Pep Boys: Accelerating Toward Profits

| About: Pep Boys (PBY)
Although Pep Boys (NYSE:PBY) came in light on revenues, it still managed to report fourth quarter results that exceeded analyst forecasts by generating 4 cents in earnings versus an expected 3 cent loss. The Street unanimously applauded the effort by rewarding shareholders and crushing shorts, with fresh two year highs, as the stock rallied nearly 20% in the last week alone, on expanded trading volume.
Gross profit margin increase: PBY’s gross service profit margin increased from 7% to 9.9% while its merchandise sales gross profit margin improved from 28.1% to 29.3%- on a blended basis PBY’s GPM rose 130 basis points from 24.1% to 25.4%. The company attributed the improvement on a better product mix, less shrink and expanded service volume.
Costs dropping: Fiscal 2009 saw the company’s SG&A costs plummet 270 basis points from 25.2% to 22.5% due to improved cost controls. Its Interest expense was trimmed 22%, from $27 million to $21 million resulting from lower debt levels of $306 million versus $352 million. In addition, the company was able to double its cash position to $39 million, pay out $6 million in cash dividends and acquire 24 Florida tire and service centers, all without having to dip into its unused revolving credit line.
Rich in real estate holdings: Despite initiating over 75 sale leasebacks in the past two years, PBY is still flush with real estate holdings. The Company owns its 300,000 square foot Philadelphia headquarters campus, four distribution centers comprising of nearly 1.5 million sq feet and 231 of its 587 store locations. The property is on the books at cost and has appreciated substantially over the years, so it represents a nice cushion to tap in to, if the need arises (estimated market value of about $700 million).
Broker action: Morgan Joseph’s Jeffrey Blaser, reiterated his buy rating and raised his one year price target to $15. He did so because he feels the company’s service center expansion strategy is progressing well ( PBY added 24 locations in 2009) and its first Quarter sales are up more than 3% with the quarter 70% already completed. Blazer’s $15 target is too conservative, and a challenge of $20 vicinity is probably in the cards, especially when you consider the shares were at those levels just three years ago, and it is a much stronger company today, than it was then.
Management road show: Management has scheduled a series of investor meetings in April to spell out their vision for the future. First quarter earnings are due in less than six weeks and estimates have already been ratcheted up to 23 cents on $516 million in sales. There is no doubt this company is on a serious roll, the question is: how long before the boys behind the foot pedal, fatigue?
Disclosure: Long PBY

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