Carparts.Com Inc (PRTS) 2012 Q4 法說會逐字稿

Welcome to U.S. Auto Parts fourth-quarter 2012 conference call. On the call today from the Company are Shane Evangelist, Chief Executive Officer; and David Robson, Chief Financial Officer.

By now, everyone should have access to the fourth-quarter 2012 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 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 April 8, 2013.

Before we begin, we'd like to remind everyone that the prepared remarks making 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 the date hereof. We refer you to the Risk Factors contained in U.S. Auto Parts' Annual Report on Form 10-K and Quarterly Report 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 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 of the reconciliation between GAAP and non-GAAP measures required by the SEC Regulation G is included in U.S. Auto Parts' press release today, which again, can be found on the Investor Relations section of the Company's website. The non-GAAP information is not a substitute for any performance measure derived in accordance with GAAP, and the use of such non-GAAP measures has limitations, which are detailed in the Company's press release.

With that, I would now like to turn the call over to Shane Evangelist. Please go ahead.

Thank you, Michaela, and thank you all for joining the call. As many of you know, over a year ago, we began to totally rejuvenate and reposition the Company's branding and customer acquisition strategy. This process continues today. However, we are nearing the end of this effort, and once completed, we'll be better for it long-term. Now in this call, I will update you both in the challenging results we're working through and the status of our repositioning of U.S. Auto Parts.

Looking at our recent results, it's clear we are still working through the challenges of needing to reposition the Company by reducing websites and lowering operating costs. Our revenues for the fourth quarter were down year-over-year by 19%, and we are currently trending down 25% year-over-year for the first quarter of this year. The majority of the reasons for the declining revenue year-over-year can be attributed to decreases in traffic across our replacement engine and collision websites.

At the end of November, Auto Parts Warehouse experienced a loss in visitors as a result of a search engine algorithm change. The loss in visitors prompted us to increase our efforts to consolidate websites both in speed and quantity. These efforts should be completed by the end of the third quarter and will reduce us down to two main websites -- autopartswarehouse and J.C. Whitney.

Adjusted EBITDA for the quarter came in negative $1.1 million. However, after adding back non-cash charges for inventory write-downs and receivable charges, adjusted EBITDA would have been positive $650,000, CapEx for the quarter was $2.3 million. Clearly, we need to be producing more EBITDA than spending on CapEx. As a result, we have taken actions to reduce the operating cost of the business. We mentioned in the last call we were taking actions to reduce both operating and capital costs. We have continued those efforts in the first quarter of this year with the elimination of 220 positions.

All told, we have reduced annual operating costs by $8 million and capital costs by $3 million, totaling an $11 million reduction in expenses. This has been a challenging period for our employees. I want to thank them for their positive attitude. It is because of their strength that we will be coming out of this stronger and more competitive going forward.

In addition to reducing expenses, we have announced a Series A convertible preferred stock financing of approximately $6 million in proceeds. For details of this race, please refer to the 8-K and press release documents filed today. With these actions, along with other actions available to us, we are creating the operating structure and liquidity we need to navigate through this transitional period; and once through, drive going forward. And I believe we will drive going forward and here's why.

First, we will continue to have the largest unique visitor footprint in the marketplace, even after the website consolidation is completed. Second, we will have two of the strongest Auto Parts eCommerce brands in the market. And third, we will continue to have the largest private label offering of any seller, uniquely positioning us to provide great quality products at low cost and with healthy margins.

Going forward, we'll be walking a dramatically simplified and improved consumer value proposition. We will be organized around two main sites -- autopartswarehouse, which is primarily focused on replacement products, and the closing in engine markets; and J.C. Whitney, which is primarily focused on the performance and accessory market. In addition, we will meet consumer demand for our products on these major online marketplaces to ensure we are in front of customers at all times.

We anticipate our efforts to reverse the negative traffic trends in autopartswarehouse will be completed by the end of the third quarter. This will be accomplished by rolling up all of our search engine-optimized based websites into carparts.com, and ensuring J.C. Whitney and autopartswarehouse have rich, unique content to be consumed by interested DIY customers. A combination of our reach, combined with our direct sourcing capabilities, will prove invaluable once our repositioning is completed.

I'm frankly encouraged by the flexibility of the business to manage through this transitional period. In addition to driving the future of eCommerce, I also believe we'll be well-positioned to thrive in the lead generation business for the do-it-for-me market. We have launched AutoMD Insta-Quotes! in three markets -- Long Island, New York; Bakersfield, California; and Spokane, Washington -- and plan to roll out to two to four more markets in the coming months. At a high level, the product is equivalent of Priceline or Travelocity from the auto repair and maintenance industry.

Basically, if you know what's wrong with your vehicle or simply need an honest mechanic in the area to help diagnose your vehicle needs, AutoMD Insta-Quotes! has the technology, distribution partners and shops to provide real-time quotes for the jobs required. This service provides much-needed transparency and pricing, coupled with user feedback on shops to ensure consumers go to highly reputable installers where they won't overpay. As soon as we turn the corner on our core business, we will be in a position to market AutoMD Insta-Quotes!. We look forward to providing the results of those marketing tests once completed.

In closing, we are well underway to totally rejuvenate and reposition our Company to be more competitive. We are addressing profitability going forward by reducing websites, and building an operating structure that can support reduced revenue. More importantly, the revenues going forward will be built on great brands with a great customer experience, driven by an unmatched direct source supply chain.

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

Thanks, Shane. Good afternoon to everybody in the call. Unless otherwise stated, this quarter refers to consolidated Q4 2012, and last year, refers to Q4 2011. In comparisons, our Q4 2012 compared with Q4 2011 also percentage and basis points discussed are calculated using net sales. However, for advertising, we'll discuss comparing to net Internet sales.

As Shane mentioned, adjusted EBITDA for the quarter was negative $1.1 million compared to adjusted EBITDA of positive $1.9 million last year. Adjusted EBITDA excludes non-cash share-based compensation expense of $265,000 this quarter and $660,000 last year. Adjusted EBITDA also excludes a non-cash impairment charge of $26.4 million related to the write-down of goodwill, intangible assets, and other property and equipment, and $67,000 related to intellectual property rights.

During the quarter, as Shane mentioned, we also took a charge related to inventory returns of $1.5 million, and vendor receivables of $257,000, which are included in adjusted EBITDA. If you exclude these write-downs, adjusted EBITDA would have been $649,000. Last year, adjusted EBITDA excludes the non-cash write-down of $5.1 million related to the J.C. Whitney trade name; $784,000 in restructuring charges associated with the J.C. Whitney business; and $19,000 related to intellectual property rights.

From a sales perspective, this quarter's net sales were $62.8 million compared to $77.2 million last year, a decrease of 18.6%. Total online sales decreased 22.5% this quarter, principally driven by an 18% decline in traffic. Our online marketplace sales increased 14.9% for the quarter. As well, our offline sales continued to grow, with net sales increasing 45% in Q4 and up 30% for the full year.

Turning to margins, this quarter's gross margin was 28.3%, down from last year of 30.8%. However, excluding the one-time inventory write-downs related to returns and the vendor receivable write-down, adjusted gross margin was 31.1%. Gross margin, excluding these one-time adjustments, improved over last year, due to a higher penetration of sales from our private label business, as well as improved margins across our branded line. For the back half of the year, margins were 31.2%.

Online advertising expense, which includes catalog costs, was 8.5% of net online sales this quarter compared with 9.5% last year. The decline in online advertising expense was due to a reduction in print catalogs of $500,000, as well as improved leverage of our marketing spend on lower sales volume. This quarter's marketing spend, including -- excluding online advertising expense, was 11.7% of net sales compared to last year of 9.0%, up 270 basis points, primarily due to higher amortization costs related to software deployment.

General and administrative expense was 6.9% of net sales this quarter and 8.1% last year. The decrease was primarily due to J.C. Whitney restructuring costs that occurred last year of $784,000, lower depreciation and amortization expense, and lower merchant fees. Fulfillment expense was 8% of net sales this quarter, up from 6.6% last year. Our leverage declined in fulfillment on lower sales volumes. Technology expense was 2.3% of net sales, flat with last year.

Visitors on our site for the quarter were 33.5 million, down 17.7% over last year. Orders placed to our eCommerce channel this year were 514,000, with an average order value of $108, down from last year's 682,000 and an average order value of $115. Our conversion rate was 1.53% this quarter, down from last year of 1.68%. Revenue capture was 82.7%, up from last year of 81.4%, primarily resulting from improvements in fill rate. This quarter's customer acquisition cost was $8.04, down from $9.87 last year, primarily due to a reduction in online advertising spend and reduction in catalog market expense.

Now turning to the balance sheet, quarter-end cash and securities were $1.1 million and debt was $16.2 million. Debt net of cash declined by $900,000 during the quarter, primarily due to reduction in inventory of $5.9 million, offset by accounts payable, and accrued expense reduction of $3.2 million, and capital expenditures of $2.3 million. Our availability at the end of the quarter on our line was $10.9 million, and net availability, not subject to any covenant tests, was $4.9 million.

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

(Operator Instructions) Mitch Bartlett, Craig-Hallum.

So, what signs do you have or what can you point to that, once you've finished this transition and there's two brands standing at the end of the day, at the end of the third quarter, that there is a viable business there or a strong business there? Or what do you see that makes you look to that future and feel good about it?

So, Mitch, I think we've modeled out the business down along those two brands along with our eBay and online marketplace business, and then, of course, our offline business. So if you take sort of all those totals and add them up, we believe we can put a cost structure and base around -- a cost structure in place around that revenue base to be successful going forward. And we think once we reset that revenue base, we'll have good growth, because we won't be impacted going forward by changes, now that we've got great content without any sort of -- the same content across multiple sites.

So I think we have to just reset the baseline and move forward. And by the way, we've operated this business at $150 million previously, right? So it's not as if we haven't been there before. And I'm not saying we're going $150 million; my only point is, we've been -- we've operated -- you know, we went $150 million, we went to $180 million, we went to $230 million. And so, we've certainly operated at multiple revenue levels previously. We just need to match the cost structure in the business to do that. And certainly, with less sites, we'll be able to have a lower cost base.

So, you're not going to give us an idea of what that baseline looks like with these two brands, once you've reset it -- but it's somewhere in the $100-million-plus range? Is that a fair assumption?

No, I don't -- I think -- obviously, we don't guide, Mitch. I think we're down 25% now and I think that's probably going to get better throughout the year. Certainly, the first quarter of 2012 was the best quarter the Company had ever had. And if you look at the year during 2012, it certainly fell off to the degree that it ran negative in the fourth quarter, and was relatively flat in the third quarter. And so we're running up against a tough comp to run up against.

Got it. Okay. And you eliminated 220 positions. Out of how many was that? What's the percentage? And where were they geographically-based? Or what did they do?

Yes. Well, they were across the business. They were -- obviously, some of them, geographically-based in the Philippines and some of them here in the US. And I think that's out of, call it, 1450 was reduced down from there. So, we would've pulled another 220 out of that number.

But, Mitch, the preponderance was in the Philippines.

Most of those were in the Philippines.

Okay. So maybe marketing positions to a good extent?

There was some marketing, some catalog, some technology, some finance. I mean, it was across departments.

Last question and then I'll (multiple speakers) --

(multiple speakers) Certainly -- but certainly, Mitch -- but to that point, though, I'll stress this, that as we made the decision to reduce websites, it certainly also reduced a lot of work required. And so a lot of the jobs followed that work requirement.

Got it. Okay. I will ask this question, then I'll get back in queue and maybe ask questions later. But the convertible preferred $6 million, the reason for that -- you went through the balance sheet, you have availability but you also liquidated some inventory in the quarter. Maybe you could just walk through kind of the rationale and where the balance sheet stood through the quarter?

So, Mitch, due to security regulations, I'm not able to provide additional details. What I can do is refer you to the 8-K filings specific to the raise.

Is the raise done?

Again, due to security regulations, (multiple speakers) I've got to send you to the 8-K.

(multiple speakers) Got it. Got it. Okay, okay. I'll stay on the side and maybe come back later. Thanks.

(Operator Instructions) Mitch Bartlett, Craig-Hallum.

I guess it's me today. What did you say the gross margin was after you did the inventory adjustment? The write-down?

31.1%.

Got it, okay. And is that a sustainable -- does that feel like something you can replicate going forward?

That seems like the range of 30% to 32%, so that's -- yes, that's a reason -- that's the range we see it coming in at.

And what was the inventory write-down? That went by fast, but what was that about?

You know, we historically had deals with J.C. Whitney where we had pretty good ability to return essentially anything that came back from our customers to our vendors. And over time, that's changed as a byproduct of our volume declining, and as we negotiated different deals with our vendors. So, we -- instead of returning to the vendors, we adjusted that down to a net realizable value.

Okay. Okay. And the inventory liquidation on the balance sheet, the $5.7 million that had sequentially came down, was that due to the adjustment of the slower revenue base, and plus there's not as many websites that you're dealing with? Or what's that about?

Well, the $5.7 million is associated with the goodwill write-down, so, as we looked at our fourth-quarter revenues declining at the 18% that we talked about. The accounting rules require that we re-look at goodwill impairment annually and then intangible assets associated. So those are intangible assets, not inventory, that we adjusted down.

And you believe all this work will be done by the end of the third quarter on the base business?

Yes, we believe the website will be consolidated by then.

Good enough. Thanks.

Thanks, Mitch.

Jeb Terry, Aberdeen Investments.

If I read the 8-K right, and it looks like your preferreds being taken down by insiders. Is that right? Or at least insiders are participating, your Chairman and --?

Yes, Jeb, I apologize, but I can't get into detail on the 8-K for securities regulations. I've got to refer you to it.

All right, all right. I can read. And then on AutoMD, I'm assuming that your recorded revenue from AutoMD in the three markets you're now in, and I think you said -- did I hear you right? -- you are going to roll out to two to four more markets in the coming number of months?

That's right. Our plans would be to expand AutoMD into more markets as fast as we can with distribution partners in those markets.

And okay. So as I recall, then, so with this multiple distribution partners as opposed to one national, or I guess some combination of both, is that how that works?

Yes, I mean the reality is there isn't one -- there isn't any one distribution partner that can reach every market and service every vehicle. So it will be a combination.

Okay. And will you begin to start reporting some metrics on that as we move through the year?

Yes, I think that's right. It's -- I mean, it's very early days here for AutoMD. But you know we fundamentally take the consumer proposition of transparency is dead-on. The fact that we are delivering value to the shops is great. The fact that we've driven value to the distribution partners is fantastic, as well as the brand. So there's clearly multiple winners in this supply chain and this -- and as well as us. And so we're excited about the product. Again, very early days and we'll look for additional distribution.

Okay. And now your offline sales were up pretty impressively year-over-year. And can you talk a bit about -- is that a derivative of your private labeling sourcing efforts and having competitive pricing? Or what's -- I mean, that obviously, as a separate business to offline, looks terrific. (laughter) You know, but (multiple speakers) --

I think you hit the nail on the head. I think it shows you how well we can buy, which is why we are so competitive online with these -- with this sourced product that we source directly offshore. And, as it relates to our offline business, we have been expanding into additional accounts, and making more of our product available to existing accounts. And so you've seen the growth there.

Okay. And so I just wanted to hear right -- I think you said there were 1450 employees prior to the headcount reduction?

That's correct.

Okay. Very good. Thanks. That's all for me.

Thank you. And at this time, I am showing no further questions in my queue. I'd like to turn the conference back over to management.

Well, first, thanks again for joining us. I think I'd leave you with three things. Once we get the revenue reset and our cost structure reset going forward, and we'll be doing that here in the next couple of quarters, we feel good about the fact we're going to leave and be leading with great brands -- with autopartswarehouse and J.C. Whitney -- that we're going to have still probably the largest footprint of unique visitors in the marketplace. And that we've got a great supply chain to support these businesses.

So we look forward to resetting them, the margin -- the revenues, and moving forward. Thank you all for joining the call.

Ladies and gentlemen, this does conclude our conference for today. We thank you all for your participation. And at this time, you may now disconnect.