CarParts.com, Inc.
Q1 2020 Earnings Call Transcript

Published: 10 May 2020

[Operator:]

Welcome to the U.S. Auto Parts First Quarter 2020 Conference Call. On the call from the company are Lev Peker, Chief Executive Officer; and David Meniane, Chief Operating Officer and Chief Financial Officer.By now, everyone should have access to the first quarter 2020 earnings release, which went out today at approximately 4

[Lev Peker:]

Thank you, operator. And good afternoon, everyone. The momentum we generated throughout 2019 has carried into this year. We're proud to be realizing the benefits of the initiatives we put in place last year, which have enabled us to generate record net sales in Q1, continued strong margins and increased adjusted EBITDA.Our Q1 adjusted EBITDA was almost as much as we generated in all of fiscal year '19. These results are validating our right part, right time, right place strategy. And it is also proving the sustainable success and resilience of our business, especially amid current COVID-19 conditions.In the outset of the pandemic, our top priority has been to ensure that our employees have a safe and healthy work environment and that our customers continue to receive the same high quality personalized service that we have delivered over the past year. We know our customers rely on us to get their vehicles back on the road, and it is our privilege to ensure that we can safely provide what they need during this difficult time.Our three distribution centers have remained operational as they are considered an essential service. For our teams on the ground there, we have implemented strict sanitation standards, social distancing practices and provided personal protective equipment.We have also implemented programs to [indiscernible] policies and interest paid sick leave for team members for any time away to take care of themselves or support family members.On the corporate side, we're all working remotely from home. Our corporate office in Carson transitioned to work-from-home smoothly since we have a large offshore operation and many team members are used to taking calls and meetings from home.Our Manila office and specifically our call center did see some disruption in the early days of moving everyone to work-from-home. However, I'm proud of the way we overcame obstacles and I'm happy to report that as of mid-April, our call center was fully functioning and able to respond to our customer needs. We are proud to be operating at full strength across our business as we haven't laid off or furloughed a single employee due to COVID-19.We are closely monitoring the effects of the pandemic and current stay-at-home orders in our business. The initial stay-at-home orders began in mid-March in San Francisco with many other cities and states across the nation following shortly thereafter.During the first week of shelter-in-place, our sales declined double digits over the prior week, with the next several weeks on a similar trend. During this time, due to the uncertainty of business continuity and our negative sales trend, we applied for the PPP loan to ensure we will not have to lay off or furlough any of our employees.Over time, it has become clear that our business remains strong and is actually benefiting from the current environment. So I'm happy to announce that we have returned the $4.1 million PPP loan so that other businesses can continue to support their employees.In early April, when the stimulus checks began to arrive, we saw a significant increase, not only week over week, but year-over-year as well. We have historically seen a lift when consumers receive their tax refunds and the stimulus checks were no exception. We had a record week in April with some of our top sales days in company history shortly after the stimulus checks were distributed.While we ultimately view this as a temporary benefit to our business, we're also starting to see other favorable tailwinds come out of this unprecedented time. As the nation adjusted to the new normal of shelter-in-place and social distancing, many of the consumers who previously shopped for auto parts at brick-and-mortar stores are now entering the e-commerce market for their auto parts needs.There are also more first time online auto parts shoppers as well as new DIY hobbyists, who now have more time on their hands to work on their vehicles at home. This evolution in consumer behavior has increased demand in the near term, and we will, of course, continue to monitor external factors in this new environment as we evaluate potential longer term impacts to our business.We see a great opportunity when more cars return to the road and miles driven start to increase again. Miles driven are at current low, but we expect that number to eventually rebound and increase, especially given low gas prices, which have historically benefited our business.In the first five weeks of Q2, even with miles driven down 50% across the nation, we still experienced significant growth as total sales were up more than 40% on a year-over-year basis, while maintaining solid gross margins. The increase over-indexed to our e-commerce sites as they significantly outpaced the growth in marketplaces.On a macro level, recessionary conditions in the broader economy has historically offset growth in the DIY segment. As consumers try to save money on their cars by investing in repairs and doing it themselves, we believe we're well positioned to address their needs. Many of the vehicles of DIY customers we'll be repairing were purchased during the economic recovery cycle between 2009 and 2015.Meaning that they're reaching a six to 12 year age range, which is a sweet spot for our business as many cars pull out of extended warranty. We view this, along with other tailwinds mentioned earlier, as a positive for our business in both the short and long term.The initiatives that we have implemented and the solid foundation we have laid over the past few quarters has positioned us for this new market environment. And we continue to expect strong growth and adjusted EBITDA for 2020.I will now turn it over to David to provide some financial highlights. David?

[David Meniane:]

Thank you, Lev. Going straight to our income statement. In the first quarter, we generated the highest level of sales in our company's 25 year history. Net sales increased 18% to $87.8 million driven by a 42% increase in private label sales compared to last year. In terms of revenue mix, private label accounted for approximately 91% of sales versus 75% in the prior year period.Gross profit for the quarter increased 48% to $29.8 million versus $20.1 million last year, with gross margins up 700 basis points to 33.9% versus 26.9% last year. This is our highest level of gross profit in nearly a decade. Most of the increase was due to our strong private label sales growth as well as better inventory position.Net loss for the quarter increased to $1 million compared to a net loss of $3.6 million in the first quarter of last year. Adjusted EBITDA in Q1 increased to $4.3 million compared to negative $0.1 million in Q1 of 2019, reflecting the benefit of executing the many initiatives we have laid out over the past year to grow private label and e-commerce sales. And as Lev mentioned, we are seeing continued momentum carry into Q2.Turning to the balance sheet. At fiscal quarter end March 28, 2020, we had no revolver debt and a cash balance of $14.1 million. The increase in cash from year end is a result of higher operating cash flow as well as temporary favorable payment terms granted by our top vendors during this period of uncertainty. The cash balance does not include the $4.1 million that we received and subsequently returned from the PPP loan.We believe it was prudent to shore up our liquidity as a precautionary measure to the new COVID environment, but since then, we have seen our business stabilize and deliver significant growth, which led us to return the PPP funds to ensure that other companies get an opportunity to retain as many employees as possible.As for the operational metrics we historically provided such as traffic and conversion, after internal discussions, we have decided to no longer provide these metrics due to competitive reasons.Now with regards to our site consolidation announced last year, we're happy to report that we have made additional progress, and we are now down to two websites, carparts.com and jcwhitney.com. This was a massive undertaking that took more than a year to complete, and we want to thank the team for all their hard work.The last couple of months have certainly been an adjustment for everyone in our company. We want to mention that none of it would have been possible without the commitment of the entire team, especially in our distribution centers. We want to thank everyone for their incredible support and dedication to our company.We're very pleased about the progress we continue to make, but we are even more excited about what lies ahead. We will continue to execute our strategy and at the same time, diligently manage our operating expenses and liquidity.And with that, I'll turn the call back over to Lev.

[Lev Peker:]

Thank you, David. As we have stated in the past, our team is very proud of the work we have accomplished to date, but we're far from living the dream, but there is more work to be done. What you mean committed to our right part, right time, right place strategy, which we expect will further grow our private label and the eCommerce business and deliver significant adjusted EBITDA growth for years to come.With that, David and I will open up the call for questions. Operator?