Welcome to the U.S. Auto Parts First Quarter 2019 Conference Call. On the call from the company are Lev Peker, Chief Executive Officer; and David Meniane, Chief Operating Officer and Chief Financial Officer. By now, everyone should have access to the first quarter 2019 earnings release, which went out today at approximately 4:05 p.m. Eastern Time.

If you have not viewed the release, it is available on the Investor Relations section of the U.S. Auto Parts website at usautoparts.net. This call is being webcast, and a replay will be available on the company's website through May 23, 2019.

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 offering, customer 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 guarantees 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 or revise any forward-looking projections that may be made in today's release or call or to update or revise the reasons these financial 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, non-GAAP financial measures such as adjusted EBITDA, will be discussed. An explanation of U.S.

Auto Parts' use of non-GAAP financial measures in this call and the reconciliation between GAAP and non-GAAP measures required by SEC Regulation G is included in the U.S. Auto Parts' press release issued 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.

In addition, please also note that the percentage and basis points discussed are calculated using net sales with the expectation of advertising, which we'll be discussing and comparing to net online sales. With that, I would now like to turn the call over to Lev Peker..

Thank you, operator, and good afternoon, everyone. During the first quarter, we began to lay the foundation to return U.S. Auto Parts to profitable revenue growth.

I took over the leadership position in January, and we have already begun to rebuild the strengths in our team with a new Chief Marketing Officer, Chief Legal Officer, Chief Operating and Financial Officer and a Country Manager for our Manila operation, all of whom bring unique qualifications and skill sets to U.S. Auto Parts.

We have also brought in critical personnel to execute our new growth strategy, including a new user experience team, SEM and content teams and a retention marketing team.

Although we have begun to deploy several new growth initiatives, our first quarter results continue to be impacted by prior management's decisions related to inventory planning, the disruption of our supply chain and marketing strategy.

We have been accumulating detention charges, which are late fees for not returning tons of storage containers within our contracted time frame. One of our DCs has been at max capacity for processing inbound inventory, and we have taken the necessary actions to reduce these late charges while allowing the DC to catch up on inbound shipments.

These charges are amortized and will continue to impact our gross profit and adjusted EBITDA over the next three quarters. Port seizures last year also impacted our in-stock rates, and a change in marketing strategy impacted our organic traffic, both of which resulted in lower revenue and gross margin for the quarter.

These short-term setbacks aside, we executed on one of our key initiatives during the quarter, which was to being the consolidation of our website and marketplace stores. We started the year with 18 e-commerce sites and have reduced the count to 7. Over the course of 2019, we expect to further consolidate to three sites.

We're also going through the same exercise with our marketplace stores. As mentioned on our last quarterly update, we want to focus our resources on fewer properties, to do a better job at both growing and optimizing these sites while ensuring each property has a unique and differentiated value proposition for the customer.

But before commenting further on our plans, I'd like to turn the call over to our new COO and CFO, David Meniane. David brings extensive experience in consumer products as both an Operator and Financier, and we look forward to leveraging his expertise to enhance our platform and return U.S. Auto Parts to profitable revenue growth.

David?.

Thank you, Lev. I appreciate the kind words, and I'm excited to hit the ground running. Jumping right into results; net sales in the first quarter were $74.7 million compared to $78.4 million in the year ago quarter.

This was primarily driven by a 6% decrease in e-commerce sales due to a reduction in traffic and lower in-stock rates resulting from last year's customs issues as well as inventory planning decisions. Private label sales were down 4% in Q1 and accounted for 76% of net sales compared to 75% in the year ago.

Gross margin in the first quarter was 26.9% compared to 29.6% in the year ago period. As Lev mentioned, the decrease was primarily driven by increased freight costs along with costs associated with port and excess carrier fees from the customs issue. Additionally, in this quarter, we've incurred approximately $675,000 in detention and related charges.

We expect to incur an additional $750,000 in the second quarter. These charges are being amortized into cost of goods sold and will continue to impact gross margin throughout the end of the year. Moving on; total OpEx in the first quarter was $23.6 million compared to $21.9 million last year.

As a percentage of revenues, OpEx was 31.5% compared to 27.9% with the increased primarily driven by employee transition costs, increased marketing spend and investments in marketing platforms and employees.

Net loss in the first quarter was $3.6 million or a loss of $0.10 per share compared to net income of $0.6 million or $0.01 per share in the year ago quarter. Adjusted EBITDA was negative $0.1 million compared to $4.3 million in the prior year quarter.

Note that this quarter's adjusted EBITDA adds back $1.8 million of expenses, including stock-based compensation expense, costs associated with our customs issue, severance and other costs related to transitions within the management team.

The decrease was also driven by lower sales due to the aforementioned decline in e-commerce channel as a result of lower in-stock rates. We anticipate these issues to further impact adjusted EBITDA through the end of the year. Now let me provide some details on our key operating metrics for the first quarter.

Traffic in Q1 was 18.2 million compared to 20.1 million in the year ago quarter, with the decrease driven in part by reduced traffic from our platform conversion of JC Whitney and less efficient marketing spend due to out-of-stock issues.

Conversion was up 30 basis points to 2.6% compared to 2.3% for the same period last year, which mostly benefited from channel mix and a decline in traffic. Revenue capture, defined as total sales dollars retained after taking into consideration returns, credit card declines and product fulfilment was 87.5% compared to 88.2% last year.

Online average order value, which includes orders from both our e-commerce sites and marketplaces, was $82 compared to $85 in Q1 2018. Decline in AOV was driven primarily by channel mix to lower AOV marketplaces as well as product mix driven by higher out-of-stock rates in our collision business.

Turning to the balance sheet; at March 30, 2019, we had no revolver debt and a cash balance of $4.8 million compared to $2 million of cash at fiscal year-end 2018. Note that our cash balance at March 30 benefited from both the timing and working capital improvements due to more favorable terms negotiated with our vendors.

We ended the quarter with inventory of $51.7 million compared to $49.6 million at the end of 2018. Inventory will be a key focus for us moving forward as our current position is not optimized. Lastly, one of the things we discussed on our prior calls was the need to get closer to our customers.

Subsequent to the quarter, we signed a new lease for a 125,000 square-foot distribution center in Las Vegas, Nevada, and we expect this new facility to go live in September. With that, I'll turn the call back over to Lev..

Thank you, David. As I mentioned earlier, we'll make progress on several key initiatives during the quarter, beginning with the deployments of new marketing and traffic acquisition strategies. We have begun to rebuild our SEO architecture and in March, we hired an agency to help with the structure of our SEM campaigns.

Although it will take a few months to get these processes ramped up, we expect to come away with better efficiency in our marketing spend and stronger organic traffic to our sites. Another key area of focus for us is to better market to the millions of consumers in our database.

We're in the process of implementing an E-CRM that should be ready by fall, and we have brought on a retention marketing team that will be solely dedicated to this new initiative.

We have millions of users in our database, and we have vastly underutilized the massive amounts of data we have on our customers to send them offers specific to their vehicles while better merchandising and selling other products for their cars, including products that they may not even know that they need.

From a technology perspective, we are going to hold ourselves to a higher standard. Consumers expect a certain type of experience regardless of the site they're on. And we need to ensure that we're meeting if not exceeding those expectations.

This means we need to improve the discovery of our products; the ease of checkout; our post-purchase experience; and most importantly, our site speed. It's important to note that all of these initiatives are setting us up for long-term success and are being funded through the balance sheet.

Although we have begun to take steps to strengthen our foundation, there is still much work to be done, particularly with improving our in-stock rate and implementing our various new marketing and technology initiatives.

Nevertheless, we remain fully committed to achieving revenue growth and positive adjusted EBITDA in 2019, and look forward to returning U.S. Auto Parts to it's leading position in the online auto parts marketplace. With that, we will now open up the call for questions..

[Operator Instructions] And our first question will come from the line of Eric Beder from SCC Research..

When you look at the third-party marketplaces, how should we be thinking about those as they go through here in terms of your goals? And where you want to take this business?.

Yes. So as we stated on the prior calls, our goal is to grow our e-commerce at a faster pace than the online marketplaces and to grow online marketplaces at the same rate as the marketplaces themselves are growing. In the first quarter, we were still hiring the team and still kind of aligning what our strategy will be on our e-commerce channel.

And we're still continuing that in this quarter. So we don't expect our e-commerce channels to grow faster until the back half of the year. But the goal is still the same. We want to reduce our reliance on marketplaces because we do not own that customer. So our goal is to grow our own channels faster than the growth of marketplaces..

And you've done a great job of basically reshaping the management team.

Is there a spot where you still are looking to hire? And how do you think that will affect what you're going to see?.

So from an executive-team perspective, we have a new CMO, a new COO, we have a new CTO; we have a new Country Manager. The founder of the company has also come back as a consultant hereon. I think the next level down is what we're looking at now.

And we have needs on the marketing side, product management, technology; so we have needs across the organization at the next level below the executive management team. And that's what we are working on now, and we should have that completed by the end of this quarter..

The last question; you've got a lot of moving pieces. It sounds like you're starting to move to the positive.

When should we be thinking about -- when will you think this business will start to look like what you want it to look like? And longer term, when does that mean?.

Yes. So I think like we said on the prior call, I think exiting this year is when we can expect to see positive momentum, so going into next year. As you can -- as you heard from David on the detention charges, that's going to hamper us pretty much all the way through the Q4. So we'll continue to see pressure on margins from the detention charges.

But we expect to exit the year with positive momentum..

And what should we be looking at in terms of the guide posts there? Is it in conversion? Is it higher orders? Both of those [indiscernible] -- how should we be thinking about it?.

Yes. I think it's traffic, I think it's revenue, I think it's EBITDA; all of those things should take a turn for the positive..

Our next question comes from the line of Gary [ph] from Barrington Research..

Could you maybe just go into what the -- what did you call, detention charges on dealing from the custom issue.

Could you just maybe give a slow description of what these charges are? Why they are still there almost a year later?.

Yes. So let me give you additional background. So I started in my role on March 15, and one of the areas that I was tasked to look into it was the charges related to the customs issue. One of the things we realized is that we were incurring additional charges, like those detention charges, which are actually different.

There were late fees for not returning containers to the carriers, which is very different from the customs issue. If you remember the customs issue, we've incurred transload fees, which are from moving container from one port to the next warehouse. Detention is just because you've -- because of our inability to process the inbound containers.

So as soon as we discovered those charges, we basically took immediate action, instead of temporary storage, to increase our inbound processing capacity. And the goal was to significantly reduce those detention charges.

As of today, we're not incurring any significant detention charges, but we are incurring temporary storage fees until we go through all the containers that are backed up. Now, from a financial standpoint, that means that these charges are being amortized into cost of goods, and they will continue to impact gross margin until the end of the year.

So for the full year, we expect both those detention charges to be about $1.5 million, but there is also an additional $500,000 in overtime charges, security guards, temporaries charges and other related charges..

Getting into some of the other things that you talked about; you addressed the websites. What about SKUs? I remember speaking with you and Lev about the fact that you were going to try and maybe skinny down some of these SKUs. And you didn't really mentioned it in the narrative of your script.

So could you tell us what your strategy is there?.

Yes. So I think we're in the process right now of formulating the strategy for our sites and what purpose they will serve. And that will really determine the merchandising strategy for each site. Right now, our goal is to continue growing our private label. So in the quarter, our private label was about 76% of our sales.

So our private label continues to be really strong, and it's a big contributor of our GP, right, because returns are at a much higher GP rate than the branded business. So our goal is to continue increasing our SKU count in our private label business.

We make -- so we'll start to sort of decreasing the number of our SKUs on the branded side because we want to reduce the paradox of choice for the consumer. So that process has started already, and we removed some SKUs, but not quite as many as we had have hoped. In some areas, we've consolidated into a single SKU.

So things like car covers, where there is a lot of variation, we have historically -- for every variation of a SKU, we've presented the consumer with multiple options. So we've reduced that SKU count. So we went from about 700,000 SKUs there to about 1,200.

So that was a big positive but we want to continue reducing our SKU count even further to reduce the paradox of choice for the customer..

And what is the percentage of your sales that were branded this quarter versus last quarter?.

It was 76% this year. I believe it was 75% last year..

Yes, that's private label.

What was branded or did I get that -- did I ask the question wrong?.

Yes. So the branded would be the other side. So 24% -- I'm sorry, 25% last year, 24% this year..

Was there a third category in sales that you had or you lump that into -- just thinking about how you used to report numbers? That's okay, that's no problem there.

And then in terms of the warehouse that you build -- that you have in Las Vegas; does that portend [ph] that you're going to be shutting another distribution facility? I mean where you have one in, where, Virginia, one in - right here in Illinois, and then you got the one you're opening in Las Vegas..

No, it's incremental to the other two. And so the way we kind of thought about it as the new DC will allow us to ship to the majority of the customers, 93% of the country in two days or less. And so one of the things we are executing on is getting closer to the customer, and so the West Coast DC allows us to do that.

And then as far as operating cost and things like that, that will be offset by the increase in sales that we're expecting from faster delivery as well as some savings in freight that we realize by being closer to the customer and not shipping across zones..

And then lastly, are you going to give us the e-commerce sales and the marketplace sales metrics or is that something you stopped giving us reporting?.

So it will be reported, I believe, in the filings that we do. We don't break out sales. What we do provide is traffic conversion and AOV. But we don't break out sales in terms of the channels..

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Peker for closing remarks..

Thank you all for joining the call today, and we look forward to speaking with you when we report our second quarter results in August..

Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..