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
U.S. Securities and Exchange Commission("SEC"), which are available on the SEC'swebsite at http://www.sec.gov. The section entitled "Risk Factors" set forth in Part II, Item 1A of this report, and similar discussions in our other SECfilings, describe some of the important factors, risks and uncertainties that may affect our business, results of operations and financial condition and could cause actual results to differ materially from those expressed or implied by these or any other forward-looking statements made by us or on our behalf. You are cautioned not to place undue reliance on these forward-looking statements, which are based on current expectations and reflect management's opinions only as of the date thereof. We do not assume any obligation to revise or update forward-looking statements. Finally, our historic results should not be viewed as indicative of future performance.
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 mission is to change the way people repair their cars and get them back on the road, and our strategy consists of the Right Part, Right Time,
Right Place, as outlined below: Right Part means ensuring our customers can find a solution to fix their vehicle on our website. Our efforts to accomplish this include curating our proprietary catalogue, creating a fast, mobile-friendly user experience, building world class data science and inventory forecasting teams and investing more heavily in our logistics and merchandising capabilities. We continue to take steps to improve our product offerings and offer customers premium products at value prices to assist customers on finding the right part. Right Time means getting the customers back on the road quickly. We expanded our existing facilities and added new distribution centers over the past three years, and plan to add more in the future, to continue improving the customer click to delivery time so that we can keep meeting our customers' evolving expectations. Our goal is to continue to make investments to improve delivery times by getting closer to our customers to provide them the parts they need in adequate time to get back on the road quickly. Right Placemeans empowering our customers to choose how they want to repair and maintain their vehicle. Whether the customer is a Do-It-Yourself ("DIY") or a Do-It-For-Me ("DIFM") customer, we intend to continue offering them the resources, tools, and turn-key solutions to get back on the road. Our vision is to provide customers an experience where they can order their repairs or maintain their vehicle and never leave their house. Whether we send a 13
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mobile mechanic or refer the customer to a trusted auto repair shop, we intend
to be there to solve the customer’s needs and make investments in our
technology, or other platforms, to bring this vision to reality.
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 874,000 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
U.S.light vehicles, an indicator of auto parts demand, is projected to be near record-highs at 12.2 years in 2022, according to the U.S. Auto Care Association. We believe an increasing vehicle base and rising average age of vehicles will have a positive impact on overall aftermarket parts demand because older vehicles generally require more repairs. In many cases we believe these older vehicles are driven by DIY car owners who are more likely to handle any necessary repairs themselves rather than taking their car to the professional repair shop. 3.Growth of online sales. The U.S. Auto Care Associationestimated that overall revenue from online sales of auto parts and accessories would reach over $21 billionby 2025. Improved product availability, lower prices and consumers' growing comfort with digital platforms are driving the shift to online sales. We believe that we are well positioned for the shift to online sales due to our history of being a leading source for aftermarket automotive parts through our flagship website and online marketplaces.
Impact of COVID-19
The COVID-19 pandemic created uncertainty and challenges on
the United States, the Philippines, and global economies and some challenges continued through the third quarter of 2022. Since the onset of the pandemic, our top priority remains the health and safety of our employees as most have continued to work from home, in addition to ensuring our customers continue receiving our high-quality, personalized service. Our distribution centers continue to remain operational while our safety protocols direct employees onsite to continue to adhere to, and follow, the COVID-19 safety guidelines recommended from the Centers for Disease Control and Prevention( CDC). We continue to monitor and proactively mitigate risks in our supply chain because of the global supply chain disruption and port congestion. We have incurred, and may in the future incur, additional freight and container costs and may also continue to incur increased costs relating to workforce shortages, overtime charges, and detention costs at one or more of our distribution centers due to the continued effects of the COVID-19 pandemic. However, the ultimate extent of the effects from the COVID-19 pandemic on the Company, our financial condition, results of operations, liquidity, and cash flows will be dependent on evolving developments which are uncertain and cannot be predicted at this time. See the "Risk Factors" section set forth in Part II, Item 1A for further discussion of risks related to COVID-19.
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
January 1, 2022.
For the third quarter of 2022, the Company generated net sales of
$164,807, compared with $141,846for the third quarter of 2021, representing an increase of 16.2%. The Company incurred a net loss of $948for the third quarter of 2022 compared to a net loss of $4,659for the third quarter of 2021. The Company's net (loss) income before interest 14
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expense, net, income tax provision, depreciation and amortization expense, amortization of intangible assets, plus share-based compensation expense ("Adjusted EBITDA") of
$6,254in the third quarter of 2022 compared to $2,295in the third quarter of 2021. Adjusted EBITDA is not a Generally Accepted Accounting Principle ("GAAP") measure. See the section below titled "Non-GAAP measures" for information regarding our use of Adjusted EBTIDA and a reconciliation from net income (loss). Net sales increased in the third quarter of 2022 compared to the third quarter of 2021 primarily driven by continued strong demand. Gross profit increased by 18.6% to $56,148and gross margin increased 70 basis points to 34.1% compared to 33.4% in the third quarter of 2021. The increase in gross margin was primarily driven by favorable product mix and favorable inbound and outbound freight costs in the third quarter of 2022. Total expenses, which primarily consisted of cost of sales and operating expense, increased in the third quarter of 2022 compared to the same period in 2021. The changes in both cost of sales and operating expense are described in further detail under - "Results of Operations" below.
Regulation G, "Conditions for Use of Non-GAAP Financial Measures," and other provisions of the Exchange Act, as amended, 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 (loss) income before (a) interest 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. 15
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The table below reconciles net (loss) income to Adjusted EBITDA for the periods
presented (in thousands):
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Net (loss) income $ (948) $ (4,659) $ 5,273 $ (5,309) Depreciation & amortization 3,406 2,573 9,671 7,123 Amortization of intangible assets 26 28 81 83 Interest expense, net 433 309 1,066 821 Taxes 49 39 118 207 EBITDA $ 2,966 $ (1,710) $ 16,209 $ 2,925 Stock compensation expense $ 3,288 $ 4,005 $ 7,786 $ 11,277 Adjusted EBITDA $ 6,254 $ 2,295 $ 23,995 $ 14,202 Results of Operations
The following table sets forth selected statement of operations data for the
periods indicated, expressed as a percentage of net sales:
Thirteen Weeks Ended Thirty-Nine Weeks Ended October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 65.9 66.6 64.7 66.3 Gross profit 34.1 33.4 35.3 33.7 Operating expense 34.4 36.4 34.1 34.7 (Loss) income from operations (0.3) (3.0) 1.2 (1.0) Other income (expense): Other income, net 0.0 0.0 0.0 0.0 Interest expense (0.3) (0.3) (0.2) (0.2) Total other expense, net (0.3) (0.3) (0.2) (0.2)
(Loss) income before income taxes (0.6)
(3.3) 1.0 (1.2) Income tax provision 0.0 0.0 0.0 0.0 Net (loss) income (0.6) % (3.3) % 1.0 % (1.2) %
Thirteen and Thirty-Nine Weeks Ended
and Thirty-Nine Weeks Ended
Thirteen Weeks Ended Thirty-Nine Weeks Ended October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 (in thousands) (in thousands) Net sales
$ 164,807$ 141,846 $ 507,080 $ 444,184 Cost of sales 108,659 94,513 327,835 294,328 Gross profit $ 56,148 $ 47,333 $ 179,245 $ 149,856 Gross margin 34.1 % 33.4 % 35.3 % 33.7 % Net sales increased $22,961, or 16.2%, for the third quarter of 2022 compared to the third quarter of 2021. Net sales increased $62,896, or 14.2%, for the thirty-nine weeks ended October 1, 2022 ("YTD Q3 2022") compared to the same period in 2021. The net sales increase was primarily driven by continued strong demand. Gross profit increased $8,815or 18.6%, for the third quarter of 2022 compared to the same period of 2021 and increased $29,389, or 19.6%, in YTD Q3 2022 compared to the same period of 2021. Gross margin increased 70 basis points to 34.1% in the third quarter of 2022 compared to 33.4% in the third quarter of 2021. Gross margin increased 160 basis points to 35.3% for YTD Q3 2022 compared to 33.7% in the same period of 2021. The increase in gross margin 16
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was primarily driven by favorable product mix and favorable inbound and outbound
freight costs in the third quarter of 2022 and YTD Q3 2022.
Thirteen Weeks Ended Thirty-Nine Weeks Ended October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 (in thousands) (in thousands)
Operating expense $ 56,729 $ 51,668 $ 173,144 $ 154,353 Percent of net sales 34.4 % 36.4 % 34.1 % 34.7 % Operating expense increased
$5,061, or 9.8% for the third quarter of 2022 and increased $18,791, or 12.2%, in YTD Q3 2022 compared to the same period in 2021 primarily due to an increase in fulfillment expense. The increase in fulfillment expense was primarily due to a higher number of fulfilled orders and inventory receipts as well as additional expenses related to investments in our business. Total Other Expense, Net Thirteen Weeks Ended Thirty-Nine Weeks Ended October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 (in thousands) (in thousands)
Other expense, net $ (318) $ (285) $ (710) $ (605) Percent of net sales (0.2) % (0.2) % (0.1) % (0.1) % Total other expense, net, increased
$33, or 11.6%, and increased $105, or 17.4%, for the third quarter and YTD Q3 2022, respectively, compared to the same periods in 2021. The increase was primarily due to an increase in interest expense primarily attributable to the higher utilization of our revolving loan during the third quarter of 2022 and YTD Q3 2022 compared to the same periods in 2021. Income Tax Provision Thirteen Weeks Ended Thirty-Nine Weeks Ended October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 (in thousands) (in thousands) Income tax provision $ 49 $ 39 $ 118 $ 207 Percent of net sales 0.0 % 0.0 % 0.0 % 0.0 %
For the thirteen and thirty-nine weeks ended
October 1, 2022, the effective tax rate for the Company was (5.5)% and 2.2%, respectively. The effective tax rate differed from the U.S.federal statutory rate primarily due to state income taxes, income of our Philippinessubsidiary that is subject to different tax rates, share-based compensation that is either not deductible for tax purposes or for which the tax deductible amount is different than the financial reporting amount, and a change in the valuation allowance that offsets the tax on the current period pre-tax (loss) income. For the thirteen and thirty-nine weeks ended October 2, 2021, the effective tax rate for the Company was (0.8)% and (4.1)%, respectively. The effective tax rate differed from the U.S.federal statutory rate primarily due to state income taxes, income of our Philippinessubsidiary that is subject to different tax rates, share-based compensation that is either not deductible for tax purposes or for which the tax deductible amount is different than the financial reporting amount, and a change in the valuation allowance that offset the tax of the current period pre-tax loss. 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 thirty-nine weeks ended October 1, 2022, there was no material change from fiscal year ended January 1, 2022in the amount of the Company's deferred tax assets that are not considered to be more likely than not to be realized in
future years. 17 Table of Contents Foreign Currency
The impact of foreign currency is related to our offshore operations in
Liquidity and Capital Resources
Sources of Liquidity
During the thirty-nine weeks ended
October 1, 2022, we primarily funded our operations with cash and cash equivalents generated from operations in addition to a higher utilization of our revolving loan. As of October 1, 2022, our outstanding revolving loan balance under our Credit Facility was $5,000. We had cash and cash equivalents of $16,654as of October 1, 2022, representing a $1,490decrease from $18,144of cash as of January 1, 2022. Based on our current operating plan, we believe that our existing cash and cash equivalents, investments, cash flows from operations and available funds under our Credit Facility will be sufficient to finance our operations through at least the next twelve months (see "Debt and Available Borrowing Resources" and "Funding Requirements" below).
of up to
receivables, inventory and property and equipment (see “Debt and Available
Borrowing Resources” below).
October 1, 2022and January 1, 2022, our working capital was $85,925and $71,808, respectively. The historical seasonality in our business during the year can cause cash and cash equivalents, inventory and accounts payable to fluctuate, resulting in changes in our working capital.
The following table summarizes the key cash flow metrics from our consolidated statements of cash flows for the thirty-nine weeks ended
October 1, 2022and October 2, 2021(in thousands):
Thirty-Nine Weeks Ended
October 1, 2022 October 2, 2021 Net cash provided by (used in) operating activities $ 5,702 $ (8,349) Net cash used in investing activities (10,502) (8,407) Net cash provided by financing activities 3,808 1,661 Effect of exchange rate changes on cash (498) (27) Net change in cash and cash equivalents $ (1,490)
$ (15,122)Operating Activities Net cash provided by (used in) operating activities for the thirty-nine weeks ended October 1, 2022and October 2, 2021was $5,702and ( $8,349), respectively. The increase was primarily driven by the generation of net income and a lower net cash outflow from the change in working capital.
For the thirty-nine weeks ended
October 1, 2022and October 2, 2021, net cash used in investing activities was primarily the result of additions to property and equipment ( $10,546and $8,434, respectively), which are mainly related to capitalized website and software development costs. 18 Table of Contents Financing Activities Net cash provided by financing activities was $3,808for the thirty-nine weeks ended October 1, 2022, primarily due to $5,000of net borrowings from the revolving loan payable and $1,113of proceeds from stock option exercises, partially offset by $3,099of payments on finance leases. Net cash provided by financing activities was $1,661for the thirty-nine weeks ended October 2, 2021, primarily due to $3,230of proceeds from exercises of stock options, partially offset by $1,566of payments on finance leases.
Debt and Available Borrowing Resources
Total debt was
the revolving loan payable.
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. On
June 17, 2022, the Company and JPMorgan Chase Bankentered into an Amended Credit Agreement amending and restating in its entirety that certain Credit Agreement dated April 26, 2012, as amended through the Amendment. The Amendment provides for the revolving commitment in an aggregate principal amount of up to $75,000(formerly $30,000) and allows for an uncommitted ability to increase the aggregate principal amount by an additional $75,000to $150,000(formerly $40,000maximum), subject to certain terms and conditions. As of October 1, 2022, our outstanding revolving loan balance was $5,000. The outstanding standby letters of credit balance as of October 1, 2022was $620, and we had $0of our trade letters of credit outstanding in accounts payable in our consolidated balance sheet. We used the trade letters of credit in the ordinary course of business to satisfy certain vendor obligations. 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 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 October 1, 2022, the Company's SOFR based interest rate was 4.70% and the Company's prime based rate was 6.25%. A commitment fee, based upon undrawn availability under the Credit Facility bearing interest at a rate of either 0.20% or 0.25% per annum based on the amount of undrawn availability, is payable monthly. Under the terms of the Credit Agreement, cash receipts are deposited into a lock-box, which are at the Company's discretion unless the "cash dominion period" is in effect, during which cash receipts will be used to reduce amounts owing under the Credit Agreement. The cash dominion period is triggered in an event of default or if excess availability is less than the $9,000for three consecutive business days, and will continue until, during the preceding 45 consecutive days, no event of default existed and excess availability has been greater than $9,000at all times (with the trigger subject to adjustment based on the Company's revolving commitment). In addition, in the event that "excess availability," as defined under the Credit Agreement, is less than $7,500the Company shall be required to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0. The Credit Facility matures on June 17, 2027. 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.
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 19
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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.
We believe our business is subject to seasonal fluctuations. We have historically experienced higher sales of replacement parts in winter months when inclement weather and hazardous road conditions typically result in more automobile collisions. Hard parts and performance parts and accessories have historically experienced higher sales in the summer months when consumers have more time to undertake elective projects to maintain and enhance the performance of their automobiles and the warmer weather during that time is conducive for such projects. 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
the United States. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, costs and expenses, as well as the disclosure of contingent assets and liabilities and other related disclosures. On an ongoing basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition, uncollectible receivables, inventory, valuation of deferred tax assets and liabilities, intangible and other long-lived assets and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of our assets and liabilities that are not readily apparent from other 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 October 1, 2022. We believe our critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our historical consolidated financial condition and results of operations (for further detail, refer to our Annual Report on Form 10-K that we filed with the SECon March 2, 2022):
? Valuation of Inventory – Inventory Reserve
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