Carparts.Com Inc (PRTS) 2016 Q1 法說會逐字稿

Welcome to the U.S. Auto Parts first quarter 2016 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 first quarter 2016 earnings release which went out today at approximately 4 p.m. Eastern time. If you have not received the 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 23, 2016.

Before we begin, we would like to remind everyone that the prepared remarks contain certain forward-looking statements within the meaning of the federal securities laws and management may make additional forward-looking statements in response to your questions. The forward-looking statements include but are not limited to statements regarding future events or future operating and financial results, financial expectations, expected growth and strategies, key operating metrics and current business indicators, capital needs and deployment, liquidity, product offerings, customers and suppliers and competition. The forward-looking statements are based on current information and expectations, are subject to uncertainties and changes in circumstances and do not constitute guarantees of future performance. The forward-looking statements involve a number of factors that could cause actual results to differ materially from those statements. We refer all of your 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 detailed discussion on the factors that can cause actual results to differ materially from those projected in any forward-looking statements. U.S. Auto Parts assumes no obligation to, nor does it intend to, update or revise any forward-looking projections that may be made in today's release or call, or to update or revise the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Please note that on today's call, in addition to discussing GAAP financial results and the outlooks 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 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 those with such non-GAAP measures have limitations which are detailed in the Company's press release.

Please also note that 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 but 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 now like to turn the call over to Neil Watanabe.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today to discuss our first quarter 2016 results. Let me provide you with some additional color on the financials reported in our press release today and then I'll touch on some of the key business metrics and initiatives that are driving our improved profitability. I'd also like to remind listeners that all metrics discussed exclude AutoMD unless specifically noted.

Net sales for the first quarter increased 6% to $80.7 million compared to $76.3 million in the year-ago quarter. Online sales were up 6% year over year, driven by an 11% increase in our online marketplace revenue, which continues to perform well given the strength of our private label business. In fact, private label revenues was up over 12% while our branded business was down mid single digits, as expected.

First-quarter gross margins increased 230 basis points to 30.4% compared to 28.1% in the year-ago quarter. This improvement was primarily driven by a higher mix of private label sales, which were 67% of net sales compared to 64% in the year-ago quarter, and by strategic pricing initiatives and freight efficiencies.

Total operating expenses were $22.6 million compared to $20.7 million in the year-ago quarter. As a percentage of net sales, operating expenses were 28% compared to 27.1% in the year-ago quarter. The increase was primarily the result of increased fulfillment costs and marketing spend as well as certain costs as part of the implementation of a new warehouse management system, which we believe will help reduce fulfillment and freight costs.

Adjusted EBITDA for the quarter increase 52% to $4.3 million compared to $2.9 million in the year-ago quarter. As a percentage of net sales, adjusted EBITDA increased 170 basis points to 5.4% compared to 3.7%. The significant increase was driven by the aforementioned improvements in gross margin, partially offset by the increase in operating expenses. Adjusted EBITDA excludes non-cash share-based compensation expense of $0.8 million in the first quarter compared to $0.5 million last year.

Net income in the first quarter increased to $1.5 million compared to $0.2 million, representing an 8 times improvement over the year-ago quarter. Our CapEx was $1 million in the quarter versus $2 million in the year-ago quarter.

Now let me provide some details on our key sales metrics for the quarter. Unique visitors to our e-commerce sites for the first quarter of 2016 increased 3% to $31.4 million compared to $30.6 million in the year-ago quarter. Orders placed through our e-commerce channel increased over 8% to 559,000 compared to the year-ago quarter while our e-commerce average order value or AOV was $106 compared to $110 in the year-ago quarter. The decrease in AOV is the result of our ramp in higher-margin private label products. Online marketplace orders increased 9% to 322,000 while AOV increased 1% to $72. Total Internet orders were up 8% to 881,000 while total Internet AOV was down 2% to $94.

Conversion rate for the quarter increased 10 basis points to 1.8% compared to (technical difficulty). We believe this increase is a result of our improved user experience and increased number of private label SKUs. Revenue capture -- or the amount of actual dollars retained after taking returns, credit card declines and product fulfillment into consideration -- was flat compared to the year-ago quarter at 85.5% of gross sales. This quarter, customer acquisition costs came in at $7.73 compared to $7.30 in the year-ago quarter and $7.95 in Q4 of 2015. As we have stated in the past, one of our key initiatives is to become less reliant on organic search traffic to acquire customers. As a result of our 15% increase in gross profit, we have been able to increase spend on customer acquisition through paid search channels. We expect the increase in paid channels will grow our audience and ultimately drive more traffic to our sites, which is validated by the increase in comp traffic over the last two quarters. Net debt at April 2, 2016, defined as revolverless cash, decreased significantly to $1.7 million compared to $10.3 million at January 2, 2016. Our debt reduction from year end can be summarized into three components: one, reduction in working capital as we gain improved productivity and turn from our inventory; two, increased proceeds from operations; and lastly, three, extended payment terms negotiated with our vendors based on our improved operating performance. We continue to expect CapEx to be around $6 million for the year compared to $6.7 million in 2015.

With that, I'll turn the call over to Shane.

Thank you, Neil. We were pleased to this quarter's performance and I want to thank the team at U.S. Auto Parts for their commitment and hard work to improve the business. With our first quarter's adjusted EBITDA results, we now have a trailing 12-month adjusted EBITDA of $11.5 million, up from $10 million last quarter and up 45% from the $7.9 million this time last year. We anticipate that our trailing 12-month adjusted EBITDA will continue to grow in the second quarter as we comp over a weak second quarter last year that only produced $1.8 million in adjusted EBITDA. Our trailing 12-month CapEx was approximately $6 million. We anticipate the spread between adjusted EBITDA and CapEx to increase as we anticipate adjusted EBITDA to increase further while CapEx remains flat.

Our strengthening financial position has helped to improve our debt position in a couple of significant ways. The most obvious is the retirement of debt with proceeds from operations. In addition, our strengthened financial position builds confidence with our suppliers, which has resulted in favorable extended terms on our payables. The combination of these two benefits,, along with a reduced inventory position, has already enabled us to significantly reduce debt. As Neil mentioned earlier, we reduced our net that position down 83% to $1.7 million during the quarter.

The business looks much different than it did 24 months ago, as we have reduced our dependency on organic search, increased our private label offerings, improved our financial performance and significantly reduced debt. We also find ourselves well-positioned to take advantage of several industry tailwinds. Online auto parts purchases are anticipated to grow over 15% annually according to Booz & Company. In addition we continue to see miles driven increase, average age of the vehicle increase and gas prices decrease.

Neil has already pointed out the details on the quarter's results, so I'll point out the highlight, which is our private label business continuing its double-digit growth trajectory. Our private label offering enables us to be one of the lowest-cost providers in the marketplace, which appeals to a very large demographic of customers who want to spend as little as possible on repairing their vehicles. Private label also allows us to have one of the loudest voices in the marketplace through marketing spend enabled by the high gross profits and margins in the private label business. The growth of this business is critical as the incremental adjusted EBITDA flow-through on the private label business is around 18% to 20%. We continue to see plenty of opportunities to develop new SKUs going forward and continue to anticipate adding 7,000 to 8,000 new SKUs this year alone. We are able to grow at this pace because of our data engines we built, which identify fast-moving SKUs and source products with high economic returns. Growing private label will continue to be the top priority in the business.

As it relates to 2016 guidance, we continue to expect low to mid single-digit revenue growth and the second quarter is currently trending within that range. We also continue to expect adjusted EBITDA to range between $11.5 million and $14 million. We are certainly off to a good start for the year, as our current trailing 12-month adjusted EBITDA is $11.5 million. That is already at the low-end of our guidance and as I stated earlier, we anticipate that to grow.

Turning to our majority ownership in AutoMD, we have just over 4,000 shops on the service and anticipate ending the year with 5,000 to 6,000 shops.

In closing, or business continues to perform well. We experienced positive year-over-year traffic growth in the first quarter and that trend is continuing in the second quarter. Our private label business continued to see double-digit year-over-year revenue and gross profit growth. Gross margin expanded to over 30% in the quarter, driven by mix shift to private label SKUs. Adjusted EBITDA came in at $4.3 million, up 52% year over year, and adjusted EBITDA increased 170 basis points to 5.4%. Our trailing 12-month adjusted EBITDA is now $11.5 million, up 45% from this time last year, and we anticipate continued growth. Finally, we are assisted by industry tailwinds of increased vehicle aid, favorable fuel prices and higher miles driven.

With that, we will now open up the call for questions.

Thank you. At this time we will be conducting a question-and-answer session. (Operator Instructions). Mitch Bartlett, Craig Hallum.

Good afternoon, guys. The paydown of the debt is quite dramatic. Congratulations on that. Is that likely to persist through the year? Are you at a new level or will that fluctuate with the orders this year?

So typically, we'll see a scaledown in the debt during this period. I will say there's a couple of sort of large changes from years past. One is the amount of cash kicked off from the operations. It certainly can get rid of some of that debt and also, we've gotten better terms with our suppliers as our financial performance has improved and so we anticipate that continued significant reduction in debt throughout the year.

Perfect and gross margins -- do you anticipate them hanging around the 30% level for the remainder of the year?

Yes, so the first quarter is typically our best quarter from a margin percent perspective and with private label up there at 67% of sales, certainly probably the strongest we'll have from a gross margin percent or typically that spend, the way it's trended in the first quarter. So it may come down a little bit off of that point, but certainly will be strong. If you look at the back half of last year, we were above 29.5 so I think that's sort of a benchmark for you, not that we're guiding to it one way or the other but margin trended where we would have anticipated it trending in the first quarter.

Got it. Great. Okay, thank you.

(Operator Instructions). Darren Aftahi, Roth Capital Partners.

Hey, guys. Thanks for taking the question. I just wanted to offer my congratulations. A couple, if I may. On the paid marketing side, we look at a lot of other Internet companies and people are focusing on social quite a bit. I'm wondering -- and maybe it's not relevant to your business but are you spending any of your paid marketing dollars in social and if you are, are you seeing any benefit from that?

Yes, Darren, we do spend into the social category. It doesn't scale quiet as well as other categories but we certainly spend time in that category, spending into that category. And as our gross profit dollars have increased, we've been able to spend into that category more than we have in the past. So hoping we can see some more growth there but most of our dollar spend comes through paid search or product listing services, the shopping engines on the search engines.

Got it. And then secondly, it seems like you guys have a pretty good formula, kind of shifting to private label. Where do you see that as a percentage of sales longer-term? And as it starts to kind of yield greater and greater amounts of free cash flow, beyond deleveraging your balance sheet, are you just going to continue to reinvest that into paid marketing or are there other avenues kind of to accelerate growth in your business? Thanks.

So on the growth side, certainly excited about the growth in the private label business and foresee that continuing going forward because of the consumer proposition it provides, which is really a low-cost product at high quality, and that seems to be working really well with people who have vehicles that are over 11 years of age. So I think you'll continue to see more of the same here. The cash from operations will go to eliminate the debt and hopefully over time build on the balance sheet and then if we see something opportunistic, the use of that cash, we would certainly look at that but as it relates to the marketing spend, we are very disciplined around how we spend the capital, specifically around a return on variable contribution margin. So as that goes negative, we stop spending. So we certainly wouldn't increase that spend level unless we felt like there was a return on it.

And then, we gave a projection this year of about 65% that private label would represent. For the first quarter, we came in at 67% but as Shane mentioned, the first quarter is a strong quarter for private label for us so we think that clearly, as we continue to add new SKUs, that percent will go up but the 65% was what we have been speaking about for this year.

Great, thank you.

Thank you. At this time we had no further questions. I will turn the call back over to Neil for closing comments.

Thank you for joining the call today. Please note we'll be presenting at the Needham conference and Craig Hallum conference over the next few weeks and hope to see some of you there. If not, we look forward to speaking with you next when we report our second quarter results in August.

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