CarParts.com, Inc. (PRTS) Q1 2013 Earnings Call Transcript

Shane Evangelist – CEO David Robson – CFO

Jared Schramm – Roth Capital Partners

Welcome to U.S. Auto Parts First Quarter 2013 conference call. On the call today from the company are Shane Evangelist, Chief Executive Officer; and David Robson, Chief Financial Officer. By now, everyone should have access to the first quarter 2013 earnings release, which went out today at approximately 4 P.M. Eastern Time. If you have not received your release, it is available on the Investor Relations portion of the US Auto Parts website at www.usautoparts.net by clicking on the US Auto Parts Investor Relations tab. This call is being webcast, and a replay will be available on the company’s website through May 21, 2013. Before we begin, we would like to remind everyone that the prepared remarks contain certain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and speak only as of the date hereof. We refer all of you to the risk factors contained in the US Auto Parts’ annual reports on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission for a more detailed discussion on the factors that can cause actual results to differ materially from those projected in forward-looking statements. : With that, I would now like to turn the call over to Shane Evangelist. Please go ahead.

Thank you Cathia, and thank you all for joining the call. Since the last time we spoke, very little has changed related to our strategy to simplify our business by reducing the number of websites and repositioning the company’s branding and consumer acquisition strategy. Our strategy is to offer dramatically simplified and improved consumer value proposition by focusing on two flagship websites. Auto Parts Warehouse, which is primarily focused on replacement products in the collision and engine markets, JC Whitney which is primarily focused on the performance and accessory markets. As part of this strategy, we continue to be on track to complete the consolidation of our secondary website, thecarparts.com by the end of the third quarter. Once completed, we believe the negative traffic trends on ATW Universe will see positive visitor growth on flagship website. As it relates to our capital structure, much has changed since our last call. We have laid net new capital of $16.5 million between a combination of two strategic secondary offerings and the sale of a building we acquired when we purchased JC Whitney over two years ago. These loops have reduced our debt position from $16.2 million at the end of the year to around $3 million today. We anticipate this new capital structure to provide us with financial flexibility to complete the company’s repositioning, and we expect once completed to thrive going forward. And I believe we’ll thrive going forward and here is why. First, we will continue to have the largest unique visitor footprint in the marketplace even after website consolidation is completed. Second, we will have the two strongest Auto Parts e-commerce brands in the marketplace. And third, we will continue to have the largest private level offering of any seller uniquely positioning us to provide great quality products at low cost without the margin. The combination of our reach with our direct sourcing capabilities will prove invaluable once our repositioning is completed and that continues to be encouraged by the flexibility of the business managed through this transitional period. Looking at our recent results, our revenues for the fourth quarter were down 25% year-over-year. Negative comp has been primarily driven by a year-over-year decrease in traffic of 23%. That said, our year-over-year comps improved every consecutive month during the quarter and that trend has continued into the second quarter. Currently, we are trending down 15% for the second quarter, and we are encouraged by the negative sales trend improvement. Adjusted EBITDA for the quarter came in at $1.5 million. Committed capital for the quarter was $2.1 million. Clearly, we need to be producing more adjusted EBITDA than committed capital, and we continue to reposition the business both from a sales and operating cost perspective to return adjusted EBITDA plus committed capital to be positive. Moving to AutoMD, we believe we are well positioned to thrive in the do-it-for-me market as well. We have launched AutoMD Insta-Quotes in three markets; Long Island, New York, Bakersfield, California; and Spokane, Washington; and plan to roll out to Phoenix and DC this quarter. At a high level, the product is [equivalent] (ph) to Priceline or Travelocity in the auto repair maintenance industry. This service provides much needed pricing transparency to help consumers make an informed decision about where they get their car serviced. In closing, our strategy to offer dramatically simplified and improved consumer value proposition and organizing around two flagship websites is well under way. This strategy allows us to not only build great online brands with a largest consumer reach in the marketplace but also reduce operating costs to support reduced revenues during our repositioning. Our supply chain remains one of the most efficient supply chains in the online after-market, and finally we have completed strategic capital raises that have significantly reduced our debt and have [allotted us] (ph) liquidity needed during our repositioning. And with that, I will turn the call over to David.

Thanks Shane. Good afternoon to everybody on the call. Unless otherwise stated, this quarter refers to consolidated Q1 2013 and last year refers to Q1 2012, and comparisons of Q1 2013 compared with Q1 2012. Also percentage and basis points discussed are calculated using net sales, however, for advertising, we’ll discuss comparing to net internet sales. Adjusted EBITDA for the quarter was $1.5 million compared to adjusted EBITDA of $4.2 million last year. Adjusted EBITDA excludes non-cash share-based compensation expense of $409,000 this quarter and $584,000 last year. Adjusted EBITDA also excludes restructuring costs of $498,000 this quarter. This quarter’s net sales were $65.4 million compared to $87.4 million last year, a decrease of 25.2%. Total online sales decreased by 28.2% this quarter, principally driven by 23% decline in traffic and a decline in average order value of 6%. Our offline sales continue to grow with net sales hitting $6.8 million this quarter and increasing 17.6% over last year. Turning to margin, this quarter’s gross margin was 30.2%, down 30 basis points from last year of 30.5%. Gross margins declined primarily due to higher freight and warehouse supplies, offset by improved selling margins on higher penetration of sales from our private label business. Online advertising expense, which includes catalog costs was 7.4% of net online sales this quarter, flat with last year. This quarter’s marketing expense excluding online advertising expense was 10.5% of net sales compared to last year of 8.4%. Excluding $254,000 in restructuring costs related to employee severance this quarter, marketing expense excluding online advertising expense was 10.1% of sales, up 170 basis points over last year, primarily due to the decline in leverage on our lower sales volume. General and administrative expense declined $1.2 million to $4.7 million, primarily due to lower merchant fees of $532,000, depreciation and amortization expense of $410,000, and lower stock compensation expense of $139,000, offset by restructuring cost related to employee severance of $94,000. Fulfillment expense was 8.2% of net sales this quarter, up from 6.8% last year. The increase was primarily due to the decreased leverage on lower sales volume. Technology expense was $1.5 million, flat against last year, however, as a percentage of sales increased to 2.3% this quarter versus last year on lower sales volume. Visitors on our site for the quarter were 36.8 million, down 23%. Orders placed through our e-commerce channel this year were 529,000 with an average order value of $109, down from last year’s 705,000, and an average order value of $116. Our conversation rate was 1.47% this quarter, slightly down from last year of 1.44%. I should point out during this quarter; we changed our method to track unique visitors and conversion. Going forward, we will report unique visitor counts and conversion based on the data captured through our third-party enterprise web analytics package. As a result of our website consolidation, which we began last year, we now have 14 across all of our remaining sites through this enterprise web analytics package, which wasn’t’ the case historically. We believe this tracking methodology provides a more accurate reflection of visitor counts and conversion. We previously reported last year’s unique visitors of 43.1 million which have been restated to 47.9 million. Last year’s conversion was previously reported at 1.64% and has been restated to 1.47%. This quarter’s customer acquisition cost was $6.94 down from $7.50 last year. The decrease is primarily due to a reduction in online advertising and catalog marketing spend. Now turning to the balance sheet. During the quarter, we issued 4.1 million shares of Series A convertible preferred stock at a purchase price per share of $1.45 and raised a total of $6 million, $5.8 million of which was received by the end of the quarter. As a result, quarter end cash and cash – cash and securities were $1.4 million and debt was $12.1 million. Debt net of cash declined by $4.4 million during the quarter due to the $5.8 million in cash received from the preferred stock capital raise, a reduction in inventory of $5.1 million. Adjusted EBITDA of $1.5 million offset by CapEx spend of $2.1 million, a decline in accounts and accounts payable of $4.4 million and the balance in other working capital increases of approximately $1.5 million. Our availability at the end of the quarter on our line was $10.1 million and net availability not subject to any (inaudible) was $6.1 million. In April subsequent to the quarter end, we issued an additional 2 million 50,000 shares of common stock at a purchase price per share of $1.09 for aggregate proceeds of approximately $2.1 million. Finally in April, we entered into a sale-leaseback transaction of our wholesale distribution center and received proceeds of $9,750,000 on the sale. The triple net lease term associated with this transaction is for 20 years with an initial annual cash rent of $853,000. After the proceeds received from the equity raise and the sale-leaseback transaction the debt on our bank revolver was reduced to approximately $3 million and our availability under our line increased to $14.1 million and net availability not subject to any covenant test was $1.8 million. And with that, I’d like to turn the call over to questions.

Thank you, sir. Ladies and gentlemen, we’ll now begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of Jared Schramm with Roth Capital Partners. Please go ahead. Jared Schramm – Roth Capital Partners: Good afternoon.

Hi Jared. Jared Schramm – Roth Capital Partners: Starting off, you mentioned that you expect to see positive visitor growth on your flagship sites going forward, is this something you expect to achieve at the end of Q2 or did you ought to begin to see this in April?

No. I think we’ll see that hopefully by the end of the third quarter once the consolidation is completed. Jared Schramm – Roth Capital Partners: Okay. And I’m looking at gross margins here, as you mentioned that the private label growth was attributable to some of the gains and some of the offset and declines in gross margin, are we likely to see what we saw in Q1 here at 30.2% gross margin as a base level, maybe some upside to that as the private label product grows throughout the year?

Yeah, I think that’s probably right. We’re going to be somewhere between 30% to 31% is our guess, it might be a little bit below 30% as we sell through some inventory that we want to turn it into cash, and we’ll certainly separately those pieces out, but yeah, that’s probably the right number anywhere between -- around 30% is probably a good number Jared. Jared Schramm – Roth Capital Partners: Okay. And then what really has been driving some of the strength in the private label business. I know that’s been one of your better performing lines in the past several years, may be just kind of talk about some highlights there?

Yeah I think -- I mean the highlight is that it is the most efficient supply chain going for a consumer, right? We source product directly out of a factory, put it in our warehouse, and ship it directly to the consumer, so there is no middle man in there, there is nobody else touching that product which allows us to sell the product today at a great price to the consumer with healthy margins. Now, part of the reason that private label number with all transparency is up because our branded business has dropped, and on a year-over-year basis, we’ve seen declines in the private label business, but certainly not to the same degree that we’ve seen on traffic. So, it’s certainly outperforming our traffic decreases, which is why we are excited about stabilizing that traffic number and seeing good growth on the private label going forward. Jared Schramm – Roth Capital Partners: Okay. And CapEx in the quarter was listed at $2.6 million, is that a good run rate to use for the back half -- for the rest of 2013?

No. I think, I think on this number, our committed capital, meaning what we committed to spend in this quarter, a lot of that has to do with how the accounting works from previous quarters. So, what we spent in the quarter is around $2.1 million. We’ll report the cash number at 2.6 as we pay for implementations done previously. But on a go forward basis, I think our total committed CapEx will be somewhere between $8 million to $8.5 million. Jared Schramm – Roth Capital Partners: And the cash rent you said for the sale-leaseback was 853,000, is that correct, David, the number you threw out there?

That’s right, 853,000 for the first year. Jared Schramm – Roth Capital Partners: And looking at AutoMD here, as far as city rollout is concerned, do you have a target in mind for 2013, and maybe a two or three-year longer-term target you’d like to disclose?

We’ll – we’ll probably take it a little slower to start with it as we rollout, but we’re certainly excited about going into Phoenix and DC, and we’ll continue to monitor that and make decisions on the speed at which we should rollout going forward. Jared Schramm – Roth Capital Partners: Great. As we look into, maybe 2014, any incentive to give maybe give a (indiscernible) marketing person you have been doing obviously due to some of the constraints here in the past two years?

Yeah so certainly as we get the EBITDA less CapEx number (indiscernible) positive, we’ll certainly look for other ways to market the business. More importantly, I think you’ll have a more unified consumer proposition across APW and JC Whitney, which really allows us to – to also probably spend more time and energy and focus behind those brands. So, I think it’s the combination of more of a focused effort on those brands as well as if we see– if we see happen what we think is going to happen, which is we start to see these flagship sites have positive growth, then it certainly will allow us to spend more going forward. Jared Schramm – Roth Capital Partners: And lastly, you mentioned that top line was tracking down roughly 15% year to – a quarter-to-date, has there been any improvement really since the first day of April to now or has that been pretty consistent?

That has been consistent. Jared Schramm – Roth Capital Partners: Okay, alright. Thank you very much.

Thanks.

(Operator Instructions) And I’m showing no further questions in the queue. Mr. Evangelist, please continue.

Well thank you Kathy and thank you all for joining the call. We look forward to update you on our next earnings call. Take care.

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.