Business context and reporting period
The supplied filing is for U.S. Auto Parts Network, Inc. and subsidiaries, not a registrant named Carparts.Com, Inc. It is a Form 10-Q for the thirteen weeks ended September 28, 2013, with year-to-date results covering 39 weeks. The company primarily sells aftermarket auto parts online, alongside wholesale and other offline sales.
Financial results and liquidity
Amounts below are in millions of dollars unless otherwise indicated.
| Metric | Q3 2013 | Q3 2012 | 39 weeks 2013 | 39 weeks 2012 |
|---|---|---|---|---|
| Net sales | $61.7 | $73.0 | $195.0 | $241.2 |
| Gross profit | $17.9 | $22.9 | $56.7 | $73.9 |
| Gross margin | 29.0% | 31.4% | 29.1% | 30.6% |
| Operating loss | $(1.2) | $(2.5) | $(13.7) | $(4.1) |
| Net loss | $(1.4) | $(2.7) | $(14.3) | $(5.2) |
| Basic and diluted loss per share | $(0.04) | $(0.09) | $(0.44) | $(0.17) |
| Adjusted EBITDA | $1.8 | $2.7 | $4.4 | $10.6 |
- For the 39 weeks, operating cash flow was $(1.9) million, investing cash flow $(6.7) million, and financing cash flow $8.7 million. Cash increased $0.1 million to $1.1 million.
- At September 28, 2013, current assets were $50.2 million and current liabilities $39.8 million; reported working capital was $10.4 million, compared with negative $4.0 million at December 29, 2012.
- Total debt was $18.1 million: $8.3 million drawn on the revolving facility and $9.8 million in capital lease obligations. The $20 million revolving commitment was subject to a borrowing base; reported excess availability was $9.6 million.
- Capital expenditures were $6.7 million year to date. The company reported total assets of $73.7 million and stockholders’ equity of $21.8 million.
Material changes versus prior comparable periods
- Q3 sales fell 15.5%; year-to-date sales fell 19.1%. Online sales, about 90% of revenue, were the principal source of the decline.
- Q3 unique visitors fell 22.2% and orders fell 19.9%; average order value declined 0.9% to $114. Revenue capture declined to 83.2% from 83.9%.
- Gross margin fell 2.4 percentage points in Q3 and 1.5 points year to date, principally due to online competition and supplier direct sales, lower purchase discounts, and higher freight costs as a share of sales.
- Q3 net loss narrowed year over year as operating expenses declined, but year-to-date net loss increased, including $6.1 million of second-quarter impairment charges for software and intangible assets. Year-to-date operating loss also included $0.7 million of restructuring costs.
- The company reduced revolving borrowings using proceeds from a $6.0 million preferred-stock issuance, a $2.2 million common-stock issuance, and a $9.5 million net sale-leaseback transaction. The LaSalle facility was leased back under a 20-year capital lease.
- Headcount was 1,074 at quarter-end, versus 1,498 a year earlier; the company said it reduced its workforce by 191 employees in the first half of 2013.
Outlook, commentary, risks, and unusual items
- Management expected revenue and net-loss trends to remain weak in Q4 2013, while also stating that the year-over-year decreases in revenue and net loss were expected to be significantly lower than in Q4 2012. The filing provides no numerical guidance.
- Management said existing cash, investments, operating cash flows, and available borrowing were expected to fund operational cash needs for at least 12 months. It cautioned that prolonged deterioration could pressure liquidity and require additional borrowing, asset sales, equity or debt financing, spending reductions, or operational restructuring.
- Management attributed lost traffic in part to search-engine algorithm changes and cited increased competition, including from suppliers selling directly to consumers. Its stated strategies included consolidating websites for unique catalog content, improving mobile and purchase experiences, lowering prices, expanding product selection, and pursuing third-party marketplaces; success was not assured.
- The credit facility has borrowing-base and covenant risks. If excess availability falls below $6 million, a minimum fixed-charge coverage ratio applies, which the company said it would not meet. The revolving loan was classified as current under accounting rules because of subjective acceleration clauses and recurring losses, although the company reported covenant compliance and no cash-dominion period at quarter-end.
- Unusual items included second-quarter non-cash impairments of $4.8 million for internally developed software and $1.2 million for intangible assets; workforce restructuring; and preferred-stock dividends. The preferred stock carries a $6.0 million liquidation preference, quarterly dividends, voting rights, and potential conversion into common shares.
- Risks disclosed include dependence on search engines and suppliers, competition and margin pressure, borrowing-base availability, seasonality, foreign-exchange exposure, and possible Nasdaq listing issues. The company disclosed it was not then compliant with Nasdaq’s majority-independent-director rule and noted periods when its share price was at or below the $1 minimum bid threshold.
- The company said asbestos-related claims were insured and not expected to cause material out-of-pocket costs; it also said ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarter change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the registrant and issuer identity: the supplied 10-Q names U.S. Auto Parts Network, Inc., not Carparts.Com, Inc.
- Track traffic, orders, revenue capture, and whether website consolidation and marketplace efforts stabilize sales.
- Assess gross-margin trends and whether supplier competition, pricing actions, and freight costs continue to erode margins.
- Review operating cash generation, borrowing-base availability, covenant thresholds, and the capacity to fund operations if performance worsens.
- Evaluate the preferred stock’s dividends, liquidation preference, and potential dilution alongside ongoing equity needs and Nasdaq compliance.
- Monitor further impairment or restructuring charges and the results of management’s cost-reduction initiatives.