Neil Watanabe - CFO Aaron E. Coleman - CEO and Director.

Darren Aftahi - ROTH Capital Partners Michael Graham - Canaccord Genuity.

Welcome to the U.S. Auto Parts Fourth Quarter 2017 Conference Call. On the call from the Company are Aaron Coleman, Chief Executive Officer; and Neil Watanabe, Chief Financial Officer. By now, everyone should have access to the fourth quarter 2017 earnings release, which went out today at approximately 4.00 PM Eastern Time.

If you have not received your release, it is available on the Investor Relations portion of the U.S. Auto Parts Web-site at usautoparts.net by clicking on the U.S. Auto Parts' Investor Relations tab. This call is being Webcasted and a replay will be available on the Company's Web-site through March 22, 2018.

Before we begin, we would like to remind everyone that the prepared remarks contain certain forward-looking statements within the meaning of the federal securities laws and management may make additional forward-looking statements in response to your questions.

The forward-looking statements include, but are not limited to, statements regarding future events, our future operating and financial results, financial expectations, expected growth and strategies, key operating metrics and current business indicators, capital needs and deployment, liquidity, product offerings, customers and suppliers, and competition.

The forward-looking statements are based on current information and expectations are subject to uncertainties and changes in circumstances and do not constitute guaranties of future performance. The forward-looking statements involve a number of factors that could cause actual results to differ materially from those statements.

We refer all of you to the Risk Factors contained in U.S. Auto Parts' annual report on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and Exchange Commission, for a detailed discussion on the factors that can cause actual results to differ materially from those projected in any forward-looking statement. U.S.

Auto Parts assumes no obligation to nor does it intend to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Please note that on today's call, in addition to discussing GAAP financial results and the outlook for the Company, the following non-GAAP financial measures will be discussed, 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 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 note that we are not including a reconciliation of adjusted EBITDA guidance to projected net income due to the high variability and difficulty in making accurate long-term forecasts and projections of our net operating loss carryforwards, which have a significant impact on future net income.

As a result, we are unable to quantify our projected net income without unreasonable efforts. In addition, 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, 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 afternoon everyone and thank you for joining us to discuss our fourth quarter and full year 2017 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 dissolution of the AutoMD subsidiary in the first quarter of 2017.

Net sales in the fourth quarter were down 4% to $68.5 million compared to $71.1 million in the year ago quarter, with the decrease primarily driven by 18% lower e-commerce sales. This was partially offset by a 26% increase in our marketplace sales channel, driven by our strong value proposition and continuous expansion of private label products.

In fact, we added approximately 1,500 new private label SKUs during the quarter, bringing our full year new SKU count to over 7,800, in line with our target of 7,000 to 8,000 new SKUs. Private label sales grew 3% in Q4 and accounted for 72% of net sales, compared to 68% in the year ago period.

Also note that offline sales for the quarter, which is comprised of our wholesale revenues, were up 5% to $7 million. Gross margins in Q4 increased 20 basis points to 30.3%, compared to the year ago period. The increase in margin was driven by our higher-margin private label mix as well as our pricing strategies.

We continue to expect gross margins to range between 29% to 30% going forward. We reduced total OpEx in the fourth quarter to $20.2 million, compared to $21.3 million last year. As a percentage of revenues, OpEx was 50 basis points lower at 29.4% versus 29.9%.

With an increased percentage of revenues coming from our marketplace channels during the quarter, we reduced both call center and marketing expenses, allowing us to maintain our overall profit objectives.

Net loss in the fourth quarter was $4.1 million or $0.12 per share, compared to a net loss of $0.2 million or $0.01 per share in the year ago quarter.

The $4.1 million net loss in the quarter was driven by a $12 million unfavorable impact from the Tax Cuts and Jobs Act's new tax rates, partially offset by an $8 million benefit resulting from a release of the tax valuation allowance. Excluding these two items, our net income would have been in line with our full year guidance.

Adjusted EBITDA in the fourth quarter increased 10% to $2.8 million, compared to $2.5 million in the prior year. As a percentage of revenues, adjusted EBITDA improved 50 basis points to 4.1%, with the improvement driven by our gross margin and expense management. Now let me provide some details on our key operating metrics for the fourth quarter.

Total orders in Q4 were 814,000 versus 840,000 in the prior year. E-commerce orders placed in Q4 decreased 20% to 419,000, with an average order value of $100, compared to $99 in the year ago period. The decline in the e-commerce orders was driven by lower traffic.

Though total orders declined, we were more efficient during the quarter with a 20 basis points improvement in conversion to 2.1%. Revenue capture, which we define as the amount of actual dollars retained after taking returns, payment capture, and product fulfillment consideration, was 86% of gross sales compared to 85% in the year ago period.

In the fourth quarter, we also reduced our customer acquisition costs to $7.14 compared to $7.64 last year. The decrease was driven by our decision to reduce marketing spend as we continued to experience a shift in channel mix during the quarter to online marketplace sales.

Turning to the balance sheet, at December 30, 2017, we continued to have no revolver debt while having a cash balance of $2.9 million, compared to no revolver debt and $2.7 million of cash at fiscal year-end 2016. We ended the quarter with inventory of $54.2 million, compared to $50.9 million at the end of 2016.

The increase was primarily due to increased private label stock inventory, in part to achieve our goal of a higher in-stock rate on key items. For 2017, we also incurred $4.9 million of CapEx, compared to $5.4 million in 2016. We estimate that in 2018 we will incur between $5 million to $5.5 million in CapEx.

During the fourth quarter, we repurchased approximately 0.9 million shares for a total cost of $2 million. This brings our total amount purchased to 2.1 million shares at $5.8 million during fiscal 2017.

We believe that buyback efforts continue to underscore our commitment to enhancing shareholder value and we will continue to be opportunistic with stock repurchases going forward. With that, I'll turn the call over to Aaron..

Thank you, Neil. Let me begin by thanking all of the U.S. Auto Parts team members for their continued focus on improving the customer experience and building long-term value.

As mentioned earlier, our Q4 results reflect our continued focus on profitability, as we generated another double-digit increase in adjusted EBITDA in the highest gross margin quarter of 2017.

As we've discussed throughout 2017, we experienced a shift in channel mix with our online marketplaces gaining significant momentum, which has been offset by a decrease in our e-commerce channel.

In the second half of the year, we communicated our strategy to improve the customer experience, increase conversion, and accelerate e-commerce growth, by implementing improvements to our product landing pages, product discovery process, checkout, mobile, site speed, and optimizing the post-purchase experience.

Turning to the recent trends in Q1, sales began the quarter soft but have recently accelerated as we have implemented a number of the customer initiatives that had a material impact on conversion. To name a few, last month we launched a new mobile progressive web application for carparts.com.

We are very excited about this new mobile experience as it provides our customers with a quick and engaging interface that allows for an easy and simplified checkout. In addition, we recently completed a platform migration on JC Whitney and launched several performance improvements to Auto Parts Warehouse.

With these improvements in the customer experience, the e-commerce sales comp trend has significantly improved. These recent results are encouraging and reinforce our customer experience strategy and we expect to roll out similar initiatives across all of our key sites in 2018.

Though we’ve placed a strong emphasis on revitalizing our e-commerce business over the last six months, it is important to note that we are also embracing our marketplace growth and plan to be present wherever consumers are purchasing auto parts online.

We're in the process of partnering with new marketplaces to build upon momentum in this channel and are also working to deepen some of our existing marketplace relationships. Given our efficient supply chain as well as our broad product assortment, we believe there is tremendous opportunity to expand our reach through these marketplace channels.

On the OpEx front, we've renegotiated terms with one of our shipping suppliers that will enable us to be more competitive and reinforces our ongoing efforts to manage expenses and better align our cost structure. Similar to last year's guidance, in 2018 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 expect low single-digit revenue growth in 2018 with adjusted EBITDA ranging between $14.5 million to $16 million, compared to $14.2 million in 2017. With that, we will now open up the call for questions..

[Operator Instructions] Our first question is from Darren Aftahi from ROTH Capital Partners. Please go ahead..

Just a few if I may, first on some of the initiatives that you are implementing, I'm curious, you’ve continued to kind of see a reduction in your customer acquisition, and that makes sense, but I'm curious if you're going to reaccelerate marketing programs? And then as it pertains to some of your online partners, what is your sort of thought process as you’ve seen continued growth in these third-party channels to try and accelerate that, and just trying to understand kind of your balance between how you get to growth via online channel versus e-com? That is all.

Thanks..

Yes, sure. In terms of the online marketplace channels, we plan on again adding new listings, bringing new products to market, and also looking at new partnerships out there, as well as different models in terms of direct fulfillment versus just pure marketplace.

So we think that the marketplace channels are a tremendous way for us to bring our product, our assortment, our private label SKUs to the platform that has a large reach.

And I'm sorry, could you repeat the first question?.

The first question was just around on your core business. Actually the first question is still in my mind. I guess it was more around just marketing. So, as you put more emphasis to these mobile initiatives and upgrade of platforms, you’re seeing better conversion rates.

Are you going to -- your CAC has continued to decline year-on-year for the last few years, I'm curious if you're going to reaccelerate spending on your own sites as you see some better conversion with some of your owned and operating?.

Yes, absolutely. The sequence is, we really want to build a better product which improves the consumer experience, and that leads to conversion improvements. Now, the traffic can grow one of two ways.

From a paid perspective, your marketing dollars just tend to perform better, so we can spend more within some of the traditional channels that we operate in like Google shopping or SCM. So, absolutely we believe that we'll lean into the marketing on the paid side.

In addition, we think that we'll get rewarded by some of the search engines by having a better experiencing and ultimately growing some of our organic traffic. Last but not least, when you have a better experience, when you have a better engagement, we also think that that long term will drive some of the repeat purchases.

So, those three areas are where we think that long term we'll be able to reverse some of the trends in terms of traffic..

Darren, you mentioned about CapEx, and we believe that we've gotten more efficient with our IT infrastructure and our processes relative to capital needs on maintaining our sites.

And so, we believe that we in the past had always been at the $6 million CapEx number, but we feel very comfortable that even with the $5 million to $5.5 million next year, that will be an increase over the prior year. So we believe we're not compromising or sacrificing any investments to generate revenues.

We've just gotten more efficient at operating our own IT infrastructure..

And then just one more if I may, could you repeat the buyback number of shares in the quarter? I didn't quite catch that..

Yes. For the 2017 year, we had bought back $5.8 million of stock, which was approximately 2.1 million shares..

And how much of that came in the fourth quarter in terms of share repurchase, not actual dollars but the shares?.

In the quarter, we repurchased 0.9 million shares at a cost of $2 million..

Got it.

Do you have any sort of – I feel if I recall correctly, you’d have a $5 million kind of bogie [ph] or target for share repurchase in 2017 or the 12 months prior, I don't remember the exact wording, like what are kind of initiatives for 2018, or do we need to wait for maybe a re-up on the buyback?.

We had a $5 million authorization. We still have some available through May of this year that we clearly from an opportunistic perspective will continue to look at. The Board will probably evaluate in an upcoming period whether or not they're going to renew that repurchase authorization.

We've had two so far and right around the next few months, there will be a topic of discussion as to whether they will approve another stock repurchase for the back half of 2018..

Great. Thank you..

Our next question is from Michael Graham from Canaccord Genuity. Please go ahead..

I just had two questions. One is on the private label business. I know that as of Q3 you had got up to 72% of the revenue mix, and that's up from 67% over the preceding seven quarters.

I was wondering if you could, you might already have and I missed it, but can you update us on where that landed in Q4, and then longer-term how high you think that mix can become and what are the profitability implications? And then second question was just you mentioned some mobile web or some mobile app redesign work that you had done and that that was leading to some better customer engagement and you guided for a low single-digit revenue growth next year.

I'm just wondering if you could give us some, any feel for what some of the other initiatives might be that you are working on, and how much, if any, impact from those initiatives that you might have incorporated into your outlook for next year?.

Sure, Michael. This is Aaron. In terms of the first question, in terms of a revenue mix for Q4, is at 73%. Now we don't provide exact mix on an ongoing basis.

However, we did mention in the script that we can continue to expect the branded business to decline by double-digit, but the private label business would grow at a rate that would still translate into an overall single-digit growth rate. So, our goal isn't really around mix percentages.

It's trying to actually grow each of those lines of business from a gross profit dollar perspective. In terms of the initiatives, we did deploy a mobile app on carparts.com. We've seen some material improvements in terms of conversion across the mobile experience. We will deploy that across other sites.

And in terms of your question across what are other future opportunities, most of our roadmap really maps into one of five areas, and it goes kind of through the conversion funnel. One is, can we create a more engaging experience when somebody lands on the Website, and that usually occurs with products or contents.

And then once they are on the Website, how do we get them through the product discovery process and help them find the right SKU for the right job. Once they have selected a product from us, we want to make sure that it's easy for them to do business with us. So, we're just emphasizing easy transactions.

And we want to make sure that that's a quick experience across the entire platform as well as have a design focus around a mobile-first philosophy.

So, we are excited about those opportunities and we believe that there are – most of that roadmap is baked into our base case guidance, but there is obviously upside if the conversion improvements are even more significant than planned..

Okay, that's helpful, and I really appreciate the commentary. Thank you so much..

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..

I'd like to thank everybody for joining the call today. Please note that we'll be participating at the ROTH Conference on March 12 and we hope to meet with some of you then. If not, we will look forward to speaking with you next when we report our first quarter results in May..

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