U.S. Auto Parts Network, one of the largest online providers of aftermarket automotive parts and accessories, has reported results for the fourth quarter and fiscal year ended Dec. 30, 2017. All information and data are from continuing operations, which exclude the AutoMD operating segment unless specifically noted.

Fourth Quarter 2017 Financial Results

Net sales in the fourth quarter of 2017 were $68.5 million, down 4 percent compared to $71.1 million in the year-ago quarter. The decrease was largely driven by an 18 percent decrease in e-commerce sales, partially offset by a 26 percent increase in online marketplace sales to $24.5 million.

Gross profit in the fourth quarter of 2017 was $20.8 million compared to $21.4 million in the year-ago quarter. As a percentage of net sales, gross profit increased 20 basis points to 30.3 percent compared to 30.1 percent. The increase in gross profit margin was primarily driven by a higher mix of private label sales, which was 72 percent of net sales compared to 68 percent in the year-ago quarter.

Total operating expenses in the fourth quarter decreased 5 percent to $20.2 million compared to $21.3 million in the year-ago quarter. As a percentage of net sales, operating expenses decreased 50 basis points to 29.4 percent compared to 29.9 percent in the year-ago quarter primarily as a result of lower call center and marketing expenses.

Net loss in the fourth quarter was $4.1 million, or $(12 cents) per share, compared to a net loss of $0.2 million, or $(1 cent) per share in the year-ago quarter. The $4.1 million net loss for the quarter included a $4.2 million income tax expense due to the change in the valuation allowance in addition to the impacts of the Tax Cuts and Jobs Act.

Adjusted EBITDA in the fourth quarter of 2017 increased 10 percent to $2.8 million, compared to $2.5 million in the same period of 2016, primarily driven by the aforementioned increase in gross margin and judicious cost management.

Full Year Financial Results

Net sales in 2017 increased to $303.4 million compared to $303.3 million in 2016.

Gross profit in 2017 was $89.7 million compared to $92 million in 2016. As a percentage of net sales, gross profit decreased 70 basis points to 29.6 percent compared to 30.3 percent.

Total operating expenses in 2017 decreased to $85 million compared to $87.8 million in 2016. As a percentage of net sales, operating expenses were 28.1 percent compared to 29 percent.

Net income in 2017 increased significantly to $24.6 million, or 62 cents per diluted share, compared to net income of $3 million, or 8 cents per diluted share in 2016. The $24.6 million net income for the year included a $21.5 million income tax benefit due to the change in valuation allowance in addition to the impacts of the Tax Cuts and Jobs Act.

Adjusted EBITDA in 2017 was $14.2 million compared to $14 million in 2016. As a percentage of net sales, adjusted EBITDA was 4.7 percent compared to 4.6 percent.

Management Commentary

“In Q4, our continued focus on profitability led to another double-digit increase in adjusted EBITDA, as well as the highest gross margin quarter in 2017,” said Aaron Coleman, CEO of U.S. Auto Parts. “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. To address the channel mix trends we managed expenses to maintain profitability and developed a strategy to improve the customer experience and re-accelerate e-commerce sales.

“We have deployed a number of customer experience initiatives in the first quarter, which have recently resulted in a material impact on conversion. We are encouraged by these recent trends as they reinforce our customer experience strategy and we expect to roll out similar initiatives across all of our key sites in 2018. In addition, we are excited about the growing opportunity in the marketplace channels to expose our value proposition to new customers,” he said.

2018 Outlook

U.S. Auto Parts continues to expect net sales to increase low single digits on a percentage basis compared to 2017. The company also expects adjusted EBITDA to range between $14.5 million and $16 million, compared to $14.2 million in 2017. U.S. Auto Parts is 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 net operating loss carryforwards, which have a significant impact on future net income results. As a result, U.S. Auto Parts says it is unable to quantify its projected net income without unreasonable efforts.