Welcome to the U.S. Auto Parts Second Quarter 2014 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 2014 earnings release, which went out today at approximately 4 p.m. Eastern Standard 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 19, 2014. 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 statement. 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 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 the 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 measures derived in accordance with GAAP, and the use of such non-GAAP measures have limitations, which are detailed in the company's press release
With that, I would now turn the call over to Shane Evangelist.
Thank you, Mike, and thank you, all, for joining the call. I'd like to start by thanking our team members at U.S. Auto Parts. The work the team has put in over the last few years is now allowing U.S. Auto Parts to produce profitable double-digit growth. Thank you, all, for your hard work and dedication to the company.
Turning to the highlights for the quarter. We produced double-digit revenue growth for the quarter with sales increasing by 13% and anticipate double-digit growth for the second half of the year. Our adjusted EBITDA for the quarter was $2.2 million, and adjusted EBITDA less CapEx was positive $0.7 million, producing the second-consecutive quarter of positive adjusted EBITDA less CapEx. At the beginning of the year, we anticipated revenue being down in the first half of the year, and up in the second half. Well, the first half of the year actually finished up 8.8%, and we continue to believe the back half of the year will be positive. We also stated at the beginning of the year we anticipated adjusted EBITDA less CapEx to be positive. Year-to-date, adjusted EBITDA less CapEx is positive $2.5 million, and we remain on plan to be positive for the entire year.
We believe our recent growth highlights the great position U.S. Auto Parts is in to take advantage of the growing online market for auto parts. Over the next 5 years, Booz & Company expects online penetration to grow from around 9% to 17%. We believe our combination of low-cost offshore sourcing coupled with our industry-leading reach puts U.S. Auto Parts in a great position to take advantage of the expected accelerated shift from online shopping -- or from offline shopping to online shopping.
Turning to revenue. Revenue from go-forward sales channels was up 18%, and total revenues were up 13% for the quarter. Including both our e-commerce websites and online marketplace orders, our orders increased 17% for the quarter. E-commerce orders were up 3%, and online marketplaces were up 56%. Excluding the impact of sites we discontinued, e-commerce orders increased 8%. Quarter to date, we're currently trending up 7%. July started out soft but has bounced back as of late, and we continue to believe we will see double-digit growth in the second half of the year.
Before restructuring charges related to the closure of our Carson, California, distribution center, gross margins for the quarter came in at 27.2%. This is an 80 bps decrease over last year. The compression was driven by more aggressive pricing in both private label and branded business. While our goals are to create a 30% gross margin business with double-digit growth, we continue to anticipate gross margins to come in annually between 27% to 29% with double-digit growth.
We have closed our Carson, California, distribution facility. The decision to close was financially driven. Historically, we've been able to offset the fixed operating costs of the facility with a local B2B business that delivered collision parts to local collision shops, creating a marginally profitable business. That marginally profitable business turned negative recently, as our warehouse costs increased to a point that the profits from the B2B business could not offset the fixed costs. As a result, we are consolidating the Carson inventory into our other 2 distribution centers in Ohio and Virginia. The consolidation does potentially create some space constraints, and as a result, we will be writing down $478,000 of inventory immediately, which may increase over the next few quarters. This write-down is a result of a markdown in the selling price of some inventory, allowing our merchants more flexibility for the accelerated sell-through of those SKUs, freeing up additional warehouse space for fast-moving, more-profitable inventory during our peak inventory season in the first quarter. We have plenty of time to plan for our peak season, and we anticipate with the markdown and aggressive pricing on the inventory, we will not have any space constraints to run our business going forward.
We continue to operate the B2B business in a more limited capacity and continue to look for alternatives for the B2B business. We would like to thank all the employees impacted by this facility closure, many of them who were long-time employees, for their commitment and years of service.
Adjusted EBITDA for the quarter was $2.2 million and CapEx was $1.5 million, making adjusted EBITDA less CapEx positive $0.7 million. This is the second-consecutive quarter we have produce positive adjusted EBITDA less CapEx. As it relates to debt, we ended the quarter with no debt. However, we are and will continue to build inventory preparing for the peak collision parts season in the first quarter. As a result, we have been accessing our credit facility and currently have $4.8 million in debt as of today. We also have over $9 million of availability on the agreement.
Our private label business continues to demonstrate strong double-digit growth rates. And to be clear, it is the main focus of our business. Our over 40,000 private label products along with our 4,000 to 5,000 private label products we will add this year provides us a great competitive moat and provides great value for our consumers at healthy margins.
We continue to see improvement in our branded business during the quarter and finished the quarter down low single digits. We continue to price test to find the right balance between growth and profitability of our branded business, and our branded business remains a strategic focus to ensure a broad assortment of product.
Moving to AutoMD. We continue to be excited about the opportunity to bring pricing transparency to consumers as well as increased business just like the shop owners. Our major focus for 2014 is to sign up shops. At the end of the quarter, we had over 700 shops signed up for the service.
In closing, we're excited about the business. We believe U.S. Auto Parts is in a great position to take advantage of the increasing penetration rates of Auto Parts online. Our combination of customer reach and efficient private label supply chain provides us a great competitive moat.
We delivered double-digit revenue growth of 13% and believe we will see double-digit growth rates in the second half of the year. Adjusted EBITDA less CapEx was positive by $0.7 million, demonstrating our ability to produce cash from operations and reinforces our estimate that adjusted EBITDA less CapEx will be positive for the year. And finally, I want to thank U.S. Auto Parts team for the tremendous job they've done to generate growth and turn the business profitable again.
Thank you, all. And with that, I'll turn the call over to David.
David G. Robson
Thanks, Shane. Good afternoon to everybody on the call. Unless otherwise stated, this quarter refers to consolidated Q2 2014, and last year refers to Q2 2013, and comparisons are Q2 2014 compared with Q2 2013. Also, percentage of basis points discussed are calculated using net sales. However, for advertising, we'll discuss comparisons to net online sales.
Adjusted EBITDA, as Shane mentioned, for the quarter was $2.2 million compared to adjusted EBITDA of $1.1 million last year. Adjusted EBITDA excludes noncash share-based compensation expense of $629,000 this quarter and $341,000 for the second quarter last year. Adjusted EBITDA also excludes restructuring costs of $1.1 million this quarter and $225,000 for the second quarter last year. The $1.1 million in restructuring costs recorded in the current quarter is associated with the closure of our distribution facility in Carson, California, at the end of July. These costs consist of $552,000 of severance, $478,000 associated with the write-down of inventory, and $73,000 of accounts receivable reserves.
In addition, we also anticipate recording additional restructuring costs in the third and fourth quarter of this year related to the inventory and fixture transfer costs from the Carson warehouse to our LaSalle and Chesapeake warehouses and further inventory write-downs. The inventory and fixture transfer costs were approximately $500,000, which we occurred in Q3. The additional inventory write-downs are anticipated in order to accelerate the sell-through of some excess inventory now that we are operating with less warehouse space because of the Carson warehouse closure. We cannot estimate the amount of these future inventory write-downs at this time. However, we expect to realize these charges during Q3 and Q4 of this year as we appropriately price this excess inventory to sell through over the coming 2 to 3 quarters. The $225,000 in restructuring costs recorded last year relates to employee severance.
Turning to sales. This quarter's net sales were $77 million compared to $67.9 million last year, an increase of $9.1 million or 13.3%. During the same period, our online sales grew by 13.6% while our offline sales grew by 9.8%. Net sales channels, excluding websites we eliminated in 2013, grew by 18.4%.
The online sales increase of 13.6%, or $8.4 million, was primarily driven by a $5.7 million increase in sales from our continuing e-commerce sales channels, a $5.5 million increase in sales from our online marketplaces, offset by a $2.7 million reduction in online sales from websites we discontinued. The $5.7 million, or 12.1%, increase in sales from our continuing e-commerce sales channels was driven by a 14.6% increase in conversion, partially offset by a 5.8% decline in traffic. Despite the 5.8% decline in traffic, revenue grew because of our strong growth in conversion, resulting from our competitive pricing strategies.
Beginning this quarter, in our earnings release and 10-Q, we began disclosing online marketplace orders and online marketplace AOV. We believe these 2 additional metrics, are meaningful data points as our online marketplaces continue to comprise a more significant portion of revenue and growth. Online marketplace orders this quarter increased to 291,000 compared with 187,000 orders last year, an increase of 56%. Online marketplace AOV declined by 7.2% this quarter from $64 compared with $69 last year. We have seen strong positive growth in online marketplace revenue this year due to our broad offering and competitively priced private label products, which resonate extremely well with that consumer base.
Total orders, including orders from both our e-commerce channels and online marketplaces, increased by 17.2% over last year. Total average order value declined by 5.9% to $96 this quarter from $102 last year. As I said previously, net online revenue grew by 13.6%.
Now turning to margins. This quarter's gross margin rate was 26.5%, down 150 basis points from last year about -- of 28%. Excluding restructuring charges, this quarter's gross margin rate was 27.2%, down 80 basis points from last year. The 80 basis point decline over last year was primarily due to our competitive pricing strategies for our private label and branded product, which drove strong sales growth. Our private label mix was 55% of net sales this quarter compared with 60% last quarter and 48% last year.
Online advertising expense, which includes catalog cost, was 7.1% of net online sales this quarter compared with 7.4% last year, a reduction of 30 basis points. The 30 basis point improvement in advertising spend was primarily due to 20 basis points of more efficient spend across commercial and search engine websites and 10 basis points for reduced catalog spend on higher sales.
This quarter's marketing expense, excluding online advertising expense, was 7.8% of net sales compared to last year of 9.7%, a reduction of 190 basis points. This compares with last quarter of 8.4% of net online sales. The decline of 190 basis points was primarily due to lower depreciation and amortization expense of 120 basis points, lower overhead expenses of 40 basis points and lower wages of 40 basis points.
General and administrative expenses, including amortization of intangibles, was $4.6 million, or 6.0% of net sales, this quarter compared to $4.7 million, or 6.9% of net sales, last year, a decline of 90 basis points or $55,000. This compares with last quarter of $4.1 million or 6.1% of net sales. The decrease over last year of 90 basis points was primarily due to lower wages of 40 basis points, lower depreciation and amortization of 20 basis points, and lower overhead costs of 30 basis points.
Fulfillment expense was 7% of net sales, or $5.4 million, this quarter. And excluding restructuring costs, fulfillment expense was 6.4% of net sales, down from 7.3% of net sales, or $5 million, last year, a decline of 90 basis points. The improvement was primarily due to lower depreciation and amortization expense. Last quarter's fulfillment expense was 6.9% of net sales or $4.7 million.
Technology expense was 1.6% of net sales, or $1.3 million, this quarter, down from 1.9% of net sales, or $1.3 million, last year, a decline of 30 basis points or $52,000. The reduction was primarily due to lower overhead expense. Last quarter's technology expense was 1.7% of net sales or $1.1 million.
Unique visitors on our e-commerce site for the quarter were 30.8 million, down 12.3% over last year. 57% of the 12.3% decline was due to the impact of sites we discontinued, which was a reduction of 2.5 million unique visitors. Excluding this impact, traffic declined by 5.8%. Orders placed through our e-commerce channel this quarter were 541,000, up 3.4% from last year of 523,000 with an average order value of $113, down 0.9% from $114 last year. And as I previously mentioned, online marketplace orders increased this quarter to 291,000 compared with 187,000 orders last year, an increase of 56%.
Our conversion rate was 1.76% this quarter, up 18.1% from last year of 1.49%. A strong growth in conversion and a decline in AOV are both due in part to more competitive pricing compared to last year.
Revenue capture, the amount of actual dollars retained after taking into consideration returns, credit card declines and product fulfillment, improved by 240 basis points or 85.6% of gross sales compared to last year of 83.2% of gross sales. The revenue capture improvement is primarily due to lower return rates. This quarter's customer acquisition costs declined 5.5% to $7.11 compared with last year of $7.52.
Now turning to the balance sheet. Cash and securities were $2.5 million, and we had no debt outstanding on our revolving line of credit. This compares with $1.4 million in cash and securities and debt of $0.8 million last quarter, an increase of cash net of debt of $1.9 million. Compared to last year, debt net of cash and securities declined by $4.8 million.
Our gross availability and net availability, subject to our covenant test on our line both increased to $13.9 million, an increase of $4.4 million from last quarter's net availability subject to our covenant tests of $9.5 million. This quarter, we increased our availability by $6 million as we exceeded the fixed coverage charge covenant in our bank agreement. Since the end of the quarter, we have increased our debt, as Shane mentioned, to $4.8 million, principally to increase our inventory position. As of today, our net availability on our line is $9.2 million. As discussed last quarter, we draw on our revolver as needed to fund working capital and operating needs of the business.
Finally, related to the closure of the Carson distribution facility, we expect our future revenues and gross profit will negatively be impacted between $2.8 million to $3.8 million in revenues and $1.1 million to $1.4 million in gross profit in 2014, but we also estimate warehouse expense and labor cost savings realized will offset most of the expected gross profit loss this fiscal year and will be net positive in future years. Additionally, some of the softness in revenue we are currently experienced -- experiencing early in Q3 can be attributed to the decline in offline revenue supported by the Carson facility. Now with that, operator, we'll now open the call for questions.
[Operator Instructions] And our first question comes from the line of Mitch Bartlett with the Craig-Hallum Capital Group.
George A. Kelly - Craig-Hallum Capital Group LLC, Research Division
This is George on for Mitch. First question. I think you mentioned 7% quarter-to-date growth? And I was just wondering if that is inclusive of the negative impact from the restructuring. And also, you also mentioned that you expect double-digit second-half growth. I'm just wondering what you're seeing that gives you confidence in -- that you can accelerate growth?
Yes. Thanks, George. The 7% does include what will be a couple of percent from the move and the loss of offline sales there. A couple of things. One is, we saw some decent double-digit growth in the second quarter. We started off a little bit weak in July, but basically, we've seen a pickup a little bit, and I expect that to continue. So we feel pretty good about the double-digit growth in the back half of the year.
George A. Kelly - Craig-Hallum Capital Group LLC, Research Division
Okay, okay. And then secondly, there's been so much growth -- just a couple modeling questions. There's been nice acceleration in the conversion rate and the revenue capture and wondering how much -- if you think there's still upside to both of those numbers? And then, on the unique visitors side, when do you expect that to start to kind of stabilize and maybe, even, turn positive?
Yes. So let me get the conversion rate -- a couple things helping drive the conversion rate. One is, the quality of traffic we're bringing in right now is -- it's higher-quality traffic. And I think you've seen 1 year ago at this time, some of that has to do with the traffic we've gotten rid of as we shut sites off. So you're seeing higher-quality traffic, which is helping the conversion. We're also seeing better user experiences and a little bit more aggressive pricing. I hope and I expect to see conversion continue to increase over time. That's what we had previously done before we were impacted here. And hopefully, we get back to that trend as well. Rev capture, I think an optimal goal for us is 1 or 2 points higher than what it is right now. We still have some opportunity inside return rates that we continue to work through, so hopefully, we get some upside there. Unique visitors has actually stabilized as it relates to around 30 million for the quarter, 10 million for the month. And you're starting to see that sort of stabilize. And hopefully, we can start to turn that positive. Some of that is a result of reduced marketing spend, which, at some point, you get past. So I think that's probably our view on those 3 topics.
[Operator Instructions] Okay. And the question goes back to Mitch Bartlett with Craig-Hallum Capital Group.
George A. Kelly - Craig-Hallum Capital Group LLC, Research Division
If no one else's in the queue, I'll just hop back in. One other question about AutoMD. Could you give us -- I may have missed in your prepared remarks, but could you give us an update, just tell me what's going on there and your expected full year investment in that business?
Yes. George, we're still running -- expected investment around $1.5 million for the year. As we've mentioned before, we need a big opportunity to bring transparency to consumers and drive more traffic into shops. And so this year, we're really focused on getting shops signed up. We ended the second quarter with a little over 700 and look forward to continuing that shop sign-up growth through the back half of this year.
And we have no other questions in the queue at this time. Would you like to proceed with any closing comments?
I just want to thank everyone for joining the call. We look forward to updating you again on our third conference call.
Thank you. And this does conclude today's teleconference. You can disconnect your lines at this time and wish you, all, a very great day.
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