Parts Dealer’s Stock Revs Up

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Although much of the auto industry is in crisis, online auto parts retailer U.S. Auto Parts Network Inc. is speeding along as more people look to do it themselves with car maintenance.

The Carson company recently reported that it turned an $800,000 profit in the third quarter as its sales jumped nearly one-third to $47 million – surprising analysts who only expected it to break even on lower sales. It lost $500,000 in the same quarter last year.

The online retailer, it turns out, is countercyclical, benefiting from a poor economy.

“More people are holding on to their cars longer, and while that may be bad for new-car dealers and suppliers, that’s good for us as an aftermarket parts retailer,” said Ted Sanders, the company’s chief financial officer.

U.S. Auto Parts primarily sells engine, body and performance accessory parts for vehicles directly to consumers. The online and mail-order portion of aftermarket auto part sales makes up no more than 2 percent of the industry, but U.S. Auto Parts has made itself into a major player in that little niche over its 14 year history. It competes against brick-and-mortar companies such as AutoZone Inc., online competitors such as J.C. Whitney & Co. and online marketplaces such as eBay.

Last year, it took a gamble on expanding its business by acquiring AutoMD.com, which offers detailed guides on do-it-yourself repair and maintenance for cars, as well as references to local repair shops. The company is in the midst of beta testing the Web site before a relaunch.

Analysts credit a new management team led by Chief Executive Shane Evangelist and Sanders. Evangelist took over the company in October 2007 and engineered the AutoMD acquisition.

Evangelist succeeded Mehran Nia, who served as chief executive since founding the company in 1995. Nia remains on the company’s board and is the single largest individual stockholder with 20 percent of outstanding shares, according to Bloomberg News.

“That was the big change when they came in a year ago and started reshaping the company to be more efficient,” said Eugene Munster, an analyst with Piper Jaffray Cos. in Minneapolis who has a “neutral” rating on U.S. Auto Parts’ stock.

“They have the opportunity to be a big player in the do-it-yourself phenomenon driven by aftermarket auto parts with the AutoMD Web site. It may be a niche, but there’s a big void in that niche,” he said.

Evangelist was not made available for comment; Sanders said he handles all media inquiries.

Major trends

Sales are being fueled by three trends, according to the company’s management: auto enthusiasts shifting to buying parts online, owners keeping their cars longer and more customers working on their cars.

“In a recent poll of our customers, 39 percent of the people said they were more likely to do the work themselves this year versus last year,” Sanders said.

To improve efficiencies and keep up with demand, the new management team opened a second warehouse in Norfolk, Va., at the beginning of this year. The East Coast operation has been credited with reducing average shipping time to three and a half days from five. In the past, the company has gotten low marks for delayed shipping to customers worldwide out of its sole warehouse in Carson.

Also, as consumers look to cut costs, the demand has been strong for private-label parts, which are generally cheaper than name-brand parts sold most commonly at brick-and-mortar retailers and dealers. In response, the company has more than doubled its private-label inventory for engine parts from 400 to 1,100 items, and more will be added. Sanders said the engine parts in particular are up to 30 percent cheaper.

However, management is most excited about its AutoMD Web site, which it plans to officially relaunch by March.

Customers will be able to input their vehicle information, a description of its problems and then receive a report with cost estimates broken down by labor hours, part prices and tools required, along with a directory of repair shops in case they don’t want to do it themselves.

Though there are other sites that provide auto repair diagnoses such as Anaheim-based 2CarPros.com Inc., the company claims the site will be unprecedented in its scope and quality.

“We’re attempting to provide transparency to vehicle repair and maintenance, similar to what Edmunds.com and Kelley Blue Book did for new-car sales,” Sanders said. “Customers no longer overpaid for new-car sales in large part because they do research before they go to the dealer.”

U.S. Auto Parts plans to sell advertising to fund the site; it will be free to users.

Stock play

Investors have taken note of the company, too. Earlier this year, shares of the company fell to an all-time low of $1 when panic set in about the state of the auto industry. Since then, shares have recovered, closing at $4.76 on Nov. 25.

Among the biggest investors in the company, which is majority owned by insiders, are mutual funds and institutional holders such as State Street Corp., Dimensional Fund Advisors and Blackrock, which recently have loaded up on shares.

Christian Buss, an analyst with Thomas Weisel Partners LLC in New York, has put a target price of $6 on the company’s stock and anticipates it will gross $250 million in annual revenue within four to five years.

“I’m impressed by their progress and … their numbers today show a complete turnaround story,” said Buss, who has a neutral rating on the company. “I’m (just) a little cautious because I think the company may be taking on too many initiatives with the AutoMD Web site and steering away from their core auto business a little too much.”

Sanders said that management does not believe it has taken on too much and plans to grow its various private-label brands. He added that the company is even on the lookout for more acquisitions, mainly of other online competitors.

“With over 250 million cars on the road with an average age of 10 years nowadays, we see a big aftermarket we can tap into,” he said.

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