On March 8, 2016, I was on the conference call of U.S. Auto Parts Network, Inc. After CEO Shane Evangelist and CFO Neil Watanabe gave a synopsis of the fourth quarter and year end 2015, the time came to ask questions. I pressed *1 on my phone as instructed by the operator, but was never called to asked a question.
There were three analysts on the call, a marked improvement from the usual one, perhaps because the call was held after hours, or perhaps, wishfully, large institutions are seeing value in the company.
Here are the Questions I would have like to asked Shane and Neil.
- Please share some light on the offline business. LKQ and others in that space are doing quite well with their offline business, distributing parts via small trucks to repair shops all across America. What are the fundamentals of the offline business? Are there any strategic plans for the offline business to generate more revenue?
- Currently, the only profit generating plan of the business is to increase the private label segment, which gross margin inches a few basis point each quarter, nothing to be terribly excited about, given that equates to a few thousand dollars. Are there any strategic plans to form a relationship with used parts entities / salvage yards to broaden the scope of the business? A good candidate for a strategic partnership would be Pick-n-Pull, owned by Schneider Steel.
- Neil, what was the main reason for a 30 percent increase in CAPEX over 2014? What is the return on invested capital (ROIC) expected from that increase?
- Neil, you alluded to the current quarter sales volume, up about six percent. What is driving those sales? Are there particular products responsible for that increase?
- How do you justify the constant issuing of stock options to executives while the performance of the company and the commensurate price movement remains anemic?
Do you believe that it is within the realms of prudence to continue to issue stock options when the company consistency produce a negative free cash flow?
- Shane, recently, major shareholders, including Mehran Nia, the Co-Founder of the company, have suggested that the company is undervalued and the only way to unlock value to shareholders is to consider a sale of the company to a large entity. Are there any consideration given to this idea, or is off the table?
Here are a few instances of large shareholders advocating a sale:
In 2012, Discovery Equity Partners disclosed that it now owns 1,634,352 shares (5.3%) and stated that it acquired the shares because it believes the trading prices “do not adequately reflect the potential value of the company’s underlying business and assets,”.
In 2015, Mehran Nia, the co-founder and former chief executive of U.S. Auto Parts Network Inc., suggested to the board of directors to explore a sale. In his letter to the board of directors, Nia said that although the company has had “double-digit year-over-year revenue growth, and independent third-party projections indicating the industry will double within five years,” the company would “remain significantly undervalued as a stand-alone publicly-traded enterprise.” He asserted that the board should hire an investment bank to look into “strategic alternatives to maximize shareholder value,” including selling the company.
Using the sale of similar companies within the space as a benchmark, U.S. Auto Parts Network Inc, should easily sell for $4 to $7 a share, a 30 percent to 100 percent premium.
Other large shareholders like Maguire Asset Management have also written letters to the board advocating a sale on the premise that the company will remain undervalued as a stand-alone concern.
Table Showing Large Shareholders, 13D and 13G filers, of U.S. Auto Parts Network Inc
|date||Filings||name||number of shares||Buy / sold|
|07/10/07||WASATCH ADVISORS INC||3195745|
|09/04/07||Thomas W. Smith||1774849|
|02/13/08||13D||Oak Associates XI, LLC||6668312|
|02/14/08||SMITH THOMAS W||2605110|
|02/14/08||WASATCH ADVISORS INC||2241747|
|07/11/08||SMITH THOMAS W||2938399|
|11/12/08||Stephens Investment Management||1700892|
|12/09/08||13D||OAK MANAGEMENT CORP||9333485|
|01/12/09||WASATCH ADVISORS INC||0|
|02/13/09||Stephens Investment Management,||1778141|
|02/03/10||SMITH THOMAS W||1438399|
|02/08/11||BLAIR WILLIAM & CO||2761198|
|02/14/11||Stephens Investment Management,||817470|
|01/30/12||BLAIR WILLIAM & CO||2213982|
|02/10/12||Capital World Investors||1980000|
|05/11/12||13D||Discovery Group I, LLC||1634352|
|09/04/12||13D||Discovery Group I, LLC||1702885|
|02/05/13||BLAIR WILLIAM & CO/||2137850|
|02/13/13||Capital World Investors||1505553|
|02/14/13||13D||OAK MANAGEMENT CORP||9333485|
|04/05/13||13D||OAK MANAGEMENT CORP||10712795|
|04/10/13||BLAIR WILLIAM & CO||4194578|
|06/07/13||13D||Discovery Group I,||1587449|
|07/18/13||13D||Maguire Asset Management||1700000|
|07/30/13||13D||Maguire Asset Management,||1700000||letter sent|
|09/25/13||13D||Maguire Asset Management||1764310|
|12/05/13||13D||Maguire Asset Management||1749880|
|02/06/14||BLAIR WILLIAM & CO||4032502|
|03/24/14||13D||Maguire Asset Management||1749880||board election|
|06/30/14||13D||Maguire Asset Management||1749880||letter sent|
|07/08/14||BLAIR WILLIAM & CO||1909003|
|07/30/14||13D||Maguire Asset Management||1749880||letter sent|
|07/31/14||13D||Nia Mehran||4660383||letter sent|
|02/04/15||BLAIR WILLIAM & CO||2495095|
|05/05/15||13D||Nia Mehran||4677001||letter sent|
|2/3/2016||Lafitte Capital, LLC||1,903,928|
|2/9/2016||BLAIR WILLIAM & CO||93,000|
A sale of the company is a low hanging fruit. There are quite a few companies like Autozone and O’reilly’s that would be interested in the company. Currently, US Auto Parts, Inc is the largest online retailer of auto parts. That makes it a target of interest.