CarParts.com, Inc.

Welcome to the CarParts.com third quarter 2021 earnings conference call. On the call from the company is Lev Peeker, the Chief Executive Officer, and Dave Minion, Chief Operating Officer and Chief Financial Officer. By now, everyone should have access to the third quarter 2021 earnings release, which went out today at approximately 4.01 p.m. Eastern Standard Time. If you have not reviewed the release, It is available in the investor relations section of the company's website at carparts.com slash investor. This call will be available for replay via the webcast archived at carparts.com slash investor. Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements within the meaning of the federal security laws. The management may make additional forward-looking statements in response to your questions. The forward-looking statements include but are not limited to statements regarding future events, our future operating and financial results, financial expectations, expected growth and strategies, key operating metrics, and current business indicators, capital needs and deployment, liquidity, product offering, customers, suppliers, competitors, the impact of tariffs, and our tariff mitigation efforts, and the potential impact of coronavirus on our supply chain and operating results. The forward-looking statements are based on current information and expectations are subject to uncertainties and changes in circumstances and do not constitute guarantees or future performance. The forward-looking statements involve several factors that could cause actual results to differ materially from those statements. We refer all of you to the risk factors contained in CarParts.com annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Security and Exchange Commission for a detailed discussion on the factors that can cause actual results to differ materially from those projected in any forward-looking statement. CarParts.com assumes no obligation to, nor does It intend to update or revise any forward-looking projections that may be made in today's release or call or update or revise the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Please note that on today's call, in addition to discussing GAAP financial results and the outlook of the company's non-GAAP financial measures, such as adjusted EBITDA, will be discussed. An expectation of CarParts.com's use of non-GAAP financial measures in this call and the reconciliation between GAAP and non-GAAP measures required by the SEC Regulation G is included in the CarParts.com press release issued today, which again can be found on the Investor Relations section of the company's website. The non-GAAP information is not a substitute or any performance measures driven in accordance with GAAP and such non-GAAP measures have limitations, which are detailed in the company's press release. With that, I would like to turn the call over to CEO Lev Peeker. Please go ahead.

Thank you, operator, and good afternoon, everyone. As you saw in today's press release, CarParts.com achieved its seventh consecutive quarter of year-over-year growth, with net sales up 21% from Q3 last year and 90% on a two-year stack. Online demand continues to exceed our outbound capacity, and I want to thank the team for working both smarter and harder to navigate this extremely difficult environment. We believe we're the best positioned company long-term to disrupt an industry with only single-digit online penetration, and a total addressable market of over $300 billion. We continue to expect 20% to 25% compounded top line growth and 8% to 10% EBITDA margins over the long term, derived from the successful implementation of our strategy of right part, right time, and right place. Let me give you a quick update on each of the three pillars of our strategy. Right part means ensuring our customers can find the exact solution that fits their vehicle on our website. We're very excited that we have been able to continue to increase our inventory position and now have the highest level of inventory in company history and feel very confident going into the rest of the year as well as heading into next year. And we're excited about mechanical parts being the fastest growing segment of our business as well as entering next year with a newly built category management function led by senior executives who come to us from automotive retailers like GPC, NAPA, as well as large traditional retailers like Best Buy. Our direct sourcing strategy and vertically integrated supply chain are a considerable competitive advantage. At a time when availability in the industry is tight, a reliance on a local distributor can leave a dropshipper at the back of the line, forcing them to pay a higher price, assuming the part is even available. Distributors often choose to maximize profits from their limited inventory by shifting their resources to more profitable channels. When we look at out-of-stock rates across the industry, we notice a significant disparity in the haves and have-nots. We believe that being a have through vertically integrated stock shipping delivers a superior value proposition. Our vertically integrated business model of going straight from manufacturer to consumer is a key reason why we have been able to demonstrate 21% year-over-year top-line growth this quarter. We were able to offer products when other competitors couldn't. I want to remind everyone that right now we're only limited by our capacity, and there is a cadence to opening and expanding our distribution centers. David will provide additional details in his supply chain update. At the same time, we also remain focused on reducing the paradox of choice for our customers. We don't want to give consumers too many or too few choices, and so our model is flexible enough to add branded products where we have gaps in our private label assortment and to offer a full range of good, better, best products. Over the last quarter, we have also built proprietary processes to help us identify gaps in our catalog, and we expect to start expanding the range of choice for our customers even further this quarter. Right times means getting the customers back on the road as quickly as possible, and to accomplish that, we continue to work on getting closer to our customers and reducing delivery times. With our new Florida facility opening in the first half of next year, We expect to be able to service 55% of our customers within a one-day transit time and 98% of our customers within two days. Right place means empowering our customers to choose how they want to repair and maintain their vehicles. We expect to have a more detailed update on the first quarter conference call, but I can tell you that we're working hard to build solutions that we believe will make booking an automotive repair as seamless and as simple as streaming a movie on Netflix. I will now turn it over to David to provide some financial and operational highlights. Thanks, Lev.

As Lev mentioned in the third quarter, we generated revenue of $142 million, up 21% versus prior year of $117 million, and 90% on a two-year stack. Gross profit was up 10% to $47 million, with gross profit margins at 33.4%. Gross profit margin had a slight impact due to a mixed shift to dropship parts as we filled gaps in our inventory. As we have stated in the past, we're always focused on maximizing margin dollars after marketing spend and fulfillment expenses. We're very proud of our supply chain, logistics, and data science teams' ability to navigate the current environment and dynamically adjust pricing based on all these external factors to protect margin dollars. Historically, our industry has enjoyed the ability to raise prices and maintain margins. And even though the volatility of current circumstances has driven up costs faster than we'd like to raise prices, we're confident that we can restore our normal margins. Despite container costs going from $7,500 to $30,000, inbound parts increasing in cost by 10% to 15%, and continuing pressure from freight surcharges, margin only compressed 100 basis points since the start of the year. The financial impact of gross profit from increased container costs and detention was about 1.5 million. We strongly believe that these factors are temporary, and as the global supply chain improves, we expect to return to a more normalized gross margin. Net loss for the quarter was 4.7 million versus income of 1.4 in Q3 2020. The decline was mostly due to an increase in non-cash expenses. Adjusted EBITDA in Q3 came in at 2.3 million versus prior year at 5.1, a change which was primarily driven by the temporary issues mentioned, higher labor costs, and increased investments in the business. Given the likelihood that the labor market will remain tight, we will continue to invest in talent, tools, and technology to improve efficiencies in our fulfillment centers. As we've mentioned before, the timing of our investments into our business will vary from quarter to quarter, and we continue to invest ahead of today's revenue. We are, however, very encouraged with the progress that we've made in marketing, branding, as well as best-in-class personnel both of which are helping to lay the foundation for significant levels of growth in the years ahead. And we continue to believe that in the long run, we will achieve 8% to 10% EBITDA margin. Turning to our balance sheet, at the quarter end, our cash position was $21 million, primarily driven by an increase in inventory to $132 million, a company record as we prepare for our peak season. Thank you to our inventory forecasting team and global supply chain teams for this great achievement. especially in this challenging supply chain environment. Our ABL remains untapped with $30 million of availability, with the option to flex up to $40 million of capacity. Now that we've covered some financial highlights, I'd like to spend more time talking about our supply chain roadmap. One of the critical components of our long-term plan is our vertically integrated supply chain. We always say that our inventory is our oxygen, and this could not be more true than in the current environment. Our strategy revolves around parts availability and speed to customer. And because our parts are fit-specific, there is no substitution. Having the right inventory and stock close to the customer is critical. For the last three years, we've worked hard to expand our assortment, increase parts availability, and get parts to our customer faster by being closer to them. With our Texas and Florida warehouse expansions, we're taking another step to increase our capacity and reduce transit time. Long term, our goal remains to cover 80% to 90% of the country in one day transit time. One of our goals is also to rapidly connect the end consumer, whether a do-it-yourself or do-it-for-me, with premium quality parts at competitive prices. Now, today, we offer an assortment of replacement and mechanical parts, but over the long term, we intend on building a one-stop, product and service destination to get all drivers back on the road by leveraging our technology, our data, our inventory, and our fulfillment capabilities. Now, moving on to the next topic. Recently, there has been a lot of talk around inflationary pressures on retailers. Now, despite cost increases on raw materials, as well as freight increases, our supply chain makes carparts.com uniquely positioned to offer competitive pricing by removing steps in the distribution chain. Looking at current gross margins, investors can see how we were able to pass on most of the transient costs and yet remain competitive in the marketplace. Our data science team has developed a lot of proprietary models to dynamically adjust pricing in real time and maintain margin dollars even in an inflationary environment. Over time, we feel very confident about hitting our margin targets by leveraging our channel mix and our own fulfillment network. Another item in the news has been the flow of containers from overseas. I'm sure most of you have seen the images on TV of ships sitting idle outside of the port of LA for weeks. Despite this and numerous other supply chain challenges, we're very excited that our teams were able to successfully build up inventory. We believe that even if the global supply chain continues to get worse, we will be able to continue to operate with minimal impact relative to our competitors because of our vertically integrated business model. We feel very comfortable not only with the current inventory position, but also our ability to source additional inventory globally. By ending the quarter with the most inventory on our books in company history, we believe that we will be able to meet customer demand through the rest of the year and through 2022. Also, while there are talks of container cost rising, we're starting to see the tight change, thanks to the incredible support of our ocean carrier partners. Now onto an update on our current expansion projects. We're excited to announce that our Texas expansion is going well. Some of the racks are already up and we have a lot of inventory on the way. We will spend the next few months building up inventory and expect the expansion to increase our capacity in Q1 2022. In Jacksonville, Florida, we're also happy to announce that construction of the building was completed this week, and racks and equipment are already on the way. We expect the first inbound container to hit in early Q1, and like our previous distribution center openings, we will first focus on receiving and increasing inventory position, next, increasing outbound capacity, and finally, we expect it to contribute to sales in Q2 2022. Investors who have been following our new management team since 2019 will understand that our growth opportunities are directly correlated to our inventory holding and outbound capacity, and that our shareholders can expect a stair-step cadence in sales as we continually reach operating capacity and expand our supply chain with additional distribution centers. As we open these fulfillment centers, the expanded capacity will drive increased revenues. As we expand our assortment and get closer to our customers, increase capacity, we feel very confident in our ability to, number one, get our customers to keep coming back. Number two, increase revenue and improve margin. Number three, grow at a 20% to 25% compounded rate and get the 8% to 10% adjusted EBITDA margin over the long term. Finally, for our long-term shareholders listening today, know that we remain committed to our philosophy of financial discipline. We will only deploy capital where we see opportunities to accelerate our growth while earning a significant return on investment. I would also like to thank all the team members at CarParts.com. I'm truly grateful to collaborate with such a talented and hardworking group of individuals each and every day. Your dedication to the mission of helping drivers get back on the road is inspirational. And with that, I'll turn it back to Lev.