CarParts.com, Inc. ($PRTS)

Good afternoon. [Operator Instructions] Please note that this call is being recorded. I would like now to pass the conference over to our host, Mark DiSiena, Interim Chief Financial Officer. Please go ahead.

Hello, everyone, and thank you for joining us for the CarParts.com First Quarter 2026 Conference Call. Joining me today is David Meniane, Chief Executive Officer. Before I turn it over to David, 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 herein 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 10-K and the quarterly reports on Form 10-Q, each as filed with the SEC, all of which can be found in our Investor Relations website. On the call, both GAAP and non-GAAP financial measures discussed. A reconciliation of GAAP to non-GAAP financial measures is provided in the press release that we issued today. With that, I'd like to turn the call over to David.

In the first quarter of 2026, we reached a milestone we have been building towards for 5 consecutive quarters, our first positive adjusted EBITDA since Q1 2024. Our adjusted EBITDA was positive $585,000, a swing of nearly $7 million from the same quarter last year. This is the result of deliberate action across every line in the P&L advertising efficiency, customer acquisition quality, life cycle monetization, warehouse operations, offshore savings and a fixed cost base that is now materially lower and mostly embedded in our run rate. 12 months ago, adjusted EBITDA was negative $6.2 million. We made a decision then to rebuild this business around profitability, and today, we cross the line. Before I walk through the quarter, I want to establish 2 frameworks that matter for how investors think about this business. The first is how we measure profitability. As our mix evolves, more drop ship more a premium, more JC Whitney, reported gross margin percentage will move and our costs will reduce. We manage this business to contribution margin dollars. We're focused on long-term free cash flow dollars that accrue to shareholders. Mark will walk through the mechanics but focus on the dollars. The second framework is strategic. For the last several years, we have been thoughtfully building out 2 sides of our business. There is the digital layer, our website, our mobile app, our search, our catalog, our marketing, and there's the physical layer. Our global supply chain, distribution network, fulfillment infrastructure, inventory and last-mile capability. Most people see CarParts.com as an e-commerce company. We see ourselves as both. And over time, the advantage will not simply be having both layers, but how effectively we can connect them through data, AI and customer ownership. I will come back to that later in the call. Turning to the trajectory of the business. Q1 2026 marks 5 consecutive quarters of sequential improvement in the metrics that matter most: gross profit margin, fixed operating expenses and adjusted EBITDA. A Q4 2025 improved over Q3. Q3 improved over Q2. Q2 improved over Q1 2025, and Q1 2026 crosses into positive adjusted EBITDA territory. Each quarter, we said the model was working. This quarter, the model proved it. This is an execution story. The restructuring is behind us. The cost actions are complete and mostly reflected in our run rate. What you are seeing now is the output of a leaner organization operating against a disciplined plan, and we still have more levers to pull. On our A premium partnership, the momentum is real and accelerating. The annualized revenue run rate is now approaching $45 million, up from $35 million at year-end, and we believe that there is a path to $50 million in the near term and eventually potentially exceeding $100 million. All of this is being generated attractive contribution margin without requiring us to carry the inventory or the working capital. To put that in perspective, a premium catalog is 5x larger than our private label mechanical offering. In the world of fitment specific parts, coverage is a durable competitive advantage. Every SKU we add compounds our ability to capture the customer before a competitor does. The partnership is capital efficient by design, and the results are reflecting that structure. And we believe we're still in the early stages of what this partnership can become. Moving to JC Whitney, this has gone from announcement to execution at a rapid pace. In March, we launched the JC Whitney branded product line in partnership with a premium, 30,000 SKUs with a premium supporting the operational build-out. The initial 7,000 JC Whitney SKUs are now live on Amazon and generating sales, with revenue growing week over week. The remainder of the 30,000 SKU catalog will scale over the balance of the year. To fund the JC Whitney inventory investment and strengthen our balance sheet, we completed an $8 million private placement with strategic investors who bring operational experience in e-commerce and the automotive aftermarket. We're buying inventory at known margins, selling through a channel that is already generating revenue and turning that capital back into cash. The investment is expected to be accretive to earnings as inventory moves through the sales cycle. I want to come back to the 2 companies in 1 framework. What I'm about to describe is early. The numbers are small, and there is significant work ahead, but the direction matters, and I want investors to understand how we're thinking about it. Since the beginning of the year, we have delivered over 2,000 packages to our last mile network, and we're running next-day delivery for our own channels out of 2 out of 4 warehouses within a defined radius. This is proof of concept intentionally constrained while we validate the model, but our target is to deliver 300,000 packages to our last mile network over the next 12 to 24 months. with a focus on big and bulky nonconveyable parts. The heavy oversized items where we have the most scale, the deepest operational expertise and historically the highest outbound carrier costs. Getting to 300,000 packages will require significant execution. We know that, but the savings per package are real, and the infrastructure is already ours. Here's the strategic logic behind this investment. As AI continues to reshape e-commerce, we're paying very close attention to where durable competitive advantages actually exist. Some assets are becoming easier and cheaper to replicate every year. digital execution, content generation, catalog enrichment. What is not easily commoditized is physical infrastructure, warehouses, fulfillment networks. Last mile reach, and the scale and purchasing power that come from 3 decades of supplier relationships. AI will optimize infrastructure, it will not replace it. At 300,000 packages annually, the economics become meaningful. At scale, they become structural and could significantly reduce our freight cost as a percentage of revenue. Our strategy is to lead in both layers, owning the demand layer and building a durable competitive advantage in the physical layer. Stepping back, the investments we're making are part of our strategic and tactical road map. Our distribution network, our last mile initiative 3 decades of sourcing relationships in Taiwan, the JC Whitney brand. They reflect a coherent view of where the real advantages in this industry will live over the next 5 years. We have more proof points to build and more to share in future quarters. but the direction of our capital allocation is deliberate, and we're executing against it today. On the technology side, we have 2 AI systems in production. Spark is our customer-facing shopping assistant live on carparts.com, helping customers find the right part using our proprietary fitment catalog. Zap is our internal system, automating returns, cancellations, and warranty claims, reducing manual work and improving response time. Both are in early stages of rollout. The advantage is the data underneath them, our customer history and catalog that a new entrant cannot replicate. That is what we are building upon. We have recently opened a branch office in Type A, Taiwan. Approximately 70% of our purchases come from Taiwan, the product of decades of supplier relationships built and deepen over time. Having a permanent presence in Type A puts us closer to those partners, strengthens those relationships, improve lead time and supports our ability to consolidate and coordinate sourcing more efficiently. This is a long-term strategic investment in the supply chain infrastructure that underpins our business and 1 we have been planning for some time. Q1 also included several headwinds facing our industry. Oil prices increased approximately 50% during the quarter, driving a direct increase in freight costs and fuel surcharges. We responded with real-time pricing actions to protect gross profit dollars. Weather across multiple regions in January and February also reduced order volume. The pricing response covered both. Gross profit came in at $42.9 million on $132 million in net sales with gross margin percentage up approximately 40 basis points year-over-year. I also want to reinforce the contribution margin framework. As we mix more towards drop shift for certain categories, reported gross margin percentage may decrease. However, contribution margin will increase. As in a drop-ship transaction, there are no associated fulfillment expenses. Mark will give you the detail. On the customer loyalty front, at the end of Q1, we officially launched the CarParts.com Mastercard issued by the Bank of Missouri in partnership with Concor. Cardholders earn 3% cash back on carparts.com purchases and 1% on all other purchases. This is very early and we have a lot to build but the infrastructure is now in place, and we have already activated over 1,000 Mastercards. The Carport Stockholm MasterCard is the latest addition to our capital-light fee income platform, which includes our Car Parts Plus membership program and various warranty products. Combined, these programs now generate in excess of $4 million in annual fee income and our aims at increasing customer lifetime value, frequency and retention. Over time, the goal is more revenue coming from customers we already have and less from customers we have to pay to acquire. Looking ahead, our path to sustainable free cash flow runs through the same controllable levers that produced this quarter's result, growing contribution margin dollars, a fixed cost base that is already materially lower and improving capital efficiency as JC Whitney and a premium scale. We're deliberately building a more resilient model. We're also clear eyed that the path from here requires continued execution. There is no shortcut and no single quarter that gets us there. We're doing this the right way. The foundation is strong. The initiatives are executing. We're not simply improving performance. We're building a model we believe is right -- is the right 1 for how automotive commerce will operate in an AI-driven world. With that, I will turn it over to Mark to walk through the financial results in detail.

Thank you, David. Before getting to the numbers, a quick calmer note, Q1 2026 included 13 weeks, consistent with Q1 2025. And fiscal 2026 is a 52-week year-over-year comparisons are clean. Before I walk through the P&L, 1 framing note, as David described, we managed to contribution margin dollars, not gross margin percentage. Keep that in mind as I walk through the mix shift, the numbers will make more sense through that lens. In the first quarter, we reported net sales of $132.0 million compared to $147.4 million in Q1 2025, down approximately 10%. And -- the decrease was primarily driven by the company's deliberate optimization of advertising spend towards higher return, higher intent customers, partially offset by growth in the premium and owned channel revenue real-time pricing actions taken in response to higher outbound freight costs and weather-related volume softness in January and February also affected the top line during the quarter. Gross profit for the quarter was $42.9 million. Gross margin was 32.5%, up approximately 40 basis points from 32.1% in Q1 [indiscernible]. The year-over-year margin improvement reflects pricing discipline, favorable product mix and favorable freight costs during the quarter. The dollar variance versus the prior year is driven by lower volume, not margin deterioration. GAAP net loss for the first quarter was $1.9 million compared to a loss of $15.3 million in Q1 2020. The -- the improvement was primarily driven by lower operating expenses, partially offset by the impact of lower net sales on gross profit dollars with gross margin rate improving 40 basis points year-over-year. Adjusted EBITDA for the first quarter was positive by $585,000 compared to a loss of approximately $6.2 million in Q1 2025, a swing of nearly $7 million year-over-year -- this reflects improvement across 4 controllable drivers. Advertising efficiency, warehouse labor, offshore operating savings, followed by the Manila transition to lean solutions group and fixed costs now mostly embedded in our run rate. Total operating expense for the first quarter was $46.0 million compared to $62.5 million in Q1 2025, and a reduction of approximately $16.5 million or 26% year-over-year. The improvement was primarily driven by lower advertising spend, improved warehouse efficiency and head count reductions. I also want to fly 1 nonrecurring item in the quarter, a $2.3 million noncash gain related to the completion of the sale of our Manila operations. Excluding that item, underlying operating expenses still declined by approximately $14.2 million year-over-year, a combination of advertising and warehouse efficiencies actions as well as fixed cost improvements now embedded in our run rate. Turning to the balance sheet. We ended first quarter with $38 million in cash and no revolver debt outstanding. This is a strong liquidity position that provides the financial flexibility to execute on our growth initiatives while maintaining a conservative balance sheet. Inventory was approximately $91 million down from $95 million at year-end, reflecting lower owned inventory requirements as drop ship volume grows and the business shifts towards a more capital-efficient mix. On share count, as of April 30, we had 8,754 shares of common stock outstanding. This includes 10 million shares. Recently issued a connection with the JC Whitney private placement at $0.80 per share. I want to specifically call out that the company holds 3,786 000 treasury shares reflecting prior repurchase activities. At our current share price, that position is material and worth knowing to investors modeling the fully diluted share count. Our convertible notes are at $25.3 million with a conversion price of $1.20 per share. On tariffs and sourcing, we continue to monitor the environment closely. Approximately 20% of our sourcing is from Chin with approximately 70% from Taiwan and the remainder from other countries. As David noted, we have officially opened a branch auction Taipei, a direct presence that deepens our supplier relationships representing the majority of our purchases. So our AEP tariff claims. We estimate up to $4.3 million in outstanding claims and are pursuing recovery through a formal CDP process. We will keep investors updated as the process develops. We are not building our forward plan around this outcome, but it represents a potential source of cash we want investors to be aware of. Turning to our partnership metrics. The 8 premium partnership is now generating an annualized revenue run rate approaching $45 million, up from approximately $35 million at the end of fiscal 2025. We continue to target $50 million in the near term with a long-term path, we believe, can exceed $100 million, all at attractive contribution margins and without a working capital burden of own mechanical inventory. I want to walk through the operational dashboard we track each quarter, so investors can monitor progress across the key drivers of the business. Starting with product mix. Private label represents approximately 81% of the revenue in Q1 compared to 83% in Q1 2025. Collision and replacement accounted for approximately 67% of revenue up from 65% in Q1 2025, consistent with our core strength in big and bulky nonconveyable parts. Turning to channel mix. On channels are e-commerce site, mobile app and commercial channels represented approximately 69% of revenue in Q1, up from 64% in Q1 2025 with marketplace at 31%. The continued shift towards owned channel reflects higher net contribution margin and lower working capital intensity. Our retention and mobile, e-mail, SMS and push note vacations represented approximately 10% of e-commerce revenue in Q1, up from 7.5% in Q1 2025. And Mobile ad revenue was approximately 14% of e-commerce revenue, up from 10% in Q1 2025. At customers convert at higher rates, carry larger basket sizes and come at lower acquisition costs, a compounding advantage as the base grows. With that, I'll turn the call back to David for closing remarks.

Thank you, Mark. 5 quarters ago, we made a decision, rebuilt this business focusing on sustained profitability and long-term cash generation, not unprofitable volume. We adjusted advertising spend rightsize the organization executed on partnerships that brought real operational capability and synergies and reduced our fixed cost base. I want to take a moment to acknowledge what that required. It was challenging. It was disruptive. And a lot of people across this organization make real sacrifices to get us here. This quarter's result belongs to them. And the results speak for themselves. Adjusted EBITDA crossed into positive territory for the first time since Q1 2024, a swing of nearly $7 million in 12 months. Gross margin percentage expanded year-over-year despite real freight headwinds. A premium is approaching $45 million in run rate revenue. JC Whitney SKUs are live on Amazon and generating sales today. Spark and ZAP are running. The CarParts.com Mastercard is in the market. We have officially opened our branch office in Taipei and we're running next-day deliveries to our last mile network out of 2 of 4 of our warehouses with a target of 300,000 packages over the next 12 to 24 months. We ended the quarter with $38 million in cash and no revolver debt. The balance sheet supports everything we have described today. We still have a lot of work ahead, and we're not declaring victory. Positive adjusted EBITDA is only 1 checkpoint, not the destination. From here, the path runs through growing EBITDA dollars consistently quarter-over-quarter until the business is generating cash after all of its obligations. We're not there yet. We said free cash flow positive in 2026 and and the levers that get us there are the same ones that produce Q1. Contribution margin dollars growing, fixed cost embedded and capital efficiency improving. Q1 is the foundation at rest on. We know what we have to do, and we're continuing to execute on our road map. At a higher level, we have always been 2 companies in 1, a digital layer and a physical asset base. In a world where AI is rapidly commoditizing digital execution, we're investing in the supply chain, physical infrastructure and brand assets that cannot be easily replicated. Warehouses cannot be digitized. Decades of supplier relationships cannot be rebuilt overnight. Last mile capability in big and bulky non-conveyable parts is a genuine moat. We have more to prove and more to share, but the direction of our investment is deliberate, and we believe it is the right bet for us in the next 5 years. I want to recognize our team. The inflection point you are seeing in these results is the product of disciplined unglamorous work executed consistently over 5 quarters. Our people stay focused on the plan served our customers and delivered. I'm proud of what this team has accomplished. I am even more confident about where we go from here. With that, I'll turn it back to the operator.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.