CarParts.com (PRTS) experienced a significant surge, mirroring other e-commerce stocks, during the peak of the pandemic. This lesser-known Car Parts Stock benefited from increased revenue as e-commerce thrived and consumers allocated discretionary spending to vehicle upgrades and repairs, capitalizing on newfound free time to invest in their cars.
However, CarParts.com has recently seen a deceleration in growth, and the stock has relinquished its pandemic-era gains. Currently trading 77% below its early 2021 peak, the question arises: Has the market overreacted, presenting a buying opportunity for this car parts retailer? Let’s delve into an analysis.
Examining Recent Performance
CarParts.com’s Q2 earnings report revealed a continued slowdown in revenue growth, reporting a marginal increase of 0.4%, or a 12% increase over two years, reaching $177 million. This figure slightly surpassed estimates of $175.8 million.
The company attributed this sluggish growth to broader economic challenges, noting a trend of customers opting for lower-priced alternatives and postponing non-essential purchases. This shift in consumer behavior directly impacts the demand for car parts stock, reflecting wider economic pressures.
Gross margin experienced a 90 basis point decrease to 34.2%, primarily due to elevated outbound transportation expenses and product mix variations. Adjusted EBITDA declined from $8.3 million to $6.3 million. The bottom line revealed a GAAP loss of $0.01 per share, a downturn from the previous year’s per-share profit of $0.07 in the same quarter, and falling short of breakeven estimates. These financial indicators are crucial for investors evaluating car parts stock performance.
Competitive Landscape for Car Parts Stock
CarParts.com is not alone in facing headwinds in the online auto parts retail sector. The struggles of competitors highlight the volatile nature of the car parts stock market.
Earlier in the year, Auto Plus, an Icahn Enterprises subsidiary, filed for Chapter 11 bankruptcy. AutoAnything announced its closure, and PartsID witnessed a dramatic 83% revenue decline to $16.2 million. These challenges within the competitive landscape could potentially offer CarParts.com opportunities to expand its market share, but traditional auto parts giants are also vying for dominance.
For instance, O’Reilly Automotive reported a strong 9% growth in comparable store sales in Q2. AutoZone and Genuine Parts Company also demonstrated more modest, yet positive, comparable sales growth. Conversely, Advance Auto Parts was compelled to cut its dividend due to declining profits, illustrating the mixed performance across the auto parts sector and the variable nature of car parts stock investments.
However, CarParts.com primarily competes within the e-commerce channel, and its brick-and-mortar counterparts did not experience the same pandemic-driven revenue surge. This distinction is important when considering the specific market segment of car parts stock that CarParts.com occupies.
Emerging Growth Vectors for Car Parts Stock
CarParts.com anticipates a gradual recovery in revenue growth during the latter half of the year. The company projects a 3% to 5% top-line growth, suggesting a range of 3% to 7% for the second half. However, management acknowledges the persistent macroeconomic headwinds expected to persist.
Simultaneously, strategic investments are being made to pave the way for future expansion. The recent launch of mobile applications for both iOS and Android platforms presents an opportunity to directly engage and monetize customer relationships. Currently, the majority of the company’s traffic originates from mobile devices, but relies on paid and organic search engines like Google, rather than direct customer engagement.
Encouraging customers to download the mobile app is intended to reduce marketing expenditures and establish a direct communication channel for targeted discounts, promotions, and potential loyalty programs. CEO David Meniane indicated that data regarding app downloads and usage metrics would likely be provided later in the year. Furthermore, a brand advertising campaign is planned for later this year to further drive app adoption, initiatives directly aimed at enhancing the value and appeal of car parts stock in the digital marketplace.
In parallel, the company is advancing its do-it-for-me (DIFM) program, enabling customers to have CarParts.com parts installed by partnered mechanics. This “Get It Installed” service remains in a “test-and-learn” phase, but management reported a doubling of the Net Promoter Score, indicating improved customer experience. These initiatives are crucial for diversifying revenue streams and bolstering the long-term prospects of car parts stock.
Investment Outlook for CarParts.com Stock
Considering the company’s projections for the remainder of the year and the anticipated subdued consumer demand, investors should moderate expectations for an immediate recovery in 2023.
Nevertheless, the mobile app and DIFM program demonstrate promising potential, and the auto parts sector is poised to benefit from the ongoing shift towards e-commerce, mirroring trends observed across the broader retail landscape. Moreover, CarParts.com stock is currently trading at a reasonable valuation of 12 times adjusted EBITDA, suggesting it may be undervalued relative to its potential.
While the near term may present challenges in 2023, CarParts.com appears to be a compelling prospect for long-term outperformance within the car parts stock market, driven by strategic initiatives and a favorable industry trend towards online retail.
