commerce auto parts retailer, with global sourcing and domestic logistics, we're uniquely positioned to disrupt the way people have both shopped and repaired their car for the last 100 years. We're excited to continue our investments in the business and look to widen our technological moat to leverage our first mover advantage. Now, we will, of course, continue to be disciplined in our investment philosophy and deploy capital only where we see opportunities to accelerate our growth and earn a significant return on investment. And with that, I would like to turn the call back over to Lev. Thank you, David.