Carparts.Com Inc (PRTS) 2015 Q1 法說會逐字稿

Welcome to U.S. Auto Parts first-quarter 2015 conference call. On the call today from the Company are Shane Evangelist, Chief Executive Officer, and Neil Watanabe, Chief Financial Officer.

By now everyone should have access to the first quarter 2015 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 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 25, 2015.

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 U.S. 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 can cause actual results to differ materially from those projected in any forward-looking statement.

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 the reconciliation between GAAP and non-GAAP measures required by the SEC's 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 have limitations which are detailed in the Company's press release.

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

Thank you and thank you all for joining the call. I would like to start by thanking our team members at U.S. Auto Parts for their hard work and dedication to the business. Your efforts have helped U.S. Auto Parts deliver a fourth consecutive quarter of double-digit growth. Thank you.

Before I get into the specifics of the quarter, I think it is important to note that we are a growing e-commerce business producing positive free cash flow from operations in the industry that is predicted to double over the next five to seven years. We believe we are in a great position to take advantage of that market growth ahead because of our industry-leading consumer reach and supply chain advantages. This business like many others has its challenges. However, we believe the challenges ahead of us are manageable and can be addressed with the right strategy and execution.

I will now provide some commentary on our revenue and our plans to support long-term growth and then we'll turn the call over to our new CFO, Neil Watanabe, who will go into the numbers in more detail.

Revenue for the fourth quarter was up 12% which hit two important milestones. The first is the fourth consecutive quarter of double-digit growth. The second important milestone is growth over the previous quarter's year-over-year growth meaning in the first quarter of 2014, we had positive 4% growth and in the first quarter of 2015, this last quarter, we were up 12%. I believe this demonstrates our ability to return to continuous year-over-year growth and anticipate this setting us up for long-term growth.

Our e-commerce channel grew 10% in the quarter and the highlight here is that this was our first quarter of positive traffic growth since the second quarter of 2012. This is encouraging.

On our last call we discussed a bit of traffic shift during the quarter and we started the quarter up mid single-digit traffic growth and then about halfway through the quarter we experienced some headwinds. Overall we finished the quarter up 1%. I believe this demonstrates that the Company can generate positive traffic growth. Our goal is to return to sustained positive visitor growth. Part of that sustainability is to become less dependent on organic search traffic and shift to more increased direct-to-site traffic and traffic from paid marketing channels.

Specific to our strategy to create sustained increases in traffic, we are focused on driving customer lifetime value or LTV of our customers. Obviously as LTV increases, we would expect the profitability of our overall business to increase.

However, there is another great outcome of increased LTV and that is being able to invest more in customer acquisition and marketing. Simply put, as LTV increases, our ability to invest more in marketing also increases. The drivers of LTV in the areas that we are focused on to improve LTV are made up of first, gross profit per unit; second, the total number of units per transaction; third, repeat purchases; and forth, conversion.

As it relates to gross profit per unit, we continue our robust process of sourcing private label products. We ended the quarter with around 63% of our revenues generated by private label SKUs. We added over 5000 SKUs last year and expect to do more this year. As we mentioned on our last call, we will be investing in additional resources to ramp development of our private label SKUs.

As per units per transaction, we have a number of initiatives centered around selling a complete job to the consumer versus selling only a single part required. Driving repeat purchases centers around initiatives to improve the customer experience and as we discussed on our last earnings call, this is the most significant investment area for the year. These customer experience initiatives have the potential for faster shipping and improve returns experience and improved first call resolution for customer issues.

Finally, conversion is about making it faster and easier for customers to find the right product. We have a number of initiatives focused on both ease and speed. Most recently we converted our flagship websites to being fully responsive, or said differently, mobile friendly, which helps with conversion and as a side note should limit any impacts from organic search position as Google recently changed its ranking criteria to include being mobile friendly.

As we execute on all of our LTV initiatives, we expect to see an increase in LTV. To provide some perspective on the upside of LTV increases, we believe a $1 increase in LTV allows us to increase marketing spend by $1.2 million annually which potentially results in traffic increases by about 2.5% driving revenue up an estimated $10 million annually and adjusted EBITDA by approximately $1 million.

More importantly though we believe this shift decreases our mix of traffic from natural search which we believe lessens the impact from future natural search engine changes.

Turning back to the financials, results for the quarter excluding AutoMD, adjusted EBITDA for the quarter came in at $2.9 million, CapEx for the quarter was $2 million producing positive adjusted EBITDA less CapEx of $900,000.

Looking forward let me provide some guidance for the full year of 2015. We continue to believe that revenue growth for 2015 will be up single digits. We also anticipate that revenue growth in the second quarter will be the toughest comp for us for the year. We also continue to believe adjusted EBITDA excluding AutoMD will be slightly down to flat year-over-year as we reinvest back into the business which is expected to drive customer lifetime value positioning us for long-term growth. Finally, we believe committed CapEx excluding AutoMD will be our around $6 million for the year.

Turning to our majority ownership in AutoMD, we made good progress during the quarter signing up shops and ended the quarter with approximately 2250 shops. We anticipate we will end the year with somewhere between 3250 shops and 4500 shops and we anticipate AutoMD will generate a $2.5 million loss in 2015 with $1.75 million in EBITDA and $1 million in CapEx.

In closing, I will reiterate what I said at the top of the call. We are a growing e-commerce business producing positive free cash flow in an industry that is expected to double over the next five to seven years. We believe we are in a unique position to take advantage of this market growth and that we have the right team to execute our strategy to drive customer lifetime value which we believe will shift traffic mix away from organic to customers coming directly to our websites as well as through more pay channels.

With that, I will now turn the call over to our new CFO, Neil Watanabe. We are excited to have Neil on the team. He is an experienced CFO in both public and privately held companies. Neil has spent his life in retail and has experiences with the changes that come with the right mix between growth and profit and inventory management. In the short term Neil has been here he has already made great impacts and we expect more of that to come going forward. Neil?

Thank you, Shane. I wanted to share how excited I am to join the U.S. Auto Parts team. I was attracted to this opportunity because of the inflection point of the Company's leadership position in the industry and the expectation of significant growth in this sector. I was also very impressed with the management team's vast experience in both the e-commerce and automotive sector which can take full advantage of the available growth opportunities.

I've hit the ground running here and am focused on improving the Company's profitability and enhancing shareholder value.

Good afternoon to everyone on the call. I'm going to go through our financial results for you and then I will touch on some of the key business initiatives that the Company is focusing on to drive improved profitability.

Unless otherwise stated, reference to this quarter in comparison to last year refer to the consolidated 13-week period of Q1 2015 as compared to the consolidated 13-week period of Q1 2014. Also, percentage and basis points discussed are calculated using net sales with the exception of advertising which we will be discussing and comparing to net online sales. Additionally unless otherwise stated, all financial data reported including and not limited to revenues, gross margin, operating expense, net income loss excludes our AutoMD reporting segment. We have included a chart of summarized segment information in our press release detailing the base U.S. Auto Parts, AutoMD, and consolidated financials.

Net sales for the first quarter of 2015 were $76.3 million compared to $68 million last year, an increase of $8.3 million or 12.3%. The majority of this growth came from our online sales channels where sales grew by 13.4% while our wholesale sales grew by 2.8. The quarter's online sales increase of $8.2 million was the result of $4.4 million or a 10% increase from our e-commerce site channels and a $3.5 million increase or 22.2% increase in sales from our online marketplaces.

The $4.4 million sales growth in our e-commerce sales channels were driven by 5% increase in conversion, 1% increase in traffic, a 2.8% increase in average order value, and a $5.7 million increase in orders. The 22.2% increase in online marketplace revenues was driven by a 12.1% increase in orders and a 9.2% increase in average order value to $71, up from $65 last year.

Now turning to margins, this quarter's gross margin was 28.1% compared to 30.3% for the period last year. This 230 basis point decline was primarily due to several factors including sales mix between sales channels and categories, competitive pricing strategies across our online sales channels and lower freight revenue as a percentage to total freight charges.

Our private-label mix grew to 63% of net sales this quarter compared to 60% last year and 58% in the most recent quarter. Our e-commerce online advertising expense including catalog costs was 7.2% of net online sales this quarter which is flat compared to both last year and last quarter.

We intend to strategically focus on optimizing spend across all acquisition sources. This quarter's marketing expense excluding online advertising expense was 6.9% of net sales compared to 7.7% last year. This decline of 80 basis points was primarily due to lower depreciation and amortization expense related to timing of capital investments.

General and administrative expenses including amortization of intangibles was $4.2 million or 5.5% of net sales this quarter compared to $4.2 million or 6.2% of net sales last year, a decline of 70 basis points. The decrease was primary due to lower wages and lower overhead costs.

Fulfillment expense was 6.6% of net sales this quarter, down from 6.9% last year, a decline of 30 basis points. This improvement was primarily due to lower depreciation and amortization expense, reduced overhead expense from the closure of the Carson warehouse facility partially offset by higher wages. Technology expense was 1.6% of net sales this quarter and flat compared to last year. As Shane mentioned earlier, adjusted EBITDA for the quarter was $2.9 million compared to adjusted EBITDA of $3.4 million last year. Adjusted EBITDA excludes non-cash share-based compensation expense of $477,000 this quarter and $376,000 for the first quarter of last year.

The difference between this year over last year can be summarized as although we had strong topline revenue growth and leveraged our operating cost as a percentage to total net revenue favorable against last year, the gross margin compression had a greater impact and was a driver of lower year-over-year adjusted EBITDA. We believe our investment in our lifetime value customer initiatives in 2015 will improve our results over time.

I would now like to touch on our sales metrics for Q1 period. Unique visitors on our e-commerce site for the quarter were 30.6 million, up 1% over last year. Orders placed through our e-commerce channel this year were 516,000, up 5.7% from last year of 488,000 with an average order value of $110, up 2.8% from the $107 last year.

Our conversion rate was 1.69% this quarter, up 5% from last year's 1.61%. We believe our strong growth in conversion and the increase in average order value are both due to improved user experience and competitive pricing.

Revenue capture defined as the amount of actual dollars retained after taking into consideration returns, credit card declines and product fulfillment, improved by 60 basis points to 85.5% of gross sales compared to last year of 84.9% of gross sales. The revenue capture improvement is primarily due to lower sales returns and reduced out of stocks.

This quarter's customer acquisition costs came in at $7.30 compared to $6.96 last year and $7.46 last quarter. The reduction from the previous quarter was primarily due to leveraging our marketing spend efficiently as numbers of orders improved double-digit while spend was up single-digit.

Now turning to the balance sheet, we ended the quarter with inventory of $48.3 million, an increase of $11.7 million or 32% greater than last year but flat to last quarter. The increase in inventory is primarily due to timing of our seasonal buy receipts to support our positive sales comp and increased demand of our private-label product. Cash and securities was $8 million and debt on our revolving line of credit was $9.5 million compared with $7.7 million in cash and securities and debt of the $11 million last quarter.

CapEx for the quarter was $2 million compared to $1.1 million last year. Adjusted EBITDA less CapEx was positive $900,000 for the quarter compared to $2.3 million last year. As Shane mentioned, the Company is focused on several key imperatives that we believe will potentially help grow revenues, anticipate will improve and gain efficiencies in our margin as well as improve inventory productivity. We believe that this will allow us to achieve our goal of improving our profitability and our liquidity.

We have several initiatives which include but are not limited to one, optimizing pricing through all channels of our business; two, focus on introducing new SKUs to our assortment that we anticipate will improve both incremental sales as well as replacing SKUs with lower productivity and margin. We will be utilizing GMROI as our productivity metric to measure and enable us to focus on SKUs that provide incremental sales and better margins. And three, improving the overall turn and productivity of our inventory assortments with an expected goal of increasing our profitability and generating cash.

We look forward to providing you an update on our next quarterly call on the progress we have made on these initiatives.

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

(Operator Instructions). Jeff Martin, ROTH Capital Partners.

Neil, could you go into more detail about the lifetime value initiative, specifically how far into the process you are and what the process entails, any results you are seeing to date and when you think that will reach the completion stage?

This is Shane. I will take it. So it has certainly been a plan of ours since the start of the year as we have addressed the issues of us being less dependent on organic search and it really led us to the position that we've got to drive LTV to be able to one, have consumers come directly back to our sites, and two, be able to spend more money in marketing that again can control that consumer flow and that traffic in.

And while we have always been focused on LTV, certainly you have heard us talk about more private label shifting and on the last call investments in that area certainly you have heard us talk about increasing repeat purchase and the investments we are making there. As a management team we have really solidified this as the operating goal for us to move forward with in 2015. You are starting to see some of those results in the numbers themselves; our conversion was up, our ALD was up, our order count was up.

So I think you are starting to see some of that process move forward and we have just a number of initiatives inside driving both gross profit per unit, the number of units, repeat purchase and conversion and hopefully by the end of the year, you will start to see our marketing spend as a percent of revenue increase as a result as we are driving more customer lifetime value to be able to put those dollars to work driving more customers.

Then could you touch on the online marketplace, if there have been any changes, that is a constantly evolving channel for you. Just an update there would be helpful.

It continues to be a channel that is important to us, both through Amazon, eBay and other emerging online marketplaces. We are seeing that soften a little bit for us over sort of you call two very aggressive growth years over the last two years. But we continue to think that is going to be a great channel for us going forward in a strong channel and it may have some to your point ups and downs but certainly a very strong channel for us and one that we think we can compete in. Because we have frankly the best supply chain in the industry when it comes to private-label products and when you are starting on marketplaces you certainly have got to be the low-cost leader to move products in that channel and we have proven that we can do that.

And then I just want to make sure I caught this right, the lifetime value initiative spend about $1.2 million and marketing should generate 2.5% increase in traffic, $10 million in revenue and $1 million in EBITDA? Did I get that right?

Yes, Jeff, let me give you that in more color. What we are saying there is if we could increase our LTV in year one by $1, that o$1 would turn into traffic, 2.5% increase in traffic, it would probably turn into like $10 million of revenue and $1 million of EBITDA because we'd spend about another $1.5 million in marketing.

So I'm hoping what you see from our business over the next period of time, year or two years is an increase in our marketing spend because of the increase in LTV and again a number of initiatives around that firmly centered around our ability to drive private label products.

Second, our ability to actually increase the basket size and as you increase the basket size obviously more GP dollars, an entire basket drop through. So that is really thinking about why are we pushing so hard on this initiative and the areas of that initiative? It really centers around our ability to drive one, two, three more dollars of LTV and then reinvest that back in the business to drive more customers in.

Yes, that makes sense. Can you shed any insight into the tail-off in the traffic growth that you started to see a the beginning of the quarter and what headwinds if you could point to any that caused the pullback from the rate it was in the quarter?

Sure. We started the quarter up mid-single digits. We were very excited about the traffic growth. We have consistently seen conversion growth but as that traffic growth came through, we were kind of clicking on all cylinders and quite excited about that. The headwind frankly came in a macro shift that we saw on our top keywords where it shifted a little bit from e-commerce players to more media sites or content players. And so that mix shift had an impact on us in the quarter. And so we went from up positive and from a traffic perspective to running a little bit negative and that has actually continued into the second quarter and that effectively has worked its way into the second quarter as I just mentioned.

Are you still seeing the conversion rates higher though?

Yes, we continue to see improved conversion. We continue to think we will be up single digits for the year. As I mentioned on the call though, second-quarter will clearly be our toughest quarter of the year based on some of the weather that happened last year. We think we will see acceleration in the back half of the year.

Thanks for your time, guys.

Mitch Bartlett, Craig-Hallum.

Good afternoon. You talked about sales metrics quarter to date and you were just talking about it a second to go but did you give growth metrics for the quarter?

For the first quarter, Mitch?

For the second quarter just like quarter to date, how you are seeing the --?

Mitch, we are slightly positive for the quarter. We have seen a little bit of a ramp during the last week and we expect it to ramp more throughout the quarter. Again though I would mention the second quarter is obviously going to be our toughest quarter of the year.

And then the private label and branded, the private label at 63% of total sales, is that is the highest level you have ever hit? And what was the growth of private label and branded in the quarter respectively?

Yes, so branded was slightly positive in the quarter and private label was up similar to where it had been trending in the upper teens.

Very good quarter. Let me ask -- the interesting news in the past few months was one of your shareholders, large shareholders and former CEO of the Company, put out a release basically suggesting the Company could be sold. Any commentary on that?

We certainly appreciate all feedback from shareholders and welcome it and we are in agreement with Mr. Nia as it relates to the value of the business. We do think we are undervalued. We are certainly a growing e-commerce business that has put up a couple of quarters of double-digit growth with positive free cash flow in an industry that is doubling. And so we like where we are going with the business and as it relates to commenting specifically on any points around acquisition, obviously we wouldn't do that. But I can assure you that our Board is always looking at our shareholders' best interest and looking at all alternatives if presented.

Good enough. Just thought I would ask the question. Thank you.

There are no further questions at this time. I would now like to turn the call over to Neil Watanabe for closing remarks.

Thank you. I just wanted to thank everyone for joining the call today. As always, we are available for any additional questions you may have so please don't hesitate to call.

Also please note that we will be presenting at the B. Riley & Company conference in Los Angeles on May 12 and the Craig-Hallum conference in Minneapolis on May 27 and hope to see some of you there.

This concludes today's teleconference. You may now disconnect your lines. Thank you for your participation and have a pleasant day.