Filing and reporting period
Entity and period mismatch: The request identifies Carparts.Com, Inc. and 2015 Q3, but the supplied filing is U.S. Auto Parts Network, Inc.’s Form 10-Q for the 13 weeks ended October 1, 2016, with comparisons to October 3, 2015. Amounts below are in thousands unless stated otherwise. The company operated an online aftermarket auto-parts business and majority-owned AutoMD.
Financial results and liquidity
| Metric | 13 weeks ended Oct. 1, 2016 | 13 weeks ended Oct. 3, 2015 | 39 weeks ended Oct. 1, 2016 | 39 weeks ended Oct. 3, 2015 |
|---|---|---|---|---|
| Net sales | $73,515 | $70,648 | $232,376 | $223,498 |
| Gross profit / margin | $22,414 / 30.5% | $21,042 / 29.8% | $70,760 / 30.5% | $63,388 / 28.4% |
| Operating income (loss) | $(84) | $(222) | $1,963 | $(1,347) |
| Consolidated net income (loss), including noncontrolling interests | $(360) | $(288) | $1,311 | $(1,626) |
| Net income (loss) attributable to U.S. Auto Parts | $(102) | $8 | $2,084 | $(827) |
| Adjusted EBITDA, consolidated (non-GAAP) | $2,744 | $2,379 | $10,411 | $6,369 |
Quarterly sales rose 4.1%; gross margin improved 0.7 percentage points. For the 39-week period, sales increased 4.0%, gross margin improved 2.1 points, and operating results turned positive. Quarterly operating expenses were $22,498, slightly above gross profit. Adjusted EBITDA is a company-defined non-GAAP measure and should not replace GAAP results.
Cash flow: 39-week operating cash flow was $19,296, versus $7,348 a year earlier; investing cash outflow was $4,695, chiefly property and equipment, and financing cash outflow was $12,604. Operating cash generation included a $7,825 inflow from accounts payable and accrued expenses, so the improvement was partly working-capital driven. Cash increased $1,968 to $7,505; $2,331 was restricted to AutoMD’s general operating purposes.
Balance sheet and debt at Oct. 1, 2016: Current assets were $63,290 and current liabilities $45,473, giving working capital of $17,817. Inventory was $49,471. Total liabilities were $57,748 and total equity $25,718. Revolver borrowings were zero; capital-lease debt was $10,449. The asset-based facility provides up to $30,000, subject to its borrowing base, and matures April 26, 2017. Excess availability was $13,871; letters of credit outstanding were $9,283, against a $15,000 permitted exposure. The company reported no off-balance-sheet arrangements.
Material changes and operating drivers
- Quarterly total online orders grew 12.1% to 846,000, while average order value declined 6.3% to $90. Marketplace orders increased 26.6%; e-commerce orders rose 5.1%.
- Quarterly online marketplace sales grew 20.6%, while e-commerce sales declined 1.5%. Unique visitors fell 3.1% to 28.4 million, primarily from lower organic search traffic; paid traffic partly offset the decline.
- Management attributed gross-margin gains to private-label mix, strategic pricing, freight efficiencies, and lower shipping-supply costs. Fulfillment costs increased 14.6% in the quarter, and technology costs increased 20.7%.
- Base USAP generated quarterly operating income of $639; AutoMD had an operating loss of $723 and net loss of $718. AutoMD quarterly revenue was $63.
- At October 19, 2016, after the reporting date, the company purchased 2,000 AutoMD shares for $2,000 under a funding milestone obligation, increasing its ownership from 64.1% to 67.4%.
Outlook, commentary, and risks
Management expected positive revenue trends for the remainder of 2016 and revenue growth for fiscal 2016 versus 2015, citing website improvements, mobile shopping, product selection, marketplace growth, and pricing initiatives. It believed available cash, operating cash flows, investments, and credit availability would fund operations for at least 12 months. This is management’s stated expectation, not a quantified earnings or revenue forecast.
Key risks include dependence on search engines and paid advertising, continued organic-traffic weakness, intense price competition (including suppliers selling directly to consumers), supplier concentration, delivery and fulfillment costs, seasonality, and potential credit-facility covenant or borrowing-base constraints. The facility’s cash-dominion and fixed-charge-coverage provisions can be triggered by reduced availability. The company also disclosed cybersecurity and website-disruption exposure, foreign-exchange risk, and possible sales-tax obligations. It cited a 10% Philippine peso exchange-rate fluctuation as having an approximately $786 impact on 39-week Philippine operating expenses. Asbestos-related litigation was disclosed, but the company did not expect material out-of-pocket costs; it said ordinary-course legal matters were not expected to have a material adverse effect. Management reported disclosure controls effective and no material change in internal control during the quarter.
Investor verification checklist
- Confirm the intended issuer and period: the supplied filing is U.S. Auto Parts Network, Inc., Q3 2016, not Carparts.Com, Inc., Q3 2015.
- Review the quality of operating cash flow, particularly the $7,825 accounts-payable and accrued-expense cash contribution.
- Assess the April 2017 credit-facility maturity, borrowing-base availability, letters of credit, and covenant triggers.
- Track organic search traffic, paid-advertising costs, order growth, average order value, and marketplace versus owned-site sales.
- Evaluate AutoMD’s continuing losses, restricted funding, and the post-quarter $2,000 share purchase.
- Reconcile consolidated net loss with income attributable to the parent and review preferred-stock dividends and potential dilution.