Good afternoon. At this time, all participants will be in a listen-only mode. After the presentation, there will be a question-and-answer session. Please note, this call is being recorded. I would now like to pass the conference over to our host, Tina Mirfarsi, Senior Vice President of Global Communications and Culture. Please go ahead.

Hello everyone and thank you for joining us for the CarParts.com Second Quarter 2023 Conference Call. I'd like to start by welcoming the investors and others who are attending this meeting remotely. Joining me today from the company are David Meniane, Chief Executive Officer; Ryan Lockwood, Chief Financial Officer; and Michael Huffaker, Chief Operating Officer. Before I turn it over to David to start the meeting, I have some important disclosures. Their prepared remarks and responses to your questions could contain certain forward-looking statements related to the business under the Federal Securities laws. Actual results may differ materially from those contained in or implied by these forward-looking statements due to the risks and uncertainties associated with the business. For a discussion of the material risks and other important factors that could affect results, please refer to the CarParts.com annual report on Form 10-K and 10-Q as filed with the SEC, both of which can be found on the Investor Relations website. On the call, both GAAP and non-GAAP financial measures will be discussed. A reconciliation of GAAP to non-GAAP financial measures is provided in the CarParts.com press release issued today. And with that, I would now like to turn the call over to David.

Thank you, Tina. Good afternoon everyone and thank you for joining us. Today, we reported $177 million of sales, up slightly from the $176 million we generated last year in the second quarter, marking our 14th consecutive quarter of year-over-year growth and the highest sales level for any quarter in our company's history. On a two-year stack, revenues for the quarter are up 12%. Adjusted EBITDA was $6.3 million. We also repurchased 250,000 shares during the quarter. The $79 million in cash on our balance sheet at the end of the quarter is a testament to the strong unit economics and cash generating capabilities of our business. And we're also happy to announce the launch of our new mobile app now available on both iOS and Android. When it comes to customer purchase patterns, we have seen a rise in the usage of our Buy now Pay Later offerings. And while some customers are choosing to defer their less urgent repairs, we believe that their return to market is inevitable once consumer confidence rebounds. At that point, we will be ready to meet their needs, thanks to our infrastructure, mobile-first customer experience and diversified assortment. We remain steadfast in focusing on building a world-class company dedicated to providing customers the best digital experience to help them with their auto repair and maintenance needs. On our last earnings call, we shared some of our accomplishments from the last four years, but we believe there are still opportunities for improvement and transformation. These fall into six strategic pillars that range from table stakes to industry disruption. We believe by putting focus on these areas, we will profitably grow to a $1 billion company and beyond. Number one, e-commerce fundamentals; number two, digital transformation; number three, assortment and catalog; number four, marketing and…

Thank you, David. I am pleased to announce that in Q2, we set the record for highest number of units in a single quarter. We did this while operating at our best safety levels ever, our fastest click to ship ever, and we had a significantly lower cost profile quarter-over-quarter and year-over-year. Over time, we will continue to make self-funded investments that have a high return with a direct impact to our bottom line from technology and process improvements to development and training. Last quarter, we discussed key areas of opportunity and let me give you a brief update on them. Number one, labor planning, demand wave management and process optimization. In order to increase PIK efficiency, we rolled out a brand-new labor planning process, order flow management process, and Stowe logic process. These combined with various smaller projects allowed us to improve our labor cost in the warehouses by 50 bps. Number two, warehouse topology and inventory placement, we have adjusted our inventory placement and service scope logic in order to decrease click to delivery times and overall transportation costs while also lowering labor costs. Number three, supply chain technology investments, we continue investing in supply chain technology that makes our associates safer and more efficient while allowing our customers to get their parts faster. For example, our Jacksonville facility is only 15 months old, but already half of our PIK use this newer technology, resulting in the fulfillment center scaling faster to meet the CarParts.com network standard. Before I turn it over to Ryan, I would like to thank our fulfillment center team members for their hard work. The success of these initiatives is only possible with their support. We appreciate their commitment to making our vision a reality and enhancing our customers' experience.

Thank you, Michael. As David mentioned, Q2 was our highest sales quarter in company history. We generated revenue of $177 million, up slightly from the prior year period, making our 14th consecutive quarter of year-over-year growth. This was also our toughest quarter to be on a nominal basis. Despite that, for the full year 2023, we still expect revenues to be up 3% to 5% year-over-year while remaining free cash flow positive and maintaining a robust balance sheet. Gross profit for the quarter was $60.4 million, down slightly from the $61.9 million in the prior year. Gross margin was 34.2% of sales, down from 35.1% in the prior year, primarily driven by higher outbound transportation costs and product mix. GAAP net loss for the quarter was $0.7 million compared to $4.1 million of net income in the prior year. As a reminder, last year's Q2 had a significant onetime pickup related to stock-based compensation. We reported adjusted EBITDA of $6.3 million, down from $8.3 million in the prior year period. This was driven by higher freight costs; increased performance marketing spend and the economic impact on consumer spending patterns. However, this was partially offset by improvements in warehouse fulfillment costs. Turning to the balance sheet, we ended the quarter with $79 million of cash and no revolver debt, up from $15 million of cash in the prior year period. For the quarter, we generated over $0.5 million of interest income. Every capital allocation decision starts with balancing growth and profitability to maximize cash flow generation. Our significant cash position highlights the resilience of our business model and we are proud of our relentless dedication to financial discipline. We believe we have ample liquidity and have no intention or need to raise capital at current valuations. The inventory balance at quarter end was $114 million as the supply chain issues continue to ease, we are becoming more efficient in having the parts our customers need. As lead-times revert to normal, we can carry less inventory both on hand and in transit, which reduces some of our working capital requirements. We have not seen any impact from the conflicts at the port with the transportation carriers. During the second quarter, we repurchased 250,000 shares for approximately $1.05 million. Under the current share repurchase program, we have approximately $28.5 million remaining of the $30 million authorization that extends through July 2024. We believe that our company is incredibly valuable and our key strategic pillars will compound our value over time through multiple cycles. As we look to the remainder of the year, we will continue balancing financial prudence with opportunistically returning capital to shareholders.

Thank you, both. CarParts.com has never been better positioned than it is today. As we continue to build a world-class organization focused on our strategic pillars, we believe we are creating a foundation that is making our company significantly more valuable and will benefit our stakeholders for years to come. Thank you to the entire CarParts team. We're proud of your hard work and your investment in our company's long-term success. Working alongside you every day is what makes us so tremendously excited for our future. We could not do this without you. Thank you for everyone who's joined us today. And as we say at CarParts.com, get after it. We'll now turn it over to the operator and open it up for questions.

[Operator Instructions] Our first question comes from the line of Ryan Meyers from Lake Street Capital Markets.

Hey guys. Thanks for taking my questions. First one for me here. Just wondering if you can talk about what you're seeing so far here in Q3 and your kind of level of confidence in the improvement here in the second half? And maybe if you've seen some improvement in your core customer. I know last quarter; you guys were kind of impacted by them sort of trading down to lower quality products. Just kind of walk us through that dynamic and if you've seen any sort of improvement there?

Hey Ryan, it's David. Yes, I guess I can tell you a little more about what we're seeing on the competitive landscape and I guess two parts. Number one, I think we're seeing the brick-and-mortar players are they're growing their B2B business, but DIY, do-it-yourself is definitely a drag. I think on the DIY side, also a portion of that growth is coming from batteries, fluids and wipers, which historically, we've not played in. But obviously, we see an opportunity which would fall under our assortment strategic pillar. Right now, what we're seeing is the environment with putting a ton of pressure on some of our competition, though, and our partners. We're seeing two online players showing significant pressure. You have one of the large warehouse distributors that just went through Chapter 11 and on our side, we're -- we have unit growth, we have positive unit economics. We have free cash flow. We have close to $80 million in cash and no debt, I think we're well positioned to kind of -- for the uptick. Now, looking to the future, the backdrop that we're seeing is you still have an aging car fleet, you still have more cars, the number of miles driven, it's climbing. Online penetration is going to grow, and we have a whole strategy to capture additional market share. So, short-term, there's some pressure due to the macro, but long-term, I think we're really well positioned.

Great, that's helpful. And then how should we think about sort of the traditional seasonality, especially on the margin side, as some of these new initiatives start to come through? I mean should we expect sort of a normal seasonal pattern? Or how should we think about that?

Yes, I think a normal seasonal pattern is reasonable. The 1 part that we don't have full visibility on yet is the holiday freight surcharge. Every year, it has started a month early. So, I think when I started back in -- it was in November, then it became October, then it became September. So, we could see a holiday surcharge as early as this month. So, that's -- we don't have visibility on. But once it starts, we expect it to run through the duration of the remainder of the year. Otherwise, as far as some of the investments we're going to make, some of that will actually go through CapEx and not run through OpEx.

Okay, got it. Thanks for taking my questions.

Thanks.

Thank you. Our next question comes from the line of Ryan Sigdahl from Craig-Hallum Capital Group.

Hey, good afternoon guys.

Hey, good afternoon.

Curious, you went through a lot of really positive operational improvement initiatives, a lot of things that have happened lot of things that are still to come. But curious how much of those you think are in the financials? Because as I look at Q2 numbers, gross margin, EBITDA margin down sequentially down year-over-year. I get the freight pressure and get that. But I guess how much of that the good things are included in that versus still to come versus are those headwinds just, I guess, too much to overcome?

I think that there's a big misconception given all the things we fixed that the improvement in the business that were at the bottom of the ninth. I would really categorize this overall turnaround of the company really is closer to the bottom of the second. And I think that, as David laid out with the strategic pillars, there's still a lot of things we can do. And in some cases, it's not even innovation. It's just table stakes. One example is e-commerce it's, I think, table stakes to have an app, which we only just launched a couple of weeks ago. I think it's table stakes to have upsell cross-sell. So, when you think about all the things we need to improve or fix, there's still just a lot going on. when we take a step back and look at the business, obviously, 2Q had some pressure. But when we look at all of the strategic pillars over a multiyear period, that's where you'll see value really getting driven. I'll let David elaborate.

Yes, I think if there's one thing I can add is if you look at the future in terms of driving EBITDA margin or free cash flow, there's a number of areas where we have opportunities number one, on transportation as we get closer to customers. Number two, on marketing spend. Our marketing spend runs in the low teens. And to Ryan's point, we didn't have an app up until a few weeks ago. So, there's definitely some opportunities there, at least, call it, 100 to 200 basis points Michael has done an exceptional job on the fulfillment side, but we still have some opportunities there. And over time, as we grow sales with the strategic initiatives and growing the assortment, there are some opportunities to get some leverage on fixed OpEx at least 100 basis points. So, we're seeing the pressure from the macro. But if you look at it over the next, call it, three to five years, there's plenty of opportunities for us to increase net margin. And none of them are a moon shot. It just requires blocking and tackling and just that execution that we've been focusing on.

And then switching over to marketing. You guys mentioned an increase in performance marketing and overall ad spend in the quarter. Curious, I guess, the strategy there and if you're seeing a change in consumer of your ability to acquire direct to consumers versus having to effectively go through Google I imagine?

Yes. And historically, performance marketing and the Google site has been the pillar of the strategy. That's kind of what we're known for. I think over time, what you're going to see is a lot to drive organic traffic and direct traffic around branding and customer experience. We called out a number of things in the prepared remarks, but I think for us over the next three years, the marketing, branding and customer experience is probably one of the things I'm most excited about. There's a lot of things that most companies do that we don't do. In terms of what we spend on Google, it is what it is, but long-term, we can drive content marketing, retention marketing, building a brand for our private label better customer experience. The app for us is a game changer to drive repeat purchase with push notifications, maintenance and recall. So, there's a ton that we can do on the marketing side. And again, if you're spending low teens, like there's a big opportunity to shave off at least 200 basis points.

Maybe on that last point, just curious how much you think the app, I guess, where you think it will drive the biggest benefit between retention marketing and maybe just user experience overall. But -- where do you see the biggest benefit there?

Well, if you think about it, our mobile traffic is about 80%. So, that's kind of the mini total addressable market for us. If we can get 10%, 20%, or 30% of our purchases to go through the app, that's a customer that we don't have to reacquire through paid channels. The other thing, too, is -- and we've talked about this in the past. We want to move away from just selling the parts and we want to deliver value and information for the customers. if we could do this in a direct manner. So, think maintenance notifications or recall notifications, your special pricing or special events, the app is a direct link between our company and the customer. So, long-term, in terms of driving down marketing spend, I think the app is going to be one of the key drivers on top of improving branding and customer experience.

Great. Thanks David, Ryan, Michael. Appreciate it guys.

Thank you.

Thank you. Our next question comes from the line of Thomas Forte from D.A. Davidson & Company.

Great. Thanks. I'm going to ask both my questions at the same time. So, you sort of touched on this in your prepared remarks, but can you talk about that efforts you're undertaking the lower fulfillment costs beyond lowering ship miles by adding new fulfillment centers? And then the second question is, it's a hot topic I guess, for 2023. But can you talk about to what extent you're leveraging artificial intelligence. And if you don't want to talk about artificial intelligence, can you talk about to what extent you're leveraging automation at CarParts? Thanks.

Hey Thomas, thanks for the question, this is Michael. Our overall efforts within the fulfillment network to reduce overall costs or discontinued process pack optimizations. We spend a lot of time rightsizing the flow of goods in and out of the building. We spent a lot of time getting rid of extraneous paths and extra touches within the network, and we're going to continue to do that through the back half of the year. We've done a full reconciliation of all our process paths in the building. And we were just spending too much time walking to work, too many times doing redundant work within the building and so we've eliminated that to really get the team far more efficient and the associates are responding well to it. As far as automation in buildings, -- we'll continue -- automation has many different facets, right? It's everything from more conveyance to the more sophisticated systems we use in our Jacksonville warehouse and we'll make intelligent investments in automation where it makes associates on the safer or faster or both. And so that's what we're going to continue to focus on. As far as further AI, I'll hand that over to David to answer that.

Yes, Tom, not to give away the secret thoughts on AI, but I want to make it clear because I think most companies fall into two camps, the people that are scared of AI and the people that embrace AI. And for us, we're in the second camp. We think artificial intelligence is a huge opportunity. We're very good at transformation. We're very good at embracing and leveraging new technology. So, we have a lot of things that we're working on that involves not only generative AI, but language models, proprietary language models, natural language processing, whether it's for catalog or marketing or assortment, we're big believers in AI. And I think that over the next three to five years, it's going to be one of the biggest opportunities for companies of our size.

Great. Thanks for taking my questions. I appreciate it.

Thank you. Our next question comes from the line of Darren Aftahi from ROTH MKM.

Hey guys, thanks for taking my questions. Two, if I may. First, can you just kind of characterize the health of the consumers on CarParts maybe since the beginning of the year till now and how that's changed, either good, bad and different?

Yes, I think the consumer has been relatively pressured. 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. We're seeing, as we mentioned in the last call, a bit of a trade down on for example, lights or certain deferrable items like bumpers, where, in some cases, people completely defer or they may go to marketplaces and buy non-DOT approved lower-quality item that is good enough to solve their problem. But I think that generally speaking, at least historically in this industry, people don't like having a car with hot air conditioning or a window that doesn't roll up. So, it creates this pent-up demand. I think that we are very well-positioned to capture this demand coming out of any kind of recession or challenging economic environment that we might be in because people once they have money in their pocket, want to fix all these things. They generally don't want to keep them broken.

Great. Thanks. And then in order to kind of hit that 3% to 5% topline growth, is there anything in operating expenses that moves around, i.e., do you have to lean into that OpEx line in order to get to that 3% to 5%? Or do you feel pretty confident based on your spend patterns for the first half of the year?

This is Ryan. I think that what you've seen for the first six months is going to be relatively similar to the back half -- six months from an OpEx perspective. A lot of the growth is going to be driven by those six pillars that David mentioned, which is things like increasing assortment, utilizing all the marketing channels that are available to us doing a better job of improving customer experience. And many of these are either just a reallocation of resources or, in some cases, some might be a capital expenditure, but that wouldn't flow through OpEx.

Got it. Thanks guys.

Thanks.

Thank you. Our next question comes from the line of Ryan Sigdahl from Craig-Hallum Capital Group.

Hey guys. Just one follow-up for me. Accounts payable was up pretty substantially sequentially here. I guess, is that timing related? Or is there something structural that you've improved from a vendor terms or something else to be aware of there?

Yes. So, AP is actually flat on a year-over-year basis. There's always going to be a little bit of seasonality on a sequential basis. What really improved was our inventory efficiency so AP, relatively flat year-over-year, but inventory is significantly down, and that's what drove the increase in AP leverage.

Thank you.

Thanks.

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