PARTS iD, Inc. (NYSE:ID) Q1 2022 Results Conference Call May 10, 2022 4:30 PM ET
Nino Ciappina – Chief Executive Officer
Kailas Agrawal – Chief Financial Officer
Conference Call Participants
Maria Ripps – Canaccord
Thank you for joining us today to discuss PARTS iD’s First Quarter 2022 Financial Results. On today’s call are Nino Ciappina, Chief Executive Officer; and Kailas Agrawal, Chief Financial Officer.
I’d like to point out that certain statements made during this presentation are forward-looking statements. These forward-looking statements reflect management’s judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting PARTS iD’s business. Accordingly, you should not place undue reliance on these forward-looking statements.
For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our first quarter 2022 earnings release, which was furnished to the SEC today on Form 8-K, as well as the company’s most recent annual report on Form 10-K and its other filings with the SEC.
The company does not undertake any obligation to update or alter any forward-looking statements whether as a result of new information, future events or otherwise. In addition, the company plans to refer to certain adjusted non-GAAP metrics on this call. Explanation of those metrics and reconciliations of GAAP metrics to those non-GAAP metrics can be found in the earnings release issued earlier today, which is also posted on the Press Releases page of our website at www.partsidinc.com.
Finally, as a reminder, a slide presentation is accompanying today’s prepared remarks. The presentation is viewable through the webcast link located at www.partsidinc.com.
With that, I’ll turn the call over to Nino Ciappina, Chief Executive Officer of PARTS iD. Nino?
Good afternoon, and thank you for joining us today to review PARTS iD’s first quarter 2022 results. Before we begin, I want to spend a moment to acknowledge our colleagues in Ukraine. As many of you know, PARTS iD has strong ties to Ukraine. It is home to many of our independent contractors who are in the affected areas. On behalf of the entire PARTS iD organization, I want to express our concern for the safety and well-being of our team that’s in Ukraine and our sympathy for everyone who has been personally impacted.
Our colleagues have demonstrated perseverance, courage and devotion to our company despite these difficult circumstances. They continue to inspire us. Our thoughts are with them during this challenging time.
Having gone public in late 2020, the PARTS iD story is still relatively new to many investors. And because our business is highly differentiated from what The Street categorizes as our peer group, I think it makes sense to start with an overview of the company, our technology platform and operating model and, of course, our vision and mission.
PARTS iD is a technology-driven digital commerce company on a mission to transform the $400 billion plus U.S. auto aftermarket and the $100 billion-plus adjacent complex parts markets by focusing on the consumers’ needs and using purpose-built technology and data to create custom infrastructure and unique user experiences where customers can quickly and easily find all the parts and accessories they need, get customer support by highly trained agents and be so satisfied with their experience shopping this category with us, then not only will they come back in the future, but they will tell their friends and families, too.
We work to achieve this through our platform business model, which brings together over 1,000 industry suppliers, more than 5,000 brands, approximately 18 million product SKUs and over 14 billion product and fitment data points. The technology platform integrates software engineering with catalog management, data intelligence, mining and analytics, along with user interface development, which utilizes distinctive rules-based parts fitment software capabilities. To handle the ever-growing need for accurate product and parts data, we utilize cutting-edge computational and software engineering techniques including Bayesian classification to enhance and improve data records and product information and ultimately, to contribute to the overall development of a rich and engaging user experience.
Furthermore, the technology is architected to support more than just car parts and accessories. We demonstrated the flexibility and scalability of the technology by launching seven adjacent verticals, including BOATiD.com, MOTORCYCLEiD.com, CAMPERiD.com and others in August 2018, all of which leverage the same proprietary technology platform and data architecture and with a unified shopping cart enabling customers to shop across all eight verticals and check out seamlessly using one cart.
There are several key points to highlight the attractiveness of our platform business model and underscore how PARTS iD as distinguished from the competition. One, our distinctive technology provides accurate fitment data which enables a successful experience for the auto parts consumer and supplier. Unlike any other consumer product category, the success or failure of selling auto parts and aftermarket accessories comes down to a rich and comprehensive fitment data that sellers like us add to our product offerings.
Two, our product catalog of approximately 18 million SKUs and over 5,000 brands is unrivaled. This comprehensive catalog is enriched with nearly 14 billion data points, advanced 3D imagery, in-depth product descriptions, customer reviews, installation and fitment guides, as well as other rich custom content, specifically catering to the needs of the automotive aftermarket industry and is further complemented by highly trained and specialized customer service agents.
Three, our proprietary and asset-light fulfillment model has enabled us to grow organically without the need for external capital. This platform model is enabled by a network of over 1,000 product vendors which we have cultivated relationships with and integrated over the last 10-plus years. This has enabled us to scale our catalog size quickly and to add adjacent verticals, unlike most of our competitors, which have very capital-intensive businesses and have, therefore, been limited to offering very few product lines such as just replacement parts and/or just hard parts.
Furthermore, our geo sourcing fulfillment algorithm factors in real-time inventory, customer proximity, shipping cost and profitability to optimize product sourcing. This algorithmic approach allows us to increase fill rate and delivery speed.
Four, our enhanced customer experience is a result of rich content, wide product range with ease of selection, proprietary fitment data and highly trained customer service representatives, providing a data-driven engagement platform for discovery and inspiration. This is demonstrated by, first, our catalog size, which contains approximately 18 million product SKUs. Second, despite the supply chain disruptions that began in 2021 and continue today, our Net Promoter Score continues to stay near 70. Third, our overall product return rate across all eight verticals continues to be approximately just 5% versus industry averages of more than 20%. In a category as complex as parts and accessories, this is truly incredible and underscores just how effective our technology and fitment data are.
Fourth, but certainly not least, repeat customer revenue, which is defined on this slide, represented 41.6% of total revenue this quarter. This is up from 38.4% last quarter and another new record for the company.
We have invested over 10 years building our platform and it’s not easy to replicate. In fact, our investment in technology and data is arguably the deepest competitive moat around our business, and it has allowed us to expand into adjacent verticals, leveraging a capital-efficient, just-in-time inventory model to offer the consumer an extensive selection and background.
With that background, I’ll walk through the details of our first quarter top line results, and then I’ll turn it over to Kailas for a review of the financials. After Kailas finishes, I will cover the opportunities we’re laser focused on to drive growth and the strategic initiatives we’re executing against to capture that growth. After that, we’ll open the line to questions.
Turning now to Slide 5. As you can see, we were up against a very difficult comparison from last year when record stimulus fueled outsized consumer discretionary spending. In addition to the lack of stimulus this year, our growth was also impacted by the delayed issuance of income tax refunds which historically has benefited our performance early in the year. When compared to the more normal first quarter of 2020, you can see we grew revenue over 34%.
Looking at our key performance indicators, you can see the impact that stimulus had last year or the lack of stimulus this year had on traffic and conversion, with 2022 traffic levels also being hampered by the rising cost of performance marketing rates. The year-over-year declines in traffic and conversion were partially offset by an increase in average order value.
Despite the volatility over the past two years, we have consistently increased our number of repeat customers. These loyal customers who returned to our sites have been largely organic to this point. They represented 32% of our total base in Q1 of this year and generated nearly 42% of revenue, up 440 basis points compared with the same period last year and up 620 basis points versus the first quarter of 2020.
As we continue to take steps to diversify our business beyond our core DIY automotive accessories category, I am pleased to share that repair parts, including our original equipment grew year-over-year as did our adjacent verticals. It’s clear our strategic initiatives are working even in the face of some challenging operating conditions.
Turning now to Slide 6. As we outlined during our Q4 call in March, the operating environment in early 2022 has been made more difficult by several external factors. Over the past two months, conditions have remained largely the same and visibility into when some of these headwinds will abate is still limited. That said, our teams are doing a great job navigating these challenges in order to best mitigate their impact on our business.
Supply chain disruptions continue to impact the economies everywhere, due in part to continued factory closures and port backlogs around the world. These have cascaded into global inventory shortages and widespread inflation. By adjusting our sourcing logic to alternative vendors with better inventory positions, we’ve been able to hold down cost increases to the extent possible and where necessary, passed some of these increases on to retail prices. To that point, this quarter, we were able to hold our cost of goods sold to an increase of only 140 basis points despite widespread inflation.
One notable and clear advantage of our platform business model is the breadth of similar products available to a consumer to trade down the product value spectrum as prices increase. By offering customers options down the value spectrum during times like this, we can capture sales with competitors with a stock and ship only model may lose due to their limited product assortment and options. We are leaning into this on the platform and with our call center sales representatives.
With respect to the war in Ukraine, our thoughts continue to be with our teammates there and all those impacted by Russia’s invasion of the country. We are in regular contact with the team, many of whom initially fled to safer regions in Ukraine or to other countries. Some of them have since returned home while the rest continue to work remotely. Fortunately, we haven’t experienced any material disruption to regular business activities to date. We are closely monitoring the situation, both the safety of our team members and the need to maintain operations.
As the situation continues to evolve, we’ll adapt with any needed temporary or longer-term adjustments as appropriate.
With that, I’ll turn it over to Kailas for a review of the financials. Kailas?
Thank you Sorry, I was on mute. Good afternoon to everyone. Since Nino already took us through our revenue results this quarter. I will start with gross margin on Slide 8. Continued investment in adjacent verticals and our repairs and OE business change the overall product category mix, which reduced overall margin this quarter by approximately 90 of the 140 basis point decline.
While these investments impacted our overall margin this quarter, with our focus margins increased in the adjacent vertical by 15.1% and by 6.2% in repairs and OE parts. As these businesses scale, these margin gains will become accretive to our overall businesses. The remaining 50 basis point decline in gross margin is attributable to continued COVID-19 supply chain disruptions as we remain more reliant on alternative sourcing of the products due to limited arability and inflation. While we expect this to continue in the short term, we believe we will be able to mitigate the impact through three key initiatives listed on the slide that will enable us to progressively move gross margin to over 23% by December 2024.
As outlined on the slide, we believe we can capture roughly 100 basis points of margin by year-end through shipping cost reductions and vendor and price optimization efforts. Further, we believe that margin improvements in our adjacent verticals, OE and repair categories can meet another 100 to 150 basis points by the year-end 2023. Additionally, we believe that we can capture another 100 basis points by December ’24 through increased private label and white label product sales as we build out that part of our business.
As a reminder, we operate a capital-efficient, just-in-time inventory business model. Since we don’t carry inventory, we don’t have material footprint and cost in our operating expenses. To properly compare our gross margin with the competition, requires an adjustment of [competers] gross margin for their fulfillment cost.
Turning now to operating intent on Slide 9. Starting with advertising expenses, we saw a decrease of $0.8 million or 7.6% for the quarter, primarily due to lower traffic. Advertising expenses as a percentage of revenue were 10.2% this quarter compared to 9.6% in quarter one of 2021. The increase in percentage is primarily attributable to increase in the cost per click as we acquire higher quality traffic along with changes in traffic mix. While digital advertising markets are also seeing some price inflation, we are staying disciplined by holding true to our ROI framework across our various marketing channels.
We also continue to innovate with new channels and are being very deliberate around where we invest across the marketing funnel to unlock the best efficiencies. Currently, our advertisement costs are variable as we heavily use performance-based marketing.
Turning now to our balance sheet and cash flow highlights on Slide 10. Our capital-efficient and inventory-light business model provides higher return on capital employed by the company. This model enables us to expand in new lines of business and new markets without material investment in the inventory. This quarter, we had $94.9 million in revenue with just averaging $1.4 million of physical inventory online.
I will now turn the call back to Nino for a review of our strategic initiatives.
Thank you, Kailas. Turning to Slide 12. The markets we operate in are very large and they continue to grow. The specialty automotive equipment market in the U.S. was estimated to be a $48 billion market in 2020 and is forecasted to grow to $55 billion by 2024.
This is exciting for us because this $48 billion specialty segment includes exterior and interior accessories, custom wheels and performance products which combined represent approximately 70% of our current sales.
The overall U.S. automotive aftermarket is estimated to be $439 billion. This is also very exciting for us because we’ve invested heavily in growing our repair and original equipment product lines, and we’re seeing the results. We now have 34 major manufacturer brands, including Dodge, Jeep, Hyundai and Lexus and approximately 2 million original equipment product SKUs, which has significantly broadened our product selection to now provide customers with a diverse range of both aftermarket and original equipment parts all in a one-stop shop platform.
Next, looking to the right of this slide is the estimated market size opportunity for the seven adjacent verticals we launched in 2018. Within these adjacent verticals, we’re focused on boating, power sports, motorcycle and RV camper, which combined represent an estimated $20 billion of total addressable market annually. Other research suggests the market sizes are even larger than this. In addition, these verticals are highly fragmented. And in most cases, there is no dominant online leader.
This presents a substantial opportunity for us.
In 2021, we hired general managers to lead the boating and RV camper verticals, and we’re making progress developing them like we’ve done in the auto segment with CARiD. In the first quarter, revenue from the adjacent verticals grew 5.4% compared to Q2 2021 and nearly 53% compared to Q1 2020. We have a lot of runway for growth with these adjacent verticals.
Earlier on the call, I stated that PARTS iD is on a mission to transform the $400 billion U.S. auto aftermarket and the $100 billion plus adjacent complex parts markets, and that’s what we’re doing. We see a future where customers can quickly and accurately find and discover parts and accessories for all their vehicles and more on the ID platform. We believe we’re on the right runway for growth and that we’ve only scratched the surface of the markets we serve.
Turning now to Slide 13. As you can see here, there are many medium- to long-term market tailwinds at our back, including, one, the U.S. auto parts e-commerce market share is projected at over $22 billion by 2023. This is up from $16 billion in 2020. Two, as I mentioned earlier, the specialty equipment segment of the industry is forecasted to grow to $55 billion by 2024.
Three, new and used vehicle sales are expected to continue increasing. Four, miles driven continues to increase. In February of 2022, miles driven increased 10.6% as compared with February 2021. Five, many of the adjacent industries we serve are experiencing continued growth. And finally, EV adoption is accelerating, and we believe we’re well positioned to capture this emerging category with our platform business model.
Turning next to Slide 14 for a review of our strategic initiatives, and then we’ll open up the line for questions. We continue to execute against our strategic initiatives, and we’re orienting the business to succeed across each of these dimensions through a technology-first approach and investing accordingly, positioning our platform to adapt to the ebbs and flows in the macro environment. Our product catalog has grown to approximately 18 million product SKUs with many initiatives already underway to continue growing repair parts, original equipment, electric vehicle, private label and more. We recently added 16 new accessories brands and in repair, we expanded both our private label offerings and brands that feature complete kits with free shipping.
Growth in our adjacent verticals continues to accelerate as we build out product selection there as well. In boating and RV, we added 24 new brands and look to continue momentum in product breadth and resulting revenues. We remain bullish on the long-term outlook of our multivertical strategy.
With regards to customer acquisition and retention, repeat customer revenue increased 440 basis points to 41.6% of revenue this quarter. We believe there’s a lot of runway on the repeat customer side, and we continue to show quarter-over-quarter improvement. As we’ve stated in the past, among our most important assets is a deep and growing data-driven understanding of our customers and their behavior. To that end, we recently completed our web analytics platform upgrade.
Next, we continue making — to make progress in pricing strategy. In our adjacent verticals and repair parts and OE categories, we identified additional opportunities to improve our pricing, leading to sizable gross margin improvements for these businesses. Gross margin improved by 15% in the adjacent verticals and by 6% in repair parts and original equipment.
Lastly, we made great progress with our technology and data initiatives this quarter. To complement our existing strength in the DIY segment, we continued to build an omnichannel customer experience to attract customers in the $225 billion plus do-it-for-me customer segment of the industry. In the first quarter, we added over 5,000 new locations to our tire installation network. This brings the total number of participating installers in our tire installation beta to more than 7,000 and more importantly, this enriches the shopping experience for tires. In addition, we’re now in a position to expand this initiative to categories beyond tires.
In closing, the first quarter presented a challenging environment due to a change in consumer spending for accessories compared to Q1 of last year, widespread inflation and supply chain uncertainties. To fix this, we’re focused on productivity and cost efficiency initiatives, which we believe will have an immediate impact. For example, we’re going to prudently secure and stock inventory of select top-selling SKUs for the back half of this year.
Long term, we remain confident in our platform business model and in our ability to provide customers a rich and differentiated shopping experience. This is demonstrated by consistent improvements in repeat customer revenue, our Net Promoter Score trend and our consistently lower return rate.
Lastly, despite the challenges in the first quarter, we continue to make progress executing against our strategic initiatives, including investments in building out our adjacent verticals, original equipment and repair parts categories. While these investments, combined with the current macroeconomic conditions are pressuring our near-term margins, we are confident that the strategic course we have set for the company will fuel sustained growth and profitability and generate meaningful value for our shareholders over the long term.
With that, we’ll open the call for questions.
[Operator Instructions] Our first question is from Maria Ripps with Canaccord.
First, any color you can share maybe on demand trends so far in Q2? And have you seen any weather-related headwinds so far this quarter? And maybe more broadly, how are you thinking about sort of consumer demand heading into the summer months given elevated inflation, sort of all this macro uncertainty?
Thanks for joining us this afternoon. I’ll take your question. The macro environment remains dynamic and it’s difficult to predict. We believe, overall, the interest and demand in the automotive aftermarket is healthy. That said, the first half of this year, as you know, presents a more difficult growth comparison due to the impact of government stimulus last year.
As we move forward, we’re planning for revenue trends that more closely mirror the pre-pandemic period, but overlaid with adjustments for the change in product mix to account for stronger demand this year from repair products right now. As for gross margin, we believe we’ve turned the corner, and we’re seeing positive early results.
Got it. And then maybe one other question on advertising expense. It seems like your advertising sort of expense was down year-over-year this quarter. Can you just talk about your thoughts on sort of near-term advertising strategy, especially sort of as you’re navigating the softer demand and macro uncertainty?
Yes, of course. Within the marketing department, we’re focused on three key areas. The first is conversion rate optimization, which is fueled by deep analytics. So to that end, we — as I mentioned, we’ve recently finished upgrading our web analytics platform to the latest version. And this week, we are scaling the first of several new tests geared towards incremental conversion rate improvement.
Second is customer relationship management or better known as CRM. Currently, we’re focused on growing our e-mail subscriber list and configuring automated trigger and trip campaigns. In terms of ROI, we’re realizing the high ROI we expected at a campaign and program level on the CRM front. Third, but certainly not least, is continuing to unlock incremental efficiencies in our search engine marketing programs. For example, we’re observing positive early results from Google’s newest AI-powered campaign type and right now, we’re migrating additional campaigns to that format right now.
Overall, we’re successfully executing against our marketing initiatives and building our capabilities to drive long-term profitable growth.
We have reached the end of the question-and-answer session. And I will now turn the call over to Nino Ciappina for closing remarks.
Thank you, everyone, for joining this afternoon to get an update on our latest results. As I mentioned in my opening remarks, our thoughts and prayers are with our Ukrainian teammates and others who have been personally impacted in the region. And we look forward to updating this group and others in August with our next earnings call. Thank you so much.
This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.