Like many e-commerce stocks that experienced a surge during the pandemic, CarParts.com (PRTS) saw significant gains. This online auto parts retailer benefited from increased online shopping and a rise in auto repairs and upgrades as people spent more time at home and invested in their vehicles.
However, CarParts.com’s growth has since slowed, and its stock has fallen considerably from its pandemic highs. Currently trading 77% below its early 2021 peak, investors are wondering if the market has overreacted and if now is the time to consider buying CarParts.com stock at a lower price. Let’s delve into the details.
Examining Recent Performance
CarParts.com’s Q2 earnings report revealed a continued deceleration in revenue growth, with only a 0.4% increase, or 12% on a two-year stack, reaching $177 million. While this slightly surpassed estimates of $175.8 million, the growth rate is modest.
The company attributed this slower growth to broader economic challenges, noting that some customers are opting for cheaper products and postponing non-essential purchases.
Gross margin experienced a 90 basis point decrease to 34.2% due to increased outbound transportation expenses and shifts in product mix. Adjusted EBITDA declined from $8.3 million to $6.3 million. The bottom line showed a GAAP loss of $0.01 per share, a drop from a $0.07 per-share profit in the same quarter last year, and falling short of breakeven estimates.
How CarParts.com Stock Stands Against Competitors
CarParts.com is not alone in facing challenges in the online auto parts retail sector. Earlier this year, Auto Plus, an Icahn Enterprises subsidiary, declared Chapter 11 bankruptcy. AutoAnything announced its closure, and PartsID experienced a significant business downturn with an 83% revenue decrease to $16.2 million.
These difficulties among competitors could present an opportunity for CarParts.com to gain market share. However, traditional auto parts chains might be capturing this share instead.
For instance, O’Reilly Automotive reported a strong 9% increase in comparable store sales in Q2. AutoZone and Genuine Parts Company also showed more moderate comparable sales growth. Conversely, Advance Auto Parts had to reduce its dividend due to declining profits.
It’s important to note that CarParts.com competes more directly within the e-commerce channel, and brick-and-mortar competitors did not experience the same revenue surge during the pandemic peak.
Exploring New Avenues for Growth
CarParts.com anticipates a slight improvement in revenue growth in the latter half of the year, projecting a 3% to 5% top-line increase, implying a 3% to 7% range for the second half. However, management acknowledges that the macroeconomic environment is expected to remain challenging.
The company is investing in initiatives to fuel future growth. The recent launch of mobile apps for both iOS and Android platforms offers a direct channel to engage and monetize customer relationships. Currently, CarParts.com primarily relies on mobile traffic through paid and organic search engines like Google, rather than direct traffic.
Encouraging customers to download the mobile app could lower marketing expenses and establish a direct communication line for offering discounts, promotions, and potential loyalty programs. CEO David Meniane indicated that data on app downloads and usage metrics would likely be shared later in the year. He also mentioned plans for a brand advertising campaign to promote app adoption.
Furthermore, the company is progressing with its “do-it-for-me” (DIFM) program, “Get It Installed,” which connects customers with partner mechanics for part installation. This service is still in the “test-and-learn” phase, but the Net Promoter Score has doubled, indicating an improved customer experience.
Evaluating CarParts.com Stock as a Potential Investment
Considering the company’s outlook for the remainder of the year and anticipated sluggish consumer demand, investors should moderate expectations for an immediate recovery.
Nevertheless, the mobile app and DIFM program demonstrate promising potential, and the auto parts sector is expected to benefit from the ongoing shift towards e-commerce, mirroring trends in other retail sectors. Moreover, CarParts.com stock is currently trading at a reasonable valuation of 12 times adjusted EBITDA.
While 2023 may present challenges, CarParts.com stock still appears to be an attractive option for potential long-term outperformance in the online auto parts market.
