CarParts.com, Inc. (then U.S. Auto Parts Network, Inc.) — Form 10-Q Summary
Period and identity: The supplied filing is for the 13 and 26 weeks ended July 1, 2017, not 2016 Q2 as stated in the request metadata. The registrant name in the filing is U.S. Auto Parts Network, Inc. Amounts below are in millions of dollars unless noted.
Business context and reporting period
The company sells aftermarket auto parts and accessories primarily online, through its own e-commerce sites and third-party marketplaces. It reported continuing operations for its core auto-parts business; AutoMD’s operating segment was dissolved in March 2017 and reported as discontinued operations, although AutoMD.com continued as a media business.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $80.2 | $78.0 | $161.0 | $158.7 |
| Gross profit / margin | $23.2 / 29.0% | $23.7 / 30.4% | $47.0 / 29.2% | $48.2 / 30.4% |
| Operating income / margin | $1.5 / 1.9% | $1.6 / 2.0% | $2.7 / 1.6% | $3.5 / 2.1% |
| Income from continuing operations | $26.9 | $1.2 | $27.7 | $2.8 |
| Adjusted EBITDA | $3.8 | $4.0 | $7.8 | $8.4 |
| Cash from operating activities | Not separately reported for the quarter | $12.5 | $15.0 |
Q2 sales grew 2.8%, but gross profit fell 1.9% as gross margin contracted 1.4 percentage points. Marketplace sales increased while e-commerce sales declined; management attributed lower margins primarily to the shift toward marketplaces. Q2 total online orders rose 11.1%, but average order value fell 10.5%. Unique visitors declined 18.2% to 24.7 million.
Reported income was unusually high because the company released $27.2 million of its deferred-tax valuation allowance. This non-cash tax benefit drove the reported continuing-operations profit; pretax continuing income was $1.1 million in Q2 and $1.9 million for the first half. The filing reported a Q2 diluted continuing-operations EPS of $0.67. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP income or cash flow.
Liquidity, debt and cash flow
- At July 1, 2017, cash and cash equivalents were $9.9 million; working capital was $14.4 million, down from $16.9 million at December 31, 2016.
- Operating cash flow was $12.5 million for the first half, compared with $15.0 million a year earlier. Investing cash use was $2.5 million, primarily property and equipment; financing cash use was $6.7 million. Cash increased $3.3 million over the period.
- Total debt was $10.0 million, comprising capital leases. The company had no revolving-loan balance on its $30 million asset-based facility, but had $17.5 million of letters of credit and $7.3 million of excess availability.
- Management said existing cash, operating cash flows and available financing were expected to fund operations for at least the next 12 months. Availability depends on borrowing-base and credit-agreement terms; a cash-dominion period was not in effect at quarter-end.
Material changes, outlook and risks
- Compared with the prior year, sales increased modestly, while gross margin, operating income, adjusted EBITDA and first-half operating cash flow declined. Q2 marketplace sales rose 37.4%, offset by a 13.0% decrease in e-commerce sales.
- Management said it expected to pursue a return to positive e-commerce growth through improved site experience, catalog content, mobile shopping, marketing, pricing and product selection. It also expected to continue generating net income, but provided no quantified financial guidance and cautioned that historical losses could return.
- Key risks include reliance on search engines and paid traffic, continued shifts to marketplaces that may pressure margins, intense competition and supplier concentration, foreign sourcing and shipping costs, seasonal demand, and the ability to comply with credit-facility covenants. Management highlighted that Google search changes had affected traffic; the filing also noted the company had no formal disaster-recovery plan.
- Legal matters included asbestos-related claims involving a subsidiary; the company said insurance coverage was maintained and significant material out-of-pocket costs were not expected. It stated that ordinary-course legal matters were not expected to materially affect financial position, results or cash flow.
- Other notable items: AutoMD’s dissolution generated $0.6 million of discontinued-operation loss in the first half, including severance and contract termination costs. A former major shareholder distributed approximately 28% of outstanding shares to its limited partners in May 2017, creating potential market-supply pressure.
Important facts for investors to verify
- Confirm the period and issuer: this is a July 1, 2017 quarter filing for U.S. Auto Parts Network, not a 2016 Q2 filing.
- Assess whether the $27.2 million valuation-allowance release is supportable and distinguish it from recurring operating performance.
- Track e-commerce recovery, marketplace sales mix, average order value and gross-margin trends.
- Review borrowing-base availability, letters of credit, covenant requirements and capital-lease obligations.
- Check subsequent filings for changes in traffic acquisition, liquidity, expected profitability, and the potential sale of shares distributed by Oak Investment Partners.