CarParts.com, Inc. (PRTS) Earnings Call Transcript & Summary

Good afternoon. [Operator Instructions] Please note, this call is being recorded. I would now like to pass the conference over to company management. Please go ahead. Good afternoon, and welcome to the CarParts.com Third Quarter 2026 Earnings Call. Joining us on the call today are Chief Executive Officer, David Meniane; and our Interim Chief Financial Officer, Mark DiSiena.

Before we begin, I want to remind everyone that certain statements made during this call, including relating to our expected financial and operating performance, business plans and strategies may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such statements. We encourage you to review the risk factors and cautionary language contained in our most recent annual report on Form 10-K, our quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission. Additional information is available on our Investor Relations website. We undertake no obligation to update any forward-looking statements after the date of this call. Additionally, we will reference both GAAP and non-GAAP financial measures during today's discussion. A full reconciliation of non-GAAP measures to the most directly comparable GAAP measures is included in the press release we issued earlier, which is also available on our IR website. With that, I'll turn the call over to David.

Thank you, [ Zayo ]. Q3 2026 marks our third consecutive quarter of positive adjusted EBITDA. That is a milestone our team worked hard for, and it is clear evidence that our transformation is working. Let me put it in context. Before this streak began, we had already strung together four straight quarters of narrowing losses. In Q1 2026, we turned adjusted EBITDA positive for the first time in several quarters, coming in at $585,000. In Q2, we built on that, reaching $1.8 million in adjusted EBITDA, the strongest result we have posted since Q3 2023. And now in Q3, we remain positive at $1 million, extending that streak to three quarters. This matters because of what it represents. Each quarter, we make deliberate decisions on assortment, on our footprint, on pricing, on advertising efficiency, on how we deploy capital, on which partnership we invest in, on which costs we eliminate. We made these choices intentionally and executed them consistently, including a continuous effort to reshape our fixed cost base. The result is structural improvement, a durable shift in the underlying economics of the business and one we are excited to build on. A year ago, in Q3 2025, we posted an adjusted EBITDA loss of $2.5 million on net sales of $127.8 million. The business we are running today is fundamentally different, more efficient, more diversified and increasingly built around recurring revenue streams. We believe the changes we've made to our cost structure and business mix are durable, and they position us to build on this quarter. We also know we are early. $1 million of adjusted EBITDA is the foundation, and our focus now is building on it. Before I go further on the results themselves, I want to make sure everyone is looking at the financials with the full picture in mind because gross margin percentage on its own does not always capture how business mix is changing. As our drop ship business scales through a premium on our own site, expanded assortment in adjacent categories and through JC Whitney across third-party channels, our reported gross margin percentage will reflect that mix. As a reminder, this model requires less working capital, carries less inventory risk and generates contribution margin dollars at attractive rates relative to the capital deployed. Drop ship eliminates the carrying costs, the fulfillment overhead and the obsolescence risk that come with a traditional stock model. When you net all that out, the unit economics are compelling. Now to be clear, this is not a move to an all-drop-ship model. We will continue to stock and maintain inventory in a disciplined way, particularly where we have a competitive advantage. So when you see the gross margin percentage line move, ask a different question. Are contribution margin dollars growing? Is free cash flow improving? Are we deploying less capital to generate each incremental dollar of revenue? Together with our GAAP results, those are the metrics we use to evaluate the health of our business. The North Star we are managing toward is long-term free cash flow generation and per share value creation for shareholders. That is the framework we use internally, and it is one we believe best captures the value we're building for shareholders over time. Before I get into the operational details of the quarter, I want to highlight two recent initiatives that I believe represent meaningful steps in the evolution of our company. First, CarParts+ Rewards. We officially launched our first-ever points-based loyalty program on October 13, and the early results are strong. Since the soft launch in early September, we have organically enrolled more than 200,000 new members. Free members earn 1 point per dollar spent. CarParts+ Gold at $79 a year, less than the national average cost of a single tow unlocks 3x the points, free shipping on over 1 million parts, 24/7 roadside assistance, extended returns and VIP customer support. Beyond enrollment, we are deepening customer engagement, increasing repeat purchases and growing customer lifetime value while improving the efficiency of our marketing investments over time. And second, we have recently partnered with Klarna, a company whose scale and brand recognition make it a strong offering to power buy now, pay later financing at checkout. It gives our customers greater payment flexibility, particularly when facing unexpected repair expenses, while also creating opportunities to improve conversion and average order value. Through capital-light initiatives, a loyalty ecosystem and payment flexibility, each one deepens our customer relationships. I want to spend a moment on the architecture of our business because it is key to evaluating where we're headed. We operate two sides of one business. They are distinct, they are interdependent and together they create something that is difficult to replicate. The first side is the digital layer, the website, the mobile app, the search and fitment catalog, the marketing engine and the AI-driven personalization infrastructure that ties it all together. Our catalog now spans over 1.5 million parts and accessories. Our mobile app accounted for nearly 15% of e-commerce revenue in Q3. AI is driving real efficiency gains across search relevance and advertising optimization, and those gains are showing up in the operating expense line. The digital layer drives discovery, conversion and increasingly retention through programs like CarParts+ Rewards. And the second side is the physical layer, the supply chain, the distribution network, the fulfillment infrastructure and the last-mile capability we're actively building. This is where the durable competitive advantage lives. AI is transforming digital commerce. but it cannot build or operate a distribution center. It cannot negotiate a supplier agreement that took 15 years to develop. Any well-funded competitor can build a website. Very few can replicate what we have built on the physical side. That is our moat. Both layers operating in concert, reinforcing each other at every step of the customer experience. Q3 was a quarter where both sides moved forward meaningfully and the financial results reflect it. Let me turn to our two strategic partnerships, both proof points for that platform thesis. Starting with A-Premium. We entered the quarter with A-Premium approaching the $50 million annualized revenue run rate milestone we set as our Q3 marker, and we surpassed it, exiting the quarter at approximately $55 million annualized. The catalog advantage here is real and growing. A-Premium's offering is now 6x larger than our legacy private label mechanical catalog, filling fitment gaps we previously could not cover. Contribution margin dollars on A-Premium orders are growing, and the economics per unit remain more than 2x as profitable as our legacy private label equivalent. The trajectory toward our long-term $100 million target remains intact. Turning to JC Whitney. We exited the quarter with 7,000 SKUs live on Amazon and added more than 8,000 in early October, bringing the total to 15,000. The annualized revenue run rate increased from $2.5 million in Q2 to approximately $3 million exiting Q3. And last week, we posted a record of roughly $100,000 in weekly revenue, a $5 million annualized pace. We're also working to bring JC Whitney products to CarParts.com, expanding the brand beyond Amazon. It remains a near-term priority, and we expect to launch soon. Both partnerships follow the same capital-light drop-ship model. They expand our catalog, improve our working capital profile and generate contribution margin dollars that are accretive to the overall business. Now let me turn to the physical layer because Q3 was another quarter of real measurable progress. We delivered more than 6,000 packages to our last-mile network during the quarter, roughly doubling Q2's pace. And we closed out the quarter with three distribution centers actively running next-day delivery. Las Vegas, Dallas and Jacksonville are live and Chicago is coming soon. The ramp is building, a few hundred packages in Q1, over 3,000 in Q2, over 6,000 in Q3. The medium-term target is 300,000 packages annually, approximately 5% of our total outbound volume, and the ramp is tracking to plan. The economics and sales opportunities in both direct-to-consumer and commercial customers are compelling as freight costs and delivery times are substantially reduced. Freight is one of the largest cost lines in this business. Every package we route through our own network rather than a national carrier is a package where we control the cost, the timing and the customer experience. At 300,000 packages, the savings opportunity is substantial, and it compounds as volume scales. The infrastructure is in place. The routing logic is live. What remains is a volume and technology opportunity, driving more packages into the network, improving delivery density and building the data layer that connects our fulfillment systems to the last-mile routing engine in real time. That work is well underway, and the momentum heading into Q4 gives us every reason to be confident. Now Q3 had its shares of external factors, and I want to address them directly. On the tariff front, the environment remained complex. Our sourcing mix is approximately 80% Taiwan and 18% China, with the remainder spread across other geographies. On our IEEPA tariff claims, we have now received $4.8 million, representing substantially all of the amount we were pursuing through the formal CBP process. Of that, $1.4 million was recognized in the third quarter and reinvested in targeted pricing and marketing investments to reflect our lower landed cost and stay competitive. The remaining $1.2 million is still sitting in inventory and will flow through cost of goods sold as that inventory sells in future quarters, and we may reinvest that in pricing and marketing as well. On the demand side, consumers remain selective with discretionary spending. We stayed disciplined, pulling back advertising spend in the most competitive segments to protect efficiency and profitability, an approach we have applied consistently and stand behind. Freight costs moderated versus prior periods, though they remain elevated, and we are managing them actively. Over time, our last-mile build-out is the structural answer. We know these conditions well, and we have operating in a challenging environment for several quarters now, while delivering positive adjusted EBITDA in each of the last three quarters. We have built this business to perform through these conditions. Let me turn to our fee income platform. That's part of the business that does not always get the attention it deserves. Our capital-light revenue layer, spanning the CarParts.com Mastercard, CarParts+ membership and loyalty and warranty products continued to build through Q3 with the annualized run rate now approaching $5 million, up from the roughly $4 million range we were running at through the back half of 2025. CarParts+ Rewards strengthens our customer ecosystem by encouraging repeat purchases and deepening engagement, while the $79 annual Gold membership creates an additional recurring revenue opportunity. The CarParts.com Mastercard continued to add cardholders in Q3 and warranty products remained a steady contributor. Across all three, we're focused on quality over volume. The long-term value is driven by engaged repeat purchasing customers, not onetime activations. None of this requires inventory, a distribution center or a freight contract. These revenue streams sit on top of customer relationships we have already built and make the next purchase more likely. This is the structural characteristic that makes this platform compelling, and it is how we build retention at scale. Let me be direct about where we stand and what we're managing towards for the rest of this year. We entered Q3 with three specific markers. On A-Premium, our goal was to surpass the $50 million annualized run rate, and we did it. The partnership is now running at approximately $55 million, and we remain on track toward our long-term $100 million target. On JC Whitney, we exited Q3 at approximately $3 million annualized, up from $2.5 million in Q2 and tracking toward our $7.5 million target. And on last mile, our goal is next-day delivery from all four distribution centers by year-end. Las Vegas, Dallas and Jacksonville are live, and we're actively working towards bringing Chicago online in Q4. In Q4, the focus shifts from activation to volume as we build towards 300,000 packages a year. So what does winning look like exiting Q4? A-Premium running above $55 million annualized, JC Whitney at or approaching $7.5 million and all four DCs running next-day delivery. Now I'd like to turn the call over to Mark to walk through our financial results.

Thank you, David. Before I begin, a brief calendar note. Third quarter 2026 was a clean 13-week period, directly comparable to third quarter 2025. No calendar distortions affect the year-over-year comparisons. Net sales for Q3 2026 were $129.3 million compared to $127.8 million in Q3 2025, a year-over-year increase of approximately 1.2%. This is our first year-over-year revenue increase in several quarters, following a period when we deliberately walked away from unprofitable revenue. The advertising optimization and pricing discipline we have maintained throughout the year continued in Q3, while revenue still grew. It is an early step, and it is the optimal growth to build on. Gross profit was $43.2 million, a gross margin of 33.4%, up approximately 30 basis points year-over-year and up approximately 20 basis points sequentially. This increase was primarily driven by lower freight rates, which continued to trend down during the quarter, benefiting from carrier diversification and progress on our last-mile initiatives. GAAP net loss for Q3 2026 was $4.1 million compared to $10.9 million in Q3 2025, a $6.8 million year-over-year improvement. Adjusted EBITDA was $1 million compared to a loss of $2.5 million in Q3 2025, a $3.5 million improvement and a third consecutive quarter of positive adjusted EBITDA. The primary items bridging GAAP net loss to adjusted EBITDA are depreciation and amortization and stock-based compensation, all of which are noncash. The full reconciliation is in the earnings press release. Total operating expenses were $47 million, down $5.3 million or approximately 10% from $52.3 million in Q3 2025. This was primarily driven by distribution center consolidation, advertising efficiency gains and fixed cost reductions from actions taken in prior periods. There were no material nonrecurring items in Q3 operating expenses. We ended Q3 with approximately $33.8 million in cash, an undrawn $25 million revolver and no near-term liquidity concerns. Inventory ended at approximately $77 million, down from $84 million for Q2 and $95 million for Q3 2025. This decline reflects both the drop ship business and our focus on inventory efficiencies. As A-Premium and JC Whitney grew as a percentage of revenue, we carry less owned inventory to support the same or greater revenue volume. Convertible notes remain outstanding at $25.5 million with a split adjusted conversion price of $12 per share. Share count post 1-for-10 reverse stock split stands at approximately 8.1 million shares at the end of the quarter. Private label represents approximately 73% of revenue in Q3 2026 compared to approximately 83% in Q3 2025, reflecting an intentional shift in our mix. As A-Premium and other third-party premium brands scale, they are shifting a portion of our private label volume to a model that is more capital efficient and carries a larger catalog. Collision and replacement parts as a percentage of revenue in Q3 2026 was approximately 60% versus 65% in the prior year. This reflects the mix shift. Mechanical parts are growing faster in collision, and that has changed the revenue composition in a way that is favorable from a margin and working capital perspective. Owned channel increased to approximately 73% of revenue in Q3. The CarParts+ Rewards program is specifically designed to reinforce this dynamic. Loyalty members have a structural incentive to transact on our own channels, and we expect that to show up in the mix over time. Regarding the retention channel, specifically e-mail, SMS and push notifications, came in at 9.6% of e-commerce revenue in Q3. The metric reflects the growing A-Premium mix and a healthy underlying retention engagement. Mobile app share of the e-commerce revenue reached approximately 14.5% in Q3, up from 12.9% last year, a consistent upward trend, reflecting ongoing investment in the app space. With that, I will turn the call back to David for closing remarks.

Let me step back for a moment because Q3 deserves to be understood not just as a quarter, but as a chapter in a longer history. Two years ago, we were making choices that were not always easy to explain in a single earnings call, pulling back on advertising that was generating revenue but not value, restructuring the cost base and investing in partnerships and infrastructure with no immediate payoff on the income statement. We ask investors to trust the direction and Q3 shows that direction is working. These results reflect the compounding effect of hundreds of deliberate decisions made consistently over time. Pricing discipline, advertising efficiency, partnership development, infrastructure investment, warehouse consolidation, the sale of our Philippines captive operation, technology and AI, each one takes time to pay off. And together, they are now showing up in our results. What has changed most fundamentally is what this company is. Historically, CarParts.com was an e-commerce retailer, list parts, drive traffic and fulfill orders. Today, we are something meaningfully different. We're a loyalty platform with 200,000 members already enrolled in CarParts+ Rewards. We're a last-mile transportation network with three distribution centers running next-day delivery and a fourth on the way. We're building a fee income platform with a co-branded Mastercard, warranty products and a fee income layer that requires no inventory. And we are a destination for the full life cycle of vehicle ownership, not just the repair moment. With our restructuring largely complete, the next phase is about growth, expanding our assortment, deepening the loyalty ecosystem and building the last-mile network toward its full economic potential. We're moving from defense to offense, and the platform we have built gives us the foundation to do that from a position of strength. The results of this quarter are the work of a team that has executed with discipline in an environment that has not always made it easy. I am proud of what they have built. We also know that this is a starting point. We have real growth ahead and real work to do to create lasting value for our shareholders, and we're excited to get after it. Thank you for your continued interest in CarParts.com.

This concludes today's call. Thank you for attending. You may now disconnect.