Aaron Coleman - CEO Neil Watanabe - CFO.

Darren Aftahi - ROTH Capital Partners Carolina Jolly - Gabelli & Company.

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

Unless specifically noted, I'd also like to remind listeners that all metrics exclude the AutoMD operating segment, which is being reported as discontinued operations following the recent dissolution of the AutoMD subsidiary. Net sales in the second quarter were up 3% to $80.2 million compared to $78 million in the year-ago quarter.

Looking at our marketplace sales channel, which is primarily comprised of private-label sales, we saw a 37% increase driven by our expanding private-label assortment and value proposition. Our total private-label sales grew 14% in Q2 and accounted for 72% of net sales compared to 65% in the year-ago period.

This was offset by lower e-commerce sales which were down 13% primarily driven by lower traffic to our sites and lower average order values. Aaron will provide more color on this channel dynamic later in the call. Also note that offline sales for the quarter were up 14% to $7.5 million.

Gross margins in Q2 were 29% compared to 30.4% in the year-ago period. The reduced margin was primarily driven by higher freight costs and the impact of lower margin channel mix, partially offset by a higher margin private-label mix. We continue to expect gross margins to range between 29% and 30% going forward.

Total OpEx in the second quarter was down to $21.7 million compared to $22.1 million last year. As a percentage of revenue, OpEx was reduced 130 basis points to 27.1% versus 28.4% in the prior year.

With an increased percentage of revenues coming from our lower margin marketplace channel during the quarter, we reduced both call center and marketing expenses accordingly to ensure adequate profitability as we remain committed to driving profits over growth.

Income from continuing operations for the quarter was $26.9 million or $0.67 per diluted share compared to $1.2 million or $0.03 per diluted share in the year-ago quarter. The large increase in income from continuing operations was driven by the release of a valuation allowance from our cumulative tax NOLs.

We recognized a $26 million tax credit in Q2 as a result of our recent profitability and our expectation to continue to generate net income in the future. Adjusted EBITDA in the second quarter decreased slightly to $3.8 million compared to the prior year at $4.0 million.

As a percentage of revenues, adjusted EBITDA was 4.8% versus 5.2% last year with the decrease driven by the aforementioned channel mix affecting gross margins. Now let me provide some details on our key operating metrics for the second quarter. Unique visitors to our e-commerce sites totaled $24.7 million, down 18% from last year.

Note that this traffic figure does not include traffic to eBay and Amazon. E-commerce orders placed in Q2 decreased 9% to 494,000 with an average order value of $103 compared to $109 in the year-ago period. These declines were largely driven by the channel mix and lower branded product sales, which Aaron will discuss later on the call.

When including our marketplace channel, total orders in Q2 increased 11% to 954,000 versus the prior year. Despite lower traffic on our e-commerce sites, we were able to increase our conversion rate 20 basis points during the quarter to 2% compared to 1.8% 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% of gross sales compared to 84% in the year-ago period. In the second quarter, we also reduced our customer acquisition costs to $6.99 compared to $7.54 last year and $7.43 in Q1 of 2017.

The decrease was again driven by our decision to reduce marketing spend as we continue to experience a shift in channel mix during the quarter to more online marketplace sales and we were not willing to sacrifice profitability for incremental growth.

Turning to balance sheet, at July 1, 2017 we continue to have no revolver debt, while increasing our cash balance to $9.9 million compared to no revolver debt and $2.7 million of cash at fiscal year-end 2016.

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

We ended the quarter with inventory of $52.2 million compared to $50.9 million at the end of fiscal year 2016. The increase was primarily due to increased private-label stock inventory along with our goal to achieve a higher in-stock rate on key items.

Also I'd like to remind investors that our Board authorized a $5 million stock repurchase program on May 17 to further underscore our commitment to enhancing shareholder value. We plan to be opportunistic in acquiring shares over the next three quarters. With that, I will turn the call over to Aaron..

Thank you, Neil. Our second quarter was highlighted by the return to double-digit growth in our private-label business. We continue to believe our private-label business uniquely positioned us in the marketplace as it enables us to be price point competitive with our customers at a higher margin than our branded products.

We plan to continue investing in private-label as it represents the fastest growing and highest margin portion of our business. During the second quarter, we added over 2,500 new private-label SKUs and we continue to anticipate adding a total of 7,000 to 8,000 new SKUs in 2017.

As Neil mentioned earlier, we are experiencing a shift in channel mix this year with our online marketplace channel gaining momentum and our e-commerce business seeing lower traffic. We are addressing these channel dynamics with various initiatives designed to accelerate e-commerce growth and cost reductions to properly adjust our expense model.

Though we are certainly embracing our marketplace growth and capitalizing on that segment, we plan to accelerate e-commerce growth by reinvesting our websites to enhance the consumer experience.

We want to ensure our customers have the widest selection of high-quality auto parts available to them, while providing them with the confidence that they are selecting the right products for the job.

Ultimately we’re going to be focused on ensuring the auto parts purchase process as easy and seamless as possible across our sites, including the mobile experience.

We can do this by continuing to add the most relevant new SKUs to our sites, making it easier for consumers to find the products they need, improving our site speed, and creating a frictionless checkout experience for our customers. We expect these investments to further improve conversion which will enable us to drive more traffic.

On the expense side, we paired back on the call center personnel and reduced marketing expenses to help mitigate the impact of the shift in channel mix on our bottom line.

While our branded business is strategic to us in terms of offering our customers a wide selection and assortment, we've also anticipated it to reduce as a percentage of total revenue as our supply chain doesn't allow us to be as price point competitive as our private-label business.

With that said, the competitive environment continues to increase which is translated into a further deceleration of our branded business as we ever made discipline around not pursuing revenue, that is margin dilutive.

We believe the branded business should also benefit from our focus on improving product discovery site speed and easy check out across all devices. However, we will forecast similar double-digit decreases until we see a meaningful change in conversion rates and/or traffic.

Despite the double-digit branded decrease, we expect the growth of private label to more than offset this decline. As such, we are maintaining our expectation for low to mid single-digit revenue growth in 2017.

As Neil mentioned earlier, during the quarter, we released a valuation allowance of $26 million which is a strong reflection of our execution and ability to generate profits, as well as our outlook to continue operating in a profitable level.

I believe this achievement appropriately represent the turnaround in our business over the last couple of years. As I mentioned on the last quarterly update, we expected to hit the lower end of our guidance range on the bottom line due to some of the channel mix issues discussed earlier.

However, given the recent tax adjustment, as well as additional projected freight related expenses and compliance costs associated with our upcoming accelerated filer status, we now expect net income to range between $27 million and $29 million with adjusted EBITDA ranging between $13 million and $15 million.

This compares to our previously issued guidance $4.8 million to $7.8 million of net income and $15 million to $18 million in adjusted EBITDA. With that, we will now open-up the call for questions..

[Operator Instructions] Thank you. Our first question is coming from the line of Darren Aftahi with ROTH Capital Partners. Please proceed with your question..

Hi. Good morning, guys. Just a few, if I may. So a lot of your competitors kind of talk about some weakness in the macro auto parts sector, I guess, outside of the shift in channel mix.

I’m just kind of curious, if you’re seeing anything in particular in that regard?.

Good morning, Darren..

Good morning..

Well, what we’re witnessing is a little bit more of a competitive environment online. So while the macro across the industry might be facing a little bit of pressure. They're still inherent online growth out there. So we're seeing increases in demand and search terms and things of that nature.

So while we can't comment on the overall industry, we are still seeing that migration online providing some incremental growth for DIY online..

I guess in terms of the strength you’re seeing in the marketplace, is there anything you would call out that’s doing particularly well or is it just kind of just a macro shift of consumers moving online for shopping in this vertical?.

Certainly there is a shift online in this vertical, but I think executing on the marketplaces requires you to have a very compelling product offering and we've done a good job with our private-label assortment. It also requires to execute with high service levels in the marketplaces to make sure that you’ve got the presence within the marketplace.

So, certainly part of a shift that we’re experiencing and a part of it's bringing the right product to market and providing good service levels..

And then on the last call, I think you had mentioned with the growth in the marketplace business you're going to make augmentations to call center marketing, which I think you called out, but I think you also said testing price elasticity on some of the products.

I’m just kind of curios, any update in that regard?.

Yes. So we certainly looked at a short-term perspective around managing expenses and offsetting some of the margin compression with that operating expenses.

But we will continue to touch pricing and on a day -- on a regular weekly basis, but our real initiative to try to address the shift in marketplaces is around creating our experience on e-com and trying to make sure that again we focus on speed, we focus on a mobile first experience, we make it easy for consumers to find product.

And I think that that's how long-term we plan on addressing the shift between the sales channels..

Got it. And then, two more, if I may.

On a reduced EBITDA guidance, can you just talk about kind of the magnitude of one, the compliance cost, and then two, the freight costs and what’s kind of driving, I guess, the latter?.

So in terms of the adjustment there to the range, you could think about the mix we’ve already spoke to and the remainder of the lower end to our new guidance range, pretty evenly mix between the new accessorial charges announced by the carriers, as well as our compliance cost. So, roughly half that..

And then, lastly, just to clear, you didn’t repurchase any stock during the quarter, correct?.

We did not..

Okay. Excellent..

We have that authorized through the next three quarters and as stated we're going to be opportunistic in acquiring that stock..

Great. Thank you..

Thanks, Darren..

Thank you. The next question is coming from the line of Carolina Jolly with Gabelli & Company. Please proceed with your question..

Good morning, guys. Thanks for taking my questions.

I know that you’ve kind of already spoken about this, but can you expand on what is driving customers towards the marketplace and is most of the marketplace growth cannibalization of your e-commerce channel or is that also just marketplace growth in general?.

Yes. Good morning. We believe that most of the growth is actually the shift from offline to online. So the marketplaces are certainly experiencing that. We still see trends in -- within Google that suggests that the peer players certainly can attract more traffic.

And again, what we’re going to do there is focus on the consumer experience and make sure that we get our fair share of that channel. So, we think that its less cannibalistic and more making sure that we get our share within the directive side as well as the search channel..

Great. Thanks..

Thank you. It appears we have no additional questions at this time. So, I’d like to pass the floor back over to management for any additional or concluding comments..

Thank you all for joining the call today. Please note that we will be participating at the Canaccord Conference today and the Liolios Gateway Conference next month, and hope to meet with some of you there. If not, we look forward to speaking with you next when we report our third quarter results in November..

Ladies and gentlemen, this does conclude today’s teleconference. Again, we thank you for your participation, and you may disconnect your lines at this time..