U.S. Auto Parts Network, Inc. (now associated with the CarParts.com name) — Form 10-K summary
Period clarification: The supplied filing is the annual report for the 52 weeks ended December 28, 2013, filed March 11, 2014. It is not a 2012 Q4 filing. The registrant named in the filing is U.S. Auto Parts Network, Inc.
Business context and reporting period
The company sells aftermarket auto parts and accessories primarily online through its own websites and third-party marketplaces; it also has wholesale and other offline sales. Its catalog covered approximately 1.5 million branded SKUs and more than 43,000 private-label SKUs. Online sales were 90% of fiscal 2013 revenue. AutoMD provides repair information and tools.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $254.8 million | $304.0 million |
| Gross profit | $74.1 million | $91.6 million |
| Gross margin | 29.1% | 30.1% |
| Operating loss | $14.8 million | $35.8 million |
| Net loss | $15.6 million | $36.0 million |
| Net loss per share | $0.48 | $1.17 |
| Adjusted EBITDA, non-GAAP | $6.0 million | $9.4 million |
| Cash provided by (used in) operations | $0.9 million | ($0.4 million) |
FY 2013 cash used in investing was $8.3 million and cash provided by financing was $7.2 million; cash declined $0.2 million to $0.8 million. Working capital was $9.8 million, versus negative $4.0 million a year earlier. The company reported $6.8 million drawn on its revolving facility and $9.8 million in capital lease liabilities. The facility commitment had been reduced from $40 million to $20 million, subject to a borrowing base; reported excess availability was $8.7 million at year-end. The company said current resources and available financing were expected to support operations for at least 12 months.
Material changes versus the prior comparable period
- Revenue fell 16.2% year over year. Online sales declined 17.8%, while offline sales increased 2.0%.
- Unique visitors decreased 21%, orders decreased 20%, and average order value decreased 2% to $111.90. Management cited search-engine changes, particularly Google, and heightened competition, including suppliers selling directly to consumers.
- Gross margin declined by 1.0 percentage point, primarily reflecting weaker online margins.
- The net loss narrowed substantially, but FY 2012 included $18.9 million of goodwill impairment and $5.6 million of intangible-asset impairment. FY 2013 included $4.8 million of property-and-equipment impairment and $1.2 million of intangible impairment; its smaller loss should be considered alongside these charges and expense reductions.
- Headcount fell about 25% to 1,032, following workforce reductions. The company also sold its LaSalle facility and leased it back, using net proceeds of about $9.5 million to reduce revolving borrowings.
Outlook, risks, contingencies, and unusual items
Management expected revenue trends to be roughly flat in the first half of 2014, with improvement thereafter, and expected a lower net loss than in the first two quarters of 2013. It anticipated only marginal improvement in visitors and orders and expected average order value pressure to continue. These are directional expectations, not quantified formal guidance.
Planned actions included consolidating websites and improving unique catalog content and search rankings, developing mobile-enabled shopping, improving conversion and recommendations, pursuing third-party marketplaces, lowering prices through more foreign-sourced products, increasing private-label mix, expanding product selection, investing in AutoMD, and continuing cost controls. Management cautioned that these initiatives might not succeed and that continued deterioration could require additional financing, asset sales, further spending cuts, or significant restructuring.
- Liquidity and borrowing: The revolving facility is borrowing-base dependent and includes restrictive covenants. A drop in availability below $6 million triggers a fixed-charge coverage test; the filing states the company would not comply with that test if triggered. Recurring losses and subjective acceleration clauses also led to current classification of the revolving balance.
- Digital traffic and competition: Reliance on algorithmic search rankings, mobile shopping experience, pricing competition, and suppliers’ direct sales create material risks to traffic, orders, revenue, and margins.
- Suppliers and fulfillment: The top ten suppliers represented 43% of product purchases; three drop-ship vendors represented 18%. Supplier availability, shipping costs, and third-party fulfillment performance could affect sales and margins.
- Capital structure: The company issued $6.0 million of Series A convertible preferred stock and approximately $2.2 million of common stock in 2013. Preferred stock carries quarterly dividends and potential conversion dilution; common-stock dividends were not expected.
- Impairments and tax assets: Further asset impairments remain possible. A $43.5 million valuation allowance was recorded against deferred tax assets; state net operating loss carryforwards begin expiring in 2016.
- Other exposures: The filing discusses product-liability and intellectual-property claims, consumer-protection and sales-tax regulation, cybersecurity and business-continuity risks, seasonality, and Philippine peso exposure. A 10% peso exchange-rate change was estimated to affect Philippine operating expenses by about $1.1 million.
The filing reports that the independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of December 28, 2013. The filing describes asbestos-related lawsuits and ordinary-course legal matters; management did not expect their final disposition to materially affect financial position, results, or cash flows. A prior catalytic-converter regulatory inquiry was settled in 2011 for a non-material penalty.
Most important facts for investors to verify
- Whether revenue, traffic, order volume, and gross margin stabilized or improved after fiscal 2013, and whether the stated 2014 outlook was achieved.
- Actual borrowing-base availability, covenant compliance, cash generation, and the company’s ability to fund operations without additional financing.
- Whether search, mobile, marketplace, and website-consolidation initiatives improved customer acquisition and conversion at sustainable costs.
- The ongoing economics and dilution implications of Series A preferred dividends, conversion rights, and the 2013 equity issuances.
- Whether impairment assumptions, deferred-tax-asset valuation allowances, and legal or regulatory contingencies changed materially in subsequent filings.