Carparts.Com Inc (PRTS) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by, and welcome to the US Auto Parts fourth quarter 2010 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today, February 28, 2011.

I would now like to turn the conference over to Shannon Roark. Please go ahead, ma'am.

Welcome to us Auto Parts fourth quarter 2010 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 2010 earnings release which went out today at approximately 4 PM Eastern Time. If you have not received your release, it is available on the investor relations portion of the US Auto Parts website at usautoparts.net by clicking on the US Auto Parts Investor Relations tab. This call is being webcast and a replay will be available on the Company's website through March 14, 2011.

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 thereof. We refer all of you to the risk factors contained in US 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 could cause actual results to differ materially from those projected in any forward-looking statement. US 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 US 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 US 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 turn the call over to Ted Sanders.

Thank you, Shannon. Unless otherwise stated, this quarter refers to consolidated Q4 2010 and last year refers to Q4 2009. In comparison, our Q4 2010 compared with Q4 2009. Legacy business refers to US Auto Parts exclusive of our JC Whitney acquisition. Also, percentage and basis points discussed are calculated using net sales. For advertising however, we will discuss using net Internet sales.

Adjusted EBITDA for this quarter was $4.3 million compared to adjusted EBITDA of $3.6 million last year. Adjusted EBITDA this quarter was negatively impacted by approximately $800,000 from eBay policy changes that reduced online marketplace sales for this quarter, as discussed on our Q3 call. Adjusted EBITDA excludes non-cash share-based compensation of $630,000 this quarter and $569,000 last year. Adjusted EBITDA for out legacy business was $3.7 million, up 3% from last year exclusive of legal expenses to protect our intellectual property in both years. Adjusted EBITDA for JC Whitney was $572,000 exclusive of $1.5 million of restructuring and transaction related expenses. This quarter's net sales were $80.5 million compared to $45.8 million last year. Legacy sales were $55 million and were up 20% over last year resulting from a 20% increase in online sales and a 29% increase in off-line sales. Had our online marketplace channel not been impacted by eBay policy changes, legacy sales for this quarter would have been $2.8 million higher, up 26% over last year. The Increase in net sales resulted from an 8% increase in conversion, a 13% increase in traffic, and a 3% increase in revenue capture, partially offset by a 3% decline in average order value.

This quarter's gross margin was 34.1%, down from last year's 36%. Legacy margin was 33.4%, down 2.6% from last year, but increased 70 basis points from Q3 resulting from price initiatives that we discussed on last quarter's call. The decline in legacy margin for this quarter compared with last year was comprised primarily of a 1.1% increase in freight costs and 60 basis points lower revenues from the discontinuation of certain traffic monetization programs. This quarter's marketing expense, excluding advertising, was 7.6%, up from last year's 7.1%. Legacy marketing expense, exclusive of advertising, was 7.6%, an increase of 50 basis points from last year, resulting from higher amortization costs related to software deployment. This quarter's advertising, which includes online and catalogue costs, was 9.5% of Internet and catalogue sales. Legacy advertising expense was 7.2%, up 50 basis points from last year.

This quarter's general and administrative expense, which includes 1.9% of Whitney integration and restructuring expenses, was 10.4%, up from 10.8% last year. Legacy G&A expense was 9%, down 180 basis points from last year's 10.8% due to fixed cost leverage on higher sales. Fulfillment expense was 5.8% this quarter, down from 6.7% last year. Legacy fulfillment was 6.6%, a decrease of 10 basis points from last year primarily due to fixed cost leverage on higher sales. Technology expense was 2.6%, up from 2.4% last year. Legacy technology was 2.4% this quarter, unchanged from last year. Visitors for the quarter were 37.4 million. Orders placed through our eCommerce channel this quarter were 650,000. And average order value was $122. Legacy visitors were 28.3 million, up 13% from last year. Legacy conversion was 1.59%, up 8% from last year. And legacy revenue capture was 86.1%, up 3% from last year. And AOV was down 3% from last year. This quarter's customer acquisition cost was $10.73. Legacy customer acquisition cost for this quarter was $6.56, an increase of $0.08 or 1% from last year.

Turning to the balance sheet, quarter end cash and securities were $22.8 million, and debt was $24 million at January 1, 2011. Cash and cash equivalents and investments decreased by $6.9 million over the previous quarter primarily from JC Whitney related spending of $6.3 million, including $3.4 million to pay down stale accounts payable, $2.2 million of integration related capital expenditures, and $700,000 of inventory. US Auto Parts also added $700,000 of inventory during the quarter, all of which was private label.

And with that, I'd like to turn the call over to Shane.

Thank you, Ted. And thanks, all, for joining the call. We are pleased to report six consecutive quarters of 20%-plus organic revenue growth in our legacy business. And specific to this quarter, we grew 20%, which came up against 36% growth last year and against a challenging environment in our online marketplace business. This progress continued to validate our growth strategy, which, simply put, is to improve the end-to-end customer experience through better front end navigation as well as great customer service and fast shipping. To improve the supply chain to be the most competitively priced in the market. To that point, we ended the quarter with over 5,000 private-label engine parts and look to add another 4,000 to 5,000 private label engine and accessory parts this year.

To increase SKU selection in 2010 we added 240,000 new SKUs and plan to add more than that in 2011. This will be in addition to the more than 1 million incremental SKUs we now have access to as a result of the acquisition of WAG. And finally, we continue to drive unique visitor growth, which was up 13% for the quarter and 7% for the year. This is driven by both our excellent internal marketing skills but also because of favorable macro tailwinds which are producing older cars with more miles on them, and driving more people to do more work themselves, and resulting in more people shopping online.

Turning to adjusted EBITDA, we started to see some improvement in adjusted EBITDA flow-through over the previous quarter in our legacy business as we began to see some margin expansion. And we realize this EBITDA margin expansion is difficult to see, as the decline in the online marketplace revenues impacted EBITDA by $800,000 for the quarter. However, had the online marketplace revenues stayed consistent with the beginning of the quarter, EBITDA flow-through would have been 7.9% compared to EBITDA flow-through of 7.2% in the third quarter.

We also discussed last quarter our goal to improve gross margin percentage in our legacy business. And we made good progress there, as gross margins improved 70 basis points from 32.7% to 33.4%. We expect to continue to make good progress on EBITDA percent flow-through as revenues continue to grow and gross margins continue to expand.

I will now address the online marketplace revenue decrease which is large driven by eBay. The impact for the quarter was around $2.8 million in revenue and $800,000 in EBITDA. To put some more perspective on the subject, our online marketplace revenues have been trending up over 50% year-over-year for the previous two months prior to flipping to negative 12% for the last two months of the quarter. This was driven by a policy change at eBay. I will not go into detail on how we're addressing the policy change, for competitive reasons, other than to say we believe we will have it worked out in the next two to four months, and we will begin to show year-over-year growth again in our online marketplace revenues in the second half of the year.

Moving on to the acquisition of WAG. We continue to make great progress. Last week we cut over a number of sites associated with Stylin' Truck brand, which now joins CarParts.com to be fully operational in the US Auto Parts platform. These sites now have access to all US Auto Parts marketing expertise, product assortment, and distribution capabilities. We believe the final site, JC Whitney.com will complete cut over by the end of the second quarter. We have also announced the Chicago office will be closing at the end of the second quarter, as well. We believe that once integration is complete, the WAG asset will produce annualized adjusted EBITDA around $8 million to $10 million on annualized sales of $115 million. We will begin to recognize the majority of those benefits in the back half of this year. We also believe that once integrated, WAG properties can grow similar to our current legacy business as we apply our growth strategy mentioned earlier to the WAG assets.

On to AutoMD. Unique visitors are now up around 500,000 per month, which is a noticeable improvement over the last time we gave this metric at 300,000 per month. This growth is not being driven by incremental marketing spends, as our spend levels have remained consistent. What this indicates is people are hungry for transparency in the repair process. And AutoMD is providing that transparency from how-to guides to access to local shops into the true cost to get your vehicle serviced. We're also seeing good growth from the community with about 50,000 questions being asked and answered. We are also pleased with the progress we are making on our Pit Crew initiative. And, as always, we would encourage you to go AutoMD and save money.

Moving to the current quarter. Our legacy business is trending up 16% quarter to date over last year. To break this down a bit further, our eCommerce business is actually up 25%. So we continue to see strong growth even with some of the price increases we have made to improve margins. Our online marketplace business is trending down 20% year-over-year. And as I stated earlier, I believe we will correct the negative trend in our online marketplace business by the end of the second quarter. The WAG properties are trending down about 18% to start the year. And we had anticipated a reduction in year-over-year comps in the beginning of the year based on an aggressive marketing spend and promotional offers done by WAG last year. And we do anticipate growth in the back half of the year once the marketing spend and promotional offers stabilize year-over-year. And all properties are on the US Auto Parts platform.

In closing, we had a good quarter. We continue to see good growth year-over-year even up against some very difficult comps. We believe this growth over difficult comps validates our growth strategy is working and will continue to work going forward for both our legacy business and WAG. We made initial progress on improving or restoring EBITDA flow-through and improving gross margins. We continue to be on track to have WAG fully integrated by the end of the second quarter. We experienced great visitor growth on AutoMD. And finally, I think we made good progress to understand how to address the negative trend in our online marketplace business, and look forward to correcting that trend in the second half of this year.

With that, I want to thank you all for participating on the call. And, Operator, we will now open up the call for questions.

(Operator Instructions) Our first question comes from the line of Richard Fetyko from Merriman Capital. Please go ahead.

Thanks, guys. How are you doing? Just on the gross margin improvement sequentially, just wondering how much of that was due to your own initiatives versus just mix change of your product. And what type of initiatives are you undertaking to improve and stabilize the gross margin in the core legacy business? And then secondly, on the acquisition of Whitney Automotive Group, just curious what are the steps you have been able to take to correct some of the things that they lack, which is they had a lot of drop shipping as a portion of the mix. There were other inefficiencies in terms of just due to lack of capital, they weren't able to carry as much inventory in their warehouses, and so on. Any other updates on the acquisition integration?

Sure. On the gross margin percent, in fact mix stayed comped for the quarter so it wasn't a mix shift, it was truly the price testing I told you we were going to be doing in the quarter. And started to see that accelerate a little bit in the end of the quarter. So, essentially, we take pricing up, we see if it has a negative impact to gross profit dollars, if it does we pull it back down, if not we keep it up. We were excited to be able to do those things, as well as maintain revenue growth. So it's an indication to us that we might have been priced a little low in some areas. With that said, we will keep doing that.

On the WAG side, we haven't been able to, outside of some overall corrections here to top-level management when we initially took over this business, we haven't got it fully integrated yet. So you're working on essentially you won't see the big benefits from the WAG integration until it is totally done. And as we indicated, Stylin's been cut over, and CarParts has been cut or over. And then Whitney will come near closes to the end of the second quarter. And that's when you're going to see the big benefits of us having better pricing on their products, more applications, more SKUs. So not a lot of benefit yet, Richard, from that.

So the integration, you'll have all the properties cut over and then the real benefits in terms of cost and stuff are really going to happen in the second half of this year than?

Yes, that's exactly right. Again, Stylin' was literally cut four days ago. So we haven't got the benefit yet, simply put.

But the big one is JCWhitney.com, correct?

Yes, that's most of the revenue. So the good new for us is we get to practice a little bit cutting these over before we get to the larger revenue phase.

Lastly, if I may, Google, it's been quite publicized in the last couple days that Google constantly obviously is making changes to their search augers. I was just curious if you are seeing any changes in your traffic trends as a result?

We haven't seen a noticeable or material impact to revenues since the change. Traffic down a little bit, conversion up a little bit, but pretty consistent.

Okay. Thanks.

Thank you. Our next question comes from the line of Gene Munster with Piper Jaffray. Please go ahead.

Good afternoon. On eBay, the $2.8 million impact and $100,000 EBITDA, is that correct?

Yes.

And you talked about some of the changes. And in some ways it can be a pretty dynamic environment making changes to stay relevant on some of these platforms like eBay. But let's take a worst-case scenario. What would happen if these changes don't have the desired impact? You said it might take in the next two to four months to have that through. Any thoughts on, do we think of this as an $800,000 in EBITDA per quarter? Is there any way to get any benchmark around it? Or maybe it is just totally irrelevant because you are confident that these changes will have the desired impact?

Yes, so Gene, I think we feel good about it. I will start with that. That business, on My Marketplace business, last year did around $30 million, and it is running around $20 million right now. So that's probably the best way to couch your worst-case scenario. But we feel good. We feel good that we've got a plan in place and will execute against that in the next two to four months.

Okay, that's helpful. And second, on AutoMD, is there anything -- you talked about some of the blogs being done or some of the messaging on it. Is there any way to think about the content, how much content has been added over the last three months? And the second is just in terms of the model, there's advertising on it today, but do you envision this being a bigger part of the story or is this going to be more or less a hobby over the next couple years?

To start with, it's certainly not a hobby. We think the do-it-for-me market is a large market. We think that the lack of transparency needs to be exploited. And we don't think that anyone is in the space doing it right now, and we certainly can fill that void. I think 60% growth in traffic in two months is a testament to our team's understanding of how to drive traffic. More importantly, probably, is people's desire to get this information. CPMs on this site are very good. It's about getting more people to it .And we actually think there is both lead generation to shops as well as to local mechanics, and that's where we are going to go with it long-term. We are committed to it, whether it takes a quarter or year or two years. It is a $150 billion industry that we think we should participate in and it's certainly not a hobby.

You talked about the increase in traffic but is there any way to measure how much content is on the site?

Yes, sorry. I think questions in the month--in the quarter--how many questions were-- I'll bet it was close to 25,000 questions, or 20,000 questions, asked and answered in the quarter. But I don't have that, Gene, I don't know exactly what that number is.

Okay. And then one final quick question, as far as the private label, you talked about going from 5,000 to 9,000. Could you talk a little bit about, just remind us what the margin shift is? I know most of the margin increment would be through raising prices but obviously private label has a potential impact on that, too -- or will have an impact. But just back of the envelope margins on private label versus other.

I will give it to you in three categories. Margins on drop ship branded product run between 20 points to 30 points. Margins on branded product that we stock in our own warehouse run between, call it 30 points to 40 points. And margins on private label product will anywhere between 50 points to 70 points. So when you say exactly what's the shift, we are not seeing cannibalization significantly. It is only like 5%, 10%, at the most, on cannibalization of private label engine SKUs when we bring on these SKUs simply because we didn't have a price point low enough in the marketplace to complete. And when we private label it we can actually get there. So you're talking about 50 points--50% margin product that has really good variable contribution margin, call it 25% to 30%, and that's why we are going after it.

Great, thank you.

Thank you. Our next question comes from the line of Jared Schramm with Roth Capital Partners. Please go ahead.

Good afternoon. Customer acquisition costs at Whitney is considerably higher than the legacy business. What are you doing to lower that over there at Whitney? And where do you see it in about 12 months?

Just so you have an appreciation for why its high -- they mail paper catalogs. And so, hence, the cost to mail that paper catalog is just higher than our traditional cost. What are we doing? One thing is we are putting in a little bit more discipline about SCM spend and variable contribution margin flow-through on that spend. Meaning there might have been, or there was some spend that was negative previously that we've got actually some pretty good controls in place to do that. And, frankly, those same controls are in place on the catalog side of the business now. So feel good that we're probably going to get rid of some marketing spend that was a little inefficient. Second, our team is already working the SEO side of the house in their business, and, frankly, the JC Whitney platform is perfect for it. It is an old domain, it's got a lot of authority, and our guys are excited about getting into it. The combination of just getting rid of some of that excess spend and getting a little bit more discipline there, as well as driving SEO traffic will help bring that overall spend down. But we've kept it in the modeling that we've done at a similar rate to what you are seeing now, probably a little bit more efficiency inside it, Jared.

Okay. And can you provide some color on what you saw in the accessory market in Q4?

It wasn't as strong as we would have liked. And I think that's because we are stale, frankly. We don't have our applications, meaning the number of cars that a SKU fits, extended well, yet. We're missing a bunch of brands. We are not competitively priced on that platform, which is the Whitney platform. And we need to do a better job of that, and that's what we are doing right now. So while we are cutting over the technology platform, we are also out doing all of those things I just talked about. We are extending the applications inside our database. We are competitively pricing in the marketplace, and we are doing those things that have made us successful in the past for this platform we are cutting over.

Okay. And any outlook based on the severe winter we saw or continue to see on the East Coast here, how that's trending for you for Q2?

For Q1 I think here's what you've got. We were up 42% last year and we are up income this year 25%. So pretty severe winter last year too, frankly, not quite as bad.

A lot if it was in March, too.

A lot of weather last year, yes. And, frankly, March was actually up 50% last year So we will see how we hold up against March, although trends right now look good still as we've indicated on the call. So the weather helps. But interestingly enough, we are seeing as much growth in the engine business as we are in the body business.

Okay, thank you very much.

Thank you. (Operator Instructions) Our next question comes from the line of Mitch Bartlett with Craig-Hallum Capital Group. Please go ahead.

Hi, guys. Did I hear you right, you said AutoMD uniques are up to 500,000?

That's correct, Mitch.

So what accounts for that increase? And let me ask my second question and then I will go off-line because this isn't a great connection. And the second question is, you guys have talked about your long-term model at different revenue points, with the EBITDA margin you expect to generate out of that. And I think at $400 million you're talking about 9% to 13% EBITDA margins. Is that model still in place? Are you still feeling good about that, post integration of JC Whitney?

Yes. So, I will take the first question on AutoMD. This is, frankly, just great content. Our guys are building really good content, it's getting indexed well, and it's showing up. It's relevant. We also had a very big push in the first quarter. Just have an appreciation for how long content, and changes on the site to realize into traffic growth. We made a bunch of changes to how we set up our shops in the system. And we saw some pretty big increases in that content showing up in SEO traffic, and sure enough, it drove a lot of visitors. So we are excited about that. So essentially, the great content along with the way we've designed the site has been the growth behind that.

What do you mean by set up the shops, if I could just throw that out?

We have, over the last two years, we have called and gotten completes on over 150,000 shops. Roughly, information like, what kind of cars you work on, what types of jobs do you do, what are your hours of operation, what type of billing do you do, do you take cars on early drop-off, do you have a rental service, do you have a shuttle service? So, about 15 different questions we ask every shop we call. That content then gets indexed inside the search engines. And when someone goes in and searches for a shop with specific content for that shop, we start to appear at a greater rate than we did previously. Then, in addition to that, all the Q&A answers we've got up there is great UGC content. So a person goes in and says -- How do I replace my fuel pump -- and we get a bunch of responses on how you do that. Those two things have created really, really good content for the site.

Great.

Okay, onto the WAG and percent flow through, yes, Mitch, I think what you saw happen to us in the last couple quarters is a little bit of decrease in gross margin which impacted flow through. And I believe we'll restore that. And we are seeing good signs at the end of the tunnel on the process we're putting in place to do that. On the $330 million business, that's what you put last year's numbers and WAG together, you're roughly, on a fully integrated business, you're roughly 8% to 9%. And then you're talking 15% to 20% flow through on the other 70 that you're talking about. So yes, that's why you start to push upwards of 10% or 11%.

Terrific. Thank you.

Thank you. Our next question is a follow-up question from the line of Richard Fetyko with Merriman Capital. Please go ahead.

With respect to WAG contribution in the fourth quarter, it was, I think, at the low end of your expectations of $25 million to $30 million. Just curious why, and also what expectations you have for them in the first quarter.

Yes. On the WAG, obviously, we did not see the level of activity that we liked, as Shane mentioned before. We did have a pretty stale catalog and we didn't see the amount of sales that we expected that we would see for them. But obviously as we integrate them and get their web sites ported over, we will be able to do some of the things we do well and restore their--the revenues into a growth mode. We mentioned on the call that we expected first-quarter revenues to be down. And the reason for that is last year WAG was spending money in an inefficient way to drive traffic and sales to the website. So obviously we do expect that WAG will be down in Q1.

Down year-over-year or relative to the quarter?

No, year over year.

It'll probably be a little off the number from the fourth quarter, Richard, if you're thinking about modeling it.

Yes, because I don't know if we knew what the fourth quarter of '09 looked like. That's helpful, thanks.

Thank you. (Operator Instructions) Our next question comes from the line of John Lawrence with Morgan Keegan. Please go ahead.

Hi guys. Just real quick, Shane. I know you don't want to give a lot away competitively, but can you talk a little bit just on the WAG question a little bit on the gross margin. What can you say about where they were focused on the mix of product and what really needs to be changed there as far as when you look at the mix and the offerings, I assume that's going to change a little bit? Can you touch on that a little bit? And secondly, just really what's the main message that you think is driving people to these sites across all platforms as far as is it price or is it availability? Thanks.

Okay. On the WAG side, listen, the deal with WAG for growth for us, and it sounds really simple, hard to do, but we saw it in our business two years ago. And it is where we are going to apply essentially the same model to WAG. And this applies to all kinds of product groups there. Which is the product needs to be up to date, it needs to have all the applications, all the cars available for each product need to be there, it needs to be competitively priced. The one thing that WAG was not able to do over the last couple years was actually bring in more of a lower end product price point for customers, so sort of a private label in the accessory business. We think there is a big opportunity there. WAG didn't necessarily bring enough product in stock out of their warehouse during that period of time as they got tight on cash, which is an opportunity to see that happen, as well. Fundamentally, WAG, we simply need to get back to basics around just getting a complete offering on the site, as well as our products being put on their site. So getting a full complement of engine parts and getting a full complement of body parts onto the JC Whitney platform, I think will be very successful there.

What drives people to the site? Frankly, it is the product. Not just that price and availability. As we put the product out, a lot of it is a Longtail, which is very good for us because we own that. But what do people want? Yes, they're driven for price and they're driven for fast shipping, and they're driven for selection. And I think we do that pretty good. I think we do it as well as anybody in the category.

Great. Thanks, guys. Good luck.

Thank you. I show no further questions in the queue at this time. I'd like to turn the conference back to management for closing remarks.

We appreciate you participating on the call today. We look forward to getting back to you at the end of the quarter with our progress, look forward to getting WAG fully implemented and start to see the benefits of that. So with that, we will end the call. Thank you.

Ladies and gentlemen, this concludes the US Auto Parts fourth quarter 2010 earnings conference call. Thank you for your participation. You may now disconnect.