Carparts.Com, Inc. quarterly report, Q1 FY2020

Business context and reporting period

U.S. Auto Parts Network, Inc. (which operates Carparts.com and other brands) sells aftermarket auto parts primarily online. This filing covers the 13 weeks ended March 28, 2020, compared with the 13 weeks ended March 30, 2019. The request metadata says “2019 Q1,” but the filing is for 2020 Q1.

Unless otherwise noted, financial amounts below are in thousands of dollars.

Financial results and liquidity

• Cash was $14,148 at March 28, 2020, up from $2,273 at December 28, 2019. Working capital was $4,036, versus $2,427 at year-end.
• Total debt was $9,219, primarily finance-lease obligations. The company paid off its distribution-center notes; notes payable were zero at quarter-end. Revolver borrowings were also zero.
• The asset-based revolver provides up to $30,000, subject to borrowing-base limits; reported excess availability was $4,676. Letters of credit totaled $21,768, of which $18,856 was included in accounts payable.
• Operating cash flow benefited substantially from higher accounts payable, attributed to payment timing and temporary favorable vendor terms. Inventory and receivables uses of cash were $4,860 and $2,362, respectively.
• Adjusted EBITDA, a non-GAAP measure, was $4,303 versus negative $98. It excludes share-based compensation and, in 2019, specified transition and customs costs.

Material changes versus prior period

• Sales grew 17.5%, mainly from online sales, which rose 20.5% to $81,596; offline sales declined 11.1% to $6,222. Online sales were 92.9% of revenue, versus 90.6%.
• Gross margin expanded 700 basis points, attributed to private-label growth and improved inventory mix. Private-label collision products represented 72% of revenue, versus 57% a year earlier.
• Operating expenses rose 27.8% to $30,132 and increased to 34.3% of sales from 31.5%, primarily due to fulfillment costs, the Las Vegas distribution center, and higher marketing spend.
• Share-based compensation expense increased to $2,819 from $554; the cash-flow reconciliation reports $2,663 of share-based compensation expense.
• Interest expense increased, which management attributed primarily to a higher letters-of-credit balance.

Outlook, commentary, risks and unusual items

• Management gave no quantitative revenue or earnings guidance. It stated that cash, operating cash flows, and available financing were expected to fund operations for at least 12 months, while noting uncertainty from COVID-19 and possible need for additional financing if results or conditions deteriorate.
• COVID-19 caused minimal business disruption in Q1, with sales affected in mid-to-late March. Distribution centers remained open as an essential service; management said the pandemic’s ultimate financial and operating effects were uncertain.
• On April 10, 2020, the company received a $4,107 PPP loan, then returned the proceeds. It therefore did not retain the loan as a liquidity source.
• The company entered a 10-year Philippines office lease beginning March 2020, with approximately $500 annual base rent, subject to scheduled increases.
• Key exposures include COVID-19 and supply-chain disruption, reliance on suppliers in China and Taiwan and third-party marketplaces, shipping and marketing costs, competition, and borrowing-base and covenant constraints. eBay and Amazon sales together were 36.4% of total sales.
• Customs enforcement issues were settled in 2019; the company reported no outstanding CBP damage or duty claims. Asbestos litigation remained ongoing, but the company did not expect material out-of-pocket costs. Ordinary-course claims were not expected to materially affect financial position, results, or cash flow.
• The company reported effective disclosure controls and no material quarter-over-quarter change in internal control over financial reporting.

Important facts for investors to verify

1. Confirm the reporting-period mismatch: this is a Q1 2020 filing, not a Q1 2019 filing.
2. Assess whether operating cash flow is sustainable given its reliance on payable timing and temporary vendor payment terms.
3. Monitor borrowing-base availability, letters of credit, covenant triggers, and liquidity under continued COVID-19 or supply-chain stress.
4. Track whether gross-margin gains persist and whether higher fulfillment and marketing expenses are controlled.
5. Review the concentration of revenue in third-party marketplaces and purchases from key suppliers, as well as the effects of freight costs, tariffs, and import disruptions.