CarParts.com, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the thirteen and thirty-nine weeks ended September 26, 2020, not 2019 Q3 as indicated in the request metadata. The comparable prior-year period ended September 28, 2019. Dollar amounts below are in thousands unless stated otherwise.
Business context and reporting period
CarParts.com, formerly U.S. Auto Parts Network, sells aftermarket auto parts and accessories online, through marketplaces, and to wholesale distributors. Online sales accounted for 93.9% of Q3 2020 sales. The company changed its name in July 2020.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Thirty-nine weeks 2020 | Thirty-nine weeks 2019 |
|---|---|---|---|---|
| Net sales | $117,406 | $69,273 | $324,154 | $217,698 |
| Gross profit | $43,121 | $21,143 | $113,729 | $63,035 |
| Gross margin | 36.7% | 30.5% | 35.1% | 29.0% |
| Operating income (loss) | $1,732 | $(1,458) | $3,555 | $(6,109) |
| Net income (loss) | $1,385 | $(1,424) | $1,975 | $(6,461) |
| Diluted earnings (loss) per share | $0.03 | $(0.04) | $0.04 | $(0.18) |
| Adjusted EBITDA (non-GAAP) | $5,131 | $1,316 | $14,991 | $2,646 |
Q3 sales rose 69.5%; online sales increased 75.1%, primarily through the flagship website, while offline sales rose 13.1%. Year-to-date sales grew 48.9%, driven by a 54.2% increase in online sales; offline sales declined 3.0%. Management attributed improved gross margin to product and channel mix and logistics optimization. Operating expenses increased 83.1% in Q3, mainly from higher marketing and fulfillment costs, including costs related to the Las Vegas distribution center.
- Cash flow, year to date: Operating cash flow was $1,610, versus $4,327 in 2019; capital spending was $6,936, versus $4,686. Financing provided $62,019, principally reflecting the equity offering. Cash increased by $56,698.
- Liquidity: Cash was $58,971 at September 26, 2020, versus $2,273 at December 28, 2019. Working capital was $70,663, versus $2,427.
- Debt and credit: Revolver borrowings were zero; total debt was $10,589, primarily finance-lease obligations. The asset-based facility allows commitments up to $30,000, subject to its borrowing base; reported excess availability was $22,519. The facility matures December 2022.
- Balance sheet: Inventory was $76,729, up from $52,500 at year-end 2019. Total liabilities were $108,273 and stockholders’ equity was $84,567.
Material changes and unusual items
- The August 2020 public offering of 4.9 million shares generated net proceeds of approximately $60.5 million, including the underwriters’ option exercise. The company said proceeds were intended for working capital and general corporate purposes.
- All outstanding Series A preferred shares automatically converted into approximately 2.62 million common shares in June 2020. Common shares outstanding were 47.772 million at quarter-end, compared with 36.167 million at December 2019.
- New operating leases for the Philippines office, Torrance headquarters, and Texas distribution center increased reported operating lease assets and obligations. The Texas distribution center was expected to open in Q4 2020.
- Share-based compensation was $6,466 for the first thirty-nine weeks of 2020, versus $1,992 in the comparable period. Adjusted EBITDA is a non-GAAP measure; its 2019 reconciliation also excludes employee-transition and customs-related costs.
Outlook, commentary, and risks
Management stated that cash, operating cash flows, and available debt financing should fund operations for at least the next twelve months. No specific revenue, earnings, or margin guidance was provided. Management’s stated priorities include improving the online shopping experience, expanding product selection and house-brand offerings, maintaining inventory, and controlling costs.
- Management reported minimal COVID-19 business disruption, with distribution centers operating; sales were adversely affected primarily in mid-to-late March. The pandemic’s future effects remain uncertain.
- A ransomware incident was detected June 28, 2020, disrupting access to some systems. Systems were restored. Management reported no evidence of sensitive customer data theft, but its investigation was ongoing; the filing also cautions that access to personally identifiable information could not yet be ruled out.
- Marketplace dependence is material: Amazon and eBay together represented 34.6% of year-to-date sales. The filing identifies possible loss of marketplace access, rising marketplace costs, and competition as risks.
- The ten largest suppliers represented approximately 63% of year-to-date product purchases; the company relies heavily on suppliers in Taiwan and China. Shipping costs, tariffs, supply interruptions, and inventory availability could pressure results.
- The company reported a full valuation allowance against deferred tax assets. Its asbestos litigation exposure is insured and not expected to create material out-of-pocket costs; the customs dispute was settled in 2019, with outstanding enforcement issues resolved and no remaining damage or duty claims reported.
Important facts for investors to verify
- Confirm the period: this filing covers Q3 2020, despite the request’s 2019 Q3 label.
- Assess whether rapid sales growth and higher gross margins are sustainable, given increased marketing and fulfillment expenses.
- Track operating cash flow and inventory investment; year-to-date operating cash flow declined despite higher earnings and sales.
- Review dilution from the equity offering, preferred conversion, and equity compensation, and the use of offering proceeds.
- Monitor the ransomware investigation and cybersecurity controls, alongside concentration in marketplaces, suppliers, and overseas sourcing.
- Check execution and costs of the new Texas distribution center and significant lease commitments.