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

Q2 2013 Earnings Call

September 10, 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.

Simeon Gutman - Crédit Suisse AG, Research Division

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Operator

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

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

Sanjay Sood

Good morning, and thank you for participating in the Pep Boys Second Quarter Earnings Conference Call. On the call with me today are Mike Odell, President and Chief Executive Officer; David Stern, Executive Vice President and 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 the strategic priorities, and then David will review the financial performance, balance sheet and cash flows. We will then turn the call over to the operator to moderate a question-and-answer session. The call would end by 9:30 Easter Time.

Before we begin, I would 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 conference call on www.investorcalendar.com. For anyone on the webcast who does not have the financial statements, you can assess 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

Thank you, Sanjay. Good morning, and thank you for joining us today. My comments will highlight for you both our second quarter results as well as the progress we are making with our strategic efforts to deliver a customer experience that differentiates Pep Boys among our target customer segments when they shop and care for their cars.

We are pleased to report an improved operating income performance. Adjusted operating income for the quarter increased 25% from $15.5 million to $19.4 million. The current quarter included a $1.7 million asset impairment charge, while the prior year included a $0.7 million severance charge and the reclassification of $1.5 million of merger-related costs. The improved adjusted operating income performance was primarily a result of improved product gross margins, particularly in tires. Our tire margins have now recovered to the levels we experienced in 2010.

Overall, comparable store sales declined 1.3%. Tires were a significant contributor to that decline, as they decreased 6.2%. However, despite the decrease in tire units and tire sales, gross margin dollars on tire sales increased by 8.6%. The unit and sales loss primarily occurred among lower-price-point tires.

Comparable store sales for our service business were flat, as a 3.5% increase in maintenance and repair services offset the decline in tire sales. Our strategically important maintenance and repair services remained steady and grew in customer count, sales and margin rate, as we continued to invest in quality-service technicians. The mix shift to the higher-margin maintenance and repairs also aided our gross margin improvement. Tires was the only real soft spot in our service business, and again, it came at a higher margin. While not yet realized, we continue to be cautiously optimistic that we will see improving demand for tires as the year progresses.

Comparable store sales for our retail business declined 2.6%, primarily driven by refrigerant, oil and brakes. However, gross margins in our retail business increased by 120 basis points, offsetting the impact of the sales decline.

We just opened our 99th Speed Shop, which is a store within an existing Supercenter. Speed Shops target the car guy that DIYs out of passion, not necessarily out of economic necessity, plus we offer the ability to install what he purchases if that is his preference. Our Speed Shops are adding about 5% to the retail sales of the stores where they are added. We have now completed this phase of Speed Shop openings and plan to start the next phase in 2014.

We also continued to invest in our online experience, which continues to grow in importance as a source for customer acquisition and retention. The latest additions include the ability to schedule professional installation with the purchase of a battery online, personalized maintenance alerts for scheduled maintenance and recall notices and a new homepage to allow -- to align with our Point B marketing campaign.

SG&A expenses increased $6.7 million or 5.8% for the quarter primarily due to short-term incentive compensation accruals and increased media spend, while the prior year benefited from the reclassification of merger costs. Below the operating income line, we had a $2.8 million reduction in interest expense; the termination fee, net of expense, of $43 million in 2012; and a very high effective tax rate in 2013 due to changes in state tax laws. The tax law changes are a non-cash event that affect our deferred tax assets.

We have been pleased with the performance of our Service & Tire Centers. We just opened our 194th Service & Tire Center. And last week, we closed a deal to acquire 17 additional locations in Southern California, which increases our customer coverage within 3 miles of a Pep Boys store to 75% of the Los Angeles metropolitan area. These stores will be converted to Pep Boys with our new store appearance immediately. This will increase our expected number of new store openings in 2013 to 47, comprised of 40 Service & Tire Centers and 7 Supercenters. With the increase in the number of Service & Tire Center openings in 2013, we have increased our capital expenditure forecast for the year from $65 million to $75 million.

Our biggest sales and profit lever is to continue to improve how we engage with and care for our customers, and we continue to work on greeting and building 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 makes a meaningful difference in the customer experience and in our results. And we are thankful for the tireless efforts of our associates to execute the key trust-building behaviors of being friendly, doing it right, keeping our promises and showing compassion as they serve our customers.

Last quarter, I spoke about our target customers and discussed some of the significant changes we are making to differentiate our brand with these key customers. 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. It has now been 22 weeks since we've re-grand opened our first test store in West Hillsborough, Tampa, Florida, and sales trends and customer response to the changes remained very strong. The changes in this store touch almost every aspect of our business model, but it starts with our associates who are learning how to build lasting relationships with all customers, whether service or retail, and to offer solutions for all of their automotive needs. For our service customers, this includes a more welcoming exterior curb appeal as well as a more inviting physical in-store environment. It starts with a comfortable and appealing customer lounge and service check-in area like a dealership. It also includes the introduction of new customer neighborhoods in our stores.

We have historically been organized for car guys and people on a mission, which can be intimidating for many customers, especially women. In this test lab in Tampa, we have created neighborhoods that appeal to our different target customers' interest and skill levels. For that "do it for me customer -- oriented" customer group, we have created 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 working on their car. Instead, they are looking for products that enhance their car experience and what they do when using their car.

On the other end of the customer spectrum is our true car enthusiast customers. For these customers, this new store design also includes a Speed Shop neighborhood with the latest in car performance and appearance upgrades. And finally, for the "day-in and day-out" core DIYer, the neighborhood in the rear of the store has a parts counter and parts 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 we are testing in Tampa also include the use of technology and more-tailored marketing messages and programs based on the customer segmentation. The implications go well beyond just the new store design, as they literally change how we go to market to attract and serve our target customer groups. As previously discussed -- disclosed, the cost of the physical changes for the rest of the Supercenters in the Tampa market is about $525,000 per store, but we do expect that the cost will come down as we commit to a bigger rollout. At $525,000, it requires a 13% comparable store sales lift in year 1 to produce a 15% after-tax IRR. And again, the results to date are a lift in comparable store sales that is significantly higher than that. 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.

As previously announced, we are in the process of converting the rest of the Tampa market and expect to complete it in December. We will continue to monitor results while we also develop plans to expand the conversion to additional markets in early 2014. Additionally, all new stores are being developed with the new design, including the Service & Tire Centers that we just acquired in Southern California.

Our strategy leads with service, 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 in our service customer base. We also intend to provide a great value, but that value will be more oriented towards -- toward raising the customer experience that we deliver in both our service business and our retail business. There is a huge gap between the dealer experience and its cost and the rest of the automotive aftermarket with its lack of consistently positive customer experiences. We fully 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 have redeveloped our service, technical and parts capabilities around fixing cars. And now as we learn more about our customers, it is clear that our biggest opportunity for a competitive advantage is to take care of our customers as well as we take care of their cars.

This continues to be an exciting time at Pep Boys. We're excited about the opportunities that abound with our customer-centric efforts and our target customer segments. And 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 will 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 second quarter of 2013 were $527.6 million, an increase of $1.9 million or 0.4% from $525.7 million in the second quarter of 2012. This increase was comprised of $8.9 million sales from our non-comparable locations, partially offset by a 1.3% decrease in comparable store sales or $7 million. The decrease in comparable store sales was comprised of a 1.7% decline in merchandise sales, primarily due to tires, partially offset by a 0.2% increase in service revenue.

Gross profit for the second quarter of 2013 was $138.7 million, an increase of $8.1 million or 6.2% from the second quarter of 2012. Gross profit margin, which is fully loaded with occupancy costs, warehousing and service payroll, was 26.3% of sales, an increase of 150 basis points. Excluding the impairment charge of $1.7 million in the second quarter of 2013, gross profit increased by 180 basis points to 26.6% from 24.8% in the second quarter of 2012. This increase in gross profit margin was primarily due to higher product margins of 270 basis points primarily due to significantly improved tire margins, and a shift in sales to higher-margin service revenues, partially offset by higher payroll and related expenses of 80 basis points.

Selling, general and administrative expenses for the second quarter of 2013 as a percentage of revenue were 22.9%, an increase of 120 basis points from the second quarter of 2012. In dollars, selling, general and administrative expenses increased by $6.7 million or 5.8% from the prior year primarily due to higher short-term incentive accruals of $1.8 million; increased media spend, $1.4 million; and higher credit card fees of $700,000. The prior year second quarter benefited from the reclassification of $1.5 million of merger-related costs, which is partially offset by a severance charge of $700,000.

Operating profit for the quarter increased by 8.8% to $17.7 million from $16.3 million in the prior year, driven by the 150-basis-point improvement in gross profit margins. Excluding the impairment charge in the current quarter and the reclassification of merger costs and severance in the prior year, adjusted operating profit increased by $3.9 million or 25% to $19.4 million in the second quarter compared to $15.5 million in the prior year.

Interest expense during the quarter was $3.6 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. Income tax expense was $9.3 million or an effective rate of 63% compared to expense of $20.3 million or an effective rate of 38% for the prior year. The change in tax rate was principally driven by a $2.5 million charge primarily due to recording of valuation allowance against state credits as a result of tax law changes.

Net income for the second quarter of 2013 was $5.4 million or $0.10 per share compared to net income of $33 million or $0.61 per share in the second quarter of 2012. The second quarter earnings included, on a pretax basis, $1.7 million asset impairments charge, while the prior year included, on a pretax basis, $43 million of net merger termination settlement proceeds and a $700,000 severance charge.

Net earnings for the year-to-date through the second quarter declined to $9.2 million or $0.17 per share versus net earnings of $31.4 million or $0.63 per share for the same period last year. The current year-to-date results included, on a pretax basis, $2.8 million of asset impairment charges, while 2012 results included, on a pretax basis, the previously referenced $43 million net termination settlement proceeds and the $700,000 severance charge.

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

The service center business, which includes service labor revenue and installed merchandising tires, generated revenue of $280.9 million in the second quarter of 2013, an increase of 2.4% or $6.6 million over the $274.3 million in the second quarter of 2012. This increase was due to $7 million of sales from our non-comparable locations, partially offset by a 0.1% decrease in comparable store revenue or $400,000. The slight decrease in comparable store sales was due to a 6.2% decline in tire sales. Excluding tires, service center comparable store sales grew by 3.5%, driven by a continued strength in our repair and maintenance service offerings and oil change promotions.

Service center gross profit was $61.6 million, an increase of 10.2% or $5.7 million from $55.9 million in the second quarter of 2012. Excluding the $1.3 million asset impairment charge in the second quarter of 2013, service center gross profit as a percentage of service center revenue improved by 200 basis points to 22.4% from 20.4% the same period of the prior year primarily due to significantly higher products gross margins which were driven, in large part, by improved tire margins, partially offset by higher employee expenses and increased store occupancy costs.

The retail business generated sales of $246.7 million in the second quarter of 2013, a decrease of 1.9% or $4.7 million from the $251.4 million in the second quarter of 2012. This decrease was primarily due to lower comparable store sales of 2.6% or $6.6 million, partially offset by the contribution from our non-comparable locations of $1.9 million. Retail comparable store sales declined primarily due to lower refrigerant, oil and brake sales.

The retail business generated gross profit of $77.1 million for the second quarter of 2013 versus $74.7 million for the second quarter of 2012. Excluding the asset impairment charge of $400,000 in the second quarter of 2013, retail gross margin rate increased to 31.4% from 29.7% in the same period of the prior year. The improvement in retail gross margin was primarily due to improved products gross margin and lower store occupancy costs.

Moving to the balance sheet and cash flow. Cash at the end of the second quarter was $64.9 million, an increase of $5.7 million from year end and a decrease of $85.9 million from the second quarter of last year. This decrease was primarily due to the debt reduction of $95 million that occurred in the third quarter of last year.

Inventory at the end of the second quarter was $649.8 million, an increase of $8.6 million from year end and an increase of $23.3 million from the second quarter of last year. Inventory balances increased primarily due to investment in new stores, adding Speed Shops to existing Supercenters, the conversion of Supercenters to Super Hubs and through the introduction of new product offerings.

Accounts payable, including the trade payable program, at the end of the quarter was $376 million, a decrease of $18.4 million from year end and an increase of $13.8 million from the second quarter of last year. The accounts payable-to-inventory ratio at quarter end was 57.9% compared to 61.5% at year end and 57.8% at the second quarter of last year. The decline since year end was primarily due to reduced inventory purchases in the first half of 2013 compared to those in the back half of 2012.

Capital expenditures for the first half of 2013 were $24.5 million and primarily consisted of the 9 Service & Tire Centers -- or Supercenters; information technology enhancements, including our e-commerce initiatives and parts catalog enhancements; as well as our regular facility improvements. Capital expenditures in the first half of 2012 were $26.3 million.

Free cash flow in the first half of 2013 was $7.4 million compared to free cash flow of $91.6 million in the first half of 2012. Free cash flow is defined as cash flow from operating activities, plus net 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 flow include $43 million of settlement proceeds from the termination of The Gores transaction.

For 2013, we anticipate capital expenditures of approximately $75 million, including $10 million for the acquisition of the 17 Service & Tire Centers in Southern California that Mike referenced. We have increased our estimated store openings from 38 to 47. These consist of the 17 acquired stores, the 9 Service & Tire Centers and 4 Supercenters opened year-to-date through the second quarter, the planned opening of another 14 Service & Tire Centers and 3 Supercenters during the third and fourth quarters. Our capital expenditures also include approximately $3 million to remodel the Tampa market stores; the conversion of 15 Supercenters into Super Hubs; the addition of 65 Speed Shops to existing Supercenters; information technologies to improve the customer experience; and required expenditures for our existing stores, distribution centers and office. These expenditures are expected to be funded by cash on hand, net of cash generated through operating activities. Additional capacity, if needed, exists under our existing line of credit.

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 today is coming from Bret Jordan from BB&T Capital Markets.

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

Could we get a little more color on the tire units versus dollars? I think you said that the units were down 6.2%, or was that dollars that were down 6.2% in tires?

David R. Stern

That was dollars.

Michael R. Odell

There has been some deflation in both the price, the retail price, of tires and the cost of tires, but that number was a -- that was a sales number.

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

Okay. What was -- what did units look like?

Michael R. Odell

I have it. It was down mid single digit.

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

Okay. And did you see much regional dispersion in the performance in the quarter, I guess, western market versus eastern?

David R. Stern

There was a little bit of regional difference probably related to heat but nothing that's really worthy of calling out.

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

Okay. And then, I guess, your comments about cautious optimism on second half tire performance, are you seeing any signs of life? Is there anything that's changing directionally? Or is that just -- I guess, that gives you this cautious optimism?

Michael R. Odell

As we've discussed, I can't say that I've seen the change in the sales results yet for the tires. But as we continue to get more of new cars into the pipeline from the earlier years and they start coming up for their first set of tires, I actually have felt okay with our tire business as it relates to the better and the best segments. It's in the goods segment where we're -- there's been an influx of a lot of Asian imports. And that's where it's been more price sensitive and that's where the softness has been for us.

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

Okay. And I'll ask one question and get back in queue. But on the California acquisition, the $10 million paid. What was the revenue run rate on those stores?

Michael R. Odell

We'll put that in our next release.

Operator

Our next question is coming from Brian Sponheimer from Gabelli & Company.

Brian Sponheimer - Gabelli & Company, Inc.

I just want to talk about Tampa as it relates to the rest of your stores. We're talking 500 stores, with the potential to have this turn over. Has the success made you want to potentially accelerate plans to push the new store format? And what's the cadence that -- do you think, on this over the next 2 or 3 years?

Michael R. Odell

I would say that, I mean, we love the results and we would love to go faster, but we need to be prudent, hence the reason for completing the Tampa market, to make sure that we replicate it through the rest of the stores in the market, and then proceed with the adding additional markets in the first half of next year. So we're going to -- we're basically putting together the plans to continue it to next markets in the first half of next year, but we won't pull the string until we've got a better read on the how things are going with the rest of the Tampa stores. So we like the results enough to want to go faster, but we intend to be prudent about it.

Brian Sponheimer - Gabelli & Company, Inc.

As you change-over these stores, are there any scale benefits, maybe learning curves, as far as cost per store where each incremental store can maybe cost you a little bit less to transform?

Michael R. Odell

Correct. I mean, that's one of the pushes and pulls, right? The better -- the more we -- the bigger the number that we commit to, obviously the better the costs get. But not prepared to obviously commit until we can prove that we can do it in more than just one store.

Brian Sponheimer - Gabelli & Company, Inc.

Now you mentioned brakes being particularly weak in the quarter. And we've talked a little bit about this in prior quarters where you're thinking, as tire sales come back, you'll get a crack at brakes. Were -- has any part of that thesis changed at all? Or is this more an issue with just tire units being down mid single digits?

Michael R. Odell

That brake comment was relative to the retail business. Our brake business in service has been okay, it's been about, I guess, about flattish, up slightly.

Brian Sponheimer - Gabelli & Company, Inc.

All right. And just with the balance sheet where it is and given your -- given what looks like a pretty significant CapEx rollout over the next few years. Is there anything that invests should be thinking about as far as the potential to returning cash to shareholders? Or is this a -- is this still a moving target as far as it relates to that?

David R. Stern

Oh, Brian, this is Dave. Not as much a moving target. We do have the share repurchase plan in place. Although for the quarter, it's relatively small, it's about 1.2 million repurchase. Given our tradings window, when we execute our trades, we do a 10b5-1 plan. And at the time we put that plan in place, we're aware that we may proceed with the acquisition, so the parameters of the plan were designed without potential use of cash in mind. So as we look forwards, we'll continue to maintain a strong balance sheet, invest in the business. We got $75 million of CapEx planned for 2013, which includes the $10 million acquisition, and then a -- further share repurchases.

Operator

[Operator Instructions] Our next question is coming from Simeon Gutman from Crédit Suisse.

Simeon Gutman - Crédit Suisse AG, Research Division

I wanted to ask about the trade-off between sales and overall margin to this quarter. It looked like, there on a 2-year basis, you did see some improvements in both of the businesses. And last quarter, you did as well, but margins were much weaker. This quarter, you got the big -- a big benefit on the gross margin side. So I'm trying to get a sense of, how quickly do you see things [ph]? Are you seeing some benefits from maybe some of the investments you made last quarter? Are we past some of the volatility that you also saw last quarter? Are we into a new precedent now where the margin will be relatively sticky and you should start to build off of it?

Michael R. Odell

Yes, so last quarter, as we had discussed, we had been fairly promotional to drive traffic. And so obviously, it helped on the top line but did not help on the bottom line, and so we did pull back on some of those promotional efforts. And obviously, you see this softer on the top line but much improved on the bottom line. I think that, consistently, we're constantly looking at what's going on with our customers, what's going on with our competitors. We did a elect for the core to go for profitability, be hesitant to project out into the future just because we -- well, when it looks like the fish are biting, we want to be out there with promotional efforts to catch as many fish as we can. And when the fish aren't biting, we want to hunker down and make sure we'd maximize our profitability. So it is -- it does depend on what we see, again, from a consumer environment and a competitive environment.

Simeon Gutman - Crédit Suisse AG, Research Division

And then I guess you mentioned that the SG&A was up a little from some marketing spend. How do you balance that marketing spend versus just putting some money back into enterprise?

Michael R. Odell

Really, it's the -- well, price or profit. And really, it's the same equation, it's -- the question I just answered.

Simeon Gutman - Crédit Suisse AG, Research Division

Okay. And then on SG&A, for the first half, it looks like you averaged somewhere around $120 million per quarter. Is that a good way to think about the back half? Is there any way we can -- you can help us think about the back half?

Sanjay Sood

Yes, this is Sanjay, Simeon. I believe that the current run rate of $120 million is appropriate. And I think it includes some incentive bonuses -- or incentive compensation accruals that we have in the current year run rates that we didn't have previously.

Simeon Gutman - Crédit Suisse AG, Research Division

Okay. And then 2 quick housekeeping items. In adjusted tax rate, if we're trying to get down to, like, an adjusted EPS, well, I mean what's an appropriate number to use there?

David R. Stern

All right. There, we've got swings due to discrete items quarter-to-quarter, but as we look out for the full year, that's something in the around 40%.

Simeon Gutman - Crédit Suisse AG, Research Division

Okay. And then the last housekeeping, on inventory growth. Do you expect, the continued investment either with Speed Shop or just new items, should there be a slight difference in that as the year progresses? Or should that narrow as sales pick up?

Michael R. Odell

A lot of that was with the Speed Shops that we have been launching, and there are some other investments as well. But I think we're -- for this year, that those investments are behind us, so things should level off here. Those are normal seasonal adjustments.

Operator

Our next question is coming from Ronald Bookbinder from The Benchmark Company.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

How are the national branded tires doing versus the house branded tires? And are you adjusting your mix there?

Michael R. Odell

Yes. We continue to expand our assortment both in terms of what we have in our stores as well as what we have access to through special orders. As I have indicated, we felt pretty good about our tire sales at more the better and the best that we -- as well as on the good. And obviously, it's the national branded tires that are taking up those best and better positions.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And what -- can you give us some color on what you think the impact of increased energy prices are on your consumer? And the increase in oil prices, how could that impact your tire margins going forward?

Michael R. Odell

Well, I think, when you look at where consumers are spending their money, it does come back to the customer segmentation work that we keep talking about. When you look at our DIFM loyalists, or you look at our heavy users of our services and our products, I think they're a little less price sensitive, but when you look at the core DIYer, a lot of the basic customers, they are more price sensitive. And every time that there's a movement in what they're paying to operate their vehicle or what they're paying in for the other necessities in their life, it does affect their spending habits. But honestly, I see a -- there's just a dichotomy in the different customer groups that are out there in terms of those that are looking for the better experiences, which is what Tampa and our customer segmentation is driving us towards, versus the customers that are very price oriented and, therefore, highly sensitive. And we have both those customers in our stores.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And on Tampa, are there any areas that especially excelled that surprised you, whether in service or in merchandise?

Michael R. Odell

I mean, I think, at these -- at the lower level or category level, I guess, there's always a couple of tweaks here and there. But I would say, just pleasantly surprised by the strength of the service business across-the-board for tires, maintenance and repairs; and the increase in the average ticket that we've experienced in the service business. In terms of retail, the biggest area of increases have been the Speed Shop because of the new product introduction as well as the sell accessories that we introduced there. But it's been fairly -- I think -- and the places where the increases have occurred have been intentional as a result of spacing investment presentation. Again, probably the most pleasant surprise -- 2 -- probably the 2 most pleasant surprises are the increase in close rate, the number of customers that are -- the traffic that's converted into sales; and then the average ticket in service.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And lastly, could you give us some color on the commercial segment and how that's been trending?

Michael R. Odell

We don't typically break out our retail business between the DIY and the commercial. As you know, our commercial business is our #3 business that leverages the inventory, the people and the trucks. Yes, I would say that it has not grown as strong as some of the others out there, but it's been relatively stable.

Operator

Our next question is a follow-up from Bret Jordan from BB&T Capital Markets.

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

If we look at the discretionary category, sort of x the Speed Shops, but on an apples-to-apples basis. What are you seeing there as to vanity improvement as some of these new cars have come to the market and people are waxing their new cars when they wouldn't wax their old cars?

Michael R. Odell

Scott, do you want to go ahead and comment on that?

Scott A. Webb

Bret, yes, I would say that, sans the Speed Shop, sort of that -- those softer categories, the personalization categories in DIY held up well for us, most of them in the positive territory, be it car covers, interior accessories, et cetera. And as you know, we have a leadership assortment in those categories. I think the Wash & Wax really sort of trends more towards those good weekends versus not. I would say that, from a sales standpoint, Wash & Wax outpaced the dollars, outpaced customer counts. So we feel pretty good about that category as well, so...

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

Okay. How are we looking current quarter-to-date, I mean, as far as general business trends?

Michael R. Odell

The current quarter has been consistent with how -- the last 2 months of the prior quarter. So we started off the last quarter positive, and then it was soft, the second and the third month. And it's been fairly consistent with that so far this quarter.

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

Okay. And I guess, in the Tampa market, are you seeing a outperformance in tires there versus the balance of your markets?

Michael R. Odell

Yes, you're referring to the Road Ahead store. That's -- it's funny, when you walk that store, you don't see the tire presence that you would see in our typical store. And that was, in part, though not in large part, due to customer reactions to what they are looking for. And yet the tire business has been strong in that store even with the reduced presence, visual presence.

Operator

Our next question is a follow-up from Brian Sponheimer from the Gabelli & Company.

Brian Sponheimer - Gabelli & Company, Inc.

Just as we're heading into kind of the build for the winter selling season, as it relates to tires, where does your inventories stand? Are you approaching this winter any differently than, say, you have in the previous couple?

Scott A. Webb

Brian, this is Scott. I think we've repositioned our inventory to bring in some of the late-model larger-diameter coverage. So we've been working on that all spring. I think, from a winter tire or a snow tire, it'll be -- that assortment will be similar to last year. The difference that we'll see is an increase in the diversity of brands that we have, which is an ongoing effort.

Michael R. Odell

I think, if you're trying to compare us to what others might say about winter tires, it -- our -- the balance of our stores is not as far north as maybe some others.

Brian Sponheimer - Gabelli & Company, Inc.

There was no comparison at all, just a Pep Boy question.

Operator

There are no further questions at this time. I'd like to turn the floor back over to management for any further or closing comments.

Michael R. Odell

Again, just want to thank all of you for your time and your interest in Pep Boys. We -- again, we're very excited with what we're doing relative to the customer segmentation and our Road Ahead, and continue to be highly optimistic about our business. And hope you have a great day. Thanks.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation too.

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