CarParts.com, Inc. (U.S. Auto Parts Network, Inc.) — Form 10-Q Summary
Period clarification: The filing is for the thirteen weeks ended March 29, 2014, compared with the thirteen weeks ended March 30, 2013. This differs from the request metadata’s “2013 Q1.” Financial figures below are in U.S. dollars; millions are used unless stated otherwise.
Business context and reporting period
The company distributes aftermarket auto parts and accessories, primarily through e-commerce websites and online marketplaces, with smaller offline sales and an online automotive-repair information business, AutoMD. Base USAP is the core parts business; AutoMD remains small and loss-making. The filing says results for this quarter are not necessarily indicative of the full fiscal year.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $68.0 million | $65.4 million |
| Gross profit / margin | $20.7 million / 30.4% | $19.7 million / 30.2% |
| Operating income (loss) | $0.5 million | $(3.1) million |
| Net income (loss) | $0.2 million | $(3.3) million |
| Basic and diluted EPS | $0.00 | $(0.11) |
| Adjusted EBITDA (non-GAAP) | $3.3 million | $1.5 million |
| Net cash from operating activities | $8.1 million | $1.3 million |
| Capital expenditures | $1.6 million | $2.6 million |
- Operating expenses fell to $20.2 million from $22.9 million, helping move operating results into positive territory. The filing attributes reductions to lower personnel, overhead and depreciation costs; the company ended the quarter with 1,016 employees, versus 1,101 a year earlier.
- Cash and cash equivalents were $1.4 million at March 29, 2014. Working capital was $11.1 million. Total current assets were $45.9 million and current liabilities $34.7 million.
- Total debt was reported as approximately $10.5 million, mainly $9.7 million of capital lease obligations. The revolving loan balance was $0.75 million at quarter-end; the filing also reports it was zero as of May 2, 2014. Excess borrowing availability was $15.5 million at quarter-end.
- Operating cash flow included a $2.8 million cash inflow from accounts payable and accrued expenses, as well as a $0.4 million inventory-related inflow. Cash generation therefore reflected working-capital movements as well as earnings.
Material changes versus the prior comparable period
- Sales increased 4.0%. Online sales were 89.4% of total sales. Growth in continuing online channels and marketplaces more than offset $4.3 million of sales lost from discontinued websites; offline sales also increased.
- Gross margin improved 0.2 percentage points to 30.4%, attributed mainly to a higher mix of private-label products, partly offset by freight costs.
- Unique visitors fell 17.7% to 30.3 million, orders declined 7.8% to 488,000, and average order value fell 1.8% to $107. Conversion improved to 1.61% from 1.44%; revenue capture rose to 84.9% from 82.2%.
- Net income improved from a substantial loss to a small profit. The company had reported full-year losses in 2012 and 2013; 2013 also included asset impairment charges described in the filing.
Outlook, risks and unusual items
- Management expected revenue to improve marginally in each comparable quarter of fiscal 2014 and forecast a full-year result ranging from a net loss to marginal net income, versus the $15.6 million net loss in fiscal 2013. It expected gross margin to be lower for the rest of 2014 as it pursued competitive pricing. Management also anticipated lower capital expenditures.
- Management believed available cash, operating cash flows and financing would cover operating needs for at least twelve months, subject to execution of its operating plan. It warned that weaker-than-expected revenue or prolonged losses could impair liquidity and require additional borrowing, asset sales, financing, spending reductions or restructuring.
- Key business risks include dependence on search-engine traffic and changing search algorithms, aggressive competition including direct sales by suppliers, pricing and freight pressure, supplier and fulfillment dependence, and execution risks in mobile, website and marketplace initiatives. Unique visitors had already declined materially.
- The revolving credit facility is subject to a borrowing base and restrictive covenants. If availability falls below $6 million, a 1.0-to-1.0 fixed-charge coverage covenant applies; the company stated it would not meet that ratio if the threshold were breached. The company was compliant at quarter-end, and the cash-dominion period was not in effect.
- The LaSalle facility sale-leaseback is accounted for as a capital lease, with a 20-year lease term and $9.7 million present value of lease obligations. The filing identifies asbestos-related litigation but says insurance is expected to cover claims and significant material out-of-pocket costs are not expected. Other ordinary-course legal matters were not expected to have a material adverse effect.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Preferred-stock dividends are payable quarterly and were paid in common shares for the quarter.
Important facts for investors to verify
- Confirm the reporting period: the filing covers Q1 2014, not Q1 2013.
- Reconcile the quarter-end revolving loan balance of $750,000 with the filing’s statement that the balance was zero on May 2, 2014, and review borrowing-base availability and covenant headroom.
- Assess whether reported operating cash flow is sustainable, given the contribution from higher accounts payable and accrued expenses.
- Track traffic, orders, conversion, average order value and marketplace growth to evaluate whether sales recovery can continue despite search-engine and competitive pressures.
- Review full-year performance against management’s forecast, including the potential for lower gross margins and the need for further cost or financing actions.
- Consider dilution and priority claims associated with the 4,150 shares of Series A convertible preferred stock, including its dividends and liquidation preference.