CarParts.com, Inc. Common Stock 2026 Q3 Earnings Call

Thank you, Zeha. Q3 2026 marks our third consecutive quarter of positive adjusted EBITDA. That is a milestone our team worked hard for, and it is clear evidence that our transformation is working. Let me put it in context. Before this streak began, we had already strung together four straight quarters of narrowing losses. In Q1 2026, we turned adjusted EBITDA positive for the first time in several quarters, coming in at $585,000. In Q2, we built on that, reaching $1.8 million in adjusted EBITDA, the strongest result we had posted since Q3 2023. And now, in Q3, we remain positive at $1 million, extending that streak to three quarters. This matters because of what it represents. Each quarter, we made deliberate decisions on assortment, on our footprint, on pricing, on advertising efficiency, on how we deploy capital, on which partnership we invest in, on which costs we eliminate.

We made these choices intentionally and executed them consistently, including a continuous effort to reshape our fixed cost base. The result is structural improvement, a durable shift in the underlying economics of the business, and one we are excited to build on. A year ago, in Q3 2025, we posted an adjusted EBITDA loss of $2.5 million on net sales of $127.8 million. The business we are running today is fundamentally different, more efficient, more diversified, and increasingly built around recurring revenue streams. We believe the changes we've made to our cost structure and business mix are durable, and they position us to build on this quarter. We also know we are early. $1 million of adjusted EBITDA is a foundation, and our focus now is building on it.

Before I go further on the results themselves, I want to make sure everyone is looking at the financials with the full picture in mind, because gross margin percentage on its own does not always capture how business mix is changing. As our drop-ship business scales through A-Premium on our own site, expanded assortment in adjacent categories, and through JC Whitney across third-party channels, our reported gross margin percentage will reflect that mix. As a reminder, this model requires less working capital, carries less inventory risk, and generates contribution margin dollars at attractive rates relative to the capital deployed. Drop-ship eliminates the carrying costs, the fulfillment overhead, and the obsolescence risk that come with a traditional stock model. When you net all that out, the unit economics are compelling. To be clear, this is not a move to an all drop-ship model.

We will continue to stock and maintain inventory in a disciplined way, particularly where we have a competitive advantage. So when you see the gross margin percentage line move, ask a different question. Are contribution margin dollars growing? Is free cash flow improving? Are we deploying less capital to generate each incremental dollar of revenue? Together with our GAAP results, those are the metrics we use to evaluate the health of our business. The North Star we're managing toward is long-term free cash flow generation and per-share value creation for shareholders. That is the framework we use internally, and it is one we believe best captures the value we're building for shareholders over time. Before I get into the operational details of the quarter, I want to highlight two recent initiatives that I believe represent meaningful steps in the evolution of our company. First, CarParts+ Rewards. We officially launched our first-ever points-based loyalty program on October 13th, and the early results are strong.

Since the soft launch in early September, we have organically enrolled more than 200,000 new members. Free members earn one point per dollar spent. CarParts+ Gold, at $79 a year, less than the national average cost of a single tow, unlocks three times the points, free shipping on over 1 million parts, 24/7 roadside assistance, extended returns, and VIP customer support. Beyond enrollment, we are deepening customer engagement, increasing repeat purchases, and growing customer lifetime value while improving the efficiency of our marketing investments over time. Second, we have recently partnered with Klarna, a company whose scale and brand recognition make it a strong offering to power buy now, pay later financing at checkout.

It gives our customers greater payment flexibility, particularly when facing unexpected repair expenses, while also creating opportunities to improve conversion and average order value. Two capital-light initiatives, a loyalty ecosystem and payment flexibility, each one deepens our customer relationships. I want to spend a moment on the architecture of our business because it is key to evaluating where we're headed. We operate two sides of one business. They are distinct, they are interdependent, and together they create something that is difficult to replicate. The first side is the digital layer, the website, the mobile app, the search and fitment catalog, the marketing engine, and the AI-driven personalization infrastructure that ties it all together. Our catalog now spans over 1.5 million parts and accessories. Our mobile app accounted for nearly 15% of eCommerce revenue in Q3.

AI is driving real efficiency gains across search relevance and advertising optimization, and those gains are showing up in the operating expense line. The digital layer drives discovery, conversion, and increasingly retention through programs like CarParts+ Rewards. The second side is the physical layer, the supply chain, the distribution network, the fulfillment infrastructure, and the last-mile capability we're actively building. This is where the durable competitive advantage lives. AI is transforming digital commerce, but it cannot build or operate a distribution center. It cannot negotiate a supplier agreement that took 15 years to develop. Any well-funded competitor can build a website. Very few can replicate what we have built on the physical side. That is our moat. Both layers operating in concert, reinforcing each other at every step of the customer experience.

Q3 was a quarter where both sides moved forward meaningfully and the financial results reflect it. Let me turn to our two strategic partnerships, both proof points for that platform thesis. Starting with A-Premium. We entered the quarter with A-Premium approaching the $50 million annualized revenue run rate milestone we set as our Q3 marker, and we surpassed it, exiting the quarter at approximately $55 million annualized. The catalog advantage here is real and growing. A-Premium's offering is now six times larger than our legacy private label mechanical catalog, filling fitment gaps we previously could not cover. Contribution margin dollars on A-Premium orders are growing, and the economics per unit remain more than two times as profitable as our legacy private label equivalent. The trajectory toward our long-term $100 million target remains intact.

Turning to JC Whitney, we exited the quarter with 7,000 SKUs live on Amazon and added more than 8,000 in early October, bringing the total to 15,000. The annualized revenue run rate increased from $2.5 million in Q2 to approximately $3 million exiting Q3. Last week, we posted a record of roughly $100,000 in weekly revenue, a $5 million annualized pace. We're also working to bring JC Whitney products to CarParts.com, expanding the brand beyond Amazon. It remains a near-term priority, and we expect to launch soon. Both partnerships follow the same capital-light drop-ship model. They expand our catalog, improve our working capital profile, and generate contribution margin dollars that are accretive to the overall business. Now let me turn to the physical layer, because Q3 was another quarter of real, measurable progress.

We delivered more than 6,000 packages through our last-mile network during the quarter, roughly doubling Q2's pace, and we closed out the quarter with three distribution centers actively running next-day delivery. Las Vegas, Dallas, and Jacksonville are live, and Chicago is coming soon. The ramp is building. A few hundred packages in Q1, over 3,000 in Q2, over 6,000 in Q3. The medium-term target is 300,000 packages annually, approximately 5% of our total outbound volume, and the ramp is tracking to plan. The economics and sales opportunities in both direct-to-consumer and commercial customers are compelling as freight cost and delivery times are substantially reduced. Freight is one of the largest cost lines in this business. Every package we route through our own network rather than a national carrier is a package where we control the cost, the timing, and the customer experience.