Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Ray Arthur - Chief Financial Officer

Mike Odell - Chief Executive Officer

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

Analysts

Anthony Cristello - BB&T Capital Markets

Jeff Blaeser - Morgan Joseph & Co.

Ronald Bookbinder – Global Hunter

Bret Jordan - Avondale Partners

The Pep Boys – Manny, Moe & Jack (PBY) F4Q09 Earnings Call April 8, 2010 8:30 AM ET

Operator

Welcome to The Pep Boys - Manny, Moe, and Jack fourth 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. Mr. Arthur you may begin.

Ray Arthur

Good morning and thank you for participating in Pep Boys’ fourth quarter and fiscal year 2009 conference call. On the call with me today are Mike Odell, Chief Executive Officer of the company and 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 fourth 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 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 access them on our website, www.pepboys.com.

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. Our commitment at the start of 2009 as you will remember is to be what we refer to as back in black. That is to return the Pep Boys – Manny, Moe & Jack to profitability.

All year long we actually wore back in black wristbands as a symbol of our commitment and we are pleased to have achieved this milestone not only for the full-year but for each quarter within the year including the fourth quarter.

At this time I do want to recognize our team for their passionate commitment to our customers and for making more money in 2009 than the company had over the previous 12 years combined. While we did not enjoy comparable store sales increases in the fourth quarter like we did in the third quarter of 2009 we did still produce a customer count increase in both our service and our commercial businesses to accompany our significant improvements in profitability.

The foundation for our turnaround has been our focus on our customers and on core automotive and we are now nearly complete with the unwinding of past practices of growth in sales but not necessarily profitability. This has touched nearly every facet of our business from merchandising to marketing, supply chain to operations.

Another key to our improved profitability both in the fourth quarter and the full-year has been our improved discipline. Category management is our disciplined process for looking at each category separately for each business and using marketing and customer data to make strategic and operational decisions. This process is important because it helps us to provide the best coverage for service, commercial and retail customers in each store in our chain.

It is also important because the process provides us with the data we need to make sound decisions about price, product and promotions. Expense disciplines were good all year long as we reduced SG&A by $20 million for the quarter and $55 million for the year. Margin and safety disciplines which are more challenging to control than expense disciplines have also started to kick in.

There are many contributors to these improved disciplines but they primarily have their roots in our operational turnaround. Keeping the business simple and focused and building and developing our teams to execute it. We expect these margin and safety disciplines to continue to contribute to improved profitability in 2010 as we progress to competitive operating margin levels.

These disciplines include inventory shrink, returns and discounts, back end inventory disposition, associate safety and customer claims. It is hard work but we continue to make progress on all fronts.

Because of our planned cost savings and these disciplines we delivered a $2 million profit for the fourth quarter against a loss of $33 million last year. For the full-year we delivered a $23 million net profit against a loss of $30 million last year. Ray will walk you through the unusual items when he reviews our financial statements but in summary the fourth quarter operating profit was $7 million as compared to a loss of $31 million in Q4 2008, representing a $38 million improvement year-over-year.

For the full-year operating profit was $57 million in 2009 as compared to a loss of $10 million in 2008. 2009 and 2008 operating profit included gains from asset sales of $1 million and $10 million respectively so that represents a $76 million improvement in operating profit before any gains on asset sales.

Our full-year operating margin is now 3% as compared to our long-term goal of mid and then high single digit operating margins but the gap being closed equally through both continuing operational improvements and also growth through our service and tire centers. Our vision is to be the automotive solutions provider of choice for the value oriented customer and I thank the Pep Boy teams in our stores, distribution centers and support center for the sustainable progress we have made in earning our customers’ trust on a more consistent basis, returning us to profitability and establishing the foundation for our growth.

Our focus continues to be on a company culture that starts by putting customers first, leading with our automotive service business, automotive superstore merchandising and automotive associate expertise. As I mentioned on our last call we did lose some sales momentum at the start of the fourth quarter. As were many, we were uncertain about what to expect in the macro environment and at the time the milder than normal weather in our Northern markets wasn’t helping.

We balanced our marketing between service and retail due to the holiday nature of some of our merchandising but it didn’t materially help the sale of discretionary retail products and it shifted resources away from service and tires. As we have returned to TV and radio starting in mid-February we are back on the air leading with service and supporting DIY. We are also back to running sales increases. Comp store sales are up 3% so far in the first quarter of 2010.

Back to 2009 results, sales of our service business which account for 46% of our sales for the quarter were down 0.2 during the quarter even though customer count was up 4.5%. The decline was driven by our tire business which was down for the quarter while the remainder of our service business was up slightly. Sales did improve as the quarter progressed and as weather normalized and the first quarter of 2010 service sales are increasing once again.

Sales for our DIY business which accounts for 43% of our sales for the quarter were down 6.4%. Sales for our DIY core which is parts and fluids part of our business for the DIY customer were flat which is consistent with the flat to 1% sales increase they ran all year. Sales in accessories and complementary products were down 13.7% primarily due to $9.5 million worth of sales decreases in discretionary categories like electronics, transportation and generators.

Sales to our commercial business which account for 11% of our sales for the quarter were up 2.4% but our underlying performance is actually stronger than that. Parts sales were up low double digits for the quarter and tires were up mid single digits for the quarter. The only category that dragged down commercial sales was lower margin commodities. This shift reflects our focus on core automotive and a profitable business model by selling parts and tires based on speed, execution and pricing rather than selling commodities at discounts.

So as you can tell there was still some noise in our sales numbers during the fourth quarter but they will now start to normalize. So far this quarter we are up in both customer count and sales across all three lines of business; service, retail and commercial. We expect to produce a single digit total store sales increase this year. We also expect to open 40 new stores primarily service and tire centers but also a few of our smaller, super center prototypes.

We opened five new service and tire centers in the fourth quarter bringing the total to 24 for the year. Our prototype is 5,000 to 6,000 square feet and has approximately six service bays. These smaller service shops are closer to where our customers live and work as well as being easier to operate.

On the acquisition front the ten Florida Tire stores we acquired in the third quarter have completed their transition to Pep Boys Service and Tire Centers and their performance is meeting expectations. Other acquisitions are in our future but we are being selective and opportunistic as we look for the right fit at the right price. We also opened one new Super Center in the fourth quarter. Our new prototype is 13,000 to 14,000 square feet with 6-7 service bays instead of 19-20,000 square feet and 10-11 service bays.

The store layout allows customers to be greeted and assisted as they enter the store. The store is very customer friendly and has a strong automotive feel throughout. We intend these new Super Centers to fill gaps in our existing hub system and to replace older stores that we relocate.

On the initiative front, we have three new automotive offerings that better utilize the extra space in our 19,000 to 20,000 square foot Super Centers. The first is our Super Hubs that support all three lines of business with enhanced, same day parts availability in the markets. As of year-end we had nine super hubs serving 106 stores in addition to the four older format warehouse distributors supporting [inaudible] stores.

The second is our speed shops that create a differentiated retail experience with high performance and special products for automotive enthusiasts that are muscle car, import performance or sport trucks. As of year-end we had two speed shops. Sales and installation technicians for our sale of automotive accessories with a complete customer solution and as of year-end we had 32 sales and installation technicians supporting 73 of our stores.

Each of these concepts which are still in development or rollout are supported by expert associates who speak the language and really know their products and services, thereby supporting our automotive super store strategy. We are now starting year three of our 3-year operational turnaround and we remain on track with building the foundations for our growth.

Let me just close by stating our four strategies to achieve our vision. One is we earn the trust of our customers every day by delivering a customer experience that is based on speed, expertise, respect and value. Two is that we lead with our service business and we will grow it by adding service and tire centers. Three is we create a differentiated retail experience by leveraging our strength as the automotive super store. Fourth is that we leverage our automotive super store to provide the most complete offerings for our commercial customers.

It is all part of our vision to transform Pep Boys into the automotive solutions provider of choice for the value oriented customer. With that I will now turn it over to Ray to review our financials.

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 relevant balance sheet and cash flow capabilities.

On a GAAP basis net earnings for the fourth quarter of 2009 improved $2.2 million or $0.04 per share. This is versus a net loss of $33.3 million or $0.63 per share for the same period last year, a swing of over $35 million. Fourth quarter 2009 pre-tax earnings include the reversal of inventory accruals of $1 million established in the fourth quarter of last year related to the EPA inquiry which has been settled. The fourth quarter 2009 net earnings also include a $1.2 million tax benefit resulting from a change in the company’s tax planning strategy.

The prior year fourth quarter results include an $8 million accrual for increased legal and inventory related charges, a $4.4 million asset impairment charge, a $1.2 million debt prepayment costs and $600,000 associated with cost cutting initiatives. The significant improvement in profitability excluding these items was the result of improved service revenues, gross margins and continued disciplined spending controls.

We are happy to report our first positive earnings for the fourth quarter since fiscal 2004. Total revenue on a GAAP basis for the fourth quarter of 2009 decreased by $12.6 million to $452.9 million from $465.5 million in the prior year. The $2.7 million drop in revenue is due to a $15.3 million decrease in merchandise sales partially offset by a $2.7 million increase in service revenue. Sales for the quarter were favorably impacted by the addition of 24 new stores in 2009 which generated $5.5 million in sales in the quarter including $2.1 million of service labor revenue.

We experienced favorable sales trends in comparable service labor revenue which increased by 0.7% or $600,000 and our commercial business sales also increased 2.2% or $1 million in the quarter. Core automotive parts and tire sales offset these increases with a sales decline of 2.6% or $6.1 million as compared to the same period of the prior year. Our comp sales decline in automotive core parts and tires was primarily due to reduced tire business which declined 7.3%. We believe this performance is due to the milder than normal weather at the beginning of the quarter coupled with a shift of our media resources to retail rather than our service business.

The balance of the core parts business remains relatively flat year-over-year. We also continued to experience soft demand for our discretionary product categories with sales down 13.7% or $13.5 million as compared to the same period last year. The summary of results is that our comparable sales declined by 3.9% or $18.1 million over the prior year.

Our nondiscretionary product sales were primarily impacted by miles driven which increased in the low single digit range in the second half of 2009 after having declined for the previous year. The recent improvement in miles driven has been a positive trend and we believe this recovery has contributed to the Q4 sales performance of our nondiscretionary categories. Additionally, new vehicle sales which declined significantly during 2008 and the first half of 2009 are contributing to increased older vehicles on the road and we believe this trend will continue in the near-term and as a result will also continue to generate additional service revenue and car part sales as consumers will spend more to maintaining and repairing their aging vehicles.

While the aforementioned trends are favorable the overall difficult macroeconomic environment continues to negative impact sales in our discretionary product categories. Sales of generators, electronics and transportation products declined by $9.5 million in Q4 2009 as compared to the same period last year. Excluding these items sales from discretionary product categories declined by $4 million or 5.2%.

Gross profit for the fourth quarter of 2009 increased to $110 million from $92.2 million in the prior year. Gross profit which is fully loaded with occupancy costs, warehousing and service [inaudible] increased to 24.3% of sales as compared to 19.8% for the prior year. The increased merchandise sales gross profit margin drove the overall results, increasing by $16.5 million from the prior year.

Merchandise sales gross profit for Q4 2009 includes the reversal of an inventory accrual of $1 million. The prior year quarter included an inventory related accrual of $3 million due to the EPA inquiry and an asset impairment charge of $2.6 million. Excluding these items from both years merchandise sales gross profit improved by 380 basis points or $10.3 million. This increase was driven by both inventory shrinkage as a result of improved controls and procedures, higher vendor support funds and low occupancy and warehousing costs.

Occupancy costs declined primarily due to lower building maintenance costs and the elimination of [inaudible] leasing costs. Warehousing costs declined primarily due to lower outbound freight costs to our stores. Service gross profit margin also improved to 4.4% from 3.5% in the prior year due to increased labor sales which leverage our fixed costs.

For the fourth quarter of 2009 selling, general and administrative expenses declined by $24 million or 16.5% to $103.2 million from $123.6 million for the same period last year. As a percentage of sales the expense rated declined to 22.8% from 26.5% for the same period last year primarily due to lower media, lower legal and professional service fees, lower general liability claims expenses and lower credit card discount fees.

Interest expense for the fourth quarter of 2009 decreased to $6.4 million from $8.1 million in the prior year. The prior year included a $1.2 million write off of deferred financing costs due to the refinancing of our revolving credit line. Excluding this item interest expense declined by $500,000 due to reduced debt levels.

For the 52 weeks ended January 30, 2010 net earnings improved to $23 million or $0.44 per share as compared to a loss of $30 million or $0.58 per share in the prior year. This represents a $53.4 million improvement year-over-year. The current year includes on a pre-tax basis a net benefit of $7 million and the prior year includes on a pre-tax basis a net charge of $3 million related to unusual items. Both 2009 and 2008 included an unusual tax benefit of $1.2 million and $2.2 million respectively.

Taking into consideration the unusual items in both years it is easy to see the significant improvement made in the current year as compared to the prior year. Specifically, the items that impact 2009 on a pre-tax basis include a $6.2 million gain from the retirement of debt, a $2 million reduction in inventory related accruals, a $1.2 million gain from the sales leaseback transactions and a $700,000 gain from an insurance settlement partially offset by the $3.1 million asset impairment charge.

The items that impacted the prior year on a pre-tax basis consisted of $8 million increase in legal and inventory related accruals, $5.4 million of asset impairments, $1.2 million in debt prepayment costs and a $600,000 charge for costs associated with cost cutting initiatives which was largely offset by a $3.5 million gain from bond repurchases and a $9.67 million gain from asset dispositions, primarily sale leaseback transactions.

Now I will cover our service center, retail and commercial businesses on a line of business basis for the fourth quarter of 2009. Our service center business which includes tire and merchandise sales as well as service labor revenue generated through our service bays reported revenue of $209.7 million in the fourth quarter of 2009 versus $210.2 million in the same period last year. Service center revenue was positively impacted by the addition of 24 new service and tire centers in fiscal 2009. These stores added $4.7 million of revenue in the current quarter and while it is still early on balance we are on track with the expected financial contribution from these stores.

Service center comparable store revenue decreased by 2.4% compared to a decrease of 1.9% in the same period last year. As noted earlier the decline in revenue was primarily driven by our tire business which was down 7.3% while the remainder of the service business was up slightly. On a macro basis we believe the most significant external factor impacting our service business is miles driven which increased in low single digits in the second half of 2009 which is a positive sign. We also believe the continued decline in new car sales will contribute to our results as the age of the U.S. fleet increases which requires an increase in consumer spending on maintenance and repair. In addition we believe our improved execution in our service bays will lead to better customer experience which will drive repeat business.

Service center gross profit increased to $45.1 million for the fourth quarter of 2009 compared with $39.1 million last year. Service center gross profit as a percentage of service center revenue improved to 21.5% in the quarter from 18.6% in the prior year. The improvement in gross profit rate over the prior year was primarily due to increased service labor revenues which carry a higher margin rate than merchandise sales.

The retail and commercial business generated sales of $243.2 million for the fourth quarter of 2009 compared to $255.3 million for the same period last year. Core parts sales remained relatively flat as compared to the prior year quarter while commercial sales increased by $1.2 million or 2.4% over the prior year. As indicated earlier, we believe the tough economic environment has depressed discretionary consumer spending and as a result our 2009 fourth quarter results reflect a $13.5 million reduction in sales in discretionary products. As noted earlier, sales of generators, electronics and transportation products made up $9.5 million of the decline year-over-year.

From a gross profit perspective the retail and commercial business reported gross profit of $64.9 million for the fourth quarter of 2009 versus $53.1 million for the same period last year. Retail and commercial gross profit as a percentage of retail and commercial sales increased to 26.7% from 20.8% in the same period last year. The current year includes a reversal of $1 million of inventory related accruals while the prior year included an asset impairment charge of $2.6 million and an inventory accrual of $3 million. Excluding these items from both years the gross profit rate increased by 90 basis points primarily due to less promotional activity, less inventory shrinkage and higher vendor support funds.

For the full-year our service center business revenue increased $27.8 million or 3.2% to

$897.6 million in 2009 versus $869.8 million last year. Gross profit also increased by $18.9 million or 9.8% to $211.1 million or 23.5% of sales from $192.2 million or 22.1% of sales in 2008. For our retail and commercial businesses revenue decreased $44.7 million or 4.2% to $1.13 billion in 2009 versus $1.58 billion last year. The decline was primarily due to lower discretionary product sales which declined $47.8 million compared to the prior year and a $7.6 million reduction in sales of non-core products which we no longer offer for sale. However, gross profit increased by $1.8 million or 0.6% to $275.1 million or 27.1% of sales from $273.3 million or 25.8% of sales in 2008.

I will now turn to the balance sheet. Cash increased by $18 million to $39.3 million from $21.3 million at the end of the prior year. Accounts receivable declined by about $6 million to $23 million due to improved collection and trade receivables and vendor support funds. Inventory at the end of the fourth quarter was $559.1 million, a decrease of $5.8 million from the $564.9 million at the end of last year. This is despite the opening of 24 new stores with inventory of $3.8 million.

The decrease in inventory from last year is due to our more disciplined inventory management including reduced seasonal inventory purchases, lead times and safety stocks. Property and equipment net declined by $33.9 million to $706.5 million primarily due to depreciation of capital expenditures. At the end of the quarter we still owned 238 properties including our headquarters, most of our distribution centers and many of our stores. As we have said previously we believe there is significantly unrecognized gains built into these properties considering the decline in the overall real estate markets.

Accounts payable including the trade payable program decreased to $237.1 million from $244.3 million at the end of the previous fiscal year. The AP to inventory rate declined to 42.4% from 43.2% in the prior year primarily due to lower purchases in the current year.

Total debt net of cash decreased by $64.5 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 under our revolving credit facility and an increase in cash of $18 million.

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

On the cash flow, we generated free cash flow defined as cash flow from operating activity less investing activities, of $57.4 million in the 52 weeks ended January 30, 2010. After paying a dividend of $6.3 million or $0.12 per share, repaying amounts outstanding under our revolving credit facility combined with the bond repurchase noted earlier the company generated $18 million of cash in the year ended January 30, 2010.

Capital expenditures for the year were $47.6 million and that includes the acquisition of the assets of Florida Tire, a privately held 10 location automotive service and tire business located in Orlando, Florida that we acquired for about $4.4 million. Reflected in investing activities is the amount paid to date for this acquisition which is $2.7 million, the balance of the purchase price is contingent on lease renewals.

Respectively we have no significant debt maturities until 2013. We expect capital expenditures to be about $68 million in fiscal year 2010 and that includes the addition of approximately 40 service and tire centers and required expenditures for existing stores, offices and distribution centers. We are not seeing any other significant cash needs other than operating cash in the near-term.

I will now turn the call over to the operator to begin the question and answer session. Operator?

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Anthony Cristello - BB&T Capital Markets.

Anthony Cristello - BB&T Capital Markets

A question I wanted to understand a bit better, you talked about the fourth quarter and you talked about the marketing balance between the service side and the retail side. It seems like you pulled a little bit from one and put into the other in terms of resources and that actually ended up hurting it sounds like a little bit in the service results. Is there a better way or is there anything you learned in terms of that approach such that you can better balance so that you are not perhaps sacrificing unit sales or customer growth at one to help drive the other?

Mike Odell

Yes, definitely some learning there. Basically going into the holiday season we know we have a lot of discretionary product. We didn’t know about the economic environment in terms of how things were going to play but basically we shifted some of the time we spent on the TV to try to drive the retail business. That was the part that the money spent from retail didn’t pay out on those discretionary products the way we would have liked it to. Obviously part of our choice is do you spend that? We decided not to. We would rather just shift it. We basically stuck with the media time we had planned. We just shifted more of it into retail. As we get into this year basically it has gone back to shifting more of it into the service and tire business.

Anthony Cristello - BB&T Capital Markets

It sounds like you accelerated that spend a little bit in February. Is that correct?

Mike Odell

We didn’t accelerate it year-over-year. We are making some shifts in terms of how we I guess use our funds but in terms of the number of events that is comparable year-over-year.

Anthony Cristello - BB&T Capital Markets

So we don’t need to anticipate outside of normal seasonality an elevation in ad spend or SG&A given with the marketing initiatives you have?

Mike Odell

Correct. Part of our thinking on the fourth quarter was we ran events early in the fourth quarter. That was service and tire focused. Even that one because the weather it was harder to remember now with all the snow we ended up having and we got later in the year or into 2010 but it was milder than normal weather so even though we ran the event we didn’t really see the lift we wanted because we were running up against the weather. So basically we said it is the weather that is going to end up driving things more than incremental spend so we decided not to spend incrementally in service but rather make sure we maintained our profitability because we just see a payback.

Really it all started at the beginning of the year. We said this is how much we think we should spend and let’s make sure we spend it against the biggest weeks of opportunity and the start of the fourth quarter and heading into the holidays wasn’t one of those opportunities. We couldn’t in our minds justify spending more to try and drive more because we just didn’t seem to get enough lift to pay for that investment.

Anthony Cristello - BB&T Capital Markets

But it seems like, and I don’t know if you actually broke this out, but if you look at the 3% comp you are running to date right now, are you seeing an even split between the two, service center and retail side?

Mike Odell

Yes. Actually all of them, between service, retail and commercial, all three were up in the quarter.

Anthony Cristello - BB&T Capital Markets

When you look at the gross margin improvement which I think was pretty impressive given the sort of soft sales you experienced, was there anything in that number in terms of mix or anything we can point to that says hey this helped or just something from an initiative standpoint that is going to continue to drive that number?

Ray Arthur

Some of it is initiatives that are going to continue. For instance, we had a very good performance on shrink and we believe that is sustainable. We have put a lot of effort into merchandise protection standards and into adding TV cameras to our operations in many of the areas. We also were able to collect some additional vendor support funds at the end of the year as we [gained] some inventory. We think those should be sustainable.

We were also able to cut some of our other related costs that are in gross margin area. Quite frankly a huge focus for us this year is around doing something we call sealing gross margin leaks which should fall into that line and you should see better margins. We don’t know exactly how much that is going to be but we do view that as a major opportunity for us.

Mike Odell

Now our focus is kind of as we have shifted our merchandise mix, our focus from day one is to make sure that we build a sustainable business model and I wouldn’t say the level of improvement in gross margin year-over-year although we would expect more improvement but everything we did last year was sustainable into the future.

Operator

The next question comes from the line of Jeff Blaeser - Morgan Joseph & Co.

Jeff Blaeser - Morgan Joseph & Co.

You mentioned weather. Did the snow at the end of the quarter have a negative impact on the fourth quarter and a positive you are seeing in the first quarter? What kind of impact did that have?

Mike Odell

The snow because of the nature of our business it is a little bit mixed. It clearly helped tires with the snow. People did less DIY work and had a little bit of a negative effect on repair work during that time. That is part of what we are trying to do with our business model is to get us to where we are balanced so that I would like to be in stock so that I don’t have to worry about weather. When weather happens it helps one part of the business and hurts the other part of the business. When the economy is good it helps accessories and maybe it doesn’t help some of the repair business. When the economy is bad it helps repair but it doesn’t help accessories.

Clearly that snow drove tire business for us. In terms of the rest of the business it hurts on things. We lost a day. We were closed in the Northeast for one day so far in the first quarter. So if you look at it by the piece of the business in terms of the effects of the weather.

Ray Arthur

I don’t think it has really deferred anything into this quarter. I don’t think the weather was so bad when we did get that snow that it was pushing business into the current fiscal year.

Jeff Blaeser - Morgan Joseph & Co.

It seems last year as well as this year that the end of the year has been slower and then the first quarter has really picked up. Is this a coincidence or a trend you are seeing? I have actually seen in a few other shops as well that the end of the year is kind of slowing down.

Mike Odell

January is always a tough month in the automotive business. It is the slowest volume particularly on the service end. Particularly with the way the economy has been people are up or down. I think the one thing that has happened both last year and this year is things start to come back when tax checks start to come back so there is some favorability I think attributable to that.

Jeff Blaeser - Morgan Joseph & Co.

I think at the beginning of the year you mentioned a run rate on the SG&A side of $109-110 million. You came in well below that this quarter. Is this the new run rate, $103 million per quarter or is there some added to next year?

Ray Arthur

There is going to be some inflation in the SG&A numbers. Not significant but I would annualize the full year and use that as opposed to one quarter.

Mike Odell

We will spend a little bit more on marketing. Not a lot. As Ray said there is some inflation. Then with the new service and tire centers some of those expenses end up on the SG&A line with payroll and such.

Ray Arthur

I would say we are going to make every effort to find additional SG&A savings this year as well. [Inaudible] We have gotten the low hanging fruit.

Jeff Blaeser - Morgan Joseph & Co.

So use the $430 million as the baseline and then factor in inflation?

Ray Arthur

Yes.

Operator

The next question comes from the line of Ronald Bookbinder – Global Hunter.

Ronald Bookbinder – Global Hunter

Looking at the discretionary items we have heard from many retailers across the consumer sector that things have rebounded. You have said the comps have rebounded in all three sectors but specifically on the discretionary items has that begun to improve since the fourth quarter?

Mike Odell

Yes. I wouldn’t call it robust or anything like that but the trend continues to improve. I think if I were to speak around the general economy I think what you tend to see is you still have heavy unemployment and under employment but I think those people that do have jobs which is the other 80% of the population are feeling better and are starting to loosen up a little bit.

Ronald Bookbinder – Global Hunter

On the gross margin how much of a benefit did you get from shrink and how many basis points in the fourth quarter? When would we begin to anniversary the initiatives on the shrink?

Ray Arthur

We didn’t break down the actual amounts of how much shrink has improved or the other components of margin improvement. We will start to anniversary some of the initiatives towards the middle of the year and more towards the end. I should say we have been progressive. So for instance last year we started putting in CCTV cameras in a number of the stores and we have rolled out more as we have gone through the end of last year and we are continuing to do them into this year. We have a pretty good run before we actually fully annualize those.

We also have other serious initiatives regarding chain of custody accountability on certain product that goes through our logistics network we will be working diligently on this year to try and improve which will also provide improvement on margins. Again it is hard to identify just how much that is going to be. We certainly have the ability I believe at least to generate additional improvement in the gross margin line.

Mike Odell

I don’t think of shrink as an unusual item that needs to be anniversaried. It is improved operating discipline that needs to be sustained and our believe is we are still too high quite frankly on our shrink and we should be able to not only sustain it but continue to drive it down further. Those numbers just get hard to estimate because you don’t have total control over everything in terms of exactly when they will roll into the P&L.

Ronald Bookbinder – Global Hunter

On the SG&A you talked about this past quarter a lot of it came from, maybe the cut in SG&A, came from lower media spend. How much lower was that?

Ray Arthur

It was $6.1 million in the quarter year-over-year.

Ronald Bookbinder – Global Hunter

You just said you are looking for it to be sort of flattish?

Ray Arthur

We will spend a little bit more year-over-year. Obviously we have reduction. When you look at the P&L there is a big reduction in advertising or media year-over-year. I still prefer to characterize it as we shifted our business model. We were spending a lot of money on print that was focused on driving non-automotive retail. We shifted to a media strategy that is largely based off of TV and radio with a heavy bias towards service. We relaxed on that bias towards service in the fourth quarter which didn’t work for us which is why we are back to shifting the bias towards TV and radio but it is not just a pure we cut media. We have shifted our strategy to focus on being core automotive versus spending a lot of money trying to drive nonautomotive products.

Mike Odell

Our media is we believe much more effective. We went from print to primarily TV and we are seeing customer count increases in our different businesses. So we believe that approach combined with our loyalty program is really driving customer count up so in our minds effectively we are spending a bunch less but we are getting a lot more for it.

Ray Arthur

We are touching a lot more customers with our strategy and spending less.

Operator

The next question comes from the line of Bret Jordan - Avondale Partners.

Bret Jordan - Avondale Partners

Trying to get a little better understanding of the current quarter plus 3 with all categories up. That is against only a minus three in the prior period. Is there something different you are running promotionally? Are you seeing some consumer acceptance of discretionary in the period? I guess are you also continuing to run traffic above sales comp?

Mike Odell

Customer count is up in all three lines of business. We are back on TV which is comp. We have done a little shift to how we allocate the media. Not necessarily spending more but we are doing things differently in terms of how we allocate the media. We have made some subtle nuances to the nature of the promotions that seems to really be working for us.

Bret Jordan - Avondale Partners

It seems like discretionary was most of the downside in the prior quarter. Is discretionary improving this quarter or is it just an easier comp on the discretionary category?

Mike Odell

Probably a little bit of both. It is an easier comp but we are actually comping clearance this quarter so we are covering that part. That was clearance but not much profit associated with it. I would say discretionary continues to get a little bit better but you are right part of it is anniversarying. It is not like the core is not being driven because of a big turnaround on discretionary or anything like that.

Bret Jordan - Avondale Partners

Regionally I guess we talked about certainly on the East coast November was a tough tire month with the warm weather. If we look at the west coast where there was less weather volatility is there any meaningful different in eastern versus western components?

Mike Odell

When you are all said and done the northeast and mid-Atlantic have been and continue to be the strongest parts of the country. When we got into the milder weather that is where the Northeast and Mid-Atlantic softened because we didn’t have the weather to drive the business like we did in the prior year. The Northeast and Mid-Atlantic are still the strongest regions.

Bret Jordan - Avondale Partners

If you look at your merchandise inventory at quarter end what would be the dollar value attached to the discretionary category of those $560-odd million?

Ray Arthur

I don’t have that. We can certainly get something together.

Operator

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

Mike Odell

I just want to thank everybody for their time and interest. 2009 was a rewarding year for the Pep Boys – Manny, Moe & Jack. We believe we are on our way to becoming the automotive solutions provider of choice for the value oriented customer. We hope everyone has a great day.

Operator

Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The Pep Boys - Manny, Moe & Jack F4Q09 (Qtr End 01/30/2010) Earnings Call Transcript
This Transcript
All Transcripts