Business context and reporting period
U.S. Auto Parts Network, Inc. (now associated with the CarParts.com name) filed this unaudited Form 10-Q for the thirteen and twenty-six weeks ended July 2, 2016. The filing period is 2016 Q2, not 2015 Q2 as stated in the request metadata. The company primarily sells aftermarket auto parts online; its majority-owned AutoMD subsidiary provides automotive repair information and related services. Amounts below are in U.S. dollars.
Financial performance and position
- Revenue: Q2 net sales were $78.1 million, up 2.1% year over year; first-half sales were $158.9 million, up 3.9%. Online marketplace growth drove sales, partly offset by lower e-commerce or offline sales depending on the comparison described in the filing.
- Profit and margins: Q2 gross profit was $23.8 million and gross margin was 30.4%, versus $20.9 million and 27.3% a year earlier. Operating income was $0.9 million, compared with an operating loss of $1.1 million. Net income attributable to U.S. Auto Parts was $0.9 million (diluted EPS $0.02), versus a $0.8 million loss (diluted EPS $(0.02)). For the first half, attributable net income was $2.2 million, versus a $0.8 million loss; diluted EPS was $0.05 versus $(0.03).
- Non-GAAP measure: Q2 Adjusted EBITDA was $3.7 million versus $1.4 million; first-half Adjusted EBITDA was $7.7 million versus $4.0 million. The company cautions that this measure is supplemental, not standardized, and not a substitute for GAAP results or cash flows.
- Cash flow: First-half operating cash flow was $15.0 million, compared with $6.5 million in the prior-year period. Investing used $3.0 million, mainly for property and equipment; financing used $12.6 million, principally from net revolver repayments. Cash declined $0.6 million to $4.9 million.
- Liquidity and debt: Working capital was $17.2 million. Cash included $2.8 million restricted to AutoMD’s general operating purposes. The company had no revolver borrowings, $5.3 million in letters of credit, and $16.0 million of reported excess availability under its asset-based facility, which matures April 26, 2017. Capital lease debt was $10.6 million; total liabilities were $51.1 million.
- Balance sheet: Total assets were $76.2 million, down from $83.8 million at January 2, 2016. Inventory decreased to $44.4 million from $51.2 million.
Changes versus the prior comparable period
- Higher sales and a 3.1 percentage-point Q2 gross-margin improvement accompanied a return to operating and net profitability. Management attributed margin gains primarily to private-label mix, pricing initiatives, freight efficiencies, and lower shipping-supply costs.
- Q2 total online orders rose 7.5%; unique visitors increased 3.4%. Average order value fell 3.1%, and revenue capture declined 2.0%. Growth in paid traffic partly offset weaker organic traffic.
- First-half operating cash flow more than doubled, supported in part by a $6.8 million inventory reduction. Net revolver borrowings fell from $11.8 million at year-end to zero.
- Fulfillment expense rose 13.7% in Q2 and 16.5% for the first half, while technology expense increased 15.0% and 7.0%, respectively.
Outlook, commentary, and risks
- Management expected positive revenue trends for the remainder of 2016 and full-year revenue growth versus 2015, citing website and mobile improvements, product expansion, pricing, marketplaces, and cost-saving efforts. No numerical earnings or revenue guidance was provided.
- Management believed available cash, operating cash flows, investments, and borrowing capacity would fund operations for at least twelve months. This outlook is subject to operating performance, borrowing-base availability, credit covenants, and other risks.
- AutoMD had more than 5,000 repair shops at Q2 end after adding approximately 2,760 in the first half. The company expected shops to leave when subscription fees began in Q3 and anticipated falling below a contractual threshold; it therefore expected to be required to buy 2.0 million AutoMD shares for $2.0 million. AutoMD recorded a Q2 net loss of $0.5 million and a first-half loss of $1.1 million.
- Key risks include reliance on search engines and paid traffic, online competition and pricing pressure, supplier concentration (top ten suppliers represented approximately 43% of first-half purchases), shipping and fulfillment costs, and credit-facility covenants. The filing also notes possible continuing losses, seasonality, product-liability and intellectual-property claims, cybersecurity and system disruption risks, and foreign-exchange exposure.
- The company reported asbestos-related lawsuits involving a subsidiary; it maintained insurance and did not expect material out-of-pocket costs. It stated that other ordinary-course legal matters were not expected to have a material adverse effect.
- Disclosure controls were judged effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Confirm the intended filing period: this document reports Q2 2016, despite the request metadata’s “2015 Q2.”
- Track gross-margin durability against lower average order value, paid-advertising costs, and rising fulfillment expense.
- Review the AutoMD share-purchase trigger, required $2.0 million funding, and restrictions on the AutoMD investment proceeds.
- Monitor the credit facility’s April 2017 maturity, borrowing-base availability, covenants, and letters of credit.
- Assess whether reported operating cash generation is sustainable and distinguish unrestricted company cash from AutoMD-restricted cash.