Areas of Concern In Pep Boys' Q2 Results

Pep Boys (PBY) reported a solid improvement in earnings yesterday. The earnings improvement is a nice sign. But I think pretty irrelevant until the new CEO Jeff Rachor articulates a vision for the company. Something he indicates in the press release will be sometime in November.

I agree with what Jeff Rachor said on the last quarterly conference call. It took a long time for Pep Boys to get off track and I appreciate him wanting to take the time to get it right this time around.

So this is one instance where investors really need to exercise patience. I wouldn't care if it took longer than November. Trying to hit an arbitrary deadline just to appease those of us (in the investment community) doesn't mean squat if he doesn't set the right course for the company.

Areas of Concern
I was a little confused to read management's comments about recognizing the importance of "permanently reversing retail sales trends with a sustainable core merchandising program." If they are talking about utilizing the retail space profitably, I am cool with it.

I just don't think Pep Boys should focus on growing the same-store retail sales line "at any cost." That is what seems to have gotten them into trouble over the years (i.e. scooters and go carts). I think they should find use of the retail space that creates economic returns, not just to grow the top line (in my opinion). Especially since I think the underlying demand for hard parts is in decline and the do-it-yourself parts market is saturated.

I was also concerned to hear management discuss its intentions to go ahead with sale leasebacking some of the company's properties (meaning they will have to pay rent). I just think it reduces flexibility (especially since the vision has yet to be cast), and over the long run shareholder's will be faced with higher expenses as rent escalation and "step ups" are often included in the contract down the road. So I should be very clear. Leasing properties absent a vision is a BAD idea (in my opinion).

Once again. I have a tremendous amount of confidence in Jeff Rachor's leadership.

But I learned my lesson with Lithia (LAD). When I have concerns, I should not even try to be polite when I raise them. L2 is an example where I should have been more vocal with my concerns (although from the get go I said I was against it).

And now Lithia appears to have gotten off track. I am confident Lithia's management will get back on track. But in part, I look at it as my failure for not being more vocal when I saw the company doing things that concerned me.

So as I promised a month ago. No matter how positive I am on a company or management. I plan to be VERY vocal in areas where I have concerns. And these are the concerns I have right now with what I read in Pep Boy's second quarter release.

I probably would have a lot of things to be encouraged about as well. But as I said, I think management is appropriately asking investor's to exercise a little patience.

So I am left dwelling on the concerns, and like you, await management's vision.

The conference call will be at 8:30am (eastern.)

Here is the link to the webcast.

Also, below are a few key metrics that I thought you might find helpful.

click to enlarge

PBY 1-yr chart: