Welcome to U.S. Auto Parts Second Quarter 2012 Earnings Conference Call. On the call today from the company are: Shane Evangelist, Chief Executive Officer; and David Robson, Chief Financial Officer. By now, everyone should have access to the second quarter 2012 earnings release, which went out today at approximately 4 p.m. Eastern Time. If you have not received your release, it is available on the Investor Relations portion of the U.S. Auto Parts' website at usautoparts.net by clicking on the U.S. Auto Parts Investor Relations tab. This call is being webcast and a replay will be available on the company's website through August 21, 2012. Before we begin, we would like to remind everyone that the prepared remarks contain certain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and speak only as of the date hereof. 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 more detailed discussion on the factors that can cause actual results to differ materially from those projected in any forward-looking statements. U.S. Auto Parts assumes no obligation to revise any forward-looking projections that may be made in today's release or call. Please note that on today's call, in addition to discussing the 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 website. The non-GAAP information is not a substitute for any performance measured derived in accordance with the non-GAAP and the use of such non-GAAP measures have limitations which are detailed in the company's press release. With that, I would like to now turn the call over to Shane Evangelist. Please go ahead, sir.

Thank you, Britney. Before David provides the detailed numbers for the quarter, I would like to reflect on the current state of the business, the steps we're taking to adjust to changing market dynamics and our plans to increase profitability. We continue to grind our way through a great many changes in our industry and challenges affecting our business. We are not happy with where we are today, but we are pleased with where we see the company headed. Historically, we won by creating tremendous reach through search engine strategies that created low-cost customer acquisition. We also won by continually improving conversion through the growth of our private label business and aggressive [indiscernible] expansion, providing enormous value for customers. We have built one of the largest online auto parts businesses with over $300 million in revenue and over $50 million in parts inventories. And up until 12 months ago, our traditional business had experienced growth in both visitors and conversion producing overall year-over-year growth above 20%. As a result since 2008, our adjusted EBITDA increased from around $5 million to $20 million. Today, the markets in which we compete are marked by massive changes impacting our visitor traffic and by new entrants to the DIY market, online market who are content to sell product at or near cost across online marketplaces. We too sell in the online marketplace and do well, but we will not run a race to the bottom on them. Our strategy to win in this space of our market development to focus on: one, consolidating our online customer acquisition efforts around fewer sites where we do a better job of servicing our customers; and two, selling more of the parts where we can earn an appropriate profit. It has not been unusual for us from time…

Thanks, Shane. Good afternoon to everybody, on the call. Unless otherwise stated, this quarter refers to consolidated Q2 2012 and last year refers to Q2 2011 and comparisons are Q2 2012 compared with Q2 2011. Also percentage and basis points discussed are calculated using net sales. However, for advertising, I will discuss comparing to net -- Internet sales. Adjusted EBITDA for this quarter was $3.7 million compared to adjusted EBITDA of $4.6 million last year. Adjusted EBITDA excludes noncash share-based compensation expense of $374,000 this quarter and $643,000 last year. This quarter's net sales were $80.7 million compared to $84.3 million last year, a decrease of 4.2%. Our traditional business was positive during the quarter offset by decline in our comps at J.C. Whitney. The J.C. Whitney comps that Shane mentioned were impacted by a pullback of our catalog spend compared with last year. But overall, EBITDA positive on the lower sales volume. Total online sales decreased 6.1% this quarter, principally driven by a 6% decline in traffic, a 7% decline in average order value, and partially offset by a 1% improvement in both conversion and revenue capture. Turning to margins. This quarter's gross margins was 30.2%, down from last year's 33.7%. Gross margin was unfavorably impacted by increased competition in the marketplace and higher freight expenses offset by a favorable growth in our private label business, which returns higher-margin rates. Gross margin was essentially flat with the first quarter, where we turned in a rate of 30.5%. Online advertising expense, which includes catalog cost, was 7% of net online sales this quarter compared with 9.6% last year. The decline in online advertising expense was due to a reduction in print catalogs of $1.3 million, as well as improved leverage of our marketing spend on lower sales volume. This quarter's…

[Operator Instructions] Our first question comes from the line of Shawn Milne with Janney Capital Markets.

I got a couple, maybe more. So a couple, to start housekeeping and then maybe Shane a couple strategically. But did you say in the first quarter that your online sales were down 6%? Did you also say that your core was up, but it was just J.C. Whitney that was down?

Right. Our traditional business was slightly up and the Whitney business was down.

And when you're saying traditional, just the online?

No, no, the traditional business, excluding everything that we did with respect to the Whitney acquisition.

Okay. And then what was your margin commentary and goal, Shane?

Yes, I think we're going to -- look to be closer to 32% versus the 30% running at now.

And what's the big driver there?

We've got a lot of low-margin transactions that aren't delivering incremental profit the way we need them to. And when we took some price action in the fourth quarter, we did see a lift and sort of incremental dollars was driving some incremental profit. As that has subsided and we go in there and examine the returns we're were getting on each sale, we've come to the conclusion that some of these sales that we're doing are simply not profitable enough to keep doing. So on those particular products, that's where we're adjusting pricing and adjusting marketing spend accordingly.

Okay, because, I guess, strategically there's always the balance of pushing your average -- I know the world doesn't work on an average, but your average unit economics would suggest to spend more but you're saying that as you've gotten in deeper, there's a certain level of SKU profitability, which is not -- you just need to cut that out?

Yes, I think you said it right there. On average, it looks okay, but when you get down an individual SKU -- look at the profitability of individual SKU, we just determine that some of that pricing that we had taken -- the action we've taken wasn't in our long-term interest.

Okay, and then just a 2 quick last ones. You mentioned you're going to try to balance margin more than growth, but obviously we're looking at fairly easy WAG cost in the second half. Do you think the overall business can get to a growth profile? I realize you're running still negative now.

Yes, I mean we don't comment too much on forward-looking other than to say we're currently trending down 8% -- and 8%, and certainly WAG is helpful on the back half of the year. We also did post some pretty good e-com comps in the back half of the year, so those 2 may sort of negate each other.

Okay. And then lastly, are there any-- what are the sort of covenants on the debt facility that we should be mindful of going forward?

The debt facility is covenant free subject to availability requirements. So if we don't borrow every last dollar, there's a covenant at any availability below $6 million to the fixed coverage charge of 1, otherwise there's no covenant.

There's no EBITDA threshold you have to hit or anything like that?

No, there's not. Part of the reason we restructured is it made our covenants a lot more flexible under this agreement.

Our next question comes from the line of Jean Munster with Piper Jaffray.

I guess, I was going to have some follow-up questions. And just on the private label side, can talk a little bit about the potential behind that? And also in terms of kind of the more -- focus on more profitable SKUs. I know that's been kind of the trend in general over the past couple of years. Is there something that you're going to do a little bit different this time and how is this going to impact just the overall number of SKUs? Do you plan on kind of reducing that for the private label and then kind of moving to higher profitable SKUs?

Yes, thanks, Jean. I think there are -- in some sense one and the same in that we've done a decent job over the last 3 years growing more private label. We're at 40% private label, 60% branded mix today. And a couple of years ago, you would have seen that 25% and then 30% and now closer to 40%. And so then the second question is -- and by the way we think there's potential upside for that to continue to grow. We will continue to grow that business. It hasn't grown quite as fast as we've liked most recently. We made some changes as to how we're determining the right private labeled product to go after. We're starting to see some benefits from that, and we think we'll see private label continue to grow specifically inside the engine category. As it relates to more profitable SKUs, I mean, I think this is really more about making a conscious decision not to sell below a certain profitable level. And so while I don't think we'll be changing the SKU mix, we certainly will be changing the acceptable margin associated with the sale of that SKU.

Okay. And then I guess, at what point as we just think about the model next year is this something that can have a positive impact? I know you don't want to give a longer-term guidance, but first half of the year or the second half of the year, or it's just a little bit too difficult to tell right now?

I think we'll start to see the impact of the gross margin expansion this quarter and next. And hopefully it grows certainly in the first quarter our largest quarter for margins, it should be even better. But I don't think this is something we have to wait 12 months for. We've taken some pretty definitive action associated with that, and we're conscious that we're going to lose some revenue and we're okay with that.

[Operator Instructions] Our next question comes from the line of Mitch Bartlett with Craig-Hallum Capital Group.

This is George on for Mitch. Just a couple questions. To start with the strategy around some core sort of brands. Wondering how are those core websites doing in the most recent quarter? What can you talk at all about growth in those core sites?

Yes, so our core sites center around J.C. Whitney. We talked a little bit about that where we're seeing good profitable growth inside J.C. Whitney for both J.C. Whitney and Stylin. We're not seeing growth there, but we're seeing great EBITDA pickup. And I think as we've discussed, that's a function of marketing spend right now and hopefully we start to see that business grow as we comp over that. And that's really started to get for the first quarter before we start to see, I think, that comps go away from a marketing perspective. APW continues to be strong. And so we like that about APW. Those are the 2 core sites we have today.

And do you expect to just maintain those? Are those the 2 sites that you're really going to put most of the focus behind? Or do you think -- will there be another one potentially or?

Yes, there'll probably be a handful of sites here's what I would say, StylinTrucks is a real great truck site. J.C. Whitney is a great accessory site. We've got APW that does a great job in the engine category. We have a site called Parts Train that's been optimized around body. And then we get a another great brand name in CarParts that has got great potential marketing exposure to it. So I think you'll see us kind of sit around those sites. I mean, the reality is managing the website today versus managing the website 5 years ago is much different. It's much more complex. And then the necessity to make sure that those sites have a mobile component and integration with mobile really dictates that you're spending a lot of time and focus and energy around those components and so we think that's the right strategy going forward.

Okay. Is there are lot of CapEx associated with this?

The consolidation?

Yes, just building out the brands.

Yes -- no, limited CapEx and the movement of that content.

Okay, and then lastly. Who -- you talked about in competition about new entrants recently. Can you talk a little more just about the competitive dynamics. Wondering sort of if eBay and WHI is having a big impact or who the new entrants are?

Yes, I know I think it's on the same footprint that you've talked about, which is the traditional do-it-for-me business who was only able to sell to a shop or installer because they didn't have a physical retail footprint, was kind of locked out of that market. The DIY market that is. And with this technology, to be a WHI and some other folks out there, they've allowed that inventory now to be exposed to the DIY customer through marketplaces, and that's essentially where the pressure has been coming from a price point perspective.

Our next question is a follow-up question from the line of Shawn Milne with Janney Capital Markets.

Shane, one of your competitors has been out there doing some more cable spot buying. And I wonder if you seem now to fundamentally becoming full circle around from search. What do you think strategically from a marketing perspective? Because, again, you're kind of starting off with -- your average order sizes are still fairly healthy. Is TV, radio, what are you doing in social? What other areas to see potentially offset some of the search issues?

Yes, I think sort of building these brands J.C. Whitney, obviously, comes to mind, as well as APW as certainly something we'll do long term. I think we'll go through the consolidation effort here, and we'll look at different ways to market on a go-forward basis. And as it relates to building those brands, I think, this much about delivering on the website experience and the future functions of that website, the social aspects of that. And I think we're going to spend a lot of time doing that.

[Operator Instructions] I'm showing no further questions in the queue. I'd like to turn the call back to management for any closing remarks.

Thank you, Britney, and thanks, everyone, for joining the call. We look forward to update you on our progress next quarter.

Thank you. Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation. You may now disconnect.