Neil Watanabe - CFO Shane Evangelist - CEO.

Jeff Martin - ROTH Capital Markets.

EBITDA; adjusted EBITDA; and comp sales. 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.

Unless and otherwise stated, references to this quarter in comparison to last year, refer to the consolidated 13-week period of Q3 2015 as compared to the consolidated 13-week period of Q3 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 otherwise stated, all financial data reported including but 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 Neil Watanabe..

Thank you, Operator. Good morning everyone and thank you for joining us to discuss our third quarter 2015 results. Let me provide some additional color on our financials reported in the press release this morning and then I’ll touch on some of the key business metrics and initiatives that we’re focused on, to drive improved profitability.

Net sales for the third quarter 2015 were $70.6 million compared to $67.9 million last year. This reflects a total increase in net sales of 4% and a comparable sales increase of 5%, after adjusting for the closure of our West Coast wholesale operations last year.

The improvement was driven by double-digit revenue increase in our private label business partially offset by decline in our branded sales.

To break down Q3 net sales further, online sales were up 3.7% year-over-year, primarily due to strong revenue increases to online marketplace of 10% and the offline business was up 6.7%, all driven by the continued strength in our private label business. Third quarter gross margins was 29.7% compared to 27% for the same period last year.

This 270 basis-point improvement was primarily due to a higher mix of private label sales which were 61% of total net sales compared to 53% in the year ago quarter. Additionally, measures taken to reduce shipping and supply cost, continued to have a favorable impact on the gross margin.

In addition to improvements in our cost of sales, our freight as a percentage of sales was 14% versus 14.5% last year, a 50 basis-point reduction. Our operating expenses came in flat year-over-year at 28.9%, excluding the 60 basis-point restructuring charge related to Carson warehouse closure last year.

Adjusted EBITDA for the quarter increased 112% to $2.8 million compared to $1.3 million last year. Adjusted EBITDA excludes non-cash share compensation expense of $587,000 this quarter and $682,000 last year. Additionally, last year included the restructuring add back of $410,000.

Net income in the third quarter was $353,000 compared to a net loss of $2 million last year. This is a result of the recent actions we have taken to increase profits, as it reflects that first time we had positive net income in the third quarter since 2009.

Adjusted EBITDA less CapEx was $1.2 million in the third quarter compared to $400,000 last year. Now let me provide some details on our key sales metrics for the quarter. Unique visitors to our e-commerce sites were 29.3 million, essentially flat from last year.

Orders placed through our e-commerce channel were 511,000, up 4.1% from last year with an average order value of $109, slightly lower than the $113 we posted in the same prior year period. Our conversion rate was 1.8% this quarter, up from 1.7% last year.

We believe that this increase in conversion is a result of our improved user experience and competitive offering of private label products. Revenue capture or the amount of actual dollars retained after taking returns, credit card declines and product fulfillment into consideration, improved to 85% of gross sales from the prior year of 84%.

This quarter’s customers acquisition cost came in it $7.65 compared to $7.14 in the year ago period and $7.91 in Q2 of 2015. As we stated in the past, one of our key initiatives is to become less reliant on organic search traffic to acquire customers.

As result of the 14% increase in gross profits, we’ve been able to executive this strategy and increase spend on customer acquisitions through search engine marketing or SCM. We expect the increase in SCM to grow our audience and ultimately drive more traffic to our sites.

Turning to the balance sheet, we ended the quarter with consolidated cash and cash equivalents totaling $5.7 million compared to $1.3 million last year and $7.7 million at January 3, 2015. Debt on our revolving line of credit was $8.3 million, down from $11 million, to start the year.

We continue to expect single-digit sales increases on a percentage basis for 2015 compared to 2014. We are currently trending up around 5% year-over-year for the fourth quarter on a calendar day basis.

However, our report fiscal comp will include 13 weeks this year versus 14 weeks last year due to the extra week in the fiscal year, which will have a negative impact of about $3 million year-over-year.

Given our meaningful gross margin expansion and leveraging of our fixed costs, we now expect 2015 adjusted EBITDA to come in at between $9 million and $10 million. Looking ahead to 2016, we anticipate revenues will be up low to mid single digits with our private label business continuing to grow at digits.

We anticipate adjusted EBITDA to increase 25% to 50% and come in between $11.5 million and $14 million. From an adjusted EBITDA margin perspective, we expect to be around 3.8% to 4.5 % in 2016, which compares to an anticipated margin of 3.2% in 2015 and an adjusted EBITDA margin of 2.8% in 2014.

Because of what are now strong tailwinds and own execution that is propelling us forward, looking beyond 2016, we expect a similar rate of growth in our adjusted EBITDA margins in 2017 over 2016 that we are experiencing this year, over 2014. We also expect CapEx for 2016 to be flat over 2015 at about $6 million.

We plan to use the excess cash generated in 2016 to make meaningful pay down to our revolver debt. With that I would like to turn the call over to Shane..

Thank you, Neil. I want to start by thanking the team at U.S. Auto Parts for their commitment and hard work which we’re seeing pay off with increases in profitability and what we believe are sustainable competitive advantages. Your hard work has not gone unnoticed. Thank you.

With gross margin nearly 30% and adjusted EBITDA margins at 4%, I believe we’ve hit a turning point in the business. This profitability improvement had been led by strong private label growth with comp up 21% for the quarter.

This our seventh consecutive quarter of double-digit private label comp growth, demonstrating our ability to sustain growth in the private label business. It accounted for 61% of our total revenue for the quarter compared to 53% last year and represented 65% of total units sold this quarter compared to 60% last quarter. For those new to the U.S.

Auto Parts story, we estimate our private label business produces around a 20% variable contribution margin. We are able to achieve these margins and produce double-digit revenue growth to three main reasons.

First approximately 50% of total sales and over 80% of our private label sales are in the collision segment, which a special retail market and much different than the hard part segment that is commoditized. To further this point; if I ask you where you would you go to buy wiper blades or brake pads, you would likely answer AutoZone or Pep Boys.

Now, if I ask you, where you would go buy a hood or fender, you likely wouldn’t answer AutoZone or Pep Boys, instead you would likely either go to a pick and pull salvage yard or you’d go online. These dynamics make the collision market, a nice specialty online retail business. And when DIY customers do go online, they discover U.S.

Auto Parts offers a widest range of part offerings with the widest reach across our e-commerce properties and online marketplaces. Second, we have a great understanding of market demand due to our significant presence online.

Our ability to read user data on our e-commerce websites and online marketplaces enables to us to estimate how many unit we believe we can sell and more importantly, at what price point.

This brings us to our third point; we get our ability to source products at the right cost of goods into very competitive pricing in the market and at healthy margins. We source from an extensive suppler network in Asia, spanning over 350 manufacturers and actively replenish over 50,000 SKUs across more than 500 part names.

In many cases, these supplier relationships take years to cultivate and develop which we’ve been dealing over the last 20 years. We have already added over 6,000 new private label SKUs and anticipate adding another 6,000 to 7,000 private label SKU in 2016.

And so, our branded business, we have put variable contribution margin targets in place that has constrained the growth of the branded business. Said differently, we have made deliberate strategic decisions to forego revenue in the branded business if it’s not profitable. And as a result, we’ve seen some revenue decline.

Also to be clear on the branded business, it is a profitable business for U.S. Auto Parts and adds positively to our EBITDA. Additionally, the branded business has higher strategic value as it helps us generate traffic to our website. So while our branded business is declining, it is profitable and strategic.

Moving to our customer lifetime value initiatives or LTV, we have experienced improvement. As mentioned earlier by Neil, we designed our LTV initiatives to enable more spend on customer acquisition, thus leading to less reliance on organic search.

With our recent improvements in our e-commerce gross profit dollars for transaction of 9.6% year over year and improvements in conversion of 4.6% year over year, we have been able to increase customer acquisition spend by 7.2%.

Our net promoter score continues to be very strong above 50 which, we believe should increase repeat purchase over the long run. We also intend to launch functionality this year designed to increase basket size. All in all, we are pleased with the progress we are making to improve LTV and expect more improvements going forward.

We anticipate we will end the year somewhere between 3,000 to 3,500 shops. We also had an initial read from selected test markets being done that have high shop penetration. Please note that the following data is not specifically significant and the results are only preliminary.

However, we’ll be sharing this data with prospective warehouse distributors and other partners in the market and therefore we’ve decided to include the data in the public domain. We do not plan on publishing any additional data on these test markets or any new markets going forward regardless of whether or not preliminary results are validating.

We selected a few limited geographic markets to ensure that we had enough shop penetration to the relevant customers. We added some limited TV media state share awareness about OND. [Ph] What we’re finding is that where we have more shops closer to the customer, we’re seeing increased conversion.

Specifically [indiscernible] California, a market that we have 1.3 shops per square-mile; we are seeing initial conversion rates from the market testing at over 20%.

And while the current cost for acquisition is not scalable because we aren’t generating enough demand based on media spend, the conversion numbers, which are a great proxy for the relevancy of the offer, is very encouraging. We anticipate AutoMD will spend around $3 million in 2015 with a $2 million loss to EBITDA and $1 million spend in CapEx.

I also want to reiterate that money being spent used to fund AutoMD is from outside investors and not being funded by U.S. Auto Parts. In closing, we believe we’ve reached a turning point for the business and there’s much to be excited about the quarter.

We have a real growth business in our private label offering; it comped accounts up 20% in the quarter and now accounts over 60% of our revenues and we believe has a significant advantage positioning us well for future growth. Gross margin expanded nearly 30%, up 270 basis points year-over-year.

Adjusted EBITDA for the quarter came in at $2.8 million, up a 112% year-over-year. Net income was positive for the first time in the third quarter, since 2009. We increased our full year adjusted EBITDA guidance to range between $9 million to $10 million, in 2015.

We anticipate 2016 adjusted EBITDA to be up, between 25% to 50%, over 2015, and we anticipate vehicle debt reduction in 2016. And with that, I will now open the call up for questions..

[Operator Instructions] Thank you. Our first question is from the line of Mitch Bartlett with Craig-Hallum. Please go ahead with your question..

This is George on for Mitch. First, Shane, I think towards the end, you said something comped up 20%.

Can you say what that was?.

Yes, our private label business in the quarter which is close to -- little to 60% of our revenues, comped up 20% for the quarter..

And then when you think of private versus branded, what -- is there kind of an ideal mix that you’re moving towards; and when -- how long does it take to get you there do you think?.

George, last year, it was 53%. So, we saw close to 8% acceleration in that mix this year and as such are seeing some margin change and margin expansion as a result.

If our branded business and our private label business continue to grow at their same growth rates that we’re seeing and experience today, we think that number will we be close to 65% probably this time next year..

And then I guess just continuing that -- can you talk about what the gross margin trends you’re seeing on each side? Is the growth -- the big growth year-over-year, is that just purely the private label mix or is it actually improving in both segments?.

George, in fact some of it is mix but there is also some expansion in the margins specific to the private label business. We put some minimum margin targets in place as well as had some pricing increases associated with some freight that we decided to get little bit more conservative on, from a freight pricing perspective.

The combination of the mix shift as well as those two actions is why we’re seeing the increase. And we think it’s probably sustainable at this level..

And then just the last one for me, the guidance you gave for next year adjusted EBITA, that excludes AutoMD, is that right?.

That’s accurate..

And what are your expectations around AutoMD for next year?.

So, we anticipate somewhere between $2.5 million to $3 million of spend on AutoMD broken up between EBITDA of about $1.5 million to $2 million loss and CapEx around $1 million..

Our next question is from the line of Jeff Martin with ROTH Capital Markets. .

Could you go into some of the gross margin gain; is there anything to break down further out of private label from that; is there particular products or group of class of products that are selling or is that just a broader mix element to it that is secondarily question to that is sustainability of the gross margin or potential further expansion of it?.

We saw some increase in gross margin across the board for PL but specifically there are some larger items that require larger freight that we saw sort of an accelerated expansion, as well as the mix shift. Obviously the delta between the two-year private label business is somewhere between 34% to 36% and the branded businesses is 18% to 20%.

So just a combination of the mix shift is going to see some expansion, as well in fact, we saw expansion specifically driven by some of these larger items that we ship. And as I indicated earlier, Jeff, we anticipate it to be sustainable. We saw an increase in gross margin as well as acceleration of the private label business at the same time.

So, it’s not as if we had significant impact to our private label business when we had the pricing increases, although we certainly had some impact, it didn’t have an enough impact for us to not take those changes..

I didn’t catch -- I know that the question is already asked, but on the private label mix going forward, where do you think that trends to? I didn’t catch the answer..

Last year we were 53% and it trended to 61% this year. Current course of speed, we anticipate the private label business probably getting up to 65% by this time next year..

And then, question for Neil on some of the initiatives he initially set out for when he came on, on managing inventories and looking at the number of SKUs; if you could give an update there, if there is progress on that front?.

There is, Jeff. We continue to add new SKUs, number one. As Shane had mentioned, we have approximately 6,000 to 7,000 new SKUs that we’re adding this year which is fueling some of our sales growth but at the same time we’ve been operating to work toward reducing our risk to supply and becoming more efficient our productivity over our inventory.

And we have made great strides in doing that. We plan to end the year about $48 million in inventory.

And as we enter next year with the increases that we’re protecting, we’re planning to keep inventory relatively flat so that we’re going to be able to improve our inventory turns and improve our gross margin return on investment and still maintain a very good in-stock percent..

And then as the mix shift continues toward private label, and I know branded has been an important data source for you, do you see that at some point becoming less of a data driver for you; and what point does branded make it difficult if it gets to a certain level but below where it is today?.

So, the branded business is still very strategic business for us. It drives a lot of traffic to our websites. It’s a profitable business for us. It’s simply declining because we made some decisions not to chase lower margin products that would deliver negative variable contribution margin. It’s probably just that simple.

At some point, I anticipate that branded business stabilizing. But at this point, we’re more than comfortable operating to where we’re operating it. I don’t anticipate it going away because of the strategic value it has..

And then last question, looking at your ad spend and your customer acquisition cost going out in the late 2015 and into 2017, is there any foreseeable shift in the strategy there?.

I think you’ll see spend probably increase a bit on customer acquisition. As margin expands for us, we’re able to actually invest more margin dollars in marketing. And frankly as LTV expands for us, we’re able to invest more on those dollars in marketing.

And so as margins expanded this quarter, you saw about a 7% increase in customer acquisition costs on our e-commerce channels. And I’m excited about that frankly because it allows us to spend more dollars in the channel, get more share of voice.

And that’s a testament to our supply chain, the testament to the ability for us to sell with the risk we have online. And so I expect to see customer acquisition cost creep up a little bit. I don’t say that is bad thing.

I think everyone should see that as a good thing because of the discipline we have around how we spend our marketing dollars in making sure that we have positive return on it..

I will now turn the call back to over to Neil Watanabe for closing remarks..

I want to thank everyone for joining the call today. Please note that we’ll be presenting next at the Wedbush California Dreamin’ Conference in Los Angeles, on December 10th, and hope to see some of you there. If not, we’ll look forward to speaking with you next when we report our fourth quarter results in March. Thank you very much..

Today’s conference has concluded. You may disconnect your lines at this time. Thank you for your participation..