Shane Evangelist - Chief Executive Officer Neil Watanabe - Chief Financial Officer.

Nick Meyers - Roth Capital Partners, LLC, Mitchell Bartlett - Craig-Hallum Capital Group LLC,.

Welcome to U.S. Auto Parts Second 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 04 PM Eastern Time.

If you have not received your release, it is available on the Investor Relations portion of the U.S. Auto Parts' Web site, 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 Web site 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 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 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 Web site.

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.

Unless and otherwise stated references to this quarter in 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 will be discussing and comparing to net online sales.

Additionally unless and otherwise stated all financial data reported including and not limited to revenue, gross margin, operating expense and net income loss, excludes are 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 Shane Evangelist..

Thank you, and thank you all for joining the call. And as always, 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 are valued and appreciated. Our results for the quarter came in as expected.

We continue to get 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 improvement and profitability in gross margin return on investment.

These actions lead 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-digit, this has been driven by lower organic traffic specific to key words related to branded terms and our resistance to sell branded products at prices that do not meet our profitability targets.

Borrowing a significant in change traffic, we anticipate branded sale to be negative going forward and become 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 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 28% as we took specific actions lower performing SKUs. 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 third quarter and translate into strong year-over-year growth. Additionally adjusted EBITDA, less CapEx remains positive $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’ve made good progress on leading indicators and expect to see LTV expansion going forward.

The first leading indicator was gross margin expansion, use the direct results 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 to 7,000 new private label SKUs. We also have a strong backlog of private label SKUs to source.

We believe we are setup for healthy private label additions through 2015 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 see our call center NPS score improve from 31 to 50 as we’ve taken actions to make returns easier. We believe these are early indicators that repeat purchases should improve. Finally, we continue to see year-over-year improvements in conversion driven by our improved customer experience.

We rolled out responsive designs on all of our flagship websites and continue to add more parts for active selling initiatives. We are pleased with the progress we are making to improve LTV and believe we will realize the financial benefits of the next year.

Turning to our major ownership and AutoMD, we made good progress in the quarter spanning 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 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-digit 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 closures 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 million last year.

These results are largely in line with the guidance provided during our last earnings call, which anticipated that our second quarter will 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 by 28% in Q2 as we anticipated softening based on our lapping high comparable sales a year ago.

Our e-commerce 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 offline 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 a 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 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 a 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 cost came in at $7.91 compared to $7.11 last year and $7.30 in Q1 of 2015.

This planned increase is a result of increased paid advertising as we become less dependent on organic advertising. We have our process designed to ensure that our marketing spend achieve certain financial return criteria and 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 at $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% age one year less versus 89% the year ago.

This is a direct result of us sourcing better performance SKUs and discontinuing those that don’t perform our meet or 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 and achieving single-digit sales increases on a year-over-year basis. Based on changes we’ve made to our business model, we anticipate margin expansion and further leveraging of our expenses that can allow us to achieve an increase and adjusted EBITDA year-over-year.

In addition to our lifetime value business initiatives, let me turn to a few or 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 good progress on both 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 effect pricing on more real time basis for all channels of our business.

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

Before opening the call for questions I would like to share that effective August 1, we’ve retained 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 like delivering the right message to the right audience with consistency and focus.

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

Thank you. [Operator Instructions] Our first question comes from Jeff Martin of ROTH Capital Partners..

Hello guys this is a Nick Meyers, I’m on for Jeff Martin today.

How are you guys doing?.

Hey Nick. Good.

Yourself?.

Doing very well, thank you.

Yes, so just the start off I want to talk about improving profitability you guys have strong conviction in doing so could you elaborate may be a little bit on the factors that will lead to this?.

Yes, so in the second quarter we took some actions on sort of lower performing SKUs, decent 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 the trend continue in July and so we’re pleased with the where the actions we took in the trend that are continuing..

Perfect, thanks Shane. Thanks for the color. And then also yes last quarter’s you guys detailed a four step plan to increase the lifetime value of your customers.

Can you provide may be a little bit of an update on the progress toward that plan and what kind of results you are seeing?.

Yes, so LTV obviously a big initiative for us as we think the expansion of LTV allows for us to reduce our dependency on organic search, and the four points of the plan certainly, the first point in that plan is increasing gross profit percentages in dollar 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 as we outlined earlier we certainly brought in more resources in the first half of this year to ensure that we could private label, so we like the expansion there.

From a repeat purchase perspective we’ve seen good net promoter score increase 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 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 and 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 have seen some good improvement on the gross margin per transaction which is also an indicator towards 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 are seeing is the shift itself is consistent in the channels that we’re marketing into, most of its around search affiliate or other online channels.

What we are seeing is a small mix of organic traffic which obviously doesn’t cost anything and so as the mix shifts from organic to what you consider paid traffic, you are seeing an increase in the actual customer acquisition cost. That said, the actually 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 thought increase in our paid channel by about 10% to 11% this year or this quarter, but only a 2% in actual dollar spent to bring that in.

So we think we’re getting some leverages and efficiency on the customer acquisition side..

Okay. Perfect. Thank you, guys very much. Good luck..

Thanks, Nick..

[Operator Instructions] Our next question comes from Mitch Bartlett from Craig-Hallum..

Good afternoon..

Hi, Mitch..

So I wonder about, in days past we’ve talked about kind of that delicate balance of between branded and private label. First Neil, I think you talked 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’s kind of flat with Q1..

Yes. As a percent of sales but over last year with 54, last year Mitch, so you are up 6% on a year-over-year basis..

Okay.

What about that blend, first is did you see any lift in price competition on the branded side, which caused you pull back on the branded more perhaps than what you would like or was that different change of pricing on the branded side is getting tighter and tougher?.

Yes. It’s two things Mitch. One, we actually saw some traffic decline specific to branded key terms and we talked about that in the first quarter. We saw that play out more in the second quarter. So it’s related to a key word like best top 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 and we didn’t see a change in competitive pricing significantly. 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 to pickup in the profitability side..

From the private label margin associated with the mix shift..

Yes..

Yes. Okay..

Mitch just so we are 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 the trajectory of private label as a percentage of a mix changing from kind of previous thoughts? Is it going to be a larger percentage than you thought before? I guess this is what….

Yes, I mean that’s right. It will be a larger percentage. So put 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 are seeing branded decline, but private label grow as I indicated in the third quarter of 2015 and over 2015, on private label in the third quarter with the branded business being down close to similar double-digit, since while you had a mid-single digit growth continue.

Under this current trend if the branded business continues to drop this way, you will see a much larger mix of a very healthy growing private label business coupled with what we consider a strategic business inside the branded side, which obviously provides a large assortment for our consumers, allow us to also sort of up sell into our private label product and it also brings traffic to site still.

So we still like the branded business from a 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 use the branded as a hook to up sell 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, overall traffic was down 4%, so we’re still driving a lot of people in Mitch and we still continued to use the branded business to sell into private label. So that hasn’t changed, we’re 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 comparisons….

Yes, some of it. Yes, Its probably more the year-over-year comparison Mitch, I mean I the second quarter of 2014 was really big specifically around that weather that took place in the first half of that year. So its probably just so much comparison, we still had good solid sales, we’re up against a tougher comp..

That’s 13%..

And was branded really strong in Q2 of last year?.

No branded was still negative 2Q of last year, it was down three last year. So 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. I don’t mean to [indiscernible] the private label..

Keep going..

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

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

So 2016 for the full-year private label could represent 65% of total sales or?.

Yes and be clear on this , by no means are we giving guidance for 2016 on the percentage mixes. I think on a year-over-year basis we saw 6% increase under current course and speed, you could see that happen again. That said Mitch, the branded business could turnaround, 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 with the pace it’s growing now, its feels pretty solid..

Got it. Thank you. I appreciate it..

Thanks, Mitch. End of Q&A.

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 10, 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 conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..