PRTS

Business Context and Reporting Period

Company: CarParts.com, Inc. (PRTS)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Thirteen and twenty-six weeks ended July 4, 2026 (Fiscal Q2 2026)
Business Overview: A leading online provider of aftermarket auto parts and accessories, selling primarily to individual consumers via its flagship website, mobile app, and online marketplaces (eBay, Amazon), as well as to professional installers. The company operates as a single reportable segment.

Key Financial Metrics

Debt and Liquidity:
- Convertible Notes: $25,416 outstanding (2% interest, payable in kind, maturity Sept 2028).
- Revolving Credit Facility: $0 outstanding balance; $25,000 maximum capacity available under new agreement with FBSF.
- Operating Cash Flow (26 weeks): $10,643 provided by operations (vs. $(20,060) used in prior year).

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 10.7% QoQ and 10.6% YTD. Management attributes this to strategic initiatives to improve profitability, specifically rationalizing marketing spend by reducing investment in lower-margin customers and those with lower lifetime values (LTV).
• Margin Expansion: Gross margin improved 40 basis points to 33.2% (Q2) and 50 basis points to 32.9% (YTD), driven by favorable product mix and reduced freight costs.
• Expense Reduction: Operating expenses decreased 22.4% QoQ and 24.4% YTD, primarily due to reduced marketing spend, lower payroll costs from headcount reductions, and a $2,292 gain on the sale of the Philippines subsidiary.
• Profitability Improvement: Net loss narrowed significantly from $(12.7M) to $(3.2M) for the quarter. Adjusted EBITDA turned positive at $1.8M compared to a loss of $(3.1M) in the prior year.
• Capital Structure: The company completed a 1-for-10 reverse stock split in May 2026. It also raised $8,000 in gross proceeds from a common stock issuance in March 2026.

Guidance, Outlook, and Risks

Management Commentary & Strategy:
- Management is focused on profitability over top-line growth, optimizing marketing spend and supply chain efficiency.
- Strategic initiatives include the launch of "Spark" (AI-powered shopping assistant), expansion of the JC Whitney Performance Hub, and a partnership with A-Premium to add 150,000 SKUs via drop-shipping.
- The company believes its cash, cash equivalents, and available credit facility are sufficient to fund operations for the next 12 months.

Risks and Contingencies:
- Tariffs: The company has received approximately $4.4M in IEEPA tariff refunds as of July 4, 2026, which reduced inventory carrying value and cost of goods sold. Future tariff impacts remain a risk.
- Supplier Concentration: Top 10 suppliers represented 56% of purchases; majority of products are sourced from Taiwan and China.
- Marketplace Dependency: Third-party marketplaces (Amazon, eBay) accounted for 30.6% of sales YTD; loss of access would materially harm revenue.
- Debt Covenants: The Credit Facility requires a Fixed Charge Coverage Ratio of 1.1 to 1.0 if cash plus availability falls below $15,000 or availability falls below $7,500.

Investor Verification Checklist

• Revenue Quality: Verify if the reduction in marketing spend is sustainable or if it risks long-term customer acquisition and market share erosion.
• Tariff Refund Sustainability: Confirm the timing and certainty of remaining IEEPA tariff refunds and the impact of potential new tariffs under other legal authorities.
• Convertible Notes: Assess the dilution risk upon conversion of the $25.4M Convertible Notes at the $12.00 conversion price and the company's ability to repay in cash if conversion is restricted.
• Inventory Management: Review inventory turnover ratios given the $83.9M inventory balance and the shift toward drop-shipping models to reduce working capital needs.
• Marketplace Concentration: Evaluate the terms and stability of relationships with Amazon and eBay, which drive nearly one-third of revenue.