Filing summary
Issuer and period: The filing is a Form 10-K for U.S. Auto Parts Network, Inc. (NASDAQ: PRTS), not a filing under the name Carparts.com, Inc. The company operated the carparts.com website. The fiscal year ended January 3, 2015, covered 53 weeks; fiscal 2013 ended December 28, 2013, covered 52 weeks. Accordingly, annual comparisons are not equal-length. Amounts below are in U.S. dollars; financial statement amounts are stated in millions unless noted.
Business context and financial results
The company sells aftermarket auto parts primarily online through its own websites and third-party marketplaces, with a smaller offline business. It also operates AutoMD, an online vehicle repair-information service. The filing reports two segments: Base USAP, the core parts business, and AutoMD.
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Net sales | $283.5 million | $254.8 million |
| Gross profit / gross margin | $78.5 million / 27.7% | $74.1 million / 29.1% |
| Operating loss | $5.9 million | $14.8 million |
| Net loss attributable to U.S. Auto Parts | $6.9 million; $0.21 per share | $15.6 million; $0.48 per share |
| Cash from operating activities | $1.2 million | $0.9 million |
| Capital expenditures | $5.6 million | $8.3 million |
- Sales rose 11.3%; online sales increased 12.1% to $257.2 million and offline sales increased 3.9% to $26.3 million. Online and offline sales represented 90.7% and 9.3% of revenue, respectively.
- Gross margin fell 1.4 percentage points, as online pricing competition reduced margins. Cost of sales increased 13.5%, faster than revenue.
- Marketing expense was $42.0 million, or 14.8% of sales, versus $41.0 million, or 16.1%. Fulfillment expense increased 8.9% to $20.4 million; G&A declined 4.9% to $16.7 million.
- Management reported non-GAAP adjusted EBITDA of $7.9 million, versus $6.0 million. This measure is not a substitute for GAAP earnings or cash flow; the filing’s reconciliation includes restructuring and other adjustments.
- Fiscal 2014 included $1.1 million in restructuring costs and $0.9 million of inventory charges associated with closing the Carson warehouse. No impairment charges were recorded in 2014; 2013 included $6.1 million of property and intangible-asset impairment charges.
Liquidity, debt and cash flow
- Cash and cash equivalents were $7.7 million at year-end, up from $0.8 million. The increase primarily reflected $7.0 million raised by AutoMD’s sale of shares to outside investors.
- Working capital was $14.6 million, compared with $9.8 million. Inventory increased to $48.4 million from $37.0 million, using $11.4 million of operating cash; accounts payable and accrued expenses also increased.
- Total debt, primarily the revolving loan and capital leases, was $20.6 million: $11.0 million drawn on the revolver and $9.5 million in capital lease obligations. The asset-based facility had a $25 million commitment, subject to a borrowing base, and matured in April 2017. Excess availability was $8.3 million at year-end.
- The revolver was classified as current under accounting rules because of subjective acceleration provisions, although the filing states that no principal payments were then due and the company was in covenant compliance. The company reported sufficient cash, operating cash flow and borrowing resources for at least the next 12 months, based on its current plan.
- Capital lease obligations had $18.5 million in total minimum future payments, including interest. The filing also disclosed $2.1 million of operating lease commitments.
Material changes, outlook and risks
- Sales growth reversed the prior year’s 16.2% decline. Orders increased 14.1%, including a 41.6% rise in marketplace orders, while unique visitors declined 9.9% to 119.8 million. Average order value fell 3.0% to $95. Management attributed the visitor decline in part to search-engine changes and said website consolidation and improved catalog content helped orders recover.
- Management expected fiscal 2015 revenue to increase and net losses to be lower than in 2014; it also forecast marginal improvement in unique visitors and total orders, while expecting average order value pressure to continue. These are expectations, not guarantees.
- Planned actions included improving websites and mobile shopping, expanding private-label and product selection, pursuing marketplace sales, and reducing costs. A key uncertainty is whether lower pricing and a greater private-label mix can improve both sales and margins amid competition from suppliers selling directly to consumers.
- AutoMD sold 35.9% of its shares for $7.0 million, leaving U.S. Auto Parts with 64.1% ownership and continued consolidation. Under specified performance or liquidity conditions, the company may have to buy back 2 million AutoMD shares for $2.0 million. Other AutoMD agreements impose additional conditions on certain obligations.
- Key risks include ongoing losses and dependence on borrowing-base availability; credit-facility covenants and possible acceleration; search-engine traffic changes; intense pricing competition; supplier and carrier concentration; inventory and fulfillment constraints after the Carson closure; cyber, technology and disaster-recovery risks; and potential product-liability, intellectual-property, tax and regulatory exposure. Management said existing internal controls were effective and ordinary-course legal proceedings were not expected to have a material adverse effect.
- Series A preferred stock carries quarterly dividends and conversion rights, creating potential dilution; common-stock dividends were not anticipated. State net operating loss carryforwards begin expiring in 2015, and the company maintained a substantial valuation allowance against deferred tax assets.
Important facts for investors to verify
- Confirm the correct issuer and reporting period: this is U.S. Auto Parts Network’s fiscal 2014 10-K, not a fiscal 2013 Q4 filing; fiscal 2014 included an extra week.
- Assess whether revenue growth can persist and whether gross margin can stabilize despite lower average order value and competitive pricing.
- Review the composition and quality of adjusted EBITDA, operating cash flow, working-capital needs and rising inventory.
- Check borrowing-base availability, amendments, covenant triggers and the current classification of revolver debt against cash needs.
- Track AutoMD’s operating performance and any triggers for share repurchases or other company funding obligations.
- Evaluate potential preferred-stock conversion and dividend dilution, lease commitments, and the use and expiry of tax loss carryforwards.