CARPARTSCOM Earningcall Transcript Of Q2 of 2024
Joining me today are David Meniane, chief executive officer; Ryan Lockwood, chief financial officer; and Michael Huffaker, chief operating officer. Before I turn it over to David to start the meeting, I have some important disclosures. 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-Qs as filed with the SEC, both 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 CarParts.com press release issued today. And with that, I would now like to turn the call over to David. David Meniane -- Chief Executive Officer Thank you, Tina, and thanks, everyone, for joining us today. I'd like to start with the most important takeaways from this quarter before I turn it over to Ryan to review our financial performance in detail. Last quarter, we discussed our emphasis on financial discipline by focusing on driving gross and net margins, accelerating efficiency and effectiveness to quickly deliver improved profitability, and achieving a path to sustainable and profitable growth with strong long-term free cash flow. In the second quarter, we made significant progress on gross margin and operating efficiencies, which reinforces our confidence that we're on the right track. We expect fiscal year 2024 to be a low-watermark year as we execute on the changes we have been making. This should position us for a strong fiscal 2025 and beyond, and we are confident in our road map and our opportunity as a leading online retailer in a highly fragmented $400 billion auto parts market. In the first half of the year, we updated our pricing and marketing acquisition strategies to target more profitable customers and generate higher gross margins. As a result, in the second quarter, we saw sequential margin improvement with product margins at 54%, up 210 basis points from Q1. We expect Q3 to be sequentially higher. Combined with the cost reduction initiatives I'll discuss in a moment, we anticipate better unit economics on less volume. However, pricing actions and beginning to change the overall profile of our customers negatively impacted sales, which were down to $144 million from $177 million in the prior-year period. Our operational highlights for the quarter were as follows. We continued to optimize our product and price assortment to maximize the profitability of our e-commerce channel. Our mobile app continues to drive strong momentum with over 450,000 downloads, more than double the number from the beginning of the year. In addition, in just 12 months after launching, mobile app sales accounted for 80% of our total e-commerce revenue. With approximately 80% of our customers shopping on mobile, over time, we expect direct in-app purchases to drive savings and advertising spend by reducing our reliance on search engines and performance marketing as well as incentivizing repeat purchases. Second, we continue to invest in our marketing channels. We are making strides on building brand awareness and recognition of our leading digital-first and customer-centric automotive e-commerce strategy, which is critical to capturing our target high-value customer base. In July, we launched our first-ever comprehensive brand campaign. Our "Now That's My Speed" campaign, along with our new tag line, Quality Parts Priced Right, is running across top social media platforms, YouTube, and connected TV. This campaign highlights our customer value propositions, our extensive selection of over 1 million quality parts at competitive pricing, and our hassle-free e-commerce solution. We are committed to moving up the marketing funnel to establish CarParts.com as one of the most trusted and recognizable brands in the industry. Our goal is to become the go-to destination for all automotive repair and maintenance needs, capitalizing on our infrastructure, website traffic, and customer lists. We also want to welcome our new chief marketing officer, Christina Thelin, who brings over 20 years of experience in marketing, with an extensive background in building global brands and award-winning campaigns across several Fortune 500 companies, including Google, Twitter, Visa, and Procter & Gamble. As CMO, Christina will lead our strategic marketing initiatives as we continue to expand our market presence, drive customer engagement, and increase awareness for CarParts.com. We are confident that her strategic marketing vision and proven track record will help propel our company forward. We are thrilled to have her on the team. And third, we made significant progress on the upgrade of our logistics and reduction of our freight costs. We've identified opportunities for pick, pack, and shipping optimization that will drive reductions in freight costs and improve margins. Combined with our product margin improvement, we believe we can continue to improve gross margin after freight in the third quarter. Higher gross margin percentage, combined with operational efficiencies, should result in increased profitability for the company. In June, our new Las Vegas fulfillment center became operational and is now shipping more than 10% of our network volume. As we exit the year, we expect this building to handle close to 20% of the company volume as we service the western part of the country. The facilities assortment, paired with a state-of-the-art AI-powered PIC Module and extensive conveyance allows for a significant reduction in operating costs. This investment was made to drive operating leverage and growth in the form of process efficiencies and improved conversion for customers in the region. We expect those savings to start ramping in the second half of 2024 and fully realized in 2025. I'll now turn the call over to Ryan to lead us through our financial results. Ryan Lockwood -- Chief Financial Officer Thank you, David. In Q2, we reported revenues of $144.3 million, down 18% from $177 million last year. The decline was driven primarily by deliberate price increases to drive gross margin expansion, combined with softer consumer demand. Gross profit for the quarter was $48.4 million, down approximately 20% compared to the prior year. Gross margin was 33.5% of sales, down from 34.2% in the prior-year period and up sequentially from 32.4% last year. Gross margin improvement from increased prices and expanded brand margins related to our efforts in the quarter were offset by higher year-over-year freight costs. As David mentioned, driving gross and net margin to strengthen financial discipline is the central part of our strategy, and we expect to see continued improvement in the quarters ahead. GAAP net loss for the quarter was $8.7 million compared to a net loss of $0.7 million in the prior-year period, primarily driven by lower flow-throughs from gross margin, combined with certain one-time costs. We reported adjusted EBITDA loss of $0.1 million, down from $6.3 million in the prior-year period, primarily due to costs related to the move and opening of our new Las Vegas facility, technology transformation costs as well as special project expenses related to our strategy refocus. The total amount of expenses outside of our normal operations was approximately $2.8 million in the quarter. Turning to the balance sheet. We ended the quarter with $34 million of cash and no revolver debt. We generated $354,000 of interest income in the second quarter. Our significant cash position and untapped revolver continues to support our business plan as we finalize the opening of our new semi-automated Vegas fulfillment center, our free cash flow should improve. The inventory balance at quarter-end was $109 million versus $114 million in the prior year. Turning to our outlook for 2024. For the full year, we expect revenues at the low end of our guidance range of $600 million to $625 million, reflective of our gross margin improvement focus for the year. We remain in line with our previously stated gross profit margin guidance of 33%, plus or minus 100 basis points. David Meniane -- Chief Executive Officer Thanks, Ryan. As we've outlined, we are positioning CarParts for the future through our work to balance gross margin expansion and revenue. These improvements span our entire business, from customer-facing improvements to enhanced product assortment and process changes that are making us more efficient across every operating group at the company. We are forging a path that we expect will result in achieving sustainable and significantly positive adjusted EBITDA next year, while working toward achieving a 6% to 8% adjusted EBITDA margin and enhanced free cash flow generation in the medium term. We expect to emerge from this period of transition strongly positioned to capture the tremendous and growing opportunity in front of us within a highly fragmented and underserved $400 billion automotive aftermarket. Our customers are excited by our offering, and our business is becoming more efficient, highly differentiated, scalable, and difficult to replicate. We remain firmly focused on becoming the go-to destination for all automotive repair and maintenance needs. I would like to thank each and every person across our global teams for their hard work and commitment as we continue to execute on our transformation. Thank you, everyone, for joining today's call. We'll now turn it over to the operator and open it up for your questions. Operator Questions & Answers: |
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