Carparts.com, Inc. (filing registrant: U.S. Auto Parts Network, Inc.) — Form 10-Q
Period: Thirteen and twenty-six weeks ended June 29, 2019; comparative periods ended June 30, 2018. The request metadata says “2018 Q2,” but the supplied filing is for 2019 Q2. Unless noted, dollar amounts below are in thousands. Prior-year financial results are identified in the filing as restated.
Business context and reporting period
The company sells aftermarket collision, engine, performance parts and accessories primarily through its websites and online marketplaces. It reported the quarter ended June 29, 2019, and filed the report on August 9, 2019. Its CEO, Lev Peker, was appointed in January 2019.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $73,687 | $76,973 | $148,425 | $155,358 |
| Gross profit / margin | $21,763 / 29.5% | $20,522 / 26.7% | $41,892 / 28.2% | $43,741 / 28.2% |
| Operating income (loss) | $(1,205) | $(476) | $(4,651) | $893 |
| Net income (loss) | $(1,457) | $(797) | $(5,038) | $(229) |
| Adjusted EBITDA (non-GAAP) | $1,425 | $2,800 | $1,328 | $7,075 |
- Q2 diluted loss per share was $0.04, versus $0.02 in Q2 2018; first-half loss per share was $0.14, versus $0.01.
- First-half operating cash flow was $2,950, down from $7,841. Investing cash outflow was $3,431, including property and equipment additions; financing cash outflow was $668. Cash decreased by $1,148 to $883.
- At June 29, 2019, current assets were $62,390 and current liabilities $58,506, for working capital of $3,884. Inventory was $52,552 and accounts payable was $40,344.
- Revolver borrowings were zero under a facility with up to $30,000 commitment, subject to borrowing-base terms. Reported excess availability was $6,740; the facility matures April 26, 2020. Total debt was reported as $8,690, primarily finance lease obligations. Lease liabilities’ present value totaled $14,320, including operating leases.
- Management said available cash, operating cash flows and borrowing capacity should fund operations for at least twelve months, while noting that results or funding needs could differ from plan.
Material changes versus the prior comparable period
- Q2 sales fell 4.3%; first-half sales fell 4.5%. Management attributed the online decline partly to a deliberate shift toward higher-margin private-label products and lower branded-product marketing, and the offline decline mainly to lower wholesale sales.
- Q2 gross margin improved 2.8 percentage points to 29.5%, reflecting product mix. First-half gross margin remained 28.2%.
- Q2 operating expenses rose to 31.2% of sales from 27.3%. Marketing expense increased 15.3% to $11,321, fulfillment expense increased 7.9% to $5,819, and technology expense increased 15.9% to $1,157.
- Q2 total online orders rose 3.4%, although e-commerce orders declined 4.5% and marketplace orders increased 11.8%. Average order value declined 9.1% to $80. Website visitors fell 12.9% to 14.2 million, while conversion increased to 2.98% from 2.70%.
- Cash from operations declined substantially year over year; the company cited higher inventory and other operating asset needs, alongside increased accounts payable and accrued expenses.
Outlook, commentary, risks and unusual items
- Management plans investment in marketing, user experience, technology, website and catalog improvements, with some expected benefits toward year-end. It stated an objective of returning to positive e-commerce growth; no numeric revenue or earnings guidance was provided.
- The company incurred $365 of customs-related port, carrier and legal costs in the first half. On July 24, 2019, after quarter-end, it reached a confidential settlement with U.S. Customs and Border Protection: certain inventory was to be released, certain goods forfeited, and mutual releases agreed. The company said outstanding CBP enforcement issues were resolved and it had no outstanding damage or duty claims from CBP.
- Key risks include recurring losses and limited cash, reliance on search engines and paid marketing, rising freight and competitive pressures, supplier concentration and dependence on China and Taiwan sourcing, tariffs, product/IP disputes, and the credit facility’s borrowing-base, covenant and maturity terms. First-half 2019 purchases from the top ten suppliers were approximately 49% of product purchases.
- The company adopted lease accounting in 2019, recognizing lease assets and liabilities and recording a $1,623 cumulative adjustment to opening retained earnings. Management reported disclosure controls effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Confirm the intended issuer and period: the supplied filing is U.S. Auto Parts Network, Inc.’s 2019 Q2 10-Q, not a 2018 Q2 filing, despite the request metadata.
- Review the reconciliation and assumptions behind Adjusted EBITDA, including employee transition and customs-related adjustments; it is a non-GAAP measure.
- Track cash burn, working capital, inventory and payable trends, borrowing-base availability, covenant headroom, and the April 2020 revolver maturity.
- Assess whether the private-label mix shift and planned investments restore e-commerce growth without eroding margins or liquidity.
- Review the customs settlement’s inventory and operating effects, and monitor any renewed import, trademark or other legal issues.