Carparts.Com Inc (PRTS) 2009 Q4 法說會逐字稿

Welcome to U.S. Auto Parts' fourth-quarter 2009 conference call. On the call today from the Company are Shane Evangelist, Chief Executive Officer, and Ted Sanders, Chief Financial Officer.

By now, everyone should have access to the fourth-quarter 2009 earnings release which went out yesterday after market. If you have not received your release, it is available on the Investor Relations portion of the U.S. Auto Parts website at 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 March 11, 2010.

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 U.S. Auto Parts' Annual Report 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 statement. 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 and 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 has limitations which are detailed in the Company's press release.

With that, I would now like to turn the call over to Ted Sanders.

Thanks, Shannon, and good morning, everyone. On today's call, I will provide a summary overview of the fourth-quarter 2009 financial results and operating metrics. I will then turn the call over to Shane, who will provide his thoughts on the quarter and the progress we are making on positioning U.S. Auto Parts for long-term growth. We will then open up the call to take your questions.

Unless otherwise stated, "this quarter" refers to Q4 2009 and "last year" refers to Q4 2008. Comparisons are Q4 2009 compared with Q4 2008. Also, percentage and basis points discussed are calculated using total net sales, with the exception of advertising, which is calculated using net Internet sales.

Adjusted EBITDA for this quarter was $3.4 million. This compares to adjusted EBITDA of $600,000 last year, a 467% increase. Adjusted EBITDA includes non-cash, share-based compensation of $600,000 this quarter and $800,000 last year.

This quarter's net sales increased 35.5% from last year. Online sales increased 36.0%, and off-line sales increased 31.2%. This quarter's gross margins was 36%, flat with last year. Freight savings from better negotiated contracts at our East Coast distribution center were offset by strategic pricing actions.

This quarter's general and administrative expense decreased by 360 basis points to 10.8%, primarily from fixed-cost leverage on higher sales.

This quarter's marketing expense, excluding advertising, was 7.1%, a decline of 150 basis points from last year, due to fixed cost leverage on higher sales. This quarter's online advertising was 6.7% of Internet sales, down 50 basis points from last year due to improved efficiencies.

Fulfillment expense was 6.7% this quarter, a decrease of 20 basis points from last year, primarily due to fixed cost leverage on higher sales, partially offset by increased facility costs to support the opening and expansion of our East Coast distribution center in 2009.

Technology expense was 2.4% this quarter, a decrease of 90 basis points from last year, also due to fixed cost leverage on higher sales, partially offset by expanded communication bandwidth to accommodate growth.

Amortization of intangibles and impairment loss for this quarter was 18 basis points compared with 18.5% for last year, reflecting primarily the 2008 impairment writeoffs of certain intangible assets.

This year's visitors increased for the quarter by 9.6% from last year to 25.1 million, which we attribute to greater online market penetration. Our conversion rate this quarter was 1.47%, a 27.8% or 32 basis point improvement over last year, and a 2.8% or 4 basis point sequential increase over the third quarter of 2009.

Orders placed through our e-commerce channel this quarter increased 39.4% to 368,000, and average order value declined by 4% to $115 from last year, both of which reflect consumer trends to insource in tough economic times. This quarter's customer acquisition costs increased by $0.07 to $6.48 from last year, as we reinvested margin expansion into growth.

Turning to the balance sheet, quarter-end cash and securities were $41.6 million, an increase of $2.8 million from last year. During the quarter, we generated $1.7 million of operating cash flow and invested $2.2 million in systems and equipment during the quarter. Our cash and securities remain primarily invested in CDs guaranteed by the federal government and federal T-bills. Additionally, we have auction-rate preferred securities of $4.3 million, down from $6.4 million at the end of 2008, due to $2.1 million in redemptions. Although we continue to classify these investments as long-term, they have a cash value.

Our inventory this quarter was $18.6 million, an increase of $7.7 million from last year, reflecting our private-label initiative, bringing more branded products in-house to stock ship, and increasing stocking levels to meet a 36% increase in demand. Accounts Payable and accrued expenses combined increased by $8 million from increased inventory purchases and accrued incentives.

With that, I would like to turn the call over to Shane.

Thank you, Ted. Thanks, everyone, for joining the call. Ted provided good color on the fourth quarter, and I will discuss our overall results for the year as well as what we see ahead in 2010.

2009 was a great year for U.S. Auto Parts. Our employees should feel proud of their accomplishments and successes this year. I want to take a second to recognize them now and thank them for their efforts. Our results this year are a direct reflection of their efforts, and I hope they are as proud of their efforts as I am of them.

I was very encouraged this year as we were able to improve both financial metrics while at the same time positioning our Company for future growth. From a topline financial perspective, we grew annually from $153 million in 2008 to $176 million in 2009, resulting in a 15% year-over-year increase. Breaking that down, over the course of the year, the first half of the year was flat and we gained significant momentum in the second half of the year, which was up 32%. Furthermore, we continued to gain momentum as the fourth quarter led the year with a year-over-year comparison up 36%. So this increase was a year-over-year 20% increase in the back half of the year. It's a direct reflection of the focus on our growth initiatives of improving our customer experience, lowering our prices, and increasing our selection.

In addition, we had a second half of the year increase year-over-year of visitors by 13%, which we believe is a direct result of macro trends in the economy resulting in people keeping their cars longer, more price-conscious customers shopping online for auto parts, and more people doing auto repair themselves. We took advantage of those macro trends by continuing to position ourselves more favorably in organic search as well as getting more aggressive in paid channels.

Now, going forward, we anticipate these macro trends to continue. The over 250 million cars on the road now average over ten years old and continue to gain age based on industry trends.

As it relates to more people shopping online, we anticipate seeing growth from customers who traditionally have shopped at off-line retailers but who are migrating online as high-speed Internet penetration reaches their homes. These traditional off-line retail customers currently have Internet penetration at their homes around 60%, versus U.S. Auto Parts' traditional online customers around 90%. We look forward to Internet penetration of these traditional off-line retail customers growing.

We also anticipate more people will continue to work themselves based on our latest AutoMD survey that said 33% of people plan to do more work themselves this year versus last year.

Now, going back to our financial results, EBITDA grew annually from $5 million in 2008 to $13 million in 2009, resulting in a 150% increase year-over-year. Now, we accomplished this while at the same time continuing to invest in the future of our business. This investment was significant as we deployed $9 million back into the business and still ended the year with an additional $2.8 million in cash and cash equivalents.

I believe 2009 will be known as a year that U.S. Auto Parts defined its strategic direction and made significant progress in that future direction. In addition to selling the largest online selection of low-cost auto parts, we are also quickly becoming the advocate for consumers seeking to service their vehicles. Our mission will continue to be the service and repair advocate for all vehicle owners, increase their confidence in the repair process, and provide the most affordable option for those service needs.

Our growth and profit initiatives will continue in 2010, and I believe we will make as much progress towards them in 2010 as we were able to complete in 2009. The initiatives include improving the customer experience, lowering prices, increasing selection, growing visitors, and becoming the advocate for low-cost auto repair.

The most significant effort made in 2009 was the progress against addressing the end-to-end customer experience. In order to improve the customer experience, we needed to reduce areas that created negative customer experiences. This included improving our first call resolution by 46%, reducing returns by 17%, reducing credit card declines by 45%, and reducing out of stocks by 9%.

We also took major steps to make the end-to-end customer experience more timely and satisfying. We opened a DC on the East Coast, resulting in reduced customer delivery times from 5 days to 2.5 days. We consolidated 70% of our drop shipments to go through three vendors, all of which have improved their delivery times. We also significantly reduced shipments from our 20 poorest performing drop shippers. We completed a major redesign of auto parts warehouse and we completed the initial integration of AutoMD into car parts wholesale. In 2010, we will continue our obsessive focus on improving the end-to-end customer experience.

Our second growth initiative is to lower prices while improving our already strong gross margins. We've been able to lower prices this year while maintaining gross margins by continuing to make our supply chain more efficient. Our average order value during the year decreased by 4%. Margins remained at 36% and transactions increased by 18%.

We were able to accomplish this by building a private-label engine business where we have gone from starting the year with no private-label engine SKUs to currently having 2000 SKUs on the site available for sale. These SKUs allow us to pass price savings along to the customer while also increasing gross margins on these transactions. Our goal is to end 2010 with at least 7500 private-label engine SKUs on our site for sale.

We also increased our in-stock position of branded product through the year. Again, this allows us to lower prices to consumers and also increase margins on these transactions. We will continue to increase our in-stock position through 2010.

Tremendous progress was made this year to get the Company back on track to be the market leader with new products to market and increased selection. This was done by building a very knowledgeable product team, coupled with a catalog department that has a mature set of business processes that allow for significant catalog product updates. Because of the progress here, we were able to add over 150,000 new SKUs and intend to add another 200,000 SKUs in 2010. We updated and extended applications on over 750,000 SKUs, and we added new categories, including complete engines as well as tires and wheels.

To reiterate the progress we've made, the combination of these three initiatives created a conversion increase from 1.15% in January of 2009 to 1.54% in December. The significant increase in conversion has allowed us to turn more of our attention to visitor growth, since more people are now converting into paying customers.

Turning to visitor growth, while we didn't specifically call out visitor growth as a major initiative in 2009, we certainly didn't take our eye off the ball. Our world-class marketers did a great job of leveraging macro trends and increasing our visitors 10% over 2008.

In addition to growing organically in 2010, we will look to grow visitors through targeted acquisitions. On our last call, we discussed the acquisition of Auto Parts Giant and we have recently completed another acquisition of a company called Drivewire. We are uniquely positioned to do such accretive acquisitions because our e-commerce platform allows us to acquire and integrate without maintaining much of the overhead required to run the websites as stand-alone businesses.

As it relates to Auto Parts Giant and Drivewire, both of these companies are generating around $3 million to $4 million of sales and were purchased between $700,000 and $900,000. We will continue to look for acquisitions that are accretive and can be quickly integrated into our platform.

Finally, while I ambitious, we believe we can become the consumer advocate for repair and maintenance, AutoMD is launched and is trending towards 150,000 monthly unique visitors in the second month of being live. This is a huge step for the company and will truly set us apart from other online automotive retailers. We now have a fully functional consumer advocate site that allows consumers to diagnose problems with easy-to-use diagnostic tools and visual guides, provides fair and objective car repair prices on over 10 million different jobs, locates repair shops from a database of over 400,000 shops, 100,000 of which we have spoken with personally and captured labor rates, specific jobs and vehicles, payment methods, hours of operations, shuttle service offered and other factors that help consumers determine the right repair center for them. AutoMD also allows free access to over 100,000 easy-to-use how-to-repair guides giving step-by-step instructions. While we will not lay out a complete product roadmap with functionality that will be added in 2010, for competitive reasons, we will tell you we plan to continue to focus on AutoMD and making meaningful improvements, allowing customers to reduce their repair costs.

Now, I would encourage everyone that is listening today to go to AutoMD.com and start saving money. You now have an advocate for auto repair.

So we won't be providing financial guidance but in the spirit of transparency, we will tell you that our year-over-year growth has continued on a similar path in the first quarter of 2010 as it did in the fourth quarter of 2009.

Now as it relates to full-year growth, clearly we have easier comps in the first half of the year compared to the second half of the year. With that said, we believe the macro trends will continue through the back half of the year and we anticipate benefiting from those macro trends. Now whether double-digit growth in the second half of the year or not is unknown, but we do anticipate continued growth throughout the year.

As it relates to gross margins, we anticipate gross margin percentage will remain around current levels. We had spoken about are plans to increase gross margin in detail, and that's a result of supply chain efficiencies. Long term, we expect margin expansion.

However, there are a couple of factors that will impact gross margins in the current year. First, as we publicly disclosed, we partner with a customer loyalty provider in the post-checkout process. We have made significant changes to the way we do business with this partner, as have many e-commerce companies. As a result, we anticipate a reduction of about $1.5 million in EBITDA from this partner compared to what we received in 2009.

Second, our freight fuel surcharges year-over-year will increase and will result in a slight increase in overall freight expense. Now, again, we anticipate our improvements in supply chain efficiency to offset the two factors I have just discussed and have margins remain flat throughout the course of the year. We also anticipate margin expansion in 2011 and beyond.

We also anticipate an annual increase in litigation -- I'm sorry, in legal expense -- of about $1 million as we litigate to protect our intellectual property. Most of this incremental expense will hit in the first half of the year.

We anticipate CapEx for the year to be around $10 million. This is made up of our normal $5 million to $6 million in development to support our growth initiatives and another $3 million to $4 million of infrastructure investments as we plan to consolidate our Philippines operations as well as our operations here in Carson. We also anticipate a $3 million to $5 million investment in inventory as we continue to make our supply chain more efficient and pass cost savings on to the customer.

In closing, we were very pleased with the year and like how we are positioning the Company for future growth. When you break down what really gives this Company an opportunity to be great, it starts with three building blocks. First, we have the most efficient customer acquisition model in the industry. Second, we have one of the most efficient supply chains in the industry and we are really just figuring out how to leverage it now. Third, with over 70% of our employees in the Philippines, we have built a low-cost operating model that gives us the manpower to stay ahead of competitors. Again, we are really just figuring out how to truly leverage that. Going forward, we believe becoming the consumer advocate for auto service and repair will become a fourth significant advantage for us in the marketplace.

With that, I will thank all of you for joining the call. At this time, I will open it up for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Richard Fetyko.

I'm curious on the visitor increases year-over-year -- pretty solid. Just what kind of challenge are you seeing that coming through? You mentioned some organic search improvements and some paid search improvements as well. Anything else? How are you generating those improvements?

Yes, so a little bit of both, both on the organic side as well as the paid side increased accordingly.

Frankly, what we are seeing is increased interest in shopping online. Frankly, we've got enough presence to benefit from that.

You haven't necessarily made sort of some changes in terms of the website layouts to make it more friendly for the search engines or anything like that? It's just more of a macro trend?

Well, no, Rich, every day we are optimizing for organic search, so certainly we've made changes to both content as well as where we are linking. But there hasn't been anything out of the ordinary, from an operations perspective, between the third quarter and the fourth quarter.

Any other things that you can do in the future to continue to drive that? Traffic and the visitor number? I mean, what about the AutoMD content? Is there an opportunity to weave that into some of the existing e-commerce sites?

Yes, so AutoMD is just starting to ramp, like the content we are starting to build there. Certainly, we will be pushing that into our e-commerce channel, probably more conversion opportunity than any visitor growth, because I suspect that unique content will be on AutoMD and then syndicated.

But, you know, the bigger opportunity, frankly, is what's happening in the macro economy, and as we see these sort of shifts to online. I think the point that was encouraging for us this year as we looked at where our consumers are coming from and where typical off-line retailers are, the AutoZones, NAPAs of the world that could just look at their customer base, their Internet connection speed outside of their home for like an AutoZone customer is around 60%. For our core customer, it's around 90%.

So I think some of the reason you are seeing some of this migrate online is this sort of infrastructure gets deployed outside of those homes, of course then you're going to see more of those folks shopping online. That's probably good for us, because that's where the rear dollars are spent in the sort of DIY aftermarket space today.

Right, gotcha. Then lastly, on the conversion rates, do you think there's more room for improvements in the conversion rates from last quarter's levels?

Yes, so we are very pleased with those conversion rates. Is their opportunity? Certainly. We are doing a number of things, both from conversion perspective as well as average order value this year. We're -- a lot more cross-selling -- you see a lot more cross-selling and upselling, continually improving the sites. From a conversion perspective, the integration of AutoMD content should help us. So yes, I mean we certainly work on it daily and we certainly hope to see that increase over time.

Then finally on that point and it's a point we can't overlook, as we continue to make our supply chain more efficient and we can lower prices to our consumers, that helps.

Right. Okay, thanks, guys.

Mitch Bartlett, Craig-Hallum.

Good morning.

Just staying on the conversion rate for just a second, you ended December 1.54, so it sequentially improved through the quarter, obviously. Is there anything unusual -- seasonality? Any impacts such that the December number would be up over November over October? Are you -- were you implying that conversion rate has continued into Q1?

Yes. So Mitch, a couple of things -- one is we had a little bit of a decreased [unique] growth in December, so we typically see a little bit of a higher conversion in December. One, you've got some folks that are a little bit probably more qualified coming in from a gifting perspective, so December typically is up a little bit for us.

Certainly, if you go 1.15 in January up to the 1.54, if you seasonalize it, it might be 1.5, right? So it's not a huge number, but it's good.

As it relates to going forward, here's what we said. Our comp number is a similar trend, slightly better than what we had seen in the fourth quarter, so a little bit ahead of the 36% number. We are pleased with that.

That's great. A little ahead of the 36%?

A little ahead.

So AutoMD, very interesting. Did you say you have now integrated down to the part level and car parts wholesale AutoMD? In other words, you are seeing the conversion impact in that website?

Yes, we've seen car parts wholesale increase as well. It is tough to read whether it's AutoMD or not only because we have seen increases across the board, so you've seen price decreases. So, it's been a very difficult time to measure the exact increase on that piece. Once we get AutoMD a little bit more integrated into a site like Auto Parts Warehouse, we will get a better feel for what the truth conversion is.

The second part to that, though, Mitch, is that the true conversion pickup is going to happen after we start to collect the user feedback and the user generated content that's really going to make that content rich. You know, if you drop on a landing page and it's got a water pump and it says 700 people have updated this how-to guide, it's just going to give that user a little bit more confidence. Today, we don't have that level of user feedback at AutoMD. We hope to see that over time. We're encouraged by the responses and the feedback we're getting to start with, so there's no reason for us to believe we won't capture that content over time.

That's great. The 100,000, the traffic number you set to AutoMD, or ramping towards 100,000, a pretty interesting number after two months. Is that, though, click-throughs coming from your website into AutoMD? In other words, kind of derivative traffic, or is that all paid and organic traffic direct to AutoMD?

Yes, actually, it is truly leveraged with the network. It is e-mail communication to our folks. It is some presence on -- for instance if you go to Auto Parts Warehouse, you'll see a little banner advertisement for it. There's been some advertisements across our site.

So what we are really doing is taking advantage of the network that we have and sort of what we call more of a branding campaign for AutoMD than anything else. We just want folks to understand it's out there. It's 150,000 right now. We are trending towards 150,000 in the second month.

40, so six minutes and 40 seconds.

So clearly we like the product and the consumer likes the product, which is why we feel good about talking about it. We think it's 150,000 now. It has no search in it as it relates to organic. Our folks are just starting to really get after that and of course as user generated content comes in, it will get better.

So we are excited about the upside of AutoMD. It's really with no paid advertisement.

You are planning on new products within AutoMD -- did I hear that?

That's correct.

Did you say you want to AutoMD to be the advocate for auto finance and repair finance and repair?

No, I apologize. It is service and repair.

Service and repair. Good enough. I will jump off here, but great quarter.

Thanks, Mitch.

Stephen Ju, RBC Capital Markets.

Good morning, guys. So looking at the freight -- so what you have modeled for the cost of oil? Because presumably the freight surcharges are pegged to that. How much of your freight expenses are from the base rate and how much is from the surcharges? Thanks.

So I think we are close to probably -- direct impact from that. If you wanted to model it, my guess is it is 30 basis points for the freight fuel surcharge. I don't -- don't quote me exactly on this. I believe last year oil was around $45-$50 a barrel, somewhere in that range.

I'm looking at Eric because he tracks it closer than I do, and we are at $75 to $80 now. So just that in and of itself is going to have that surcharge impact. That is probably 30 basis points, hopefully offset by more product coming out of the East Coast, so less zones for shipping over as well as the supply-chain efficiencies. So, we are hoping to mitigate it, but clearly it's not at as a favorable position this year as it was last.

Got you. But as you look forward for the balance of the year, presumably you have some sort of cost of oil modeled among your assumptions. So I'm just wondering if you guys are budgeting in a higher cost per barrel for oil or something along the lines of where it is now.

Yes, I think what I'm telling you is I think gross margin remains relatively flat over the year and there will be mix in there between our cost of goods and freight.

You know, freight, it'll run -- it could run between 12% and 13% depending on the quarter and what we are shipping. Typically, freight in the first quarter is going to be higher because we are shipping a lot more body parts.

You know, actually truth be told, the weather on the East Coast and across the country, frankly, unfortunate for drivers but good for our business because there's some more accidents. So in that scenario, we end up with a higher freight expense. We also end up with higher gross margin, though, Stephen because our product of course is direct-sourced out of the Pacific Rim.

Got you. Do you have contracts out with multiple carriers right now, or do you have it consolidated (inaudible)?

Yes, we have multiple carrier contracts and move volume where it makes the most sense.

Got you. The customer loyalty partner that you talked about on the prepared remarks, the reduction of EBITDA of like $1.5 million -- that's for the full year?

Yes, that's accurate.

That's for the full year? Okay. Was any of that contribution in the fourth quarter?

No, it was consisted in the fourth quarter.

Tony Cristello, RBC Capital Markets.

Yes, it's Tony Cristello with BB&T Capital Markets. A few questions -- one, as you continue to sort of grow the business and you look at sort of the traffic and who is coming on and off of the site, have you noticed any shift or change in the demographics of your customers?

Yes, so what we've seen is some of this private-label engine business starting to attract a little bit more of that consumer that typically would have shopped in a retailer store. The segment specifically over-indexes inside what you would consider AutoZone store. That's the MRI data that we bench off of. Yes, so we are seeing a little bit of an increase there.

Truth be told, though, I think it's hard to exactly co-opt the visitor growth. We can look at the transaction growth and see a little bit of growth in that area. Again, I think I would go back to this penetration rate of a typical zone store versus one of our typical customers. As infrastructure builds, it's got to build whether there isn't infrastructure, so it's got to go to those areas.

Would you say that the mix of sort of nameplate -- do you categorize that? I mean if you look at the foreign versus domestic versus luxury on your site, have you disclosed or do you typically comment on what the breakdown of that, in terms of who is shopping for what, would be?

We haven't broken it down. We haven't seen a significant change in mix, though we do look at it. The makes and models are relatively very consistent still. You just end up putting a lower-cost product inside that mix.

Okay. Is it still skewed more toward the domestic vehicle or is there some -- are domestic and foreign fairly balanced? I'm assuming you don't do much in the way of luxury.

No, we actually, we do a lot of BMW, we do a lot of Mercedes, so we actually do do luxury. It really indexes per vehicle on the road is what you're going to see.

Okay. Then you talked a lot about your ability to (technical difficulty) zone example but the ability to sort of take share from the traditional DIY channel. When you listen to what the Advances or the Zones or the O'Reillys of the world are talking about, and I will just make the case of Advance at this point who is out saying that, one, they are going to get more aggressive with their online efforts, and two, they are going to get more aggressive and try to do more in the way of direct sourcing. How does that impact you and/or your ability to capture or garner that share? Or does it really not matter -- you think there's enough of an audience out there that there is enough for both?

Yes, I think, Tony, the reality is the migration online probably helps us, for sure.

You know, it's a $40 billion -- I don't know what the latest number was -- a $42 billion DIY segment. [Gerry] is giving me that number. It's $1 billion to $2 billion online. We are the largest player. So I think Advance is accurate, that they should clearly be looking online and I believe it will be a growth channel for the aftermarket business in general. We certainly are very cognizant of what those guys are doing and respect what they're doing. I do believe we will be able to compete relatively well.

Okay. When you looked in it through 2010, you discussed a lot of various initiatives. What, in your mind, are sort of the -- will be easier for you to accomplish or implement? Which do you believe, as we look out over the next 12 months, are going to say, "These ones take a bit more work for us to see the results from?"

Well, I think the biggest opportunity the Company has is to continue our direct source strategy similar to what you talked about with Advance. That is not an easy process. That's a difficult thing to do. I'm really proud the team has done what they've done. To go from 0 to 2000 units on the site is impressive, 2000 SKUs. So I'm excited about that. It's a lot of hard work but I think we will see the most progress from that.

You know, the hardest thing to do online is to continue to improve the online experience to get consumers to really buy from you, to convert, which is what we did a lot this year. We will keep working on that.

One of the things that AutoMD brought to the table for us is our ability to now sell jobs online. So with AutoMD, if you went in there and you needed a bumper, the support and the brackets are now going to be cross-sold and upsold online over a period of time. So a lot of the stuff we have done with AutoMD to try to get consumers to understand the full repair picture actually starts to benefit us in cross-selling and upselling.

So we are not sure how well that will take hold, but we like that. I think, from a customer experience perspective, that's just a day in/day out grind, grind, grind, and we will keep pushing ahead on that. New SKU growth to that area, feel good about new SKU growth. We've got them lined up into the pipeline and should see growth from that.

So there is -- I don't think there's anything that we could sit back and say is easy, and I don't think there's anything that we would sit back and say we can do either. It's just a lot of hard work.

Okay, and one last question. When you look at -- you talked about conversion rates. I might've missed it. Do you talk about the repeat business of that customer that actually has converted through and made a sale? I mean how often are they not only coming to the site but actually making a purchase over the course of a year?

Yes, so what we talked about, we started measuring this in January of '07, and we have been looking at sort of what has that build been since then. We talked about it going from 15% up to 20%, up to 23%. Last quarter, it was 24% of transactions from customers that had shopped with us since that period of time.

That's great because, at the same time that number increased, our overall business increased at the same time, so in fact the transaction growth is really making good progress for us. So we like that and we think that probably is more a direct result of the consumer experience that we have repaired over the last two years than anything else.

The typical brick and mortar, if you will, DIY customer will shop three to for times a year or make a visit three to for times on average. Is that what you typically see from your customers now? It sounds like you're getting close to that, if you are at 24%-25%.

No, we are seeing that in the quarter, you would have had -- you are talking 1.2 to 1.3 times a year they are buying from us is probably the right way to think about that.

Gotcha, okay.

There's a lot of crash parts.

Yes, keep in mind that the category that we run in, like hopefully you are not crashing your car multiple times in a year.

Sure.

So there's 35%, 40% of our business that shouldn't happen. The wear parts shouldn't wear through in a year.

Now, the question that's -- are you capturing your fair share across multiple cars? We probably aren't yet. And so I do think there's good upside for us. I think we have seen the same numbers. Our touch rate for consumers touching their car, 60% of them are touching their car every month and 90% of them are touching their car every quarter, so we clearly have a good big opportunity and probably a lot of work to do there.

Great, very helpful. Thanks, guys.

(Operator Instructions). Christian Buss, Thomas Weisel.

I was wondering if you could run through what the mix was, body parts versus engine parts versus performance and accessories for the year.

Chris, we actually don't break it out. You know, we've talked about it around a 40/40/20 number and it is pretty consistent to there, but we haven't actually broken it out any further than that, and probably won't going forward for competitive reasons as we start to see some shifting.

Okay, and can you talk about, on the direct side of it, you know one of the focuses had been on engine parts and rolling out more direct source products there. Can you talk about where you are in that?

Yes, so we are about 2000 SKUs now on the site, operational, very pleased with their results, and hope to end the year around 7500 on the site available for sale.

Okay. Where was that sort of midpoint of 2009?

Well, we didn't really start building until --

It was like 600,000 kind of at the end of Q2. That's 600 parts, I'm sorry.

600.

Yes, so the build, the 200,000 parts really happened in the back half of the year.

Is there any way you can help us out with what percent of that engine parts business is currently running from direct to ship -- sorry, direct source?

Chris, you're just not going to get it.

Richard Fetyko, Merriman and Company.

Housekeeping question -- off-line sales in the fourth quarter, Ted, do you have that?

I think the off-line sales number -- here, let me (inaudible) for you. It was $3.4 million.

Thanks. Then the CapEx of $10 million is an increase versus '09 I believe. I'm just curious what areas you're looking to invest into.

So that's really the facilities. We've got about $4 million planned for two facility moves, one in the Philippines, which is happening right now, and then out here in the Carson office. We operate across three different buildings. We are actually seeing some pretty big efficiencies around labor rates in the warehouse on the East Coast, which is in one facility that is four walls. So the combination of those two is about $4 million.

You know, just to reiterate this, I think, from a CapEx perspective, this business will operate between $5 million to $6 million on run rate basis, whether we are doing $175 million or whether we are doing $300 million. Aaron Coleman, our operator, has set that up properly. We did the same thing at Blockbuster; we had very consistent capital spend regardless of revenues. So we like that. It just happens to be, this year, we have got two pretty big infrastructure projects we've got coming ahead.

Those office consolidations will presumably save some costs on the operating expense side over time, or is it more of a --?

Yes, so for the Philippines, we just ran out of space, so there was no option on that; we had to make a move, although the operating expense will be actually down a little bit in the Philippines on larger space.

The other thing in the Philippines is we've now consolidated the call center and the day-to-day operations of running the business in the same facility. So in fact, the call center can go 2X now and not have to move facilities. So from that perspective, we will save over time as expansion is required.

Here, on the West Coast, we are seeing about a 15% reduction in transaction expense on a pick, pack and ship. So you can't pull that out of the labor number because it is split 50-50. But on the variable side of our fixed expense, we are seeing good pickups.

Got you. Then lastly, on the private-label side, as you ramp up the inventory of private-label products, do you expect the bigger impact to come on the sales turnover, or gross margins?

I'm sorry, Richard. I'm not sure I'm following the question.

The private-label initiative obviously allows you to lower prices, increase sales. I was just wondering where the bigger benefit will be. Will it be in the sales turnover, meaning an increase in sales, or in expansion of gross margins potentially?

Yes, I think it is a little bit of both. I think what we are seeing is that there is a need in the marketplace for a lower-priced product that we are fulfilling. While we're doing it, it's got good margins associated with it. So, I think we will see growth in both areas as a result of that initiative, which is why we've had so much focus on it.

Actually one more question -- on your acquisition strategy, just you've been doing one a quarter or so. Is that sort of the pace you think you will be doing and the same size we have seen so far?

Yes, so I don't know the answer to that. Sometimes these things roll fast and sometimes take a little bit longer. So, do we expect to do some acquisitions this year? Absolutely. Whether it will be one a quarter or whether we will show up with a couple in a quarter, you know, it really comes down to the negotiation process.

Do we see some $2 million to $4 million acquisitions on the horizon yet? There's a couple we've identified. Some are open; some aren't open today. We see some larger ones as well and we will just keep working that process.

Got it, thanks.

(Operator Instructions). Mitch Bartlett, Craig-Hallum.

I just want to kind of bore down on the price (inaudible - background noise) that you are able to push through to customers and obviously get some leverage on the marketing and the G&A side pretty dramatically. But the lowering of prices, apart from what you are doing on the private-label side, you got pretty aggressive like June of last year. Has that been kept up? Has that been increased? Are you broadening into more SKUs? Could you just talk about where prices are on a sequential basis and your strategy there? Because obviously it's lifting the sales growth pretty dramatically.

Yes, pricing -- the pricing methodology has been very consistent since June. We will increase and decrease pricing. Two factors -- one, competitive price in the marketplace; two, cost of goods changes that we are getting coming through. So Mitch, the pricing strategy has been relatively consistent. The number of SKUs may have grown a little bit in the back half of the year as we've got more bandwidth to look at additional SKUs, but on our core SKUs that generate 80% of our revenue, that was put in place sort of June-July timeframe.

Okay. And as that would -- a question earlier was about Advance and them coming online and trying to get more aggressive and direct-sourcing and all of the other parts. But they are still bound by the prices that they have at storefront. Do you think they separate online different prices from their storefront prices? What would your comparable pricing be against like an Advance?

So like an Advance, for instance, online pricing, we are very competitive. Truth be told, we are probably a little bit below them.

You've got your issue with the stores. Probably not their bigger issue -- their bigger issue is that they've got this B2B business where they are doing significant business within the B2B channel, which is probably more restrictive on their pricing and their -- how aggressive they can get on pricing underneath their Advance banner or their Zone banner online.

Here's what we typically find -- $0 to $50, they are going to be pretty competitive only because you've got to add $6 for shipping for us, and this is against their store pricing. You get above $50, in a $50 to $75 range, and we are about the same. Above that, we get pretty, pretty competitive.

They also have a different SKU mix in the store, a lot of batteries in the store. They do a much better job with tools than we do, lots of liquids they sell that we can't sell. So there's clearly product sets inside a big box or a small box retailer that we don't carry online. But from a price perspective, you get above that $75 mark and we are pretty competitive.

Your average order value came down a little bit year-over-year. Is that a mix shift or is that pricing?

A lot of it is pricing.

Okay. Very good, thanks.

(Operator Instructions). Management, I am showing there are no further questions at this time. Please continue.

Well, with that, we appreciate everybody participating on the call. We would encourage you to go out there and test drive AutoMD. We look forward to getting back to you guys next quarter and giving you an update on the progress. Take care.

Ladies and gentlemen, this concludes the U.S. Auto Parts fourth-quarter 2009 earnings call. Thank you for your participation. You may now disconnect.