Shane Evangelist - CEO Neil Watanabe - CFO.

Mason Anderson - Craig-Hallum Capital Group Jeff Martin - ROTH Capital Partners.

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 the 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 those with such non-GAAP measures have limitations, which are detailed in the Company’s press release.

Please also note that the fourth quarter included 13-weeks versus 14-weeks in the fourth quarter ended January 3, 2015 and the fiscal year included 52-weeks versus 53-weeks ended fiscal ended January 3, 2015. All information and data unless specifically noted and expect for a comparable sales include the extra week in 2014.

Also, percentage and basis points discussed are calculated using net sales with the exception of advertising, which we will be discussing impact 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 our 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 fourth quarter 2015 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 like to remind listeners that all metric discussed are excluded AutoMD unless we specifically note otherwise. Net sales for the fourth quarter decreased 4% and comp sales increased 2% to $67.5 million compared to $70.5 million in the year ago quarter.

Our fiscal fourth quarter of 2014 included an extra week as well as sales related to our discontinued west coast wholesale operations. The comparable sales increase was driven by an 11% increase in private label sales partially offset by the expected decline and our lower margin branded business.

To breakdown Q4 net sales further, after adjusting for the first week in 2014, online sales were up 2% year-over-year driven by a 6% increase in our online marketplace revenue, which continues to perform well given the strength of our private label business.

Fourth quarter gross margins increased 290 basis points to 29.6% compared to 26.7% last year and 27.5% excluding the restructuring charge from closing our west coast operations in the year ago quarter. This improvement was primarily driven by a higher mix of private label sales which were 63% of net sales compared to 58% in the year ago quarter.

The increase was also driven by strategic pricing initiatives and freight efficiencies. Our operating expenses decreased 4% to 19.7 million compared to 20.5 million in the year ago quarter and were flat when excluding the extra week in 2014.

As a percentage of net sales, operating expenses increased slightly 29.2% compared to 29.1% in the fourth quarter of 2014. Excluding the extra week, OpEx was favorable 20 basis points. Adjusted EBITDA for the quarter increased 89% to 2.6 million compared to 1.4 million in the year ago quarter.

When excluding the extra week in 2014, adjusted EBITDA was up 107%. As a percentage of net sales adjusted EBITDA increased 190 basis points to 3.9% compared to 2.0% with a significant increase driven by the improvement in gross margins and operating efficiencies.

Adjusted EBITDA excludes non-cash share based compensation expense of 0.7 million in the fourth quarter which is essentially flat from Q4 2014. Net loss in the fourth quarter was 0.1 million compared to a net loss of 2 million in the year ago quarter. Adjusted EBITDA less CapEx increased to 0.9 million compared to 0.1 million in the year ago quarter.

Now let me provide some details on our key sales metrics for the quarter. Unique visitors to our ecommerce site for the fourth quarter of 2015 were 27.6 million compared to 29.3 million in the year ago quarter. The decrease was entirely driven by the extra week in 2014. Excluding the extra week, unique visitor traffic was up 2%.

This is an important milestone for U.S. Auto Parts as it reflects our first Q4 comp traffic growth since 2012. Orders placed through our ecommerce channel increased slightly to 492,000 compared to the year ago quarter which on a comp basis increased 8% with an average order value of $106 compared to $112 in the year ago quarter.

The decrease in average order value is a result of our ramp in higher margin private label products which generally have a lower average order value than our branded product. Conversion rate for the quarter was 1.8% up 10 basis points from the 1.7% last year.

We believe this increase is the 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 and consideration was 86% of gross sales which was flat compared to the year ago quarter.

This quarter customer acquisition cost came in at $7.95 compared to $7.46 in the year ago quarter, and $7.55 in Q3 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 12% increase in comp gross profit, we’ve been able to increase spend on customer acquisitions through paid search channels. We expect the increase in paid channels to grow our audience and ultimately driven more traffic to our sites which is demonstrated by the 2% increase in comp traffic this quarter.

Net debt at year-end defined as revolverless cash was 10.2 million compared to 10.3 million at January 3, 2015. For 2016, we are re-underwriting our previously issued revenue guidance of low to mid-single digit growth on a percentage basis compared to 2015.

We are also re-underwriting our target for 2016 adjusted EBITDA to range between 11.5 million to 14 million which reflects up to 40% increase from the 10 million we reported for 2015.

We continue to expect gross margin expansion and double digit private label sales growth in 2016 and 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. Before I get into the quarter, I want to take a second to reflect on the year. We started the year guiding just below $8 million in adjusted EBITDA and we ended the year with 10 million in adjusted EBITDA which was on the high end of our guidance from our Q3 earnings call.

Additionally, our adjusted EBITDA has increased from 6.4 million in 2013 to 10 million which is a CAGR of over 25%. This is a testament to the hard work and commitment by the team members at U.S.

Auto Parts and I want to thank all our team members for their commitment and hard work, we witnessed it pay off in 2015 and we believe it has set a great foundation for even more improvements in 2016. While our comparable revenues for the year were up 6%, our private label business grew 17% and has grown at a 14% CAGR over the last seven years.

The growth of this business is critical due to its 18% to 20% incremental adjusted EBITDA margin flow through. When compared to the prior year this has led to a 50 basis points improvement in adjusted EBITDA margin to 3.4% in 2015 and as Neil mentioned earlier up to 3.9% for our latest quarter.

Our private label growth is driven by our ability to be a low cost provider in the market place, which is a particularly strong value preposition to cost conscious customers.

Additionally, the high profitability of our private label products allow us to outspend others in the marketplace for premium placements in paid acquisition channel, and differently our private label offering allows us to be one of the lowest cost providers in the marketplace with one of the loudest marketing voices, while maintaining strong incremental adjusted EBITDA margin flow through.

For the year we ended over 8,000 new private label SKUs, we anticipate adding an additional 7,000 to 8,000 SKUs in 2016 which we believe will allow our private label business to continue double digit growth in 2016 and become around 65% of our revenue mix and over 80% of our unit sold.

The process and data engines we have built to identify fast moving SKUs and then source product with high economic returns differentiates us from other online retailers of auto parts, whose primary delivery mechanism is through drop shipments of product.

We believe the drop ship only business model is equivalent to online media arbitrage which will eventually get squeezed as the suppliers of auto parts sell direct. We are one of those direct supplier of auto parts that also happens to have one of the largest footprints through auto parts warehouse, J.C.

Whitney and carparts.com along with our large presence across online marketplaces. We believe this is the right long-term strategy to be a significant and profitable online player in the auto parts market.

We ended 2015 with approximately flat net debt compared to the prior year, however inventory increased $3 million and essentially flat accounts payable.

Basically, we were able to not only fully fund CapEx and interest expense but also increase inventory with the cash from operations and we anticipate in 2016 we will not only fund all in investment activities including inventory builds but also generate cash and usually pay downs debt on our revolver.

Turning to the fourth quarter, we added over 1,800 private label SKUs. Our strategy to focus on private label is resulting in significant margin expansion as Neil mentioned earlier gross margins for the quarter improved 290 basis points and adjusted EBITDA margin were up 190 basis points.

Our focus on private label and ultimately increased profitability has both increased our customer lifetime value and allows us to invest more on customer acquisition that investment of customer acquisition drove a 2% increase in comp traffic for the quarter which demonstrates our strategy to improve unit economics resulting in traffic growth from increased investment in marketing.

Furthermore the positive traffic trend has continued thus far in the first quarter of 2016. As worth noting that in 2010 31% of our total revenues came from organic search or the free part of Google. And in 2015 organic search drove only 14% of total revenues which is in line with typical pure play ecom retailers.

But typically a company would not highlight a decrease in free traffic to its website. However we view this as very positive and we’re reducing our alliance on organic search and building strong supply chains that allow us to acquire customers through paid marketing channels while also increasing overall profitability of the business.

We believe our ability to add new private label SKUs will continue to drive year-over-year private label growth and our nearly 50,000 total private label SKUs [indiscernible] 350 factories is a huge long-term competitive advantage.

Couple of that was very positive industry trends both online which is anticipated to grow over 15% annually through 2018 according to the 2016 digital auto care fact book and in general where we continue to see miles driven increase, average age of vehicles increase and gas prices decreased.

We believe we are well positioned with the right strategy to capitalize on these positive industry tailwinds. While we are not changing our previous guidance of low to mid-single digit revenue growth and $11.5 million to $14 million of adjusted EBITDA, I can't say we are very encouraged by our first quarter revenue and gross margin trends.

So far for the first quarter total revenues are trending up high single digits with our private label business trending up 13%, gross margins trending over 30% and traffic growth comping positive on similar trends as the fourth quarter. These are all very encouraging trends that should position us for a strong 2016.

Turning to our majority ownership in AutoMD, we ended the quarter with 3,200 shops and currently have around 3,700 shops on the service. We anticipate ending the year with 5,000 to 6,000 shops. In closing we continue to see the turn in the business as we place great emphasis on private label products and focus on cost and pricing initiatives.

We return to positive tracker growth in the fourth quarter and are encouraged by the same positive trends in the first quarter of this year. Our private label business continues to fuel growth and is trending up 13% so far, and the first quarter and total revenues for the first quarter are trending up high-single digits.

Gross margin expanded to nearly 30% in the fourth quarter and is trending over 30% so far this quarter. Adjusted EBITDA came in at 2.6 million, up a 107% year-over-year on a comp basis. We continue to anticipate 2016 adjusted EBITDA to range between 11.5 million and 14 million and are encouraged by the strong start to the year.

We also anticipate meaningful reductions in our debt in 2016. And with that, I’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 comes from the line of Mitch Bartlett with Craig-Hallum Capital Group. Please proceed with your question..

This is Mason on for Mitch, thanks for taking the question.

So just first on the investment in customer acquisition there, are there new channels to pursue or is that more spend into the same marketing channel?.

Actually customer acquisition looks like it's up a little bit but that’s because you’re seeing a mix shift from paid -- to paid from organic, and in fact [indiscernible] enough our paid spend is actually more efficient this year over last year meaning our actual paid cap is down a little bit.

And so what you’re actually seeing is a lift in what we publish as our overall cap, but that’s mainly because of the mix shift to paid versus organic..

And then on the mix shift in revs, when do you expect to lap the declines in the branded and see that segment stabilize?.

I don’t know if we’ll see it grow positive on an annualized basis in the near future, we’re not guiding to that, what we’re guiding to there is certainly good private label growth, double-digit private label growth.

As we indicated over the last seven years we’ve seen a 14% PL growth and the branded business while a good business for us and profitable business for us, it has been declining and truth be told most recently we’ve seen some positive trends in the branded business, but not enough for us to stay right now that we think it will be positive long-term.

So, while we’ve seen the positive trends in the branded business we’re still really focused around private label..

And then I guess just follow up to that on the gross margin side. Obviously some nice improvements year-over-year, but you’re relatively flat sequentially.

Is there more room to go there and shift mix more is more towards the private label side or is that relatively flat going forward?.

I think to be on the conservative side, I think where we’re at right now is positive right trend we’ve been on that trend for the last couple of quarters and I think that’s probably what we’re seeing going forward.

That’s not to say that we won’t see some optimization and that’s not to say that we won’t see more PL mix shift growth which will certainly -- will help the overall percentage. But at this point this trend we have around this 30 number where we’re trending at we think a pretty good number..

[Operator Instructions] Our next question comes from the line of Jeff Martin with ROTH Capital Partners. Please proceed with your question..

Wondering if Shane can you give us an update on the lifetime value of the customer.

How are you measuring that and how are you tracking it and then finally how is it trending?.

Yes, so good news is it's trending up for us and both conversion and gross margin dollars per customer per annum, we’re seeing positive trends there, and excited about that. So certainly that measurement is good and you’ve seen that as a result of increased marketing spend.

So as our LTV is increased we’ve been able to be more aggressive on the marketing side. Two areas that we got opportunity one is in bundles and so we’re starting to see some progress on bundles and we just recently launched a bundle builder Auto Parts Warehouse and we’re seeing descent pick up there.

And so we’re excited about where we can start to move the needle this year on the other leg of LTV. But for us LTV is looking good and then on a repeat purchase perspective we haven’t seen a lot of movement on the repeat purchase perspective and we’ll keep pushing on that.

I think probably the most upside we’ll see this year though is in the continued trends of GP dollars per transaction and conversion and then also in bundles, meaning larger basket size..

I would imagine, email marketing is a big part of your repeat purchase initiative.

Could you touch on that, or any new initiatives there, if that’s an active part of your program, or is that something you planned do more of?.

Yes, so certainly a big part of our mix is email. What we continue to do is make it more personalized to the individual, down to the year, make and model. car and then specific products that they want and will continue to push through that email, but still email is an overall part of our acquisition channel is in the single digit.

So it's not as if email is a huge revenue driver, but certainly a very strong revenue driver for us and one that we continue to optimize..

Okay. And then wondering if you can give us an update on your manufacturing partners in Asia, the new partners added, maybe remind us how many manufacturing partners you have and then second part of that question would be have you experienced any margin benefit from a strong U.S.

dollar?.

Yes. So we continue to operate out of Asia and as you can tell push more and more product there so certainly growth happening in Asia for us. We've got over 350 core suppliers and that number grows as we add new products some of the margin expansion is reflected in the dollar and our ability to negotiate the dollar.

I also think as we see improvement in our balance sheet and our P&L, our suppliers are willing to give us some more terms. So it certainly will help out our debt position as we strengthen our financial position. So I think there is lots of good things happening on the front, our Asian supply chain is as healthy as it's ever been..

Okay, great.

And then I noticed in your earnings release you mentioned cash and equivalent was 1.5 million, on the balance sheet it shows 5.5 million, I was wondering if that 4 million difference is what's tied up in AutoMD?.

That's correct that difference is the amount and AutoMD is part of the cash that was raised to help build that business..

Okay.

And then can you remind us what your current credit facility is and how much is currently drawn on that?.

Yes we just actually increased our facility the 30 million from 25 million through a recent bank amendment reducing our interest rate and so we have an availability that's actually increased based on some suppressed availability that we had so our bank line and the revolver is now adding $30 million line and that last 5 million we’re actually not being charged for through our bank, so it’s just extra capacity..

And what was the change in interest rate with the amended facility?.

The change in the interest rate was really kind of a premium of off LIBOR, where we’re currently LIBOR plus 150 going to 1.25 based on our ratios. So we basically accelerated our ability to get lower interest rates based on that LIBOR tier..

Great, thanks for taking my questions. Good luck in 2016..

There are no further questions at this time. I would like to turn the floor back over to management for closing comments..

I'd like to thank you all for joining the call today. Please note that we’ll be presenting at the Roth conference on March 14th, and hope to see some of you there. If not, we’ll look forward to speaking with you next when we report our first quarter results in May..

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