Business context and reporting period
U.S. Auto Parts Network, Inc. (the registrant; now known as CarParts.com, Inc.) filed this unaudited Form 10-Q for the thirteen weeks ended March 30, 2013. The company distributes aftermarket auto parts and accessories, primarily through e-commerce websites and online marketplaces. Unless otherwise stated, financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $65.4 million | $87.4 million | Down 25.2% |
| Gross profit / gross margin | $19.7 million / 30.2% | $26.6 million / 30.5% | Margin down 0.3 percentage points |
| Operating loss | $3.1 million | $0.5 million | Loss increased |
| Net loss / loss per share | $3.3 million / $0.11 | $0.8 million / $0.03 | Loss increased |
| Adjusted EBITDA | $1.5 million | $4.2 million | Down 64.0% |
| Operating cash flow | $1.3 million | $(0.2) million | Improved |
| Capital expenditures | $2.6 million | $2.4 million | Increased |
Cash and cash equivalents were $1.3 million at quarter-end, with $0.1 million in short-term investments. Working capital was approximately $41,000, compared with a $4.0 million deficit at December 29, 2012. Total assets were $81.3 million and total liabilities were $51.5 million. Revolving borrowings were $12.1 million; total debt, including capital leases, was approximately $12.2 million. The company reported $12.1 million of excess availability under its $40 million asset-based revolving facility and was in compliance with its covenants at March 30.
Operating cash flow benefited substantially from a $5.1 million reduction in inventory, partly offset by a $6.2 million cash outflow from lower accounts payable and accrued expenses. Cash increased by $0.3 million during the quarter.
Material changes versus the prior comparable period
- Online sales fell 28.2% to $58.6 million; offline sales rose 17.6% to approximately $6.8 million, partially offsetting the online decline.
- Orders declined 25.0% to 529,000, and average order value declined 6.0% to $109. Revenue capture fell to 82.2% from 83.7%.
- Gross margin slipped despite lower sales. Operating expenses declined in dollars but increased as a share of sales, contributing to the wider operating loss.
- Marketing expense fell 16.8% to $11.2 million, while marketing expense as a share of sales rose to 17.1% from 15.4%. Advertising costs were $4.3 million, versus $6.1 million.
- The company recorded approximately $0.5 million of severance costs after reducing its workforce by 176 employees in January 2013.
Outlook, financing, risks and unusual items
- Outlook: Management expected revenue declines and net losses to continue in 2013; it provided no specific full-year revenue or earnings guidance. Its stated initiatives included consolidating websites to improve search visibility, upgrading the online shopping experience, expanding mobile-enabled sites and product selection, lowering prices, and developing marketplace sales.
- Liquidity and financing: Management believed cash, operating cash flow, available debt financing and subsequent financing transactions would cover operating cash needs for at least twelve months. It cautioned that prolonged declines could impair liquidity and require additional borrowing, asset sales, equity or debt financing, or spending and operating reductions.
- Subsequent transactions: After quarter-end, the company completed a common-stock sale for approximately $2.2 million gross proceeds (net proceeds used to reduce revolving debt), sold the remaining Series A preferred shares for $0.2 million, and sold its LaSalle, Illinois property for $9.75 million. The property was leased back for 20 years, with initial annual rent of about $0.85 million; the company expected capital-lease accounting. Net property-sale proceeds of approximately $9.6 million were applied to revolving borrowings.
- Preferred stock: In March, the company issued approximately $5.8 million of Series A convertible preferred stock. The preferred shares carry an annual dividend of $0.058 per share and are initially convertible at $1.45 per common share, creating potential dilution and a cash-dividend obligation subject to the stated terms.
- Principal business risks: Management cited adverse search-engine algorithm changes, heightened competition—including suppliers selling directly to consumers—lower traffic and order values, and reliance on suppliers and third-party fulfillment. Borrowing capacity depends on the asset-based borrowing base; a decline in availability could trigger covenant requirements or repayment pressure.
- Other items: The company reported prior-year impairment charges but no new long-lived-asset impairment in Q1 2013. It said asbestos-related litigation was insured and not expected to result in material out-of-pocket costs. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Reconcile the filing’s inconsistent unique-visitor figures: its operating-metrics table reports 36.8 million versus 47.9 million, while the narrative gives different figures and describes a 23.2% decline. The filing text does not provide a clear, internally consistent value.
- Track whether website consolidation and other initiatives stabilize traffic, orders, average order value, and online sales.
- Assess the company’s cash runway and borrowing-base headroom after the common-stock offering, preferred issuance, and property sale-and-leaseback, including the recurring lease obligation.
- Evaluate preferred-stock dividend and conversion terms, potential common-share dilution, and the effect of subsequent share issuance on existing holders.
- Monitor the trend in operating cash flow, inventory and payables, gross margin, restructuring actions, and any further impairment charges.
- Review the credit agreement’s availability and covenant triggers, especially if operating performance or eligible collateral weakens.