PRTS

U.S. Auto Parts Network, Inc. (PRTS)

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U.S. Auto Parts Network, Inc. (PRTS)

Q2 2008 Earnings Call

August 5, 2008 5:00 pm ET

Executives

Laura Foster

Shane Evangelist - Chief Executive Officer

Michael McClane - Chief Financial Officer

Analyst

Steven Becker - Greenway Capital

Katie Benjamin - Thomas Weisel Partners

Jim Markins - Vastech

Presentation

Operator

Welcome to the U.S. Auto Parts second quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Laura Foster.

Laura Foster

Welcome to U.S. Auto Parts second quarter 2008 conference call. On the call today from the company are Shane Evangelist, Chief Executive Officer; and Michael McClane, Chief Financial Officer. By now everyone should have access to the second quarter 2008 earnings release which when out today at approximately 4:00 pm Eastern Time. If you have not received the 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 until August 19.

Before we begin we would like to remind everyone that the prepared remarks contain certain forward-looking statement and management may make additional forward-looking statements in response to your question. 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 more detailed discussion on the factors that could 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 maybe made in today’s release or call. Please note that 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 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 measure 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 like to turn the call over to Michel McClane.

Michel McClane

On today’s call I will discuss our second quarter financial results and operating metrics. I will then turn the call over to Shane, who will provide an overview of our second quarter business highlights followed by a more detailed discussion of the key drivers of our business and an update on our 2008 guidance before turning the call over to the operator for your questions.

We are pleased to deliver second quarter results inline with our expectations. Net sales for the second quarter of 2008 were $43.1 million at the high-end of our previously stated guidance range of $40 million to $43 million. Adjusted EBITDA for the quarter was $1.9 million, within our previously stated guidance range of $1.8 million to $2.5 million. Our net sales of $43.1 million for the second quarter of 2008 represented an increase of 2.4% from $42.1 million in the second quarter of 2007.

The year-over-year increase in net sales is primarily the result of an 18.9% increase in our online marketplaces channel and 1.9% increase in our e-commerce channel. Partially offset by a 14.3% decline in our offline sales channels. Sequentially net sales for the current quarter increased by 7.7% from the first quarter of 2008, the sequential increase in net sales was comprised of a 34.7% increase in our online market place sales channel and a 7% increase in our e-commerce sales channel. Partially offset by a 14.9% decline in our offline sales.

As anticipated we continue to experience softness in the second quarter in our wholesale division as we transition the way from a significant customer. We are very encouraged that our core online business was driving our sales growth in the quarter, particularly exciting was the 34.7% increase in our online marketplaces channel. Without going into too much detail for competitive reasons we implemented a new strategy within this channel that had a positive impact on sales while maintaining strong gross margins and we expect to continue to refine the strategy in order to continue to capture additional benefits.

Gross profit for the second quarter increased to $14.6 million or 33.9% of net sales versus $13.8 million or 32.8% of net sales for the same period last year. On a year-over-year basis the increase in gross margin was primarily due to a higher percentage of products distributed via our stock and ship and more favorable vendor contracts.

Sequentially gross margins declined 50 basis points to 33.9% in the second quarter of 2008 compared to 34.4% in the first quarter of 2008. The sequential decline in gross margins is primarily due to higher outbound freight costs from our third-party carriers associated with rising fuel prices.

We estimate the increase in freight cost reduced our gross profit and impacted gross margins by 350,000. In order to mitigate this impact going forward, we increased prices in mid-June and will be testing price elasticity during the third quarter. Many of our costs have increase in the second quarter, when compared to prior year. We are investing in the business in order to support our longer-term strategic plan.

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