Business context and reporting period
U.S. Auto Parts Network, Inc. distributes aftermarket auto parts and accessories, primarily through e-commerce websites and online marketplaces. This filing reports the 13 and 39 weeks ended September 27, 2014, compared with periods ended September 28, 2013. The request metadata says “2013 Q3,” but the filing itself is for 2014 Q3.
Amounts below are in millions of dollars unless otherwise noted. Fiscal 2014 is a 53-week year ending January 3, 2015.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Net sales | $68.0 | $61.7 | $212.9 | $195.0 |
| Gross profit | $18.4 | $17.9 | $59.5 | $56.7 |
| Gross margin | 27.1% | 29.0% | 28.0% | 29.1% |
| Operating loss | $(2.2) | $(1.2) | $(3.7) | $(13.7) |
| Net loss | $(2.5) | $(1.4) | $(4.5) | $(14.3) |
| Diluted loss per share | $(0.08) | $(0.04) | $(0.14) | $(0.44) |
| Adjusted EBITDA (non-GAAP) | $1.2 | $1.8 | $6.7 | $4.4 |
Q3 sales rose 10.1%, but gross margin fell 1.9 percentage points and the net loss widened. Management attributed margin pressure chiefly to online competition, including suppliers selling directly to consumers, and higher freight costs. Year-to-date net loss improved substantially, including because the 2013 comparison included $6.1 million of impairment charges.
Q3 total online orders increased 13.4%; e-commerce orders rose 7.0% and marketplace orders 29.3%. Unique visitors declined 9.0% to 29.4 million, while conversion improved to 1.67% from 1.42%. Average order value fell 3.0% to $97.
- Cash flow, 39 weeks: Operating cash flow was $0.7 million, versus cash use of $1.9 million; investing used $4.5 million; financing provided $4.2 million. Ending cash was $1.3 million, up from $0.8 million at fiscal year-end 2013.
- Balance sheet at September 27: Current assets were $53.1 million and current liabilities $43.7 million, giving working capital of $9.4 million. Inventory was $44.8 million, up from $37.0 million at December 28, 2013.
- Debt and liquidity: Revolver borrowings were $10.9 million; capital lease obligations were $9.6 million; total debt was $20.5 million. Revolver availability was $7.1 million, and the company reported compliance with credit covenants. Borrowings were classified as current because of subjective acceleration provisions and recurring losses, although principal payments were not then due and the cash-dominion period was not in effect.
- Other: The company had $1.8 million in net intangible assets and $18.4 million in stockholders’ equity. Interest expense was $0.8 million year to date. Preferred-stock dividends were $0.18 million year to date.
Material changes and unusual items
- On June 25, 2014, the company committed to close its Carson, California distribution facility, consolidating operations into LaSalle, Illinois and Chesapeake, Virginia. The closure reduced headcount by approximately 77. Year-to-date restructuring costs were $1.0 million; an additional $0.5 million inventory charge was recorded in cost of sales in Q2.
- On October 8, 2014, AutoMD sold 7 million shares to third-party investors for $7 million. U.S. Auto Parts retained approximately 64.1% ownership and continued to consolidate AutoMD. The parent may have to buy 2 million additional shares for $2 million if specified conditions are triggered.
- Also on October 8, the lender increased the revolving commitment from $20 million to $25 million, subject to the borrowing base. Certain potential AutoMD-related obligations require minimum availability and fixed-charge coverage tests.
- The company filed an effective shelf registration in August 2014 permitting up to $100 million of common-stock offerings; the filing does not report an offering under it during the period.
Outlook, commentary, and risks
Management expected fiscal 2014 revenue to improve year over year and the full-year net loss to be substantially below fiscal 2013. It believed available cash, investments, operating cash flow, and debt financing would fund operational needs for at least 12 months. These are expectations, not guarantees; the filing provides no numerical full-year revenue or net-loss guidance.
- Management expected Q4 traffic and total orders to improve marginally year over year, while average order value could continue to decline amid competition. It expected gross margin, excluding the Carson closure impact, to remain near Q3 levels.
- The Carson closure was expected to reduce Q4 offline sales by $1.5 million to $2.5 million; management also estimated expenses could decline by $1.5 million to $2.5 million. Further inventory markdowns or other consolidation charges remained possible.
- Key risks include reliance on search-engine traffic and changes to search algorithms; intense price competition, including direct supplier sales; margin and freight pressure; inventory and fulfillment capacity; supplier and carrier dependence; and the asset-based borrowing base and credit covenants. A decline in eligible collateral or availability could restrict borrowing or require repayment.
- Management warned that renewed revenue declines or continued losses could pressure liquidity and require additional borrowing, asset sales, equity or debt financing, spending cuts, restructuring, or significant curtailment of operations. Asbestos-related litigation was disclosed; the company did not expect material out-of-pocket costs. Other ordinary-course legal matters were not expected to materially affect financial position, results, or cash flow.
Most important facts for investors to verify
- Confirm the intended reporting year: the supplied metadata says 2013 Q3, while this filing covers Q3 2014.
- Track whether revenue growth persists and whether traffic, conversion, average order value, and gross margin trends improve or deteriorate.
- Check operating cash flow, inventory levels, revolver availability, borrowing-base eligibility, covenant compliance, and the basis for current classification of revolving debt.
- Monitor Carson closure costs, capacity at remaining warehouses, expected offline-sales losses, and any additional inventory markdowns.
- Review AutoMD’s post-sale ownership, performance against share-purchase triggers, potential litigation-cost reimbursements, and related credit-facility tests.
- Distinguish GAAP losses from Adjusted EBITDA, a non-GAAP measure, and assess the assumptions behind management’s 12-month liquidity outlook.