Shane Evangelist - CEO Neil Watanabe - CFO

Welcome to the U.S. Auto Parts Third Quarter 2016 Conference Call. On the call from the company are Shane Evangelist, Chief Executive Officer; and Neil Watanabe, Chief Financial Officer. By now, everyone should have access to the third quarter 2016 earnings release, which went out today at approximately 7:30 AM 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 November 15, 2016. 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 or revise any…

Thank you, operator. Good morning everyone, and thank you for joining us to discuss our third quarter results. I would like to provide a summary on the financial results reported in the press release today, as well as an overview over our key business metrics. I would like to remind listeners that all metrics discussed exclude AutoMD unless specifically noted. Over the last year we’ve emphasized our focus to drive profitability over low margin revenue growth, and during the third quarter we continue to execute on this initiative with another strong quarter of private label sales growth, increased margin dollars, effective managed expenses and growing our net cash position. Moving on to our third quarter results. Net sales increased 4% to $73.5 million compared to $70.6 million at the year ago quarter, in line with our mid single-digit growth expectations. To raise sales down further, online sales were up 4%, driven by strong growth in online marketplace sales, which increased 21%. E-commerce sales were down slightly to $46.8 million versus $47.5 million last year, while traffic was also down 3% with 6% lower average order value, partially offset with an 8% increase in conversation rate. The decline in average order value was expected, given our continued focus on shifting sales to higher margin private label products, which carry lower price points. The traffic decline was partially due to reducing spend on lower converting campaigns, which ultimately increased the overall conversion. Total online orders increased 12%, a clear sign of our market share growth. Offline sales increased to $6.6 million compared to $6.2 million the prior year. Taking a look at our sales by product category, the private label business was up, approximately 12%, offset by an expected single-digit decrease in our branded business. The branded business decline continues to reflect…

Thank you, Neil. We are, again, very pleased with this quarter's financial performance. I want to thank the team members at U.S. Auto Parts for their commitment and hard work to improve the business. We delivered $400,000 in net income, and this is the first time in five years that we delivered over $3 million in adjusted EBITDA for the third quarter, an accomplishment the entire team should be proud of. With the keen improvement in financial results, our cash and balance grew to $5.2 million with no borrowings on our revolver debt at the end of the quarter. At the end of 3Q last year, our balance on the revolver debt was $8.3 million, and was $1 million in cash, which amounts to a $12.5 million improvement in our net cash position over the last 12 months. In addition to the free cash flow generation, that is driving our improved cash position, we continue to build confidence with our vendor community, resulting in improved payable terms that further contribute to our increase in cash. We continue to believe these factors will continue to drive improvements in cash going forward. Over the last 24 months, we have executed on our strategy to significantly increase our private label offering, reduce our dependency on organic research and completely eliminate our revolver debt. We also believe we are well positioned to take advantage of several industry tailwinds, primarily the growing shift to online purchases from offline competitors. According to the 2016 Digital Fact Book, online auto part purchases are anticipated to grow annually double-digit at double-digit rates, whereas offline purchases are expected to grow in low single-digits. In addition, national online [ph] gas prices continue to remain low and averaged $2.28 in the third quarter compared to $2.58 prior year. The reduced gas…

Thank you all for joining the call today. Please note we’ll be presenting to several conferences over the next couple of months and hope to see some of you there. If not, we look forward to speaking with you when we report our next fourth quarter earnings results in March.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. And have a wonderful day.