Filing summary
Period and issuer: The supplied filing is U.S. Auto Parts Network, Inc.’s Form 10-Q for the thirteen weeks ended April 1, 2017—not a Carparts.com, Inc. filing for 2016 Q1. Amounts below are in thousands of dollars unless noted.
Business context and financial results
The company primarily sells aftermarket auto parts online through its websites and online marketplaces. In March 2017, AutoMD’s operating segment was dissolved and reported as discontinued operations; AutoMD.com was to continue as a media business within continuing operations.
| Metric | Q1 2017 | Comparable 2016 period |
|---|---|---|
| Net sales | $80,833 | $80,746 |
| Gross profit / margin | $23,787 / 29.4% | $24,532 / 30.4% |
| Operating income / margin | $1,205 / 1.5% | $1,911 / 2.4% |
| Income from continuing operations | $816 | $1,537 |
| Net income, including discontinued operations | $257 | $990 |
| Adjusted EBITDA (non-GAAP) | $4,028 | $4,344 |
| Cash provided by operating activities | $7,558 | $10,251 |
Basic and diluted continuing-operations earnings per share were $0.02, versus $0.04. AutoMD discontinued operations generated a $559 loss in Q1 2017, including $221 of severance and $164 of contract termination costs.
Liquidity, debt and cash flow
Cash and cash equivalents were $7,198 at April 1, 2017, up from $6,643 at year-end. Working capital was $13,108, down from $16,869. Inventory rose to $57,186 from $50,904; accounts payable rose to $43,334 from $33,697. The company attributed much of operating cash flow to higher accounts payable and accrued expenses, partly offset by inventory investment.
Total debt, consisting of capital leases, was $10,176, compared with $10,312 at year-end. There were no revolving-credit borrowings; letters of credit totaled $16,442 and reported excess availability was $10,926 under a facility with a commitment of up to $30,000, subject to the borrowing base. Capital-lease obligations totaled $17,626 in minimum payments, including interest. The company said current cash, operating cash flows and available credit should fund operations for at least the next twelve months.
Investing activities used $1,223, mainly for property and equipment. Financing activities used $5,768, including $2,485 of debt-financing costs, $2,272 of treasury-stock repurchases and $120 of preferred dividends. Cash increased by $555 during the quarter.
Changes, outlook and risks
- Revenue was essentially flat, but gross margin declined 1.0 percentage point, primarily from a sales mix shift toward online marketplaces. Operating income and continuing-operations income also fell.
- Total online orders increased 7.7%: e-commerce orders fell 7.3%, while marketplace orders rose 33.9%. Average order value decreased 7.4%. Unique visitors fell 8.0% to 28.9 million, mainly due to lower organic search traffic; conversion remained 1.8%.
- Management expected positive revenue trends for the remainder of 2017 and continued full-year revenue growth versus 2016, citing site improvements, mobile experience, product selection, pricing and cost-saving efforts. No numerical revenue or earnings guidance was provided.
- Key risks include dependence on search engines and paid traffic, marketplace and supplier competition, margin pressure, supplier and shipping dependence, inventory and seasonality, credit-facility covenants, and potential operating losses. Management warned continued losses could affect liquidity and require financing, asset sales or spending reductions.
- The company reported effective disclosure controls and no material change in internal control over financial reporting. It disclosed asbestos-related lawsuits involving a subsidiary, but said insurance coverage was maintained and it did not expect material out-of-pocket costs.
Investor facts to verify
- Confirm the intended issuer and reporting period: this filing covers U.S. Auto Parts Network’s Q1 2017, not Carparts.com’s 2016 Q1.
- Review the drivers and sustainability of the gross-margin decline and the shift from owned e-commerce sales to marketplaces.
- Assess whether operating cash flow remains sustainable given the large inventory build and increase in payables.
- Check credit-facility borrowing availability, covenant headroom and the effects of letters of credit and capital-lease commitments.
- Evaluate the effect of AutoMD’s dissolution costs and the treatment of AutoMD.com results in future periods.
- Distinguish GAAP earnings and cash flows from management’s non-GAAP Adjusted EBITDA measure.