Pep Boys: Turnaround Plan Gains Speed

The Pep Boys (PBY) reported solid third quarter results when they delivered earnings of 4 cents (5 cents excluding one time charges) on sales of $473 million. Although the auto parts purveyor met earnings estimates, they handily surpassed their top line expectations by more than $4 million, by reporting their first comparable store sales gain in more than three years.

Gross profit margin gains: The auto parts retailer was able to increase its gross profit margin by 30 basis points from 24.7% to 25%. Its service segment was the biggest contributor of its gross profit improvement, as it nearly doubled from 5.4% to 9.6%. The company’s merchandise segment didn’t fare as well, losing 30 basis points from 29.1% to 28.8%.

Cost cutting efforts fruitful: PBY trimmed its SG&A costs by more than $10 million, as this category fell an impressive 260 basis points from 25.8% of sales to 23.2%. In addition, Manny, Moe and Jack were able to cut their interest expense from $7.1 million to $6.9 million, thanks to a combination of lower interest rates and reduced borrowings.

Sale leaseback transaction: PBY recorded a onetime gain of $1.3 million when it sold a single property during the quarter and entered into a lease contract with the new owner. This goes to show you how much hidden value the company still can tap in to. The fact is, they still own the real estate on 235 of their 580 locations.

New service spokes added: During the first nine months of the year, PBY acquired 20 new service locations, using only its free cash flow to do so. The acquisition of Florida Tire Inc. for $2.6 million appears be pure genius, especially when you consider the fact PBY was able to pick the entire ten-store chain for the bargain price of $2.6 million.

Bottom line: Although the shares have dipped more than 20% from their highs (at least new buyers don’t have to jump in at the top), the solid report should produce a few analyst upgrades, prompting the stock to re-challenge its 52 week high of $11. After all, PBY’s turnaround status is still in its infancy stage, and the sky is the limit if you have the patience to let the turnaround gain even more speed.

Disclosure: long PBY

Comments

[stink726]

Interesting article and stock; thanks.

2009 Dec 08 12:51 PM

[107Sid]

What analysts are going to potentially upgrade the stock? It has a very limited following, regardless of its merit, or lack thereof.

2009 Dec 09 02:49 PM

[Venerability]

I think these were phenomenal results, and those analysts who don’t agree are looking at the big picture all wrong – mostly because they live in big cities and don’t drive.

PBY stores are heavily concentrated in the Northeast, where we had the worst, coldest, windiest and most miserable winter in about 50 years. And it extended into March, which started off with a hurricane-caliber Nor’easter that kept everyone stuck at home for days.

With better weather and more consumer confidence, I believe this summer is going to be a superb driving season, no matter where gasoline prices go.

Mid-market consumers – PBY’s target audience – are not yet confident enough to splurge on vacations that require you to fly somewhere. But they are now so stir crazy after this horrendous winter, they’re going to be jumping into their cars and taking a consecutive series of mini-vacations whenever they have the chance over the next five or six months. They’ll be going to the beach, to amusement parks, hiking, fishing, you name it.

Comparing PBY and its brethren companies to other “retailers” is totally deceptive and totally wrong. Consider it a “driving” company, rather than a “retail” company, and you’ll see that the picture is much brighter, indeed. Watch those same-store sales figures zoom up over the next several months.

(I posted this same comment on the Reuters article, but I think more people read Seeking Alpha, so I am posting it again. I hope no one minds.)

Apr 08 12:23 PM