Carparts.Com Inc (PRTS) 2014 Q1 法說會逐字稿

Welcome to the U.S. Auto Parts first-quarter 2014 conference call. On the call today from the Company are Shane Evangelist, Chief Executive Officer, and Dave Robson, Chief Financial Officer. By now, everyone should have access to the first-quarter 2014 earnings release, which went out today at approximately 4:00 PM 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 May 20, 2014. 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 of the date hereof.

We refer all of you to the risk factors contained in the U.S. Auto Parts annual reports on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission for a more detailed discussion on the factors that can cause actual results to materially those projected in 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 the non-GAAP financial measures in this call and 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 like to turn the call over to Shane Evangelist.

Thank you, Katia, and thank you all for joining the call. I would like to start by thanking our team members for putting U.S. Auto Parts in the strongest position that we have been in over the last two years. And I believe we are back in the position to be aggressive and achieve growth in both revenue and EBITDA. Thank you all for your hard work and dedication of the Company.

Turning to highlights for the quarter, our go-forward sales channels were up double digits at 11% year-over-year and their overall comps were up 4%. Our adjusted EBITDA for the quarter was $3.3 million, and adjusted EBITDA less CapEx was positive $1.8 million.

Our net debt less cash at the end of the quarter was positive, and currently we have no debt and over $3 million of cash on the balance sheet. And currently for the second quarter, our go-forward sales channels are trending up 20% year-over-year and overall revenues are trending up 13% year-over-year.

Now before I get into more detail on the quarter, I will take a few minutes to discuss the industry in general and the shifts that are taking place from offline to online growth. I believe that in either 2014 or 2015, the incremental growth of the overall $47.2 billion DIY market, as estimated by the Automotive Aftermarket Suppliers Association, or AASA, will be larger online than offline.

According to the AASA, the overall DIY market is expected to grow 3.9%, from $47.2 billion to $49 billion in 2014, of which we estimate $4.5 billion of the DIY market to be online between online marketplaces like eBay, pure-play retailers like U.S. Auto Parts, and offline retailers selling through their website like AutoZone. We anticipate the $1.8 billion of growth to be split almost evenly between offline and online in 2014, with offline expected to grow 2.2% while the online is expected to grow 20%.

In 2015, AASA estimates DIY growth to be 3.8%, with a recent Booz Allen report expecting the online DIY growth to be 20%, which will result in offline DIY growth at 1.7%. If these growth rates take place as expected, this will lead to a split of DIY dollar revenue growth in 2015 being around 60% online and 40% offline.

I believe the shift and greater share of growth coming from online is a watershed moment in the DIY aftermarket. And by 2018, based on the different growth rates between online and offline, potentially 90% of the DIY marketshare growth could occur online. I believe U.S. Auto Parts is well positioned to take advantage of this shift.

Turning to revenues in the quarter, our go-forward sales channels finished up 11% year over year for the quarter, driven by strong year-over-year performance in our online marketplaces and more aggressive pricing. Overall, we grew revenue by 4% in the quarter, a meaningful pickup over the trend we announced [only to March] of negative 0.4%.

Quarter to date for the second quarter, our go-forward sales channels are up 20% and our overall revenue comps up 13%, again driven by strong online marketplaces, more aggressive pricing, and improvements in our branded business.

We had previously stated that we anticipated overall revenues to be down in the first half of the year and up in the second half of the year, and our go-forward sales channels being positive throughout the entire year. We now anticipate overall revenue growth to be positive every quarter of the year, and go-forward sales channels to be double-digit positive for the full year.

Gross margins for the quarter came in at 30.4%, which was an improvement over the fourth quarter by 110 basis points and a 20 point basis points improvement over last year. I anticipate gross margin percent in the second quarter to be closer to our second-quarter results of 2013, or down 200 to 300 basis points over the first quarter.

Some of the decrease is a result of normal seasonal mix shift away from auto body parts to more engine and hard parts, and some of the decrease is the result of more strategic pricing that has resulted in a lift in revenues which we discussed earlier. It is a trade-off we continue to monitor daily and will continue to adjust with our goal of maximizing gross profit dollars.

Adjusted EBITDA for the quarter was $3.3 million, with CapEx of $1.6 million, making adjusted EBITDA less CapEx positive $1.8 million. This is the first quarter in the last 5 quarters where adjusted EBITDA less CapEx was positive, and I believe supports what we had previously stated that adjusted EBITDA less CapEx will be positive for 2014.

Also of note is a reduction in debt during the quarter from $6.8 million at the end of the fourth quarter to $750,000 at the end of the first quarter. We also had $1.4 million of cash on the balance sheet at the end of the first quarter, making us cash positive net of debt.

Currently, we have no debt drawn against our revolver and over $3 million in cash on the balance sheet. We do anticipate using this cash and the availability under our revolver as needed to build inventory and take advantage of quick pay discounts in the future.

As I mentioned on a previous call, our private-label business has been growing at double-digit rates, and to be clear will remain our main focus for growth. Our over 40,000 private-label products, along with the 4000 to 5000 private-label products we will add this year, provides us great competitive moat and provides great value to our customers at healthy margins.

We are beginning to see some improvement in our branded business. The last time we spoke, I indicated our branded business was down double digits. This has improved to being down mid-single digits, and as we get smarter on our pricing strategies should continue to improve. We believe it is strategic to grow our branded business as it provides a broad assortment of products and helps inform other areas of our business.

Moving to AutoMD, we continue to be excited about the opportunity to bring pricing transparency to consumers, as well as increase business to selected shop owners. We continue to anticipate our net direct investment in AutoMD to be around $1.5 million in 2014, with a major focus on signing up shops to the AutoMD Insta-Quotes! service.

In closing, we are excited about the business. Over the next two years, I believe the DIY industry is going to go through a watershed moment where more DIY market growth will be achieved online versus offline. And U.S. Auto Parts is in a great position to take advantage of this shift. Based on our first quarter and current quarter revenue trends, we now anticipate revenue being positive for the entire year and our go-forward sales channels to be double digit up for the year.

I believe a double-digit growth rate for our continued sales channels demonstrates our ability to grow with the market. We expect to see some gross margin depression as we offer more competitive pricing, with gross margin rates ranging between 27% to 29% for 2014.

Adjusted EBITDA less CapEx was positive $1.8 million, demonstrating our ability to produce cash from operations and reinforce our previous statements that adjusted EBITDA less CapEx will be positive for the year. We currently have no debt, which has been eliminated from a recent high of $8.3 million at the end of the third quarter last year to currently over $3 million of cash on the balance sheet, a $10.1 million positive swing in cash over the last seven months.

And finally, I want to thank U.S. Auto Parts team for the tremendous job they have done to stay focused and turn the business profitable again. I recently returned from a trip to the Philippines where the spirit of the employees there is infectious and uplifting. Thank you all for being inspirational and tremendous leaders. And while much of the direction of our business may come from the very talented employees in the US, the heart of our organization resides in Manila, and it is a big heart.

Thank you all, and with that I will turn the call over to David.

Thanks, Shane. Good afternoon to everybody on the call. Unless otherwise stated, this quarter refers to consolidated Q1 2014, and last year refers to Q1 2013, in comparisons of Q1 2014 compared with Q1 2013. Also, percentage and basis points discussed are calculated using net sales. However, for advertising we will discuss comparing to net online sales.

Adjusted EBITDA as Shane mentioned for the quarter was $3.3 million, compared to adjusted EBITDA of $1.5 million last year. Adjusted EBITDA excludes non-cash share-based compensation expense of $376,000 this quarter and $409,000 for the first quarter of last year. Last year's adjusted EBITDA also excludes $499,000 in restructuring costs.

CapEx for the quarter was $1.6 million compared to $2.6 million last year. Adjusted EBITDA less CapEx was positive $1.8 million for the quarter, and improved by $2.9 million over last year. This quarter's net sales were $68 million compared to $65.4 million last year, an increase of $2.6 million or 4%.

During the same period, our online sales grew by 3.8%, while our offline sales 5.7%. Net sales channels, excluding websites we eliminated in 2013, grow by 11.4%. The online sales increase of 3.8% or $2.2 million was driven by a $6.5 million increase from continuing online sales channels, offset by a $4.3 million reduction in online sales from websites we discontinued.

The $6.5 million increase in continuing online sales channels was driven by a $5.4 million increase in sales from our online marketplaces and a $1.1 million increase in sales from our continuing e-commerce sales channel. Both our online and offline businesses benefited from better in stock positions, and favorable weather conditions this year over last year.

Now turning to margins. This quarter's gross margin was 30.4%, up 110 basis points from last quarter of 29.3%, and up 20 basis points from last year of 30.2%. The 20 basis point improvement over last year and 110 basis point improvement over last quarter was primarily driven by higher penetration of sales of our private-label products, which generate a higher gross margin rate, partially offset by more aggressive pricing across our online sales channels.

Our private-label mix was 60% of net sales this quarter compared with 55% last quarter and 49% last year. Online advertising expense, which includes catalog costs, was 7.2% of net online sales this quarter compared with 7.4% last year, a reduction of 20 basis points. This compares to 7.0% in Q4 2013.

The 20 basis point improvement in advertizing spend was primarily due to more efficient spend across commercial and search engine websites and reduced catalog spend on higher sales. This quarter's marketing expense excluding online advertising expense was 8.4% of net sales, compared to last year of 10.5%, a reduction of 210 basis points. The decline was primarily due to lower depreciation and amortization expense of 90 basis points, lower wages of 70 basis points and lower overhead expenses of 50 basis points.

General and administrative expenses, including amortization of intangibles, was $4.1 million or 6.1% of net sales this quarter, compared to $4.7 million or 7.2% of net sales last year, a decline of 110 basis points or $540,000. The decrease was primarily due to lower wages of 50 basis points, lower depreciation and amortization of 30 basis points, and lower overhead costs of 30 basis points.

Fulfillment expense was 6.9% of net sales this quarter, down from 8.2% last year, a decline of 130 basis points or $669,000. This improvement was primarily due to lower depreciation and amortization expense of 90 basis points, reduced overhead expenses of 20 basis points, and lower wages of 20 basis points.

Technology expense was 1.7% of net sales this quarter, down from 2.3% last year, a decline of 60 basis points or $367,000. The reduction was primarily due to lower wages of 20 basis points, lower telephone expense of 10 basis points, and lower overhead of 30 basis points. Unique visitors on our e-commerce sites for the quarter were 30.3 million, down 18% over last year. 72% of the 18% decline was due to the impact of sites we discontinued, which was a reduction of 4.7 million unique visitors. Excluding this impact, traffic declined by 5.6%.

Orders placed through our e-commerce channel this year were 488,000, down 7.8% from last year of 529,000, with an average order value of $107, down 1.8% from $109 last year. Our conversion rate was 1.61% this quarter, up 11.8% from last year of 1.44%. Our strong growth in conversion and the decline in ALV are both due in part to our more competitive online pricing compared to last year.

We are also seeing an improvement in year-over-year conversion as the sites we retired last year had lower conversion rates than our go-forward sites. Revenue capture, the amount of actual dollars retained after taking into consideration return, credit card decline and product fulfillment, improved by 270 basis points or 84.9% of gross sales compared to last year of 82.2% of gross sales.

The revenue capture improvement is primarily due to the improved in-stock position and lower sales return. This quarter's customer acquisition cost was flat compared with last year at $6.96.

Now, turning to the balance sheet. Cash and securities were $1.4 million, and debt on a revolving line of credit was $0.8 million; compared with $0.9 million in cash and securities, and debt of $6.8 million last quarter. A reduction in debt net of cash is $6.6 million. Our cash and other debt was positive at the end of the quarter at $0.7 million.

Compared to last year, debt net of cash decreased by $11.4 million. Our availability at the end of the quarter on our line increased to $15.5 million, and net availability not subject to any covenant test increased to $9.5 million. As of today we have no debt, and our net availability in our line is $10.3 million. Although we currently have no borrowings against our revolver, we do anticipate future borrowings as needed for working capital and operating needs of the business.

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

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

Hey guys, this is George on for Mitch. First question, great quarter on accelerating growth at the go-forward site. So the question is, if you were to point to just a few things that is really driving that acceleration, what would you point to? And second part of that is how much is weather contributing to that growth?

Hey, George. So I think there is a couple of things. One is we continue to improve the website, and so the user experience has been better. And you can see that in conversion as well as we have a better in-stock rate this year than we did last year, so that certainly helped. And I think we've mentioned it a few times, we got a little bit more aggressive with our pricing. So the combination of those three things has helped drive the growth.

Okay. Okay. And then --.

Oh, I'm sorry. I apologize, George. My guess is we think weather is probably a couple of points.

A couple of points.

But I would definitely tell you that I believe the performance of the business is a much greater share of our performance than weather.

Sure. And then secondly, and you just talked a little bit about pricing, I assume that is getting more aggressive on the branded stuff. Is that -- do you see more competition? Is competition sort of intensifying, or has it mostly just been sort of internal decision to start to be more competitive with the market?

Yes. a couple things. One is we have gotten more aggressive with some of the private label as well, and so it hasn't just been branded. And we have liked the result we have seen from private label. And as it relates to more price point competitive out there, I don't think that is the case. I think we just made a decision to get our pricing more in line with some of the market pricing.

Okay. And then lastly, could you go through the quarter-to-date metrics again for go0forward and consolidated?

Which ones did you want, George?

You just gave the revenue growth for where we are so far in the quarter.

Yes, so total revs are up 13%, and go-forward sales channels were up 20% sort of quarter to date for the second quarter.

Okay. All right, thank you.

(Operator Instructions) Jared Schramm, ROTH Capital Partners.

Hi, good afternoon. Most of my questions were just answered. Two ones, though, that were not. You mentioned net direct investment in AutoMD for 2014 to be about $1.5 million. Have you pegged out an investment figure for that property heading into 2015 at all? Or is it too soon to be forecasting that?

Yes, I don't think we have -- I think we will read that, Jared, based on the progress we make this year as well as what we see in 2015. We are certainly excited about the opportunity to bring transparency to consumers, and we're certainly excited about filling up shops.

We think those two are big needs in the marketplace that have not been met, and we think we are in the best position to do it. And as it relates to what the overall investment will be, we will continue to evaluate that as we go forward.

Okay, and I think you mentioned it as well that private label comprise about 60% of sales in the quarter. Was that correct?

Yes, that is right.

How do you see that mix trending for 2014? Is that a number that you are pleased with at this point in time? Or maybe you'd like a different balance or mix shift in the future.

Yes, I think probably the right way to think about it is we certainly want our private-label business to grow with markets on a go-forward basis, and hopefully ahead of market. We also would like to see our branded business growth with the market as well, and so that mix shift may come down a little bit since our branded business just hasn't been growing. And I think as we get smarter and sharper about how to price it and position it, as well as some of the changes we will make on our website coming forward. Hopefully we see that growth.

So I wouldn't be disappointed if the shift reduced a little bit from PL to branded, but it wouldn't be because PL wasn't growing, I think is probably the best way to say it. We think about these two businesses as kind of separate businesses as it relates to the growth of those businesses, and we hope to grow both of them.

And frankly if they both grow, then obviously PL would continue to keep the same percent mix it has today. But we wouldn't be opposed to having our branded business grow, too.

Okay. Congratulations on the quarter and thanks for taking my question.

Thank you. And I am showing no further questions at this time. I'd like to turn the conference back over to management for closing remarks.

Thank you. Thanks, everyone, for joining the call. We look forward to updating you with the second quarter. Take care.

Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.