Carparts.Com Inc (PRTS) 2011 Q3 法說會逐字稿

Welcome to US Auto Parts Third 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 third quarter 2011 earnings release, which went out today at approximately 4 p.m. 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 November 22, 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 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 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 Mr. Ted Sanders.

Thank you, Camille. Unless otherwise stated, "this quarter" refers to consolidated Q3 2011 and "last year" refers to Q3 2010, and comparisons are Q3 2011 compared with Q3 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 $3.1 million compared to adjusted EBITDA of $4.1 million last year. Adjusted EBITDA excludes noncash, share-based compensation of $623,000 this quarter, and $640,000 last year. Adjusted EBITDA for our legacy business was $4 million, down 7% from last year. Adjusted EBITDA for the quarter for JC Whitney was a loss of $900,000 exclusive of $3.8 million of restructuring and integration-related expenses.

This quarter's net sales were $78.6 million compared to $72.3 million last year. Legacy sales of $59.4 million were up 1.2% over last year due to increased non-Internet sales. eCommerce sales decreased 1% was attributable to a 5% decline in conversion rates, a 3% decline in revenue capture, and a 1% decline in average order value, partially offset by a 10% increase in unique visitors.

This quarter's gross margin was 31% down from last year's 33.2%. Legacy margin was 32.4% down 30 basis points from last year resulting from a mix shift from body to engine parts and increased freight expenses. This quarter's marketing expense, excluding advertising, was 8.9% up from last year's 7.6%. Legacy marketing expense exclusive of advertising was 8.3% an increase of 130 basis points from last year resulting from higher amortization costs related to software deployment.

This quarter's advertising, which includes online and catalogs, was 9.7% of Internet and catalog sales. Legacy advertising expense was 7.6% up 30 basis points from last year primarily due to higher online marketplace costs.

This quarter's general and administrative expense, which includes $3.8 million of JC Whitney integration and restructuring expenses was 11.6% up from 11.3% last year. Legacy G&A expense excluding the legal settlement and cost to protect intellectual property was 7.5% down 130 basis points from last year's 8.8% due to fixed cost leverage on higher sales.

Fulfillment expense was 5.7% this quarter, consistent with last year. Legacy fulfillment was 6.3%, an increase of 50 basis points from last year reflecting higher depreciation and amortization expense from software deployments.

Technology expense was 2.1% up 20 basis points from last year. Legacy technology was 2% this quarter consistent with last year.

Visitors for the quarter were 42.1 million. Orders through our eCommerce channel this quarter was $662,000, and average order value was $122. Legacy visitors were at $32.3 million up 10% from last year. Legacy conversion was 1.54% down 5% from last year. Legacy revenue capture was 82.0% down 3% from last year, and AOB was $115, down 1% from last year.

This quarter's customer acquisition cost was $9.70. Legacy customer acquisition cost for this quarter was $6.94, an increase of $0.50 or 8% from last year.

Turning to the balance sheet, quarter-end cash and securities were $18.4 million, and debt was $19.4 million. Cash equivalents and investments decreased by $2.8 million over the previous quarter primarily from integration expenses, capital expenditures related to the integration of JC Whitney, and paydown of long term debt.

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

Thank you, Ted. Thanks, all, for joining the call. I'm going to be very candid about our third quarter results. They are extremely disappointing on a number of fronts. We certainly have not executed up to our expectations, and we all recognize the need to do better.

Having said that, I believe most of the heavy lifting has been completed, and the third quarter will be our transitional low point for the fiscal year.

We have made great strides in our online marketplace channel, search channel, and AutoMD. However, the JC Whitney acquisition proved to be far more time-consuming and problematic than we anticipated. We are still optimistic about the acquisition and our prospects at the combined entity. JC Whitney remains the leader in brand recognition that catapults us in the accessory category, which we believe we will leverage across the entire US Auto Parts platform. And I believe all the steps we have taken in the last 15 months will deliver improved results in 2012.

The integration of JC Whitney onto the US Auto Parts platform now allows us to manage all of our businesses with one set of management systems, which was not the case until it was completed the end of October. The completion of this integration has been about four months behind schedule, and it's not only impacted the results of JC Whitney but also the base business.

As it relates to JC Whitney, during our AV testing, we inadvertently impacted traffic. However, we corrected the issues, and we are now seeing traffic return and hope to have it back to pre-impacted levels by the end of the year.

Additionally, we also experienced low stock levels as we transitioned from the JC Whitney demand planning forecast system, US Auto Parts, resulting in product being out of stock, decreased conversion rates, and increased no-fills.

We have addressed the system's integration issues in order to the necessary products to correct the out-of-stock position. Unfortunately, these complications experienced during the cutover have affected revenues, which are now trending down 40% year-over-year. We believe we have taken the necessary steps to correct these operational issues.

In addition, now that we're on one operating platform, we believe we can reverse the trends prior to coming into the quarter that were created by not focusing on the competitive position of the Company while we were preparing for the cutover.

We are looking forward to more aggressively competing in the $20 billion accessory market. In an effort to be more competitive, we will be adding over 500,000 new SKUs to JC Whitney this quarter as well as properly addressing competitive pricing in the market.

As it relates to the integration impact on the core US Auto Parts business, during the cutover to the catalog, we ran into some SKU translation issues that resulted in revenue capture decreasing by 3% during the quarter, which pulled sales down.

These translation issues are being corrected and, by the end of the quarter, we shoot back to historic revenue capture levels.

This acquisition and subsequent integration certainly has not been how we planned it when we made the acquisition. We anticipated a quicker integration and one without complication to JC Whitney or the existing business. And it certainly stretched the entire Company, but we are, fortunately, through that period. We are now a stronger and more competitive business as a result, and we are looking forward to growing the business, going forward.

Moving to our core business, visitor growth was up 10% while conversion was down 4%, and revenue capture was down 3%. As it relates to revenue capture I mentioned previously, we believe we have addressed the negative trend here and should have it fully corrected by the end of the quarter. As it relates to traffic conversion, on our last call we discussed changes in our organic search channel resulting in decreases in traffic on some higher converting sites and traffic increases on some lower converting sites resulting in increases in traffic but reduction in convergence.

We experienced the same impact this quarter as well. For competitive reasons, we won't go into specific actions we'll be taking to address the traffic trend reduction in higher converting properties other than to say we believe we will have it addressed over the next 6 to 12 months, and anticipate incremental improvements between now and then. And 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 on our higher converting properties, which, in return, should increase conversion as well.

As it relates to the online marketplace revenue, our business was impacted a year ago by changes made in this channel, which we have now passed the anniversary date of those changes. We are pleased that we were actually flat year-over-year in the quarter in our online marketplace business prior to the anniversary of those changes. And this comp came up against a 62% comp from the previous year.

Said differently, we have been able to make up all the revenue loss resulting from the changes prior to the anniversary and expect good year-over-year comp growth for Q4 in 2012.

I would also reiterate we remain the market leader from online auto parts and have positioned ourselves to take advantage of an industry poised for online growth. We have made our sites some of the easiest to use and navigate for the automotive repair customer. We believe our core strategy creates a significant competitive advantage over the long term.

We will continue to focus on, first, improving the online customer experience through better front-end navigation as well as great customer service and fast shipping. Second, creating a more efficient supply chain in the industry. To this point, we now have 8,000 private label engine parts and look into the 3,000 to 4,000 private label engine and accessory parts annually. Additionally, we have over 35,000 private label body parts, which is, by far, the largest of any online seller. Third, increasing our already millions of SKUs by adding SKU selection faster than competitors with the goal of adding at least 250,000 new SKUs annually. And, finally, by producing double-digit (inaudible) growth by implementing the changes we discussed earlier and taking advantage of more people shopping online for auto parts.

Moving to AutoMD we continue to see positive unique visitor trends. We comped up 15% quarter-over-quarter and over 115% year-over-year. We are now trending about 700,000 monthly unique visitors. It remains the leading automotive repair customer advocate website.

AutoMD was launched to provide consumers' transparency on the automotive repair process, and we have been doing this by providing information on the website as well as calling shops on behalf of customers to get local quotes for immediate repair needs. The results of these calls demonstrates a need for transparency. On over 11,000 job requests across 3,000 cities, our average price variance from the lowest quote to the highest quote is over $250, an above 40% variance. We believe AutoMD has proven to satisfy legitimate need and now looks to bring greater automation to this service, going forward.

While we don't provide full guidance consistent with our previous calls, we will provide a view into the current quarter. Our core business is trending up 6% quarter-to-date over last year. Additionally, in recent weeks, we have additional acceleration above the 6% from both our online marketplace business and changes to our core eCommerce business. While it's too early to understand the total EBITDA impact from the possible mix shift, we are encouraged by the recent improvement in growth we are experiencing.

Going forward, now that we're fully integrated, we won't break out EBITDA contribution between our core and WAG businesses, as all now runs on one platform as one business. We also recognize we have a number of moving parts in our business, and it makes it difficult to model. The best insight I can provide is a few data points to help you model the business.

If you were to assume 10% growth next year on historic growth margins, the business should produce around $30 billion of EBITDA.

2011 has been and continues to be a year of investment and transition for the business. We address changes in our online marketplace business, we have completed the full integration of WAG and, finally, we are addressing changes within our organic search channel. We believe the progress we have made against all three of these changes to 2011 have set us up for a solid 2012.

And with that, Operator, I will now open up the call for questions.

Thank you, sir. (Operator Instructions) Mitch Bartlett, Craig-Hallum Capital Group.

I wonder if you could just address the gross margin decline in the core business again. It went by a little bit fast.

Yes, the gross margin decline, Mitch, is made up of two things. We had some higher freight costs, and we had a mix shift from body to engine. So those are the two things that contributed to the change in margin.

Okay. And you said that WAG is still down 40% since the cutover, but now you see that it's starting to turn or -- go through that one more time as well.

Yes, so we ran into some issues during the cutover. We've identified them. We're addressing them. Some are corrected already. Some will be corrected in the coming weeks and months as we fix those issues. We didn't certainly anticipate those issues coming in. We've got them, and we'll address them. The good news is we're on the US Auto Parts platform and so now what we have to do is go correct the issues that came up and go compete in the marketplace.

Thank you. Shawn Milne, Janney Capital Markets.

Yes, thanks for taking my question. I have to go back. There's a lot there that I -- a lot of stuff coming there. So going back to the prior questions, do you expect WAG to be a higher revenue number in Q4? Or is it still going to keep declining? Said another way, when do you think that business is going to show a better number than what we saw in Q3? And then going back to the legacy business in Q3, the eCommerce side, can you go there -- just really quick there -- what was the issue with revenue capture, and why all of a sudden now is your -- I understand the traffic issue earlier in the year with Google, but now why are we seeing revenue capture issues? Thank you.

Okay, so I think the question you're asking, Shawn, the first one is you did $19 million in the third quarter. Clearly, we're trending below that number based on (technical difficulty) running through here post-integration. We don't give guidance on that number. We certainly expect to reverse the trend and be above the $19 million number on a go-forward basis, and we'll work through it this quarter.

As it relates to revenue capture, that number dipped about 3% over what it should have been. Frankly put, we ran into some SKU translation issues, to get technical, where when we did the integration, either a SKU was put up on the site when we thought it was in stock, or the SKU that was up on the site that was in stock, when we then went to vend it had a translation issue on the back end, which ended up having us with higher no-fill rates than we anticipated. And we've identified it, we've corrected it. It should be back to historic levels, certainly, in the first quarter.

I don't understand how there's a SKU translation issue on the -- your core business because of an integration with Whitney. What am I missing?

Well, because it all went into one common catalog. And when we put that into one common catalog, then some of the nomenclature was flipped.

I'll have to follow up offline. I don't quite understand that.

Gary Prestopino, Barrington Research.

A lot to digest here, but I guess the bigger question is you've got this integrated, you've got your anniversary in eBay and some of the issues with Google. In your mind, as you put this -- as it's been completed, anything changed in terms of -- we were looking at Whitney being able to generate maybe $100 million of revenue annualized with about $8 million to $10 million of adjusted EBITDA. Has anything changed in regard to that, realizing that this is probably going to be pushed out into 2012 and possibly 2013. But can you talk about that at all?

Yes, I think this is -- as we've got it modeled today, the $100 million in revs is probably closer to $8 million in EBITDA. And we had hoped to be running at a higher revenue run rate exiting this year. Obviously, we're not. We believe we can hit that number and we do, we believe it's going to take a little bit longer than we anticipated? Yes, probably.

I think as we work through the integration issues we run into today or at the -- and we have, to date, at the cutover. And as we then address the marketplace with new SKUs and the right pricing, we'll have a better feel for what that acceleration looks like when we talk to you in the first quarter.

Okay, and then, again, you were kind of cutting out because we're on a cell phone, but did you say that if you take the legacy business, grow it at 10%, you should be generating adjusted EBITDA of $30 million this year -- 2012, I'm sorry?

Yes. So I'm saying if you take both the Whitney platform and assets we've acquired and our platform, and you ran a basic assumption. If you were to assume 10% growth on that revenue base, with consistent margins, we think the business model is around $30 million.

I guess what I'd say is, Gary, we're probably not going to go forward breaking out Whitney versus US Auto Parts. It's just integrated now. And so probably best for us to put that out there for you and allow you to model off of that.

No, that's fine. But in terms of going forward here, the last couple of quarters we really haven't gotten clean numbers. There's been restructuring charges, there's been all sorts of one-time hits. Is Q4 going to be a similar kind of quarter or is all the restructuring over? Do we wipe the slate clean and Q4 we get a really good idea of what the run rate of both of these entities are going to be?

Yes, Q4 won't be clean, Gary, because we pushed into the quarter. And so I think the first clean quarter you're going to see is Q1. The integration is done, so now it's -- we get through this quarter, and start to see clean quarter in Q1.

Yes, so Q1 there will be no more restructuring. Just real quickly, if the integration is done, what other restructuring is involved here? What other charges are you looking at? Not to get specific on the level of charges, but what's still there to do?

You would have anticipated the contractual and people obligations to be done before the quarter is over. It pushed into the quarter, so it will fall into this quarter versus third quarter.

Ross Sandler, RBC Capital Markets.

Hello, this is actually Andre Sequin on for Ross. I wonder if you could give us a sense of what kind of growth rate you think you might see on the eBay channel on 4Q now that you're comping the downtick from last year. And then also could you remind us what sort of an EBITDA margin you think you might be able to achieve next year with the Whitney acquisition done and the partial impact from the Google traffic hit?

We don't give guidance on either of those.

Right. Well, we did state last year that our eBay revs were down about $2 million in Q4. So if you were to assume flat or with just flat no growth, then you would assume that we're going to be $2 million better than we were last year in Q4.

Thank you. (Operator Instructions) There are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

We appreciate you guys joining the call and look forward to update you in the first quarter. Thank you.

Ladies and gentlemen, this concludes the US Auto Parts Third Quarter 2011 Conference Call. If you would like to listen to a replay of today's conference, please dial 1-877-870-5176 with the access code of 4485236. Thank you for your participation. You may now disconnect.