CarParts.com, Inc. (PRTS) Q2 2022 Earnings Call Transcript

CarParts.com, Inc. (PRTS -2.40%)
Q2 2022 Earnings Call
Aug 02, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the CarParts.com second quarter 2022 conference call. [Operator Instructions] Please note, this call is being recorded. I would now like to turn the call over to your host, Tina Mirfarsi, vice president of communications & culture. Please go ahead.

Tina Mirfarsi -- Vice President, Communications and Culture

Hello, everyone. Thank you for joining the call today to discuss our second quarter 2022 results. Joining me today from the company are David Meniane, chief executive officer; and Ryan Lockwood, chief financial officer. 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 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 the 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.

With that, I would now like to turn the call over to David.

David Meniane -- Chief Operating and Financial Officer

Thank you, Tina, and good afternoon, everyone. As reported in today's release, for Q2 2022, our team achieved record sales of $176 million, up 12% year over year and adjusted EBITDA of $8.3 million. This represents our tenth consecutive quarter of double-digit year-over-year revenue growth and a 44% increase on a two-year stack. We're also excited to announce our new $150 million five-year credit facility with our partners at J.P.

Morgan Chase. Our leadership has continued executing on the four areas of focus: outstanding customer service, operational excellence, financial discipline and innovation. Number one, outstanding customer service. As a reminder, over one-third of our e-commerce revenues come from repeat customers.

As we think about capital and resource allocation, we see a significant opportunity to increase our focus and efforts on customer-centric initiatives. Our entire team is fully committed to simplifying and removing the stress from vehicle care by redefining ourselves from a parts company to a customer-oriented company with an unparalleled digital-first experience. Number two, operational excellence. As the business continues to grow and evolve, we see opportunities for our teams to collaborate and improve performance by systematically removing inefficiencies and improving process.

Focusing on driving results is key for us as evidenced with our year-to-date results and our ability to simultaneously open two distribution centers in this environment. We're always raising the bar and aligning people, process and strategy with the needs of our customers, which is part of our DNA. Number three, financial discipline. Over the last three and a half years, we have invested in building a scalable foundation, which we are now leveraging.

Our management team strongly believes that financial resilience and disciplined capital allocation will be key to our success in times of market uncertainty. Profitable growth and free cash flow generation are more important than ever, and it's where we will focus our energy and resources. Our team remains committed to being prudent and intentional with every dollar we deploy. Our business model is rooted in positive unit economics even after fulfillment and customer acquisitions.

This will help create an exceptional company for our shareholders to own for the long term. And number four, innovation. As we think about the future, we are committed to growing our addressable market and turning more of our customers into repeat customers. The opportunity is the Do-It-For-Me customer, who relies on outside help to complete a repair or maintenance job.

In the spirit of simplifying and removing the stress from vehicle care, we have been working on expanding our offering to include the ability for our customers to find a trusted local mechanic to assist with their repair, and we're excited to report that we have already completed hundreds of successful bookings. We recently launched the new experience on our website, which is live in certain test markets. With this newly built functionality, some of our customers have the option to book an appointment with a certified mechanic of their choice directly on CarParts.com with full transparency of the installation price. Now Ryan will now discuss our financial results and a quick operational update.

Ryan Lockwood -- Senior Vice President of Finance

Thanks, David. In Q2, we generated revenue of $176 million, up 12% from the prior year period, resulting from the great execution by our entire team. On a two-year stack, revenue increased 44%. If you'll recall, Q2 of 2021 benefited from the inflow of pandemic-related federal stimulus funds, resulting in an increased consumer spending.

Gross profit for the quarter was a record $62 million, up 16% with gross margins improving 120 basis points to 35% this year versus 33.9% in the same year period. The improved gross margin continues to reflect purchasing and freight savings being driven by our data science and supply chain teams. Net income for the quarter was $4.1 million versus $2.1 million in Q2 of 2021. And adjusted EBITDA in Q2 was $8.3 million, flat to last year, reflecting the impact of self-funding our new Jacksonville distribution center, including rent and start-up expenses.

Turning to our balance sheet. As David indicated, we entered into a $75 million credit facility with the ability to accordion to $150 million. We believe the terms are attractive and that it further reinforces that we have enough liquidity to grow without tapping the capital markets. We appreciate the support of our partners at J.P.

Morgan Chase, who have been with us for many years. At the end of Q2, our facility was undrawn. At the quarter end, our cash position was $15 million, and we were successful in building our inventory to $163 million. As a reminder, we are currently carrying approximately $40 million or eight extra weeks of inventory to account for longer lead times in the supply chain.

Over time, as the supply chain normalizes, we expect this inventory to be converted back to cash. We will likely work down some of that safety stock as we focus on free cash flow and further reinforcing our balance sheet. Our goal remains to be able to deliver to 80% to 90% of our customers in one-day transit time, and we continue to be pleased with our Texas expansion, which is now fully stocked. We also recently opened our brand-new Jacksonville, Florida distribution center that includes new best-in-class technology tools that over time should drive operational efficiencies.

Despite what we're seeing in the broader macro environment, we continue to optimize the business toward a balance of growth and profitability. For the first four weeks of Q3, our robust inventory position is helping us against prior year comparisons. For net revenues in the back half of 2022, we continue to project double-digit year-over-year growth. And with that, I'd like to turn it back to David for some closing remarks.

David Meniane -- Chief Operating and Financial Officer

Thank you, Ryan. We're excited to build a trusted and disruptive platform where we can help our customers solve their auto repair and maintenance needs. Our goal is to become the No. 1 destination for customers that need help fixing their vehicles.

Q2 was another record for our company, and this performance would not have been possible without the incredible dedication from all our teams across the globe. As we look forward to the next evolution of our company, we are honored, humbled and excited to be working with such an amazing group of people. Thank you again to all our team members for coming to work every day ready to crush it. And as we say at CarParts.com: get after it.

I'll now turn it over to the operator to open it up for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question is from the line of Victoria James from D.A. Davidson.

Tom Forte -- D.A. Davidson -- Analyst

Tom Forte here. I have a couple of questions. So congrats on the performance in the quarter. The first question I had is can you talk about your gross margin performance? What were the contributing factors? It looks like you had gross margin expansion versus last year.

Ryan Lockwood -- Senior Vice President of Finance

Yeah. Thanks, Tom. Obviously, we feel very good about how gross margin is trending out, both up nominally, sequentially and year over year. We continue to leverage our data science team to basically optimize for price, as well as leaning on our vertically integrated supply chain, which I think gives us a benefit over some of our competitors who have a worse ability to stay in stock compared to us.

Tom Forte -- D.A. Davidson -- Analyst

Great. And then second, can you talk about where you are now? And you talked a little in your prepared remarks, but where are you now in your Do-It-For-Me efforts? And when can we expect that to start to meaningfully contribute to your revenue?

David Meniane -- Chief Operating and Financial Officer

Yeah. Hi Tom, it's David. I think -- if you think about auto repair in general, the majority of the time, at least my experience has been, it's complex and stressful. And the long-term vision is really to make auto care simple and stress-free.

And I think the Do-It-For-Me opportunity is part of that. Obviously, it's a big project. It's a big endeavor, but we're very excited about the progress. I think the great thing is that it expands the total addressable market.

But more importantly, it gives our customer a new option depending on what type of repair they want to do. Now as of today, like we called it out in the prepared remarks, we've done hundreds of successful bookings. We have the experience that is now live on the website in certain markets. Now it's just the beginning, but in the last three months, we've made a big push to get this going.

Super proud of the efforts of the team. I don't expect it to meaningfully contribute to top line yet. We're really focusing on the customer experience. But over time, and especially over the long run, I think this is a game changer for our company.

Tom Forte -- D.A. Davidson -- Analyst

Great. So last question. Thanks for taking my questions. So with the expansion of Grand Prairie, Texas fulfillment center seemingly behind you and the opening of Jacksonville, how should we think about your plans for additional fulfillment center square footage over the next 12 months?

David Meniane -- Chief Operating and Financial Officer

Yeah. Good question. I think short term, in this environment, we're really focusing on free cash flow and profitable growth. So we really want to get the maximum out of the current network before investing in the new building.

Right now, at least internally, the focus is on operational efficiencies and leveraging some of the tools, the new tools and software that we're implementing in Jacksonville. We're really learning and focusing on driving the most out of what we have in the network. Now medium term, obviously, as we called out many times before, we're going to open another DC. The goal is always to provide the best level of customer service, and that means one day shipping to 80% to 90%.

But again, right now, as far as the main focus is free cash flow and operational efficiencies and getting most out of the current network.

Tom Forte -- D.A. Davidson -- Analyst

And then one quick point of clarification then. So Grand Prairie expansion and Jacksonville. What percent operational are there? Are they 100%? Or they -- How close to 100% are they?

David Meniane -- Chief Operating and Financial Officer

Well, so Texas is pretty full right now. I mean, the team has done a great job on the installation, the staffing, the training. It was an expansion. Jacksonville, it's almost full right now.

Again, we got the labor, we started shipping. I think that for 2023 peak season, it should really help us. It went live during the quarter. What I'm most excited about, Tom, is really for the second half of the year that, as Ryan called it out in his prepared remarks, we're really targeting double-digit year-over-year growth, but at the same time, kind of balancing that growth and profitability.

Tom Forte -- D.A. Davidson -- Analyst

Thank you, David. Thank you, Ryan.

David Meniane -- Chief Operating and Financial Officer

Thank you, Tom.

Operator

Thank you. Our next question comes from the line of Austin Vetterick from ROTH Capital Partners.

Darren Aftahi -- ROTH Capital Partners -- Analyst

Hello?

David Meniane -- Chief Operating and Financial Officer

Hey.

Darren Aftahi -- ROTH Capital Partners -- Analyst

It's Darren Aftahi. I was a little confused when they talked about my colleague. Anyway, Hey guys, hope you are well. Three, if I may.

So I think I just heard you say when you went to Tom's question that Jacksonville is almost full. I guess how contributory was it top line-wise to the business?

David Meniane -- Chief Operating and Financial Officer

Yeah, that's a good question, Darren. I think the challenge with a same-store metric like this for an online retailer is that for us, you're always focusing on delivery speed, and so we're constantly optimizing for shipping times and transportation costs. So if you're looking at it on a same-store basis, it's kind of difficult to quantify.

Darren Aftahi -- ROTH Capital Partners -- Analyst

OK. Fair enough. I noticed inventory ticked up, but it sort of slowed on the margin. So I guess kind of having said that, your context about generating cash, could you just kind of shed some light about container pricing, logistics, supply chain, kind of where you see things? I know there's been some consternation with COVID in Asia, but like just kind of where are we? Have we plateaued in terms of that monkey wrench in the system? And do inventory levels maybe fall from here, plateau? Just any kind of color would be great.

David Meniane -- Chief Operating and Financial Officer

Yeah. I think we're definitely seeing some signs of improvement. Now whether it's short term or long term, it's hard to say. I think we've built some great capabilities in-house.

Now to the inventory question, and we've always called it out, it's always a game of parts availability and having the inventory in stock close to the customer. Now in the past two years, to navigate the supply chain disruption, we have to build this extra safety stock, and we have been carrying that extra eight weeks or call it about $40 million. Now as I said, because of the signs of improvement over time, I think that you're going to see this inventory level come down and convert it back to cash. Now it is a little more complicated than just giving you a number because it's a SKU level at the vendor level.

But I think over the next, call it, six to 12 months, you're going to see some of that inventory revert back to cash and us carrying less inventory to support this level of business.

Darren Aftahi -- ROTH Capital Partners -- Analyst

Great. And just last one for me. On the Do-It-For-Me, how much -- like what is the source of marketing where you're getting [Audio gap] from? And like how much cost was there in the quarter related to that?

David Meniane -- Chief Operating and Financial Officer

Yeah. So two-part question. So the number one is the source of customers right now is our existing customer base. On CarParts.com, I think we've built a fantastic destination for auto repair.

We have over 100 million visitors on our website. On top of that, we have a pretty robust email list with millions of customers. And again, as we called out, about one-third of our revenues on e-commerce come from repeat customers. So there's plenty of opportunities for us to offer this service to our current customers.

So I think, right now, at least for Phase 1, we're OK with targeting the current customer. Now the second part of your question is in terms of extra cost. I don't think we're spending any incremental dollars to make this work. What we're doing is really reprioritizing our efforts around the Do-It-For-Me initiative.

So we have a technology team, we have a marketing team. We think that the Do-It-For-Me opportunity is going to be a game changer. So it's just a matter of allocating more resources and more capacity to that, which is how we were able to push out this new phase of the initiative in the last three months. We've made significant improvements as reflected by the several hundred bookings.

I think that's going to get better. So right now, the whole team is really focused on making this phase a success.

Darren Aftahi -- ROTH Capital Partners -- Analyst

Great. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Ryan Meyers, Lake Street Capital.

Ryan Meyers -- Lake Street Capital Markets -- Analyst

Just one for me. Just wondering if you could give us an update on mechanical parts business during the quarter and kind of how that's tracking and how that contribution has been looking.

Ryan Lockwood -- Senior Vice President of Finance

Yes, I do have that number. So for mechanical, we are at -- hard parts was 27%, replacement parts was 67% and performance was 6%. So it was basically flat year over year, a hair down sequential, but I wouldn't read too much into the minor fluctuations. Over the long run, the goal is still to be at that call it, 45% to 50% mechanical, 45% to 50% collision and that last 5% to 10% perform as accessories.

That's the target long-term goal.

Ryan Meyers -- Lake Street Capital Markets -- Analyst

Right. Makes sense. Next one for me. Have you seen any labor challenges ramping up either the distribution centers in Grand Prairie or Jacksonville?

David Meniane -- Chief Operating and Financial Officer

Yeah. I think every retailer and anyone in the industrial warehouse space is always competing for talents. I think we're always looking to, number one, have a safe environment, building a great culture, great values, diversity, inclusion, equality. So we're constantly investing in that.

We've also done a good job at setting a compensation structure that incentivizes performance where we do gain sharing and referral bonuses, retention bonuses. I think there's a lot of different things that you can do. But ultimately, I think that our warehouse associates are bought into the vision. They're bought into the business that we're trying to build and really a big part of the culture.

For us, we always see ourselves as a supply chain company first and the warehouse teams are really the heart of our company.

Ryan Meyers -- Lake Street Capital Markets -- Analyst

Got it. Makes sense. And then last one for me, just kind of touching on the Do-It-For-Me offering. Pretty helpful to hear some of the positive commentary on that.

What sort of feedback have you guys gotten from not only just your customers, but mechanics that you have partnered with, whether it's adding customers that they wouldn't have thought that they would have gotten? Just kind of walk us through that, the partnership with mechanics you're using for the DIFM offering.

David Meniane -- Chief Operating and Financial Officer

Yeah. For this phase of the initiative, we really partnered with mechanics that are already pre-bought in to the fact that the customer is going to bring in the parts. So part of making the initiative of success, at least for this phase, is to have a preselection of mechanics that already know that customers are going to come in and the scheduling is transparent and the ZIP codes and the part names and categories that we're focusing on. So there's been a lot of communication upfront so that there's no surprises at the mechanic.

Now obviously, it's a new experience and no one has done it before, so still working out the kinks. But overall, the feedback has been great. And frankly, I'm excited about the feedback from the customer because it gives them an alternative. If they don't feel comfortable doing the repair themselves, they have this option.

And also targeting another subset of customers that maybe doesn't feel like doing the repair themselves. So for us, expanding that addressable market is what excites me the most.

Ryan Meyers -- Lake Street Capital Markets -- Analyst

Got it. Thanks, guys.

Operator

Our next question comes from the line of Ryan Sigdahl with Craig-Hallum.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Curious on the gross margin. So really solid this quarter. But as you think about kind of all the cost inflation and the moving pieces between how much cargo containers cost coming from China to so on and so forth, with FIFO accounting, anything to be aware of kind of as we model gross margin going forward? Or is Q1, Q2 good run rates kind of as you look about the movement within the cost structure in your inventory?

Ryan Lockwood -- Senior Vice President of Finance

Sure. Yeah. Thanks, Ryan. Obviously, we kind of always say this, but when we think about gross margins, EBITDA margins, we always really take a step back and look at it over multiple quarters in the full year.

So that being said, we do feel still very good about the margin for the remainder of the year. For Q2, we were obviously up sequentially and year over year on a nominal basis. As far as container pressures go, we are mostly hedged so -- and our hedges are at very attractive rates. So I think we feel very comfortable there, as well as far as the remainder of the year.

And then obviously, next year, I think going back to our history over the last three years, no matter what has happened, we've generally done a great job working through it. So I think whatever kind of pressures the environment might throw at us in 2023, I'm pretty confident our team can handle it.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Good. You talked about profitable growth, big focus or increased focus, at least in the near term. When we look at kind of the seasonally softer back half of the year, do you think you can still stay profitable, if you're willing to comment on that?

Ryan Lockwood -- Senior Vice President of Finance

As far as profitability, absolutely, it's a laser focus to balance that back half growth with profitability. So we do believe we will be profitable in the back half.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Just to clarify, are you talking EBITDA or net income?

Ryan Lockwood -- Senior Vice President of Finance

EBIT -- adjusted EBITDA margin and nominal.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Great. And David, maybe a question for you. I've seen some of these tech forward companies that are starting to lay off people. Some good talent out there, and I've seen you kind of go open arms embracing them if they want to come work for CarParts.

I guess have you seen any success with that? And then also, you mentioned a little bit, but talk through kind of your retention of your existing employee base?

David Meniane -- Chief Operating and Financial Officer

Yeah. I think, listen, we've made significant investments in building culture. We're a culture that rewards discipline, excellence and high performance. I think our turnover has been significantly lower than some of our competitors.

I have been pretty public in our will to hire great talent. For me, we're trying to build an exceptional business, and that starts with hiring the best people, hiring, training, developing and retaining. So we had good success. Obviously, if there's good talent out there in critical roles, yes, we want it.

So if this is going to be a commercial for CarParts.com, I would go to CarParts.com/career. And if you have an exceptional friend and you're willing to work extremely hard to build an exceptional business, I think we can be a great destination.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Never miss an opportunity. I like it. Maybe just last question for me is as you shift into the Do-It-For-Me business, can you talk through the mechanics a little bit of that? I guess, how you see the puts takes from one marketing that? And I realize it's not as much this year, but kind of as you look to next year, marketing that product, selling that product and then how that flows through -- kind of will flow through from P&L from a revenue standpoint, margin standpoint?

Ryan Lockwood -- Senior Vice President of Finance

Ryan, maybe I'll take that one. So for me, I always think about DIFM in two phases. So right now, we're in the short-term phase where we're focused on the customer experience. And really, if you think about it, there's no place that customers can go that they trust to get their car repaired, a single destination.

If you have a car in warranty, you go to the dealership, but that's a very small fraction of actual regular people. So our goal is to get it right for the customer and take that stress out of car repair, and that's the phase we're in. Obviously, once we get this nailed down, then the next phase is to scale the offering, scale the market, scale the bookings and with that, obviously, comes marketing.

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

Good. Thanks, guys. Good luck. Nice quarter.

Ryan Lockwood -- Senior Vice President of Finance

Thanks, Ryan. Appreciate it.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Tina Mirfarsi -- Vice President, Communications and Culture

David Meniane -- Chief Operating and Financial Officer

Ryan Lockwood -- Senior Vice President of Finance

Tom Forte -- D.A. Davidson -- Analyst

Darren Aftahi -- ROTH Capital Partners -- Analyst

Ryan Meyers -- Lake Street Capital Markets -- Analyst

Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst

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