U.S. Auto Parts Network, one of the largest online providers of aftermarket automotive parts and accessories, has reported results for the first quarter ended March 31, 2018. All information and data are from continuing operations, which exclude the AutoMD operating segment unless specifically noted.

Net sales in the first quarter of 2018 were $78.4 million compared to $80.8 million in the year-ago quarter. The decrease was largely driven by a 13 percent decrease in e-commerce sales, partially offset by an 11 percent increase in online marketplace sales.

Gross profit in the first quarter of 2018 was $23.5 million compared to $23.8 million in the year-ago quarter. As a percentage of net sales, gross profit increased 50 basis points to 29.9 percent compared to 29.4 percent as a result of a favorable mix shift towards private label products, as well as optimized pricing strategies. The company continues to expect gross margin to range between 29 to 30 percent going forward.

Total operating expenses in the first quarter were reduced to $21.9 million compared to $22.6 million in the first quarter of last year. As a percentage of net sales, operating expenses remained constant at 27.9 percent compared to the year ago quarter.

Net income in the first quarter decreased to $0.7 million, or 2 cents per diluted share, compared to $0.8 million or $2 cents per diluted share in the year-ago period.

Adjusted EBITDA in the first quarter of 2018 increased to $4.1 million compared to $4 million in the year-ago quarter, driven by the aforementioned increase in online marketplace sales and prudent cost management, partially offset by higher compliance costs related to the company’s accelerated filer status and litigation costs.

At March 31, 2018, cash and cash equivalents totaled $9.2 million compared to $2.9 million at Dec. 30, 2017.  The increase was driven by improvements in working capital, free cash generation, as well as temporary favorable payment terms with one of its shipping vendors. The company also continued to carry no revolver debt at March 31, 2018.

Management Commentary

“As discussed on our last quarterly call, 2018 got off to a slow start, however we launched several web development initiatives in March that quickly drove meaningful improvements to our results,” said Aaron Coleman, CEO of U.S. Auto Parts. “These initiatives led to increases in both gross margin and Adjusted EBITDA for the quarter, as well as our fourth consecutive quarter of conversion rate improvement.

“We are in the process of deploying similar initiatives across our other core e-commerce sites, and early results have been promising. In addition, we are continuing to expand our current marketplace partnerships and have made real progress on this front over the last month, with Amazon soon carrying some of our private label assortment under a direct fulfillment model. We are also working to create new relationships with marketplace partners, as we embrace the continued strong growth we’ve experienced in this sales channel. In fact, the first quarter was our ninth consecutive quarter of double-digit marketplace sales growth.”

Update on Customs Issues

U.S. Auto Parts recently filed a lawsuit against the United States Department of Homeland Security in the U.S. Court of International Trade. The lawsuit asserts that the United States Customs and Border Protection, an agency of the Department of Homeland Security (“Customs”), has been wrongfully seizing automotive grilles being imported by U.S. Auto Parts on the basis that the grilles are allegedly counterfeit and infringe trademarks held by the original automobile manufacturers. U.S. Auto Parts intends to vigorously defend its right to sell aftermarket automotive grilles under well-established trademark doctrines as the grilles are neither counterfeit nor is there a likelihood of confusion between U.S. Auto Parts’ aftermarket products and OEM parts.

While the number of seized automotive grilles currently represents less than one percent of U.S. Auto Parts’ overall revenue and product assortment, U.S. Auto Parts has taken this action to remove overly burdensome bonding requirements arising from the wrongful seizures and to ensure that Customs expeditiously processes the flow of its goods into the United States. U.S. Auto Parts has already won a temporary restraining order reducing the bonding requirement to three percent of the commercial invoice value of each shipment and currently has a preliminary injunction hearing on the matter scheduled for today, May 9. U.S. Auto Parts expects to issue a Form 8-K following the court’s decision on the preliminary injunction hearing.

2018 Outlook

U.S. Auto Parts continues to expect net sales to increase low single digits on a percentage basis compared to 2017. In light of the anticipated costs associated with the customs issues, the company has revised its adjusted EBITDA range from between $14.5 million and $16 million to between $13 million and $14.5 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.