Filing and reporting period
Entity and period: The filing identifies the registrant as U.S. Auto Parts Network, Inc. (Nasdaq: PRTS), which operates CarParts.com among other sites. This differs from the request metadata naming Carparts.Com, Inc. The 10-Q covers the 13 and 39 weeks ended September 28, 2019—not 2018 Q3—and was filed November 1, 2019. Amounts below are in millions of dollars unless noted. Comparative 2018 figures are marked “as restated”; the supplied filing text does not clearly explain the basis for that restatement.
The company sells aftermarket collision, engine, performance parts and accessories primarily online. It reported 90.9% of Q3 sales online, versus 89.2% a year earlier.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Net sales | $69.273 | $69.463 | $217.698 | $224.821 |
| Gross profit / margin | $21.143 / 30.5% | $18.414 / 26.5% | $63.035 / 29.0% | $62.155 / 27.6% |
| Operating income (loss) | $(1.458) | $(1.210) | $(6.109) | $(0.317) |
| Net income (loss) | $(1.424) | $(0.180) | $(6.461) | $(0.409) |
| Basic and diluted loss per share | $(0.04) | $(0.01) | $(0.18) | $(0.02) |
| Adjusted EBITDA (non-GAAP) | $1.316 | $2.587 | $2.646 | $9.662 |
Profitability: Q3 gross profit rose 14.8% as the product mix shifted toward higher-margin private-label products. That benefit was outweighed below gross profit by higher operating costs: Q3 marketing expense increased 19.8% and fulfillment expense 24.5%. For the 39-week period, operating expenses were $69.144 million versus $62.472 million. Adjusted EBITDA is a company-defined non-GAAP measure and excludes share-based compensation, customs-related costs and employee transition costs; it also excludes the 2018 AutoMD sale proceeds in the comparative reconciliation.
Cash flow and capital spending: In the 39 weeks ended September 28, 2019, operating cash flow was $4.327 million, down from $10.903 million; investing cash outflow was $4.686 million, mainly property and equipment additions; and financing cash outflow was $0.562 million. Cash declined $0.923 million to $1.108 million. Management attributed the cash decline in part to employee transition costs, technology capital spending, marketing and setup costs for a new Las Vegas distribution center.
Balance sheet and funding: Current assets were $57.383 million and current liabilities $54.286 million, leaving working capital of $3.097 million, down from $10.466 million at December 29, 2018. The balance sheet showed $1.108 million cash, $47.699 million inventory and $69.832 million total liabilities. Finance lease obligations were $9.285 million; the new note payable for warehouse development totaled $1.684 million. The company had no revolving loan balance, with reported excess availability of $9.820 million under a borrowing-base facility of up to $30 million. Letters of credit totaled $13.520 million, of which $10.454 million was utilized and included in accounts payable. The facility matures April 26, 2020. Management believes available cash, operating cash flows and financing will cover operating needs for at least 12 months, while warning that weaker results or margins could require additional financing or spending cuts.
Material changes and management commentary
- Q3 sales were nearly flat year over year, while 39-week sales fell 3.2%. Q3 online sales rose 1.7%, offsetting a 16.6% decrease in offline sales; year-to-date online sales declined 1.3% and offline sales fell 17.9%, largely reflecting lower wholesale sales.
- Q3 total online orders increased 4.7%, but average order value fell 8.2%. Website unique visitors declined 15.9% to 13.8 million; management attributed the decrease in part to reduced marketing on branded products as the company prioritized private label. Marketplace orders grew 10.8% in Q3, while e-commerce orders declined 0.5%.
- Management is investing in marketing, product management, customer experience and technology, and restructuring efforts around its principal e-commerce sites. It expects some benefits toward year-end and believes the initiatives can restore positive e-commerce growth; no quantified financial guidance was provided.
- Lease accounting was adopted in 2019, adding right-of-use assets and lease liabilities and a $1.623 million cumulative adjustment to opening retained earnings.
Risks, contingencies and unusual items
- Customs dispute: A July 2019 confidential settlement resolved outstanding CBP enforcement issues. Certain mistakenly seized inventory was to be released, the parties provided mutual releases, and the company forfeited certain goods without admitting liability. The company reported no outstanding CBP damage or duty claims. Customs-related costs were $0.097 million in Q3 and $0.418 million for the 39 weeks.
- Liquidity and credit: Recurring losses, a low cash balance, the April 2020 credit-facility maturity, borrowing-base limitations and financial covenants may constrain liquidity. The filing says subjective acceleration clauses are present and management considers acceleration more than remote in light of recurring losses; there were no revolver borrowings at quarter-end.
- Operating and market exposure: Key risks include search-engine dependence and rising paid-search costs, competition and marketplace channel mix, supplier concentration (top ten suppliers represented about 51% of purchases), dependence on suppliers in Taiwan and China, freight costs, and tariffs of 10–25% on certain imports. A shift toward marketplaces may pressure gross margins.
- Other matters: The company disclosed asbestos-related lawsuits involving a subsidiary but expects insurance to cover claims without material out-of-pocket costs. It also cited seasonality, product-liability and intellectual-property risks, cybersecurity and privacy requirements, and the California Consumer Privacy Act taking effect January 1, 2020. Management reported disclosure controls effective and no material quarterly change in internal control over financial reporting.
Investor facts to verify
- Confirm the registrant and reporting period: the filing is U.S. Auto Parts Network, Inc.’s 2019 Q3 10-Q, not a 2018 Q3 filing.
- Review the basis and implications of the “as restated” 2018 comparative figures; the supplied text does not explain the restatement.
- Track cash conversion, working capital, losses and spending, particularly as the company approaches the credit facility’s April 2020 maturity.
- Monitor whether private-label mix and planned investments improve sales and margins enough to offset lower traffic, falling average order value and higher operating expenses.
- Assess borrowing availability and covenant compliance, including the borrowing base, letters of credit and disclosed acceleration risk.
- Evaluate the impact of supplier concentration, import tariffs, freight costs and marketplace growth on product availability and gross margin.