Business context and reporting period
This summary covers U.S. Auto Parts Network, Inc. and its subsidiaries, an online-focused aftermarket auto-parts distributor. The filing is a Form 10-Q for the 13 weeks ended June 29, 2013, with year-to-date comparisons for the 26 weeks ended June 29, 2013. The filing identifies the registrant as U.S. Auto Parts Network, Inc.; this differs from the request metadata name, Carparts.Com, Inc.
Financial performance and liquidity
Amounts below are in millions of dollars unless otherwise noted; per-share data is in dollars.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $67.9 | $80.7 | $133.3 | $168.2 |
| Gross profit / margin | $19.0 / 28.0% | $24.3 / 30.2% | $38.8 / 29.1% | $51.0 / 30.3% |
| Operating loss | $(9.3) | $(1.0) | $(12.5) | $(1.5) |
| Net loss | $(9.6) | $(1.7) | $(12.9) | $(2.5) |
| Basic and diluted loss per share | $(0.29) | $(0.06) | $(0.40) | $(0.08) |
| Adjusted EBITDA (non-GAAP) | $1.1 | $3.7 | $2.6 | $7.9 |
- Q2 sales fell 15.9%; first-half sales fell 20.7%. Gross margin contracted 2.2 percentage points in Q2 and 1.2 points in the first half.
- Q2 operating expenses included $6.1 million of non-cash impairment charges: $4.8 million for internally developed software and $1.2 million for intangible assets. The charges followed declining revenue and gross margin and lower expected cash flows.
- First-half operating cash flow was positive $0.9 million, versus a $1.7 million use in the prior-year period. Investing used $4.9 million, principally for $4.8 million of property and equipment additions; financing provided $3.8 million. Cash declined by $0.2 million to $0.9 million.
- At June 29, 2013, working capital was $10.6 million, compared with negative $4.0 million at December 29, 2012. Current assets were $45.0 million and current liabilities $34.4 million.
- Total debt, including capital leases, was $12.9 million: $3.3 million revolving borrowings and $9.6 million capital leases. Revolver availability was reported as $11.4 million; the company said it was covenant-compliant at quarter-end. The revolver was classified as current under accounting rules because of subjective acceleration provisions and recurring losses.
Material changes versus the prior comparable period
- Online sales weakness drove the decline: Q2 unique visitors fell 18.4% to 35.1 million, orders fell 17.6% to 523,000, average order value fell 1.7% to $114, and revenue capture decreased to 83.2% from 84.4%.
- Management attributed traffic loss partly to search-engine algorithm changes, particularly Google’s, and cited increased competition, including suppliers selling directly to consumers. Q2 online sales declined 17.3%; offline sales were flat.
- Lower revenue and competitive pricing pressure contributed to weaker gross margin. Cost of sales was 72.0% of sales in Q2, versus 69.8% a year earlier.
- The company sold its LaSalle, Illinois facility for $9.75 million and used net proceeds of about $9.5 million to repay revolver borrowings, while entering into a 20-year capital leaseback with initial annual rent of about $0.85 million.
- The company raised about $6.0 million through Series A convertible preferred stock and about $2.2 million through common stock; net proceeds were used to reduce revolving debt. Preferred stock carries a $1.45-per-share liquidation preference and a stated annual dividend of $0.058 per share, and is initially convertible one-for-one into common stock.
Outlook, commentary, risks and unusual items
- Management expected the downward trends in revenue and net loss to continue through the second half of 2013. It believed available cash, operating cash flows and debt financing would fund operations for at least 12 months, but warned that further deterioration could strain liquidity and require additional borrowing, asset sales or financing, expenditure reductions, restructuring or significant curtailment of operations.
- Strategic priorities included consolidating websites to improve search rankings, enhancing site content and mobile capabilities, improving the purchase experience, lowering prices through increased foreign sourcing, expanding product selection, and developing third-party marketplace sales. Management cautioned these initiatives might not succeed.
- After quarter-end, on August 2, 2013, the company amended its credit agreement, reducing the revolving commitment to up to $20 million, subject to conditions allowing increases up to and above $40 million.
- Workforce reductions totaled 191 employees in the first half of 2013; severance charges were $0.7 million. Management did not expect material additional restructuring charges after Q2.
- Key risks include continued traffic and sales declines, supplier and price competition, borrowing-base and covenant restrictions, limited liquidity, potential Nasdaq listing noncompliance (including the minimum bid-price requirement and board-independence requirement), and possible further asset impairments. The company also disclosed asbestos-related lawsuits involving a subsidiary, but said insurance was expected to cover the matter without material out-of-pocket cost.
- Disclosure controls and procedures were reported effective at quarter-end; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Confirm the entity and period: the supplied metadata says Carparts.Com, Inc., while this filing names U.S. Auto Parts Network, Inc. and reports the quarter ended June 29, 2013.
- Track subsequent sales, visitor, order, average-order-value and gross-margin trends, and whether website consolidation and marketplace initiatives improve results.
- Verify liquidity and borrowing capacity under the August 2, 2013 amended credit agreement, including borrowing-base availability and covenant triggers.
- Assess the cash and dilution implications of preferred dividends and potential conversion, alongside the company’s recurring losses and financing needs.
- Review impairment assumptions and remaining carrying values of software and intangible assets, plus capital spending and lease obligations.