Deep Dive: Carparts.com
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(Ryan) What they do: CarParts.com is an ecommerce company that delivers a range of car parts direct to consumer or through wholesale distribution partners. They tout more than 800k different stock keeping units. The majority of their items are sourced in SEA and then shipped out to America. And they have 3 different types of items. Replacement Parts, Hard Parts, and Performance Parts & Accessories.
Replacement: It’s for the exterior of an automobile. These are typically replacements or in response to damage/wear and tear. Also a lot of mirrors are sold in this category including their own brand.
Hard: This is more like engine components or mechanical and technical parts.
Performance: These parts are designed to improve the performance of the car. I imagine this is more for car junkies.
And they fulfill orders in one of two ways. Stock and ship, where they take delivery and store it in their DCs. Or drop-ship, where merchandise is shipped directly from the suppliers to the customers.
(Ryan) History: CarParts has been in business for more than 20 years. Recently changed their name, but used to be known as US Auto Parts Network. The company was founded in 1995 by Sol Khazani and Mehran Nia and initially incorporated in CA, where they still have their headquarters. Mehran Nia was the CEO I believe until 2019 and he’s still on the board.The company built its first website in 1999. And it looks like they initially went public in 2007.
But in 2019 the company hired new management by bringing on Lev Peker as the CEO and kind of tried to reinvent themselves. They’ve been growing much faster than they used to, hired a bunch of employees, started expanding distribution capacity.
Total U.S. aftermarket for autoparts is $280 billion. CarParts.com is playing in a subset of that though (for example, I don’t believe they do tires)
Competitors include AutoZone, O’reilly, local mechanic shops that sell parts (although some might be customers of CarParts.com)
For example, Autozone did $13.4 billion in sales TTM
Used car sales in the U.S. have trended up over time, while new car sales have trended down (only 14 million sold in 2020). This should provide and industry tailwind
(Ian) Management and Ownership:
Lev Peker is the current CEO. He was hired in 2019 to enact a turnaround of the company. Actually worked for the company from 2008 to 2014 in a variety of roles
Basically an entirely new management team was brought in with him in 2019.
I like listening to his interviews. He says in response to a silly question about being the amazon of Carparts, “Who wouldn’t want to be the amazon of anything, but we are focused on building a great business.” Says he does not focus on share price
Lev owns about 4% of shares outstanding
Made nearly $2million in 2020
About 18% short interest
Fairly high institutional ownership at 75%
Market cap of $779 million used fully diluted share count, ticker PRTS
EV will be slightly less than market cap so not much of a difference
P/S of 1.56
P/GP of 4.46
No P/E or P/CF that would be relevant, right around break-even now
A few million in share options/RSUs that could dilute shareholders vs. 50 million share count, so not a crazy amount of potential dilution
Q1 Revenue grew 65% to $145M
Gross Margin was pretty much steady at 34%
Net loss was $2.7M, vs a net loss of $1M a year ago
Generated $13M in OCF for the quarter down from a year ago
TTM: Negative $30M in FCF on $501M in revenue
And they’re unprofitable on a TTM GAAP basis
(Ian) Balance sheet and liquidity:
$46mm in cash
$98mm in inventory
About $32mm in leases
Inventory turnover ratio improving slightly 4.2 in LTM up from 3.8 in 2019
Not a perfect comparison, but 1.3x at Autozone
Not a ton of cash, but looks to be a solid balance sheet.
Product Experience/Anecdotal Evidence:
(Brett) Some positive reviews. “I have never had a concern with them like some of their competitors” https://www.consumeraffairs.com/online/carparts.html#:~:text=Carparts%20has%20been%20very%20reliable,business%20with%20over%20the%20internet.
(Ryan) Not sure there’s any big one here. The in-house brands seem to be well liked, but that’s a tiny portion of their total SKU’s. Potentially scale. Website says that with the current expansion in distribution centers the company will be able to reach 100% of their customers within the contiguous United States in 2 days or less.
(Brett) This is a developing one, but getting the database right to have the million or so SKUs for all the different parts be legit for whatever people are buying. Most complaints besides standard shipping stuff are for wrong parts. This is something Autozone cannot scale up to, and something Amazon or Wal-Mart are not focused on. Only someone focused on this niche could potentially do it.
(Ian) Asset-light model. Holding less inventory. Shipping times have come way down. Tilting balance toward asset-light instead of close to consumer.
Future growth opportunities:
(Ryan) Mobile mechanics. This drastically grows the pool of potential customers. Right now DTC without the mechanics involved means the customers are people who have the ability to fix or change their cars on their own. This means it could apply to anyone and could be a potential disruptor to traditional mechanic shops.
(Brett) More DCs. They hinted about it on the call. Right now they have 3 I believe including a new one in Texas. If they got 6 or 8 around the country it would give them a better chance of getting operating leverage and building a competitive advantage through faster shipping times and a better customer experience
(Ian) Continued growth in DIY. There is an assumption that DIY will slow down coming out of COVID, but I think that this is an interesting story.
Highlights and lowlights:
(Ryan) Highlights: Cars are lasting longer than they used to, which means a lot of people will be upgrading instead of just buying a new one. Lowlights: I don’t like the economics. They have to pay for procurement from China, hold inventory of 820k different SKU’s, and then pay for freight & shipping costs. There’s a reason they have 34% gross margins. Optimistically they could maybe reach 5%-10% net margins. And over the last 5 quarters, share count has grown He was asked about it on a CC he said “18 out of 20 members on the exec team are new and last year when we all joined we just didn’t have the cash.” And just prior to the offering they changed their name to sound more tech driven.
(Brett) Highlights: Unit economics are sound, and they have a better (but not great) value proposition vs. offline competitors. The mechanic connector thing looks like a solid idea, where buying the part and having them come over to your place of residence could really increase the value prop for the consumer. Lowlights: At first glance, I worry about the long-term viability of the auto repair market if EVs have much simpler engineering, and there is the threat that better brands like Autozone or O’reilly can replicate this model (but it would likely take a few years), I also don’t like how in the 10-K they mentioned 35% of sales are not from CarParts.com
(Ian) Highlights: Revenue growth (they believe they can hit 20-25% long-term CAGR), model makes sense. Like the progress of this turnaround and the management team. 30% of rev comes from repeat purchases. Lowlights: Not sure what the long-term looks like for this business. Auto market is going to change a lot going forward.
More or less interested?
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Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.