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)
Reporting Period: Thirteen and thirty-nine weeks ended October 3, 2009.
Business Overview: The Company is a leading online provider of aftermarket auto parts, operating a network of websites including autopartswarehouse.com and partstrain.com. It sells directly to consumers via e-commerce and online marketplaces, as well as through offline wholesale and Kool-Vue operations. The Company changed its fiscal year to a 52/53-week calendar ending on the first Saturday following December 31, effective January 1, 2009.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Oct 3, 2009 | 39 Weeks Ended Oct 3, 2009 | 3 Months Ended Sep 30, 2008 | 9 Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Net Sales | $47,043 | $130,512 | $36,554 | $119,668 |
| Gross Profit | $16,899 | $47,407 | $12,069 | $40,406 |
| Gross Margin | 35.9% | 36.3% | 33.0% | 33.8% |
| Net Income (Loss) | $781 | $731 | $(491) | $(13,429) |
| Diluted EPS | $0.03 | $0.02 | $(0.02) | $(0.45) |
| Cash and Equivalents | $33,609 (as of Oct 3, 2009) | |||
| Working Capital | $40,000 (as of Oct 3, 2009) | |||
| Long-Term Debt | None reported (Capital leases current: $1) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 28.7% for the quarter and 9.1% for the 39-week period compared to the prior year. This was driven primarily by a 29.3% increase in internet business (e-commerce and marketplaces), partially offset by a 14.9% decline in offline business.
- Profitability Turnaround: The Company returned to profitability, reporting net income of $0.78 million for the quarter and $0.73 million for the 39-week period, compared to net losses of $0.49 million and $13.43 million in the respective prior-year periods.
- Margin Expansion: Gross margins improved by 290 basis points for the quarter and 250 basis points for the 39-week period, primarily due to lower outbound freight expenses.
- Expense Management: Operating expenses as a percentage of sales decreased. Marketing expenses declined as a percentage of sales due to fixed cost leverage. A significant non-cash impairment charge of $18.4 million recorded in 2008 did not recur in 2009.
- Cash Flow: Net cash provided by operating activities was $10.4 million for the 39 weeks ended October 3, 2009, a substantial improvement over the $1.9 million generated in the prior year period.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates that funds from operations and cash on hand will be sufficient to meet working capital needs and capital expenditures for at least the next 12 months. The Company expects to continue investing in technology and expanding its East Coast distribution center.
- Seasonality: The business is seasonal, with higher sales for body parts in winter months and performance parts in summer months.
- Investment Liquidity Risk: The Company holds $4.3 million (fair value) in Auction Rate Preferred Securities (ARPS). Due to market illiquidity, these are classified as long-term investments. While currently earning interest, they may not be readily convertible to cash without potential loss of principal if auctions fail.
- Legal Proceedings: The Company is involved in litigation with PartsGeek LLC regarding trade secret misappropriation and is a defendant in a trademark infringement suit filed by Parts Geek LLC. Management believes the latter is without merit.
- Executive Sales Plan: The Chairman of the Board intends to enter into a Rule 10b5-1 sales plan to sell up to 375,000 shares of common stock at prices significantly above current trading levels.
Key Facts for Investor Verification
- ARPS Liquidity: Verify the status of the $4.3 million investment in illiquid Auction Rate Preferred Securities and the potential for future impairment charges if market conditions do not improve.
- Revenue Mix: Monitor the continued decline in offline sales versus the growth in e-commerce to ensure the strategic shift is sustainable.
- Legal Exposure: Track the outcomes of the ongoing litigation with PartsGeek LLC and the counter-suit filed against the Company.
- Capital Expenditures: Assess the impact of ongoing investments in the new East Coast distribution center and technology infrastructure on future operating margins.
- Share-Based Compensation: Note the $5.1 million of unrecognized share-based compensation expense expected to be recognized over the next 2.76 years.