Filing summary
Period and filer: The supplied filing is U.S. Auto Parts Network, Inc.’s Form 10-Q for the thirteen weeks ended March 30, 2019, not a 2018 Q1 filing. The company describes Carparts.com as one of its websites; the filing’s registrant is U.S. Auto Parts Network, Inc. Financial amounts below are in thousands of dollars unless noted. The 2018 comparative figures are marked “as restated.”
Business context and reporting period
The company sells aftermarket collision, engine, performance parts and accessories, primarily online through its own websites and online marketplaces. It reported results for Q1 2019 against the thirteen weeks ended March 31, 2018.
Financial performance and liquidity
- Revenue: Net sales were $74,739, down 4.7% from $78,385. Online sales fell 2.8%; offline sales fell 19.1%.
- Profit and margins: Gross profit was $20,129, down 13.3%; gross margin declined to 26.9% from 29.6%. Operating loss was $3,446, versus operating income of $1,369. Net loss was $3,581, versus net income of $568; loss per share was $0.10.
- Adjusted EBITDA: The company reported a non-GAAP loss of $98, compared with positive $4,349. Adjustments included $986 of employee transition costs and $266 of customs-related costs; the company cautions that this measure is not a substitute for GAAP results.
- Cash flow: Operating cash flow was $4,875, versus $8,560. Investing cash outflow was $1,587, mainly for property and equipment, including capitalized website and software development. Financing cash outflow was $477. Cash increased by $2,804 to $4,835.
- Balance sheet and liquidity: Current assets were $66,088 and current liabilities $60,596; reported working capital was $5,492, down from $10,466 at year-end 2018. Inventory was $51,706 and accounts payable was $42,372.
- Borrowings and leases: Revolving loan borrowings were zero at quarter-end under a facility with a commitment of up to $30,000; excess availability was $8,864 and the facility matures April 26, 2020. The filing reports total debt of zero, but separately reports finance-lease obligations with a present value of $8,840 and operating-lease obligations of $971. Letters of credit totaled $16,371, of which $12,482 was utilized and included in accounts payable.
Material changes versus the prior comparable period
- Sales declined while cost of sales fell less than revenue, reducing gross margin by 2.7 percentage points. Management attributed margin pressure mainly to higher freight costs and customs-related port and carrier fees.
- Marketing expense rose 16.9% to $11,668, including higher paid-search advertising and investment in marketing platforms and staff. Technology expense increased 25.2% to $1,362. Fulfillment expense decreased 4.7% to $5,576.
- Unique visitors to the company’s websites fell 9.5% to 18.2 million, while total online orders increased 1.0% to 910,000. Total average order value declined to $82 from $85. Management cited traffic shifts to marketplaces, lower organic and paid traffic, and customer-acquisition economics.
- Cash from operations was lower year over year. The company cited cash outflows from receivables and inventory, partly offset by higher accounts payable and accrued expenses.
Outlook, commentary, risks and unusual items
- Outlook: Management said existing cash, operating cash flows and available credit should fund operations for at least twelve months. It expects investments in marketing, user experience, technology and catalog capabilities to begin providing some benefits toward year-end and believes it can return to positive e-commerce growth. No quantified revenue or earnings guidance is provided.
- Strategy: The company plans to improve its websites and mobile experience, expand product selection and private-label offerings, and pursue supply-chain changes to reduce freight costs. It expects to shift resources toward its own e-commerce websites while continuing to sell on marketplaces.
- Customs litigation: A court had enjoined enhanced bonding requirements and directed CBP to use best efforts to process certain shipments. Despite that relief, processing delays had caused port, carrier and legal costs; $266 was incurred in Q1 2019. The filing says product not implicated by the trademark allegations had been released. The litigation’s outcome and any appeal remain uncertain.
- Other risks: The filing highlights continued losses, dependence on online traffic and search engines, marketplace competition and potentially lower marketplace margins, freight costs, supplier concentration, imports from China and Taiwan, tariffs, inventory availability, and credit-facility covenants. The company warns that continued losses could affect liquidity and require additional financing or spending reductions.
- Lease accounting and facilities: The company adopted the new lease standard in January 2019, recognizing lease assets and liabilities and recording a $1,623 cumulative adjustment to opening retained earnings. In May 2019, it signed a five-year lease for a 125,000-square-foot distribution center in Las Vegas.
- Controls: Management concluded disclosure controls were effective at the quarter-end and reported enhancements to procedures for promptly escalating significant or unusual items.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is for Q1 2019, although the request metadata says Q1 2018.
- Review why the 2018 comparative financial statements are labeled “as restated,” and whether related filings explain the restatement.
- Assess the drivers and durability of the gross-margin decline, lower website traffic and average order value, and the company’s ability to execute its planned investments.
- Monitor cash generation, working capital, credit-facility availability and covenants, including the distinction between reported debt and lease obligations.
- Track the customs litigation, import and product availability issues, related costs, and the potential effects of tariffs and freight expense.
- Consider the Las Vegas distribution-center lease commitment and the financial impact of the company’s growth and restructuring plans.