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Pep Boys - Manny, Moe & Jack (NYSE:PBY)

Q1 2013 Earnings Call

June 11, 2013 8:30 am ET

Executives

Sanjay Sood - Chief Accounting Officer, Vice President and Corporate Controller

Michael R. Odell - Chief Executive Officer, President and Director

David R. Stern - Chief Financial Officer and Executive Vice President

Scott A. Webb - Executive Vice President of Merchandising, Supply Chain and Digital Operations

Analysts

Bret David Jordan - BB&T Capital Markets, Research Division

Brian Sponheimer - Gabelli & Company, Inc.

Daniel Engel-Hall - Crédit Suisse AG, Research Division

James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Operator

Greetings, and welcome to Pep Boys' First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Sanjay Sood, Chief Accounting Officer and Controller for Pep Boys. Thank you. Mr. Sood, you may begin.

Sanjay Sood

Good morning, and thank you for participating at Pep Boys' First Quarter 2013 Earnings Conference Call. On the call with me today are Mike Odell, President and Chief Executive Officer; David Stern, Chief Financial Officer; and Scott Webb, Executive Vice President, Merchandising, Supply Chain and Digital Operations.

The format of the call is similar to our previous calls. First, Mike will provide opening comments regarding our results and our strategic priorities; and then Dave will review the financial performance, the balance sheet and cash flows. We will then turn the call over to the operator to moderate a question-and-answer session. This call will end by 9:30 Eastern Time.

Before we begin, I'd like to remind everyone that this conference call is governed by the language at the bottom of our press release concerning forward-looking statements, as well as SEC Regulation FD. In compliance with these regulations, we are webcasting the investor conference call on www.investorcalendar.com. For anyone on the webcast who does not have the financial statements, you can access them on our website, www.pepboys.com.

I will now turn the call over to Mike Odell, our President and Chief Executive Officer. Mike?

Michael R. Odell

Thanks, Sanjay. Good morning, everybody. Thank you for joining us today. My comments today will highlight for you both our first quarter results, as well as our strategic efforts to deliver a better customer experience that differentiates Pep Boys among our targeted customer segments when they shop and care for their cars.

We're then pleased to report an improved revenue performance and continued growth in comparable store service customer count. Our store chains have been working diligently to make Pep Boys the best place to shop and care for your car, and it is nice to be rewarded with some top line sales growth.

Our biggest sales and profit lever is to continue to improve how we engage with and care for our customers. And under the new leadership of Chris Adams for the past 90 days, our teams have been working to build rapport with our customers before launching into the fact-finding and problem-solving phases of customer service. This effort includes intensive focus on customer care that is not as simple as it may sound but, when executed correctly, makes a meaningful difference in the customer experience and in our results. So we are thankful for the tireless efforts of our associates to be friendly, do it right, keep our promises and show compassion as they serve our customers.

For the first quarter of 2013, comparable store sales grew 1.0%, with a 3.9% increase in service, partially offset by a 2.1% decline in retail. Overall, comparable store sales trends have continued to be positive during the first month of our second quarter. While we are pleased with our improving revenue performance, we also know that we need to convert our sales into profit at a higher rate.

Net income for the first quarter improved by $2.8 million from $1.1 million to $3.9 million. Gross margins declined 160 basis points in total primarily due to heavier promotional activity in our retail business, higher levels of point-of-sale discounting and investments in technicians in our service business. Margin rates improved as the quarter progressed and have continued to improve in the second quarter.

In regards to technician payroll, we continue to invest in this core competency, which is the foundation of our business, and got ahead of schedule during the first quarter as we prepare for the summer seasonal demand. Disappointingly, this temporary setback conceals the progress we have made with our tire margins and also our service and tire center overhead absorption.

On a positive note, SG&A expenses declined slightly in dollars on the higher sales, resulting in 80 basis points of improved leverage. Interest expense declined $2.8 million due to lower debt levels and interest rates following our refinancing late last year, and also our tax provision benefited $3.8 million from state hiring credits related to job creation and enterprise zones.

Our bigger profit leather -- levers are improved gross margins and leveraging our expense structure with comparable store sales gains, both of which we expect in the second quarter. There have been no significant changes in our balance sheet or cash flow profile since year end. Inventory increased due to investments in new stores, Speed Shops and seasonal buys [ph].

Our strategically important service maintenance and repair categories remained steady. The only service category that experienced a decline on a comparable store basis was tires, which declined low-single digits. However, margin dollars on tires increased mid single digits as gross margin rates continued to recover. Service technician payroll did increase as a percent of sales due to investments in technician capability that I mentioned previously.

Maintenance services grew double digit on a comparable store basis, while repair services grew high single digit on a comparable store basis. And comparable store service customer count increases also remained healthy at 4.3% for the quarter. This is the fourth consecutive quarter that comparable store service customer count has been positive.

As we have stated previously, we do continue to see the impact of the decline in new car sales that started in 2008. Our sweet spot is vehicles between 5 and 13 years old, and we see the impact as these new cars age deeper into their normal maintenance and repair cycle. This trough in maintenance for newer cars affected oil changes first, then tires and now brakes, and this will continue category by category, with batteries next. The good news is that the headwind does turn into a tailwind since new car sales have increased every year since 2009. We have already been through the trough with oil changes and basic maintenance and we're cautiously optimistic that we will see improving demand for tires this year. While brake sales have been soft in our DIY and Commercial businesses, brake sales in our service bays continue to be positive.

Vehicle complexity also continued to increase, which supports the competitive advantage that we enjoy with our technicians' skill level that allows them to perform the medium and heavy work that folks cannot and do not -- or do not want to do for themselves. That's why we continue to invest in quality technicians.

We also continued to invest in our online experience, which continues to grow in importance as the source of customer acquisition and retention. The latest additions are more service options online, buy online, pay in store and live chat.

Last quarter, I spoke about our target customers and shared some of the following facts: 1 of 7 of our transactions are service bay transactions. 5% of our customers account for 25% of our retail and service sales. The median household income of our best customers is higher than you would expect, and we've also learned where else they shop.

20% of our customers come back for basic tire and oil change services but are still not devoted to us or anyone else for their repair work, they -- because they go to the dealer when it gets complicated and they pay too much. Such customers account for over 1/3 of automotive aftermarket sales and represent a huge opportunity for us.

We have 3x the market share of vehicle appearance customers, but most of them go to a dealer or a trusted independent for service. And 1/3 of our customers are true DIYers, but they account for less than 20% of our sales.

As a result of this, I also spoke last time about the series of changes we've made to one store in Tampa, Florida, that embraced these learnings. Our objective is to be the best alternative to the dealer for our target audience, not just the best alternative for the value-oriented customer. The first store was completed in March and is a working-in-market test lab. We are very encouraged by the results for the first 9 weeks since the grand -- since the re-grand opening and are now making plans to complete the rest of the Tampa market this year. In total, our Tampa market consists of 6 Supercenters and 3 service and tire centers. The changes touch almost every aspect of our business model.

It starts with our associates who are learning how to build lasting relationships with all customers, whether service or retail, and offer solutions for all of their automotive needs. Our customer base is quite diverse given the diversity of our product and service offering. We have parts and fluids for serious do-it-yourself-ers. We have Speed Shops for enthusiasts. We have friendly associates and inviting sales floors for light DIYers. And we can do everything from replacing oil in engines to replacing engines for customers that want a professional to do the work for them. But our stores have historically been organized for car guys and people on mission, which can be intimidating for many customers, especially women.

In this test lab in Tampa, we have created neighborhoods that appeal to our target customers. For service customers, this effort includes more welcoming curb appeal as well as a more inviting physical environment. It starts with a comfortable and appealing customer lounge and service check-in area, like a dealership. It also has a neighborhood adjacent to the customer lounge that pulls together all of the products that we carry that appeal to these customers that do not necessarily have deep automotive knowledge and may not even be very interested in their car, except as a mode of transportation.

For our enthusiast customers, the new design also includes a Speed Shop neighborhood. We just completed our 83rd Speed Shop this quarter, which is a store within an existing Supercenter. The Speed Shop targets the guy that DIY-es out of passion, not necessarily out of economic necessity. Plus, we offer the ability to install repurchases [ph] if that's his preference. Excluding the work being done in Tampa, our Speed Shops have been increasing DIY sales in the completed stores by mid single digits during the first year. And the primary investments are inventory and payroll, while capital costs are minimal.

For the core DIYer, the neighborhood in the rear of the store has a parts counter and part professionals that cater to all of their automotive parts and fluid needs, whether they just do light maintenance or like to do it all themselves.

The changes that we are testing in Tampa also include the use of technology and more tailored marketing messages and programs, so as you can see, the implications go well beyond store design and are literally changing how we go to market.

The cost of the physical changes for the rest of the Supercenters in the Tampa market is about $525,000 per store. It requires a 13% comparable store sales lift in year 1 to produce a 15% after-tax internal rate of return. The results to date are a lift in comparable store sales that is significantly higher than that. We expect to read this market further before proceeding to any other markets. We also expect that the costs will come down further if we commit to a bigger rollout. When you experience the store, you will clearly see our vision for Pep Boys to become the best alternative to the dealer and also how we can use our retail business to drive our service business. While all parts of our business have seen a lift in the first store, the strongest lift has been in service, which supports our lead-with-service growth plans.

We have already implemented the non-capital elements of the changes in our Tampa market, particularly the talent selection and development, and they have lifted sales in the mid-single-digit range, but we see a clear difference in results where we coupled these changes with the physical improvements in West Hillsborough. We expect to have the Tampa market completed during the fourth quarter of this year and to fully understand its results before proceeding to any additional markets. However, the non-capital elements will continue to be implemented across the chain at a faster pace.

Our capital spending for the year is still forecasted to be $65 million. This includes a little under $3 million for the store remodels in Tampa, Florida.

Our strategy leads with service now more than ever as we still favor the fundamentals for DIFM over the long haul. The demand for maintenance and repair remains consistent, which has been driving the growth of our service customer base. We also still intend to provide a great value, but that value will be more oriented toward raising the customer experience that we deliver in both our service business and our retail business. There's a huge gap between the dealer experience and its costs and the rest of the automotive aftermarket with its lack of consistently positive customer experiences. We intend to own that position to fill that gap profitably and to use our retail business to further complement our repositioning.

Our business is taking care of cars and, just as importantly, the people who drive them. Over the past 5 years, we've redeveloped our service, technical and parts capabilities around fixing cars. Now as we learn more about our customers, it is clear that our biggest opportunity for competitive advantage is to take care of our customers as well as we take care of their cars. This is an exciting time at Pep Boys. We're excited about the opportunities that abound with our customer-centric efforts and our target customer segments.

Thank you for your continued belief in Pep Boys and for investing in our bright future. I will now turn the call over to Dave Stern, our Chief Financial Officer, to review our financial results.

David R. Stern

Thanks, Mike. Good morning, everyone. This morning, I'll review our results on both a GAAP and a line-of-business basis. The last page of our press release includes financial information in a line-of-business format.

Sales for the first quarter of 2013 were $536.2 million, an increase of $11.6 million or 2.2% from $524.6 million in the first quarter of 2012. This increase was composed of a $6.4 million increase from noncomparable store locations and $5.2 million from the 1.0% increase in comparable store sales for the quarter. The increase in comparable store sales was comprised of an increase in service revenue of 4.2%, while merchandise sales were essentially flat, up 0.1%.

Gross profit for the first quarter of 2013 was $121.8 million, a decrease of $5.8 million or 4.6% from the first quarter of 2012. Gross profit margin, which is fully loaded with occupancy costs, warehousing and service payroll, was 22.7% of sales, a decrease of 1.6 percentage points. Excluding the impairment charge of $1.2 million in the first quarter of 2013, gross profit margin decreased by 1.4 percentage points to 22.9% from 24.3% in the first quarter of 2012. This decrease in gross profit margin was primarily due to higher payroll and related expenses of 90 basis points and lower merchandise margins of 80 basis points due to increased promotional activity, partially offset by a sales shift to higher-margin service revenues.

Selling, general and administrative expenses for the first quarter of 2013 as a percentage of revenue were 22.1%, a decrease of 0.7 percentage points from the first quarter of 2012. In dollars, selling, general and administrative expenses decreased $1.5 million or 1.3% from the prior year primarily due to lower media spend of $2.5 million and due to not having merger-related costs of $1.6 million that were incurred in the first quarter of 2012. These were partially offset by higher professional services costs and credit card fees.

Interest expense for the first quarter was $3.7 million, a decrease of $2.8 million primarily due to the reduced debt level and interest rate resulting from the refinancing that took place in the third quarter of 2012. During the first quarter of 2013, we recorded an income tax benefit of $3.7 million primarily as the result of the $3.8 million tax benefit from state hiring credits. During the first quarter of 2012, income tax was $0.8 million.

Net income for the first quarter of 2013 was $3.9 million or $0.07 per share compared to net income of $1.1 million or $0.02 per share in the first quarter of 2012.

I will now turn to our results by line of business, as opposed to the GAAP basis, for our service center and retail operations for the first quarter of 2013.

The Service Center business, which includes service labor revenue and installed merchandise and tires, generated revenue of $287.0 million in the first quarter of 2013, an increase of 5.9% or $15.9 million over the $271.1 million reported for the first quarter of 2012. This increase was primarily due to a 3.9% increase in comparable store revenues or $10.5 million, and the additional contribution of $5.4 million from noncomparable locations.

The growth in service center comparable store revenues was due to an increase in customer count of 4.3%, partially offset by a decline in average transaction amount of 0.4%. The increase in customer counts was due to the strength in our maintenance and repair business, led by increased oil change transactions which have a lower average transaction amount. The promotion of oil changes is designed to attract new customers to Pep Boys to introduce them to our full-service capabilities in order to satisfy their future needs.

Service center gross profit was $52.0 million, a decrease of 3.5% or $1.9 million from $53.9 million in the first quarter of 2012. Excluding the $1.0 million asset impairment charge in the first quarter of 2013, Service Center gross profit as a percentage of Service Center revenue declined to 18.5% from 19.9% in the same period of the prior year primarily due to increased payroll and related costs due to upfront investment in our technicians; and increased store occupancy costs, partially offset by improved product gross margin. Although tire revenue was essentially flat, tire gross profits increased due to an increase in product margin rate.

The Retail business generated sales of $249.2 million in the first quarter of 2013, a decrease of 1.7% or $4.3 million from the $253.5 million in the first quarter of 2012. The decrease was primarily due to lower comparable store sales of 2.1% or $5.3 million, partially offset by the contribution from our noncomparable locations of $1.0 million. Retail comparable store sales declined as a result of a decrease in 3% in customer count, partially offset by an increase of 0.9% in the average ticket.

The Retail business generated gross profit of $69.8 million in the first quarter of 2013 versus $73.8 million in the first quarter of 2012. Excluding the asset impairment charge of $0.2 million in the first quarter of 2013, the Retail gross margin rate decreased to 28.1% from 29.1% in the same period of the prior year. The decrease in Retail gross margin was primarily due to increased promotional activities, which did not lead to the anticipated lift in sales in the quarter.

Moving to the balance sheet and cash flow. During the first quarter of 2013, cash decreased by $3.1 million to end the quarter at $56.1 million. Cash used in investing and financing activities offset the cash flows generated from operating activities.

Inventory at the end of the quarter was $648.1 million, an increase of $6.9 million from $641.2 million at the end of last year. Inventory balances increased primarily due to seasonal purchases, investments in our new stores, adding Speed Shops to existing Supercenters and the conversion of Supercenters to Super Hubs.

Accounts payable, including the trade payable program, remained essentially flat at $394.6 million at the end of the first quarter of 2013, as compared to the end of 2012. The accounts payable to inventory ratio at quarter end was 60.9%, a decline of 0.6% from the end of 2012.

Capital expenditures in the first quarter of 2013 were $12.8 million and primarily consisted of 4 service and tire centers; 2 Supercenters; information technology enhancements, including our e-commerce initiatives and parts catalog enhancements; as well as our regular facility improvements. Capital expenditures at the end of first quarter of 2012 were $11.9 million.

Net property and equipment of $647.6 million declined by $9.6 million during the first quarter of 2013 primarily due to depreciation exceeding capital expenditures and the $1.2 million asset impairment charge recorded during the quarter.

Free cash flow in the first quarter of 2013 was negative $2.7 million compared to free cash flow of $41.3 million in the first quarter of 2012. Free cash flow is defined as cash flow from operating activities plus amounts financed under our trade payable program, which is included in cash flows from financing activities, less cash flow from investing activities. Our prior year cash flows included $20 million of net cash generation from expanding our accounts payable to inventory ratio by 4.1 percentage points due to increased inventory purchases and improved vendor payment terms.

We continue to anticipate capital expenditures of approximately $65 million for 2013. This includes approximately $3 million for remodeling the Tampa market; as well as the addition of 38 new locations, 31 of which will be service and tire centers and the remaining 7 will be Supercenters; the conversion of 15 Supercenters into Super Hubs; the addition of 50 Speed Shops to existing Supercenters; information technology enhancements to improve the customer experience; and required expenditures for our existing stores, office and distribution centers. These expenditures are expected to be funded by cash on hand and net cash generated from our operating activities. Additional capacity, if needed, exists under our existing line of credit.

Finally, regarding our gross profit rate for the quarter. We ran some promotions and price tests that resulted in a lower gross profit rate for the quarter. Of course, some are -- also worked well, and we will use this information going forward as we plan. And with this, we project that we will have gross profit rate improvement for the remainder of the year.

I'll now turn the call over to the operator to begin the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Bret Jordan with BB&T Capital Markets.

Bret David Jordan - BB&T Capital Markets, Research Division

A quick question on that last comment about improving on the gross margins for the balance of the year. Are you thinking about sequential improvement or year-over-year improvement in gross margin? And I guess, to dig a little deeper, if you look at the increased labor expenditures, is that labor at the core stores, or is that incremental labor added to the STC stores as well?

David R. Stern

It's a -- the labor piece is, I guess, a little bit of both, but it's more of the comp STCs. So that's really is a -- it's a comp basis in terms of the increase in the payroll, not the new stores. We did see improved overall margin -- or overhead absorption in the service and tire centers due to their comp growth.

Michael R. Odell

And to address your question regarding gross margins, those are year-over-year improvements.

Bret David Jordan - BB&T Capital Markets, Research Division

Okay, great. And I guess, as you look at the STC strategy, it sounds as if now it's in sort of a tipping point where it's beginning to be accretive to aggregate margin. Is -- was that not the case in Q1, given the labor?

David R. Stern

No, they were accretive in Q1. It's really the payroll piece that diminished the margins. It was really in the comp stores and the Supercenters, mostly indiscernible] in the comp service and tire centers but mostly in the Supercenters.

Bret David Jordan - BB&T Capital Markets, Research Division

Okay. And then on the retail promotions that you ran in Q1 that didn't work, could you give us any color of sort of what lines that were promoted or what you picked up from that, that you -- that just continued [ph] in Q2 the benefits of the retail marketing going forward?

Michael R. Odell

Yes, the best example -- there's a couple of things. So the best example relative to retail was we ran some tests of -- different kinds of tests, actually, in the fourth quarter in different markets to see if we could stimulate retail demand, particularly of our discretionary products. And so in March, we ran a "20% off any single item." And basically, we got a lift in customer count, but it was erosive to margins and didn't do much for the top line. So it was intended to drive, again, the -- more the retail in general, discretionary in particular. And it just did -- it didn't work when we went national the same way it did when we did it in a single market in December.

Bret David Jordan - BB&T Capital Markets, Research Division

Okay. And one last question, on capital allocation. I guess you've been locked out of a buyback until [ph] this call is completed. As you look at the CapEx and where you -- expansion of the Tampa model, what are the thoughts on the share repurchase program sort of heading into the next quarter?

David R. Stern

Sure. This is Dave. The board authorized the plan in mid-December, and since that time, our shares have appreciated by about 30%. So given the share appreciation, given the early results that Mike discussed regarding the initiatives around Tampa, we're currently assessing our options regarding the use of cash. It's part of balancing, maintaining our strong balance sheet, investing appropriately in the business and, of course, looking at returns to shareholders.

Operator

Our next question comes from the line of Brian Sponheimer with Gabelli & Company.

Brian Sponheimer - Gabelli & Company, Inc.

Just a question on the retail side of the house. Talk a little bit about the promotional activity that you guys implemented in the quarter and if you expect this to be a continued drag for the balance of the year.

Michael R. Odell

No. As I just responded, really, to Bret's question, a big part of it was the event that we ran in March, which just it turned out to be a bust. We were trying to -- things were soft. We were trying to stimulate traffic. We had tested it in other markets in the fourth quarter, and it worked nicely, and it just -- it bombed in March. And we're not going to repeat it. The other pressure that's not necessarily promotional, but the level of customers that are finding coupons and bringing those into the stores was higher in the first quarter than it has been, so we're going to dial back on that as well.

Brian Sponheimer - Gabelli & Company, Inc.

Okay. And just if I'm thinking about your service categories, with everyone of them being up, with the exception of tires, that kind of goes against what you were talking about as far as brakes being -- going through a bit of a cyclical downturn right now. Can you just talk about the brakes market and what you're seeing there?

Michael R. Odell

So the -- on the brakes piece, so while we were up in brakes in service, brakes was just a little bit up, not up near where the rest of the service business was up. And in terms of the cyclical nature, we see that more in our retail and our commercial business. It exists in service. I just think that we've got some offers out now with -- out there with brakes that's kind of running against that cycle, to our favor. But we definitely see it affecting the retail and commercial. Scott, did you want to add anything?

Scott A. Webb

The only thing I was going to add, Brian, was, I think, when you look at the total brake business out there, others that give public commentary have experienced a decline there. I believe that our promotional activity, as well as our service activity, we believe we're taking share in the brake category.

Michael R. Odell

In service.

Scott A. Webb

In service.

Brian Sponheimer - Gabelli & Company, Inc.

Okay. And I -- and just one more question, on -- just on tires, whether you -- on the branded side and the non -- and the private label, non-branded. Just talk about what you're seeing from a pricing standpoint both on the input level and what you're able to pass on.

Michael R. Odell

Our margins have continued to expand. That's coming more from the cost side. But actually, it's a little bit of both the cost and the sales side. In terms of splitting that between branded and non-branded, we don't really go into that.

Operator

Our next question comes from the line of Simeon Gutman with Crédit Suisse.

Daniel Engel-Hall - Crédit Suisse AG, Research Division

This is actually Dan Engel-Hall filling in for Simeon. I know -- just a quick one on sort of the service. I know that, obviously, part of the customer strategy has been trying to create loyal visits in just sort of [ph] the lower-ticket services, and then, obviously, retaining those customers. At this point, is that something you're seeing -- are you seeing most of those customers sort of transition to heavier work? Or is that more of a tailwind you'd expect just later on as vehicles start to age?

Michael R. Odell

It's really -- it takes time to measure that. So I think we see signs of that because we have been feeling pretty good about our maintenance and our repair business, but it takes a year to see that, those trends develop.

Operator

[Operator Instructions] Our next question comes from the line of James Albertine with Stifel.

James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division

Just a quick sort of housekeeping item on one of your comments, talking about the sweet spot, 5- to 13-year-old cars. Can you give us a sense of which end of that spectrum is growing more rapidly as you see this sort of inflection, as it were from the past few years of deferred maintenance?

Michael R. Odell

Well, what'll -- well, it's not really from the deferred maintenance. It's the cars in the pipeline. So we see, the declines right now is those cars at the front end of that 5- to 13-year old, right, because when new car sales declined in '08 and then '09, and then they've grown into '10, '11 and '12 -- it's those '10, '11, '12 they've grown -- that's grown roughly $1 million a year. As those start to hit the 5-year-old spot in, I guess, 2015, '16 and '17, that's when the tailwind starts to come in, at the front end of that 5- to 13-year-old cycle.

James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division

Okay, so it's sort of taking the fight on [ph] from the reduced new car sales in '08 and in '09. But trying to get a sense for our people working on cars that are older, saying it another [ph] way maybe, older cars that you probably wouldn't have worked on in the past but are starting to put more money into service and maintenance.

Michael R. Odell

I think what we see is that, when the cars are newer, people spend money to keep their cars in -- right, the people with younger cars tend to drive their cars more than the people with older cars, so there's greater frequency of service. Plus, they have -- they're more likely to keep up on their maintenance, and so there's more maintenance to be done in the cars in our sweet spot and in those early years. As cars get to that 10 years and older, that's when it -- it's in that phase that they start to shift from maintaining their cars and deferring maintenance, but they get more into the repairs because things are breaking and they need to fix it to keep the car running.

James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division

Understood. And then, if I may, on the Tampa market, just to dig in a little bit, just trying to get an idea of how replicable that pilot program is throughout the rest of your portfolio. And is there something about maybe Tampa real estate or something sort of unique to the Tampa market that we should consider? And then separately, I think you said, just from some initial -- some personnel changes and some initial readings, it looks like sales was up mid single digits, if I heard you correctly. Just trying to see if that's more of a retail-driven surge, or is this sort of more of a service-led sort of improvement, if you will.

Michael R. Odell

Yes, let's see if I can remember all the questions. It is the result -- the result is more service led. I mean, it's helping both sides of the business, but it's definitely focused on it and more helpful to the service. There is -- we did the whole process in terms of selection of people and teaching them on how to serve -- how to build rapport with customers. As so we -- definitely, we see a positive lift just from the personnel changes, but it's much more significant when we add the physical elements to the personnel changes. In terms of Tampa, one of the reasons we've picked that market is because there's a diversity of our store base down there in terms of the types of neighborhoods that those stores are in. And the reason we believe that it's going to be replicable is that West Hillsborough is actually below average in terms of kind of the demographic around that store, relative to that portfolio. So we didn't pick, like, the best store and the best area to go do this. We picked a store kind of in the lower half, not at the bottom but the lower half, of kind of that demographic, which gives us, I guess, confidence that if it works in that, then it'll work as we trade up to the higher-demographic stores.

Operator

Our next question comes from the line of Ronald Bookbinder with The Benchmark Company.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

You talked about the POS discounting, or the coupons. It seems like, coupons, more people use them. So coupons were bringing people into the store. Were they new customers? Or were they just existing customers using a coupon?

Michael R. Odell

We're seeing a higher penetration of new customers. I mean, there's some of both, but there's more new customers coming in as a result of that. But they are also being used by existing customers.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

So when you say you're going to cut them, going forward, are you talking about a -- just reducing the volume of coupons out there, or just reducing the value, or...

Michael R. Odell

I think the 2 biggest pieces are, obviously, looking at the relative payback of the different coupons and perhaps reducing the value of some of them but then also making sure that they don't -- that they're not getting abused. And that obviously becomes a store controllable.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Okay. And on the promotion of different items in the retail store, was that 20% off? Was that a onetime -- was that just one item?

Michael R. Odell

Correct. It was a single item, with the idea being that they either trade up to -- start to build the basket or trade up to the higher-value items.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Oh, and they didn't build the basket, they just came in, bought the one item and left.

Michael R. Odell

More or less, yes...

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And that was a coupon also?

Michael R. Odell

It was a coupon, yes, but it was generally available to everybody that came in the store.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

So it was in, like, a flier when you walk into the store and [indiscernible] pick-up...

Michael R. Odell

Correct, correct.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

All right. Well, it's nice to see the comp side turning back positive...

David R. Stern

Yes, we needed margin to go with it.

Operator

Mr. Odell, there are no further questions at this time. I'd like to turn the floor back over to you for closing comments.

Michael R. Odell

All right. Well, thank you, everybody, for your time and interest in Pep Boys. We're excited about our road ahead. And we look forward to talking to you again after the second quarter.

Operator

That concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.

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