Business Context and Reporting Period
Company: U.S. Auto Parts Network, Inc. (d/b/a Carparts.Com, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 4, 2009 (13 weeks)
Business Overview: The Company is a leading online provider of aftermarket auto parts, selling body parts, engine parts, performance parts, and accessories primarily through its network of websites (e.g., autopartswarehouse.com, partstrain.com) and online marketplaces. The Company changed its fiscal year from a calendar year to a 52/53-week year ending on the first Saturday following December 31, effective January 1, 2009.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 (13 weeks) | Q1 2008 (3 months) |
|---|---|---|
| Net Sales | $39,664 | $40,009 |
| Gross Profit | $14,640 | $13,750 |
| Gross Margin | 36.9% | 34.4% |
| Operating Income (Loss) | $593 | $(1,711) |
| Net Loss | $(679) | $(875) |
| Net Loss Per Share (Basic & Diluted) | $(0.02) | $(0.03) |
| Cash and Cash Equivalents | $33,939 | $32,156 |
| Working Capital | $37,271 | $36,013 |
| Long-Term Investments (ARPS) | $6,351 | $6,351 |
Note: Q1 2009 includes three additional business days compared to Q1 2008 due to the fiscal year change.
Material Changes vs. Prior Period
- Revenue: Net sales decreased 0.9% to $39.7 million. On a calendar basis (excluding the three extra days), sales decreased 4.3%. The decline was driven by a 27.5% drop in offline channels (loss of a significant customer) partially offset by a 4.6% increase in online marketplace sales.
- Profitability: The Company reported an operating income of $0.6 million, a significant improvement from an operating loss of $1.7 million in the prior year. This was primarily due to a 2.5% increase in gross margin and a sharp reduction in amortization of intangibles.
- Expenses:
- Marketing: Decreased 10.6% due to lower personnel costs, reduced online advertising spend, and fee reductions from eBay.
- Fulfillment: Increased 27.0% due to personnel and facility costs associated with opening a new East Coast distribution center.
- Amortization: Decreased 82.5% to $0.4 million from $2.1 million, largely due to the impairment write-off of certain intangible assets in 2008.
- Tax Provision: The effective tax rate was 199.3% compared to 39.2% in the prior year. The high rate was driven by a $1.0 million tax effect from stock option forfeitures and non-deductible permanent differences.
Guidance, Outlook, Risks, and Unusual Items
- Liquidity and Capital Resources: The Company holds $33.9 million in cash and cash equivalents. Management believes this, combined with operating cash flows, is sufficient for the next 12 months. However, $6.4 million of investments in Auction Rate Preferred Securities (ARPS) are illiquid due to failed auctions in the credit markets. These are classified as long-term investments.
- Legal Proceedings: On April 16, 2009, the Company settled two pending legal actions with Ford Motor Company regarding design patent infringement. The settlement required the Company to agree not to challenge the validity of the patents.
- Seasonality: The business is seasonal, with higher demand for body parts in winter months and performance parts in summer months.
- Stock Option Exchange: Stockholders approved a program to exchange up to 1.5 million options for 0.74 million new options. The program has not yet commenced.
- Risks: Key risks include dependence on search engines for traffic, supply chain disruptions (particularly from Asia), potential product liability claims, and the impact of economic downturns on consumer spending for auto parts.
Investor Verification Checklist
- ARPS Liquidity: Verify the status of the $6.4 million in illiquid Auction Rate Preferred Securities and the potential for further impairment charges if the market does not recover.
- Offline Channel Recovery: Assess the impact of the 27.5% decline in offline sales and whether the loss of the significant customer is permanent.
- East Coast Expansion: Monitor the cost-benefit analysis of the new East Coast distribution center, which drove a 27% increase in fulfillment expenses.
- Intellectual Property: Review the terms of the Ford settlement and the ongoing risk of patent infringement claims from other OEMs.
- Share-Based Compensation: Note the $6.1 million of unrecognized share-based compensation expense expected to be recognized over the next 3 years.