Aging US Fleet Will Erode Margins As AI Will Help

Key Takeaways

• Structural industry shifts and greater automaker competition threaten long-term sales growth and margin sustainability amid shrinking demand for traditional replacement parts.
  
• Operational challenges from supply chain, cost pressures, and market shifts limit earnings potential and risk ongoing net losses despite cost realignment efforts.
  
• Strengthening digital capabilities, expanding high-margin services, and optimizing operations are positioning the company for higher growth, profitability, and resilience against external risks.

Catalysts

Operates as an online retailer of aftermarket auto parts and accessories in the United States and the Philippines.

• CarParts.com's heavy reliance on the aging US vehicle fleet leaves its future revenue base increasingly exposed as electric vehicle adoption accelerates and new vehicles require fewer and more specialized replacement parts, shrinking the addressable market and diminishing long-term sales growth potential.
  
• As original equipment manufacturers ramp up direct-to-consumer digital initiatives and expand proprietary online parts sales, CarParts.com faces substantial pressure on pricing power and market relevance, leading to the risk of persistent gross margin erosion and net profit compression.
  
• Heightened tariffs on both China and Taiwan imports, combined with rising inflation and shipping costs, are structurally raising cost of goods sold while limiting CarParts.com's ability to offset these headwinds through price increases, resulting in sustained margin pressure and dampened earnings potential.
  
• The company's core market of do-it-yourself and do-it-for-me consumers is threatened by longer vehicle replacement cycles due to increased consumer adoption of ride-sharing and alternative mobility solutions, reducing long-term order frequency and revenue visibility.
  
• Ongoing supply chain and inventory management complexity inherent in the car parts industry ties up significant working capital, and with the closure of distribution centers and efforts to realign cost structure, CarParts.com may struggle to achieve the operational scale necessary for durable earnings growth, risking continued net losses.

CarParts.com Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on CarParts.com compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming CarParts.com's revenue will decrease by 0.6% annually over the next 3 years.
• The bearish analysts are not forecasting that CarParts.com will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate CarParts.com's profit margin will increase from -9.3% to the average US Specialty Retail industry of 4.7% in 3 years.
• If CarParts.com's profit margin were to converge on the industry average, you could expect earnings to reach $27.9 million (and earnings per share of $0.58) by about August 2028, up from $-53.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 1.7x on those 2028 earnings, up from -0.8x today. This future PE is lower than the current PE for the US Specialty Retail industry at 18.8x.
• Analysts expect the number of shares outstanding to decline by 4.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.1%, as per the Simply Wall St company report.

CarParts.com Future Earnings Per Share Growth

Risks

• The company is leveraging investments in machine learning and AI-driven search, which are already strengthening its competitive edge by improving conversion rates, customer loyalty, and order values, likely leading to higher revenues and enhanced net margins over time.
  
• The expansion of high-margin fee income streams, such as shipping protection and paid membership services, is increasing customer engagement and contributing to gross margin improvement, supporting future earnings growth.
  
• Mobile app adoption is rising rapidly, now contributing to 12 percent of e-commerce revenue with over one million users, indicating that digital and mobile penetration could further drive top line growth and customer retention.
  
• Vertical integration and prioritization of house brands like JC Whitney, along with investments in domestic sourcing and optimized supply chain operations, are expected to protect margins, reduce tariff exposure, and improve operational efficiency, directly benefiting profitability and cash flow.
  
• Cost-saving initiatives and network rationalization, including facility closures, workforce streamlining, and automation, are projected to generate substantial annualized savings, providing stronger operating leverage and the potential to improve net income and earnings in the medium to long term.

Valuation

• The assumed bearish price target for CarParts.com is $0.7, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of CarParts.com's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $2.0, and the most bearish reporting a price target of just $0.7.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $587.9 million, earnings will come to $27.9 million, and it would be trading on a PE ratio of 1.7x, assuming you use a discount rate of 11.1%.
  
• Given the current share price of $0.74, the bearish analyst price target of $0.7 is 5.2% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.