Mobile App And B2B Expansion Will Drive Future Success

Key Takeaways

• Expansion of product offerings and B2B services alongside digital transformation are key strategies for long-term revenue growth.
  
• Focus on high-margin income and mobile apps aims to improve net margins and profitability, reducing reliance on expensive marketing.
  
• Soft consumer demand, higher costs, and financial losses are straining CarParts.com, impacting margins, profitability, and investor confidence amidst strategic uncertainty.

Catalysts

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

• CarParts.com's strategic initiatives include expanding their product offering and increasing average basket size, which are expected to drive revenue growth over the long term.
  
• The company is focused on high-margin fee income, such as shipping and product protection, which is expected to improve net margins over time.
  
• The scaling of their B2B offering with last-mile delivery services is anticipated to enhance earnings due to its higher contribution margin compared to e-commerce sales.
  
• Growth of the mobile app business is expected to improve customer lifetime value and reduce dependency on expensive paid search, contributing positively to net margins and profitability.
  
• Investments in digital transformation and non-recurring expenses in 2024 that won't recur in 2025 are seen as catalysts for better financial performance, potentially boosting earnings in the near future.

CarParts.com Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CarParts.com's revenue will grow by 2.6% annually over the next 3 years.
• 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 -6.9% to the average US Specialty Retail industry of 4.4% in 3 years.
• If CarParts.com's profit margin were to converge on the industry average, you could expect earnings to reach $28.0 million (and earnings per share of $0.44) by about May 2028, up from $-40.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.6x on those 2028 earnings, up from -1.4x today. This future PE is lower than the current PE for the US Specialty Retail industry at 15.2x.
• Analysts expect the number of shares outstanding to grow by 2.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.15%, as per the Simply Wall St company report.

CarParts.com Future Earnings Per Share Growth

Risks

• The decrease in revenue from $675.7 million in 2023 to $588.8 million in 2024, driven by soft consumer demand and significant pressures in lighting and mirrors, could negatively impact future revenue growth and earnings.
  
• The GAAP net loss increase from $8.2 million in 2023 to $40.6 million in 2024, primarily due to lower gross profit, indicates financial challenges that may affect net margins and profitability.
  
• The adjusted EBITDA loss of $7.1 million in 2024 compared to adjusted EBITDA of $19.7 million in 2023 suggests reduced earnings, partly due to soft consumer demand and increased competitive pressures.
  
• Increased outbound transportation costs and performance marketing pressure have led to declining gross margins, which could further impact net margins if cost management strategies are not effective.
  
• The strategic alternatives process being overseen by the Board of Directors introduces uncertainty that could affect investor confidence and impact stock price performance and overall revenue stability.

Valuation

• The analysts have a consensus price target of $1.9 for CarParts.com based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $3.0, and the most bearish reporting a price target of just $0.8.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $636.8 million, earnings will come to $28.0 million, and it would be trading on a PE ratio of 5.6x, assuming you use a discount rate of 9.2%.
• Given the current share price of $0.96, the analyst price target of $1.9 is 49.4% higher.
• 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.