CarParts.com, Inc. — Form 10-K Summary
Reporting period: The filing is for the 53-week fiscal year ended January 2, 2021, compared with the 52-week fiscal year ended December 28, 2019. Although the request metadata says “2019 Q4,” this is an annual report for fiscal 2020, not a 2019 quarterly filing. Dollar amounts below are in millions unless otherwise noted.
Business context
CarParts.com sells aftermarket auto parts and accessories primarily online through its flagship website and third-party marketplaces, with a smaller wholesale business. Its catalog contained more than 820,000 SKUs. The company emphasized expanding house-brand products, improving delivery through distribution centers, and consolidating its websites under CarParts.com.
Financial results and liquidity
- Revenue: $443.9 million, up 58.2% from $280.7 million. Online sales rose 65.6% to $424.1 million and were 95.5% of sales; offline sales fell 19.5% to $19.8 million.
- Gross profit and margin: Gross profit was $155.4 million, up 84.5%; gross margin improved to 35.0% from 30.0%. Management attributed the improvement mainly to a higher house-brand mix and favorable channel and product mix, partly offset by higher freight costs.
- Operating results: Operating expenses rose 67.7% to $155.1 million, or 34.9% of sales versus 32.9%. Operating income was $0.3 million, compared with an operating loss of $8.3 million.
- Net income: Net loss was $1.5 million, or $0.04 per share, versus a $31.5 million loss, or $0.89 per share. The prior-year loss included a $23.0 million deferred-tax valuation allowance; fiscal 2020 still had a $30.5 million valuation allowance against deferred tax assets. Adjusted EBITDA, a non-GAAP measure, was $16.0 million versus $4.5 million; it includes adjustments for share-based compensation and, in 2019, specified customs and employee-transition costs.
- Cash flow: Operating cash flow was negative $19.1 million, versus positive $6.9 million. The company cited inventory growth, including inventory for the new Texas distribution center, as a key use of cash. Investing cash outflow was $9.8 million, mainly for property, equipment, website and software development.
- Cash and working capital: Cash and cash equivalents were $35.8 million, up from $2.3 million; working capital was $67.4 million, up from $2.4 million. The filing attributes much of the cash increase to the August 2020 stock offering.
- Debt and leases: Total debt was $13.0 million, primarily finance-lease obligations; revolving-credit borrowings were zero. The company reported $26.6 million of excess availability under its $30 million asset-based facility, which matures December 16, 2022, and was in covenant compliance. Separately, operating-lease obligations had a $16.0 million non-current balance and $2.5 million current balance at year-end.
Material changes and notable items
- In August 2020, the company raised $60.5 million net through a public stock offering. It also issued shares through option exercises. The Series A preferred stock converted into common stock in June 2020.
- Online sales growth, especially from the flagship website, substantially changed the channel mix; house-brand replacement parts increased to 71% of revenue from 62%.
- The company opened a Texas distribution center in the fourth quarter of 2020 and expanded its fulfillment footprint. Employee count increased 96% year over year to 1,649.
- COVID-19 caused minimal business disruption overall, though management said sales were adversely affected in mid-to-late March 2020. Distribution centers remained operational.
- A ransomware attack detected June 28, 2020 disrupted access to some systems. The company restored affected systems and reported no material impact to its business or financial results.
- The 2019 comparison included a $23.0 million tax valuation allowance; the company maintained a substantial valuation allowance in 2020 because of cumulative losses and uncertainty about future taxable income.
Outlook, risks and contingencies
- Management provided no specific revenue or earnings guidance. It said available cash, investments, operating cash flows and credit-facility availability should fund operations for at least the next 12 months, while warning that requirements could vary with sales, margins, expenses and economic conditions.
- Key risks include competition and pricing pressure, dependence on online marketplaces, and supply-chain concentration. Amazon and eBay together accounted for 35.1% of sales; the top ten suppliers represented about 62% of product purchases, and the company relies heavily on suppliers in Taiwan and China.
- Higher inbound and outbound freight costs, tariffs, supplier disruptions, inventory availability, and the ability to manage fulfillment capacity could pressure margins or sales. The company also identified seasonality, cyber and privacy risks, and changing consumer demand as material concerns.
- The asset-based credit facility has borrowing-base limits, restrictive covenants and cash-dominion triggers that could constrain liquidity if availability falls. Letters of credit outstanding were $1.55 million.
- Legacy customs litigation was settled in 2019; the company said outstanding CBP enforcement issues and claims were resolved. Asbestos-related lawsuits remain, but the company does not expect material out-of-pocket costs. Management said ordinary-course litigation was not expected to materially affect financial position, results or cash flows.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Inventory reserves and realization of deferred tax assets were identified as critical audit matters requiring significant judgment.
Investor facts to verify
- Whether sales growth and the 35.0% gross margin persist as freight costs, marketplace fees and the product mix change.
- Whether operating cash flow improves after the substantial inventory build and whether inventory reserves adequately reflect slow-moving or obsolete stock.
- How much marketplace concentration and supplier concentration affect revenue continuity, costs and bargaining power.
- Liquidity and covenant headroom under the asset-based facility, including the effect of borrowing-base changes and lease commitments.
- Whether future taxable income supports any release of the $30.5 million deferred-tax valuation allowance and the use of tax-loss carryforwards.