Filing summary
Period and entity: The supplied filing is U.S. Auto Parts Network, Inc.’s Form 10-Q for the thirteen and twenty-six weeks ended June 30, 2018, filed August 8, 2018. This does not match the request metadata identifying Carparts.Com, Inc. and 2017 Q2. The filing describes the company as an online seller of aftermarket auto parts and accessories.
Financial results
Amounts below are in thousands, except per-share data and percentages.
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $76,973 | $80,208 | $155,358 | $161,041 |
| Gross profit / margin | $21,485 / 27.9% | $23,244 / 29.0% | $44,944 / 28.9% | $47,031 / 29.2% |
| Operating income | $487 | $1,509 | $2,096 | $2,714 |
| Continuing-operations net income (loss) | $(485) | $26,918 | $250 | $27,734 |
| Adjusted EBITDA | $2,786 | $3,818 | $7,052 | $7,846 |
Q2 diluted loss per share was $0.02; first-half diluted earnings per share rounded to $0.00. The unusually high 2017 comparative earnings reflected a partial release of the valuation allowance on deferred tax assets, not a comparable improvement in underlying operations. Q2 2018 included a $544 tax provision on $59 of pretax continuing-operations income.
Cash flow and liquidity: First-half operating cash flow was $7,841, versus $12,470 a year earlier; investing cash outflow was $2,940, mainly for property, website and software development; financing cash outflow was $903. Cash rose to $6,824 from $2,850 at year-end, mainly because of the timing of payments to a shipping vendor. Working capital was $15,295.
Debt: Total debt, consisting primarily of capital leases, was $9,457, down from $9,752 at December 30, 2017. There were no revolver borrowings at quarter-end under the $30,000 asset-based facility; excess availability was $11,229, and the facility matures April 26, 2020. Capital lease obligations had $9,458 present value. The company reported $14,045 in letters of credit, of which $10,350 was utilized and included in accounts payable.
Changes and operating drivers
- Sales fell 4.0% in Q2 and 3.5% in the first half year over year. Online sales declined, partly offset by growth in offline Kool-Vue and wholesale sales.
- Q2 gross margin fell 1.1 percentage points to 27.9%; management cited a shift toward online marketplaces and customs-related costs, partly offset by a more favorable private-label mix.
- Q2 total online orders decreased 10.2%. Unique visitors fell 34.0%, while conversion improved 35.5% and total average order value increased 3.5%. Management attributed lower traffic to marketplace channel shifts, reduced organic traffic, and less paid traffic where customer-acquisition economics were unfavorable.
- Q2 general and administrative expense rose 10.0%, primarily from higher overhead. Fulfillment, marketing and technology costs declined.
- First-half net income was $250, compared with $27,175 in 2017, which included the substantial tax benefit noted above. First-half Adjusted EBITDA declined 10.1%.
Outlook, risks and unusual items
- Management gave no quantified revenue or earnings guidance. It said it expected to return to positive e-commerce growth through improvements to site content, search visibility, mobile experience, conversion, product selection and cost management.
- Management believed available cash, operating cash flows and borrowing capacity would fund operations for at least twelve months, while cautioning that weaker sales or margins, higher expenses or other adverse events could require asset sales or additional financing.
- U.S. Customs and Border Protection’s product seizures and import delays affected grille availability and product flow. A May 25, 2018 preliminary injunction barred enhanced bonding requirements and directed CBP to use best efforts to process certain shipments; the order could be appealed, and delays continued. Port, carrier and legal costs were $609 in Q2 and $740 in the first half.
- Management identified material business risks including dependence on search engines and online marketplaces, lower margins from marketplace sales, reliance on suppliers (including Taiwan and China), import and trademark disputes, shipping costs, competition, and credit-facility covenants. The company said recurring losses made the likelihood of certain subjective acceleration clauses more than remote; borrowings, if any, would be classified as current.
- Asbestos-related lawsuits remained pending; the company expected insurance to cover the exposure and did not expect material out-of-pocket costs. Ordinary-course litigation was also disclosed without an expected material adverse effect.
- AutoMD had been dissolved in March 2017 and classified as discontinued operations. The company sold the domain associated with AutoMD operations on August 3, 2018, for $1,400.
- The company adopted revenue standard Topic 606 at the start of fiscal 2018 using the modified retrospective method; the cumulative adjustment decreased accumulated deficit by approximately $342.
Investor verification points
- Confirm the filing-period and company mismatch in the request metadata: this is a June 30, 2018 filing by U.S. Auto Parts Network, Inc., not a 2017 Q2 filing.
- Track whether customs processing normalized, the preliminary injunction remained effective, and grille supply and related costs recovered.
- Assess whether declining website traffic and order counts stabilized, and whether improved conversion and average order value translated into sustained sales and margins.
- Separate recurring operating performance from the prior-year deferred-tax valuation-allowance benefit and from management’s non-GAAP Adjusted EBITDA adjustments.
- Monitor liquidity, capital-lease payments, borrowing-base availability, letters of credit, covenant compliance and the impact of supplier-payment timing on cash generation.