CarParts.com, Inc. (PRTS) Q2 2013 Earnings Call Transcript

Shane Evangelist - Chief Executive Officer and Director David G. Robson - Chief Financial Officer and Principal Accounting Officer

Jared Schramm - Roth Capital Partners, LLC, Research Division

Welcome to U.S. Auto Parts Second 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 accessed the second quarter 2013 earnings release, which went out today at approximately 4:00 p.m. Eastern Time. If you have not received your release, it is available on the Investor Relations portion of the U.S. Auto Parts website at www.usautoparts.net by clicking on the U.S. Auto Parts Investor Relations tab. This call is being webcast, and a replay will be available on the company's website through August 20, 2013. Before we begin, I 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 U.S. 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 any forward-looking statements. U.S. Auto Parts assumes no obligation to revise any forward-looking projections that may be made in today's release or call. Please note that on today's call, in addition to discussing the GAAP financial results, the outlook for the company, the following non-GAAP financial measures will be discussed: EBITDA and adjusted EBITDA; an explanation of U.S. Auto Parts' use of these non-GAAP financial measures in this call and the reconciliation between GAAP and non-GAAP measures required by SEC Regulation G is included in U.S. Auto Parts' press release today, which again can be found on the Investor Relations section of the company's website. The non-GAAP information is not a substitute for any performance measure derived in accordance with GAAP, and the use of such non-GAAP measures have limitations, which are detailed in the company's press release. With that, I would now like to turn the call over to Mr. Shane Evangelist. Please go ahead.

Thank you, Lilly, and thank you, all, for joining the call. For the first time in a while, we're able to report some positive news as it relates to our strategy to simplify our website and continue with 2 strong sustainable brands going forward. Auto Parts Warehouse has seen some positive increases in visitor growth over the last few weeks. And while we still haven't returned to our levels of last year, traffic continues to improve weekly and in an impressive manner. We believe that this is a direct result of our website consolidation strategy, and reaffirms that our recent deliberate actions are creating a long-term sustainable brand in Auto Parts Warehouse. Our flagship website, JC Whitney -- our other flagship website, JC Whitney, continues to experience visitor growth, and was up year-over-year in unique visitors for the second quarter. Overall revenue, year-over-year comp has improved every quarter this year. And in the most recent week, JC Whitney is producing positive year-over-year revenue comps on lower year-over-year marketing spend. This is exciting for the business and we believe, again, reaffirms our strategy to consolidate and simplify our business model. In addition to the positive signs we're seeing in our flagship website, both our online marketplace business and our offline businesses posted positive year-over-year revenue comps in the quarter. I believe the improved trends we are seeing in visitor growth confirms that we are on the right track going forward. And in addition to those recent improvements, I believe we will thrive going forward, and here's why: first, we have the largest unique visitor footprint in the marketplace; second, we will have 2 of the strongest Auto Parts' e-commerce brands in the market; and third, we continue to have the largest private label offering of any online seller, uniquely positioning us to provide great quality products at low cost without the margin. I believe the combination of our reach with our direct sourcing capabilities will provide clear competitive advantages going forward. Looking at our recent results, our revenues for the second quarter were down 16% year-over-year. The negative comp has been primarily driven by year-over-year decreases in traffic of 18%. For the current quarter, revenues are trending down 18%, and I recognize that the negative trend increase over the second quarter doesn't exactly line up with the recent positive trends I discussed at the top of the call. Probably a more accurate view of where we're -- where the business is trending, we look at trends over the last 3 weeks. For the last 3 weeks, we are comping now close to 13%. We believe the improvement in the trend can be tied back to our website consolidation strategy and our deliberate actions to create long-term sustainable brands. The negative 13% year-over-year trend of the last 3 weeks of the quarter can still be tied to the traffic loss, primarily broken in 2 categories. The first is the loss of traffic from the consolidation of websites, which is painful in the short term, but a trade that we are more than willing to make to strengthen our flagship websites so they can sustain long-term benefit. The second, reduced marketing spend, which have been impacted as margins and overall revenues have declined. Gross margins for the quarter came in at 28%. However, we have seen an improvement in gross margins in July and anticipate gross margin above 28% coming in for the quarter and close to 30% long term, as we increase our private label sales. The increase in private label sales could be recognized in the near term as we have products on-order and anticipate improvement once it lands in the coming months. Adjusted EBITDA for the quarter was $1.1 million. CapEx incurred during the quarter was $1.8 million. Clearly, we need to be producing more adjusted EBITDA than incurred CapEx, and we believe the recent trends on -- with managing operating cost will allow us to return to adjusted EBITDA, less incurred CapEx and be positive in 2014. Moving to AutoMD. We believe AutoMD positions us for the Do-It-For-Me market. We have launched AutoMD Insta-Quotes in a number markets and have received positive responses from the 250 shops that we have signed up on AutoMD. At a high level, the product is the equivalent of Priceline or Travelocity for the auto repair and maintenance industry. These services provide much needed pricing transparency to help consumers make an informed decision about where their car can be repaired. In closing, we believe our strategy to offer dramatically simplified and improve consumer value proposition by organizing around 2 flagship websites is working. We are starting to see the benefits of this strategy. While we still have a way to go, we have made great strides in returning U.S. Auto Parts to a leading position. And with that, I'll turn the call over to David. David G. Robson: Thanks, Shane. Good afternoon to everybody on the call. Unless otherwise stated, this quarter refers to consolidated Q2 2013, and last year refers to Q2 2012, in comparisons of Q2 2013 compared with Q2 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 $1.1 million compared to adjusted EBITDA of $3.7 million last year. Adjusted EBITDA excludes noncash share-based compensation expense of $341,000 this quarter and $374,000 last year. Adjusted EBITDA this quarter also excludes a noncash impairment charge of $6.1 million, of which $4.8 million was for the impairment of property and equipment; and $1.3 million was for the impairment of intangible assets. Adjusted EBITDA this quarter also excludes $225,000 in restructuring costs associated with employee severance. This quarter's net sales were $67.9 million compared to $80.7 million last year, a decrease of 15.9%. Total online sales decreased by 17.3% this quarter, principally driven by an 18% decline in e-commerce traffic, offset by good performance from our online marketplaces. Our offline sales continued to grow, increasing by 1%. Turning to margins, this quarter's gross margin rate was 28%, down 220 basis points from last year, of 30.2%. The gross margin rate declined, primarily due to higher freight expense and lower purchase discounts, as well as some increased competition. Our margins were favorably impacted during the quarter by a higher penetration of sales from our higher-margin private label business. However, this was offset during the quarter by a higher mix of branded drop-ship sales, which runs at a lower margin rate than branded stock-ship sales. Online advertising expense, which includes catalog cost, was 7.4% of net online sales this quarter compared with 7% last year. This quarter's marketing expense, excluding online advertising expense, was 9.7% of net sales compared to last year of 9.6%, increasing over last year, primarily due to higher depreciation and amortization expense. Excluding depreciation and amortization expense, total marketing expense, however, declined to 13.7% of net sales this quarter compared to 13.8% of net sales from last year. General and administrative expense dollars of $4.7 million this quarter was flat with last year and de-leveraged the lower sales of 6.9% of net sales this quarter versus 5.8% last year. For this quarter, credit card fees, which are included in general and administrative expenses, were lower by $427,000 over last year and this was principally offset by a onetime settlement of $551,000, which we received last year. Settlement expense was 7.4% of net sales this quarter, up from 7% last year. The increase was primarily due to the decreased leverage on lower sales volume. Technology expense was 1.9% of net sales this quarter, down from 2.1% last year, primarily due to lower wages and telephone expense. Visitors to our site for the quarter were 35.1 million, down 18.4%. Orders placed through our e-commerce channel this year were 523,000, down 17.6% from last year of 635,000. And our order -- average order value this quarter was $114, down 1.7% from last year of $116. Our conversion rate was 1.49% this quarter, up from last year of 1.48%. This quarter's customer acquisition cost was $7.52, up from last year of $7.07. The increase was driven by the 17.6% decline in orders compared with a 13% decline in the associated online advertising expense. Now turning to the balance sheet. Cash and securities were $1 million and debt on our revolving line of credit was $3.3 million this quarter. This compares to cash and securities of $1.3 million in debt on our revolving line of credit of $12.1 million at the end of last quarter. We paid down our debt during the quarter of $9.8 million in proceeds from the sale and leaseback of our wholesale distribution center and from the issuance of 2,050,000 shares of common stock at a purchase price per share of $1.09, an aggregate proceeds of approximately $2.2 million. In addition to the proceeds from the building sale and common stock issuance, the reduction in debt, net of cash can also be attributed to: a $3.4 million reduction in inventory; a $1.9 million reduction in accounts receivable, offset by a reduction in accounts payable and accrued expenses of $4.8 million and capital expenditures of $2.2 million. Now given our lower debt levels, this month, we amended our bank agreement to reduce the credit line facility from $40 million to $20 million, which will reduce future unused line fees. Should we need a larger facility in the future, the existing agreement has an accordion feature which allows the total commitment to increase up to $40 million. Our availability under our line at the end of the quarter was $11.4 million, and net availability, not subject to any covenant test, was $5.4 million. And with that, I'd like to turn the call over to questions.

[Operator Instructions] Our first question comes from the line of Jared Schramm with Roth Capital Partners. Jared Schramm - Roth Capital Partners, LLC, Research Division: So looking, firstly, at gross margins. You mentioned that 220 basis point drop due to higher freight cars -- higher freight costs and some discounting that was unexpected in the period. Do you think these are more onetime in nature or they're going to have to bear through these for the next couple of quarters?

So I will give you a trend -- what we talked about on the call there is we're seeing it come back already. And the largest discount issue happened in the quarter from a purchase discount perspective, so that will get smaller on a go-forward basis as well. And I think as we get more of the private label product landed and in stock, that we've got on order, we'll get that number back closer to 30%, certainly, above the 28% and hopefully, heading towards 30%. Jared Schramm - Roth Capital Partners, LLC, Research Division: On a go-forward basis, are you looking to maybe replace some of the branded product with private label, as you look out into 2014 and '15?

I mean, that's always been our goal. If you look at what's happened over the last 3 to 4 years, I wouldn't say we've replaced it, we've just increased our overall sales with the private label business. Certainly, this year, we've seen a decrease in some of our branded businesses as our revenue has dropped. But we think about, certainly, continuing to grow the private label business, grow into categories that we aren't in. And so that will be our plan going forward as well. Jared Schramm - Roth Capital Partners, LLC, Research Division: Traction with consumers with regards to private label has always been pretty strong. Do you think it has maintained that same status level over the past 1.5 years or so?

Yes. It certainly has outperformed our branded business relative to traffic loss. So we like that. We think it's a great option for consumers. It's certainly a low-cost option for consumers but high-quality. It's good for us because it's got good margins in it. So it will, certainly, be a big focus for us as it has been in the past. Jared Schramm - Roth Capital Partners, LLC, Research Division: Okay. And then, overall, on a percentage of completion basis, where do you believe you stand today in regards to getting the business down to the 2-site strategy that's been spoken about for the past several quarters?

We are probably -- I mean, if you look at quantity of sites, we're 99% of the way done from a consolidation perspective. And as you can see in the quarter, we've seen a really good -- this recent quarter, not the second quarter, but recently, we've seen a very big pickup in Auto Parts Warehouse, and that's been fantastic for us. So right now we've got only a couple of other sites that we would probably look to continue to consolidate, but that's probably more a function of operations and operational improvement versus a function of consolidating because of any impact that those sites would have on Auto Parts Warehouse or JC Whitney. And so those are mixed sites, one is a truck site, one is really focused around body parts. Jared Schramm - Roth Capital Partners, LLC, Research Division: Okay. And then, looking at AOV here, you were able to hold AOV relatively stable on a year-over-year basis. Could you just provide a little color on the background there, what we're seeing?

Yes. I think that's a similar mix shift to what we had last year, is what you're seeing there from an AOV perspective. It came up a little bit. We did do some pricing in the quarter and so some of that's going to be in pricing. But that number is probably just a function of the mix being very similar. Jared Schramm - Roth Capital Partners, LLC, Research Division: Okay. I think the last time we spoke, you mentioned that, looking for committed CapEx on an annualized basis of about $8 million to $8.5 million. Is that a good run rate still to use looking forward?

No, it will be below that. I think it's probably going to be closer to $6 million to $7 million. And we'll evaluate that, as well, to see if we still need to spend that on a go-forward basis. And Jared, that's probably a good 2014 number, that $6 million to $7 million number. David G. Robson: Jared, you'll see it coming down a couple of hundred thousand every quarter as we get it in the out-quarters from where it was this quarter. Jared Schramm - Roth Capital Partners, LLC, Research Division: But that was for both -- we're looking at the full year for '14 for that figure, that $6.5 million? David G. Robson: That's right.

[Operator Instructions] Ladies and gentlemen, this concludes the U.S. Auto Parts Second Quarter 2013 Earnings Conference Call. Thank you for -- pardon me, we do have one more question, and our next question is from Tim Macquarie [ph] from Macquarie Asset Management.

Shane or David, can you please explain the impairment charge of $6 million? David G. Robson: Sure. Quarterly, we run an impairment test based on the accounting rules. And based on the performance when we come into the quarter, sales margin and EBITDA, we run out a model that -- under the rules that required impairment. So the fair value compared to the carrying value on the books, that difference, we write down. We don't expect that kind of charge going forward, given our long-lived assets are not pretty large.

Okay. And then, management and board seems committed to this strategy of being an Internet pure-play. And looking at the sales and the margins and the unique visitors and the stock price, frankly, it doesn't seem to be working, and I'm wondering if the management and the board has considered the sale of the company?

Tim, we wouldn't comment on that one way or the other, obviously, but I will tell you this. I think we're managing through the times we've got at this point, which is decreased traffic and some margin compression. And we're taking the actions we believe necessary to both rectify the issues associated with traffic and then, reduce the cost structure to deal with the compressed margins that we've got.

Okay. And I'm just wondering right now it doesn't seem like U.S. Auto Parts is really -- it seems like your focus is on the consumer entirely. And I'm wondering if there has been any discussion about targeting the $52 billion commercial auto repair sector with a direct sales force?

Look, Tim, we do have an offline business in a wholesale market where we service local body shops, as well as, we wholesale to folks who, then, also service local body shops. And in that industry, you've got to be able to get product to a consumer or to a shop within anywhere -- as low as 1 hour up to within that day of ordering. And so if you're going to get into the business of servicing the B2B market, you're going to have to significantly expand your warehouse presence so that you can actually get to those shops in a quick manner. And we are a B2C-focused business. Where we can take advantage of a B2B business, we will. But we've certainly been focused around the B2C customer, and I think that will be our focus kind of looking forward.

Okay. And so that's a definitive no, that you're not considering going off and starting to look at that other niche as a possible expansion into that?

Yes. Where we have distribution locations that we can meet the service levels required for delivering B2B business, we'll do that and we that today. If it requires us to open up another distribution location, that's where we've decided not to move forward with.

Okay. And just to be clear, those distribution channels would be California and Illinois?

That's correct. David G. Robson: And Virginia.

And Virginia.

[Operator Instructions] Ladies and gentlemen, this concludes the U.S. Auto Parts Second Quarter 2013 Earnings Call. Thank you for your participation. You may now disconnect.