U.S. Auto Parts Network, Inc. Aktie

Good afternoon. [Operator Instructions] Please note that this call is being recorded. I would like now to pass the conference over to our host, Mark DiSiena, Interim Chief Financial Officer. Please go ahead.

Hello, everyone, and thank you for joining us for the CarParts.com First Quarter 2026 Conference Call. Joining me today is David Meniane, Chief Executive Officer. Before I turn it over to David, have some important disclosures.

Our remarks on this call could contain certain forward-looking statements related to our company and our strategic initiatives under the federal securities laws. Actual results may differ materially from those contained herein or implied by these forward-looking statements due to various risks and uncertainties. For a discussion of the material risks and other important factors that could affect results, please refer to the CarParts.com annual report on Form 10-K and the quarterly reports on Form 10-Q, each as filed with the SEC, all of which can be found in our Investor Relations website. On the call, both GAAP and non-GAAP financial measures discussed. A reconciliation of GAAP to non-GAAP financial measures is provided in the press release that we issued today.

With that, I'd like to turn the call over to David.

In the first quarter of 2026, we reached a milestone we have been building towards for 5 consecutive quarters, our first positive adjusted EBITDA since Q1 2024. Our adjusted EBITDA was positive $585,000, a swing of nearly $7 million from the same quarter last year. This is the result of deliberate action across every line in the P&L advertising efficiency, customer acquisition quality, life cycle monetization, warehouse operations, offshore savings and a fixed cost base that is now materially lower and mostly embedded in our run rate. 12 months ago, adjusted EBITDA was negative $6.2 million. We made a decision then to rebuild this business around profitability, and today, we cross the line.

Before I walk through the quarter, I want to establish 2 frameworks that matter for how investors think about this business. The first is how we measure profitability. As our mix evolves, more drop ship more a premium, more JC Whitney, reported gross margin percentage will move and our costs will reduce. We manage this business to contribution margin dollars. We're focused on long-term free cash flow dollars that accrue to shareholders. Mark will walk through the mechanics but focus on the dollars.

The second framework is strategic. For the last several years, we have been thoughtfully building out 2 sides of our business. There is the digital layer, our website, our mobile app, our search, our catalog, our marketing, and there's the physical layer. Our global supply chain, distribution network, fulfillment infrastructure, inventory and last-mile capability. Most people see CarParts.com as an e-commerce company. We see ourselves as both. And over time, the advantage will not simply be having both layers, but how effectively we can connect them through data, AI and customer ownership. I will come back to that later in the call.

Turning to the trajectory of the business. Q1 2026 marks 5 consecutive quarters of sequential improvement in the metrics that matter most: gross profit margin, fixed operating expenses and adjusted EBITDA. A Q4 2025 improved over Q3. Q3 improved over Q2. Q2 improved over Q1 2025, and Q1 2026 crosses into positive adjusted EBITDA territory. Each quarter, we said the model was working. This quarter, the model proved it. This is an execution story. The restructuring is behind us. The cost actions are complete and mostly reflected in our run rate. What you are seeing now is the output of a leaner organization operating against a disciplined plan, and we still have more levers to pull.

On our A premium partnership, the momentum is real and accelerating. The annualized revenue run rate is now approaching $45 million, up from $35 million at year-end, and we believe that there is a path to $50 million in the near term and eventually potentially exceeding $100 million. All of this is being generated attractive contribution margin without requiring us to carry the inventory or the working capital.

To put that in perspective, a premium catalog is 5x larger than our private label mechanical offering. In the world of fitment specific parts, coverage is a durable competitive advantage. Every SKU we add compounds our ability to capture the customer before a competitor does. The partnership is capital efficient by design, and the results are reflecting that structure. And we believe we're still in the early stages of what this partnership can become.

Moving to JC Whitney, this has gone from announcement to execution at a rapid pace. In March, we launched the JC Whitney branded product line in partnership with a premium, 30,000 SKUs with a premium supporting the operational build-out. The initial 7,000 JC Whitney SKUs are now live on Amazon and generating sales, with revenue growing week over week. The remainder of the 30,000 SKU catalog will scale over the balance of the year. To fund the JC Whitney inventory investment and strengthen our balance sheet, we completed an $8 million private placement with strategic investors who bring operational experience in e-commerce and the automotive aftermarket. We're buying inventory at known margins, selling through a channel that is already generating revenue and turning that capital back into cash. The investment is expected to be accretive to earnings as inventory moves through the sales cycle.

I want to come back to the 2 companies in 1 framework. What I'm about to describe is early. The numbers are small, and there is significant work ahead, but the direction matters, and I want investors to understand how we're thinking about it. Since the beginning of the year, we have delivered over 2,000 packages to our last mile network, and we're running next-day delivery for our own channels out of 2 out of 4 warehouses within a defined radius. This is proof of concept intentionally constrained while we validate the model, but our target is to deliver 300,000 packages to our last mile network over the next 12 to 24 months. with a focus on big and bulky nonconveyable parts. The heavy oversized items where we have the most scale, the deepest operational expertise and historically the highest outbound carrier costs. Getting to 300,000 packages will require significant execution. We know that, but the savings per package are real, and the infrastructure is already ours.

Here's the strategic logic behind this investment. As AI continues to reshape e-commerce, we're paying very close attention to where durable competitive advantages actually exist. Some assets are becoming easier and cheaper to replicate every year. digital execution, content generation, catalog enrichment. What is not easily commoditized is physical infrastructure, warehouses, fulfillment networks. Last mile reach, and the scale and purchasing power that come from 3 decades of supplier relationships. AI will optimize infrastructure, it will not replace it. At 300,000 packages annually, the economics become meaningful. At scale, they become structural and could significantly reduce our freight cost as a percentage of revenue.

Our strategy is to lead in both layers, owning the demand layer and building a durable competitive advantage in the physical layer. Stepping back, the investments we're making are part of our strategic and tactical road map. Our distribution network, our last mile initiative 3 decades of sourcing relationships in Taiwan, the JC Whitney brand. They reflect a coherent view of where the real advantages in this industry will live over the next 5 years. We have more proof points to build and more to share in future quarters. but the direction of our capital allocation is deliberate, and we're executing against it today.

On the technology side, we have 2 AI systems in production. Spark is our customer-facing shopping assistant live on carparts.com, helping customers find the right part using our proprietary fitment catalog. Zap is our internal system, automating returns, cancellations, and warranty claims, reducing manual work and improving response time. Both are in early stages of rollout. The advantage is the data underneath them, our customer history and catalog that a new entrant cannot replicate. That is what we are building upon. We have recently opened a branch office in Type A, Taiwan. Approximately 70% of our purchases come from Taiwan, the product of decades of supplier relationships built and deepen over time. Having a permanent presence in Type A puts us closer to those partners, strengthens those relationships, improve lead time and supports our ability to consolidate and coordinate sourcing more efficiently.

This is a long-term strategic investment in the supply chain infrastructure that underpins our business and 1 we have been planning for some time. Q1 also included several headwinds facing our industry. Oil prices increased approximately 50% during the quarter, driving a direct increase in freight costs and fuel surcharges. We responded with real-time pricing actions to protect gross profit dollars. Weather across multiple regions in January and February also reduced order volume. The pricing response covered both. Gross profit came in at $42.9 million on $132 million in net sales with gross margin percentage up approximately 40 basis points year-over-year.

I also want to reinforce the contribution margin framework. As we mix more towards drop shift for certain categories, reported gross margin percentage may decrease. However, contribution margin will increase. As in a drop-ship transaction, there are no associated fulfillment expenses. Mark will give you the detail. On the customer loyalty front, at the end of Q1, we officially launched the CarParts.com Mastercard issued by the Bank of Missouri in partnership with Concor. Cardholders earn 3% cash back on carparts.com purchases and 1% on all other purchases. This is very early and we have a lot to build but the infrastructure is now in place, and we have already activated over 1,000 Mastercards. The Carport Stockholm MasterCard is the latest addition to our capital-light fee income platform, which includes our Car Parts Plus membership program and various warranty products.

Combined, these programs now generate in excess of $4 million in annual fee income and our aims at increasing customer lifetime value, frequency and retention. Over time, the goal is more revenue coming from customers we already have and less from customers we have to pay to acquire. Looking ahead, our path to sustainable free cash flow runs through the same controllable levers that produced this quarter's result, growing contribution margin dollars, a fixed cost base that is already materially lower and improving capital efficiency as JC Whitney and a premium scale. We're deliberately building a more resilient model. We're also clear eyed that the path from here requires continued execution.

There is no shortcut and no single quarter that gets us there. We're doing this the right way. The foundation is strong. The initiatives are executing. We're not simply improving performance. We're building a model we believe is right -- is the right 1 for how automotive commerce will operate in an AI-driven world.

With that, I will turn it over to Mark to walk through the financial results in detail.

Thank you, David. Before getting to the numbers, a quick calmer note, Q1 2026 included 13 weeks, consistent with Q1 2025. And fiscal 2026 is a 52-week year-over-year comparisons are clean. Before I walk through the P&L, 1 framing note, as David described, we managed to contribution margin dollars, not gross margin percentage. Keep that in mind as I walk through the mix shift, the numbers will make more sense through that lens.

In the first quarter, we reported net sales of $132.0 million compared to $147.4 million in Q1 2025, down approximately 10%. And -- the decrease was primarily driven by the company's deliberate optimization of advertising spend towards higher return, higher intent customers, partially offset by growth in the premium and owned channel revenue real-time pricing actions taken in response to higher outbound freight costs and weather-related volume softness in January and February also affected the top line during the quarter. Gross profit for the quarter was $42.9 million. Gross margin was 32.5%, up approximately 40 basis points from 32.1% in Q1 [indiscernible].

The year-over-year margin improvement reflects pricing discipline, favorable product mix and favorable freight costs during the quarter. The dollar variance versus the prior year is driven by lower volume, not margin deterioration. GAAP net loss for the first quarter was $1.9 million compared to a loss of $15.3 million in Q1 2020. The -- the improvement was primarily driven by lower operating expenses, partially offset by the impact of lower net sales on gross profit dollars with gross margin rate improving 40 basis points year-over-year. Adjusted EBITDA for the first quarter was positive by $585,000 compared to a loss of approximately $6.2 million in Q1 2025, a swing of nearly $7 million year-over-year -- this reflects improvement across 4 controllable drivers.

Advertising efficiency, warehouse labor, offshore operating savings, followed by the Manila transition to lean solutions group and fixed costs now mostly embedded in our run rate. Total operating expense for the first quarter was $46.0 million compared to $62.5 million in Q1 2025, and a reduction of approximately $16.5 million or 26% year-over-year. The improvement was primarily driven by lower advertising spend, improved warehouse efficiency and head count reductions. I also want to fly 1 nonrecurring item in the quarter, a $2.3 million noncash gain related to the completion of the sale of our Manila operations. Excluding that item, underlying operating expenses still declined by approximately $14.2 million year-over-year, a combination of advertising and warehouse efficiencies actions as well as fixed cost improvements now embedded in our run rate. Turning to the balance sheet.

We ended first quarter with $38 million in cash and no revolver debt outstanding. This is a strong liquidity position that provides the financial flexibility to execute on our growth initiatives while maintaining a conservative balance sheet. Inventory was approximately $91 million down from $95 million at year-end, reflecting lower owned inventory requirements as drop ship volume grows and the business shifts towards a more capital-efficient mix. On share count, as of April 30, we had 8,754 shares of common stock outstanding. This includes 10 million shares. Recently issued a connection with the JC Whitney private placement at $0.80 per share.

I want to specifically call out that the company holds 3,786 000 treasury shares reflecting prior repurchase activities. At our current share price, that position is material and worth knowing to investors modeling the fully diluted share count. Our convertible notes are at $25.3 million with a conversion price of $1.20 per share. On tariffs and sourcing, we continue to monitor the environment closely. Approximately 20% of our sourcing is from Chin with approximately 70% from Taiwan and the remainder from other countries. As David noted, we have officially opened a branch auction Taipei, a direct presence that deepens our supplier relationships representing the majority of our purchases. So our AEP tariff claims. We estimate up to $4.3 million in outstanding claims and are pursuing recovery through a formal CDP process.

We will keep investors updated as the process develops. We are not building our forward plan around this outcome, but it represents a potential source of cash we want investors to be aware of. Turning to our partnership metrics. The 8 premium partnership is now generating an annualized revenue run rate approaching $45 million, up from approximately $35 million at the end of fiscal 2025. We continue to target $50 million in the near term with a long-term path, we believe, can exceed $100 million, all at attractive contribution margins and without a working capital burden of own mechanical inventory. I want to walk through the operational dashboard we track each quarter, so investors can monitor progress across the key drivers of the business. Starting with product mix. Private label represents approximately 81% of the revenue in Q1 compared to 83% in Q1 2025. Collision and replacement accounted for approximately 67% of revenue up from 65% in Q1 2025, consistent with our core strength in big and bulky nonconveyable parts.

Turning to channel mix. On channels are e-commerce site, mobile app and commercial channels represented approximately 69% of revenue in Q1, up from 64% in Q1 2025 with marketplace at 31%. The continued shift towards owned channel reflects higher net contribution margin and lower working capital intensity. Our retention and mobile, e-mail, SMS and push note vacations represented approximately 10% of e-commerce revenue in Q1, up from 7.5% in Q1 2025. And Mobile ad revenue was approximately 14% of e-commerce revenue, up from 10% in Q1 2025. At customers convert at higher rates, carry larger basket sizes and come at lower acquisition costs, a compounding advantage as the base grows.

With that, I'll turn the call back to David for closing remarks.

Thank you, Mark. 5 quarters ago, we made a decision, rebuilt this business focusing on sustained profitability and long-term cash generation, not unprofitable volume. We adjusted advertising spend rightsize the organization executed on partnerships that brought real operational capability and synergies and reduced our fixed cost base. I want to take a moment to acknowledge what that required. It was challenging. It was disruptive. And a lot of people across this organization make real sacrifices to get us here. This quarter's result belongs to them. And the results speak for themselves. Adjusted EBITDA crossed into positive territory for the first time since Q1 2024, a swing of nearly $7 million in 12 months. Gross margin percentage expanded year-over-year despite real freight headwinds. A premium is approaching $45 million in run rate revenue. JC Whitney SKUs are live on Amazon and generating sales today. Spark and ZAP are running.

The CarParts.com Mastercard is in the market. We have officially opened our branch office in Taipei and we're running next-day deliveries to our last mile network out of 2 of 4 of our warehouses with a target of 300,000 packages over the next 12 to 24 months. We ended the quarter with $38 million in cash and no revolver debt. The balance sheet supports everything we have described today. We still have a lot of work ahead, and we're not declaring victory. Positive adjusted EBITDA is only 1 checkpoint, not the destination. From here, the path runs through growing EBITDA dollars consistently quarter-over-quarter until the business is generating cash after all of its obligations.

We're not there yet. We said free cash flow positive in 2026 and and the levers that get us there are the same ones that produce Q1. Contribution margin dollars growing, fixed cost embedded and capital efficiency improving. Q1 is the foundation at rest on. We know what we have to do, and we're continuing to execute on our road map. At a higher level, we have always been 2 companies in 1, a digital layer and a physical asset base. In a world where AI is rapidly commoditizing digital execution, we're investing in the supply chain, physical infrastructure and brand assets that cannot be easily replicated. Warehouses cannot be digitized. Decades of supplier relationships cannot be rebuilt overnight.

Last mile capability in big and bulky non-conveyable parts is a genuine moat. We have more to prove and more to share, but the direction of our investment is deliberate, and we believe it is the right bet for us in the next 5 years. I want to recognize our team. The inflection point you are seeing in these results is the product of disciplined unglamorous work executed consistently over 5 quarters. Our people stay focused on the plan served our customers and delivered. I'm proud of what this team has accomplished. I am even more confident about where we go from here.

With that, I'll turn it back to the operator.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.

Good afternoon. [Operator Instructions] Please note, this call is being recorded.

I would now like to pass the conference over to our host, Mark DiSiena, Interim Chief Financial Officer. Please go ahead.

Hello, everyone, and thank you for joining us for the CarParts.com Fourth Quarter of 2025 Conference Call. Joining me today is David Meniane, Chief Executive Officer.

Before I turn it over to David to start the call, I have some important disclosures. Our remarks on this call could contain certain forward-looking statements related to our company and our strategic initiatives under the federal securities laws. Actual results may differ materially from those contained herein or implied by these forward-looking statements due to various risks and uncertainties. For a discussion of material risks and other important factors that could affect results, please refer to CarParts.com annual report on Form 10-K and quarterly reports on Form 10-Q, each is filed with the SEC, all of which can be found on our Investor Relations website.

On the call, both GAAP and non-GAAP financial measures will be discussed. A reconciliation of GAAP to non-GAAP financial measures is provided in the press release that we issued today.

With that, I would now like to turn the call over to David.

In 2025, we closed the $35.7 million strategic investment, completed a full cost structure reset and built an operating model that is now delivering results every quarter. Our A-Premium partnership is already at a $35 million annual revenue run rate with a clear path to $50 million in the short term, and we believe it will eventually exceed $100 million at attractive contribution margin. all without requiring us to carry the inventory or the working capital. That's the headline.

Now I'd like to talk to you about our current trajectory. Q4, which is historically our weakest quarter seasonally, was stronger than Q3 and showed significant year-over-year improvement. Q3 improved over Q2, Q2 improved over Q1. That marks 4 consecutive quarters of improvement in the metrics that matter most. Contribution margin, fixed operating expenses and adjusted EBITDA. We now have clear evidence that our new operating model is working, and we're progressing toward our profitability goals.

Let me give you more context on why the A-Premium partnership is so important. Historically, CarParts.com has been a collision-focused business, roughly 2/3 of revenue, while we turn inventory up to 3x annually. This is where we have real scale and operational expertise, efficiently managing large, bulky nonconveyable inventory at speed and at volume. It's where we have a clear right to win.

Mechanical parts are fundamentally different. Slower turns, typically 1 to 1.5x annually, higher minimum order quantities and significant working capital when owned directly. Now the A-Premium partnership addresses all of these issues rather than sourcing and carrying that inventory ourselves, we have access to a world-class mechanical catalog through a capital-efficient model with lower minimum order quantities. We expand assortment, improve coverage and preserve contribution margin without assuming the working capital burden.

The A-Premium catalog is 5x larger than our prior mechanical offering and growing. In the world of fitment specific parts, coverage is a durable competitive advantage. In addition to the premium partnership, we set decisive operational action in 2025 to materially change our cost structure and margin profile. 2025 was a demanding year that required deliberate choices across the organization.

Our price cost structure and advertising spend were designed for revenue levels that no longer existed. And we chose to rebuild the business around profitability and cash generation rather than pursue unprofitable volume. We adjusted advertising spend, rightsized the organization and reduced our fixed cost base. Those actions are complete, and the company we are today is leaner, more focused and built to operate at our current revenue scale.

On the cost side, we consolidated operations and reduced our fixed overhead. In the fourth quarter, we completed the consolidation of our Virginia warehouse operations, centralized logistics into our 4 other warehouses and leveraged our partnership with Dongfeng. This eliminates redundant overhead and allows for improved variable economics while maintaining service levels.

We also completed the transition of our Manila-based captive operations, the Lean Solutions Group, a third-party BPO company in January of this year. Now this simplifies and reduces our cost structure and it shifts to a more flexible variable operating model while allowing us to focus internal resources on our core U.S. distribution, supply chain, technology and customer experience. Both of these consolidations are a meaningful driver of our operating expense reduction and our path towards free cash flow.

On advertising, we significantly improved efficiency. Between Q1 and Q4, overall marketing efficiency improved by close to 300 basis points. We stopped chasing unprofitable one-and-done transactions, and we refocused on high-intent customers. As a result, revenue from retention channels such as e-mail and SMS increased from 6.7% of e-commerce revenue in Q4 of 2024 to over 10% in Q4 of 2025. We're retaining more of the customers we acquire, which lowers our long-term cost of revenue and improve lifetime value.

We also doubled down on mobile app adoption, which in Q4 of 2025 represented over 13% of e-commerce revenue, up from 7.8% in Q4 of 2024 and 0% at launch in Q3 of 2023. And app customers convert at higher rates, purchase more frequently, carry larger basket sizes and come with lower customer acquisition costs. In addition, our ads services and paid membership offerings now generate nearly $4 million in annual high-margin fee income with virtually no capital required, raising our margin profile over time.

Turning to overall business performance. The fourth quarter results reinforce this progress. Despite being our seasonally weakest quarter, we delivered meaningful year-over-year improvement in adjusted EBITDA with the loss narrowing to $2.2 million compared to $6.8 million in the prior year period. Gross margin expanded 70 basis points year-over-year to 33.2%, reflecting improved pricing discipline and mix including higher-margin fee income. Operating expenses also declined as the organization became more efficient

Our strategy is built on operational resilience, diversified sourcing pricing discipline and asset-light partnerships. As we look ahead, our path to free cash flow is not dependent on a sharp rebound in demand. It's driven by higher contribution margins, a materially lower fixed OpEx base and improved capital efficiency as we scale through our partnerships. Our focus is execution, turning operational progress into consistent cash generation quarter by quarter.

And with that, I'll turn it over to Mark to walk through the financial results and details.

Thank you, David. Before getting into numbers, just a quick point of reference. The fourth quarter included 14 weeks in fiscal 2025 was a 53-week year which has a modest impact on year-over-year comparisons. In the fourth quarter, we reported net sales of $120.4 million, down 10% from $133.5 million last year. For the full year, we generated $547.5 million in net sales, down 7% from $588.8 million in 2024. The decrease was primarily driven by the company's efforts to improve returns by optimizing our advertising spend.

Gross profit for the quarter was $39.9 million, down 8% compared to the prior year. Gross margin was 33.2%, and up 70 basis points from 32.5% in the prior year period. For the full year, gross profit was $179.3 million, down 9% compared to the prior year. Gross margin was 32.8% and down 60 basis points from 33.4% in 2024. The decrease in the margin is primarily driven by the product mix and the impact of tariffs, partially offset by pricing increases.

GAAP net loss for the quarter was $11.6 million compared to a loss of $15.4 million in the prior year period. For the year, GAAP net loss was $50.4 million compared to a loss of $40.6 million in 2024, primarily driven by lower net sales and impairment loss on long-lived assets partially offset by lower operating costs, including payroll costs and marketing spend.

For the fourth quarter, adjusted EBITDA loss was $2.2 million, including approximately $200,000 of noncash impact for the reversal of previously recorded severance expense compared to a loss of $6.8 million in the prior year period. For the full year, adjusted EBITDA loss was $14 million compared to a loss of $7.1 million in 2024. Total operating expenses for the fourth quarter were $51.2 million compared to $58.9 million in the prior year period. For the full year, total operating expenses were $228.2 million, down from $237.4 million in 2024.

During the fourth quarter and as required in GAAP our market capitalization relative to book value triggered an impairment test resulting in a $3.7 million noncash charge to long-lived assets. This accounting adjustment has no impact on business operations or cash flow. Excluding a $3.7 million impairment charge recorded in 2025, underlying operating expenses decreased by approximately $12.8 million year-over-year, primarily driven by lower warehouse spend, lower stock-based compensation and reduced payroll and consulting costs from head count actions.

Turning to the balance sheet. We ended the year with $25.8 million of cash and no revolver debt. We had $25.2 million and convertible notes payable balance at the end of the year. Our inventory balance was $95.2 million at year-end versus $90.4 million at the end of 2024. Our cash position and untapped revolver continue to provide necessary liquidity to support our business.

As of February 28, 2026, we had approximately 70.5 million shares of common stock outstanding which includes 10.3 million shares issued in connection with the September 2025 strategic investment at $1.04 per share. Our convertible notes carry a conversion price of $1.20 per share. As David noted, in September, we closed a $35.7 million strategic investment from A-Premium, ZongTeng Group and CDH Investments. We are targeting free cash flow positive results in 2026 driven by contribution margin expansion, partnership scale and the full year benefit of our cost actions.

On tariffs, we continue to operate in an evolving environment. While the Supreme Court's recent decision in validated tariffs imposed under IEEPA, other tariffs specifically around auto parts remain in effect, and the administration has introduced temporary measures under Section 122. We are monitoring loans closely and evaluating mitigation action while continuing to execute on our plan.

For context, approximately 20% of our sourcing from China, with the remainder from Taiwan and other countries. Tariffs repaid last year quantified under IEEPA totaled approximately $3.6 million. While there may be a path to recovering some previously paid duties, we are not building our plan around regulatory relief.

Before I wrap up, some context on product and channel mix trends, starting with product mix. For the fourth quarter, private label products represented approximately 83% of revenue while third-party branded products represented 17%. For the full year, private label mix was approximately 82% compared to 83% in the prior year. With that, our collision and replacement business accounted for approximately 68% of or revenue in the fourth quarter and approximately 65% for the full year, also flat year-over-year. The remainder of our revenue came from other product categories. Turning to channel mix.

Our own channels which include our e-commerce, mobile app and commercial channels represent approximately 68% of revenue in the fourth quarter with marketplaces accounting for 32%. Over the full year, owned channels represent approximately 67% and marketplaces approximately 33%. By comparison in 2024, owned channels represented approximately 63% of revenue. Over time, we expect mix to continue ticking towards higher contribution margin revenue streams with lower working capital requirements.

I'll now take it back to David for final remarks.

Thank you, Mark. In 2025, we took decisive action to reposition the company for profitability. We pulled back on advertising spend that wasn't delivering returns. We rightsized the organization and we closed on strategic partnerships that bring real operational capabilities, not just capital. The evidence is in the results.

In the fourth quarter, adjusted EBITDA improved by nearly $5 million year-over-year. Gross margins expanded, operating expenses remained under control. This is an execution story, not a turnaround narrative. I want to end our call by recognizing our team. The progress we are seeing reflects consistent execution across the organization. Our people stay focused on serving customers and delivering against the plan. and the foundation they built positions CarParts.com to generate consistent profitability.

With that, I'll turn it back to the operator.

Thank you. And this concludes our conference. Thank you for participating, and you may now disconnect.

Good afternoon.

[Operator Instructions]

Please note, this call is being recorded.

I would now like to pass the conference over to our host, Ryan Lockwood, Chief Financial Officer. Please go ahead.

Hello, everyone, and thank you for joining us for the CarParts.com Third Quarter 2025 Conference Call. Joining me today is David Meniane, Chief Executive Officer.

Before I turn it over to David to start the call, I have some important disclosures. Our remarks on this call could contain certain forward-looking statements related to our company and our strategic initiatives under the federal securities laws. Actual results may differ materially from those contained in or implied by these forward-looking statements due to various risks and uncertainties. For a discussion of the material risks and other important factors that could affect results, please refer to the CarParts.com annual report on Form 10-K and the quarterly reports on Form 10-Q, each as filed with the SEC, all of which can be found on our Investor Relations website.

On the call, both GAAP and non-GAAP financial measures will be discussed. A reconciliation of GAAP to non-GAAP financial measures is provided in the press release that we issued today.

With that, I would now like to turn the call over to David.

Thank you, Ryan, and thanks, everyone, for joining us today. Earlier this year, we began exploring strategic alternatives to maximize shareholder value. That process has now concluded, and I'm pleased to announce that in early September, CarParts.com closed on a $35.7 million strategic investment from A-Premium, ZongTeng Group and CDH Investments. Now I want to spend a few minutes on each of these strategic partners and why we're excited about the value creation opportunities we see.

ZongTeng Group is a global e-commerce logistics leader operating more than 24 million square feet of fulfillment space and serving over 60,000 cross-border sellers. Through this partnership, we gain access to a nationwide U.S. network of more than 50 facilities and a fully integrated global logistics network, enabling us to reduce delivery times, improve inventory efficiency and lower fulfillment cost as we integrate the network. Importantly, this partnership eliminates the need to open additional distribution centers, allowing us to continue leveraging our existing network for large nonconveyable items while relying on ZongTeng's high-velocity automated capabilities for smaller conveyable products. The result is a highly complementary logistics model that delivers scale, speed and flexibility without significant capital outlay.

A-Premium is a fast-growing global auto parts brand recognized for its quality, innovation and broad product portfolio. Within the CarParts.com assortment, collision and replacement represents about 70% of our business, while mechanical parts have historically been secondary and require significant capital investments to build out selection and inventory depth. Through our collaboration, we're adding over 100,000 SKUs, including exclusive kits and bundles that strengthen our offering for both do-it-yourself customers and professional installers with minimal capital outlays. We've already onboarded the majority of the catalog since the investment announcement in September with current sales trending at an approximate $20 million annualized run rate. And we're targeting $50 million in incremental revenue in the near term and believe this partnership has the potential to exceed $100 million annually over time, contingent on market acceptance and successful integration execution.

CDH Investments brings far more than capital with approximately $20 billion in assets under management and a proven track record of investing in more than 350 companies, including over 100 successful public listings, CDH offers not only deep financial expertise, but also exceptional operational insight and governance discipline that will be incredibly valuable as we continue to scale and execute on our growth ambitions. Together, these partnerships strengthen our product assortment, logistics capabilities and capital and strategic positions, setting up for sustainable, profitable growth.

We want to provide an update on the tariff environment. The current situation remains fluid with rates, applications and effective dates continuing to evolve in real time. Approximately 20% of our private label products are imported from China with the remainder sourced from Taiwan and other countries. Our team is actively managing this environment through a range of initiatives, including negotiating cost concessions with vendors, implementing dynamic pricing adjustments and optimizing our supply chain and operating expenses. We've made intentional decisions on what to import and what to hold when it comes to inventory from China.

Overall, we are comfortable with our inventory position, but given how quickly conditions are shifting, we continue to monitor developments closely and adjust as needed. Currently, automotive products sourced from Taiwan are currently subject to tariffs of about 25% and products from China have tariffs ranging from 55% to 75%. While these tariffs represent a near-term headwind to gross margin, our proactive sourcing and pricing strategies are designed to mitigate impact and protect long-term profitability.

Now turning to our third quarter results. Revenue was $128 million, down 12% year-over-year, reflecting our strategic shift in consumer acquisition approach that I'll detail in a moment. The important story is profitability improvement. From a profitability standpoint, we continue to make steady sequential progress. As a reminder, due to the success and throughput of our Las Vegas facility we opened last year, combined with operational improvements in the remainder of the network, we have excess capacity in our distribution network. As a result, we closed our Virginia facility at the end of October, aligning operational fixed costs with our volume. We have also streamlined corporate headcount, including full-time employees, third-party contractors and operational partners and cut back on underperforming or noncritical software.

Adjusted EBITDA and free cash flow both improved quarter-over-quarter, even with seasonal headwinds. Q3 outperformed Q2, which outperformed Q1. Gross margin increased from 32.1% in the first quarter to 33.1% in the third. With our focus on profitability, optimizing channel and customer mix and improving warehouse labor efficiency, variable contribution margin expanded from the low 6% range in Q1 to the high 7% range in Q2 and reached the low 9% range in Q3. And at the same time, fixed operating expenses adjusted for transaction and restructuring costs declined sequentially in both Q2 and Q3. We now have a business that's leaner, more efficient and more profitable on a contribution margin basis with a smaller fixed cost base.

We're tackling every critical lever of the P&L, gross margin, variable costs, operational efficiency and fixed expenses with the goal of driving sustained free cash flow generation. This marks the strategic evolution of our operating model, one that prioritizes profitable growth, operational discipline and sustained free cash flow generation. Now these improvements are the direct results of strategic choices we've made over the past 2 years to strengthen our platform, diversify our revenue streams and enhance customer lifetime value.

Number one, we replatformed the CarParts.com website, improving speed, scalability and user experience. We completely rebuilt our search and product recommendation engine using artificial intelligence, resulting in more relevant results and higher conversion rates.

Number two, we launched and continue to grow our mobile app, which has quickly become an important growth driver. Mobile app revenue has increased from under 9% of e-commerce sales at the beginning of the year to more than 13% by the end of the third quarter.

Three, we've also focused on expanding higher-margin recurring revenue streams. fee-based income, including product and shipping protection and our CarParts+ membership program and roadside assistance is now running at nearly $4 million annualized run rate. We now have over 8,000 CarParts+ members.

And four, retention revenue has grown from under 7% to approximately 10% in less than a year, reflecting stronger customer engagement, loyalty and lifetime value.

Now I want to discuss our e-commerce customer acquisition strategy and how it's driving better unit economics. We're shifting from volume-focused acquisition through paid search to a more balanced approach, emphasizing retention, mobile app and own channels. Now this isn't about accepting lower growth. It's about building sustainable, profitable growth. By pairing improved contribution margins with the A-Premium partnership with $50 million in targeted incremental revenue, we're creating a more durable and efficient business model. That means being more selective about where and how we invest marketing dollars, prioritizing channels that drive profitable customer relationships and repeat purchase behavior over onetime transactions. We want to build a more efficient and sustainable growth engine.

Historically, much of our business relied heavily on paid traffic through Google product listing ads, which drive high volume but dramatically lower contribution margins. By rebalancing the traffic mix toward our owned and retained channels, including our mobile app, life cycle marketing and CRM-driven initiatives, we're lowering acquisition costs, increasing customer lifetime value and driving more predictable profitability. This pivot isn't about pulling back on growth. It's about redefining growth to mean profitable, repeatable and cash flow positive. We've already seen early proof of success through improved conversion rates, increased units per order and stronger contribution margins. Bringing this all together, the shift we made in e-commerce acquisition is fully aligned with the partnerships and operational progress we've been discussing.

When you combine our focus on contribution margin and profitable customer growth with a leaner fixed cost structure and you layer on the incremental high-margin sales from the A-Premium partnership, you see the full picture of our transformation. Our plan is clear, disciplined execution, profitable growth and operational efficiency working together to drive sustained free cash flow. Every part of the business is moving in the same direction, and the results we're seeing each quarter reinforce that model -- that the model is working. We're confident that this approach, supported by the foundation we've built and the partnerships established through the strategic review, positions CarParts.com for long-term profitability. We expect to be free cash flow positive in 2026.

We recognize that there are still challenges ahead. The operating environment remains complex with continued tariff uncertainty, shifting consumer demand and inflationary pressures across labor, logistics and product costs. Certain areas of our business, particularly in the Marketplaces segment, continue to face pressure. The ongoing influx of noncompliant products imported from China, often sold without proper safety standards or regulatory oversight distorts the competitive landscape and creates pricing pressure. In response, we're doubling down on our owned e-commerce channel, CarParts.com, and emphasizing CAPA certified parts and trusted in-house brands like JC Whitney. This allows us to control the customer experience, ensure quality and compliance and build long-term direct relationships with our customers.

Tariffs and inflation also continue to weigh on demand, particularly in discretionary categories. We're mitigating these effects through measured pricing, gradual cost pass-throughs and greater sourcing diversification to reduce volatility. While the market may take time to adjust, our disciplined pricing, balanced sourcing and diversified marketing strategy position us for greater stability and profitability over time. We're also expanding into adjacent segments such as European and OE premium parts to reach new customers and serve more vehicle owners across more categories.

Now for those who are newer to the CarParts.com story, I want to take a moment to share why we're confident in our strategy and why we believe we're building a stronger and more competitive company for the long term. One, we've built a mobile-first, data-driven platform with over 100 million annual site visits and more than 1 million app users. Our AI-driven personalization delivers best-in-class fitment accuracy and product recommendations, creating a seamless shopping experience that drives higher conversion and greater customer lifetime value. Two, we operate nearly 1 million square feet of optimized warehouse space across the U.S. designed to handle both conveyable and nonconveyable products efficiently. Proprietary tools such as Box on Demand and custom packaging technology help lower freight costs and improve speed, while vertical integration gives us control over quality and cost.

Three, we're leaders in assortment and brand. Our collision private label business represents about 70% of our revenue, encompassing more than 70,000 SKUs, while JC Whitney continues to build trust, loyalty and brand equity. Our proprietary kits and bundles increase basket size and simplify repairs. And we're expanding into European and premium segments to reach new customers. And four, our strategic partnerships with A-Premium, ZongTeng and CDH further extend our reach and strengthen our foundation. A-Premium allows us to scale mechanical private label assortment from 20,000 to over 120,000 SKUs with 0 capital outlay. ZongTeng's global logistics network adds capital-light scaling and flexibility and CDH brings operational expertise and investment discipline.

Together, these partnerships enhance capacity, efficiency and profitability positioning CarParts.com to maximize free cash flow and long-term value creation. This combination, customer experience, supply chain strength, product leadership and strategic partnerships is what strengthens CarParts.com competitive position. It's why we believe we're positioned to win and why we're confident we're building a stronger, more competitive company in the long term.

Now I'll turn it over to Ryan to walk through the financials.

Thank you, David. Before I discuss the quarter results, I'd like to drill down on some of David's comments around the strategic changes we made during the quarter and the year as a whole. We started the year with an incredibly challenging e-commerce marketing environment with ad spend running 17.7% of gross sales. By September, we had reduced this to 12.5% of gross e-commerce revenue, and we expect to see continued improvement through the rest of this year and 2026. In the short run, this will result in lower revenue, but in the long run, it will be better for the company's overall profitability.

Our contribution margin as a percentage of revenue has improved by over 300 basis points from Q1 to Q3, demonstrating the effectiveness of this approach. To put this in perspective, our average weekly net sales in January was $9.7 million and generated under $600,000 of variable contribution margin. By contrast, our average weekly sales in September was $9 million and generated over $900,000 of variable contribution margin. So while we are giving up some revenue, we believe the strategic changes we've made to increase in profitability are trending in the right direction. We're laser-focused on driving profitability through the P&L and believe these changes position CarParts.com to achieve free cash flow positive performance in 2026.

In the third quarter, we reported revenues of $127.8 million, down 12% from $144.8 million last year. The decrease was primarily driven by our efforts to increase profitability by rationalizing advertising expense. Gross profit for the quarter was $42.3 million, down 17% compared to the prior year. Gross margin was 33.1%, down from 35.2% in the prior year period. The decline in gross margin was primarily driven by increased outbound freight, cost of goods sold and tariff charges, slightly offset by pricing increases. GAAP net loss for the quarter was $11 million compared to a loss of $10 million in the prior year period, primarily driven by lower revenues, partially offset by lower operating costs. The current quarter was also impacted by onetime advisory fees related to our strategic review as well as restructuring costs.

For the third quarter, the adjusted EBITDA loss was $2.2 million, down from adjusted EBITDA loss of $1.2 million in the prior year period, primarily due to lower gross margin. We ended the quarter with $36 million of cash and no revolver debt. Earlier this year, we started proactively investing in inventory ahead of tariffs to improve the continuity of our supply chain. This works out to about 2 extra weeks of stock shipped cost of goods sold. As a reminder, our inventory has low obsolescence risk and no risk of spoilage and our freight margins are over 50%. Our inventory balance was $94 million at the end of the quarter versus $90 million at the end of 2024.

I'll now turn it over to David for final remarks.

Thank you, Ryan. Before we move on, I want to share an important leadership update. After thoughtful consideration, Ryan has decided to pursue a new opportunity with a high-growth private company in the technology and services space. He will remain with us during the transition period as we start the process to identify his replacement. I'm grateful for his leadership and the impact he has had on strengthening our financial foundation and supporting our transformation, and we wish him continued success in his next chapter.

Let me close with what we're focused on for the remainder of the year. We'll continue to expand our product offering to attract new customers and increase average basket size with a strong focus on the A-Premium catalog. We'll focus on monetizing our 100 million annual website visits and customer list through high-margin fee income opportunities. We'll continue to grow our mobile app business to diversify our marketing mix, strengthen customer engagement and increase customer lifetime value. And we'll protect our balance sheet by carefully managing cash flow and inventory levels as we navigate the uncertainty in the tariff environment.

We know this transformation is a multiyear effort. Our focus remains on rebuilding the foundation of CarParts.com into a company that can scale efficiently, innovate rapidly and deliver a seamless, high-quality customer experience while driving greater discipline in both our cost structure and capital deployment. Much of this work is happening behind the scenes from realigning our fulfillment network to investing in AI and automation, and we expect these efforts to become more visible over the next year. As these initiatives come together, we're confident that our financial performance will follow.

First, continued margin and efficiency gains and then through earnings growth. We believe these improvements will stabilize and build through next year with our goal of achieving free cash flow breakeven in 2026.

Before we wrap up the call, I want to take a moment to thank the entire CarParts.com team. Over the past year, our people have worked incredibly hard in an environment filled with uncertainty and change. Their resilience, focus and determination have been the driving force behind our progress. Because of their efforts, we're able to deliver measurable improvements across the business and established 3 transformative strategic partnerships with A-Premium, ZongTeng and CDH. These partnerships represent a major milestone for CarParts.com and provide exciting opportunities for growth, innovation and operational excellence.

I am proud of what we've achieved together and energized by the momentum we're carrying forward. We have a clear strategy, strong partners and an exceptional team dedicated to executing our vision. While challenges remain, we feel confident about where we're headed in our path to profitability and free cash flow in 2026.

Thank you, everyone, for joining today's call. We'll now turn it over back to the operator.

We currently don't see any questions in the Q&A queue. This concludes today's conference call. Thank you for participating. You may now disconnect.

Good afternoon.

[Operator Instructions]

Please note this call is being recorded.

I would now like to pass the conference over to our host, Ryan Lockwood, Chief Financial Officer. Please go ahead.

Hello, everyone, and thank you for joining us for the CarParts.com Second Quarter of 2025 Conference Call.

Joining me today is David Meniane, Chief Executive Officer. For David to start the call, I have some important disclosures. Our remarks on this call could contain certain forward-looking statements related to our company and our strategic initiatives under the federal securities laws. Actual results may differ materially from those contained in or implied by these forward-looking statements due to various risks and uncertainties.

For a discussion of the material and other important factors that could affect results, please refer to the CarParts.com annual report on Form 10-K and quarterly reports on Form 10-Q, each as filed with the SEC, all of which can be found on our Investor Relations website.

On the call, both GAAP and non-GAAP financial measures will be discussed. A reconciliation of GAAP to non-GAAP financial measures is provided in the press release that we issued today.

With that, I'd now like to turn the call over to David.

Thank you, Ryan. Thanks, everyone, for joining us today. Earlier this year, we announced a process to explore strategic alternatives to maximize shareholder value. To provide an update, we remain fully engaged in our process and are highly confident that this process is nearing completion. We're currently evaluating several different transaction structures, including a potential sale of the company and strategic investments that we believe have the potential to strengthen our capabilities and unlock new growth. .

In all of this, our Board is committed to continuing to operate in a manner that delivers value to our shareholders. We are fully engaged in finalizing our strategic review as quickly as possible. That said, there can be no assurance that we will reach a transaction. We do not intend to provide further updates, unless and until we enter into a definitive agreement with respect to a transaction or otherwise determined that further disclosure is appropriate or required by law. We won't further address our strategic process on this call.

Now turning to tariffs. The current situation remains fluid with rates, applications and effective dates changing real time. Specific to our exposure, approximately 20% of our private label products are imported from China, and the rest from Taiwan and other countries. Our team is working on mitigating tariff impact through a variety of actions, including cost concessions from vendor partnerships, dynamic pricing adjustments, and identifying supply chain and operating expenses optimization. Like all importers, we're actively managing rising product costs while maintaining competitive pricing for our customers. As a reminder, automotive products sourced from Taiwan are currently subject to tariffs of approximately 25%. For auto products from China, current tariff rates range from 55% to 75%.

Turning to our second quarter performance. We showed measurable sequential progress across the business with the results improving over Q1. While the full impact of our strategic initiatives isn't yet reflected in the quarterly numbers, the month of June was a milestone. We achieved positive adjusted EBITDA, underscoring that our efforts are beginning to deliver tangible results.

Several key drivers are contributing to this momentum. Mobile app and retention-driven e-commerce revenue both reached record levels, reflecting stronger engagement from our most loyal customers. Our mobile app now has over 1 million users and accounts for 12% of e-commerce revenues. High-margin fee income continues to grow, supported by increased adoption of services like products and shipping protection as well as our paid membership and Roadside Assistance. The CarParts+ membership program has surpassed over 7,000 paid members. Conversion rates, units per order and average order value all improved sequentially, indicating progress from our e-commerce and mobile app product road map. Investments in machine learning-based search algorithms, customized for fitment based products are paying off and strengthening our competitive edge.

Marketing efficiency also improved with better customer acquisition cost and less reliance on Google product listing ads as a percentage of total marketing spend. Together, these gains reflect a more profitable acquisition mix, stronger customer loyalty and increased operating leverage from our vertically integrated supply chain. We remain focused on disciplined growth, customer experience and operational efficiency as we build a more profitable and resilient business. While we're seeing encouraging signs in our core business, certain areas remain under pressure, particularly in our Marketplaces segment.

First, the continued influx of noncompliant products imported from China, often sold without proper safety standards or regulatory enforcement continues to distort the competitive landscape. In response, we're doubling down on our own channel, CarParts.com, along with CapEx certified parts and house brands like JC Whitney. This allows us to control the customer experience ensure compliance and build long-term direct relationships with consumers avoiding a race to the bottom, driven by lower quality parts.

Second, tariffs and inflation continue to weigh on consumer demand. particularly in discretionary categories. In response, we're taking a measured approach to pricing, dually passing through cost increases while closely monitoring industry dynamics. We're also exploring more domestic sourcing options to reduce exposure to import-related volatility. While many competitors are implementing price increases, we anticipate the market will take time to fully adjust. In the near term, this may result in volatility in customer behavior and category performance, but our disciplined approach and diversification strategy position us for both greater stability and profitability over the long term.

Third, the current macroeconomic environment requires us to find new categories for growth. We continue to expand our assortment into adjacent customer segments such as European and OE premium to attract new customers and serve more vehicle owners across different segments. Also, we recognize the need to realign our cost structure to reflect today's macroeconomic realities. Due to the success and throughput of our Las Vegas facility we opened last year, combined with operational improvements in the remainder of the network, we have excess capacity in our distribution network. As a result, we will close our Virginia facility at the end of August, aligning operational fixed costs with our volume.

We have also streamlined corporate headcount, including full-time employees, third-party contractors and operational partners and cut back on underperforming or noncritical software. By leveraging AI and automation, these actions are expected to generate approximately $10 million in annualized cost savings. These pressures are real, but not new. By focusing on what we can control, our panels, our assortment, our customer experience and our cost structure, we are positioning ourselves to navigate near-term headwinds and strengthen the foundation for sustainable long-term growth.

As we progress through the remainder of the year, we'll continue to navigate a dynamic macro environment, including ongoing tariff impact and pricing volatility with discipline and agility. Our focus remains on profitable growth, anchored by the strong foundation we've built. While certain investments will take time to fully materialize, we're confident they'll unlock long-term value. In the near term, we're committed to protecting gross margins, reducing operating expenses and driving more efficient marketing spend.

With that, I'll turn it over to Ryan to walk through the financials.

Thank you, David. In the second quarter,. we. Reported revenue of $151.9 million, up 5% from $144.3 million last year. The increase was primarily driven by an increase in our e-commerce channel and our off-line channel partially offset by continued softness in our marketplace channel. Gross profit for the quarter was $49.8 million, up 3% compared to the prior year. gross margin was 32.8%, down from 33.5% in the prior year period. The decline in gross margin was primarily driven by product mix and the impact of tariffs, while outbound transportation as a percentage of revenue remained relatively flat year-over-year. GAAP net loss for the quarter was $12.7 million compared to a loss of $8.7 million in the prior year period, primarily driven by lower gross margin and higher marketing costs. The current quarter was also impacted by onetime advisory fees related to our strategic review as well as restructuring costs. .

For the second quarter, adjusted EBITDA loss was $3.1 million, down from adjusted EBITDA of $0.1 million in the prior year period, primarily due to lower gross margin and marketing costs. Turning to the balance sheet. We ended the quarter with $19.8 million of cash. During the quarter, we also joined our revolver to provide additional financial flexibility a proactive move to help us manage through near-term uncertainty, including the ongoing impact of tariffs and macro volatility, while continuing to protect our working capital in times of pressure.

Earlier this year, in the face of uncertainty, we started proactively investing in inventory ahead of to improve the continuity of our supply chain. This works out to about 2 extra weeks of stock ship cost of goods sold. As a reminder, our inventory has low obsolescence risk and no risk of spoilage and our pre-freight margins are over 50%. Our inventory balance was $94 million at year-end versus $90 million at the end of 2024. I'll now turn it back over to David for final remarks.

Our priorities for the rest of the year include: one, continue to expand our product offering to attract new customers and increase average basket signs. Two, monetize our $100 million annual website visits and customer list with high-margin fee income. Number three, scale our B2B offering with last mile transportation and higher touch sales in key markets. four, continue to grow mobile app business to diversify our marketing mix and deliver greater customer life value. And five, protect our balance sheet with a focus on managing cash flow and inventory levels while navigating the uncertainty of the tariff environment. We know this transformation is a multiyear effort. We're focused on rebuilding the core foundation of CarParts.com, one that can scale, innovate and deliver a seamless, high-quality customer experience, while driving greater discipline in both our cost structure and capital deployment.

A lot of work is happening behind the scenes, from realigning our fulfillment network to investing in AI and automation, and we expect these efforts to become more visible over the next year. As come together, we're confident that our financial performance will follow. First, in margin and efficiency gains and then in earnings growth. I want to thank our team across the organization for their commitment to building a stronger, more resilient CarParts.com, one that our customers, employees and shareholders can be proud of.

Thank you, everyone, for joining today's call. I'll now turn it back over to the operator.

This concludes today's program. Thank you all for participating. You may now disconnect.