Maguire Asset Management Seeks to Purchase Oak Investment Partners'
Approximate 28% Ownership in U.S. Auto Parts
Expresses Extreme Disappointment with Multi-Year Stock Price Performance
Urges Board to Remove the CEO and Articulate Its Turnaround Plan or Sell the
Business to the Highest Bidder
LAGUNA BEACH, Calif., Sept. 25, 2013
LAGUNA BEACH, Calif., Sept. 25, 2013 /PRNewswire/ --Maguire Asset Management
today delivered a letter to the Board of Directors of U.S. Auto Parts Network,
Inc. (NASDAQ: PRTS) commenting on the Company's 90%+ drop in shareholder value
since its IPO debut in 2007, most of which was realized under the leadership
and direction of its current board and management team.
In the letter sent to U.S. Auto Parts, Timothy Maguire, Managing Partner of
Maguire Asset Management stated, "Given the staggering loss of value
shareholders have endured over the past six years, it is simply not
conceivable that the current board is content with the status quo. I
encourage them to take decisive action and for ALL shareholders to join me in
demanding that a new sense of urgency is embraced before shareholder value is
The full text of the letter follows:
September 24, 2013
The Board of Directors
U.S. Auto Parts Network, Inc.
16941 Keegan Avenue
Carson, CA 90746
Dear Members of the Board of Directors:
We appreciate the time that Chairman Robert Majteles, Chief Executive Officer
Shane Evangelist, and Chief Financial Officer David Robson have spent with us
over the past few months to discuss our views about US Auto Parts Network,
Inc. ("US Auto Parts" or the "Company").
Maguire Asset Management, LLC currently owns 5.3% of the outstanding shares of
US Auto Parts. Further to this, as you may know, we recently reached out to
Fred Harman, a Partner at Oak Investment Partners and Board Member at US Auto
Parts, to inquire if Oak Investment would be interested in selling us its
approximate 28% ownership stake in the Company.
We continue to acquire shares of US Auto Parts because we believe the
Company's stock price is extremely undervalued regardless of the valuation
metric we apply to our analysis. Further to this, we find several industry
and business characteristics all very compelling: the online automotive parts
industry in the US is expected to grow 6% annually over the next five years,
the Company is a market leader with an 11.4% market share and, most
importantly, we believe the business has enormous potential for improvement.
You should not interpret our interest to own 33%+ of US Auto Parts as an
indication of confidence or support for this Board's governance of the
business or for its management team. In fact, we are writing to express our
profound disappointment with management's ability to effectively manage the
Company and its abject failure to safeguard shareholder value over the past
five years – a period of time in which many of the Company's peers have
generated considerable value for their shareholders.
As you can see in the graph below, US Auto Parts' stock price has drastically
underperformed its competition losing 90.08% of shareholder value since its
IPO debut in February 2007.
(Photo: http://photos.prnewswire.com/prnh/20130925/CL86126 )
SHARE VALUE PERFORMANCE UNDER CEO SHANE EVANGELIST HAS SIGNIFICANTLY
UNDERPERFORMED PEER COMPANIES
Since Oct. 15, 2007, when Shane Evangelist became CEO, U.S. Auto Parts has
lost 85.27% of its value.
Shareholder Value (includes dividends)
Oct. 15, 2007 – September 16, 2013
US Auto Parts (PRTS) -85.27%
O'Reilly Automotive (ORLY) +282.77%
LKQ Corp. (LKQ) +264.80%
AutoZone, Inc. (AZO) +253.92%
Advance Auto Parts, Inc. (AAP) +155.78%
Despite this precipitous decline in shareholder value and peer group
underperformance, we are confident that, under the right leadership and
direction, US Auto Parts can reverse course and become a high performing
business once again.
To put our confidence in perspective, it's worth reflecting on US Auto Parts
during its pre-IPO era under its former leadership regime. From the Company's
inception in 1995 through the last fiscal year before its IPO in 2007, the
Company's previous management grew sales to $120 million, generated $3.5
million in net income and $0.24 in earnings per share.
Since then, a series of poor management decisions and weak risk oversight have
contributed to today's current state - a rapidly declining revenue business
losing nearly $36 million in FY 2012 net income and a stock languishing around
$1.00 per share and on the brink of being de-listed.
PRE IPO POST IPO
FYE FYE FYE FYE 2008 FYE 2009 FYE 2010 FYE 2011 FYE 2012
2005 2006 2007
NET SALES 59,698 120,060 160,957 $153,424 $176,288 $262,277 $327,072 $304,017
Cost of 34,829 78,573 107,132 100,869 112,415 172,668 220,072 212,379
Gross 24,869 41,487 53,825 52,555 63,873 89,609 107,000 91,638
Gross 41.7% 34.6% 33.4% 34.3% 36.2% 34.2% 32.7% 30.1%
Net Income 6,819 3,496 (3,597) (16,906) 1,317 (13,926) (15,137) (35,978)
Earnings 0.52 0.24 (0.13) (0.57) 0.04 (0.46) (0.50) (1.17)
DESPITE POOR PERFORMANCE MANAGEMENT CONTINUES TO BE REWARDED
Inexplicably, despite this persistent multi-year decline in performance,
management has recently been rewarded as if the responsibly for managing
shareholder value resides elsewhere. We note, for example, the Company's
recently revised Share Option Exchange Program in which a substantial portion
of the stock options outstanding with an exercise price greater than $4.00 per
share (many of these options were held by senior managers who have led the
business for the past five years) have been given a new strike price of
$0.9866 per share. In our opinion, this is simply unconscionable and given
management's performance over the past five years, the Company's proclamation
that the value exchange was necessary to retain good management is absolutely
POOR CORPORATE GOVERNANCE AND LACK OF DIRECTOR INDEPENDENCE IS ALARMING
This Board's laissez faire attitude toward good corporate governance is
alarming, but unfortunately not surprising. Not only has the board continued
to accept management's justifications for poor performance
quarter-after-quarter and year-after-year, there appears to be no real sense
of urgency whatsoever to eliminate the looming threat of the Company becoming
de-listed from NASDAQ for its lack of independence in the boardroom.
This Board has known since last February when Ellen Siminoff decided not to
seek re-election that the Company would no longer be compliant under NASDAQ
listing standards due to a lack of independent directors. Yet, nearly eight
months later, nothing has been done to cure this by adding at least one new
independent board member. To this day, the US Auto Parts Board is comprised
of six members (see chart below), half of which are NOT considered
"independent" under stock exchange listing standards.
Director Director Audit Compensation Nominating & Considered
Since Governance "Independent"
Sol Khazani 2001
(Former Chairman & CFO)
Harman (28% shareholder
through Oak Investment)
(However, due to Mr.
Majteles' role as a
Robert 2006 X X Chair Venture
Majteles Partner at Oak
Investment, we believe
not be considered truly
Joshua Berman 2007 X Chair X Yes
Warren Phelps 2007 Chair X X Yes
As you know, we have proposed Sean Sweeney - a highly competent operating
executive with a stellar track record of creating value for investors, as a
possible candidate for filling the open position on the Board of Directors.
Unfortunately, this recommendation was quickly dismissed out-of-hand by Mr.
Majteles because of concerns that Sean would not be recognized as
"Independent" by NASDAQ due to the fact that he is related to a 5%
shareholder. We find this reasoning to be completely unsubstantiated and
furthermore suggests that any idea (no matter how good it is) put forth by
outsiders will be immediately discharged because it was not generated from
For the record, we have confirmed with NASDAQ that Sean would indeed be
considered an "Independent Director" under its Listing Rule 5605. Toward this
end, we implore the Board to reconsider Sean as a board candidate and
contemplate these facts:
oMr. Sweeney is the former President and CEO of Philadelphia Insurance
Companies, a global, publicly-traded insurance business which traded on
NASDAQ from 1993 to 2008 under the ticker symbol PHLY
oPHLY designs markets and underwrites property and casualty insurance
products for niche markets, including the automobile and truck rental and
oMr. Sweeney opened and successfully integrated 21 sales offices for PHLY,
increasing revenues from $96 million to $2.2 billion over a 10-year period
oIn December 2008 PHLY was sold to Tokio Marine Holdings for $4.7 billion
in cash – which is considered one of the largest transactions for
financial firms in Japanese history
oMr. Sweeney is currently a Director at Fortegra Financial Corporations
(NYSE: FRF), a former member of the Board of Directors at Tokio Marine
North America, and a former member of the Board of Directors at
Philadelphia Insurance Companies
IMPROVING PERFORMANCE AND REGAINING INVESTOR CONFIDENCE
There are both immediate and near-term options available to management that we
believe will regain investor confidence and uncover the value lying dormant
within this business. We strongly believe the Board should convene
immediately to evaluate the following options.
1. Immediately replace Shane Evangelist as CEO
The core issue facing the Company is leadership and we believe now is the
time for the Board to take decisive action to address this. Five years of
poor performance, the lack of an adequate plan to improve the business and
the loss of shareholder confidence has resulted in an 85%+ decline in
share value during Mr. Evangelist's tenure as CEO. It is time for a
2. Sell the AutoMD business
Earlier this year Cars.com announced a $13 million investment into a
similar online source for auto repair called RepairPal. We suggest the
Board examine selling AutoMD's assets instead of continuing to invest
millions into a business with no clear strategy or return on investment
for shareholders. (During the first six months of 2013 management invested
$1.2 million into AutoMD despite the fact that no significant revenues
have been generated for four years.)
3. Implement and communicate to shareholders a Company-wide cost
The Company reported a FY 2011 net loss of approximately $15 million, or
($0.50) EPS and a FY 2012 net loss of approximately $36 million, or
($1.17) EPS. In Q2 2013 the Company lost $9.6 million, or ($0.29) EPS.
Despite this, CEO Shane Evangelist had the audacity to announce during the
quarterly conference call, "For the first time in a while, we're able to
report some positive news as it relates to our strategy…"
It is unclear to us if the Company's strategy going forward will be any
different from the past. After years of underperformance, reinforced by
the Company's Q2 results, we believe that shareholders are fatigued with
management's failed initiatives and its inability to articulate a clear
path to profitability. In an effort to regain investor confidence, we
believe it is now time for the Board to adopt a new policy of transparency
and to take it upon themselves to communicate a metric-driven
restructuring plan that holds management accountable (and rewards them
appropriately) for generating positive earnings per share.
4. Reconstitute the board and consider Sean Sweeney as a truly
independent board member
We implore you to update shareholders immediately regarding the progress
on the Board's search for an independent director. As discussed
previously, we believe Sean Sweeney's distinguished track record for
improving performance in a multi-billion dollar public-traded Company,
will enhance the board's current capabilities and provide a balanced,
operational perspective inside the boardroom.
5. Build the offline business via telemarketing and direct sales
Offline sales contribute approximately 10% of the Company's total revenues
and have provided stability to the business as online sales continue to
decline. It is our belief that the Company needs to develop a more stable
overall revenue stream, reduce the substantial dependence on search engine
advertising and algorithmic listings to attract online customers to the
Company's websites, and ultimately exert more control over its destiny.
The offline market (namely commercial repair shops) has experienced
significant growth in recent years. We believe it would be sensible for
the Company to allocate more resources to a telemarketing and direct sales
force focused on selling its private-label Kool-Vue™ products directly to
commercial repair shops initially in states where the Company presently
has geographically feasible distribution facilities. In addition,
management must improve its disclosure practice by providing shareholders
with quarterly updates relating to product sales and gross margins for
6. Stop rewarding management for poor performance
Management compensation should be tied to positive earnings per share/net
income. We do not think it was appropriate that the board re-priced
options for senior management given the poor performance of the stock
7. Examine strategic alternatives, including a sale of the entire
Absent the Board's ability to communicate a turnaround plan that shows a
clear path to generating positive earnings per share, the board has an
obligation - indeed a fiduciary duty to shareholders, to examine all of
its alternatives to protect shareholder value, which we believe should
include a sale of the business to the highest bidder.
In our view, US Auto Parts would be an attractive acquisition target for a
strategic buyer. Less than one year ago AutoZone acquired AutoAnything,
a major competitor to US Auto Parts, for up to $150 million in cash, which
we estimate to be a sale price of approximately 1x sales (US Auto Parts is
currently trading around 0.15x trailing-twelve-month sales). Applying the
transaction metrics in the AutoAnything transaction, US Auto Parts would
be valued at $8.10 per share.
Accordingly, we believe a newly reconstituted Board - including Mr.
Sweeney, should promptly form a special committee comprised of independent
directors to explore all strategic alternatives for the Company before
shareholder value is further eroded.
We believe US Auto Parts is in a constant state of undervaluation for all of
the reasons we have expressed in this letter. However, in order for the
Company to realize its true value potential, there must be a major paradigm
shift in the way this Board of Directors thinks and acts.
Finally, we would like to reiterate our interest in acquiring Oak Investment's
28% ownership position and look forward to examining the possibility of such a
transaction with Mr. Harman. In the meantime, we would like to participate in
the effort to create value for all shareholders by continuing to engage in a
constructive dialogue about these critical areas of concern -- which we
believe are shared by many other shareholders.
We call on the Board to act now with a renewed sense of urgency and to update
shareholders by the end of October about what is being done to substantially
Maguire Asset Management
SOURCE Maguire Asset Management
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