CarParts.com, Inc.

Good afternoon. At this time, all participants will be in a listen-only mode. Please note, this call is being recorded. I would now like to pass the conference over to our host, Ryan Lockwood, Chief Financial Officer. Please go ahead.

Hello, everyone, and thank you for joining us for the CarParts.com second quarter of 2025 conference call. Joining me today is David Mignon, Chief Executive Officer. Before I turn it over to David to start the call, I have some important disclosures. Our remarks on this call could contain certain forward-looking statements related to our company and our strategic initiatives under the federal securities laws. Actual results may differ materially from those contained in or implied by these forward-looking statements due to various risks and uncertainties. For discussion of the material risks and other important factors that could affect results, please refer to the carparks.com annual report on Form 10-K and quarterly reports on Form 10-Q, each as filed with the SEC, all 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 press release that we issued today. With that, I would now like to turn the call over to David.

Thank you, Ryan, and thanks everyone for joining us today. Earlier this year, we announced a process to explore strategic alternatives to maximize shareholder value. To provide an update, we remain fully engaged in our process and are highly confident that this process is nearing completion. We're currently evaluating several different transaction structures including a potential sale of the company and strategic investments that we believe have the potential to strengthen our capabilities and unlock new growth. In all of this, our board is committed to continuing to operate in a manner that delivers value to our shareholders. We're fully engaged in finalizing our strategic review as quickly as possible. That said, there can be no assurance that we will reach a transaction. We do not intend to provide further updates unless and until we enter into a definitive agreement with respect to a transaction or otherwise determine that further disclosure is appropriate or required by law. We won't further address our strategic process on this call. Now turning to tariffs, the current situation remains fluid with rates, applications, and effective dates changing in real time. Specific to our exposure, approximately 20% of our private label products are imported from China. and the rest from Taiwan and other countries. Our team is working on mitigating tariff impacts through a variety of actions, including cost concessions from vendor partnerships, dynamic pricing adjustments, and identifying supply chain and operating expenses optimization. Like all importers, we're actively managing rising product costs while maintaining competitive pricing for our customers. As a reminder, automotive products sourced from Taiwan are currently subject to tariffs of approximately 25%. For auto products from China, current tariff rates range from 55% to 75%. Turning to our second quarter performance, we showed measurable sequential progress across the business, with results improving over Q1. While the full impact of our strategic initiatives isn't yet reflected in the quarterly numbers, the month of June was a milestone. We achieved positive adjusted EBITDA, underscoring that our efforts are beginning to deliver tangible results. Several key drivers are contributing to this momentum. Mobile app and retention-driven e-commerce revenue both reached record levels, reflecting stronger engagement from our most loyal customers. Our mobile app now has over 1 million users and accounts for 12% of e-commerce revenues. High margin fee income continues to grow. supported by increased adoption of services like products and shipping protections, as well as our paid membership and roadside assistance. The Car Parts Plus membership program has surpassed over 7,000 paid members. Conversion rates, units per order, and average order value all improved sequentially, indicating progress from our e-commerce and mobile app product roadmap. Investments in machine learning-based search algorithms customized for Fitment-based products are paying off and strengthening our competitive edge. Marketing efficiency also improved with better customer acquisition costs and less reliance on Google product listing ads as a percentage of total marketing spend. Together, these gains reflect a more profitable acquisition mix, stronger customer loyalty, and increased operating leverage from our vertically integrated supply chain. We remain focused on disciplined growth customer experience and operational efficiency as we build a more profitable and resilient business. While we're seeing encouraging signs in our core business, certain areas remain under pressure, particularly in our marketplaces segment. First, the continued influx of non-compliant products imported from China, often sold without proper safety standards or regulatory enforcement, continues to distort the competitive landscape. In response, We're doubling down on our own channel, CarParts.com, along with CAPA certified parts and house brands like J.C. Whitney. This allows us to control the customer experience, ensure compliance, and build long-term direct relationships with consumers, avoiding a race to the bottom driven by lower quality parts. Second, tariffs and inflation continue to weigh on consumer demand, particularly in discretionary categories. In response, we're taking a measured approach to pricing, gradually passing through cost increases while closely monitoring industry dynamics. We're also exploring more domestic sourcing options to reduce exposure to import-related volatility. While many competitors are implementing price increases, we anticipate the market will take time to fully adjust. In the near term, this may result in volatility in customer behavior and category performance. but our disciplined approach and diversification strategy position us for both greater stability and profitability over the long term. Third, the current macroeconomic environment requires us to find new categories for growth. We continue to expand our assortment into adjacent customer segments, such as European and OE premium, to attract new customers and serve more vehicle owners across different segments. Also, we recognize the need to realign our cost structure to reflect today's macroeconomic realities. Due to the success and throughput of our Las Vegas facility we opened last year, combined with operational improvements in the remainder of the network, we have excess capacity in our distribution network. As a result, we will close our Virginia facility at the end of August, aligning operational fixed costs with our volume. We have also streamlined corporate headcounts including full-time employees, third-party contractors, and operational partners, and cut back on underperforming or non-critical software. By leveraging AI and automation, these actions are expected to generate approximately $10 million in annualized cost savings. These pressures are real, but not new. By focusing on what we can control, our channels, our assortment, our customer experience, and our cost structure, we are positioning ourselves to navigate near-term headwinds and strengthen the foundation for sustainable long-term growth. As we progress through the remainder of the year, we'll continue to navigate a dynamic macro environment, including ongoing tariff impact and pricing volatility with discipline and agility. Our focus remains on profitable growth anchored by the strong foundation we've built, While certain investments will take time to fully materialize, we're confident they'll unlock long-term value. In the near term, we're committed to protecting gross margins, reducing operating expenses, and driving more efficient marketing spend. With that, I'll turn it over to Ryan to walk through the financials.

Thank you, David. In the second quarter, we reported revenue of $151.9 million, up 5% from $144.3 million last year. The increase was primarily driven by an increase in our e-commerce channel and our offline channel, partially offset by continued softness in our marketplaces channel. Gross profit for the quarter was $49.8 million, up 3% compared to the prior year. Gross margin was 32.8%, down from 33.5% in the prior year period. The decline in gross margin was primarily driven by product mix and the impact of tariffs, while outbound transportation as a percentage of revenue remained relatively flat year over year. Gap net loss for the quarter was $12.7 million compared to loss of $8.7 million in the prior year period, primarily driven by lower gross margins and higher marketing costs. The current quarter was also impacted by one-time advisory fees related to our strategic review, as well as restructuring costs. For the second quarter, adjusted EBITDA loss was $3.1 million, down from adjusted EBITDA of $0.1 million in the prior year period, primarily due to lower gross margin and marketing costs. Turning to the balance sheet, we ended the quarter with $19.8 million of cash. During the quarter, we also joined our revolver to provide additional financial flexibility, a proactive move to help us manage through near-term uncertainty, including the ongoing impact of tariffs and macro-volatility. while continuing to protect our working capital in times of pressure. Earlier this year, in the face of uncertainty, we started proactively investing in inventory ahead of the tariffs to improve the continuity of our supply chain. This worked out to about two extra weeks of stock ship costs of goods sold. As a reminder, our inventory has low obsolescence risk and no risk of spoilage, and our pre-freight margins are over 50%. Our inventory balance was $94 million at year end versus $90 million at the end of 2024. I'll now turn it back over to David for final remarks.

Our priorities for the rest of the year include, one, continue to expand our product offering to attract new customers and increase average basket size. Two, monetize our 100 million annual website visits and customer lists with high margin fee income. Number three, scale our B2B offering with last mile transportation and higher touch sales in key markets. Four, continue to grow our mobile app business to diversify our marketing mix and deliver greater customer lifetime value. And five, protect our balance sheet with a focus on managing cash flow and inventory levels while navigating the uncertainty of the tariff environment. We know this transformation is a multi-year effort. We're focused on rebuilding the core foundation of CarParts.com, one that can scale, innovate, and deliver a seamless, high-quality customer experience while driving greater discipline in both our cost structure and capital deployment. A lot of work is happening behind the scenes, from realigning our fulfillment network to investing in AI and automation, and we expect these efforts to become more visible over the next year. As they come together, we're confident that our financial performance will follow. first in margin and efficiency gains, and then in earnings growth. I want to thank our team across the organization for their commitment to building a stronger, more resilient carparts.com, one that our customers, employees, and shareholders can be proud of. Thank you, everyone, for joining today's call. We'll now turn it back over to the operator.

This concludes today's program. Thank you all for participating. You may now disconnect.