Business context and reporting period
U.S. Auto Parts Network, Inc. (now associated with the Carparts.com brand) sells aftermarket collision, engine, performance parts and accessories through its websites, online marketplaces and wholesale channels. This filing is a Form 10-K for the 52 weeks ended December 29, 2018, with comparison to the 52 weeks ended December 30, 2017. Although the request metadata says “2017 Q4,” the filing covers fiscal 2018; it reports fourth-quarter 2018 net sales of $64.6 million and net loss of $4.5 million.
Unless otherwise indicated, financial figures below are in millions of dollars; the filing presents amounts in thousands.
Financial and operating performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $289.5 | $303.4 |
| Gross profit / margin | $78.7 / 27.2% | $89.7 / 29.6% |
| Operating income (loss) | $(5.0) | $4.6 |
| Net income (loss) | $(4.9) | $24.0 |
| Adjusted EBITDA | $10.4 | $14.2 |
| Cash from operations | $6.2 | $11.6 |
| Cash used in investing | $(5.7) | $(4.9) |
| Cash and cash equivalents at year-end | $2.0 | $2.9 |
| Working capital | $10.5 | $13.6 |
Sales fell 4.6%; online sales declined 5.9% to $258.0 million, while offline sales rose 8.3% to $31.5 million. Online channels represented 89.1% of sales. Total online orders declined 8.2%, while average order value rose 4.9%. Unique visitors fell 28.5% to 69.3 million; reported conversion rose to 2.54% from 1.95%.
Gross margin contracted 2.4 percentage points, primarily from marketplace channel mix, customs-related costs and higher freight, partly offset by greater private-label mix. General and administrative expense rose 13.3% to $20.0 million, including increased overhead and customs-related legal costs. The FY2017 net income included a $21.5 million income tax benefit, largely from a valuation allowance release; FY2018 recorded a $0.3 million tax benefit.
Capital leases totaled $9.2 million, including $0.6 million current. The $30 million asset-based revolving facility had no borrowings outstanding at year-end; availability depends on a borrowing base and covenants. Letters of credit totaled $14.7 million, of which $11.4 million was utilized and included in accounts payable. Management stated that available cash, operating cash flows and financing resources were expected to cover operations for at least 12 months.
Material changes, outlook and risks
- Management plans: Following Lev Peker’s appointment as CEO in January 2019, the company said it planned to invest in marketing, user experience and technology; focus on its principal e-commerce sites; improve catalog and product discovery; and pursue private-label products and supply-chain changes intended to address margin and freight pressure. Management expected some benefits toward year-end, but provided no quantified financial guidance.
- Customs and import disruption: CBP actions involving imported repair grilles caused product-flow delays and $5.0 million of port, carrier and legal costs in FY2018. A court enjoined enhanced bonding requirements, and the company said the case was no longer pending and non-implicated goods had been released. Certain grilles were no longer imported; the company said alternatives or a settlement remained uncertain. Some imported auto parts were also subject to a 10% tariff.
- Control weakness and revisions: Management identified a material weakness in review of significant and unusual transactions. Abnormal customs-related freight costs had been improperly capitalized into inventory rather than expensed when incurred; certain tax calculations were also incorrect. The company revised reported results for the first three 2018 quarters to recognize customs costs and said it was enhancing controls. Management concluded disclosure controls were effective, but internal control over financial reporting was not effective. The auditor gave an unqualified opinion on the financial statements and did not audit internal control effectiveness.
- Principal business risks: Search-engine algorithm changes and marketplace dependence may reduce traffic or margins; marketplace sales were 36.0% of total sales in 2018. Other cited risks include supplier concentration, freight costs, dependence on Asian sourcing, tariffs, competition, product-liability and intellectual-property claims, sales-tax collection obligations after the Wayfair decision, cyber and fulfillment disruptions, seasonality, and possible continuing losses.
- Capital structure: The company paid $0.2 million in Series A preferred dividends in FY2018; preferred shares carry senior rights and potential dilution. No common dividends were paid, and none were expected in the foreseeable future.
Important facts for investors to verify
- Whether the company’s investments and restructuring improve e-commerce traffic, order growth and gross margin, and whether the expected benefits materialize.
- The final economic and supply-chain impact of CBP actions, grille restrictions, tariffs and customs-related costs.
- Progress in remediating the material weakness, including whether subsequent filings identify further errors or control deficiencies.
- Actual borrowing-base availability, covenant headroom and liquidity against the low $2.0 million year-end cash balance and $9.2 million capital-lease obligation.
- The sustainability and realizability of the $21.8 million deferred tax asset, alongside the company’s loss carryforwards and recent operating losses.