CARPARTS.COM, INC. Cautionary Statement
You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this report. Certain statements in this report, including statements regarding our business strategies, operations, financial condition, and prospects are forward-looking statements. Use of the words "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would", "will likely continue," "will likely result" and similar expressions that contemplate future events may identify forward-looking statements.
The information contained in this section is not a complete description of our
business or the risks associated with an investment in our common stock. We urge
you to carefully review and consider the various disclosures made by us in this
report and in our other reports filed with the
Overview
We are a leading online provider of aftermarket auto parts, including replacement parts, hard parts, and performance parts and accessories. We principally sell our products to individual consumers through our flagship website at www.carparts.com and online marketplaces. Our proprietary product database maps our SKUs to product applications based on vehicle makes, models and years. Our corporate website is located at www.carparts.com/investor. The inclusion of our website addresses in this report does not include or incorporate by reference into this report any information on our websites.
We believe by disintermediating the traditional auto parts supply chain and selling products directly to customers online allows us to efficiently deliver products to our customers. Our vision of "Empowering Drivers Along Their Journey" focuses on creating a trusted platform that takes the stress out of vehicle repair and maintenance. We believe our strategy consists of four areas of focus: outstanding customer service, operational excellence, financial discipline, and innovation.
Outstanding Customer Service means delivering an extensive assortment of competitively priced, quality parts to drivers looking for simple, stress-free vehicle care in an unparalleled digital-first experience. We accomplish this by leveraging our vertically integrated supply chain, expanding our domestic footprint to get closer to the customer, and improving our website and user experience.
Operational Excellence means creating a culture of continuous improvement. We focus on optimizing processes, eliminating bottlenecks, and improving communication and collaboration within our organization. This requires a commitment to ongoing learning and development as well as embracing new technologies and processes.
Financial Discipline means optimizing costs and managing financial resources in a prudent and responsible manner in order to drive shareholder value. At an organizational level, our goal is to optimize cash flow, control costs, and allocate resources effectively.
Innovation means ensuring that our company continues to evolve and deliver products and services that meet our customers evolving needs. There are currently products and services that are not widely available to customers that we believe are areas of opportunity. With meticulous execution, these innovations have the chance to build more value for our shoppers while creating additional revenues or profits in the future.
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Industry-wide trends that support our strategy and future growth include:
1.Number of SKUs required to serve the market. The number of automotive SKUs has grown dramatically over the last several years. In today's market, unless the consumer is driving a high volume produced vehicle and needs a simple maintenance item, the part they need is not typically on the shelf at a brick-and-mortar store. We believe our user-friendly flagship website provides customers with a favorable alternative to the brick-and-mortar shopping experience by offering a comprehensive selection of approximately 941,000 SKUs with detailed product descriptions, attributes and photographs combined with the flexibility of fulfilling orders using both drop-ship and stock-and-ship methods.
2.U.S. vehicle fleet expanding and aging. The average age of
3.Growth of online sales.
Factors Affecting our Performance
We believe that our performance and future success depend on a number of factors
that present significant opportunities for us but also pose risks and
challenges, including those discussed in Part II, Item IA, of this Quarterly
Report on Form 10-Q and in Part I, Item IA, in our Annual Report on Form 10-K
for the fiscal year ended
Executive Summary
For the first quarter of 2023, the Company generated net sales of
Net sales increased in the first quarter of 2023 compared to the first quarter
of 2022 primarily driven by continued strong demand. Gross profit increased by
2.3% to
Total expenses, which primarily consisted of cost of sales and operating expense, increased in the first quarter of 2023 compared to the same period in 2022. The changes in both cost of sales and operating expense are described in further detail under - "Results of Operations" below.
Non-GAAP measures
Regulation G, "Conditions for Use of Non-GAAP Financial Measures," and other provisions of the Exchange Act, define and prescribe the conditions for use of certain non-GAAP financial information. We provide EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. EBITDA consists of net income before (a) interest
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expense, net; (b) income tax provision; (c) depreciation and amortization expense; and (d) amortization of intangible assets; while Adjusted EBITDA consists of EBITDA before share-based compensation expense.
The Company believes that these non-GAAP financial measures provide important supplemental information to management and investors. These non-GAAP financial measures reflect an additional way of viewing aspects of the Company's operations that, when viewed with the GAAP results and the accompanying reconciliation to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting the Company's business and results of operations.
Management uses Adjusted EBITDA as one measure of the Company's operating performance because it assists in comparing the Company's operating performance on a consistent basis by removing the impact of share-based compensation expense as well as other items that we do not believe are representative of our ongoing operating performance. Internally, this non-GAAP measure is also used by management for planning purposes, including the preparation of internal budgets; for allocating resources to enhance financial performance; and for evaluating the effectiveness of operational strategies. The Company also believes that analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate the ongoing operations of companies in our industry.
This non-GAAP financial measure is used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. Management strongly encourages investors to review the Company's consolidated financial statements in their entirety and to not rely on any single financial measure. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. In addition, the Company expects to continue to incur expenses similar to the non-GAAP adjustments described above, and exclusion of these items from the Company's non-GAAP measures should not be construed as an inference that these costs are unusual, infrequent or non-recurring.
The table below reconciles net income to Adjusted EBITDA for the periods
presented (in thousands):
Thirteen Weeks Ended
April 1, 2023 April 2, 2022
Net income $ 1,051 $ 2,103
Depreciation & amortization 3,919 2,957
Amortization of intangible assets 11 28
Interest expense, net 347 291
Taxes 141 52
EBITDA $ 5,469 $ 5,431
Stock compensation expense $ 3,899 $ 3,992
Adjusted EBITDA $ 9,368 $ 9,423
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Results of Operations
The following table sets forth selected statements of operations data for the periods indicated, expressed as a percentage of net sales:
Thirteen Weeks Ended
April 1, 2023 April 2, 2022
Net sales 100.0 % 100.0 %
Cost of sales 64.4 63.2
Gross profit 35.6 36.8
Operating expense 35.3 35.4
Income from operations 0.3 1.4
Other income (expense):
Other income, net 0.6 0.0
Interest expense (0.2) (0.1)
Total other income (expense), net 0.4 (0.1)
Income before income taxes 0.7 1.3
Income tax provision 0.1 0.0
Net income 0.6 % 1.3 %
Thirteen Weeks Ended
Thirteen Weeks Ended
April 1, 2023 April 2, 2022
(in thousands)
Net sales $ 175,492 $ 166,053
Cost of sales 112,941 104,891
Gross profit $ 62,551 $ 61,162
Gross margin 35.6 % 36.8 %
Net sales increased
Gross profit increased
Operating Expense
Thirteen Weeks Ended
April 1, 2023 April 2, 2022
(in thousands)
Operating expense $ 61,915 $ 58,771
Percent of net sales 35.3 % 35.4 %
Operating expense increased
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Total Other Income (Expense), Net
Thirteen Weeks Ended
April 1, 2023 April 2, 2022
(in thousands)
Other income (expense), net $ 556 $ (236)
Percent of net sales 0.3 % (0.1) %
Total other income (expense), net, increased
Income Tax Provision
Thirteen Weeks Ended
April 1, 2023 April 2, 2022
(in thousands)
Income tax provision $ 141 $ 52
Percent of net sales 0.1 % 0.0 %
For the thirteen weeks ended
For the thirteen weeks ended
The Company accounts for income taxes in accordance with ASC Topic 740 - Income
Taxes ("ASC 740"). Under the provisions of ASC 740, management is required to
evaluate whether a valuation allowance should be established against its
deferred tax assets. We currently have a full valuation allowance against our
deferred tax assets. As of each reporting date, the Company's management
considers new evidence, both positive and negative, that could impact
management's view with regard to future realization of deferred tax assets. For
the thirteen weeks ended
Foreign Currency
The impact of foreign currency is related to our offshore operations in
Liquidity and Capital Resources
Sources of Liquidity
During the thirteen weeks ended
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Working Capital
As of
Cash Flows
The following table summarizes the key cash flow metrics from our consolidated
statements of cash flows for the thirteen weeks ended
Thirteen Weeks Ended
April 1, 2023 April 2, 2022 Net cash provided by operating activities
(2,745) (3,760)
Net cash provided by financing activities 502 5,379
Effect of exchange rate changes on cash - 6
Net change in cash and cash equivalents $ 30,538 $ 6,891Operating Activities
Net cash provided by operating activities for the thirteen weeks ended
Investing Activities
For the thirteen weeks ended
Financing Activities
Net cash provided by financing activities was
Debt and Available Borrowing Resources
Total debt was
The Company maintains a Credit Facility that provides for, among other things, a
revolving commitment, which is subject to a borrowing base derived from certain
receivables, inventory and property and equipment. The Credit Facility provides
for the revolving commitment in an aggregate principal amount of up to
Loans drawn under the Credit Facility bear interest at a per annum rate equal to either (a) SOFR plus an applicable margin of 1.50% to 2.00% per annum based on the Company's fixed charge coverage ratio, or (b) an "alternate prime
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base rate" subject to an increase from 0.00% to 0.50% per annum based on the
Company's fixed charge coverage ratio. As of
Our Credit Agreement requires us to satisfy certain financial covenants which could limit our ability to react to market conditions or satisfy extraordinary capital needs and could otherwise restrict our financing and operations. If we are unable to satisfy the financial covenants and tests at any time, we may as a result cease being able to borrow under the Credit Facility or be required to immediately repay loans under the Credit Facility, and our liquidity and capital resources and ability to operate our business could be severely impacted, which would have a material adverse effect on our financial condition and results of operations. In those events, we may need to sell assets or seek additional equity or additional debt financing or attempt to modify our existing Credit Agreement. There can be no assurance that we would be able to raise such additional financing or engage in such asset sales on acceptable terms, or at all, or that we would be able to modify our existing Credit Agreement.
Funding Requirements
Based on our current operating plan, we believe that our existing cash, cash equivalents, investments, cash flows from operations and available debt financing will be sufficient to finance our operational cash needs through at least the next twelve months. Our future capital requirements may, however, vary materially from those now planned or anticipated. Changes in our operating plans, lower than anticipated net sales or gross margins, increased expenses, continued or worsened economic conditions, worsening operating performance by us, or other events, including those described in "Risk Factors" included in Part II, Item 1A may force us to sell assets or seek additional debt or equity financings in the future, including the issuance of additional common stock under a registration statement. As such, there can be no assurance that we would be able to raise such additional financing or engage in asset sales on acceptable terms, or at all. If we are not able to raise adequate additional financing or proceeds from asset sales, we will need to defer, reduce or eliminate significant planned expenditures, restructure or significantly curtail our operations.
Seasonality
We believe our business is somewhat seasonal in nature. It includes many categories, geographies, and channels which may experience seasonality from time to time based on various external factors. Additionally, seasonality may affect our product mix. These historical seasonality trends could continue, and such trends may have a material impact on our financial condition and results of operations in subsequent periods.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in
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sources. Actual results could differ from those estimates, and we include any revisions to our estimates in our results for the period in which the actual amounts become known.
There were no significant changes to our critical accounting policies during the
thirteen weeks ended
? Valuation of Inventory - Inventory Reserve
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