The Pep Boys F3Q09 (Qtr End 10/31/09) Earnings Call Transcript

| About: Pep Boys (PBY)

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

F3Q09 Earnings Call

December 8, 2009 8:30 am ET


Ray Arthur - Chief Financial Officer

Mike Odell - Chief Executive Officer

Scott A. Webb - Sr. VP of Merchandising & Marketing


Anthony Cristello - BB&T Capital Markets

Jeff Blaeser - Morgan Joseph & Co.

Bret Jordan - Avondale Partners

Analyst for Greg Malik – Morgan Stanley


Greetings and welcome to The Pep Boys - Manny, Moe, and Jack third quarter 2009 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Ray Arthur, Executive Vice President and Chief Financial Officer of Pep Boys. Thank you.

Ray Arthur

Good morning and thank you for participating in Pep Boy's third quarter fiscal year 2009 conference call. On the call with me today are Mike Odell, Chief Executive Officer of the company; Scott Webb, Senior Vice President Merchandising and Marketing; and our Vice President and Controller, Sanjay Sood.

The format of the call is similar to our previous calls. First Mike will provide opening comments regarding our results and strategic priorities, then I will review the financial performance, balance sheet, and cash flows for the third fiscal quarter of 2009. We will then turn the call over to the operator to moderate a question and answer session and the call will end at 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 conference call on For anyone on the webcast who does not have the financial statements, you can access them on our website,

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

Mike Odell

Thanks, Ray. Good morning, everyone and thank you for joining us today. We are pleased to report Pep Boys' first comparable store sales increase since the fourth quarter of 2006 and also the first total store customer count increase since the first quarter of 2004 as we continue to progress with our operational turnaround. Our vision is to be the automotive solutions provider of choice for the value oriented customer and I do want to start by thanking the Pep Boys team and our stores, distribution centers, and support center for the progress we have made in earning our customers’ trust on a more consistent basis, for returning us to profitability, and for beginning to establish the foundation for our future growth.

We do still have more hard work ahead of us but it’s nice to see three quarters of improved results from our work so far. I continue to be very pleased with the level of pride we see returning to our organization as our associates embrace and drive forward with our vision and strategies. Our people are the heart and soul of our business and they are proud of our return to core automotive.

The third and fourth quarters have typically been difficult for Pep Boys as the seasonal drop in sales has historically dropped us into an unprofitable condition. But because of our planned cost savings and an increase in sales, we delivered a $2.1 million net profit for the quarter against the loss of $7.3 million last year.

Ray will walk you through the unusual items when he reviews our financial statements but in summary, the gains on property sales, the impairments of assets held for sale, and a few other unusual items roughly offset. Our operating profit was $10.1 million in the third quarter of 2009, as compared to a $5.0 million loss in the third quarter of 2008, representing an improvement of $15.1 million. The results reflect a sales increase, improved total gross margin, primarily due to fixed cost leverage in our service business, and planned reductions in operating expenses.

For the first three quarters, operating profit is $50.3 million in 2009, as compared to $21.4 million in 2008. 2009 and 2008’s operating profit included gains from asset sales of $1.3 million and $9.6 million respectively, so that represents a $37.2 million improvement in operating profit before any gains on asset sales. Our year-to-date operating margin is now 3.4% and our long-term goal is to achieve a mid and then high single-digit operating margin with the gap being closed equally through both continuing operational improvements and also growth through our service and tire centers.

We are pleased with our cash flow from earnings, working capital management, and several opportunistic sale leasebacks that we executed during the third quarter. Ray will speak more about these during his comments, but basically they are at favourable cap rates that allow us to pay down debt while also adding more service and tire centers.

To remind everyone, there are four key strategies that underpin our vision. It starts with earning the trust of our customers every day, which is the top of mind focus of our 18,000 associates. Our primary business strategy is to lead with our service business and to grow by adding service and tire centers. This is followed by our next business strategy, which is to create a differentiated retail experience by leveraging our strength as the automotive superstore. And finally, we are leveraging our automotive superstores and our service and tire centers to provide the most complete offering for our commercial customers, and the vision to be achieved from executing these strategies is to transform Pep Boys into the automotive solutions provider of choice for the value-oriented customer. We want to be the one place that does and has everything automotive.

Our service business was very strong during the third quarter, including tire sales, which had been our soft spot during the second quarter. Service center customer count was up 8.8% during the third quarter, while service center comparable store revenue was up 7.0%. Tire, maintenance, and repair services were all up in both customer count and revenues. And we had double-digit sales increases in maintenance services, alignments, starting and charging, and ride control, and single-digit increases in brakes, tires, HVAC, and engine performance. These results are due to our marketing program, store execution, and favourable industry trends. The macro driver for our service business is miles driven, which continues to stabilize in relation to 2008’s reduced level. We were particularly pleased with the improved trend in tire sales and our increase in tire unit sales but I do need to temper my comments a little bit as the warmer weather during the first five weeks of the quarter as compared to last year’s cold and snow has resulted in sales of tires and cold weather related services being off to start the quarter. However, we do believe that the weather impact on the start of the quarter is temporary as evidenced by our sales trend the last several days as the weather has changed.

As we look to become the low cost alternative to dealerships for complete automotive service, we continue to invest in high quality technicians and master technicians. Technical training, late model parts coverage, and the latest equipment.

During this quarter, we will complete the installation of advanced engine performance and diagnostic equipment in all of our stores. It has been very exciting to our team to be able to say yes to more customers as a result of our improved capabilities and that will only get better as the percentage of vehicles on the road with advanced technologies increases.

It’s a really big deal for us to be a complete automotive service provider so that we can provide a credible alternative for customers to expensive dealerships.

We have also just completed converting our installers to express service technicians focused on delivering fast, expert oil changes and fast expert tire services. 29 minutes or less for oil changes and 59 minutes or less for most tire services are our new standards. These changes include process changes, new equipment for some stores, training, and a shift to performance-based pay.

We have also entered into an agreement with Allstate to be our new provider for towing service. We offer $39.99 towing service for all customers and $19.99 towing service for our rewards members, and we believe that our relationship with Allstate will result in increased tow in vehicles, which is a very profitable segment.

We have now opened 20 new service and tire centers this year, including the 10 stores we added as a result of our acquisition of Florida Tire in Orlando. We will open a total of approximately 25 new service and tire centers in 2009 and have recently upped our targets for 2010 and 2011 to 40 and 80 respectively.

With our Florida tire acquisition, we increased our presence in Orlando from six to 16 stores. It is a very good example of how we can improve our store density in many of our under-penetrated markets without adding to industry capacity.

We also continue to add individual store locations in our more dense locations, like Southern California, Chicago, and parts of the Northeast. While it is still early, on balance we are on track with the expected financial contribution of our new service and tire centers and we are finding more service and tire center opportunities as some service operators have struggled to succeed in this difficult and uncertain economic environment.

Our strategy for our retail business is to win in the trade areas around our stores, primarily because of our assortment. Having the highest level of replacement parts coverage and the broadest range of maintenance performance, personalization, and niche products, plus installation. Our retail business was down 2.9% during the third quarter. The core automotive portion of the business delivered its third good quarter in a row and was up 2.5% due to improved parts coverage, effective marketing, and favourable industry trends.

The accessories and complementary portion of the business was down 13.4% as consumer spending remains tight for discretionary products. Complementary product sales were also hurt by $5.1 million decrease in generator sales as there were no major hurricanes in the markets that we serve, as well as our inability to sell certain power sports vehicles due to a dispute with the EPA. However, the EPA matter has been satisfactorily resolved and we are back in business. Excluding power sports and generators, retail sales were actually positive for the quarter.

Our results reflect our shift in advertising mix from primarily retail-centric print ads to service-centric TV and radio promotions. During the third quarter, we added DIY oil changes to the TV and radio promotions with good results in store traffic and heading into the Thanksgiving holiday weekend, we shifted some of the TV and radio ads to feature gift-giving products that we sell.

As it relates to the fourth quarter and not the third quarter, but since it is top of mind, I do want to spend a minute on our Thanksgiving weekend sales. In prior years, our strategy focused on the six-hour early open specials. While we drove some top line, we weren’t really satisfied with our profitability, our customer experience, or our automotive focused brand building. This year we shifted to a three-day sale that included more automotive focus. We did experience an overall sales decrease with a decline on Friday followed by increases on Saturday and Sunday. And the decreases were primarily in electronics and gas-powered sports vehicles. But we did drive more customer transactions and slightly more margin dollars, plus we delivered a much better customer experience to continue to build our automotive superstore brand.

Shifting back to the third quarter, business has been good for our commercial business, up 2.5% in total during the quarter and the mix of business has been good as well, leading to improved margins. We were off in commercial tire sales as we restricted large unit sales while we were working to make sure that we had the cost and supply chain risk mitigated relative to the Chinese tariffs, because our first priority was to ensure that we had an adequate supply at a competitive cost for our service customers and we have now satisfactorily mitigated the risk and returned to normal selling practices.

Part sales for our commercial business, which are the heart of our commercial business, were up double-digit for the third consecutive quarter due to the improving quality of our commercial teams, improved parts coverage, and favourable industry trends.

We added commercial operations to seven more of our super centers during the quarter, bringing us to 453 out of 561 of our retail stores, and we plan to open nine more in the fourth quarter and five more each quarter in 2010.

During this fourth quarter, we will also roll out the performance-based pay program for our commercial sales managers that we have been testing.

Our rewards program continues to build momentum as we now have 4 million customers enrolled in the program. Our rewards program is designed not only to drive repeat business with service and retail customers but also to drive cross-shopping of retail customers with relevant service offers and service customers with relevant retail offers, and all customers enjoy benefits like discounted towing service, free flat repair, free tire rotation, free check engine light diagnostic, and free brake inspection, all of which are driving more customer count and most importantly we are now gathering data with which to better understand both our service and retail customers.

We just opened our second speed shop in Lancaster, Pennsylvania. The big grand opening party will be in the spring. The speed shop again has its own space and dedicated experts and is a destination for car and truck enthusiasts, and again our objective is to create a differentiated retail experience that becomes a destination not just for the surrounding neighbourhood but for the surrounding community, as we do intend to have the broadest range of maintenance performance personalization and niche products. We will open one more speed shop and three new speed shop light concepts during the first quarter of 2010.

The addition of dedicated sales and installation technicians for our 12 volt products like electronics remote starters and towing harnesses in 20 stores is meeting expectations and we are currently developing plans to roll it out to more stores, as we also intend to be the leading installer of automotive after-market products.

And finally, we still plan to add 10 more super hubs to existing supercenters over the next six months, in addition to the 12 that we currently have up and running, as it is our intention to have the highest levels of replacement parts coverage. Super hubs provide same day availability in the market area for late model and new model parts coverage, while our distribution center in Indianapolis provides free next day delivery for 40,000 [hard-to-find] parts.

We are in the process of transforming our supercenters into automotive superstores so that whenever customers think about automotive services and products of any kind, they think of Pep Boys. We do everything and we have everything for less. Meanwhile, our supercenters will be feeding parts to our new service and tire centers and help our commercial business to provide the most complete offering for our commercial customers.

As you can tell from my comments, we are pleased with our progress but we do still have another five quarters or so of work to do to complete the transformation of our business model. And as we do that, we are moving towards our future of being the market share leader in the automotive service industry and becoming the automotive solutions provider of choice for value-oriented customers.

I will now turn the call over to Ray to review our financial statements.

Ray Arthur

Thanks, Mike. This morning I will review our results on a GAAP as well as a line of business basis. Please see the last page of our press release for line of business format statements. I will also review balance sheet and cash flow data.

On a GAAP basis for the third quarter 2009, service labor revenue core automotive parts and tire sales and sales of our commercial business increased 9.4%, 4.1%, and 2.5% respectively compared to the same time period last year. Dampening this performance is continued soft demand for discretionary product categories. Sales of these products were down 13% as compared to the same time period last year.

The summary result is that our third quarter comparable store sales increased 1.6% over the prior year. Total revenues also increased by $8.4 million or 1.8% compared to the third quarter of 2008, making this quarter the first time in 10 quarters that total revenue has increased year over year.

The recent stabilization in small recovery and miles driven after having declined significantly for many months has been a positive trend and we believe this recovery has contributed to the overall sales performance of our non-discretionary categories. We also believe that the decline in new car sales will continue to generate additional service revenues and hard part sales as consumers will ultimately spend more maintaining and repairing their aging vehicles. While the aforementioned trends are favourable, the overall difficult macroeconomic environment continues to negatively impact sales in our discretionary product categories and we believe this trend will continue for the remainder of the year.

On a GAAP basis, net earnings for the third quarter of 2009 improved to $2.1 million or earnings of $0.04 per share, versus a net loss of $7.3 million or $0.14 per share for the same period last year.

The current period results include on a pretax basis a net charge of $300,000. This charge includes on a pretax basis a $3.3 million asset impairment charge offset by a $1.3 million gain from sale leaseback transactions and a $1 million reduction inventory related accruals, as well as a $700,000 gain from an insurance settlement.

There were no significant unusual items in the prior year quarter.

Consolidated revenue for the third quarter increased by $8.4 million to $472.6 million from $464.2 million in the prior year. The 1.8% increase is due to an increase in total comp sales of 1.6%, primarily driven by an increase of 8.9% in service revenue, a 4.1% increase in core part and tire sales, and a 2.5% increase in commercial sales.

Service revenue automotive core parts and tire sales and commercial sales improved by $8.1 million, $9.9 million, and $1.3 million respectively over the prior year. The improvement in sales was partially offset by an $11.6 million or 13% decline in sales of discretionary products.

Total gross profit dollars for the third quarter of 2009 increased to $118.3 million from $114.8 million in the prior year. Gross profit, which is fully loaded with occupancy costs, warehousing and service payroll, increased to 25% of sales, as compared to the 24.7% in the prior year.

Service gross profit margin drove the overall results, improving to 9.6% from 5.4% of sales in the prior year due to increased sales leading to higher absorption of fixed expenses such as occupancy costs, including rent, utilities, taxes, and the fixed component of labor costs.

The improvement in service gross profit percentage comes despite the unfavourable impact on gross margin while recording an asset impairment charge of $700,000 during the quarter.

In part offsetting the increase in service, merchandise sales gross profit declined 30 basis points to 28.8% in the third quarter of 2009, from 29.1% in the prior year. This result is primarily due to an asset impairment charge of $2.4 million, partially offset by the gain from the insurance settlement and reversal of inventory related accruals of $1.7 million.

For the third quarter 2009, selling, general and administrative expenses declined by $10.3 million, or 8.6%, to $109.5 million from $119.8 million for the same period last year. As a percentage of sales, the expense rate declined to 23.2% from 25.8% for the same period last year, primarily due to lower media expenses, lower payroll and related costs, lower legal and professional service fees, and lower store selling expenses such as bad debt and fuel costs for our commercial fleet.

Net gain from disposition of assets was $1.3 million for the third quarter of 2009, as compared to a loss of $100,000 in the prior year. The current quarter gain resulted from the sale and leaseback of three stores for gross proceeds of approximately about $1 million. There were no significant transactions in the prior year quarter.

Interest expense for the third quarter of 2009 remained relatively flat to the prior year at $6.9 million.

For the 39 weeks ended October 31, 2009, net earnings improved to $20.8 million, or $0.40 per share, as compared to $2.8 million or $0.05 per share in the prior year. The current year includes on a pretax basis a net benefit of $5.9 million and the prior year includes on a pretax basis a net benefit of $13.1 million related to unusual items. The prior year also includes a one-time tax benefit of $2.2 million. Taking into consideration the unusual items in both years, it’s easy to see the significant improvement made through the first three quarters of the current year, as compared to the corresponding period of the prior year. The items that impact 2009 on a pretax basis consist of a $6.2 million gain from the retirement of debt, a $1.3 million gain from the sale leaseback transaction, a $1 million reduction in inventory related accruals, and a $700,000 gain from an insurance settlement, all offset by a $3.3 million asset impairment charge.

The items that impact the prior year on a pretax basis consist of a $3.5 million gain from the retirement of debt and a $9.6 million gain from the disposition of assets. The prior year also includes a one-time, $2.2 million tax benefit resulting from the recording of a deferred tax asset.

Now I’ll cover the service center, retail and commercial business on a line of business basis for the third quarter of 2009.

Our service center business, which includes tire and merchandise sales, as well as service labor revenue generated through our service bays, recorded revenue of $226.4 million in the third quarter of 2009 versus $210.7 million in the same period last year. Service center comparable revenue increased by 7% compared to a decrease of 8.2% in the same period last year. The recent stabilization of small recovery in miles driven which have significantly declined for many month has been a welcome trend and we believe this recovery has contributed to the sales performance of our service business. As you know, we believe the most significant external factor impacting our service business is miles driven and stabilization of this measure is a positive sign. We believe the continued decline in new car sales has also contributed to our results as the age of the U.S. fleet increases, which requires an increase in consumer spending on maintenance and repairs.

Last, we believe our improved execution in our service base is leading to a better customer experience, which is also driving the business.

Service center gross profit increased to $52.4 million for the third quarter of 2009 compared with $46.5 million last year. Service center gross profit as a percentage of service center revenue improved to 23.2% in the third quarter of 2009, from 22.1% in the prior year. The improvement in gross profit rate over the prior year was primarily due to increased service labor revenues that leverage our fixed cost and gross margin. The current year service center gross profit improvement was made despite recording an asset impairment charge of $700,000.

The retail and commercial business generated sales of $246.3 million for the third quarter of 2009, compared to sales of $253.5 million for the same period last year. Core part sales increased by $2.9 million or 2.5% as compared to the prior year quarter, while commercial sales increased $1.3 million or 2.5% over the prior year. As indicated earlier, we believe the tough economic environment has depressed discretionary consumer spending and as a result, our 2009 third quarter results reflect an $11.6 million reduction in sales of discretionary products.

From a gross profit perspective, the retail and commercial business reported gross profit of $65.8 million for the third quarter of 2009, versus $68.4 million for the same period last year. Retail and commercial gross profit as a percentage of retail and commercial sales remain flat at 27% after considering that net negative impact of an asset impairment charge of $2.4 million, which was partially offset by the gain on the insurance settlement and the reversal of certain inventory related accruals of $1.7 million.

I will now discuss key balance sheet data. Cash balances increased by $19.5 million to $40.8 million from $21.3 million at the end of the prior year. Accounts receivable declined by $8.4 million to $20.5 million, primarily due to improved collection of trade receivables and vendor support funds.

Inventory at the end of the third quarter was $571.8 million, an increase of $6.9 million from the $564.9 million at the end of last year. However, end of quarter inventory was down $12.9 million as compared to inventory levels at the end of the third quarter of 2008. The increase in inventory from last year end is due to seasonal inventory purchases partially offset by disciplined inventory management, including reduced lead times and safety stocks.

Property and equipment net declined by $31.4 million to $709 million, primarily due to depreciation outpacing capital improvements in asset acquisitions. At the end of the quarter, we owned 239 properties, including our headquarters, most of our distribution centers, and many of our stores. At the end of the quarter, we also had approximately 160 properties with ground leases, and as we have previously indicated, we believe we have significant unrecognized gains built into these properties, even considering the decline in the overall real estate markets.

Accounts payable including the trade payables program increased to $245.7 million from $244.3 million at the end of the previous fiscal year. The AP to inventory ratio remained relatively flat at 43%.

Total debt net of cash decreased $65.8 million from year-end 2008, primarily due to the repurchase of $17 million of the company’s outstanding senior subordinated notes, the repayment of $23.8 million of loans outstanding on our revolving credit facility, and an increase of cash of $19.5 million.

The company had no borrowings under its credit facility at the end of the quarter, and the bonds were repurchased at a pretax gain of approximately $6.2 million, which is reflected as a reduction of interest expense in the first quarter of 2009.

From a cash flow perspective, we generated free cash flow of $64.9 million in the 39 weeks ended October 31, 2009. After paying a dividend of $4.7 million or $0.03 per share, repaying amounts existing under our revolving credit facility and trade payable liability program, combined with the bond repurchase noted earlier and after the company acquired the assets of Florida Tire, a 10-service location operation in Florida for approximately $4.4 million, the company generated approximately $19.5 million in cash in the 39 weeks ended October 31st, 2009.

Prospectively, we have no significant debt maturities until 2013. We expect capital expenditures to be about $45 million for the full year this year, which includes the addition of approximately five more service only spokes during the fourth quarter. We don’t see any other significant cash needs other than normal operating cash flow in the near-term.

And with that, I will now turn the call over to the Operator to begin the question-and-answer session.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Anthony Cristello with BB&T Capital Markets.

Anthony Cristello - BB&T Capital Markets

First question, Mike, when you look at the 2009 goal to get back to profits, what would you say is going to characterize the goal for 2010?

Mike Odell

I guess when we -- last month we laid out our long-term operating margin goal of first -- we said -- call it mid- to high-single, obviously mid first, high follows that. You know, what I expect is consistent progress in terms of our operating margin improvement along that goal. I don’t expect it to be in one year or no progress in a lot of years -- just consistent progress year after year. And then I think we are going to be conservative in our plans for revenue increases.

Anthony Cristello - BB&T Capital Markets

When you think about the business today and going through last year, you had a lot of markdowns and clearance of inventory and obviously some of the electronics and the accessory business is still working against you in the discretionary categories. Where do you think you are in terms of inventory mix today, both branded, private label, as well as the hard parts -- tires, non-discretionary and accessories, and is it where you would want to be or do you still have some changes to make?

Ray Arthur

That’s a hard question to answer because I mean literally what Scott has brought is our category management process and really to answer that question, you really got to go category by category because my answer would be a little bit different in each of the categories. I think we’d still see opportunities to continue to refine our mix -- less so on the overall and more so a lot with the categories we still see opportunities. I am pleased with our progress but I don’t think we are ever complete and we still see the opportunities. Scott, do you want to -- I got Scott here with me. Do you want to add anything to that?

Scott A. Webb

I think the only other thing that I would add is the continued pressure on some of those complementary categories like power sports and generators has disciplined us to be less dependent on them in the future, therefore transitioning us to a more complete automotive offering and having a less dependence on those complementary categories.

Mike Odell

And we have added a lot more late model parts coverage and if you look at the numbers themselves, core auto has been positive, which is -- has not been traditionally.

Anthony Cristello - BB&T Capital Markets

Yeah, and it definitely seems like you are continuing to show improvement and that’s why as long as -- I guess if the mix is where it wants you to be and then this is sort of the next question -- you talked about better -- go ahead.

Ray Arthur

The one thing I would just add on the mix, I mean, when it comes to things like power sports and generators, as Scott characterized it well, less dependent, it’s one of those things where they are kind of -- if I were starting from scratch, I don’t know if we would necessarily have gotten into those or not but it’s there so are we not just going to walk away from it.

Anthony Cristello - BB&T Capital Markets

So that’s a -- those are things that you might have less of a quantity or less of a SKU representation but you are still going to sell those products in the stores?

Ray Arthur

Right. And over time, as we continue with concepts like speed shop, that starts to take over, when that starts to go to more stores, that takes up more space and perhaps we could change mix some more. I mean, there is still going to be a continual shift towards more automotive focus. We are just trying to make sure that we do it in a thoughtful, profitable way and make sure we test our way into these changes.

Scott A. Webb

And Tony, I think your comment and Mike’s earlier comment about category management play out in this. When you look at each category, for instance, power sports is not a leadership category. The context of a leadership category is to be famous in assortment. Power sports may be a core category where you would have a smaller assortment, so your assortment rules, your pricing rules, your display rules are all set by the category role and so those complementary categories do not have a leadership role. Does that make sense?

Anthony Cristello - BB&T Capital Markets

That makes perfect sense. If I could ask just one more question then -- it sounds like if you are switching to some incentive or variable base compensation structure, do you think your labor management and your staffing, you’ve got the control and you’ve got that in place where you want it to be as well?

Ray Arthur

Yeah, we’ve been really pleased with the results of going -- we’ve gone [to performance pay] late last year for service advisors and then this year we’ve been doing it for the express service technicians. Our flat raters were already on it, had been on it for years. So now commercial is the next business and it really just -- performance based pay helps us to be able to reward our performers and to be able to attract a higher calibre person. Buy we’ve been pleased with it and we are going to continue to move it through until it touches the whole organization.

Anthony Cristello - BB&T Capital Markets

Okay, great. Thanks, guys.


Your next question comes from the line of Jeff Blaeser with Morgan Joseph & Co.

Jeff Blaeser - Morgan Joseph & Co.

Just a couple of clarifications -- you mentioned that Thanksgiving weekend sales, did I hear right -- sales were down but profit dollars were up?

Ray Arthur

Yeah, slight increase in margin dollars, decrease in sales.

Jeff Blaeser - Morgan Joseph & Co.

Okay, so overall a positive weekend from a profit standpoint. And then when you talked about the 4Q accessory sales being weak, is that a change from what you are seeing now or just kind of reinforcing the current environment? It doesn’t sound like there’s anything different because it has been a tough environment I think from the last three quarters.

Ray Arthur

Correct. I would say it’s the -- yeah, we’re not trying to say that there’s been a trend change. We’re just saying that there continues -- you know, people continue to be tight with their spending on discretionary products -- not a change in trend to the negative.

Jeff Blaeser - Morgan Joseph & Co.

Okay, and the tire side, any feel for what the positive momentum in the third quarter had on comps? And yeah, I guess -- yeah, that’s fine.

Ray Arthur

I guess the way to look at it, I mean, you saw in the second quarter I had commented that my primary disappointment in service was tires and when I look at the third quarter, the primary shift in service is tires so you can kind of do the math from there, I guess.

Jeff Blaeser - Morgan Joseph & Co.

Okay, and then finally on the strong service margins -- I know in the past the Northeast has been the stronger area with some of the economically challenged territories a little bit weaker. Was it a geographic shift in momentum or was it the Northeast just blew doors off?

Ray Arthur

The Northeast continues to be the strength of our company and quite frankly, as I talked about November and where November was a slower start in the tire business in particular, it was the Northeast that didn’t have the cold weather that cooled off in sales instead of cooled off in weather and hence the last couple of days, as we’ve gotten to more normal weather patterns, the Northeast has come back on track for us.

Jeff Blaeser - Morgan Joseph & Co.

Great. Thank you very much.


Your next question comes from the line of Bret Jordan with Avondale Partners.

Bret Jordan - Avondale Partners

A quick question on the commercial tire side of the business, if you could give us some sort of order of magnitude -- I guess you scaled back your shipments to commercial to keep inventory in-house. What is sort of the order of the scale-back on tires?

Ray Arthur

That’s -- it’s not significant to the company. It’s somewhat significant -- not hugely significant but it is relevant to the commercial business. It’s not real relevant from a profit standpoint because the margin on wholesaling commercial tires, it’s a skinny, skinny margin so it’s more of a top line than having any impact really on the bottom line, so the only reason I throw it in there is to try to -- when I say we’re up 2.5% I think was the number for commercial, that doesn’t sound robust but when you split it and you see double-digit in parts, which is the core profitable piece, that actually to me is impressive. And that’s like well, if you are so strong in parts, why aren’t you strong overall and it’s really because of the equipment, which is a continuing issue as people are conservative with their cash and then we did have a trend change in the third quarter relative to our commercial tire sales. Not really relevant to our bottom line but it does help [when we dissect] the business to understand the top line.

Bret Jordan - Avondale Partners

Okay, and then to understand the EPA issue, which I guess is finally resolved, what was the year over year Q3, and then I guess what are we comping against in Q4 now that it’s back on track in that from just a dollar basis?

Mike Odell

Well, there are still certain products -- although we’ve resolved in principal the issue with the EPA and we’ve been able to put certain SKUs back on the sales floor, there are other SKUs that we still have to do some remediation on in terms of putting stickers on and some small modifications before we can get those back on the sales floor, so it’s probably a third of the SKUs are actually for sale now and two-thirds of them still have to go.

Ray Arthur

Maybe just to give you context, I think I said in my comments -- not think, I know I said in my comments that if you pulled out generators and power sports from the third quarter, our retail actually would have been slightly positive versus the negative that we reported.

Bret Jordan - Avondale Partners

Right, that’s what I’m trying to figure out what the upside from power sports might be if --

Ray Arthur

Well, the other thing I do want to say about power sports is that there is a -- when you break out power sports, and this is probably going a little deep and then I am going to stop, but the electronics part of power sports is actually doing well. The gas powered, which is the higher ticket type transportation, is the part that’s off and again, I think just because we resolved the EPA issue, you still got the fact that it’s a big ticket discretionary item, so -- and it’s not key to our future so I don’t want to overly depend on it.

Mike Odell

The other thing is that we sold those power sports equipment last year right up through Christmas -- a week before Christmas so there’s probably not an incredible upside from power sports getting back on the --

Bret Jordan - Avondale Partners

I’m not looking for upside -- I’m just trying to figure out what the magnitude of the anchor was and what we might offset in the quarter. I’ll back into it. Thanks.


Your next question comes from Greg Malik with Morgan Stanley.

Analyst for Greg Malik – Morgan Stanley

This is Mike [Montagni] calling in for Greg. I just have two questions around two areas I wanted to focus on -- one is related to the dealership closures. Just wondering if you can provide some context in terms of what you are seeing on the traffic side, especially for stores that are sort of within a zero to five mile range of the dealerships versus the overall average.

Ray Arthur

We really haven’t figured out -- it’s so complicated to really come up with hard numbers. I know some have kind of tried to estimate it but we really find that hard to quantify or to estimate. I mean, obviously there is something -- the other thing that is out there, I’ll just give you a little bit of a sidebar -- the other thing that is closing besides the dealers that obviously has been reported is the small shops. When I asked my commercial team how many of you have lost customers due to closings, almost every hand in the room will go up. When I asked them how many of those people that closed have four or more bays, most of the hands go down, so I mean the play that is out there really is the -- it’s the guy that has the one or two bay that has been actually probably hurt the -- hurt as much or more so than the dealers in all of this, and those are quite frankly our technicians that end up coming to work for us or someone like us.

Mike Odell

But the overall trend is you see our customer count is up for the first time in quite a long time and up recently over the Thanksgiving holidays.

Analyst for Greg Malik – Morgan Stanley

Great, and just as a follow-up, I know, Mike, one of your initiatives you guys are thinking about was more of a branded tire offering, I guess with Goodyear and Dunlop and there was some tests going on in Orlando and Sacramento and Phoenix, I believe. Can you just provide any update -- have you seen any improvement there or what the improvement overall in tires?

Mike Odell

The test is continuing and really nothing more to add than that. I mean, the test continues and we look forward to a good relationship with Goodyear Dunlop but we -- really nothing more to comment other than that.

Analyst for Greg Malik – Morgan Stanley

Okay. Thank you, guys.


Ladies and gentlemen, there are no further questions at this time. I’ll turn the conference back over to management for closing remarks. Thank you.

Ray Arthur

All right. Thank you to everybody for your time and your interest in Pep Boys. Again, we are pleased with our consistent progress and best wishes to all of you for a safe and merry holiday. Have a great day.


This concludes today’s teleconference. You may disconnect your lines at this time. Thank you all for your participation.

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