Business context and reporting period
U.S. Auto Parts Network, Inc. (NASDAQ: PRTS), now identified in the request as Carparts.com, Inc., sells aftermarket collision, engine, performance and accessory parts online and through wholesale channels. This is the company’s Form 10-K for the 52 weeks ended December 28, 2019—not a standalone 2018 Q4 filing. The comparable year ended December 29, 2018. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $280.7 | $289.5 |
| Gross profit / margin | $84.2 / 30.0% | $78.7 / 27.2% |
| Operating loss | $(8.3) | $(5.0) |
| Net loss | $(31.5) | $(4.9) |
| Basic and diluted loss per share | $(0.89) | $(0.14) |
| Cash from operating activities | $6.9 | $6.2 |
| Cash used in investing activities | $(6.2) | $(5.7) |
Gross margin improved 2.8 percentage points, principally as sales shifted toward higher-margin private-label products. However, operating expenses rose to $92.5 million from $83.7 million: marketing expense increased 16.4%, fulfillment 17.1% and technology 27.6%. The net loss included a $21.4 million income-tax provision, largely related to an increased valuation allowance against deferred tax assets; the company reported no deferred tax asset on its year-end balance sheet.
Adjusted EBITDA was $4.5 million in the filing’s reconciliation, versus $10.4 million in 2018. The executive-summary text describes 2019 Adjusted EBITDA as a “loss” of $4.5 million, which conflicts with the reconciliation and should be checked. Operating cash flow exceeded investing outflows by approximately $0.7 million, before financing activity. The company attributed much of operating cash generation to changes in working capital, including higher accounts payable and accrued expenses.
At year-end, cash and cash equivalents were $2.3 million; working capital was $2.5 million, down from $10.5 million. Total assets were $87.9 million, total liabilities $75.6 million and stockholders’ equity $12.4 million. Reported debt was $11.1 million, primarily finance-lease obligations and a warehouse financing arrangement; the revolving loan balance was zero. The $30 million asset-based revolver had reported excess availability of $6.6 million. Letters of credit totaled $17.6 million, of which $13.0 million was recorded in accounts payable. Management said available cash, operating cash flow and borrowing resources should fund operations for at least 12 months, while warning that weaker results could require additional financing, asset sales or spending reductions.
For Q4 2019, net sales were $63.0 million versus $64.6 million in Q4 2018; gross profit was $21.2 million versus $16.6 million; operating loss was $2.1 million versus $4.7 million; and net loss was $25.1 million versus $4.5 million. The Q4 net loss included the annual tax valuation-allowance impact.
Material changes versus the prior year
- Annual sales fell 3.0%. Offline sales declined 21.8% to $24.6 million, principally from lower wholesale revenue; online sales declined 0.8% to $256.1 million.
- Online orders increased 2.4% overall, but average order value fell 7.0%. Website unique visitors declined 14.1%, while conversion improved from 2.54% to 2.87% and revenue capture from 87.5% to 88.7%.
- Marketplace orders grew 8.5%, while e-commerce website orders declined 3.1%. Sales through Amazon and eBay together represented 42% of revenue, up from 36% in 2018.
- Private-label mix increased, supporting gross margin but contributing to lower average order value. Private-label collision parts were 62% of revenue, versus 57% in 2018.
- Cash increased $0.2 million, but working capital fell $8.0 million, largely because of increased accounts payable. Stockholders’ equity declined from $38.8 million to $12.4 million.
- The company adopted lease-accounting guidance in 2019, recognizing right-of-use assets and lease liabilities; it said adoption did not significantly affect operating results or cash flows.
Outlook, risks and unusual items
No quantified revenue or earnings guidance is provided. Management described plans to improve the shopping experience, catalog and mobile features, invest in marketing and technology, expand private-label products, optimize inventory and reduce freight and operating costs. Management expected some benefits from investments toward year-end, while acknowledging execution and profitability uncertainty.
Key risks include ongoing losses and limited cash reserves; borrowing-base and covenant restrictions; dependence on marketplaces, search engines and third-party delivery providers; freight costs and competition; supplier concentration and sourcing in China and Taiwan; and regulatory, privacy, cybersecurity and product-liability exposure. The filing specifically warned that the early-2020 COVID-19 outbreak could disrupt Asian suppliers and operations, but its financial impact was uncertain. Tariffs and import restrictions were also identified as risks.
Customs litigation over imported grilles was settled in July 2019: certain inventory was to be released, the company agreed to forfeit certain goods, and outstanding CBP enforcement issues and damage or duty claims were reported resolved. The company reported $0.5 million of customs-related costs in 2019, compared with $5.0 million in 2018. It also reported executive-transition costs of $2.3 million in 2019. Management said internal controls over financial reporting were effective; the auditor did not provide an opinion on internal-control effectiveness.
Important facts for investors to verify
- Reconcile the filing’s conflicting description of 2019 Adjusted EBITDA: the table reports positive $4.5 million, while the executive summary calls it a loss.
- Assess whether reported operating cash flow is repeatable given the substantial contribution from increased accounts payable and accrued expenses.
- Confirm borrowing-base availability and liquidity after considering outstanding letters of credit, covenant triggers and the company’s low cash balance.
- Evaluate the deferred-tax valuation allowance, its effect on reported earnings, and the evidence required for any future release.
- Monitor sales, margins and costs by channel, especially marketplace dependence, website traffic, average order value and private-label mix.
- Track COVID-19, tariffs and supplier disruptions, and review subsequent filings for their realized effects on inventory, sales, cash flow and financing needs.