Etsy (ETSY -2.10%) has been one of the big winners on the stock market in recent years.
The online marketplace for homemade crafts and vintage items is now an investor darling, having jumped more than 300% over the last year, helped by the transition to e-commerce during the pandemic. There are plenty of reasons why investors like the stock today, including its unique positioning as an artisan-based market and its blowout growth of late. However, the real story of its success is more complicated than that.
Etsy stock shot up on its IPO on April 16, 2015, closing at $30 a share. Investors clearly had high hopes for the stock, but not long after the debut it was trading in single digits. In May 2017, activist investors saw an opportunity, calling the company bloated and demanding new leadership. The board ousted CEO Chad Dickerson and brought in Josh Silverman to run the company. Silverman, who was previously an executive at eBay, got to work slashing costs and improving the business. He scaled back on corporate perks, laid off 140 employees to trim a bloated management structure, focused on nuts-and-bolts tech improvements like improving the search function, and focused on the customer experience, rather than pleasing merchants, arguing that merchants would be satisfied with increased sales.
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The results of that turnaround strategy have been phenomenal. Since May 2017, when Silverman was named CEO, the stock price is up nearly 2,000%, and had gained multiples even before the pandemic-driven surge. That's a reminder that Etsy's success is fundamentally a turnaround story, rather than a business that was an automatic winner because of its unique e-commerce marketplace.
The next e-commerce turnaround
There's another under-the-radar e-commerce company now in the midst of its own turnaround: CarParts.com (PRTS 0.70%).
Founded in 1995, the company was known as U.S. Auto Parts for most of its history, and struggled to grow for most of the last decade. However, since management changed in early 2019, the company has been executing a turnaround, jettisoning unprofitable business lines and focusing on the CarParts.com brand, to which it changed its name last year, rather than the old multi-site strategy that failed to deliver growth.
Like Etsy and other e-commerce stocks, CarParts.com has surged during the pandemic, with the stock up nearly 700% over the last year. But there's more to the growth story than that.
Under CEO Lev Peker, the company has changed its management team and has been focused on improving and modernizing its technology, better managing inventory data using data science, improving its pricing, and adding new distribution centers to speed up delivery.
Management believes that it can follow a playbook similar to e-commerce companies like Amazon and Chewy, disrupting brick-and-mortar auto parts retail with wide product selection, an easy-to-use interface, and fast and convenient shipping.
The company is also able to undercut competitors on pricing by focusing on private labels. Much in the way that Costco sells brand-name products under Kirkland or Trader Joe's private-label brand name products, CarParts.com is doing this with car parts. Roughly 87% of sales now comes from its private-label products, showing the company is differentiating itself from brick-and-mortar competitors like AutoZone or O'Reilly Automotive.
As the company opens new distribution centers, gets closer to the customer, and speeds up delivery, its value proposition will improve, allowing it to take more market share from brick-and-mortar peers.
So far, the results from these initiatives have been encouraging. About a third of its business now comes from repeat customers, and the ability to do things that physical auto parts stores can't, like save vehicle profiles, helps drive retention. In its most recent quarter, revenue rose 69% year over year and e-commerce sales jumped 105%, a gap that reflects a small wholesale business and the closing of unprofitable business lines. SimilarWeb also named the company the fastest-growing website in auto parts, with monthly visits jumping last year to 7.5 million, well ahead of the No. 2 company with 39% growth.
In an interview last week, Ryan Lockwood, the Senior Vice President of Finance, also stressed that the company's recent growth isn't just about the pandemic. "People, once they find a better way through e-commerce, they usually stick with it," he said.
What's next for CarParts.com
The e-commerce company is still making core improvements to the business. It's in the process of filling its new distribution center in Grand Prairie, Texas, and updating internal software, among other changes. Lockwood said: "We're trying to squeeze in 15 years of capex (capital expenditures) into three years."
Over the long term, the company envisions allowing customers to order both parts to their homes and a mechanic that will show up to do the work, or, alternatively, parts that will go directly to a garage for the work to be done. That vision is a long way away, but it shows the company is thinking long-term and is focused on maximizing customer convenience.
The company's performance will be tested as it laps the strong growth from 2020, but management is confident that its investments will continue to pay off. Analysts see revenue growth slowing to 12% this year, giving the company a low bar to hop over, and the stock still looks like a bargain based on a price-to-sales ratio of just 2.4.
Like Etsy a few years ago, CarParts.com seems to have many of the components to make it a winning turnaround play. Keep an eye on the stock as we move into 2021, as there's ample upside potential here if the company can prove it's more than just a pandemic story.
