Supply chain disruptions are hammering retailers big and small. A combination of factory shutdowns because of COVID-19, limited shipping capacity, delays at ports, and labor shortages are introducing unprecedented inventory challenges for a wide range of businesses. Retail giants like Walmart and Costco are chartering container ships to ensure they have sufficient inventory for the holiday season, and automakers are still reeling from a shortage of semiconductors.
CarParts.com (PRTS -4.20%)is small-cap online auto parts retailer. It's facing many of the same challenges as other retailers, including delays in shipping and higher freight costs, but the company also sees an opportunity to take advantage of the squeeze. Just as the stock soared during the early stages of pandemic, the supply chain disruptions could also present a good entry point for investors, especially with the stock down 20% in the last three months.
Every crisis is an opportunity
The supply chain is important in any industry, but it's crucial in auto parts. There are millions of SKU's (stock-keeping units) across the automotive world since every car requires a different set of components. Unlike some products, in auto parts there are no substitutes -- either you have the right part or you don't -- so having the right part in stock is the most important factor in making a sale.
In an interview with The Motley Fool, CEO Lev Peker underscored this point, and said that the company has paid a premium in shipping costs to ensure it has sufficient product in stock. Peker believes it can pass on some of those additional costs along to the customer, especially for items that have limited availability. The company entered the third quarter in a strong inventory position, with more than $100 million in inventory on its balance sheet, and with that bet to pay extra to keep inventory in stock, it's gunning to to gain market share during the supply chain crunch.
Unlike most online auto parts retailers, CarParts.com controls its own inventory. Competitors like CarID and Rock Auto use drop-shipping, an order fulfillment tactic in which the retailer doesn't hold inventory, but instead has a third-party provider fulfill its orders. While drop-shipping has advantages, including cost savings, it's vulnerable to inventory shortages such as the current one. That means CarParts.com should be able to pick up market share from online-only competitors that might not have as much inventory in stock. If the company can peel away those customers, it should be able to keep some of them as more than 30% of its purchases came from repeat customers over the last year.
CarParts.com vs. the major chains
Controlling its own inventory gives CarParts.com an edge over small online retailers, but the auto parts industry is dominated by a few major chains, including AutoZone, O'Reilly Automotive, and Advance Auto Parts. Those chains are also struggling with supply shortages and shipping delays. AutoZone CEO William Rhodes said on the company's earnings call just a few weeks ago, "This is the most difficult supply chain environment that I have ever seen."
The major chains generally rely on wholesale distributors to provide their merchandise, while CarParts.com buys its inventory directly from the manufacturer, eliminating a number of steps in the typical industry distribution chain and therefore the markups that go with them. Because of that, Peker says, many of his company's products sell for half of what they would with one of the major chains. CarParts.com can do that because it has private-label versions of many of the same products that industry leaders sell under name brands, like Dorman Products, a parts supplier for Advance Auto Parts and AutoZone.
In addition to the shake-up from the supply disruptions, the auto shortage is also ensuring prices of new and used cars remain elevated. That's encouraging consumers to keep their current car and spend on repairs, a boon for CarParts.com and the industry more broadly. With no end in sight to the automotive chip shortage, that tailwind should persist for at least the next few quarters for CarParts.com.
Its shares are up more than 600% since the start of 2020 as sales soared during the pandemic, but the company faces a new test as it laps that strong growth from a year ago. With its focus on ensuring sufficient inventory and absorbing higher shipping costs, the company is making a smart move to grab market share and build its customer base for the long term. We'll learn more when it reports third-quarter earnings next month, but during a difficult time for many of its peers, CarParts.com looks to be in an enviable position.