Shane Evangelist - CEO Michael Yoshida - Interim CFO.

Mitch Bartlett - Craig-Hallum.

Welcome to U.S. Auto Parts Fourth Quarter 2014 Conference Call. On the call today from the company are Shane Evangelist, Chief Executive Officer and Michael Yoshida, Interim Chief Financial Officer. By now, everyone should have access to the fourth quarter 2014 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 March 23, 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 day 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 a 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 the use of such non-GAAP measures have limitations, which are detailed in the company's press release. With that, I would like to turn the call over to Mr. Shane Evangelist..

Thank you, Manny, and thank you all for joining the call. I would like to start by congratulating the U.S. Auto Parts employees for delivering strong year-over-year results. We returned to double-digit growth year-over-year. We delivered a 35% increase year-over-year in adjusted EBITDA and produced over $2 million in adjusted EBITDA less CapEx.

Our employees should be proud of their achievements and as always, it is an honor to be a part of this team and thank you all for your hard work.

Before I go into the quarter, I want to make it clear that all the numbers I speak to are excluding AutoMD beginning in the fourth quarter of 2014 as we raised $7 million last quarter for AutoMD and we're using those funds to operate the business of AutoMD. Revenue for the fourth quarter was up 18%.

Adjusted for the additional week, we had in 2014 the revenue comp would have been up 12% for the quarter. Any further comments I make regarding revenue and the drivers of revenue will be on an net adjusted basis. Revenue growth from a product line perspective saw our private label business grow in the high teens for the quarter -- this quarter.

This has been driven by over 5,000 private label new SKUs that we sourced in the quarter as well as better in stock position. Our branded business continued a second consecutive quarter of positive comps driven by over a 100,000 new SKUs launched in 2014 and by [well] [ph] competitive pricing.

Breaking revenue down a bit further, our e-commerce business grew at 10%. The growth in e-commerce was driven by an 11% increase in conversion, also 4% increase in AOV and a 1% increase in revenue capture offset by a 6% decrease in traffic.

Our online marketplace business continued strong growth of 25% in revenues demonstrating our efficiency in private label sourcing. This quarter also marks the fourth consecutive quarter of positive revenue growth and the third consecutive quarter of double-digit revenue growth and for the entire year of 2014 we grew double-digit to 10%.

Gross margins for the quarter came in at 26.8%, but that includes a $500,000 of restructuring cost as a result of the closure of the West Coast operations; adding back that restructuring cost gross margins would have come in for the quarter at 27.5%.

For the full year of 2014 gross margins were 27.7% and with the adjusted add back for the closure of the West Coast operations gross margins would have come in at 28% for the full year.

Adjusted EBITDA for the quarter came in at $1.4 million, CapEx for the quarter was $1.1 million producing positive adjusted EBITDA less CapEx, and adjusted EBITDA for the full year came in at $8.1 million or 35% increase over 2014. CapEx for the year came in $6 million creating a $2.1 million surplus of adjusted EBITDA less CapEx.

As always for 2015 we continue to be excited about the opportunity that lies ahead. First the online auto parts industry continues to experience strong growth.

The industry is expected to be over $5 billion in 2015 and according to Booz & Company should double over the next five years, clearly customers are becoming more comfortable buying auto parts online.

Second, the average age of the vehicle on the road is estimated now to be over 11.3 years and expected to continue to grow increasing the likelihood of parts failure. Third, the average miles driven on the vehicle on the road today is estimated over 100,000 miles and again hoping the likelihood of parts failure.

And finally, significant SKU proliferation over the last 10 to 15 years lends itself to an online business where there isn’t physical space constraints.

We believe our goal to build more efficient low cost offshore sourcing supply chain, coupled with the widest selection of auto parts positions us well to take advantage of these tailwinds and expected accelerated shift from offline to online shopping. We expect the first quarter of 2015 to come in at high single digits year-over-year.

We've seen a decrease over the comp expense in the fourth quarter as we go into tougher comps in the first quarter, which will continue into the second quarter as well as we've seen some recent traffic decrease and a little bit of softening in the online marketplaces based on the current trends we anticipate revenue for the full year to be up single digits on an adjusted basis for the year for the second quarter being our toughest year-over-year comp.

Adjusted EBITDA without AutoMD will be slightly down to flat year-over-year as we reinvest back into the business. Now this is a very conscious decision to take advantage of the market opportunity ahead in 2016 and beyond as the market is predicted to double. Specifically we anticipate making investments in three areas.

The first is improvements in our customer experience. We will be adding resources to ship product faster, answer phones quicker and making our returns process more customer centric. These changes are designed to build customer loyalty and increase repeat purchase rates.

Second, we anticipate investing in resources to bring in more private label products and categories. We believe we can accelerate our private label offering by adding resources to identify, source and help position the product on our website.

Private label products make us more competitive in the marketplace and would help your margins, and third, we anticipate performing very limited price testing to determine the lower transactional profits will drive volume, increase customer frequency and long-term profits.

All told, we believe these investments will impact adjusted EBITDA by around $2 million in 2015 and as always we will monitor these investments going forward. We believe CapEx for the year will be around $6 million.

Turning to our majority ownership and AutoMD, we made good progress during the quarter signing up shops including a large chain, helping us to end the year with approximately 2,000 shops. We're increasing our sales force and anticipate we will end the year somewhere between 3,250 to 4,500 shops.

From a financial modeling purpose, we anticipate AutoMD will generate about $2.75 million loss in 2015 with $1.75 million in EBITDA and $1 million in CapEx. For the purpose of consolidation to U.S.

Auto Parts' financial for 2015, we expect the annual -- we expect an annual $1.15 million non-cash impact to EBITDA or about $300,000 per quarter and about an annual $640,000 of non-cash charge in CapEx or about $160,000 per quarter in CapEx. Again I want to thank the U.S.

Auto Parts team for the tremendous they've done to generate growth and turn the business back profitable again. And with that, I'll now turn the call over to Mike..

Thanks Shane. Good afternoon to everybody on the call. Unless otherwise stated, this quarter refers to consolidated 14-week Q4 2014 and last year refers to 13-week Q4 2013 in comparisons, our 14-week Q4 2014, compared with 13-week Q4 2013.

Also percentage and basis points discussed are calculating using net sales, however, for advertising we'll discuss comparisons to net online sales. Adjusted EBITDA for the quarter was $1.2 million compared to adjusted EBITDA of $1.6 million last year and adjusted EBITDA for the 13-week Q4 2014 was $1.1 million.

Adjusted EBITDA for the quarter excludes non-cash share-based compensation expense of $680,000 this quarter and $198,000 for the fourth quarter last year. Adjusted EBITDA also excludes restructuring cost of $521,000 this quarter, compared to zero for the fourth quarter last year.

The $521,000 in restructuring cost recorded in the current quarter were due to an inventory write down of approximately $419,000 net of restructured charges related to the Carson warehouse closure of approximately $102,000. CapEx for the quarter was $1.3 million, compared to $1.6 million last year.

Adjusted EBITDA less CapEx was a negative $0.1 million for the quarter compared to last year which was flat. Turning to sales, this quarter's net sales were $70.6 million, compared to $59.7 million last year, an increase of $10.8 million or 18.1%. The sales for the 13 week Q4 2014 were $66.9 million, an increase of $7.2 million or 12%.

This quarter, our online sales grew by 19.8%, while our offline sales increased by 4.3%. This compares to the 13 week Q4 2014 with online sales up 13.5% and offline sales flat.

The quarter’s online sales increase of 19.8% or $10.6 million was the result of a $6.6 million or 16.5% increase in sales from our e-commerce sales channels and a 31.1% or $3.7 million increase in sales from our online marketplaces.

The $6.6 million sales growth in our e-commerce sales channels were driven by a 9.9% increase in conversion and an increase in traffic of 1.7% and a 2.8% higher average order value. The $3.7 million increase in our online marketplaces was driven by a 26% increase in orders.

Total orders including both our e-commerce channels and our online marketplaces increased by 16.5% over last year. Excluding the 14th week total orders for the quarter increased by 8.8%. Total average order value increased by 2.1% to $97 this quarter from $95 last year. Average order value was flat to our previous quarter at $97 per order.

This quarter's gross margin rate of 26.8% is down 250 basis points from last year of 29.3%. Excluding the restructured charges, gross margin was 27.5% down 180 basis points from last year.

The 180 basis point decline was primarily due to our competitive pricing strategies for our private label and branded products, which drove our double-digit sales growth in the quarter. Our private label mix was 58% of net sales this quarter, compared to 53% last quarter and 55% last year.

Excluding restructure charges this quarter's margin rate for the 13 week Q4 2014 was 27.5%. Online advertising expense, which includes catalog cost was 7.2% of net online sales this quarter, compared to 7% last year and the same as last quarter of 7.2%. We continue to achieve online revenue growth, while maintaining spend efficiency.

For the 13 week Q4 2014 the online advertising cost was 7.2% of net online sales. This quarter's marketing expense, excluding online advertising expense was 8.5% of net sales, compared to last year of 9.3%.

The 80 basis points decrease to last year was primarily due to lower depreciation and amortization expense net of stock compensation expense of 70 basis points and lower fixed wages of 30 basis points partially offset by overhead increase of 20 basis points.

For the 13 week Q4 2014 marketing expense, excluding online advertising expense was 8.7% of net sales, compared to last year of 9.3%. General and administrative expense including amortization of intangibles was $4.3 million or 6.1% of net sales this quarter compared to $4 million or 6.7% of net sales last year, a decline of 60 basis points.

The decrease over last year of 60 basis points was primarily due to lower overhead costs of 60 basis points, lower wages of 20 basis points partially offset by higher depreciation and amortization net of stock compensation of 20 basis points.

For the 13-week Q4 2014, general and administrative expense including amortization of intangibles was 6.2% of net sales compared to last year of 6.7%. Fulfillment expense was 7.1% of net sales this quarter and up from 6.9% last year, an increase of 20 basis points.

This increase was primarily due to wages to support the increase in inventory receipts during the quarter of 50 basis points, partially offset by lower overhead, depreciation and amortization, net of stock compensation of 40 basis points. Last quarter’s fulfillment expense was 7.7% of net sales.

For the 13-week Q4 2014, fulfillment expense was 7.2% of net sales compared to last year of 6.9%. Technology expense was 1.7% of net sales this quarter down from 1.8% last year, a decline of 10 basis points. The reduction was primarily due to lower overhead and telephone expense.

For the 13-week Q4 technology expense was 1.8% of net sales or flat to last year. Turning to our revenue metric, unique visitors on our e-commerce site for the quarter were 29.3 million, up 1.7% over last year. Excluding the 14-week, our unique visitors were 27.1 million or down 5.9%. E-com revenue grew by 16.5%.

Excluding the 14th week, e-com revenue grew by 10.3%, primarily due to our strong growth in conversion of 9.9% as a result of our competitive pricing strategy and increase in our average order value of 2.8%. Our conversion rate improved to 1.67% this quarter from last year of 1.52%.

Orders placed through our e-commerce channel this quarter were 490,000 or up 12.4% from last year of 436,000 with an average order value of $112, up 2.8% from $109 last year. Excluding the 14th week, our e-commerce orders were 457,000 or up 4.8% over last year.

Total orders including orders from both our e-commerce channels and online marketplaces increased by 16.5% over last year. Excluding the 14th week, total orders increased by 8.8%. Total average order value increased by 1.1% to $96 this quarter from $95 last year. As I previously said, 13-week Q4 net online revenue grew by 13.5%.

Online marketplace orders increased this quarter to 252,000 compared to 200,000 orders last year, an increase of 26%. Excluding the 14th week, online marketplace orders increased 17.5%. Online marketplace average order value was $68 this quarter compared to last year of $65, an increase of 4.6%.

The positive growth in online marketplace revenue is driven by a broad selection of competitively priced private label products.

Revenue capture, the amount of actual dollars retained after taking into consideration, returned, credit card declines and product fulfillment improved by 70 basis points or 85.6% of gross sales, compared to last year of 84.9% of gross sales. The revenue capture improvement is primarily due to lower return rates.

This quarter’s customer acquisition costs came in at $7.46 or 4.5% higher than last year and 6.3% greater than with last year of $7.02. The increase was due to greater spend across commercial and search engine or websites, which resulted in double-digit comp sales increase.

Now turning to the balance sheet, cash and securities were $7.7 million and debt outstanding on our revolving line of credit was $11 million compared to last quarter’s cash and securities of $1.2 million and debt outstanding of $10.9 million.

The cash increase was primarily due to the non-controlling interest investment in AutoMD of $7 million during the quarter. Revolver debt net of cash and securities improved to net debt of $3.3 million compared to last quarter's net debt of $9.7 million.

Last year's cash and securities were $0.9 million and debt outstanding on our revolving line of credit was $6.8 million. Our net availability that's subject to covenant test on our line was $8.3 million, compared to last quarter of $7.1 million and last year's net availability not subject to covenant test of $2.7 million.

As discussed last quarter, we draw on our revolver as needed to fund working capital and operating needs of the business. As of today, our current debt outstanding on our revolving line of credit is at $13.7 million and our net availability not subject to covenant test is at $8.2 million.

Our fiscal year end, total company headcount was 983 employees compared to 1,032 last year. The headcount reduction was primarily due to the Carson warehouse closure in 2014. Now with that operator, we’ll now open up the call for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Mitch Bartlett of Craig-Hallum. Please go ahead..

Sure. I wonder if you could go over all the numbers again, not, just kidding.

The private label you said was up high-teens in the quarter and since your growth was high-teens that means the branded was up high-teens, is that a fair assessment?.

No, Mitch, branded was up - I think the issue you're running into is that -- yes, the '14 - PO was up high-teens and branded was probably up low-single digits and if you were to then take the two of those, what I discussed is we were up 12% for the entire quarter normalized..

Got it. Got it. Okay.

But you did experiment with sharper pricing on the branded side to see if you could drive that or what was your kind of pricing strategy in the quarter?.

Yes we saw a little bit of branded pricing, but not a whole lot. We’ve seen some of the success that we’ve done around improving the user experience on the website, some of the data getting a little more clear, some of the usability being a little better.

I think I talked a little bit about SmartFit previously and how we’re helping consumers find products faster. So we saw some of that inside the branded space..

Okay..

But it wasn’t a price. It wasn’t necessarily anymore price driven than it was the previous quarter..

So you decided, I mean I noticed that the traffic numbers are up year-over-year first time in a long-time, so really a strong turn in the business and was that a deliberate….

Yes, let me go back to that. That’s because of the 14 week; traffic was down 6% without that..

Okay. Okay.

And go over again and my last question, what you said about kind of growth in first quarter what you’ve seen so far?.

Yes, so what’ve said is we’re going to -- we think we’ll end the quarter high-single digits..

Okay. Good. Thanks..

Thanks, Mitch..

Thank you. [Operator Instructions] It appears we have no further questions in queue at this point. I would like to turn it back over to management for any additional or closing remarks..

Thanks all for joining the call. We look forward to updating you on our next call. Thank you..

Thank you. And ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation..