Carparts.Com Inc (PRTS) 2010 Q2 法說會逐字稿

Welcome to U. S. Auto Parts Second Quarter 2010 Conference Call. On the call today from the Company is Shane Evangelist, Chief Executive Officer, and Ted Sanders, Chief Financial Officer. By now, everyone should have access to the second quarter 2010 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 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 16, 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 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 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.

And with that, I would now like to turn the call over to Shane Evangelist.

Thank you, Shannon, and good afternoon, everyone. On today's call, I will provide a summary overview of our strategic initiatives and our thoughts on the quarter, as well as our recently announced Whitney Automotive Group acquisition. I will then turn the call over to Ted who will review the second quarter 2010 financial results and operating metrics in greater detail and will then open up the call for questions.

In the second quarter of 2009, we made significant changes to some of our go to market strategies. In addition to our maniacal focus on improving the customer delivery experience, we began to improve the front end user experience through better navigation and product display. We became more competitively priced on certain strategic projects. We improved our supply chain by bringing in more branded products, as well as starting to build a private engine business and we started to add new branded SKUs in a significant manner. The result of these actions started to produce double-digit growth on a year over year basis in the second half of 2009. That growth continued to accelerate in the third quarter, fourth quarter, and first quarter of this year. And in the most recent quarter we continued to see year over year growth of around 26% on a pro forma basis.

The strong growth from the fourth--from the previous four quarters set up the third quarter of 2010 to be the first quarter where we were going to comp against a strong previous year comparison. Last year, July comped up 24% over the previous year. This year, July is continuing to see 20%-plus comps and quarter to date we are up 22% over last year. In total, we're up 53% over 2008 revenue levels. We are pleased with the results. We believe the strong comps over a previously strong comparison validate our go to market strategy changes and only increase our conviction to strengthen our skill sets in these areas and become better at what we do daily. And I would be remiss if I didn't acknowledge the great work our employees have done to not only deliver on these strategies but also continue to improve their skills. I'm certainly proud to be leading this very talented and skilled team.

In addition to better internal execution, external factors certainly continue to improve tailwinds in the auto parts market. At the highest level, there was about 25 trillion total miles driven on the road. That is made up of about 250 million cars on the road that average about 10 years of age and have around 100,000 miles on them. The total number of miles will fluctuate up and down based on the numbers of--number of cars on the road and the number of cars that leave. Without going into too much detail, we estimate that as long as new car sales remain below 13 million a year and gas prices stay below $4 a gallon, the overall miles driven on the road will increase above 25 trillion and the auto parts aftermarket overall market will continue to grow. New car sales for both 2010 and '11 are estimated to be below 13 million, so we don't anticipate a drop in the market.

Continuing on external factors, consumers continue to do more work themselves. In a survey we conducted quarterly, 41% of the people said they would do more work themselves this year on their car versus last year. And lastly, external factors, people's willingness to buy auto parts online continues to grow. This shows both an increase in visitor shopping especially--I mean, specifically, our traffic was up 3.3% as well as in conversion which was up 17%, demonstrating that not only are more people coming online to shop, but also committed to purchase. Specific to conversion, we believe our go to market strategy changes have created a recipe for success.

On a year over year basis, our average ship days have increased by about two days. We have over 25,000 products that are now competitively priced versus last year. We have an incremental 4,000 new private label engine SKUs versus last year and we have added over 300,000 more branded SKUs to our offering versus last year. Next year, we will continue to decrease ship days with the addition of a new DC in the center of the country as a result of our recent acquisition. We will add another 25,000 of SKUs to our competitive price point. We will add another 5,000 private label SKUs and over--and add over 200,000 new SKUs and we'll do that year after year after year. We'll just continue to repeat this recipe going forward.

Moving from parts sales to Auto MD, we continue to see great progress. We are now around 300,000 monthly unique visitors. We have added a question and answer section and in just the first four months we have had over 20,000 questions asked. Clearly, consumers are hungry for repair and maintenance information, as well as transparency defining both shops as well as understanding repair costs. We will continue to invest in Auto MD as we see there's a great media and lead generation platform, and we hope to see conversion improvements on our e-Commerce sites as well. And as always, I would encourage everyone listening to the call today to go to Auto MD and start saving money.

But today, we announce some very exciting news for you with Auto Parts. We have signed a definitive stock purchase agreement to acquire Whitney Automotive Group, which is expected to generate revenues between $110 to $120 million in 2010. This acquisition has both strategic and financial benefits (inaudible) with Auto Parts, but before we get into those benefits in detail I'll firs discuss a little background on Whitney Automotive Group, or as we refer to it, as WAG. Established in Chicago in 1915, WAG operates under multiple brands and became known as a catalogue marketer that specialized in hard to find, unique, and customer unique--and customer fit after market parts and accessories.

The company targets the DIY market looking to repair and customize their automobiles, light trucks, ATVs, RVs, and motorcycles, carrying over 1 million SKUs and marketing through JCWhitney.com, StylinTrucks.com, CarParts.com, AllBikeSuperStoreShop.com, eBay, and eight different physical mail order catalogues that are focused on lifestyles. WAG reached approximately 3 million monthly unique visitors and maintains one of the largest customer databases with over 680,000 active customers and 7.6 million total customers on file. WAG owns approximately a 10,000--a $10 million DC that's about 300,000 square feet in the center of the country in LaSalle, Illinois and has been custom built for the B-to-B business of auto parts and has the capacity to handle over $300 million worth of business and currently contains over $15 million of owned inventory.

From a strategic perspective, we'll be adding a 95-year-old brand that is probably one of the most well known aftermarket accessories brand in the marketplace. Going forward, the JC Whitney site will be one of our flagship websites for U.S. Auto Parts and we will be expanding the product offering at JC Whitney to include more comprehensive offering in engine and body parts. This acquisition gives U.S. Auto Parts a key element that has been lacking, which is a very recognizable consumer facing brand in the online auto parts market.

We will also be diversifying our sales mix. Our current revenue mix is not representative of the overall market and certainly not representative of the online market. We significantly over-index in body compared to the overall market and under-index in accessories, particularly when considering the online market. This acquisition will more closely align our sales mix to that of the overall online market as well as help our other sites sell accessories. We will go from a revenue mix of approximately 45% engine, 37% body, 10% accessory, and 8% performance, to 32% engine, 23% body, 37% accessory, and 8% performance. We are excited to start working with many of these accessory suppliers.

We will also achieve product line expansion. WAG offers product line expansion for us into ATV, RV, and motorcycle, as well as deep product knowledge into niche segments like Jeep, VW, and the truck enthusiasts. We are very excited about the very talented workforce WAG has developed over the years and look forward to learning a lot from them as we go forward. The distribution center in the center of the country completes our three distribution center network and provides the ability to now get to 96% of the population within two days of common carriage ground. The distribution center is also state-of-the-art when it comes to distribution of auto parts with a significant amount of automation that we will leverage going forward. Finally, with over $330 million in combined revenues, the combined company becomes the clear market leader and once integrated brings significant scale to U.S. Auto Parts.

Financially, the acquisition has tremendous upside once the business is fully integrated, which we believe will take about 12 months to complete. Taking just the existing base business, we believe applying our business model to these acquired operations will generate about a 9% EBITDA flow through, or around $10 million in EBITDA. We're also very excited about the growth opportunities and we believe that once this integration is complete we will see similar growth in the acquired operations that we are experiencing in our existing business with similar incremental EBITDA margins of between 18 to 22%. We believe this because WAG's current business looks very much like U.S. Auto Parts did in 2008. The catalog data needs to be improved considerably. There is very little--limited competitive pricing done to understand the market pricing. There has been limited SKU additions, and the private label business has not had much focus lately. We believe we can apply our recipe of improving the customer experience, driving down prices through market intelligence, building a stronger private label business and adding additional SKUs. We believe this recipe will drive growth and ultimately produce EBITDA in the mid-teens.

Total cash commitment of the deal will be around $41 million with the purchase price being 27.5 million and a combined--and a combination of integration expenses and negative working capital being around $13.5 million. In addition to future cash flow we think the business will generate, we will be getting $15 million in inventory and a building and a--in combination with automation machinery of over $10 million. The combined company once fully integrated should be over $330 million in revenues with EBITDA over $35 million and we should be able to get there on a run rate basis by the end of 2011.

We will be funding this transaction with cash from our balance sheet along with $35 million of our approved credit facility from Silicon Valley Bank. Ted will provide some near term guidance on the deal in a second, but to reiterate, we are extremely excited about both the strategic and financial aspects of this transaction, which will continue to strengthen U.S. Auto Parts position in the online aftermarket.

In closing, we had another great quarter, and most importantly, we have proven that our growth recipe which we have put together can produce 20%-plus comps over previous quarters' 20%-plus comps. The team continues to strengthen its skills and we anticipate future growth based on both good macroeconomics and good internal execution. We believe the acquisition of Whitney Automotive Group provides the Company with a new flagship consumer brand that increases our distribution footprint and diversifies our product revenue mix. We're very excited about both the growth through experience in our existing business, as well as the new acquisition.

And with that, I'll turn the call over to Ted.

Thanks, Shane. Unless otherwise stated, this quarter refers to Q2 2010 and last year refers to Q2 2009. The comparisons are Q2 2010 compared with Q2 2009. Also percentage and basis points discussed are calculated using net sales, which exclude a $2 million one-time non-cash adjustment from a change in our revenue recognition due to a change in freight contract terms. For advertising however, we will discuss using net internet sales.

Adjusted EBITDA for this quarter was $3.3 million. This compares to adjusted EBITDA of $3.2 million last year. Adjusted EBITDA excludes non-cash share based compensation of $600,000 this quarter and $800,000 last year. Excluding $1.2 million of legal expenses to protect our intellectual property and a $400,000 one-time non-cash charge for a change in revenue recognition related to our new freight contract, adjusted EBITDA was $5 million, up 58% from last year. This quarter's net sales increased 26% from last year. Online sales increased 25.6% and offline sales increased 32--37.2%. The increase in net sales resulted from a 17% increase in conversion, 3% increase in traffic, and 4% increase in revenue capture, partially offset by a 1% decline in AOV.

This quarter's gross margin was 34.3%, down from last year's 36.2%. Higher freight costs associated with fuel surcharges and a discontinuation of high margin loyalty programs on a quarter to quarter basis as discussed on the last call were responsible for the change. This quarter's general and administrative expenses increases 60 basis points from last year to 11.6% due to $1.2 million of legal fees incurred to protect our intellectual property. Absent these fees, G&A would've declined 180 basis points from last year to 9.2% from last year, due to fixed cost leverage on the higher sales. Going forward, we do not expect to incur significant legal fees associated with this lawsuit until the case goes to trial, which we estimate to be in 12 months.

This quarter's marketing expense excluding advertising was 7.2%, an increase of 60 basis points from last year, resulting from higher amortization costs related to software deployment. This quarter's online advertising was 6.3% of internet sales, down 70 basis points from last year, due to improved efficiencies. Fulfillment expense was 5.3% this quarter, a decrease of 110 basis points from last year, primarily due to fixed cost leverage on the higher sales. Technology expense was 2.2% this quarter, a decrease of 80% from last year, also due to fixed cost leverage on higher sales.

Visitors increased for this quarter by 3.3% from last year to 27.8 million, which we attribute to growth in the DIY market. Our conversion rate this quarter was 1.58%, a 23-basis point improvement over last year. Orders placed through our e-Commerce channel this quarter increased 21% to 440,000, and average order value declined by 1% to $120 from last year, both of which reflect consumer trends to [enforce] in tough economic times. This quarter's customer acquisition cost decreased by $0.72 to $5.93 from last year from more efficient advertising spend.

Turning to the balance sheet, quarter end cash and securities were $44.3 million, a decline of $1.2 million from Q1 2010, due to increases in inventory and capital expenditures. We generated $2 million in operating cash flow and invested $3.3 million in systems and equipment. Our cash and securities remain primarily invested in CDs guaranteed by the federal government and other A to AAA-rated short term investments. Additionally, we have auction rate preferred securities of $4.2 million that we continue to classify as long term, but have a cash value.

Our inventory this quarter was $26.5 million, an increase of $8.5 million from Q1 2010, reflecting a $2.3 million increase in private label SKUs, a $2.1 million increase in branded SKUs, and a $4.2 million increase in existing SKUs, reflecting our supply chain initiatives and increasing stocking levels to meet increased demand.

As we have done in the past, we expect to grow inventory heading into the fourth quarter. Accounts payable and accrued expenses combined are $26.8 million, an increase of $4.8 million from Q1 2010. Consistent with past practice, we will not provide earnings guidance. But as Shane mentioned previously, we are currently up 23% year over year, and we do not expect a pronounced seasonal decline in the second half of the year as we typically experience. We expect margins to remain in the 34 to 35% range.

With respect to JC Whitney, we expect sales for Q3 to be $12 to $14 million, assuming an August close, and $25 to $30 million for Q4. Gross margins for Whitney are expected to be in the same range as U.S. Auto Parts of 34 to 35%. Marketing expenses are approximately 15% of sales, reflecting a higher catalogue advertising cost. We expect adjusted EBITDA to be a small loss in Q3 and a small profit in Q4. These estimates do not reflect integration expenses that used to be capitalized, but are now run through the P&L. We also expensed incremental legal and due diligence expenses of $2 to $4 million in this quarter related to the Whitney transaction. We expect integration costs to be $2 to $3 million over the next three quarters and we will break these out separately in future calls.

For 2011, we expect sales of $110 to $125 million and EBITDA of $5 to $7 million for Whitney, depending on our progress in updating their operation. As Shane indicated, we do anticipate being on a $10 million annualized EBITDA run rate by the fourth quarter for the Whitney assets. We expect total CapEx for 2010 to be $12 to $13 million, including Whitney's integration and some accelerated spending on Auto MD. We will not be opening a new distribution center on the West Coast at this time. We will also need $1 to $2 million for inventory for Whitney.

With that, I would like to thank you all again for joining the call. At this time, we would now like to open up the call for questions. Operator?

Thank you, sir. (Operator Instructions.) And our first question comes from the line of Shawn Milne with Janney Capital Markets. Please go ahead.

Thank you. Good afternoon and congratulations on the acquisition or pending acquisition. Just one strategic number question around the Whitney deal. It just looks like, Shane, if you exit the year, given the fact that you're growing at 20% against these tough comps, and then you layer on 110 million to 115, it seems like the fiscal '11 number could be a fair amount higher than 330 million. Maybe you could just talk about that a little bit. And then, just if you could clarify the--I think you said 5 to 7 million in EBITDA. If you could just clarify what you would expect that to be on a full year basis in fiscal '11. And then, just lastly, Ted, on the gross margin front, just maybe a little bit lower than we were looking for in the June quarter. You talked about referral fees and you talked about the freight costs. Can you break out the two components and maybe was there something else? Did you lower prices a little bit more than you expected? Thanks.

Hey, Shawn. Yes, so we don't give guidance on certainly 2011, but I think you can run math as it relates to growth off of this year's number to come up with what I would see the existing business to be doing. We--I'm not sure we anticipate much growth yet inside the new acquired company and we'll--as we get into it and dig more into it, we'll probably have to be able to give you some more guidance on that. I think what I was saying on EBITDA for 2011 was somewhere between 5 to 7 million on a full year basis. I think we'll expect to see sort of that run rate basis of 10 or so plus in the back half of the year once we sort of have full integration done. So on a full year basis, call it five to seven from that acquisition or monies off of that business.

But the reality is some of the regs have changed around what can be capitalized and not be capitalized during the acquisition. Many of the integration expenses previously could be capitalized upfront. We're going to have to take those throughout the course of the year, which is what's going to hurt a little bit of EBITDA on a go forward basis. We'll break those numbers out as we go forward.

On the gross margin number, yes, I think first of all, the referral fees as we mentioned before is about $300,000 in referral fees for the quarter. So I think about--what's that work out to be--about 70 basis points. So also, the freight is I would say about 30 basis points. Also, keep in mind that the overall--in this quarter versus Q1 we typically have more body part business in Q1, which is all private label and flows through at a higher percentage rate. And we're a little bit less mix wise in body and a little bit more in engine, which has a little bit lower margin than body. So those are the things going on with margin this quarter.

Shawn, just to clarify, talk about 70 bps in the post transaction revenue, up 30 bps from a freight perspective, and then there was some mix shift as well. So that's how that number went from 35 to 34.

Okay, great. Best of luck on the deal.

Thank you. Our next question comes from the line of Richard Fetyko with Merriman and Company. Please go ahead.

Hey, good evening, guys. On the second quarter traffic, unique visitors were down sequentially a bit. I'm just curious if that's just seasonality and do you expect to--the traffic to be a key component of growth--organic growth going forward, or will it continue to be conversion rates? And also on the acquisition grab from that, lots of questions there. But I'll ask a couple. Just, if you just sort of go through some of the sale synergies or low hanging fruit of sort of things you can--you're going to do in the next--in the first six months of the integration to extract some of the sort of sales synergy that you mentioned?

Yes. So on a year-over-year basis, we were up 3%. So typical seasonality is going to drop from quarter--first quarter to second quarter. And then, on the conversion front, Richard, I think we're making good progress. And as I've outlined, this is simply better competitive pricing, more SKUs, better customer experience, and those are the things that continue to drive conversion. We anticipate those to continue to drive conversion going forward. From a sort of low hanging fruit perspective on the acquisition, we're really focused around integration to begin with. So certainly there's some [SEO] power we can bring to the table. I think we can help catalogues. I think we can help SKU addition similar to our core business. But I would tell you, we're going to be in the middle of making sure the integration happens properly before we're really too concerned about revenue growth. Not that we won't do the things that you're going to expect us to do just from a revenue perspective, but that's what our focus will be for the first nine to 12 months.

And when you say integration, what does that entail? And could you tell us about their business in terms of the key sales channels? Is it still primarily offline through catalogues?

No. Of the call it 120 million, about 35 is catalogue. So it's 30% of their overall business, so it will be less than 10% of our total business. So that's that mix there. And they typically--they're a DIY sort of direct-to-consumer ship product base. So it's not a B-to-B business by any means. And the catalog businesses would have seen the most dramatic decline in the last few years. It hasn't been the online business, in fact. And we're starting to see or they're starting to see that flat line a little bit. So I suspect the deterioration in sales has probably subsided from that perspective. And--but needless to say, the other point I made is it's a great marketing channel for us. We're excited about that channel. We think we have a big file as well and maybe [allow us to] actually grow that catalogue channel going forward.

And in terms of the integration, what sort of things do you foresee being sort of the biggest obstacles or challenges in terms of integration?

Well, we haven't laid out our integration plan with either company, so I don't want to get ahead of myself. But I think you can plan to see this integration very similar to the last two or three acquisitions we've done where we leverage a lot of our technology and underpinning to the backbone to operate going forward, and at the same time, aptly leverage and take advantage of the skill sets that we've got--that we just picked up at WAG. Great product knowledge in the accessory category, really deep in some of these lines of business. Good call center from an assisted sales perspective into sort of niche products, like [lift] kits. So they've got a lot of great assets that we plan to use and take advantage of. And over the next 30 to 60 days we'll have a full integration plan in place.

Okay, thanks.

Thank you. And our next question comes from the line of Jared Schramm with Roth Capital.

Good afternoon.

Hey, Jared.

Could you provide some more color on what's driving the improvement in conversion rates?

Yes, Jared, it almost seems too simple to think it works, but it just is. If you can make sure you're competitively priced in the marketplace, meaning you have the lowest option out there from the channel of acquisition a customer comes in, you can continue to add SKUs, bring in private label product where you get another price advantage. Those are the things that continue to make consumers excited about buying from us, as well as we've made some good improvements on the website. But at the end of the day, consumers really buy online and a lot of it's price point based. And we've done a very, very good job of ensuring that we're priced right online and adding the SKUs going forward that consumers want.

And how are the private label SKUs performing in relation to your expectations?

We're excited about that business. It's now got over 4,000 SKUs in it and that process is just plugging away as we anticipated. Hopefully by this time next year we'll have another 5,000 SKUs added and we'll just keep doing that. So if you think about a year over year basis, if you got another 25,000 to 50,000 SKUs competitively priced, if you have another 200,000 new SKUs in the system, if you have another 5,000 private label SKUs in the system, and if you're delivering better customer experience, you would anticipate continued growth. And in many cases you'll see it through conversion.

Okay. Now, with the addition of RV and motorcycle parts with the recent acquisition, can we expect a change in margin in AOV going forward once it's fully integrated?

Yes. So Ted talked a little bit about the margin around 35%. AOV is a little higher in this accessory category. Their AOV is closer to 135. And so, I think you'll see a little bit of lift in AOV over time. And frankly, their conversion is a little bit higher than ours as well, so I think you'll see conversion increase as well.

Okay, thank you very much.

Thank you. And our next question comes from the line of Mitch Bartlett with Craig-Hallum. Please go ahead.

Yes. Shane and Ted, you guys have been busy this last quarter. It's great to see the business lift in June and July. So back to Whitney, if I could just replay the script a little bit. You are most excited--let's fast forward into the end of 2011. Whitney represents what in your product mix and what leverage has it brought to your existing business?

So I think Whitney in the accessory--let's say the accessory category business, which is where they've been--their core business has been, goes from what we would consider about 10% today up close to the 37% when we're fully integrated. And frankly, that will happen immediately anyway because when we put the business together you'll see that. And what leverage--we didn't have a lot of competition because it was such a small part of our overall mix. So in fact, what we do is we bring up--we can actually bring in a lot of additional products that we weren't selling. I think our leverage with the supplier that Whitney uses--and we look forward to working with them--is that they are now going to get access to 10 million more monthly unique visitors through our website.

So while we're excited about putting body parts and engine parts into the JC Whitney offering, because their consumers there are clearly giving us permission to sell those product sets, we're also quite excited about getting that accessory product onto the existing U.S. Auto Parts site. That will take close to nine to 12 months to get all of that integrated and completed. But clearly some synergies there and then some increased buying power.

Increased buying power, that's what I was going to ask. So that leverage is back into your base business.

Absolutely, yes.

And as far as marketing, the scale advantages as well as other competitive advantages, can you speak to that?

Yes. So we look forward to sort of unleashing what we've got built in the Philippines around how to market from an [FPO] perspective, how to build content, how to build links, how to get those sites a little bit more prominent, excited about that. So clearly, we'll start that immediately, so there's clearly going to be some synergies from that perspective. Do I expect over time the percent of rev--I mean, percent of marketing that they spend to go down? I do, because I think we'll see good growth. Mitch, I can't hit this point hard enough in that helping correct some of the data issues they have in terms of their business, alongside with getting products competitively priced, along with getting new SKUs added in that accessory category, that's a very powerful mix for us. And we look forward to taking that recipe, which has worked here, and really applying it wholeheartedly over there, along with the tremendous consumer brand that we pick up in the Whitney name.

Great. Did you also mention in the text--it came by pretty fast--accelerated spending on Auto MD?

Yes. So we have got an initiative on Auto MD that we believe we'll be launching in the fourth quarter, maybe in the first quarter. And it was a decision by the Company to invest in it and it's--it accelerated a little bit of spending from a capital perspective in the back half. But we like the program, and when we get closer to announcing what that is, we'll let you know what that is. But it did increase capital expense a little bit specific to that part of the business. And I'd also clarify this, Mitch. We aren't taking our eye off the initiatives we have in the business right now. We clearly will get focused on integrating the Whitney set and very focused on that. But we're going to continue to invest in the core business of where we've been investing.

Great. Maybe one last question for Ted, perhaps. Just to walk us through the $2 million reduction in the sales number from the accounting, and then the legal fees. What is the tail on that?

Yes. First of all, on the revenue recognition, we had a contract change in our freight contract where we're no longer submitting claims for damages. We're getting a discounted rate and it winds up costing us the same. It's just a little bit easier in terms of administration. So because of that, the accounting rules are such that you have to change your revenue recognition from when you ship the product to when the customer actually receives the product. And so, that was a change we made this quarter. Now, normally, that wouldn't be a material--wouldn't even matter because normally you have some days coming in this quarter and you would pull some days back at the end of the quarter. But because you have to do what they call the Iron Curtain thing--the SEC requires you to do an Iron Curtain versus a rollover type of effect--that's why you're even seeing it.

It's one-time though.

That is the first thing. Does that answer your question, Mitch?

Yes, right. Just so we're clear on it, that's a one-time hit.

That's a one-time thing. Non-cash, one-time.

Thank you.

On the--on--with respect to the legal fees, let me first clarify one thing. On the legal fees associated with JC Whitney in terms of the due diligence and all the things we're doing with the acquisition, it's $200,000 to $400,000 that we expect in Q3. So it's $200,000 to $400,000. The other legal fees, obviously, that was associated--that we had in Q2 was associated with our protecting our intellectual property. We had some of those fees pretty much in Q1 of this year. We had a couple of those in Q2. We expect those fees to essentially be rather small until it goes to trial and we don't expect that for some time.

Very good. Thanks.

Thank you. (Operator Instructions.) And our next question comes from the line of Stephen Ju with RBC. Please go ahead.

Good afternoon, guys. So even some more questions on Whitney, I guess. So what was the online catalogue mix last year and how is that evolving over time? And can you give us a revenue number for Whitney for last year as well? And if you can walk us through the seasonal patterns for Whitney and how that differs from what's now I guess the legacy business effect?

Yes. So let's put it this way, in--relatively flat 2009, 2010. Last year, in 2009 it was about 123 million, and that was down from about 154 in 2008, and as high as 171 in 2007. That mix, Stephen, you can essentially assume is catalogue coming off that business down over those steps. But you'll see between '09 and 2010 sort of a flat lining of that. Seasonally, it's a little bit higher in the first quarter, and then again in the fourth quarter. The accessory product is a--it's a good gifting product.

Got you. Okay. And I mean, I think you guys talked about a 23% growth rate as we headed into the third quarter along with the commentary that you don't expect a material decrease in the growth rate for the balance of the year. What gives you the confidence that you won't see further deceleration, given that you guys are not running into progressively tougher comp as you had in the fourth quarter? Thanks.

Yes, so Stephen, let's be clear on this. I believe that our recipe works going forward. That's the first thing I would tell you - lower prices, more SKUs, and more private label products. What we're telling you here is we're at 23 in July over previous numbers and we haven't given any other guidance outside of saying we're up 23% and that we believe that we've got the recipe to grow going forward. You'll have to make a decision on what you want to do over the tougher comp in the fourth quarter. But I think we've answered a big question, which is can you put a good growth over a previous year of good growth? And I think we've said, yes, I think we can and I think we've got the recipe to do it going forward.

Understood. Thanks.

Thanks, Stephen.

Thank you. And our next question is a follow-up question from the line of Richard Fetyko with Merriman and Company. Please go ahead.

Thanks, guys. My question was already answered. Appreciate it.

Okay.

Okay. And Management, I'm showing no further questions in the queue. Please continue with any further remarks.

Okay. We appreciate you being on the call today. I can't tell you how excited we are about (a) the growth in the quarter, and (b) the recent acquisition. We are extremely excited about bringing Whitney onboard. Can't wait to get in there and work with the really talented employees that they have. And look forward to reporting back to you guys on the next call. Take care.

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.