Aaron Coleman - CEO Neil Watanabe - CFO.

Darren Aftahi - ROTH Capital Partners.

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 the U.S. Auto Parts' press release today, which again can be found in 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 discontinued AutoMD reporting segment. Additionally, when we reference net debt, we define it as cash and cash equivalents less revolver debt excluding AutoMD.

With that, I would like to turn the call over to Neil Watanabe..

Thank you, Operator. Good afternoon everyone and thank you for joining us to discuss our first quarter results. Before I begin, I would like to take a moment to introduce and congratulate Aaron Coleman on his new position as CEO for U.S. Auto Parts.

Aaron has been with the company for more than nine years and has served as Chief Operating Officer since 2010 before being appointed the President last year. Needless to say he has been instrumental to the company's operations over his tenure and we're all very excited to have him lead our organization.

Turning to the quarter, I'd like to provide a summary of our financials reported in our press release today, as well as an overview of key business metrics.

Unless specifically noted, I would also like to remind listeners that all metrics exclude the AutoMD operating segment which we will be reporting as discontinued operations following the recent dissolution of the AutoMD entity. Net sales in the first quarter were up slightly to $80.8 million compared to $80.7 million in the year ago quarter.

As mentioned during our last quarterly update, we experienced a soft February which we believe was largely attributable to mild weather trends related to milder temperatures in many markets and delayed tax refunds by the IRS.

We experienced a sales pick up in March as tax refunds were received but it wasn't enough to fully offset the shortfall in February. Sales in the second quarter have since returned to normal levels with private label business seen double-digit year-over-year growth thus far.

Looking at the marketplace sales channel which are largely private label sales, we saw a 24% increase. This was offset by e-commerce sales which were down 10% primarily driven by lower traffic and lower average order values. Offline sales remain flat for the quarter at $7.5 million.

We continue to expect an increase in the revenue mix of our private label products which accounted for 71% of net sales in Q1 compared to 67% in the year ago period. Gross margin for the quarter were 29.4% compared to 30.4% in the year ago period.

The reduced margin was primarily driven by higher freight costs and lower margin channel mix partially offset by a higher private label mix. We continue to expect gross margins to range between 29% to 30% going forward. Total operating expense in the first quarter was relatively flat compared to last year at $22.6 million.

As a percentage of revenue, operating expense was 27.9% versus 28% in the prior year. Net income for the quarter was $0.8 million or $0.02 per share compared to $1.5 million or $0.04 per share in the year ago quarter. The decrease was driven by the aforementioned lower margin channel mix and higher freight costs.

Adjusted EBITDA in the first quarter decreased slightly to $4 million compared to the prior year at $4.3 million.

Turning to AutoMD, we incurred a total loss of $0.6 million during the first quarter reported as discontinued operations which included severance and contract terminations as a result of the dissolution of AutoMD which Aaron will discuss in more detail later in the call.

Now let me provide some details on our key operating metrics for the first quarter. Unique visitors to our e-commerce sites totaled 28.9 million, down 8% from last year and orders placed decreased 7% to 518,000, with an average order value of $104 compared to $106 in the year ago period.

While traffic was lower on our e-commerce site in Q1, we were able to maintain our overall conversion rate for the quarter at 1.8% flat compared to last year.

Revenue capture defined as the amount of actual dollars retained after taking returns, credit card declines and product fulfillment into consideration was 85.2% of gross sales compared to 85.5% in the year ago period. In the first quarter, we reduced our customer acquisition cost to $7.43 compared to $7.73 last year and $7.64 in Q4 of 2016.

The decrease was driven by our decision to reduce marketing spend as we experience a shift in channel mix during the quarter to more online marketplace sales.

Turning to the balance sheet at April 1, 2017, we continue to have no revolver debt while increasing our cash balance to $7.2 million compared to $3 million in revolver debt and $1.3 million in cash in Q1 of 2016.

The increase in cash is a result of our continued focus on increased cash from operations and extending payment terms with our vendors which we've accomplished through improved operating performance and utilization of LCs as selected import vendors.

We also ended the quarter with inventory of $57.2 million compared to $46.9 million at the end of Q1 2016. The increase in inventory was primarily due to lower than anticipated sales in Q1, along with increase in our in-stock rate for higher stock ship sales in Q2.

As announced in November of last year, we enacted a stock repurchase program to further underscore our commitment to enhancing shareholder value. And during the first quarter, we purchased approximately 0.7 million shares for $2.3 million bringing our total amount of repurchase shares to 1.1 million at a cost of $3.7 million.

With that, I'll turn the call over to Aaron..

Thank you, Neil. Let me start by saying that I'm very honored by this great opportunity and I'm proud to lead an amazing team and company with a clear focus on creating value for our customers, employees, and shareholders.

I'm excited that we compete in a large addressable market with many favorable macro trends including a continued increase in vehicle miles driven, the aging of the vehicle population and a 15% to 20% online growth trend.

Over the last few years, we've been transitioning to a vertically integrated e-commerce company and we've proven that when we have the most competitive supply chain we win.

Our strategic plan is simply to create a compelling value proposition by offering our customers a wide selection of Auto Parts at tremendous quality and value and providing them the confidence that they're selecting the right products for the job and ultimately making it as easy as possible for them to do business with us.

The growth of our private label business is strong and continues to be a major focus point as it enables us to be price point competitive with our customers at a higher margin than our branded business.

During the first quarter, we added more than 1,500 new private label skews and we continue to anticipate adding a total of 7,000 to 8,000 new skews in 2017. We also continue to expect private label sales to grow double-digits for the year, despite the 6% private label sales growth in the quarter.

We are maintaining our previous 2017 guidance of low-to-mid-single-digit revenue growth and $4.8 million to $7.8 million of net income with $15 million to $18 million in adjusted EBITDA. However based on our current year-to-date performance, we're trending towards the lower end of guidance.

As we manage and monitor sales channel performance, we will ensure that our expense structure is aligned with the margin contribution to ensure EBITDA flow through is healthy. Turning to AutoMD, after agreeing to redeem out the minority shareholders, the AutoMD board decided to dissolve AutoMD entity and distribute the assets to U.S. Auto Parts.

As a result, the AutoMD website and assets are now fully owned and operated by U.S. Auto Parts. As we renew our focus to our core business AutoMD will no longer be a key initiative. However, we continue to anticipate positive net income from AutoMD as the revenues generated from the media sales will be greater than the ongoing operating expenses.

We will also no longer be reporting on AutoMD's financial results as an operating segment. With that, we will now open up the call for questions..

Thank you. Ladies and gentlemen we will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Darren Aftahi of ROTH Capital Partners. Please go ahead..

Hey guys, thanks for taking my questions and congratulations to you as well Aaron on the new position..

Thanks, Darren..

Just a couple quick questions, so you kind of get private label grow up in the quarter and the composition as you look at may be kind of weighed down the month of February and then rebounded in March as you look to the second quarter is some of that revenue or funding maybe from tax refund that was delayed or you I know you can may be quantify that exactly where you're seeing maybe an over indexed growth rate thus far through the quarter in Q2 and then I have a couple of follow-ups..

No, Darren, it’s Neil. We're seeing actually immediately after the tax refund started getting released our sales week-over-week really rebounded significantly to where it followed into March where we are seeing clearly back to our traditional double-digit increases in private label.

Some of our sectors are growing a little faster rate than historically. But overall it really showed that that was a temporary issue that was related to both the weather and the IRS refunds..

Getting just to add to that -- add to Neil's answer there. We haven't seen the demand fully compensate for the headwind that we saw in February, we really saw demand return to a more normal level, so that's where you hear us reaffirm the low-to-mid-single-digit guidance for the year..

Got it.

Let me be transitioning to kits I know you talked about adding 7,000 or 8,000 by the skews this year, can you just talk about kits in general, what portion of your business are kits and then what are your kind of plans over the next 12 months in terms of scaling that? And then maybe just how that benefits you kind of from a margin perspective and is that something where it's going to have more of an impact longer term on fiscal 2018 and beyond are there actually could be a near-term benefit if you guys ramp up kits this year?.

Yes, kits are certainly included into our overall sales and EBITDA guidance as it is. We have seen some success with kits. We think that there are great value option for our consumer. However it isn't something that will drive enough sales for us to meaningfully change the guidance for 2017..

We have made pretty good progress.

So Darren in the first quarter, we actually entered about 2,500 kits into our assortment and we've actually increased some of the staffing levels to do the mapping required to actually map more kits, so we believe that that number we anticipate will increase as we keep pacing through the year by providing more resources to get those onboard without any working capital commitment.

Needless to say it's an existing skew that we've already owned that we're just putting a few things together.

So as Aaron mentioned we have embedded and reflected that in our sales numbers but we clearly believe it is an opportunity to raise average order value and other things and potentially gain some efficiencies on freight as we ship more items under one shipment..

That's helpful.

I know you said last one, just when we look at your profit ranges for the year both on EBITDA and the net income, I know Aaron you said you're kind of trending towards one of those and what's the only variable in terms of that really the growth in sales at a particular private label, can you just kind of help me help understand how you come in at the low-end versus how you come in at the high-end of those EBITDA ranges? Thanks..

Sure. Certainly the big inputs there are going to be in the top-line but also the margin line and one of the things that we have witnessed is that we've seen some growth into some of our channels that have a lower average selling price and that put some pressure on some of our variable line items.

So what we are going to do on a go-forward basis is that we're either going to adjust the selling price or adjust the expense lines within those margins to make sure that they flow through at the EBITDA ranges that we're comfortable with and get those back on track.

So clearly the sales line will drive it and also kind of restoring our gross margins back to that 29% to 30% range for the year..

Thank you. At this time, I would like to turn the conference back over to management for any closing remarks..

Thank you for joining the call today. Please note we will be participating on several Mundial road shows over the next couple of months and I hope to meet with some of you then, if not we will look forward to speaking to you during our next report for our second quarter which will be in August. Thank you..

Thank you. Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation..