Shane Evangelist - CEO Neil Watanabe - CFO.

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 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 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.

Please also note that 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.

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 consolidated financials to provide the components of our business. Additionally, when we reference net debt, we define it as cash and cash equivalents less revolver debt excluding AutoMD. With that, I would now like to turn the call over to Neil Watanabe. Thank you, sir you may begin..

Thank you, operator. Good morning everyone, and thank you for joining us to discuss our third quarter results. I would like to provide a summary on the financial results reported in the press release today, as well as an overview over our key business metrics.

I would like to remind listeners that all metrics discussed exclude AutoMD unless specifically noted.

Over the last year we’ve emphasized our focus to drive profitability over low margin revenue growth, and during the third quarter we continue to execute on this initiative with another strong quarter of private label sales growth, increased margin dollars, effective managed expenses and growing our net cash position.

Moving on to our third quarter results. Net sales increased 4% to $73.5 million compared to $70.6 million at the year ago quarter, in line with our mid single-digit growth expectations. To raise sales down further, online sales were up 4%, driven by strong growth in online marketplace sales, which increased 21%.

E-commerce sales were down slightly to $46.8 million versus $47.5 million last year, while traffic was also down 3% with 6% lower average order value, partially offset with an 8% increase in conversation rate.

The decline in average order value was expected, given our continued focus on shifting sales to higher margin private label products, which carry lower price points. The traffic decline was partially due to reducing spend on lower converting campaigns, which ultimately increased the overall conversion.

Total online orders increased 12%, a clear sign of our market share growth. Offline sales increased to $6.6 million compared to $6.2 million the prior year. Taking a look at our sales by product category, the private label business was up, approximately 12%, offset by an expected single-digit decrease in our branded business.

The branded business decline continues to reflect our strategy to maintain minimum margin targets. As such, we continue to expect an increase in the revenue mix of our private label product, which accounted for 65% of net sales compared to 60% in the year ago period.

During the third quarter, we continued to expand gross margins with an 80 basis-point improvement to 30.5% compare to the year ago period. This improvement was largely due a higher mix of private label sales. Total OpEx was $21.7 million compared to $20.4 million in the year ago quarter. As a percentage of revenues, OpEx was 29.6% compared to 28.9%.

The slight increase was primarily driven by cost associated with stock registrations, investor relations and marketing costs. Net income for the quarter came in at $8.4 million or $0.01 per diluted share, relatively flat when compared to the year ago quarter.

Adjusted EBITDA in the third quarter increased 10% to $3.1 million compared to $2.8 million last year. Now, let me provide some details on our key metrics of the third quarter. Unique visitors to our e-commerce sites were $28.4 million, down 3% from last year.

Orders placed online increased 12% to 846,000 with an average order value of $90 from the $96 we posted in the year ago period. Our conversion rate was 1.9% for the quarter, up 1.8% during the same period last year, representing an 8% increase.

Revenue capture, defined as the amount of actual dollars retained after taking returns, credit card declines, and product fulfilment into consideration, was 84.7% of gross sales compared to 85.3% in the year ago period. For the third quarter, customer acquisition costs came in at $7.61 compared to $7.65 last year, and $7.54 in Q2 of 2016.

Turning to balance sheet, we ended the quarter with no revolver debt and $5.2 million in cash.

The balance sheet improvements are the result of our continued focus on inventory productivity, increasing cash from operations, and extended payment terms negotiated with our vendors, resulting from our improved operating performance and utilization of LCs for selected import vendors.

We ended the quarter with inventory of $49.5 million compared to $51.2 million at the end of our last fiscal year. We have achieved six consecutive quarters of improved profitability over the same quarters from the prior year with the last three quarters reflecting positive net income and increased cash from operations.

We remain focused on continued execution and refinement of our profit enhancement strategies as we close out the year. With that, I'll turn the call over to Shane..

Thank you, Neil. We are, again, very pleased with this quarter's financial performance. I want to thank the team members at U.S. Auto Parts for their commitment and hard work to improve the business.

We delivered $400,000 in net income, and this is the first time in five years that we delivered over $3 million in adjusted EBITDA for the third quarter, an accomplishment the entire team should be proud of.

With the keen improvement in financial results, our cash and balance grew to $5.2 million with no borrowings on our revolver debt at the end of the quarter.

At the end of 3Q last year, our balance on the revolver debt was $8.3 million, and was $1 million in cash, which amounts to a $12.5 million improvement in our net cash position over the last 12 months.

In addition to the free cash flow generation, that is driving our improved cash position, we continue to build confidence with our vendor community, resulting in improved payable terms that further contribute to our increase in cash. We continue to believe these factors will continue to drive improvements in cash going forward.

Over the last 24 months, we have executed on our strategy to significantly increase our private label offering, reduce our dependency on organic research and completely eliminate our revolver debt.

We also believe we are well positioned to take advantage of several industry tailwinds, primarily the growing shift to online purchases from offline competitors.

According to the 2016 Digital Fact Book, online auto part purchases are anticipated to grow annually double-digit at double-digit rates, whereas offline purchases are expected to grow in low single-digits. In addition, national online [ph] gas prices continue to remain low and averaged $2.28 in the third quarter compared to $2.58 prior year.

The reduced gas pricing is aided an increase in miles driven year-over-year, which is up 2.7% in August. And finally, the average age of vehicles continued to have over 110 miles on them and they are getting older.

The result of more miles driven and more aged vehicles on the road help increase demand for quality auto parts and low prices online, which is where we believe the market is shifting and we believe we are well positioned for continued growth.

Neil previously spoke in detail on the results of the quarter, so I'll focus on our highest priority, the continued growth of our private label business.

We were pleased with the 12% private label growth in the quarter, and our continued mix of private label is now at 65% of revenues, demonstrating our commitment to grow in the private label business.

Our private label product enable us to be one of the low cost providers in the marketplace, which appeals for a very large demographic of customers who seek value oriented options to repair their ageing vehicles.

The growth of the private label business is critical, because it not only has great incremental pull-through but it also allows us to spend more marketing dollars and acquire more customers.

And we continue to see plenty of opportunity to develop new SKUs going forward and anticipate adding over 7,000 to 8,000 new SKUs this year, and another 7,000 to 8,000 in 2017. We also continue to invest in our data engines and people to help us identify fast moving SKUs and source products with high economic returns.

Growing private label remains our top priority for the business. As it relates to 2016 guidance, we are maintaining our previous guidance of low to mid single-digit revenue growth. We also expect net income to range between $1.7 million to $3.7 million and with adjusted EBITDA ranging between $13 million to $15 million for the year.

At this time, we're also issuing guidance for fiscal year 2017. We continue to expect low to mid single-digit revenue growth with our private label business continuing its double-digit growth as we increase new SKUs and optimize our user experience.

We expect net income to range between $4.8 million to $7.8 million, and adjusted EBITDA to range between $15 million to $18 million for fiscal 2017. We also do not anticipate increasing capital expenditures on a year-over-year basis.

Turning to our majority ownership in AutoMD, as we anticipated subsequent to the quarter close, we invested $2 million in AutoMD pursuant to our funding milestone obligation under our purchase agreement with the AutoMD investors. Our investment increased our equity ownership to 67.4% of AutoMD.

In closing it is an exciting time for us, as we have turned U.S. Auto Parts from a majority of drop shift branded business to a low cost provider with the competitive advantage of private label products directly sourced from Asia. We are also now at a point where our cost structure can be leveraged.

To summarize our highlights, our private label business continues its double-digit growth and is now 65% of our revenues. Gross margin continued to expand over 30% for the quarter.

Net income for the quarter came in at $400,000, Q3 adjusted EBITDA came in above $3 million for the first time in five years, and we continue to build cash on the balance sheet.

And we are providing net income guidance for 2017 to range between $4.8 million and $7.8 million and adjusted EBITDA guidance for 2017 to range between $15 million to $18 million with no anticipated increase in CapEx. And with that, I will now turn the call over for questions..

Operator:.

Thank you all for joining the call today. Please note we’ll be presenting to several conferences over the next couple of months and hope to see some of you there. If not, we look forward to speaking with you when we report our next fourth quarter earnings results in March..

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. And have a wonderful day..