CarParts.com, Inc. (then U.S. Auto Parts Network, Inc.) — Q3 2015 Form 10-Q
Reporting period: Thirteen weeks ended October 3, 2015; year-to-date figures cover the thirty-nine weeks ended that date. Comparatives are for the corresponding 2014 periods. Dollar amounts below are in millions unless stated otherwise.
Business context
The company sells aftermarket auto parts and accessories primarily online through its websites and marketplaces, with a smaller offline wholesale and private-label business. It reports two segments: Base USAP, the core parts business, and majority-owned AutoMD, an online automotive repair-information service.
Financial performance and liquidity
- Q3 revenue: $70.65, up 3.9% year over year. Gross profit was $21.04; gross margin improved to 29.8% from 27.1%.
- Q3 operating results: Operating loss narrowed to $0.22 from $2.22. Consolidated net loss was $0.29; net income attributable to U.S. Auto Parts was $0.008. Basic and diluted EPS was reported as $0.00. AutoMD recorded a $0.64 net loss, while Base USAP recorded $0.35 net income.
- Year to date: Revenue was $223.50, up 5.0%; gross margin was 28.4% versus 28.0%. Operating loss was $1.35 versus $3.66, and consolidated net loss was $1.63 versus $4.47. Net loss attributable to U.S. Auto Parts was $0.83, or $0.03 per share.
- Cash flow: Operating activities provided $7.35 year to date, compared with $0.71 in 2014. Investing used $5.81, mainly for $5.80 of property and equipment additions; financing used $3.46. Cash fell $1.98 to $5.68.
- Balance sheet at October 3: Current assets were $58.81 and current liabilities $45.28, with working capital of $13.53. Total assets were $80.26; total liabilities $58.15; total equity $22.11.
- Debt: Revolver borrowings were $8.29 and capital leases $10.83, for total debt of $19.12. The $25.00 asset-based credit facility matures April 26, 2017; reported excess availability, net of the $2.00 availability block, was $11.96. The revolver is classified as current because of subjective acceleration clauses, although no principal payments were then due and cash dominion was not in effect.
Material changes versus the prior comparable period
- Q3 revenue growth reflected higher online and offline sales. Total online orders increased 2.9%; conversion rose to 1.75% from 1.67%, while total average order value declined 1.0% to $96. Unique visitors were nearly flat, down 0.3%.
- Gross-margin improvement was attributed primarily to private-label mix, pricing initiatives, freight efficiencies, and lower shipping-supply costs. Operating loss improved, while marketing and general and administrative costs increased; fulfillment costs declined.
- Year-to-date operating cash flow increased substantially, helped by a $2.18 reduction in inventory (a source of cash), versus a $7.83 inventory-related use of cash in the prior-year period.
- Adjusted EBITDA, a non-GAAP measure, was $2.38 in Q3 versus $1.22; year to date it was $6.37 versus $6.72. The 2014 comparisons included restructuring and inventory write-down add-backs.
Outlook, commentary, and risks
- Management expected revenue trends to remain positive and net loss for fiscal 2015 to be significantly lower than fiscal 2014. It believed available cash, operating cash flows, investments, and debt financing would cover operating cash needs for at least twelve months, based on the current plan; these are expectations, not guarantees.
- Management expected capital expenditures to increase over the next twelve months for customer-experience and long-term-value initiatives. It also expected revenue capture to improve marginally for fiscal 2015.
- Key risks include continued losses, dependence on search engines and paid traffic, intense online price competition, suppliers selling directly to consumers, supplier and drop-ship concentration, shipping costs and fulfillment disruptions, cyber and systems risks, and borrowing-base and credit-covenant restrictions. A 10% Philippine peso/U.S. dollar movement was estimated to affect year-to-date Philippine operating expenses by about $0.78.
- AutoMD had approximately 2,900 repair shops in its network at quarter-end, up from about 2,100 at December 2014. Under its stock-sale agreement, the company could be required to buy 2.0 million AutoMD shares for $2.0 million if specified shop-network or cash thresholds are not met. The $7.0 million proceeds from AutoMD’s share sale are restricted to AutoMD’s general operating purposes.
- Several asbestos-related lawsuits involving a subsidiary concern brakes marketed in the late 1960s and early 1970s. The company said insurance was expected to cover the matter and significant material out-of-pocket costs were not expected. It reported no material adverse effect expected from ordinary-course legal matters.
- Disclosure controls were deemed effective at quarter-end, and the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subsequent results support management’s fiscal 2015 expectations for growth and a significantly lower net loss, and whether operating cash flow remains positive.
- Actual borrowing-base availability, covenant compliance, and the implications of classifying revolver borrowings as current; the facility matures in 2017.
- Whether gross-margin gains persist as paid advertising costs rise and competition and supplier-direct sales continue.
- AutoMD’s progress against contractual shop-network and cash thresholds, including any potential $2.0 million share-purchase obligation.
- The cash and dilution implications of Series A preferred dividends, which were $0.18 year to date, and the preferred stock’s conversion rights.