2023-08-09 15:16:09 ET
Summary
- CarParts.com experienced significant growth during the COVID-era, but its stock has since come down dramatically from its peak.
- The company reported $177 million in quarterly revenue, with a slight increase from the previous quarter.
- CarParts.com has a lower profitability compared to industry leaders, but its valuation is attractive and it has a strong cash position.
- In my view, the macro setup for aftermarket auto parts retailers is strong and the eCommerce focus puts the company in an advantageous position.
One of the stocks that rallied the hardest during the COVID-era stimulus boom was CarParts.com ( PRTS ). The company operates an aftermarket automotive retail business that competes with much larger brick and mortar stores like AutoZone ( AZO ), O'Reilly Automotive ( ORLY ), and Advance Auto Parts ( AAP ). As an eCommerce business, lockdowns created a bit of tailwind for CarParts.com and revenue has been growing much faster than B&M peers on a percentage basis over the last few years:
There is obviously a growth component to CarParts.com. Unlike the traditional B&M stores which are already multi-billion dollar businesses, the COVID-era revenue growth from PRTS came from a much smaller starting point of less than $300 million in annual revenue pre-pandemic. Like so many other Nasdaq names, the market arguably priced in the lion's share of CarParts.com's growth in a short amount of time. Between the March 2020 low of roughly $1 per share through February 2021, PRTS rallied a face-ripping 2,200%.
Today, the stock has come back down to earth. At roughly $4 per share, the stock is still much higher than where it was in February 2020, but given the more than 80% selloff from the high two years ago, I think this stock is worth a look today for patient investors with a high risk tolerance.
Q2 Revenue and Gross Margin
For the period ended July 1, 2023, CarParts.com reported $177 million in quarterly revenue. This was up slightly from the $175.5 million in the prior quarter and also up slightly from the $176.2 million in revenue from the same period a year ago.
However, cost of revenue grew slightly faster than revenue in Q2 and gross margin fell sequentially to 34.2% from 35.6% in Q1. One of the issues for CarParts is consumer trade-down. Even as the company moved record units in the quarter, those units don't necessarily generate as much revenue because the consumer is spending less money per unit. This is indicative of a stressed consumer and we'll touch on that point again in a moment.
Comps and Valuations
Compared to AutoZone or O'Reilly, CarParts is well behind industry leaders from a profitability standpoint. PRTS is lower in both gross margin and earnings per share.
Year to date, the company is slightly net income negative which was not the case through the first half of last year. However, CarParts has been spending money on marketing to generate more brand awareness. Regarding other corporate strategies, the company has also spent time on process improvement initiatives that have seen touchpoint reduction and greater associate efficiency.
From a valuation standpoint, PRTS looks good. At a 0.34 P/S ratio, PRTS shares are far cheaper than AZO or ORLY and in-line with AAP. Advance Auto Parts has struggled against AutoZone and O'Reilly in recent years and CarParts is getting the same treatment from the market despite arguably being an earlier stage business. Balance sheet-wise, CarParts.com has been battening down the hatches:
At $79.2 million in cash and cash equivalents, CarParts.com is currently at an all-time high quarterly cash position as the global economy could be in or entering a recession.
Macro Setup
One of the biggest reasons why I actually like this company despite the profitability concerns at the moment is the macro setup that I believe the company may benefit from even if the economy slows down to a significant degree.
Even though we've seen growth since the COVID-low, total vehicle sales are still well below where they were before the pandemic started. At the same time, the cost of financing is at the highest level we've seen in the last 15 years. Furthermore, automotive debt outstanding is over $1.5 trillion and the average age of vehicles in operation is well over a decade old:
Taking all of these things together: cars are getting older, there aren't as many being sold, and it's expensive to buy a new one. I think this is a very good sign for aftermarket parts companies going forward.
Risks
I alluded to one of the major risks earlier; there is a possibility that the economy could be in or entering a recession. On the recent Q2 conference call, company leadership mentioned stress on the consumer has been a problem for much of this year. CEO David Meniane:
First quarter, early wasn't as bad, and I think the consumer has been under increased pressure throughout the year. When you look at tax refunds, we all know that those came in a little bit lighter than expected this year, and we did experience some of that in the beginning of Q2. I think as we go through the remainder of the year, we're hopeful that consumers will get some relief. But obviously, it's a challenging time for everyone.
This likely speaks to exactly why CarParts.com has been piling up cash in recent quarters. They seem to be preparing for a slowdown. Non-recessionary risks to the bull thesis include increases in the cost of labor or goods sold. There is also significant competition in the aftermarket auto parts category and even though larger peers like AutoZone and O'Reilly are more focused on brick and mortar sales today, it doesn't mean those businesses can't go after a larger share of eCommerce parts sales in the future.
Summary
I actually like PRTS down here. I think the company is taking the right steps in creating a loyal customer. The recent launch of the CarParts.com mobile application should help the company nudge consumer behavior without requiring marketing intermediaries. Utilizing YouTube for instructional videos is another way to generate sales and brand loyalty and leadership mentioned building out that channel on the Q2 call.
All this said, PRTS is not a stock that I would jump into heavily at this time. I think there are a lot of potential headwinds for the broader equity market that could take PRTS shares down in sympathy. But I do think taking a DCA approach to this name over the next few quarters could potentially pay off well in the years ahead. The company doesn't have a high debt load and has plenty of cash to make it through the recession if sales growth remains slow or even turns negative. I think CarParts.com is a cautious buy.
For further details see:
CarParts.com: The Hatches Are Battened Down