Summary
- CarParts is an online, US-focused autoparts and accessories retailer.
- CarParts has been struggling to reach profitability despite respectable revenue growth.
- The company faces intense competitive pressures in the eCommerce space.
Thesis
The years after the Covid-19 pandemic hit in 2020 have been filled with eCommerce successes in most retail consumer-oriented industries. CarParts.com ( PRTS ) is a growing, small-cap, online autoparts and accessories provider operating in the United States. In this analysis, I explore the stock's performance, look into the financials of the company and examine its valuation.
Stock Performance
Caught in greater stock market turbulence, CarParts has seen a large stock price decline since the beginning of the year. The stock has retreated 48% to reach $6.10 per share, with a 52-week low of $3.92. As with many small cap stocks, especially under the $1B market cap threshold, volatility is high, while CarParts is also heavily shorted. Currently, the company trades a $332.8M market cap and plays no dividend.
Small-Cap Underperformance
Investing in Small-cap has also been associated with the addition of risk to a portfolio. Investor's looking to gain exposure in small-caps seek higher returns and accept greater volatility. During periods of struggle in the general market, small-caps have generally recorded significant losses. For 2022, small-caps have just slightly underperformed the broader market, helped by the small exposure the space has towards technology stocks. With that in mind, investors should consider the possibility of a broader recession in the economy and the effects the increased volatility would bring to small-caps.
The Business
CarParts maintains a direct-to-consumer platform where auto-owners can shop for parts and accessories. The company has been in business for over 20 years and its main focus remains towards non-professional, everyday drivers. The company aims to cut costs across the supply chain by bringing factory parts directly to the consumer, offering, as a result, premium, value-for-money products. CarParts also carries its own private-label products, while a lot of emphasis is also put at quick delivery, utilizing warehouses in strategic locations across the country.
Aiming to improve delivery times, targeting 80-90% of products reaching the customer within one day, the company is expanding its warehouse capacity. CarParts has recently expanded, with new warehouses in Texas and their newest distribution center, in Jacksonville, Florida in Q2 2022.
Improvements are also being made to the company's online and mobile platforms in order to further enhance user experience. The company's long eCommerce experience along with constant innovation should help boost engagement and drive sales higher in the coming years.
Q2 2022 Results
On November 9, 2022 CarParts.com reported earnings result for the quarter that ended on October 1, 2022. Despite recording a small EPS loss of -$0.02, earnings slightly beat analysts' expectations. When it comes to revenue, CarParts reported quarterly sales of $165M (16.2% YoY increase), slightly missing expectations. The net loss of $-0.9M (or $-0.02 EPS) compared with a net loss of -$4.7M (or $-0.09 EPS) a year ago. EBITDA increased from $2.3M last year to $6.3M. Overall, the company's performance appears improved.
Strong Growth Numbers
Over the past decade the company has recorded consistent increases in sales. On a 10Y, CAGR basis, revenue has grown at 7.3%, while over the past few years, growth has accelerated, recording 5 and 3-year CAGRs of 16%.1 and 37.7% respectively. Of course, recent results include the major tailwinds eCommerce received in general, after the Covid-19 pandemic hit in 2020. For CarParts.com being an online business, the pandemic has served to accelerate demand for its platform.
Over the next few years, analysts remain optimistic regarding CarParts sales growth. The company is expected to reach $920M in revenue in 2024, growing at mid-double digits annually.
Profitability
Even though CarParts maintains good gross margins, around 35%, the company is barely profitable on the operating level, while recording net losses. Fast growing SG&A expenses are mostly to blame, indicating the need for increased operational efficiency. The company has recorded a net loss during 4 out of the last 5 fiscal years. Analysts, however, expect the company to break even in 2022 and turn profitable in 2023, on an EPS basis.
Valuation
With CarParts's profitability struggles most traditional valuation metrics like P/E and EV/EBITDA are of little use. The Price/Book ratio is also inappropriate for valuing the stock, given its online orientation and asset-light nature. In this segment, I focus on the Price/Sales ratio, a metric commonly used to value unprofitable, growing companies
Currently the company trades at a P/S of 0.5. While PRTS currently trades significantly lower in terms of its P/S multiple, compared to a year or so ago, it still trades higher, compared to pre-pandemic levels. The very low P/S multiples the company is exhibiting are a testament to its profitability struggles while also capturing the perceived risk that investors assign to the stock. While inexpensive, investors appear to seek a high premium to compensate for the risk the business carries.
The Competition Concern
When it comes to eCommerce for autoparts, or any other product for that matter, companies face intense competition and potentially low survivability ratios. A small-cap company like CarParts, with insignificant advertising and logistics power, has to compete with mega-caps like Amazon (AMZN) for sales. The company is facing an uphill climb in that regard and is even more limited on how much it can spend on promotional campaigns and platform innovation due to its profitability and cash flow production struggles.
Final Thoughts
Many indicators suggest that CarParts, despite good revenue growth carries a lot of risk going forward. High volatility should be expected, with more downside potential ahead, if management fails to meet earnings expectations. Over the long-term, prospects are even less optimistic, given the large competitive pressures the company will likely be facing.
For further details see:
CarParts.Com: Risks Overshadow The Value Play