Description
Thesis
PRTS is a profitable and leading pure-play internet retailer of aftermarket auto parts that trades at a compelling 4.4x adjusted EBITDA with an EV of just $48 MM and generates more than $300MM in annual sales. It would require substantially more than the current enterprise value in investment to recreate the current network and the return of its former longtime CEO / president could possibly be a signal that a “fix and sale” process is underway. PRTS will continue to benefit from the macro trends as online aftermarket sales are expected to more than double by 2023 as market share continues to increase. We believe that PRTS will either appreciate based on improving fundamentals or else a strategic will pay a healthy premium for the embedded network and customer base.
Description
U.S. Auto Parts Network, Inc. (PRTS) is a leading online provider of automotive aftermarket parts that principally sells products to individual consumers through the company’s network of websites and online marketplaces. The user-friendly websites provide customers with a comprehensive selection of over 1.0 million SKUs with detailed product descriptions, attributes and photographs. PRTS developed a proprietary product database that maps SKUs to product applications based on vehicle, makes models and years.
PRTS was incorporated in California in 1995 as a distributor of aftermarket auto parts and launched its first website in 2000. The online sales channel and relationships with suppliers enables PRTS to eliminate intermediaries in the traditional auto parts supply chain and to offer a broader selection of SKUs than can easily be offered by offline competition. Like most e-commerce retailers, PRTS success depends on their ability to attract online consumers to their websites and covert them to customers in a cost-effective manner.
Historically, marketing through search engine optimization provided the most efficient opportunity to reach online auto part buyers. In order to improve business, PRTS has been enhancing the process of consolidation and implementing improvements to the multiple websites so that search rankings would improve through the increase use of paid search advertising and also through opportunities in the third-party online marketplaces. There is a three-part process to improve website purchase experience for PRTS online customers: (1) help customers find the parts they want to buy through a customized and guided shopping experience specific to key part names; (2) increase order size across sites through improved recommendation engines (3) provide leading customer service and product support. The aforementioned improvements and further implemented strategies are designed to build and increase PRTS’s customer lifetime value by focusing on increasing gross profit per transaction, transaction attachment rate, repeat purchases and conversion.
PRTS flagship websites:
www.autopartswarehouse.com
www.carparts.com
www.jcwhitney.com
www.usautoparts.net
Fulfillment Operations
PRTS fulfills customer orders using two primary methods:
(1) stock-and-ship, where they take physical delivery of merchandise and store it in one of their four distribution centers until it is shipped to a customer and:
(2) drop-ship, where merchandise is shipped directly to customers from PRTS suppliers.
The flexibility of fulfilling orders using two different methods allows PRTS to offer a broader product selection, helps optimize product inventory and enhances overall business profitability.
Products
Private Label Product: PRTS private label suppliers offer products which are generally less expensive and provide better value to the consumer; private label products are stock-and-ship from the distribution centers; currently have over 55,000 private label SKUs in the product selection.
· Customer Value Proposition
o Private label product pricings when compared against the same branded product averaged more than 20% below the online competitors and 40% below the brick and mortars
o TTM revenue mix: 57% collision parts, 28% engine parts, 15% performance & accessories
Branded Product: PRTS has developed and implemented application programming interfaces with the majority of their branded, drop ship suppliers allow PRTS to electronically transmit orders, check inventory availability and receive the shipment tracking information which is easily passed to PRTS’s customers; currently have over 1MM branded SKUs in the product selection.
Q1 2018 Earnings Call and Update
· Net sales Q1 $78.4MM a decrease of 3% compared to $80.8MM in the year ago quarter, with the decrease largely driven by 13% lower e-commerce sales; partially offset by an 11% in marketplace sales channel, driven by PRTS strong value proposition and continuous expansion of private label products; added 1,500 private label SKUs during the quarter; private label sales grew 3% in Q1 and accounted for 75% of net sales compared to 71% in the year ago period
· PRTS experienced some softness in the private label sales, however these sales began to pick up and were nearly double digit in growth in the last month of the quarter
· Gross margins in Q1 increased 50 basis points to 29.9% compared to the year ago period; increase in gross margin by the higher-margin private label mix as well as optimized pricing strategies ; continue to expect gross margins to be in the 29% to 30% range
· Reduced total operating expenses in the quarter to $21.9MM compared to $22.6MM and opex remained at 27.9% reflecting our commitment to maintaining our overall profit objectives despite lower revenues for the quarter
· Net income in the first quarter decreased to $0.7MM or $0.02 compared to $0.8MM or $0.02 per share in the year ago period; adjusted EBITDA increased to $4.1MM compared to $4MM in the prior year; as a percentage of revenues, adjusted EBITDA improved 30 basis points to 5.3%, with the improvement driven by price optimization and higher conversion rates, in addition to adjusting the cost structure in line with shift in sales channel mix
· Total orders in Q1 were 901,000 versus 949,000 in the prior year; an average order value of $98 compared to $104
· Revenue recapture, defined as the amount of actual dollars retained after taking returns, payment capture and product fulfillment into consideration was 88% of gross sales compared to 85% in the year ago period; this is the highest revenue capture percentage in PRTS history and reflects their efforts to improve the customer experience through better in-stock rates and reduced returns.
· In the first quarter, PRTS reduced the customer acquisition cost to $7.31 compared to $7.43 last year; via reduced marketing spend
· Balance sheet: no revolver debt, cash balance of $9.2MM compared to no revolver debt and $2.9MM cash at FY 2017; increase in cash was driven by improvements in working capital, free cash generation as well as temporary favorable payment terms with a shipping vendor
· CEO Aaron Coleman, CEO and Director: “We have received several inquiries from the investment community regarding the impact of tariffs on our business. Fortunately, the tariffs that went into effect do not impact any of the aftermarket products we sell. We’ll continue to monitor this situation closely and provide and relevant updates as appropriate.”
· Guidance: sales in 2018 to increase low single-digits on a percentage basis compared to 2017 and adjusted EBITDA of $13MM and $14.5MM
Return of Nia
On June 12, 2018 Mehran Nia an original co-founder returned to PRTS as a director. Nia served as CEO, President and Director from 1995 to 2007 and during his first five years of his tenure, Nia helped lead the company’s transformation from a regional wholesale of collusion auto parts into an e-commerce retailer and wholesaler with a diversified base of automotive parts.
Catalysts:
Fix and sell
Strategic buyer
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Fix and sell
Strategic buyer