Carparts.Com Inc (PRTS) 2015 Q2 法說會逐字稿

Welcome to U.S. Auto Parts' second-quarter 2015 conference call. On the call from the Company are Shane Evangelist, Chief Executive Officer, and Neil Watanabe, Chief Financial Officer. By now, everyone should have access to the second-quarter 2015's earning release, which went out today at approximately 4 PM Eastern Time.

If you have not received your release, it is available on the investors' 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 August 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 the 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 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 SEC Regulation G is included in U.S. Auto Parts' press release today, which again can be found on the investors' 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 those of such non-GAAP measures have limitations, which are detailed in the Company's press release.

Unless otherwise stated, references to this quarter and comparisons to last year refer to the consolidated 13-week period of Q2 2015 as compared to the consolidated 13-week period of Q2 2014. Also, percentage and basis points discussed are calculated using net sales, with the exception of advertising, which we'll be discussing and comparing to net online sales. Additionally, unless otherwise stated, all financial data reported, including, and not limited to, revenue, gross margin, operating expense, and 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 to provide the components of our business.

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

Thank you and thank you all for joining the call. As always, I'd like to start by thanking our team members at U.S. Auto Parts for their hard work and dedication to the business. Your efforts are valued and appreciated.

Our results for the quarter came in as expected. We continue to be excited about our private-label revenue growth and recent improvements in profitability. Revenues for the second quarter on a year-over-year comp basis came in up 1.2%, despite being up against difficult comps.

Our private-label business was up approximately 10%, demonstrating continued revenue growth strength in spite of some pricing actions during the quarter that resulted in negative impact on sales, but an improvement in profitability and gross margin return on investment. These actions led to over 28% gross margins in June and we continue to see that similar trend in July.

Even with price actions, private-label sales continue to be strong thus far in the third quarter, up over 15%. Overall sales for the third quarter to date are trending up mid single-digits year over year. Branded sales for the quarter were down double digits. This has been driven by lower organic traffic specific to keywords related to branded terms and our resistance to sell branded products at prices that do not meet our profitability targets.

Barring a significant change in traffic, we anticipate branded sales to be negative going forward and becoming a smaller mix of our overall sales. This will put some near-term pressure on overall revenue growth, but as we transition to more private-label sales, we anticipate year-over-year revenue growth acceleration as well as healthier gross margins and adjusted EBITDA.

Gross margins for the quarter came in at 27.2%. As I mentioned, gross margins expanded in June to over 28% as we took specific actions on lower-performing SKUs. And we anticipate gross margin for the third quarter to be above 28% and expect to continue to improve in future quarters as our private-label mix increases as a percentage of sales.

Adjusted EBITDA for the quarter was $1.8 million and also showed acceleration in June, which we anticipate to extend into the third quarter and translate into strong year-over-year growth. Additionally, adjusted EBITDA less CapEx remains positive at $400,000 for the quarter and approximately $1.3 million year to date. We continue to expect CapEx to be around $6 million for the year.

We previously discussed our strategy to increase traffic by driving increased lifetime value, or LTV, which will enable us to spend more on customer acquisition. We have made good progress on leading indicators and expect to see LTV expansion going forward.

The first leading indicator was gross margin expansion is the direct result of our private-label growth. We have already sourced over 4,000 private-label SKUs this year and continue to anticipate ending the year with between 6,000 and 7,000 new private-label SKUs. We also have a strong backlog of private-label SKUs to source. We believe we are set up for healthy private-label SKU additions through 2016 and beyond.

As it relates to repeat purchases, our net promoter score, or NPS, continues to be strong at a score of over 50. We are continuing to invest to improve service levels in our distribution center and call center to further improve customer satisfaction. For example, we have seen our call center NPS score improve from 31 to 50 as we have taken actions to make returns easier. We believe these are early indicators that repeat purchase should improve.

Finally, we continue to see year-over-year improvements in conversion driven by our improved customer experiences. We rolled out responsive designs on all of our flagship websites and continue to add more parts to our active selling initiative. We are pleased with the progress we're making to improve LTV and believe we will realize the financial benefits over the next year.

Turning to our majority ownership in AutoMD, we made good progress in the quarter, setting up 450 shops and ending the quarter with approximately 2,700 shops. We anticipate we will end the year with somewhere between 3,250 to 4,500 shops and we anticipate AutoMD will generate a $3 million loss in 2015, with $2 million in EBITDA and $1 million in CapEx.

In closing, the quarter came in where we anticipated. And for the first half of the year, we are up 7.7% in comparable sales, with our private-label business growing double digits year over year. Revenue trends in the third quarter are back to mid-single digits.

We anticipate improved profitability and margin expansion in the second half of the year. As such, we now expect full-year adjusted EBITDA will be ahead of last year versus our previous guidance of being around flat to slightly below last year.

And with that, I'll now turn the call over to our CFO, Neil Watanabe.

Thank you, Shane. I'm going to provide a bit more detail about the financial results reported in the press release and then I'll touch on some of the key business metrics and initiatives that we are focused on to drive improved profitability.

Our comp sales for the second quarter of 2015 increased 1.2%, excluding the West Coast wholesale operations from last year's sales numbers due to its closure as part of the consolidation and elimination of our Carson, California, distribution center.

Net sales for the second quarter of 2015 were $76.4 million compared to $76.9 last year. These results are largely in line with the guidance provided during our last earnings call, which anticipated that our second quarter would be the toughest comp of the year, as we were lapping very strong revenue growth in the second quarter of 2014.

Now let me break down net sales for you. Online sales were down 1.1%, as we experienced some lower growth in sales, which was impacted by certain pricing actions we took within the quarter to improve the profitability of our business. Our online marketplace sales increased 5.8% in Q2, as we anticipated, softening based on our lapping high-comparable sales a year ago.

Our e-commerce sales were affected by lower traffic and slightly lower average order value, partially offset by higher conversion and revenue captured during the quarter. The decrease in online sales was partially offset by an increase in our off-line sales, which grew 4.4% in Q2 2015, primarily due to the addition of new customer accounts in our wholesale business.

Taking a look at our sales by product category, our private-label business was up approximately 10%, offset by our branded business being down low double-digits. The branded business decline continues to reflect our intentional strategy to maintain minimum required hurdles. This builds on our initiatives to continue growing the private-label sector of our business at a faster rate than our branded category.

Now let me turn to gross margin and operating expenses. For the second quarter of 2015, gross margin was 27.2% compared to 26.5% in the year-ago period. This 70 basis point improvement was due in part to a higher mix of private-label sales, which was 60.3% of net sales this quarter compared to 54.6% in the year-ago quarter and 62.7% in the first quarter of 2015. Margins also had a favorable year-over-year comparison due to a charge to cost of goods last year related to the closing of the West Coast distribution center.

Our operating expenses were 27.8% of net sales, a decrease of 50 basis points from last year's second quarter of 28.3%, which included restructuring charges related to our Carson warehouse closure. We were also able to leverage our fulfillment and general and administrative expenses this year.

As Shane mentioned earlier, adjusted EBITDA for the quarter was $1.8 million compared to adjusted EBITDA of $2.3 million last year. Adjusted EBITDA excluded non-cash share-based compensation expense of $574,000 this quarter and $624,000 last year. The primary reason for the $500,000 difference in adjusted EBITDA was related to investments and initiatives to improve our customer experience and service levels.

Now let me provide some details on our sales metrics for the second quarter of 2015. Unique visitors to our e-commerce site were 29.2 million, down 5.2% from last year. Orders placed through our e-commerce channel this year were 523,000, down 3.3% from last year, with an average order value of $112, slightly lower than the $113 we posted in the prior-year period.

Our conversion rate was 1.79% this quarter, up from 1.76% last year. We believe this increase in conversion is the result of our improved user experience and our lifetime value customer initiatives.

Revenue capture -- or defined as the amount of actual dollars retained after taking returns, credit card declines, and product fulfillment into consideration -- was 85.7% of gross sales, which was slightly better than the prior year of 85.6%.

This quarter, customer acquisition costs came in at $7.91 compared to $7.11 last year and $7.30 in Q1 of 2015. This planned increase is the result of increased paid advertising as we become less dependent on organic advertising. We have a process designed to ensure that our marketing spend achieves certain financial return criteria in the retention and acquisition of new customers.

Turning to the balance sheet, we ended the quarter with inventory of $45.2 million, an increase of $10 million or 28% greater than last year and $3.1 million lower than the first quarter of 2015. While our inventory is up year over year, we are pleased with the composition, which is 94% aged one year or less versus 89% year ago. This is a direct result of us sourcing better performing SKUs and discontinuing those that don't perform or meet our minimum inventory productivity targets. Debt on our revolving line of credit was $8 million, down $1.5 million from the first quarter.

Looking forward, we remain confident with our projection for 2015 in achieving single-digit sales increases on a year-over-year basis. Based on changes we have made to our business model, we anticipate margin expansion and further leveraging our expenses that can allow us to achieve an increase in adjusted EBITDA year over year.

In addition to our lifetime value business initiatives, let me turn to a few of our other key business initiatives to improve profitability that we outlined during the first quarter's earnings call. These include price optimization and enhancing the productivity of our inventory. We continue to make good progress on both of these initiatives during the second quarter. Regarding price optimization, we are in process of refining and automating many of the processes that will enable us to affect pricing on a more real-time basis for all channels of our business.

Lastly, we are working to improve the overall turn and productivity of our inventory with the expected goal of increasing profitability and generating cash. We've instituted various refinements to improve the productivity of our inventory and increase GMROI, or gross margin return on investment.

Before opening the call for questions, I'd like to share that effective August 1, we retained the services of Liolios Group as our new investor relations firm to support our focus on adding value to our existing shareholders while facilitating introduction to new investors.

We went through a very thorough internal review and comparison to find a partner who would assist us in this strategy. And we believe Liolios Group brings a solid track record of helping companies like ours enhance shareholder value by delivering the right message to the right audience with consistency and focus.

Now with that, operator, we'll open up the call for questions.

(Operator Instructions) Jeff Martin, ROTH Capital Partners.

Hello guys, this is Nick Meyers; I'm on for Jeff Martin today. Yes, so just to start off, I want to talk about the improving profitability. You guys have strong conviction in doing so. Could you elaborate maybe a little bit on the factors that will lead to this?

Yes, Jeff, so in the second quarter, we took some actions on some of the lower-performing SKUs to do some price increases as well as some overall pricing action in general. We saw really good results happen in June and profitability on the overall business was improved. We saw that trend continue in July and so we are pleased with the actions we took and the trends that are continuing.

Perfect. Thanks for the color. And then also last quarter, you guys detailed a four-step plan to increase the lifetime value of your customers. Can you provide maybe a little bit of an update on the progress toward that plan and what kind of results you're seeing?

Yes, so LTV -- obviously a big initiative for us, as we think expansion of LTV allows for us to reduce our dependency on organic search. And the four points to the plan -- certainly the first point of that plan is increasing gross profit percentages in dollars and we're seeing that expansion now. So we're pleased with that.

Obviously, driven by our private-label mix and our commitment to the private-label business is, as we outlined earlier, we certainly brought in more resources in the first half of this year to ensure that we could drive private-label. So we like the expansion there.

From a repeat purchase perspective, we've seen good net promoter score increases, specifically around our returns processing. And so we anticipate that will turn into LTV or repeat purchases longer term and our conversion continues to improve. So on three of the four fronts, we're seeing progress -- or at least we're certainly seeing indicators that should help down the road.

On attachment, which is the third piece or size of the basket, we've got some initiatives we're launching in the back half of this year that we hope to see some improvement there. So all in all, we're very pleased with the progress we're making. We think the investments were smart investments and early signs look good.

We've also, Nick, seen some good improvement on the gross margin per transaction, which is also an indicator toward that improved profitability.

Perfect. Thank you, guys; that was good. And then also just one last question. Can you provide also an update on the impact of a shift in your marketing spend from online to more direct marketing?

Yes, Nick, really what you're seeing is the shift itself is consistent in the channels that we're marketing into. Most of it around search affiliate or other online channels.

What we're seeing is a smaller mix of organic traffic, which obviously doesn't cost anything. And so as the mix shifts from organic to what you would consider paid traffic, you're seeing an increase in the actual customer acquisition cost.

That said, the actual customer acquisition cost is not significantly changing. The dollars that we spend to acquire a customer and the process we spend around the return on that has been consistent and, frankly, probably more efficient now. We actually saw an increase in our paid channel by about 10% to 11% this year -- or this quarter, but only a 2% increase in actual dollars spent to bring that in. So we think the -- we're getting some leverage and some efficiency on the customer acquisition side.

Okay, perfect. Thank you, guys, very much and good luck.

(Operator Instructions) Mitch Bartlett, Craig-Hallum.

I wonder about in days past, we've talked about kind of that delicate balance between branded and private label. First, Neil, I think you talked about a percentage of private label in the quarter and I didn't pick up on that. What was that percentage?

It was just over 60%.

Just over 60%. So it was kind of flat with Q1?

Yes, as a percent of sales. But over last year, it was 54% last year, Mitch. So you're up 6% on a year-over-year basis.

Okay, okay. So what about that blend? First is did you see a lift in price competition on the branded side, which caused you to pull back on the branded more perhaps than what you would like? Or was that different, a change of pricing on the branded side as it is getting tighter and tougher?

Yes, it's two things, Mitch. One: we actually saw some traffic decline specific to branded key terms. We talked about that in the first quarter. We saw that play out more in the second quarter.

So as it relates to a keyword like Bestop, which is a term that you would sell for an accessory category, we actually saw a decrease in our position on branded key terms. So some of it is that we didn't get as much traffic in. We didn't see a change in competitive pricing significantly.

We just had -- we set -- as I indicated, we set some margin floors in place on both the branded business and the private-label business. And as such, we had some impact on sales. We do, however, like the pickup in the profitability side.

From the private-label margin associated with the mix shift?

Yes.

Yes, okay.

Well, it's not just -- Mitch, just so we're clear, it's not just the mix shift. We actually saw an increase in gross margin per transaction as well. So it's a combination of mix, but also the fact that we are having higher gross margin percent and dollars per transaction on private label.

So is the trajectory of private label as a percentage of the mix changing from kind of previous thoughts? Is it going to be a larger percentage than you thought before? I guess is what I'm trying to get at.

Yes, that's right. It will be a larger percentage. So to put it in perspective, it was 60% of revenue. It was over 70% of actual transactions. So it's certainly on the higher end of transaction volume. And if you look at the business right now, you're seeing branded decline, but private label grow, as I indicated in the third quarter, over 15% on private label in the third quarter, with the branded business being down close to similar double digits is why you had this mid-single digit growth continue.

But as the branded business -- under this current trend, if the branded business continues to drop this way, you'll see a much larger mix of a very healthy growing private-label business coupled with what we would consider a strategic business inside the branded side, which obviously provides a large assortment for our consumers. Allows us to also sort of upsell into our private-label product and it also brings traffic to the site still. So we still like the branded business from the strategic aspect, but certainly current trends would indicate that our private-label business will grow at a faster rate, which should see margin expansion.

And Mitch, I would also say I want to hit this home. We like the private-label business outlook. The backlog of SKUs we have lined up to bring in, the current trends are positive.

I guess, Shane, where I was headed, though, was I always thought you used the branded as a hook to upsell into the private label. And if it is a different mix, is it going to make the private label sale down the road more difficult?

No, our traffic, you know, still is -- at overall traffic was down 4%. So we are still driving a lot of people in, Mitch. And we still continue to use the branded business to sell into private label. So that hasn't changed. We are fighting a little bit of traffic decreases, which is why you're seeing probably branded at a bigger decrease than private label.

And the movement between Q2 and Q3, the improvement 10% to 15% in private label and the like, is that because of the comparison or is there momentum in addition to it? The year-over-year comparison --

Yes, some of it -- it's probably more the year-over-year comparison, Mitch. I mean, the second quarter of 2014 was really big. Specifically around the weather that took place in the first half of that year. So it's probably just [some much] comparison. We still had good solid sales; we were up against a tougher comp.

It was 13%.

And perhaps -- and was branded really strong in Q2 of last year?

No, branded was still negative 2Q of last year. It was down 3% last year, so it wasn't -- branded didn't turn positive for us until the first quarter of this year. So we were still running against a negative comp on branded last year.

Last question -- and I don't mean to belabor the private label.

Keep going.

What kind of percentage -- looking into 2016, where could private label be as a percent of your overall revenue and transaction mix?

I mean, it could probably run at a similar pace you're seeing today, Mitch, where you're up 5% to 6% year over year. If you just run the math up 15% to down 10%, you're going to get close to that.

So 2016 for the full-year private label could represent 65% of total sales or do you have a (multiple speakers)?

Yes, I'm going to be clear on this. We're not by no means are we giving guidance for 2016 on the percentage mixes. I think on a year-over-year basis, we saw a 6% increase. Under current course and speed, you could see that happen again.

That said, Mitch, the branded business could turn around. We could see traffic pick up as well. The one thing I feel pretty good about and believe is that the private-label business will continue to grow at the pace it's growing right now. It feels pretty solid.

Got it. Thank you. Appreciate it.

Thank you. This concludes our Q&A portion. I will turn the call back over to our speakers for closing comments.

I would like to thank all of you for joining our 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 Liolios Group Gateway conference in San Francisco on September 9 and 10th; the B Riley conference in New York on September 16; and the LD Micro conference in Los Angeles during the first week of December. We hope to see some of you there.

Thank you. This does concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.