CarParts.com (PRTS 0.70%) was a market darling early in the pandemic, but lately the stock has looked like it could use an overhaul.
Shares are down 63% over the last year as the buzz around e-commerce stocks has faded, and while the company's growth rate has slowed from the pandemic, it's still delivering solid growth, outperforming its e-commerce peers, and gaining market share from traditional auto parts retailers.
In fact, even as macroeconomic headwinds strengthened in the third quarter, the company's revenue growth increased from 12% in the second quarter to 16% in the third quarter. Here are a few reasons why CarParts.com looks like a smart buy.
Growth is accelerating, profitability is improving
Not only did CarParts.com post a surprising increase in revenue growth, but it's also taking positive steps on the bottom line. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the quarter rose from $2.3 million in the quarter a year ago to $6.3 million, and gross margin increased 70 basis points to 34.1%. On the earnings call, management said that optimizing for gross profit dollars was its primary objective, and gross profit rose 19% to $56.2 million.
That emphasis on gross profit dollars makes sense, because that's the money the company has left over to reinvest in the business for things like expanding its warehouse footprint, growing inventory, and investing in new technology.
That increase in gross profit helped the company narrow its loss per share from $0.09 to $0.02 -- as calculated under generally accepted accounting principles (GAAP) -- beating estimates of a per-share loss of $0.06.
The company also upgraded its enterprise resource planning (ERP) system to Microsoft Dynamics 365, continuing the process of improving its dated tech from when the company was known as U.S Auto Parts Network. The move will help make the company more efficient and contribute to its goal of reducing its technology spending as a percentage of revenue.
Making progress with "do it for me"
CarParts.com's business has traditionally focused on do-it-yourself (DIY) customers who order a part like a headlight assembly or brake pad and install it themselves. But its most disruptive idea is its new do-it-for-me (DIFM) program, which it calls Get It Installed.
The company has partnered with 1,000 mechanics across the country for easy installation. Customers simply schedule an appointment on the CarParts.com website, and take the part to have the repair done. Through the end of the third quarter, the company had 1,500 bookings through Get It Installed, but the program could significantly expand the company's addressable market, as most car owners prefer to have a mechanic do repair work rather than doing it themselves.
The company's long-term vision is to have a mobile mechanic that can come directly to your home and make repairs with CarParts.com parts, which could have truly disruptive potential.
Is CarParts.com a buy?
CarParts.com is taking market share from its brick-and-mortar peers, improving its profitability, and innovating through Get It Installed.
Management is taking a conservative stance heading into a potential recession; it has no new warehouses planned and is instead focusing on building profitability and free cash flow. However, auto parts companies tend to be recession-proof businesses. Most repairs are necessities, and consumers delay purchasing new cars in recessions, meaning they need to spend more money on repairs. Already, the average age of a car on the road is 12 years.
In addition to an economic environment that favors auto parts stocks and CarParts.com's momentum on the top and bottom lines, the stock also looks well priced. It now trades at a price-to-sales ratio of 0.5, and enterprise-value-to-EBITDA ratio of 21. In other words, the market seems to be underestimating its growth potential.
While the company won't get back to its pandemic-era growth rate, it still has an attractive opportunity and should continue to penetrate the large auto parts market over the coming years. Right now looks like a great time to buy.
