Carparts.Com Inc (PRTS) 2017 Q3 法說會逐字稿

Welcome to U.S. Auto Parts Third Quarter 2017 Conference Call. On the call from the company are Aaron Coleman, Chief Executive Officer; and Neil Watanabe, Chief Financial Officer.

By now, everyone should have access to the third quarter 2017 earnings release, which went out today at approximately 4:00 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 November 13, 2017.

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, our 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 can cause actual results to differ materially from those statements.

We refer all of you to the risk factors contained in the U.S. Auto (technical difficulty) 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 statement. 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 outlook for the company, the following non-GAAP financial measures will be discussed: EBITDA and adjusted EBITDA. An explanation of the 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 measures derived in accordance with GAAP, and those such as 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 in comparing to net online sales.

Unless otherwise stated, all financial data reported, included but not limited to, revenue, gross margin, operating expense and net income loss, excludes our discontinued AutoMD reporting segment.

With that, I would now like to turn the call over to Neil Watanabe.

Thank you, operator. Good morning, everyone, and thank you for joining us to discuss our third quarter results.

I'd like to provide a summary of the financials reported in our press release today as well as an overview of key business metrics. Unless specifically noted, I would also like to remind listeners that all metrics exclude the AutoMD operating segment, which is being reported as discontinued operations following the dissolution of the AutoMD subsidiary.

Net sales in the third quarter increased to $73.8 million compared to $73.5 million in the year-ago quarter.

Our marketplace sales channel increased 41% year-over-year, driven by our expanded private label assortment and strong value proposition.

Our total private label sales grew 10% in Q3 and accounted for 72% of the net sales compared to 65% in the year-ago period. This was offset by lower e-commerce sales, which were down 17%, primarily driven by lower traffic and average order values.

Aaron will provide more color on this channel dynamics later in the call.

Also note that offline sales for the quarter, which is primarily comprised of our wholesale revenues, were up 6% to $6.9 million.

Gross margins in Q3 came in at 29.6% compared to 30.5% in the year-ago period. The lower margin was anticipated and primarily driven by higher freight costs and lower-margin channel mix, partially offset by a higher-margin private label mix. We continue to expect gross margins to range between 29% to 30% going forward.

We reduced total OpEx in the third quarter to $20.5 million compared to $21.7 million last year. As a percentage of revenues, OpEx was reduced 180 basis points to 27.8% versus 29.6%.

With an increased percentage of revenues coming from our lower-margin marketplace channels during the quarter, we reduced both call center and marketing expenses accordingly to ensure adequate profitability,(technical difficulty) committed to driving profits over growth.

Income from continuing operations for the quarter increased to $0.9 million or $0.02 per diluted share compared to $0.4 million or $0.01 per diluted share in the year-ago quarter.

Adjusted EBITDA in the third quarter increased 14% to $3.6 million compared to $3.1 million in the prior year. As a percentage of revenues, adjusted EBITDA improved to 4.8% versus 4.3% last year.

Now let me provide some details on our key operating metrics for the third quarter.

Total orders in Q3, which include marketplace orders, increased 8% to 915,000 versus the prior year.

From a traffic perspective, unique visitors to our e-commerce sites totaled 23.1 million, which was down 19% from last year. Note that this traffic figure does not include the traffic to marketplace channels.

E-commerce orders placed in Q3 decreased 14% to 460,000, with an average order value of $99 compared to $103 in the year-ago period.

These declines were largely driven by the channel mix mentioned earlier and the expected decrease in branded product sales.

Despite lower traffic on our e-commerce sites, we were able to increase our conversion rate 10 basis points during the quarter to 2.0% compared to 1.9% last year.

Revenue capture, defined as the amount of actual dollars retained after taking returns, payment capture and product fulfillment into consideration, was 86% of gross sales compared to 85% in the year-ago period.

In the third quarter, we also reduced our customer acquisition cost to $6.95 compared to $7.61 last year. The decrease was again driven by our decision to reduce marketing expense (technical difficulty) to experience a shift in channel mix during the quarter to lower margin (technical difficulty), and we were not willing to sacrifice profitability for incremental growth.

Turning to the balance sheet. At September 30, 2017, we continue to have no revolver debt, while increasing our cash balance to $6.7 million compared to no revolver debt and $5.2 million of cash at the end of the third quarter of 2016. The increase in cash is a result of our continued focus on increasing cash from operations and extending payment terms with our vendors, which we've accomplished through improved operating performance and the utilization of LCs for selected import vendors.

We also ended the quarter with inventory of $53.7 million compared to $49.5 million at the end of the third quarter of 2016. The increase was primarily due to higher levels of stock inventory, which support our private label growth and helped us achieve higher availability rates on key items.

As we discussed last quarter, we have a $5 million stock repurchase program that was authorized on May 17, which underscores our commitment to enhancing stockholder value. We plan to be opportunistic in acquiring shares over the next few quarters.

In Q3, we repurchased approximately 542,000 shares for a total cost of $1.6 million.

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

Thank you, Neil. Let me start off by thanking all of U.S. Auto Parts' team members for remaining focused on the customer experience and their continued execution of our strategy and operating plan.

The third quarter was underscored by our continued commitment to profitability as reflected by the 14% increase in adjusted EBITDA, despite having only modest revenue growth. In fact, Q3 was our strongest quarter year-to-date for gross margins.

We continue to believe our private label business uniquely positions us in the marketplace, that it enables us to be price-point competitive with our customers at a higher margin than our branded products. And we plan to continue investing in private label, as it represents the fastest-growing and the highest-margin segment of our business.

As Neil mentioned earlier, we are continuing to experience a shift in channel mix this year, with our online marketplace channel gaining momentum and our e-commerce business experiencing lower traffic. We're addressing these channel dynamics with various initiatives designed to accelerate e-commerce growth, including improvements to our product landing pages, product discovery, checkout, mobile, and site speed as well as optimizing the post-purchase experience.

Though we don't expect these initiatives to bear fruit overnight, we do expect them to gradually improve our customer experience over the next year, which, in turn, should improve conversion and enable us to spend more on traffic to our sites. But until we begin to realize the results from these initiatives, we will continue to manage expenses and align our cost structure with the shift in channel mix, as we remain committed to profitability over revenue growth.

Regardless of the channel, we will ensure our customers have the widest selections of high-quality auto parts available to them, while providing them with the confidence that they are selecting the right products for the job. And we can do this by continuing to add the most relevant, new SKUs to our product assortment.

During the third quarter, we added over 2,200 new private label SKUs, and worked (technical difficulty) to exceed our annual target for the year of 7,000 to 8,000 SKUs in 2017.

Similar to our guidance in the past, we expect our branded business to continue to decline by double digits over the near term. However, we expect the growth of private label to more than offset this decline. As such, we are maintaining our expectation for low- to mid-single-digit revenue growth in 2017.

We are also maintaining our 2017 guidance for net income to range between $27 million to $29 million, with adjusted EBITDA ranging between $13 million and $15 million.

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

(Operator Instructions) Our first question is from Darren Aftahi from Roth Capital Partners.

Just a few, if I may.

So when you reiterated guidance, it looks like, year-to-date, you've grown sales, if my math is right, roughly kind of 1%. I am just curious why you're keeping the language around low to mid? And what could actually get your growth to the kind of the mid-rate?

Second question, with the growth you're seeing in the online marketplace channel, I'm just sort of curious strategically if you've thought about trying to expand that channel, while understanding it's lower-margin? I'm just giving the company a larger growth profile.

And then third, just on some of the speed, mobile conversion after checkout, I'm just kind of curious, (technical difficulty) little bit of testing with some of your sites, how that's going? And then any kind of forward initiative that you may be implementing in the fourth quarter that we can monitor?

Sure. Darren, on the first question the -- in terms of the sales guidance, your year-to-date numbers are probably pretty close. We think that anything between kind of that 1% to 5% would be the outer bounds, and unless we go outside of the range, that's when we are -- then we would traditionally update it. If you don't mind, could you repeat the second question?

The second question was more around, I guess, when you just sort of step back big picture and look at the growth in your marketplace channel versus some of the declines in e-com, I mean, does it make sense strategically to try and find some other channels? There may be a Facebook relative to an eBay, to actually expand that channel? And again, it's lower gross margin, but just accelerate the growth profile of the company?

Yes, absolutely. Good question. And I think that we bring in 2 real competitive advantage to the table. One is the strength of our supply chain, and the other is our reach. So we're always looking at other partnership opportunities where we can further increase that reach. We want to make sure that our product assortment is where our customers are shopping. So we will absolutely evaluate additional channels that we're not participating in as well as different ways to grow within the channels that we are.

Great. And then I guess my last one was just -- go ahead.

The only other point, Darren, was that we've built a model that has a very efficient supply chain that provides a good mix of both the private label product, and that can support a myriad of opportunities, both on the marketplace as well as continue to build our e-commerce sites as well.

Got it. And then -- yes the third question is more around your owned and operated sites and some of the progress you saw. I think you had said maybe earlier that, not on the call, but that, that you were doing some testing on your sites with some of the conversion, speed, checkout process. I am just curious how that went? And then any new initiatives you put in place for the fourth quarter? Whether it be A/B testing, et cetera?

Yes, absolutely. And thank you, Darren. The roadmap across those 5 strategic initiatives is a multiquarter one. So we're absolutely doing things with incremental benefit with speed to try to improve conversion. We have seen some successes on certain pages. We'll continue to roll these things out as they are available over the next couple of quarters. But we're setting expectations about meaningful change there throughout next year.

And in terms of new initiatives now, I think the team is mostly committed around those 5 pillars and that's how we've allocated the resources. So I look forward to providing additional updates in the quarters to come.

This concludes the question-and-answer session. I'd like to turn the floor back over to Mr. Watanabe for any closing comments.

Thank you for joining the call today. Please note that we'll be participating in [Bally's] conference tomorrow in Las Vegas, and the [Nobel's] conference later this year. And we hope to meet with some of you there. If not, we look forward to speaking with you next when we report our fourth quarter results in March.

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