Filing summary
Period and entity: This is U.S. Auto Parts Network, Inc.’s unaudited Form 10-Q for the 13 weeks ended September 30, 2017, with year-to-date results for the 39 weeks ended that date. Although the request metadata says Carparts.Com, Inc. and 2016 Q3, the supplied filing is for U.S. Auto Parts Network and 2017 Q3. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown.
Business context and results
The company sells aftermarket collision, engine, performance parts and accessories, principally online through its websites and third-party marketplaces. AutoMD’s operating segment was dissolved in March 2017 and classified as discontinued operations; AutoMD.com continues as a media business within continuing operations.
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Net sales | $73.8m | $73.5m | $234.8m | $232.2m |
| Gross profit / margin | $21.9m / 29.6% | $22.4m / 30.5% | $68.9m / 29.3% | $70.6m / 30.4% |
| Operating income | $1.3m | $0.6m | $4.0m | $4.1m |
| Income from continuing operations | $0.9m | $0.4m | $28.7m | $3.2m |
| Net income (loss) | $0.9m | $(0.4)m | $28.1m | $1.3m |
| Adjusted EBITDA (non-GAAP) | $3.6m | $3.1m | $11.4m | $11.5m |
Q3 diluted income from continuing operations was $0.02 per share, versus $0.01 a year earlier; year-to-date diluted EPS was $0.72 versus $0.07. The year-to-date comparison is heavily affected by a non-cash tax benefit, described below.
Cash flow, liquidity and debt
- For the 39 weeks, operating cash flow was $12.1m, down from $19.3m; investing cash outflow was $3.6m, principally property and equipment, and financing cash outflow was $8.4m. Cash increased by only $0.03m to $6.7m.
- Cash and short-term investments totaled approximately $6.7m at September 30, 2017. Working capital was $14.8m, compared with $16.9m at December 31, 2016.
- Total debt was $9.9m, primarily capital lease obligations, versus $10.3m at year-end 2016. There were no revolver borrowings; letters of credit outstanding were $15.0m under a facility with a $30m commitment. Reported excess availability was $10.0m.
- Inventory was $53.7m, up from $50.9m at year-end. Capital expenditures were $3.7m. Management said current cash, operating cash flows and available credit should fund operating needs for at least 12 months, subject to the risks and conditions discussed in the filing.
Material changes and management commentary
- Q3 sales were nearly flat, up 0.5%; year-to-date sales rose 1.1%. In Q3, marketplace sales increased 41.1% while e-commerce sales declined 16.8%, leaving online sales nearly flat overall. Offline sales increased 6.0%.
- Total online orders increased 8.2% in Q3, but average order value fell 8.9% to $82. Unique visitors declined 18.7% to 23.1 million. Management attributed these shifts to channel mix, including customer movement to online marketplaces, and cited marketplace pricing and broader product selection as contributors to order growth.
- Gross margin fell 0.9 percentage points in Q3 and 1.1 points year-to-date, primarily from the shift toward marketplace sales, partly offset by a greater private-label mix. Marketing and technology expense declined; operating income improved in Q3 but was slightly lower year-to-date.
- Year-to-date income tax benefit was $25.8m. In Q2, management reduced the deferred-tax valuation allowance by $27.2m after concluding that realization of certain deferred tax assets was more likely than not, partly based on three years of cumulative U.S. federal pre-tax income. This accounting benefit materially boosted reported year-to-date earnings and is not operating cash generation.
- Management intends to improve e-commerce growth through website and mobile shopping improvements, search visibility, pricing, product selection and cost controls, while continuing to expand marketplace sales. It expected positive net income, but provided no quantified sales, earnings or margin guidance.
- The company repurchased $3.8m of common stock and paid $2.5m to redeem AutoMD minority interests during the 39 weeks. AutoMD’s discontinued-operation loss was $0.6m, including severance and contract termination costs.
Risks, contingencies and unusual items
- Key risks include dependence on search engines and paid traffic, marketplace channel growth that may pressure margins, intense competition, supplier concentration and foreign sourcing, shipping costs, inventory management, cyber and technology disruptions, and seasonality.
- The credit facility has borrowing-base and covenant restrictions; low excess availability or default could trigger cash dominion, limits on borrowing or repayment requirements. Management disclosed subjective acceleration clauses and cautioned that covenant or liquidity problems could materially affect operations.
- The company disclosed asbestos-related lawsuits involving subsidiaries, with insurance coverage and no expectation of material out-of-pocket costs. It said ordinary-course legal matters were not expected to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing notes that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Confirm the filing period and issuer: the supplied document is U.S. Auto Parts Network’s 2017 Q3 10-Q, not a 2016 Q3 Carparts.Com, Inc. filing.
- Assess underlying earnings excluding the large deferred-tax valuation-allowance release; compare operating cash flow and operating income with reported net income.
- Track gross margin and average order value as marketplace sales grow, and whether the company can restore e-commerce traffic and growth.
- Review borrowing-base availability, letters of credit, capital lease obligations and compliance with credit-facility covenants.
- Monitor inventory growth, cash conversion, supplier and shipping exposure, and the results of website, mobile and cost initiatives.