Business context and reporting period
This is U.S. Auto Parts Network, Inc.’s Form 10-Q for the thirteen and thirty-nine weeks ended September 29, 2018, compared with the periods ended September 30, 2017. The company sells aftermarket auto parts primarily online through websites including Carparts.com. Figures below are in thousands of dollars unless noted. The filing is by U.S. Auto Parts Network, not an entity named Carparts.Com, Inc.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $69,463 | $73,807 | $224,821 | $234,848 |
| Gross profit / margin | $19,045 / 27.4% | $21,877 / 29.6% | $63,989 / 28.5% | $68,908 / 29.3% |
| Operating income (loss) | $(579) | $1,332 | $1,517 | $4,046 |
| Net income | $438 | $919 | $688 | $28,094 |
| Adjusted EBITDA (non-GAAP) | $2,498 | $3,577 | $9,550 | $11,423 |
Quarterly sales declined 5.9%; year-to-date sales fell 4.3%. Gross margin contracted 2.2 percentage points in Q3 and 0.8 points year to date. Q3 operating results moved to a loss, while net income remained positive in part because of other income related to the AutoMD asset sale. Year-to-date 2017 net income included a substantial deferred-tax benefit; the 2017 comparison is therefore not a straightforward measure of operating improvement.
For the first 39 weeks, operating cash flow was $10,903, investing cash outflow was $4,327, and financing cash outflow was $1,095. Cash increased $5,450 to $8,300 from December 30, 2017; management attributed the increase primarily to payment timing with a shipping vendor. At September 29, working capital was $16,187. Total debt, consisting of capital leases, was $9,306; there was no revolving-loan balance. The $30,000 asset-based credit facility had $10,093 of excess availability, subject to its borrowing base and terms. Management said available cash, operating cash flows, investments and borrowing capacity should fund operations for at least twelve months.
Material changes and management commentary
- Online sales fell, partly due to fewer marketplace orders, reduced website traffic and lower in-stock rates related to customs delays. Offline sales increased, primarily from Kool-Vue and wholesale sales. Total online orders decreased 10.9% in Q3; unique website visitors fell 29.0% to 16.4 million. Average order value and conversion improved, but did not offset lower order volume.
- Management attributed lower gross margin to customs-related port and carrier charges, higher freight costs and, year to date, sales-channel mix. Marketing, fulfillment and technology expenses decreased in dollars, while general and administrative expense increased year to date.
- On August 3, 2018, the company sold AutoMD assets for $1,400. AutoMD had been classified as discontinued operations following its 2017 dissolution.
- The company reported $1,784 of customs-related port, carrier and legal costs through Q3. A May 2018 preliminary injunction blocked enhanced bonding requirements and directed CBP to process certain shipments; the company said CBP processing delays nevertheless continued. Product not implicated by trademark allegations had been released by quarter-end. The dispute and potential appeal remained unresolved.
- Management said it aims to improve site experience, catalog content, mobile shopping, pricing and cost controls, and believes these efforts can return e-commerce to positive growth. The filing provides no quantified revenue or earnings guidance.
Risks, contingencies and unusual items
Key risks include search-engine dependence and declining organic and paid traffic; marketplace concentration and potentially lower marketplace margins; supplier and carrier dependence; import and trademark disputes; freight costs and tariffs (certain imports faced a 10% tariff); competition; and credit-facility covenants. The company also cited sales-tax collection exposure following the Wayfair decision, cybersecurity and fulfillment risks, and seasonality. Its credit facility matures April 26, 2020; availability depends on the borrowing base, and covenant or default events could constrain liquidity. The filing reports no material adverse expected outcome from ordinary-course litigation and says asbestos claims are insured, with no significant material out-of-pocket cost expected.
In October 2018, after the quarter ended, the company announced CEO Aaron Coleman’s planned resignation following a transition period and began a successor search. Management cautioned that a prolonged search could affect business relationships and retention. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether traffic, order volume and online sales stabilize, and whether conversion and average order value can offset lower traffic.
- The continuing effect of customs actions, grille-related trademark claims, import processing delays, legal costs and tariffs on product availability and margins.
- How much of operating cash generation and the reported cash increase reflects sustainable operations versus payment timing, and whether credit-facility availability and covenants remain adequate.
- The effect of the AutoMD sale proceeds and the prior-year tax benefit when assessing comparable earnings and Adjusted EBITDA, a non-GAAP measure.
- CEO succession progress and any resulting changes to operating strategy or execution.