CarParts.com reports Q3 revenue drop of 12% while enhancing profitability through strategic partnerships and operational efficiencies, targeting free cash flow positivity by 2026.

OPERATOR - (00:00:00)

Good afternoon. At this time all participants will be in a listen only mode. Please note that this call is being recorded. I would now like to pass the conference over to our host, Ryan Lockwood, Chief Financial Officer. Please go ahead.

Ryan Lockwood - Chief Financial Officer - (00:00:16)

Hello everyone and thank you for joining us for the CarParts.com third quarter 2025 conference call. Joining me today is David Mignon, Chief Executive Officer. Before I turn it over to David to start the call, I have some important disclosures. Our remarks on this call could contain certain forward-looking statements related to our company and our strategic initiatives under the federal securities laws. Actual results may differ materially from those contained in or implied by these forward-looking statements due to various risks and uncertainties. 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 10K and the quarterly reports on Form 10Q each as filed with the SEC, all 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. Financial measures is provided in the press release that we issued today. With that, I would now like to, Turn the call over to David.

David Mignon - Chief Executive Officer - (00:01:23)

Thank you Ryan and thanks everyone for joining us today. Earlier this year we began exploring strategic alternatives to maximize shareholder value. That process has now concluded and I'm pleased to announce that in early September CarParts.com closed on a $35.7 million strategic investment from A-Premium, Zhongtang Group and CDH Investments. Now I want to spend a few minutes on each of these strategic partners and why we're excited about the value creation opportunities we see. Zongteng Group is a global e-commerce logistics leader operating more than 24 million square feet of fulfillment space and serving over 60,000 cross border sellers. Through this partnership, we gain access to nationwide US network of more than 50 facilities and a fully integrated global logistics network, enabling us to reduce delivery times, improve inventory efficiency and lower fulfillment cost as we integrate their network. Importantly, this partnership eliminates the need to open additional distribution centers allowing us to continue leveraging our existing network for large non conveyable items while relying on Zongteng's high velocity automated capabilities for smaller conveyable products. The result is a highly complementary logistics model that delivers scale, speed and flexibility without significant capital outlay. A-Premium is a fast growing global auto parts brand recognized for its quality, innovation and broad product portfolio. Within the CarParts.com assortment, collision and replacement represents about 70% of our business while mechanical parts have historically been secondary and require significant capital investments to build out selection and inventory depth. Through our collaboration, we're adding over 100,000 SKUs, including exclusive kits and bundles that strengthen our offering for both Do It Yourself customers and professional installers with minimal capital outlays. We've already onboarded the majority of the catalog since the investment announcement in September, with current sales trending at an approximate $20 million annualized run rate and we're targeting $50 million in incremental revenue in the near term and believe this partnership has the potential to exceed $100 million annually over time, contingent on market acceptance and successful integration execution. CDH Investments brings far more than capital with approximately $20 billion in assets under management and a proven track record of investing in more than 350 companies, including over 100 successful public listings, CDH offers not only deep financial expertise but also exceptional operational insight and governance discipline that will be incredibly valuable as we continue to scale and execute on our growth ambitions. Together, these partnerships strengthen our product assortment, logistics capabilities and capital in strategic positions, setting up for sustainable, profitable growth we want to provide an update on the tariff environment the current situation remains fluid with rates, applications and effective dates continuing to evolve in real time. Approximately 20% of our private label products are imported from China, with the remainder sourced from Taiwan and other countries. Our team is actively managing this environment through a range of initiatives including negotiating cost concessions with vendors, implementing dynamic pricing adjustments and optimizing our supply chain operating expenses. We've made intentional decision on what to import and what to hold when it comes to inventory from China. Overall, we are comfortable with our inventory position, but given how quickly conditions are shifting, we continue to monitor developments closely and adjust as needed. Currently, automotive products sourced from Taiwan are currently subject to tariffs of about 25% and products from China have tariffs ranging from 55 to to 75%. While these tariffs represent a near term headwind to gross margin, our proactive sourcing and pricing strategies are designed to mitigate impact and protect long term profitability. Now Turning to our third quarter results, revenue was 128 million down 12% year over year, reflecting our strategic shift in consumer acquisition approach that I'll detail in a moment. The important story is is profitability improvement. From a profitability standpoint, we continue to make steady sequential progress. As a reminder, due to the success and throughput of our Las Vegas facility we opened last year, combined with operational improvements in the remainder of the network, we have excess capacity in our distribution network. As a result, we closed our Virginia facility at the end of October, aligning operational fixed costs with our volume. We have also streamlined corporate headcount, including full time employees, third party contractors and operational partners and cutback on underperforming or noncritical software. Adjusted EBITDA and free cash flow both improved quarter over quarter even with seasonal headwinds. Q3 outperformed Q2 which outperformed Q1. Gross margin increased from 32.1% in the first quarter to 33.1 in the third with our focus on profitability, optimizing channel and customer mix, and improving warehouse labor efficiency. Variable contribution margin expanded from the low 6% range in Q1 to the high 7% range in Q2 and reached the low 9% range in Q3 and at the same time, fixed operating expenses adjusted for transaction and restructuring costs declined sequentially in both Q2 and Q3. We now have a business that's leaner, more efficient and more profitable on a contribution margin basis. With a smaller fixed cost base, we're tackling every critical lever of the P and L gross margin, variable cost, operational efficiency and fixed expenses with the goal of driving sustained free cash flow generation. This marks the strategic evolution of our operating model, one that prioritizes profitable growth, operational discipline and sustained free cash flow generation. Now these improvements are the direct results of strategic choices we've made over the past two years to strengthen our platform, diversify our revenue streams and enhance customer lifetime value. Number one, we re platformed the CarParts.com website improving speed, scalability, end user experience. We completely rebuilt our search and product recommendation engine using artificial intelligence resulting in more relevant results and higher conversion rates. Number two, we launched and continue to grow our mobile app which has quickly become an important growth driver. Mobile app revenue has increased from under 9% of E commerce sales at the beginning of the year to more than 13% by the end of the third quarter. 3. We've also focused on expanding higher margin recurring revenue streams, fee based income including product and shipping protection and our car parts plus membership program and roadside assistance is now running at nearly $4 million annualized run rate. We now have over 8,000 car parts plus members and 4 retention revenue has grown from under 7% to approximately 10% in less than a year, reflecting stronger customer engagement, loyalty and lifetime value. Now I want to discuss our E Commerce customer acquisition strategy and how it's driving better unit economics. We're shifting from volume focused acquisition through paid search to a more balanced approach emphasizing retention, mobile app and own channels. Now this isn't about accepting lower growth, it's about building Sustainable Profitable Growth by pairing improved contribution margins with the A premium partnership with $50 million in targeted incremental revenue, we're creating a more durable and efficient business model. That means being more selective about where and how we invest marketing dollars, prioritizing channels that drive profitable customer relationships and repeat purchase behavior over one time transactions. We want to build a more efficient and sustainable growth engine. Historically, much of our business relied heavily on paid traffic through Google product listing ads which drive high volume but dramatically lower contribution margins. By rebalancing the traffic mix toward our owned and retained channels, including our mobile app lifecycle marketing and CRM driven initiatives, we're lowering acquisition costs, increasing customer lifetime value and driving more predictable profitability. This pivot isn't about pulling back on growth, it's about redefining growth to mean profitable, repeatable and cash flow positive. We've already seen early proof of success through improved conversion rates, increased units per order and stronger contribution margins. Bringing this all together. The shift we made in E Commerce acquisition is fully aligned with the partnerships and operational progress we've been discussing. When you combine our focus on contribution margin and profitable customer growth with a leaner fixed cost structure and you layer on the incremental high margin sales from the A premium partnership, you see the full picture of our transformation. Our plan is clear disciplined execution, profitable growth and operational efficiency working together to drive sustained free cash flow. Every part of the business is moving in the same direction and the results we're seeing each quarter reinforce that the model is working. We're confident that this approach, supported by the foundation we've built and the partnerships established through the strategic review positions CarParts.com for long term profitability we expect to be free cash flow positive in 2026. We recognize that there are still challenges ahead. The operating environment remains complex with continued tariff uncertainty shifting consumer demand and inflationary pressures across labor, logistics and product costs. Certain areas of our business, particularly in the marketplaces segment, continue to face pressure. The ongoing influx of non compliant products imported from China, often sold without proper safety standards or regulatory oversight, distorts the competitive landscape and creates pricing pressure. In response, we're doubling down on our owned e commerce channel CarParts.com and emphasizing CAPA certified parts and trusted in house brands like JC Whitney. This allows us to control the customer experience, ensure quality and compliance and build long term direct relationships with our customers. Tariffs and inflation also continue to weigh on demand, particularly in discretionary categories. We're mitigating these effects through measured pricing, gradual cost pass throughs and greater sourcing diversification to reduce volatility. While the market may take time to adjust, our disciplined pricing, balanced sourcing and diversified marketing strategy position us for greater stability and profitability over time. We're also expanding into adjacent segments such as European and OE Premium Parse Q to reach new customers and serve more vehicle owners across more categories. Now, for those who are Newer to the CarParts.com story, I want to take a moment to share why we're confident in our strategy and why we believe we're building a stronger and more competitive company for the long term. 1. We've built a mobile first data driven platform with over 100 million annual site visits and more than 1 million app users. Our AI driven personalization delivers best in class fitment, accuracy and product recommendations, creating a seamless shopping experience that drives higher conversion and greater customer lifetime value. 2. We operate nearly 1 million square feet of optimized warehouse space across the US designed to handle both conveyable and non conveyable products efficiently. Proprietary tools such as box on demand and custom packaging technology help lower freight costs and improve speed while vertical integration gives us control over quality and cost. 3. We're leaders in assortment and brand. Our collision private label business represents about 70% of our revenue, encompassing more than 70,000 SKUs, while J.C. whitney continues to build trust, loyalty and brand equity. Our proprietary kits and bundles increase basket size and simplify repairs and we're expanding into European and premium segments to reach new customers. And four Our strategic partnerships with Apremium, Zongteng and CDH further extend our reach and strengthen our foundation. Apremium allows us to scale mechanical private label assortments from 20,000 to over 120,000 SKUs with zero capital outlay. ZongTeng's global logistics network adds capital, light scaling and flexibility and CDH brings operational expertise and investment discipline. Together these partnerships enhance capacity, efficiency and profitability, positioning CarParts.com to maximize free cash flow and long term value creation. This combination, customer experience, supply chain strength, product leadership and strategic partnerships is what strengthens Car Parts.com's competitive position. It's why we believe we're positioned to win and why we're confident we're building a stronger, more competitive company in the long term. Now I'll turn it over to Ryan to walk through the financials. Thank you David.

Ryan Lockwood - Chief Financial Officer - (00:15:13)

Before I discuss the quarter results, I'd like to drill down on some of David's comments around the strategic changes we made during the quarter and the year as a whole. We started the year with an incredibly. Challenging e commerce marketing environment with ad spend running 17.7% of gross sales, by September we had reduced this to 12.5% of gross E Commerce revenue and we expect to see continued improvement through the rest of this year and 2026. In the short run, this will result in lower revenue, but in the long run it will be better for the company's overall profitability. Our contribution margin as a percentage of revenue has improved by over 300 basis points from Q1 to Q3, demonstrating the effectiveness of this approach. To put this in perspective, our average weekly net sales in January was 9.7 million and generated under $600,000 of variable contribution margin. By contrast, our average weekly sales in September was 9 million and generated over 900,000 of variable contribution margin. So while we are giving up some. Revenue, we believe the strategic changes we've made change increase in profitability are trending in the right direction. We're laser focused on driving profitability through the P and L and believe These changes position CarParts.com to achieve free cash flow positive performance in 2026. In the third quarter we reported revenues of 127.8 million, down 12% from 144.8 million last year. The decrease was primarily driven by our efforts to increase profitability by rationalizing advertising expense. Gross profit for the quarter was 42.3 million, down 17% compared to the prior year. Gross margin was 33.1 down from 35.2% in the prior year period. The decline in gross margin was primarily driven by increased outbound freight cost of goods sold and tariff charges slightly offset by pricing increases. GAAP net loss for the quarter was. $11 million compared to a loss of $10 million in the prior year period primarily driven by lower revenues partially offset by lower operating costs. The current quarter was also impacted by one time advisory fees related to our strategic review as well as restructuring costs. For the third quarter the adjusted EBITDA loss was 2.2 million, down from adjusted EBITDA loss of 1.2 million in the prior year period, primarily due to lower gross margin. We ended the quarter with 36 million of cash and no revolver debt. Earlier this year we started proactively investing in inventory ahead of tariffs to improve the continuity of our supply chain. This works out to about two extra weeks of stock ship cost of goods sold. As a reminder, our inventory has low offs, pleasant risk and no risk of spoilage and our pre freight margins are over 50%. Our inventory balance was $94 million at the end of the quarter versus $90 million at the end of 2024. I'll now turn it over to David for final remarks.

David Mignon - Chief Executive Officer - (00:18:18)

Thank you, Ryan. Before we move on, I want to share an important leadership update. After thoughtful consideration, Ryan has decided to pursue a new opportunity with a high growth private company in the technology and services space. He will remain with us during the transition period as we start the process to identify his replacement. I'm grateful for his leadership and the impact he has had on strengthening our financial foundation and supporting our transformation, and we wish him continued success in his next chapter. Let me close with what we're focused on for the remainder of the year. We'll continue to expand our product offering to attract new customers and increase average basket size with a strong focus on. The A-Premium and catalog. We'll focus on monetizing our 100 million annual website visits and customer lists through high margin fee income opportunities. We'll continue to grow our mobile app business to diversify our marketing mix, strengthen customer engagement and increase customer lifetime value. And we'll protect our balance sheet by carefully managing cash flow and inventory levels as we navigate the uncertainty in the tariff environment. We know this transformation is a multi year effort. Our focus remains on rebuilding the foundation of CarParts.com into a company that can scale efficiently, innovate rapidly and deliver a seamless, high quality customer experience while driving greater discipline in both our cost structure and capital deployment. Much of this work is happening behind the scenes, from realigning our fulfillment network to investing in AI and automation, and we expect these efforts to become more visible over the next year. As these initiatives come together, we're confident that our financial performance will follow first continued margin and efficiency gains and then through earnings growth. We believe these improvements will stabilize and build through next year with our goal of achieving free cash flow breakeven in 2026 before we wrap up the call, I want to take a moment to thank the entire cloudparts.com team. Over the past year, our people have worked incredibly hard in an environment filled with uncertainty and change. Their resilience, focus and determination have been the driving force behind our progress. Because of their efforts, we're able to deliver measurable improvements across the business and establish three transformative strategic partnerships with Apremium, Zongfang and CDH. These partnerships represent a major milestone for CarParts.com and provide exciting opportunities for growth, innovation and operational excellence. I am proud of what we've achieved together and energized by the momentum we're carrying forward. We have a clear strategy, strong partners and an exceptional team dedicated to executing our vision. While challenges remain we feel confident about where we're headed in our path to profitability and free cash flow in 2026. Thank you everyone for joining today's call. We'll now turn it over back to the operator.

OPERATOR - (00:21:10)

We currently don't see any questions in the Q and A queue. This concludes today's conference call. Thank you for participating. You may now disconnect.