Mehran Nia letter to the Board of Directors of CarParts.com, Inc.

$PRTS

Mehran Nia letter to Board of Directors, August 21, 2024

Dear Members of the Board,

●David Meniane

●Warren B. Phelps III

●Henry Maier

●Dr. Lisa Costa

●Nanxi Liu

●Jay K. Greyson

●Jim Barnes

●Ana Dutra

Shareholders, and Employees of CarParts.com Inc. (Nasdaq:PRTS),

This letter follows up on my previous communications about the critical issues threatening CarParts.com's sustainability. It is intended to shed further light on the ongoing challenges that jeopardize the company's financial and operational health, emphasizing the necessity for decisive, urgent action.

This communication reasserts the board's fiduciary duty to prioritize shareholders' interests over the interests of failing management. This management has destroyed shareholder value. I have repeatedly warned the board privately when the stock was as high as $15 per share all the way down to current levels. It is now under a dollar. If no action is taken, in my opinion bankruptcy is inevitable within the next couple of years at the current trajectory.

Directors must remember that failure to act in the best interests of shareholders can lead to personal liability, as seen in the WorldCom case. This is not merely a theoretical risk; it becomes a reality when directors fail to address clear signs of financial and operational decline. The board must act decisively now to avoid the severe consequences that have befallen other companies in similar situations.

Institutional investors, even those whose mandates typically avoid activism, must also recognize that this is an exceptional situation. Their duty to their own investors compels them to ask hard questions and demand accountability from the company's leadership

Financial Discipline and Cash Burn

I delayed this letter until after the release of the latest financial results, hoping for signs of recovery. 

Regrettably, they are nothing short of alarming. Management continues to tout fiscal discipline, yet the numbers tell a different story—a story of unchecked cash burn and financial mismanagement. In the latest quarter, cash reserves have plummeted to levels that should concern every stakeholder. The company burned through $12 million in a single quarter, and cash reserves have dropped by $45 million year over year. With operating expenses consistently outstripping gross margins (33.5% margins versus nearly 40% in expenses), it is clear that the current trajectory is unsustainable. The company is hurtling towards a liquidity crisis, yet management appears oblivious to the urgency of the situation.

As we approach the fourth quarter, which historically requires significant inventory build-up, the cash needed to secure this inventory is dwindling. How does management plan to navigate this critical period? With inventory levels down year over year, where exactly is the cash going? The disconnect between the claimed improvements and the stark financial reality is confusing and unacceptable.

Furthermore, management's guidance for $600 million in sales is entirely divorced from the current trajectory. Year-to-date sales are down 11.9%, with the latest quarter alone showing an 18% decline. The idea that this trend will reverse in the second half of the year is not just unrealistic—it’s delusional. Where is the evidence that the situation is improving? If Q3 and Q4 are historically weaker quarters, what credible plan exists to avoid restating guidance?

Inability to Execute

The Do-It-For-Me (DIFM) initiative was once hailed as a transformative game-changer. Yet, more than two years later, it has delivered nothing but empty promises. This initiative has been quietly shelved without explanation, despite its touted potential. The latest earnings call didn’t even mention its status. This is symptomatic of a broader issue—management's inability to execute on its own strategies.

There is a glaring disconnect between the responsibility management claims to uphold and the accountability they continue to evade for failures, delays, and poor decision-making within their control.

A Pattern of Exaggeration and Omission

The management team has developed a troubling pattern of exaggerating successes while omitting or downplaying failures. Take the launch of the mobile app, which was positioned as a major strategic development. We were told that it would drive down marketing costs and boost e-commerce revenue. Yet, where is the evidence of this success? There is no functional difference between the mobile app and the traditional website. Management boasts of 250,000 non-paid organic downloads, but what does this really mean? Are these downloads truly organic, or is this just another case of smoke and mirrors?

More importantly, if the app is truly a success, why are overall sales down 18%? Where is the detailed analysis of how the app is contributing to the bottom line? Is it merely shifting existing customers from the mobile website to the app without adding new revenue? This kind of superficial marketing spin only deepens the distrust between management and shareholders.

The podcast, promoted as a key community tool, used paid views to feign success. This can easily be seen from their YouTube channel. 

The recent brand campaign is another example. Described as the company’s "first ever comprehensive campaign," it is supposed to be a game-changer. But what makes this campaign any different from those launched previously? Where is the evidence that it is attracting the more profitable customers management claims to be targeting? So far, there is none. Instead, we see a company struggling in its attempts to redefine itself while its core business erodes.

Russell Index Ejection and Stock Price Collapse

The ejection of CarParts.com from the Russell Index at the end of Q2 is perhaps the most glaring indictment of management's failure. This company was once celebrated for its inclusion in the Russell Index, a milestone that brought significant investor interest and validation. Now, the company has been removed, directly due to the implosion of the stock's market value. This is not just a setback—it is a disaster.

Management has remained silent on these monumental failures, preferring instead to bury bad news rather than take accountability.

Legal and Compliance Failures

Most shockingly, the company has utterly failed to uphold its own stated standards of quality and compliance. Despite repeated assurances that all products sold by CarParts.com are DOT certified, it has now come to light that the company itself has been selling non-DOT approved, inferior quality lights. These products were quietly listed on the company’s eBay store, possibly in an attempt to avoid scrutiny. Evidence of these eBay listings lives on with these “MH” branded products. 

The hypocrisy is staggering—while publicly blaming competitors for selling unsafe, non-DOT approved products, CarParts.com was engaged in the very same practice. This is not merely a breach of trust—this could expose the company to significant liabilities. 

Those responsible for these unacceptable actions, which directly contradict the company’s commitment to being a trusted and recognizable brand, must be held accountable and terminated with cause immediately.

Adoption of Poison Pill: A Brazen Power Grab at Shareholders' Expense

I have requested a waiver to purchase more than 4.99% of the company’s stock to demonstrate my commitment to CarParts.com, but the Board denied it, not to protect tax attributes, but to prevent any challenge to the current management. This move clearly prioritizes their own positions over shareholder value, a direct violation of their fiduciary duties.

By blocking my ability to invest and potentially raise the share price, the Board is keeping the company in a state of decline, sending a strong message that CarParts.com is closed off to those who seek accountability and change. This strategy is not only unjustifiable but actively harmful to the company and its shareholders. The Board must start fulfilling its true purpose: to protect shareholder interests and allow the company to recover. If they continue to fail in these duties, they must be held accountable for their reckless and self-serving actions.

Commitment to Invest and Drive Change

In light of the company's critical financial situation, I am reaffirming my proposal to purchase a 15-20% stake in CarParts.com, similar to my actions in 2013 when the company was facing a similar crisis. This substantial injection of capital is not just an investment—it's a lifeline to stabilize the balance sheet and restore confidence in the company's future.

While some may view this move as potentially dilutive, it is a necessary measure to protect and preserve any remaining shareholder value. My intention is to align my interests directly with those of all shareholders—I seek no special treatment, no warrants, no preferred shares. My commitment is straightforward and transparent: I am fully vested in the success of CarParts.com.

Along with this investment, I will introduce a new management team with a proven history of successfully turning around struggling companies. The current leadership has been given ample time and opportunity to correct course, yet they have consistently failed to deliver. It is clear that fresh, capable leadership is essential to navigating the challenges ahead and driving the company toward sustainable growth.

Conclusion

The livelihoods of CarParts.com’s hardworking employees, who have devoted so much to this company, are now at serious risk. These employees—who have poured their time, energy, and passion into building CarParts.com—deserve far better than to see their efforts undone by ineffective leadership. I refuse to stand idly by while their futures—and the company’s proud legacy—are jeopardized.

My commitment to CarParts.com runs deep; I am passionate about the company’s well-being and the well-being of every individual who contributes to its success. These employees have been the backbone of CarParts.com, and it is their dedication that inspires my determination to secure a stable and prosperous future for the company.

CarParts.com is at a crossroads, and the board must act decisively to steer the company back on course. As a former CEO and co-founder, I have not only built this company but have also returned to help rescue it from the brink on multiple occasions. I am fully prepared to be part of the solution once more, but meaningful change will only come if the board is willing to make the difficult decisions that the current situation demands.

The time for half-measures and empty promises is over. The employees and shareholders of CarParts.com deserve a company that is run with integrity, transparency, and a genuine commitment to sustainable growth. The choice before you is stark: continue down the current path towards irrelevance and failure, or take bold, decisive action to reclaim this company’s future. I stand ready to lead this turnaround—will you join me in saving CarParts.com?

Sincerely,

Mehran Nia

Co-Founder and Former CEO, CarParts.com, Inc. (Nasdaq:PRTS)

Source:

https://www.sec.gov/Archives/edgar/data/1378950/000121465924016231/r96240dfan14a.htm