Carparts.Com Inc (PRTS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the US Auto Parts Second Quarter 2011 Earnings 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 Tuesday, August 9th, 2011.

I would now like to turn the call over to Shannon Roark. Please go ahead.

Welcome to US Auto Parts second quarter 2011 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 second quarter 2011 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 August 23rd, 2011.

Before we begin, we would like to remind everyone that the prepared remarks contain certain forward-looking statements and management may be 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 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 that are projected in any forward-looking statements.

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 Part's 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 would like to now turn the call over to Ted Sanders.

Thank you Shannon. Unless otherwise stated this quarter refers to consolidated Q2, 2011 and last year refers to Q2, 2010 and comparisons are to Q2 2011 compared with Q2, 2010.

Legacy business refers to US Auto Parts exclusive of JC Whitney. 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 $4.6 million compared to adjusted EBITDA of $5.0 million last year. Adjusted EBITDA excludes non-cash share base compensation of $643,000 this quarter and $612,000 last year.

Adjusted EBITDA for our legacy business was $5.2 million, up 4% from last year exclusive of legal expenses to protect our intellectual property in both years and a change in revenue recognition last year. Adjusted EBITDA for the quarter for JC Whitney was a loss of $600,000 exclusive of $l.5 million of restructuring and integration related expenses.

This quarter's net sales were $84.3 million compared with $53.2 million last year. Legacy sales of $59.5 million were up 11.8% over last year, which included a $2.0 million reduction in sales for change in revenue recognition. Adjusting for last year's change in revenue recognitions, legacy sales grew 7.8% resulting from a 7.8% increase in online sales and a 7.1% increase in off line sales.

Legacy eCommerce sales grew by 6% and online market place sales grew by 8.2%. The increase in legacy eCommerce net sales resulted from a 9% increase in traffic and a 1% increase in revenue capture, partially offset by a 3% decline in conversion and a 2% decline in AOV.

This quarter's gross margin was 33.7%, down from last year's 34.6%. Legacy margin was 34.0%, down 50 basis points from last year resulting from a mix shift from body to engine parts.

This quarter's marketing expense excluding advertising was 8.0%, up from last year's 7.5%. Legacy marketing expense exclusive (inaudible) was 7.9%, an increase of 40 basis points from last year resulting from higher amortization costs related to software deployments.

This quarter's advertising, which includes online and catalogues, was 9.8% of internet and catalogue sales. Legacy advertising expense was 7.0%, up 70 basis points from last year.

This quarter's general and administrative expense, which includes $1.5 million of JC Whitney integration and restructuring expenses, was 10.0%, down from 12.0% last year. Legacy G&A expense, excluding the cost to protect our intellectual property both years, was 8.0%, down 170 basis points from last year's 9.7% due to fixed cost leverage on higher sales.

Fulfillment expense was 5.4% this quarter, down 10 basis points from last year. Legacy fulfillment was 6.2%, an increase of 70 basis points from last year reflecting higher depreciation and amortization expense from software deployment.

Technology expense was 2.3%, up 10 basis points from last year. Legacy technology was 2.0% this quarter, down 20 basis points from last year reflecting fixed cost leverage on higher sales.

Visitors for the quarter were 41.8 million. Orders placed to our eCommerce channel this quarter was $669,000 and average order value was $125. Legacy visitors were 30.3 million, up 9% from last year. Legacy conversion was 1.53%, down 3% from last year. Legacy revenue capture was 84.5%, up 1% from last year and AOV was down 2% from last year.

This quarter's customer acquisition cost was $10.11. Legacy customer acquisition cost for the quarter was $6.55, an increase of 62% from last year.

Turning to the balance sheet, quarter-end cash and securities were $21.1 million and debt was $21.0 million at July 2nd, 2011. Cash, cash equivalent and investments decreased by $3 million over the previous quarter, primarily from integration expenses, capital expenditures related to the integration of JC Whitney and pay down of long-term debt.

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

Thank you Ted and (inaudible). We are excited that we are continuing to build a great Company, even through tough challenges like those we faced this quarter. Our profitability remains strong. We have legacy business generating over $5 million in adjusted EBITDA. However, with the overall growth of the quarter at 8% we are not yet growing as we previously did nor as we'd like or expect.

Some of the challenges we faced this quarter regarding growth can be addressed internally and some are more macro based. Addressing growth internally, we are working through the JC Whitney integration, which is on track to be completed this quarter. EBay changes that we previously discussed are finally being rectified. And finally, adjusting the search engine changes also being handled well but take time.

On a macro basis, the economy continues to present its own challenges. We won't be discussing these things in detail as we think it could sound more like excuse making but it's real and the job of our team to deal with it.

Our ability to generate good margins and profits through all of this is really a sign of strength in the business. We believe we'll get back on the right growth track and since we don't provide guidance, I will not make any predictions as to timing. We just want our investors to know that we're focused on the right growth drivers and eventually it will benefit us both top line and bottom.

(inaudible) our online market places eBay made some policy changes last November that impacted growth in both the fourth quarter of 2010 and the first quarter of this year. We've taken a number of actions to rectify the situation and in the second quarter we actually comped up 8% in our online market place channel. We continue to optimize the channel. Although the third quarter we'll be a tough quarter to comp over based on last year's 52% year-over-year comp growth, we feel we're on track to continue growth in the channel going forward.

Moving to visitor growth, our legacy business was up 9% and conversion was down 3%. Now this is very misleading because of the traffic shifts between higher and lower converting sites. Said differently, we saw traffic decreases in some high converting sites and traffic increases in some low converting sites resulting in increases in traffic but reductions in conversions.

For competitive reasons some of the positions we took we set about to address eBay changes we will not go into specific actions we will be taking to address traffic trend reductions other than to say we believe we'll have it fully addressed over the next nine to 18 months. And fortunately we believe we won't wait that long to see the full impact, as we expect incremental improvements between now and then.

Regardless of the timing of those incremental improvements, we will anniversary the changes In February of 2012 and should immediately begin to see the normal 5% to 10% traffic growth at our higher converting properties, which in return should increase conversion as well.

Moving to [WAG] integrations, we are finally nearing the end and we are very excited to get JC Whitney brands and property aggressively competing again. On a positive note the traffic increased on JCW was up double digit year-over-year for the quarter demonstrating the power of the brand and sale of our markers. Unfortunately, conversion had decreased resulting in overall sales being down 13% for JC Whitney properties. Conversion is down for three main reasons.

First, we haven't had any new SKUs in over a year. Second, we have not extended existing lines at all vehicles when they come to market and finally we haven't been aggressively pricing to beat competition since we acquired Wag and frankly for sometime before that.

These three things have been -- haven't been done because we had made a conscience decision to integrate the technology platforms and then leverage the marketing tools we have already built in the Auto Parts platform -- US Auto Parts platform to aggressively compete.

The good news is we have over 500,000 new SKUs ready to launch once integration is complete which is a combination of (inaudible) and existing Auto Parts SKUs plus SKUs that have been added for JC Whitney's core accessory business. Additionally, we have extended over 200,000 SKUs with well over one million applications that will also be introduced once integration is complete and finally, we will be much more competitively priced.

Simply put we are ready to compete once integration is completed. We will be cutting a small percentage of the jcwhitney.com site over US Auto Parts platform this week for basic AB testing to ensure all the metrics remain consistent. Assuming all goes well, we will cut the entire property over before the end of the quarter.

We continue to believe that once WAG is fully integrated, and we stop the negative revenue trend it will produce on average $2 million in EBITDA per quarter and much more once we restore growth.

I will also reiterate we believe our core strategy creates significant competitive advantages over the long term. We will continue to focus on first, improving the end-to-end customer experience through better front end navigation as well as great customer service and fast shipping.

Second, creating the most efficient supply chain in the industry, to that point we ended the quarter with over 7,000 private labels engine parts and look to add another 3,000 to 4,000 private label engine and accessory parts annually.

Third, increasing SKU selections faster than competitors with the goal of adding at least 250,000 new SKUs annually and finally to grow visitors, which we discussed earlier.

Moving to Auto MD, we continue to see positive unique visitor trends. We comped up over 20% quarter-over-quarter and 70% year-over-year. We are now trending above 600,000 monthly unique visitors.

We are also excited to report for the first time since we launched Auto MD a little over two years ago, we now have more unique visitors than our closest competitors and a consumer advocate auto repair states according to all three major tracking services, compete.com, Hitwise and comScore.

Auto MD was launched to provide consumers transparency in auto repair process. We are continuing to deliver on that promise with the most recent product launch called "You Auto Be Negotiator." The service does pretty much what the name suggests, negotiate pricing for customers.

At a high level a consumer request service for their vehicle and a date and a time convenient for them to have the care serviced. The Auto MD customer service agent calls shops [local] to the consumer by accessing our database of over 400,000 shops and negotiating pricing on behalf of the customer. Our goal is to get customers at least three quotes to choose from. The customer can then select a shop that best fits them based on cost versus location versus shop rating versus warranty period and so on.

The results from the Auto MD negotiator confirm the need for transparency in the repair process. Since we launched the service in April of this year, we have received over 6,000 requests for service, called over 50,000 shops to get pricing and have received quotes from over 15,000 shops.

The results are fascinating and appalling from a consumer's perspective all at the same time. Here's why. For the same vehicle for the same job in the same location at the same time and in most cases using the same parts, the average variance in the quote is over $250 and a 40% variance between the high and low quotes.

Over the last quarter we have seen requests for quotes double and while recognize it's early and it's on a low base to start from, we view the growth is being driven by positive word of mouth, which is extremely encouraging. We have a lot of development ahead and we are excited about the disruption this service may bring to the industry.

Moving back to the core business, although we don't provide guidance, we will keep consistent with our previous calls and tell you that our legacy business is trending up 3% quarter-to-date over last year and we look forward to improving this trend as we begin to build traffic growth back to historic levels.

The WAG property are trending down 18% quarter-to-date and we look forward to reversing that trend once integration is completed.

In closing, we continue to be pleased with our ability to improve profitability in the face of difficult headwinds. We have demonstrated our ability to react to and correct negative trends, as we did with eBay, and we believe we will see the same results within search traffic. The WAG integration should be completed by the end of the quarter and begin to deliver meaningful EBITDA contribution going forward.

And finally, we believe the Auto MD negotiator has the ability to be a real game changer to help consumers get their car repairs (inaudible) that the industry operates.

And with that, operator, we will now open up the call for questions.

(Operator Instructions). Our first question is from the line of Ross Sandler with RBC Capital Markets. It appears they have stepped away for a moment. The next question is from the line of Gene Munster with Piper Jeffery, please go ahead.

Good afternoon and good job on the quarter. I know you guys rarely give forward-looking guidance but we're having a tough time reconciling the fact that you outperformed on the top line and it seems that some of the comments are more either cautionary in turn or maybe your cautiously optimistic but just seems like business is doing well. You guys have had some headwinds that you're working through, but just kind of looking at the tone of the comments, seems that we're expecting a little bit more headwind or am I totally misreading this kind of some of the general comments? And then I have a follow up.

Yes sure, Gene, we're -- I mean we are kind of in this process of reacting to sort of the changes that were made from a traffic perspective. It will take us a little bit of time to correct those and so we're, I think, setting the right expectation that says we don't think there is a problem with demand in the market place. We think the online auto parts segment is good. We think that we're well positioned in that market, but it's going to take us a little bit of time to get back to sort of an apples for apples comparison, both from a traffic and conversion perspective than what you guys have traditionally seen.

Okay that's helpful and the second in terms of you talked a little bit about the kind of the private label stuff. If you look out a year from now if you're going to have to guess what percentage of your business is private label, any thoughts on that?

Well, Gene, I hope it's a lot more that it is today. We are steadily bringing SKUs in. I think our private label as a total mix today is around 30%. And obviously that runs off of a couple of numbers and correct me if I'm wrong there, but that's about 100% of that is what you would call the body business. That's our traditional business.

We're running around 10% inside the engine business and about 8% inside the accessory business. We've got good opportunities inside the accessory business in that lots of sales there with the Whitney acquisition and we're pretty focused on trying to bring that stuff in private label and we're continuing to be able to source product from an agent perspective. So, hopefully a year from now that mix is up from 30 close to 33, 34, 35. And we just keep pushing that along.

Okay that's helpful and then last question is just in terms new car demand versus demand for your product. Assuming that we kind of get a little bit of a double dip here and new car sales slow, that -- can see it would be a good thing for your business, is that correct?

Certainly reduction in new car sales is good for us. It increases the miles on the road and then, of course, you've got to offset that a little bit with miles driven, which has been down a little bit lately. And typically miles driven drops for a little bit and then comes back, so hopefully that's a little bit of the impact as well.

Okay. All right thank you.

Jared Schramm, Roth Capital Partners.

You mentioned $2 million in EBITDA per quarter from WAG once the integration is complete so can we expect to see that in Q4?

Yes I would say if we go the way we're going right now I don't think you'll see the full -- we still have some -- we will still have some residual cost associated with people in Q4. All that should be cleaned up by the first quarter, Jared.

Okay.

But I mean I think that number could be anywhere between $0.5 million to $1.5 million, depending on how fast that does get cleaned up.

And you mentioned WAG was trending down 18% quarter-to-date. Just curious if there's an overlying or underlying reason as to why. Is that due to focusing the efforts, the integration right now and not really driving customers to the business at the moment?

Yes it's actually -- here's what's good news. The news is traffic is up double-digit to the JC Whitney property so all good things from that perspective and I think that's a testament to sort of the market demand as well as our marketers. What we've seen though is a pretty dramatic decrease in conversion and there's three reasons that we've seen that decrease in conversion. One is we haven't added new SKUs to that site in over a year.

Second, we haven't extended applications to SKUs, meaning if your car comes out the next year and then next year comes out and it fits the product we have today, we haven't actually extended it out to that point.

And then third, we haven't competitively priced this product and frankly it hasn't been done for a long time. What we have done while all this integration has been completed is actually added over 500,000 SKUs to our database. We've extended over 200,000 SKUs and that's over, well over millions of applications for cars, and we've done a pretty good job of understanding what the competitive price point is in the marketplace.

But we did make a conscious decision during the integration not to try to keep up with both businesses all at the same time and to get the integration complete and then let the power of our platform execute. So I believe what you're going to see is and what we all anticipate is a reverse in that trend of a negative growth because you're now a much more competitively priced, because you've got the right SKUs on the site and because they fit the right applications.

And the last question on WAG here, are you still intending on keeping the print catalogue for WAG for the time being?

Yes absolutely. The print catalogue to us is another marketing channel. It's got a veritable contribution margin return on that channel and we will manage it accordingly. We hope it grows frankly. If we can figure out a way to make it more profitable and reach more people and drive more revenue, that would be fantastic but at the highest level it's another channel to market our business.

And last question here, how aggressive would you say you've been with soliciting ad sales to the Auto MD site and what's interest been like there from advertisers?

So are you saying how -- are you saying are advertisers excited about being on Auto MD?

Yes.

Yes I can't sell enough inventory. Let's put it that way, good high CPMs and, as I get more traffic, we won't have any problem selling advertisement on that site. It's sold as a package product when we sell our overall advertisement in the marketplace. We don't spend -- Jared, we spend less than -- we've probably spent $5,000 a month in SCM driving traffic there so our traffic is not driven. It's a very small marketing spend associated with Auto MD and that's been consistent for about a year. So our recent growth has been primarily organically driven.

I'm sorry, the second part of that question, Jared, was?

I was just curious how active you've been in soliciting advertisers to the site.

Yes well we've got a team that goes out and as soon as we get more inventory we'll sell it.

Okay thank you very much.

Ross Sandler, RBC Capital Markets.

Hey, guys, sorry about the mix-up before; question on conversion rate. I've been hopping on and off the call so apologies if I missed it but you said that there's been a mix shift of traffic to lower converting sites. Can you just elaborate what exactly you mean by that, what's going on with conversion rates? Will they go up from here? Is this a USAP inflicted situation or is this from some external factor?

Second question is can you just give us an update on where you are on the eBay channel, strategy and when we expect that to kind of resume to growth rates that you were seeing before the listing policy change in the fall of last year?

And then third is any update on like what the long-term target EBITDA margin for the business is? I think someone asked earlier if you're changing your view on that but any color on that and kind of what a realistic time frame is to start seeing that long-term EBITDA margin? Thanks.

Yes so, Ross, we'll get the first question on mix shift. We actually saw on our highest performing sites Auto Parts Warehouse JC Whitney increases in traffic. We also saw on some other of our higher converting sites or sites that we would spend most of our time and energy focused on around, actually saw a decrease in some traffic.

And then on lower converting sites, or sites that we don't spend much time on, we actually saw n increase in traffic and the combination of the decrease from higher converting sites to in the increase in lower converting sites resulted in overall traffic increase but because of the percentages between the properties, the overall conversion decreasing.

Well, can you explain I guess why that phenomenon is happening? I was under the impression that Panda was impacting some of your lower converting sites or not your flagship as much as some of the smaller sites. Can you just give us a little bit more color on why this phenomenon is happening?

So I -- here's what I can give you. I can tell you that we have a really good feel for sort of why -- you know, the sites that increase and the sites that decrease. We have a good feel for that and that's what we're doing now, addressing that. For competitive reasons, we won't get into what we're doing, similar to what we did with eBay. We had an appreciation. We understood what we had to go do.

We went out and did it but we didn't broadcast it and I think I'd keep a similar tone and method here, other than to tell you that we have an appreciation for what is relevant in the eyes of the search engines and we will go address that accordingly. But for your simple math discussion if you had one site that converted at 2% and one site converted at 0.5% and your conversion went from a high converting site to a low converting site, even if traffic went up the overall conversion numbers would decrease.

So this -- is it safe to assume that the conversion rate will stay at this reduced year-on-year level for another four quarters or is this going to be something that you guys feel like you can fix in the next six months or so?

Well, no, Ross, I think what you've got is a new baseline conversion and what you're going to see is through our normal process of fixing the customer experience, add new SKUs and lower pricing, add new SKUs in general, I think you'll see conversion increase, as we continue to do the things that we've typically always done and seen increases. I also think you'll in conversion increase as we address the sites that lost traffic so I think I would say you've got a new base line. I think that base line will grow for two reasons.

One is just because we think we have the right long-term strategy and we are on track to execute against that strategy and second, because we will be addressing the loss in traffic and high volume sites over the next, as I indicated to you, nine to 18 months to get it fully addressed and then certainly we should see incremental improvement on that during that period as well.

Okay thanks, guys.

So I'll go to eBay for you real quick, Ross. So eBay was negative in the fourth quarter and the first quarter. It actually went positive this quarter. We believe it will be very difficult to come positive probably on eBay in the third quarter because we were thick, we were comping over 53% from the previous year so we just a very difficult comp in the third quarter. And then we think we should return back to our normal eBay comps in the fourth quarter and beyond.

On EBITDA margin our goal continues to be 10% or above that and I think if you look at the way our business rolls today, our incremental EBITDA flow through is somewhere between 15% to 20% and so if you add $100 million in sales you start to see yourself above that 10% margin.

We can go to the next question.

Shawn Milne, Janney Capital Markets.

I've got a couple things. Just in the quarter did you -- what were your expectations for Whitney profit and loss going into the quarter? Was it -- it sounds like you're a little bit behind schedule on integration. Does that and is that the reason why the business lost $600,000 or is it because of the sales decline?

And then looking into Q3 I mean you talked about reasons why Whitney could start to grow again but it sounds like that's not really going to happen in Q3 so will Whitney lose money, this kind of money, in Q3 again? And then I've just got one more follow-up.

Yes so Whitney's conversion is on track as it relates to the expectation we set on the last call, which is it will be done in the third quarter. We have got it all -- let's put it this way, the technology is all built and we will start to cut portions of traffic over this week frankly to start our AB test. And then, as the AB test goes along and we see that things are working properly and all the metrics are consistent, we will then start the process of cutting over to 100% of our site.

And so, as it relates to why do I think we're going to grow, I think we've handcuffed ourselves relatively well that last year with the lack of attention we've put on new SKU development and pricing on Whitney and I think frankly if I did it all over again I would. I think it was the right decision than to try to maintain both of those businesses at the same time.

As it relates to the quarter yes, Shawn, I believe it's softer than we expected, which is why we saw the negative growth from an EBITDA perspective. Into this quarter I believe it will be flattish as it relates to and that also comes down to when we get a cutover. If it gets cut over later in the month, it might be down a little bit and if it gets cut over earlier and later in the quarter it will be we might lose $200,000. If it gets cut over earlier in the quarter it might be up $200,000.

Okay and then but you talked about there's a question before about some carry over into Q4 where you may not get the $2 million. You know, I think a lot of us are just looking for what the run rate would be in fiscal '12 but I mean at some point, not to be blasé about it, but at some point why are you carrying those higher costs, people related costs, on Whitney? I mean, that's been ongoing now for a while.

I think the other one is for Ted. I mean, now we've seen obviously who the heck knows where oil prices are going to be in three, six, nine weeks but we've seen a pretty big decline. I mean, do you expect to get a little bit of the less pressure on your shipping costs as we move forward? Thanks.

Yes so I would say two things, Shawn. You can cut the platform over but it does take a little bit of time to wind everything else down so I think that's the reason why you may see it push a little bit farther into the fourth quarter. But certainly, as we indicated, if we can sort of stop the hemorrhage as it relates to sales growth, which we think we will be able to do, you're roughly to $2 million a quarter on average. Some will be up; some will be down over the course of 2012 and certainly if we grow it we think that business, like our business, will drop through at a similar rate between 15% to 20% EBITDA margins.

I'll take the oil real quick.

Yeah well on the freight too I mean, keep in mind, Shawn, that our eBay contract we do have I mean not on your -- again, sorry. On--

Freight contracts.

On freight contracts, I'm sorry, on FedEx there is a two-month lag in the adjustment that we have for pricing the latest oil price so clearly we won't see that this quarter.

I would probably, Shawn, there's two good things about this. Yes we believe a trending who knows to you point. If oil comes down there's two good things for us. One is it's cheaper to ship and second, hopefully we see a return to positive year-over-year sales growth or miles driven. The last three months has been the first time in two years that we've seen three consecutive months of negative miles driven and we hopefully, as gas pricing comes down a little bit of that pressure comes off and we start to see people drive a little bit more.

Okay that's helpful. Lastly, just a housekeeping question, when you say your legacy business is up 3% quarter to date just remind me is that just straight ecom or does that include your eBay business, which you said was against a very tough comp?

Yes it includes the eBay business. It also includes the off line business, Shawn, so you've got that number in there. It just doesn't include WAG.

Right but if I am thinking through that and eBay is a very tough comp, that suggests that ecom business itself maybe is not decelerating quarter to date.

Yes I think I won't go any further than that but we certainly do run into a tougher comp for eBay. We don't break out. I don't break out. We've never historically broken them out and I'd rather not try to break them out sort of in quarter.

That's fine. Does my logic make sense?

I don't believe your logic is flawed.

Okay thank you. Okay good luck.

Mitch Bartlett, Craig-Hallum Capital Group.

Just two quick questions, just update us on any movement within competition, anybody getting more aggressive. And then on private label, has there been any issues, any recalls, any product defections, anything that of note, just update us on that. Thanks.

Yes from a competitive perspective, Mitch, I think it's getting a little bit more competitive in the marketplace but consistent with that it always gets a little bit more competitive. From a P&L perspective we've had no major recalls from a P&L perspective, no -- you know, normal course of business on that front.

Good thank you.

[Tom Claugus], Graham Partners.

You probably have gone over this before but why is there such a large difference in the [CAG] between JC Whitney and or WAG and US Auto Parts? I mean, even as of last quarter it was if you look at the weighted average it's 963 versus $6 or something for the other business. Is it because you throw eBay in there or what's the deal? I was just trying to understand it from a general concept.

So no it's the catalogues that we mail for WAG so we'll mail roughly anywhere between eight to 10 million catalogues in a year and that catalogue distribution is what increases the market expense on their side.

And then my other question is it sounds like to hit whatever your revenue goal is for next quarter you're expecting higher conversion on JC Whitney once you convert over to the platform and that was pretty clear from what you were saying, correct?

Yes we certainly believe we should restore conversion back to historical levels once we get this product back competitively priced properly and good working conditions is probably the best way to say it on the site.

So it was minus, was it minus 13 this quarter and minus 18 going forward or what was it again?

Yes it was down 13 for the quarter and 18 for -- I'm sorry 13 for the second quarter. It's down, currently down 18 for this quarter.

Okay thank you.

We are, not to understate this, we are extremely excited about getting this cut over.

(Operator Instructions). Jeff Blaeser, Morgan Joseph.

A quick question on the gross margin and the trends, the shift from body to engine parts, is that continuing? Do you expect that to continue? Is this a run rate that we'll see throughout the year, a little bit lower WAG sales have a bigger impact going forward?

I think your mix shift will be similar to the baseline you saw in Q2 so the same percentage will probably run on a go forward basis. With that said, our margin on those same lines of business, meaning body or accessory or engine, is up on a year-over-year basis so if you're trying to compare Q3 of last year to Q3 of this year probably better margin percent this year than last year based on the fact that we've got a little healthier margins with inside the lines outside of the mix.

Okay and then I'm sure you've probably addressed it. You addressed the trends quite a bit. Any way to quantify the current economic environment to some exterior conditions like eBay and with a quarter-to-quarter trends?

Right so I think it's hard to measure us against anybody right now on a like-for-like basis. I think that would be difficult to do and so I think the trends in the industry though are very strong, continue to be strong, and I think they can be stronger. Certainly new car sales down and miles driven going up there are two very positive macro impacts for us. With all that said, we are very, very small in the grand scheme of auto parts being sold so certainly we should and our team expects to grow in any of those conditions.

Great thank you very much.

(Operator Instructions). And there are no further questions at this time. I will turn it back over to management for any closing remarks.

Well, thank you. We appreciate you joining the call and we look forward to getting back to you next quarter to report on our progress. Take care.

Ladies and gentlemen, this does conclude the conference call. You may now disconnect and thank you for your participation.