Executive Summary / Key Takeaways

• CarParts.com is undergoing a multi-year transformation, shifting from a growth-at-all-costs model to one focused on sustainable profitability, driven by strategic investments in technology, supply chain optimization, and a higher-margin customer base.
• The company's proprietary fitment-based catalog, re-platformed e-commerce website, and rapidly growing mobile app are key technological differentiators, enhancing customer experience, driving efficiency, and reducing reliance on costly paid marketing channels.
• Despite recent revenue declines influenced by rationalized marketing spend, macroeconomic headwinds, and tariffs, CarParts.com achieved positive Adjusted EBITDA in June 2025, signaling early success in its profitability initiatives.
• Strategic financial moves, including a $35 million convertible note and common stock issuance in September 2025 and an amended credit facility, bolster liquidity and support ongoing operational transformations.
• Key risks include intense competition from larger omnichannel retailers and direct-selling suppliers, ongoing tariff impacts (ranging from 25% to 145% on certain products), and the need to regain Nasdaq's $1 bid price compliance by December 10, 2025.

A Digital Re-Engineering for the Aftermarket Auto Parts Giant

CarParts.com, Inc. (NASDAQ:PRTS), a long-standing online provider of aftermarket auto parts and accessories, is in the midst of a profound strategic re-engineering. Operating within a highly fragmented and underserved $400 billion auto parts market, the company's core business revolves around selling replacement parts, hard parts, and performance accessories primarily to individual consumers through its flagship website, mobile app, and various online marketplaces. This transformation, initiated in 2024, centers on three pillars: driving gross and net margins, accelerating efficiency, and achieving sustainable growth with robust long-term free cash flow.

The company's journey began in 1995, culminating in an IPO in 2007. Early challenges included a patent infringement settlement with Ford (F) in 2009 and a ransomware attack in 2020, the same year it rebranded from U.S. Auto Parts Network, Inc. to CarParts.com, Inc. These experiences underscore a history of adapting to both market and operational pressures. More recently, a new global enterprise resource planning (ERP) system was implemented in fiscal year 2022, laying the groundwork for enhanced operational control.

The broader industry landscape is characterized by several tailwinds that CarParts.com aims to leverage. The number of automotive SKUs has dramatically increased, making comprehensive inventory challenging for traditional brick-and-mortar stores. Concurrently, the average age of U.S. light vehicles reached a record 12.80 years in 2025, according to the U.S. Auto Care Association, driving demand for replacement parts as older vehicles require more frequent repairs. This trend is further supported by the rise of "Do-It-Yourself" (DIY) car owners who prefer to handle their own repairs. The shift to online sales, projected to reach over $27 billion by 2028, also presents a significant opportunity, fueled by improved product availability, competitive pricing, and growing consumer comfort with digital platforms.

Technological Edge: The Core of CarParts.com's Moat

CarParts.com's competitive differentiation is deeply rooted in its technological infrastructure and innovation. At its heart is a proprietary, fitment-based catalog, meticulously built and refined over two decades. This extensive database maps approximately 1.69 million SKUs to specific vehicle makes, models, and years, enabling customers to quickly find the exact parts they need. This capability is crucial in an industry with an ever-expanding number of unique automotive parts, offering a significant advantage over competitors who may struggle with comprehensive inventory management and accurate product matching. The catalog includes 83,000 private label SKUs and 1.5 million premium branded SKUs, supporting a full assortment across collision, mechanical, and private label categories.

The company's flagship website, CarParts.com, has been fully re-platformed onto a best-in-class, cloud-based infrastructure. This technological upgrade dramatically shortens development cycles, allowing the company to roll out new features in weeks rather than the six to nine months previously required. Recent innovations include a partnership with SimpleTire for tire sales and installation, new shipping and product protection offerings, and a VIN lookup tool that saw over 30,000 uses in just two weeks. These enhancements are designed to improve the user experience, increase conversion rates, and boost average basket size.

Further strengthening its digital presence is the CarParts.com mobile app, which has rapidly grown to over 1 million users and now accounts for 12% of e-commerce revenues as of Q2 2025. The mobile app boasts higher conversion rates, average order values, and repeat purchase rates compared to traditional desktop e-commerce. This mobile-first approach is a strategic move to diversify marketing mix, reduce reliance on expensive paid search engine advertising, and foster greater customer lifetime value. Investments in machine learning-based search algorithms, specifically customized for fitment-based products, are also strengthening the company's competitive edge by optimizing product discovery. Looking ahead, the company plans to introduce AI-powered product recommendations and a loyalty program, further leveraging its technological capabilities to drive engagement and profitability.

Operationally, CarParts.com is leveraging AI and automation to enhance its fulfillment network. The new semi-automated Las Vegas distribution center, opened in June 2024 and now processing 25% of the company's volume, is integrated with cutting-edge AI capabilities to optimize operations, improve safety, and expand product availability. This facility is expected to reduce last-mile transportation expenses to the West Coast and enhance customer service through expedited delivery, with full savings anticipated in 2025. To further streamline its supply chain, the company closed its Virginia distribution center at the end of August 2025, a move expected to contribute to approximately $10 million in annualized cost savings, alongside corporate headcount reductions and cuts to underperforming software.

Financial Performance and Strategic Realignment

CarParts.com's recent financial performance reflects its ongoing strategic transformation amidst a challenging macroeconomic environment. For the third quarter ended September 27, 2025, net sales decreased by 11.7% to $127.77 million compared to $144.75 million in the prior year period. Year-to-date net sales for the thirty-nine weeks ended September 27, 2025, also saw a decline of 6.2% to $427.10 million from $455.31 million in the same period of 2024. These decreases were primarily driven by the company's deliberate strategy to rationalize marketing spend in pursuit of increased profitability and were also impacted by inclement weather in Q1 2025.

Gross profit for Q3 2025 decreased by 17.1% to $42.28 million, with gross margin contracting by 210 basis points to 33.1% from 35.2% in Q3 2024. This margin compression was mainly due to product mix and the impact of tariffs, partially offset by pricing increases. However, management noted a sequential improvement in pre-freight margins, reaching 54.6% in Q3 2024, up from 50.8% in the prior year quarter, attributed to lower input costs and a focus on higher-value customers. Operating expenses decreased by 14.1% in Q3 2025, primarily due to favorable marketing spend and payroll costs resulting from headcount reductions. Despite this, operating expense as a percentage of net sales increased year-to-date, influenced by marketing spend in the first half of 2025 and one-time fees related to strategic alternatives.

The company reported a net loss of $10.89 million for Q3 2025, compared to a net loss of $10.02 million in Q3 2024. For the thirty-nine weeks ended September 27, 2025, the net loss was $38.88 million, compared to $25.18 million in the prior year period. However, a significant milestone was achieved in June 2025, when the company recorded positive Adjusted EBITDA, reflecting the initial tangible results of its strategic initiatives. For Q3 2025, Adjusted EBITDA was $2.17 million, an improvement from $1.16 million in Q3 2024.

Liquidity was bolstered by strategic financing activities. As of September 27, 2025, CarParts.com held $36.01 million in cash and cash equivalents.

On September 8, 2025, the company secured a strategic investment, issuing convertible notes with an aggregate principal amount of $25.0 million and selling common stock for $10.73 million in gross proceeds. These convertible notes mature on September 10, 2028, accrue interest at 2% per annum, and are convertible into common stock at $1.20 per share. The company's Amended Credit Facility was also modified, reducing the revolving commitment to $25.0 million (from $75.0 million) and extending its maturity to September 8, 2026. Management believes its existing cash, investments, cash flows from operations, and available debt financing will be sufficient to cover operational cash needs for at least the next twelve months. Proactive inventory investments were made ahead of tariffs, representing about two extra weeks of stock, with management emphasizing the low obsolescence risk and over 50% pre-freight margins of its inventory.

Competitive Landscape and Strategic Positioning

The auto parts industry is intensely competitive and highly fragmented, with low barriers to entry for online retailers. CarParts.com faces direct competition from national auto parts retailers like AutoZone (AZO), O'Reilly Automotive (ORLY), Advance Auto Parts (AAP), and Genuine Parts Company (GPC) (owner of NAPA), as well as large online marketplaces such as Amazon (AMZN) and eBay (EBAY). Many of these competitors possess longer operating histories, larger customer bases, greater brand recognition, and significantly more financial and marketing resources.

CarParts.com differentiates itself as an online specialist, emphasizing its user-friendly e-commerce platform and efficient digital distribution. While larger rivals like AutoZone and O'Reilly benefit from hybrid models combining physical stores with online sales, CarParts.com's focused online expertise allows for potentially lower overhead costs and faster innovation in e-commerce features. However, these larger competitors often exhibit stronger revenue growth and cash flow generation due to their scale and diversified channels. For instance, AutoZone's efficient supply chain and physical footprint provide an edge in immediacy that CarParts.com's digital model cannot fully replicate.

A significant competitive pressure comes from suppliers increasingly selling directly to customers, often at lower prices due to their cost advantages. Furthermore, the "influx of noncompliant products imported from China" sold without proper safety standards distorts the competitive landscape, particularly impacting the lighting and mirror business. In response, CarParts.com is "doubling down on our own channel, CarParts.com, along with CapEx certified parts and house brands like JC Whitney," to control the customer experience and ensure compliance, thereby avoiding a "race to the bottom."

The company's strategic initiatives, such as expanding into higher-margin OE premium and European brands (up 24% and 23% year-over-year in Q3 2024, respectively), and scaling its B2B wholesale offering (with contribution margins up to 3x higher than e-commerce), are designed to diversify revenue streams and enhance profitability in the face of intense competition. Its position as the "second largest importer of aftermarket collision parts in the U.S. and the world's number 1 seller on eBay Motors" highlights its established presence in key segments.

Risks and Outlook

Despite the strategic transformation, CarParts.com faces several material risks. Dependence on suppliers in Taiwan and China for the majority of its products exposes the company to complex regulatory regimes and logistical challenges. Tariffs, which increased in February 2025, now range from 55% to 145% on auto products from China and approximately 25% on products from Taiwan, significantly impacting product costs and gross margins. While the company is actively mitigating these impacts through cost concessions, dynamic pricing, and exploring domestic sourcing, the situation remains fluid.

Rising shipping costs, which were approximately 19.3% of sales in Q3 2024, and potential increases in wage and commodity prices, could further pressure margins. The company's reliance on online channels makes it vulnerable to shifts in consumer behavior and increased competition for online advertising, which has seen "significant increase in cost per click rates on search engines" partly due to AI models. Access limitations or increased costs from third-party marketplaces, which accounted for 33.9% of sales in YTD Q3 2025, also pose a risk. Continued net losses could severely impact liquidity, potentially requiring additional financing or asset sales. The company's Amended Credit Agreement contains restrictive covenants, and failure to comply could limit borrowing capacity or trigger immediate loan repayment.

Furthermore, CarParts.com received a Nasdaq deficiency letter on June 13, 2025, for its common stock closing below the $1 minimum bid price for 30 consecutive business days, requiring compliance by December 10, 2025, to avoid delisting.

Looking ahead, CarParts.com is not providing specific guidance for 2025 due to its ongoing evaluation of strategic alternatives. However, management expresses confidence that the foundational improvements and investments made will lead to "sustainable and significantly positive adjusted EBITDA in 2025" and a "6% to 8% adjusted EBITDA margin and enhanced free cash flow generation in the medium term." The company anticipates "significantly higher year-over-year" free cash flow in 2025, benefiting from the anniversary of headcount reductions and large capital expenditure projects from 2024.

Conclusion

CarParts.com is executing a deliberate and comprehensive transformation, strategically pivoting towards sustainable profitability in the dynamic aftermarket auto parts sector. The company's investment thesis is anchored in its differentiated technological capabilities, particularly its proprietary fitment-based catalog and re-platformed e-commerce platform, which are designed to enhance customer experience and drive operational efficiencies. While facing significant headwinds from macroeconomic pressures, intense competition, and escalating tariffs, early signs of success, such as achieving positive Adjusted EBITDA in June 2025, suggest the strategic initiatives are beginning to yield results. The recent strategic investment and strengthened liquidity position provide a crucial runway for these multi-year efforts. Investors should closely monitor the company's progress in expanding high-margin offerings, optimizing its supply chain, and leveraging its digital assets to improve its margin profile and achieve its stated profitability targets, all while navigating the competitive landscape and addressing its Nasdaq listing status.