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 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 third 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 would 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 third quarter increased to $73.8 million compared to $73.5 million in the year-ago quarter.

Our marketplace sales channel increased 41% year-over-year driven by our expanding private-label assortment and strong value proposition. Our total private-label sales grew 10% in Q3 and accounted for 72% of the net sales compared to 65% in the year-ago period.

This was offset by lower e-commerce sales which were down 17% primarily driven by lower traffic 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 which is primarily comprise of our wholesale revenues were up 6% to $6.9 million.

Gross margins in Q3 came in at 29.6% compared to 30.5% in the year-ago period. The lower margin was anticipated and primarily driven by higher freight cost and lower margin channel mix partially offset by a higher margin private-label mix. We continue to expect gross margins to range between 29% to 30% going forward.

We reduced total OpEx in the third quarter to $20.5 million compared to $21.7 million last year. As a percentage of revenues, OpEx was reduced to 180 basis points to 27.8% versus 29.6%.

With an increased percentage of revenues coming from our lower margin marketplace channels 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 increased to $0.9 million or $0.02 per diluted share compared to $0.4 million or $0.01 per diluted share in the year-ago quarter. Adjusted EBITDA in the third quarter increased 14% to $3.6 million compared to $3.1 million in the prior year.

As a percentage of revenues, adjusted EBITDA improved to 4.8% versus 4.3% last year. Now let me provide some details on our key operating metrics for the third quarter. Total orders in Q3 which include marketplace orders, increased 8% to 915,000 versus prior year.

From a traffic perspective Unique Visitors to our e-commerce sites totaled $23.1 million, which was down 19% from last year. Note that this traffic figure does not include the traffic to marketplace channels. E-commerce orders placed in Q3 decreased 14% to 460,000 with an average order value of $99 compared to $103 in the year-ago period.

These declines were largely driven by the channel mix mentioned earlier and the expected decrease in branded product sales. Despite lower traffic on our e-commerce sites we were able to increase our conversion rate 10 basis points during the quarter to 2.0% compared to 1.9% last year.

Revenue capture defined as the amount of actual dollars retained after taking returns, payment capture and product fulfillment into consideration was 86% of gross sales compared to 85% in the year-ago period. In the third quarter, we also reduced our customer acquisition costs to $6.95 compared to $7.61 last year.

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 lower margin online marketplace sales and we were not willing to sacrifice profitability for incremental growth.

Turning to balance sheet, at September 30, 2017 we continue to have no revolver debt, while increasing our cash balance to $6.7 million compared to no revolver debt and $5.2 million of cash at the end of the third quarter of 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 also ended the quarter with inventory of $53.7 million compared to $49.5 million at the end of the third quarter of 2016. The increase was primarily due to higher level of stock inventory which support our private-label growth and helped us achieve higher availability rates on key items.

As we discussed last quarter we have $5 million stock repurchase that was authorized on May 17, which underscores our commitment to enhancing stockholder value. We planned to be opportunistic in acquiring shares over the next few quarters. In Q3 we repurchased approximately 542,000 shares for a total cost of $1.6 million.

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

Thank you, Neil. Let me start off by thanking all of U.S. Auto Parts team members for remaining focused on the customer experience and their continued driven of our strategy and operating plan.

The third quarter was underscored by our continued commitment to profitability as reflected by the 14% increase in adjusted EBITDA despite having only modest revenue growth. In fact, Q3 was our strongest quarter year to-date for gross margins.

We continue to believe our private-label business uniquely positions us in the marketplace as it enabled us to be price point competitive with our customers at a higher margin than our branded products. And we plan to continue investing in private-label as it represents the fastest growing in higher margin segment of our business.

As Neil mentioned earlier, we are continuing to experience a shift in channel mix this year with our online marketplace channel gaining momentum in our e-commerce business experiencing lower traffic.

We’re addressing these channel dynamics with various initiatives designed to accelerate e-commerce growth including improvements to our product landing pages, product discovery, check-out, mobile and site speed as well as optimizing the post purchase experience.

Though we don’t expect these initiatives to bear fruit overnight, we do expect them gradually improve our customer experience over the next year, which in turn should improve conversion and enable us to spend more on traffic to our sites.

But until we begin to realize the results from these initiatives we will continue to manage expenses and align our cost structure with a shift in channel mix as we remain committed to profitability over revenue growth.

Regardless of the channel we will 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. And we can do this by continuing to add the most relevant new SKUs to our product assortment.

During the third quarter we added over 2,200 new private-label SKUs and we’re current on-track to exceed our annual target for the year of 7,000 to 8,000 new SKUs in 2017. Similar to our guidance in the past we expect our branded business to continue to decline by double digits over the near-term.

However 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. We’re also maintaining our 2017 guidance for net income to range between $27 million to $29 million with adjusted EBITDA ranging between $13 million and $15 million.

With that, we will now open up the call for questions..

Thank you. At this time we’ll be conducting a question and answer session. [Operator Instructions] Our first question is from Darren Aftahi from ROTH Capital Partners. Please go ahead..

Hey, guys. Thanks for taking my questions. Just a few if I may. So when you relay guidance it looks like year to-day you’ve grown sales, if my math is right, roughly kind of 1%.

I’m just curious while keeping the language around the low to mid and what could actual get your growth to the kind of the mid rate? Second question, with the growth you’re seeing in the online marketplace channel, I’m just sort of curious strategically if you thought about trying to expand that channel? I wanted understand as lower margin, I’m just giving kind of the company a larger growth profile And then third, just on some of the speed mobile kind of the conversion after checkout I’m just kind of curious I know you’re doing a little bit testing with some of your sites.

How that’s going? Any then, any kind of forward initiatives you maybe implementing kind of in fourth quarter that we can kind of monitor? Thanks..

Sure. Hey, Darren. On the first question in terms of the sales guidance, your year to-date numbers are probably pretty close. We think that anything between kind of that 1% to 5% would be the outer bounds, and unless we go outside of the range, that’s when we are – then we are traditionally updates.

If you don’t mind could you repeat the second question?.

The second question was more around, I guess, when you just sort of step back, big picture and look at the growth in your marketplace channel versus some of the declines in e-com, I mean, does it make sense strategically to try and find some other channels or there maybe a Facebook relative to an eBay to actually expand that channel? And again its lowered gross margin but just accelerate kind of the growth profile of the company?.

Yes. Absolutely, good question. And I think that we bring in two real competitive advantages to the table. One is the strength of our supply chain and the other is our reach. So, we’re always looking at other partnership opportunities where we can further increase that reach.

We want to make sure that our product assortment is where are customers are shopping. So, we will absolutely evaluate additional channels that we’re not participating in, as well as different ways to grow within the channels that we are..

Great. And I guess my last one was just – go ahead..

The only point Darren was that, we build model that has a very efficient supply chain that provides a good mix of both the private-label product. And that can support various channels of opportunities both on the marketplace as well as continue to build our e-commerce sites as well..

Got it. And then,.

And your third question..

Yes. The third question is more around your owned and operated sites some of the progress you saw, I think you’d said maybe earlier that, not on the call, but that you were doing some testing on your sites with some of the conversion, speed, checkout process.

I’m just curious how that went? And any kind of new initiative you kind of put in place for fourth quarter, whether it would be A/B testing et cetera? Thanks..

Yes, absolutely and thank you, Darren. The roadmap across those five strategic initiatives is the multi-quarter one. So, we’re absolutely doing things that incremental benefit with speed to try to improve conversion. We have seen some successes on certain pages. We’ll continue to roll these things out as they are available over the next couple quarters.

But we’re setting expectations about meaningful change there throughout next year. And in terms of new initiatives I think that the team is mostly committed around those five pillars and that’s how we’ve allocated the resources. So I look forward to providing additional updates in the quarters to come..

Great. Thank you..

Thank you. This concludes the question-and-answer session. I’d like to turn the floor back over to Mr. Watanabe for any closing comments..

Thank you for joining the call today. Please note that we’ll be participating in Gabelli Conference tomorrow in Las Vegas and the Noble’s Conference later this year. And we hope to meet with some of you there. If not, we look forward to speaking with you next when we report our fourth quarter results in March..

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