Business context and reporting period
Filing-period discrepancy: Although the request identifies Carparts.com, Inc. and 2013 Q2, the supplied filing is for U.S. Auto Parts Network, Inc. (now associated with the CarParts.com business), for the 13 and 26 weeks ended June 28, 2014. Comparisons below are with the periods ended June 29, 2013. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
The company distributes aftermarket auto parts and accessories, primarily through its e-commerce websites and online marketplaces. It reports Base USAP, its core parts business, and AutoMD, an online automotive repair resource.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $76.9 | $67.9 | $145.0 | $133.3 |
| Gross profit / margin | $20.4 / 26.5% | $19.0 / 28.0% | $41.1 / 28.4% | $38.8 / 29.1% |
| Operating loss | $(1.9) | $(9.3) | $(1.4) | $(12.5) |
| Net loss | $(2.2) | $(9.6) | $(2.0) | $(12.9) |
| Basic and diluted loss per share | $(0.07) | $(0.29) | $(0.06) | $(0.40) |
| Adjusted EBITDA (non-GAAP) | $2.2 | $1.1 | $5.5 | $2.6 |
Gross margin contracted year over year, attributed to competition and lower online margins, freight costs, and Carson warehouse closure-related inventory charges. Q2 operating expenses included $0.6 million of restructuring costs; the company also recorded $0.5 million of inventory-related charges in cost of sales. Q2 2013 included $6.1 million of asset impairment charges, contributing to the larger prior-year loss.
For the first half, operating cash flow was $11.4 million, versus $0.9 million a year earlier; investing cash outflow was $3.9 million and financing cash outflow was $6.7 million. The cash generation reflected working-capital movements, including lower receivables and inventory and increased payables and accruals; it should not be read as equivalent to operating profit. Cash and cash equivalents were $1.7 million and short-term investments $0.8 million at June 28. Working capital was $10.7 million.
At June 28, revolving borrowings were zero; capital lease obligations totaled $9.6 million, making reported total debt $9.6 million. The revolving facility commitment was $20 million, with $13.9 million of excess availability. The filing reports a $4.8 million revolving balance outstanding as of August 4, after quarter-end. Current liabilities included the revolving loan classification requirement tied to subjective acceleration clauses and recurring losses, although no revolving balance was outstanding at quarter-end.
Changes, outlook, risks and unusual items
- Q2 sales rose 13.3% year over year and first-half sales rose 8.8%. Online marketplace orders grew 55.6% in Q2, while total online orders increased 17.2%; average order value fell 5.9%. Website unique visitors declined 12.3%, which management linked in part to search-engine algorithm changes.
- Management expected fiscal 2014 revenue to improve versus comparable 2013 quarters and the full-year net loss to be substantially lower than in 2013. It expected gross margin percentage to remain around Q2 levels, excluding the Carson closure effects. These are expectations, not guaranteed outcomes; the filing provides no precise full-year revenue or net-loss guidance.
- The company committed to close its Carson, California distribution facility and consolidate operations in Illinois and Virginia. The closure affected about 77 employees. Management estimated second-half offline sales could fall by $2.8–$3.8 million, with a similar estimated reduction in expenses. It also anticipated approximately $0.4 million for inventory moves and additional fixed-asset removal and cleanup costs.
- On August 4, 2014, the company amended its JPMorgan credit agreement to permit additional adjusted EBITDA add-backs for specified 2014 quarters. It reported covenant compliance at June 28, but borrowing availability depends on the borrowing base and covenant conditions.
- Key risks include continued search-engine traffic changes, direct-to-consumer competition from suppliers, price pressure and margin erosion, execution of the warehouse consolidation, and the possibility that weaker revenue or operating cash flow could require additional borrowing, asset sales, or equity or debt financing. Management said available liquidity and expected operating cash flows should fund needs for at least 12 months, but cautioned that adverse results could impair liquidity.
- Other notable items: the Series A preferred stock carries quarterly dividends and a $6.0 million aggregate liquidation preference; the company began hedging some Philippine peso operating exposure in Q2; and it reported no material adverse expected outcome from disclosed legal proceedings, including asbestos-related claims.
Most important facts for investors to verify
- Confirm the requested company and period: this filing is U.S. Auto Parts Network’s Q2 2014 report, not a 2013 Q2 filing.
- Track whether revenue growth persists while gross margin recovers from 26.5%, and whether order growth offsets declining visitors and average order value.
- Assess operating cash flow quality and working-capital effects, especially payables, inventory, and receivables movements.
- Verify post-quarter borrowing, borrowing-base availability, covenant compliance, and the effect of the August 4 credit amendment.
- Monitor actual Carson closure costs, sales impact, fulfillment savings, and the timing and success of consolidation.
- Evaluate dilution and cash obligations from preferred dividends, options, restricted stock units, and potential preferred conversion.