Looking Under the Hood at PepBoys

Pep Boys (PBY) has had more than its share of hard knocks the last decade, but that presents opportunity, as Wall Street has taken the shares behind the woodshed and punished it beyond reason. This autoparts retailer has what its competitors don't, the ability to install the parts they sell through their own service bays.

The auto retailing sector has four large players excluding Pep Boys: Advance Auto Parts (AAP), Autozone (AZO), CSK Auto (CAO) and O'Reilly Automotive (ORLY). The industry is in a consolidation period with CSK Auto currently in the process of being acquired by O'Reilly. None of these players offer service and installation on the parts they sell, giving PBY a unique advantage in the marketplace. PBY could be considered a viable takeover candidate based on these valuable Service Bays alone.

The last two years, PBY has been in transition. New management has implemented a turnaround plan that includes:

1. "hub and spoke" business strategy
2. the exiting of its non-core merchandise
3. the shedding of unprofitable locations
4. reduction of SG&A expenses
5. optimization of its real estate holdings.

In its efforts to trim down and get "lean and mean," small improvements are starting to surface as service center revenues are up 1.8% and have experienced eight consecutive quarters of positive momentum. Annual sales of $2 billion offer PBY the opportunity for substantial earnings gains once its turnaround efforts gain additional traction. Pep Boys has been on a recent real estate selling spree that has generated some $230 million in cash from 54 separate sale/leaseback transactions.The proceeds from these sales were used to pare down long-term debt from $535 million to $400 million. PBY's real estate portfolio has a market value estimate of over $1 billion, so at today's share price, the company is actually selling at less than break-up value.

PBY's current cash dividend results in a 2.7% yield and its 51.75 million shares outstanding are trading at a small premium to its book value of $9.04 per share. Management is showing enthusiasm about PBY's prospects as they have embarked on a $100 million share repurchase program. In the last six months, officers and directors have also purchased about 1.9 million shares in the open market for their own accounts, adding additional confirmation that the shares represent compelling value.

A stake in PBY at these levels offers the value investor significant upside potential with minimal risk, with the real estate acting as a buffer against further declines. If you check under the hood, you just might like what you see.

Disclosure: Author is long PBY.

Comments

[User 175035:]

Sell it ...its a dog going to 7
TM

2008 Apr 08 01:54 PM

[greengo:]

PBY has another problem that the turnaround plan does not seem to address... The store's selling floors are way too big. So even with a sale leaseback, they still are now leasing way too much real estate for anything near optimum square footage requirements.

I support PBY in their efforts to correct the other obvious problems (to me). Previous management (since Ben Strauss) dismisses recognizing these problems that the current new CEO and his management team address. So, maybe, things will improve. But there is much work to be done. You must be patient. Buy now at what could possibly be "value" prices?? Look back a few years and it was in the threes, then shot up to the thirties, but I remember when it was doubling annually and hit $36/share in 1996. Patience, and hope for a possible buyout if you own shares. Speculators buy now. And scaredy cats.... be afraid, be very afraid.

PS I have been invested in PBY since 1983. I love the roller coaster. Best of luck to all.

2008 Apr 08 05:48 PM

[scott3.1416:]

Interesting.
Hub and Spoke- Not much more than a glorified mini distribution center. Same deal was tried years ago (hub store) where a centralized store had more parts than others from which sister stores pulled as needed via preset intra-store deliveries. Still it is a good idea as parts sold this way are more profitable than those out sourced. Just remember that it is not novel.

Non-core merchandise- Exiting? We’ll see. Exiting requires planning and follow through, not one or two price reductions. Once consumers shop out the best bargains the remainder need to quickly be further reduced until sold. The space wasted would be better utilized for fresh merchandise being sold at a profit.

Shedding of unprofitable locations? Less than ten percent of all stores were closed and yet the company is still not profitable. It is a stretch to say that unprofitable locations have been eliminated, better to view as a step in the right direction and a tactic that may need to revisited in the future.

Reduction of SG&A expenses- layoffs and off shoring of support positions coupled with a freeze on wages and the hope of replacing long term employees with lower cost new employees. Less with less = more?

Optimization of real estate holdings- Sell assets, lease them back and hope the business becomes profitable enough to offset the subsequent net increase in operating costs.

Lean and mean- Lean at store level, lean at the top, still fat around the middle. Mean, yes well if you were in middle management, you would be getting mean about now too.
Eight quarters of positive momentum? What does that mean? 1.8 % increase in revenues?
How much of the 1.8% and the eight quarters could be attributed to price increases?
Decreased debt, well at less this is good news. Money from asset sales spent on debt reduction reduces cost of operating, well except for the increases incurred at those stores being leased back.
Officers and directors purchasing on the open market. A vote of confidence in the long term future, excellent, or could they know something outsiders do not? Well no there are rules against that and they would never break them. Still if a take over were to occur, ownership of 1.9 million shares would certainly prove to be a wise investment.

2008 Apr 08 06:28 PM

[StuntMan:]

Yep, the hole company is going down hill. They have made a few steps in the right direction. But its to little to late! Im a current employee, one of those freeze wage ones. And trust me, some of these problems that have been raised aren't even the half of it. Drive line in febuary? Im expected to tell these 50 year old ladies to walk back out in the snow, freezing rain. So we can do a walk around of there vehicles to suck them dry of every pennies they have. An if we don't comply we will be fired. They attribute the increase in sales to this set of chain/cones. AN not to the session change.

They promised us we will get spiffs (commission) for upselling. Which we are 2 months behind in pay. Apparently is why I saw a hole 6 dollars for upselling 132 spiff units. AT a 3 month avg score of 181/100 plus top sales. Not only that but im technicaly a tire guy because they want us to run the drive line/desk/run parts ( new part mgr doesnt do his job) With 2 guys on a busy sat. Our store grosses over 10k avg in the summer. All 4 phone lines going, and a line out the door. But thats my rant.

Next we move into the new computer software, that was DUMPED on us on a Friday. We use Linux boxes which have a hole 64mb ram an a 700mhz cpu. This new system thats supposed to be faster. It actuality takes about 2-3 more minutes to right a ticket up because of the hardware, software bugs, and real time access LAG time. In non comp geek talk. Install windows VISTA on your dell you bought in 1996. SLOW SLOW SLOW FREEZE... FREEZE... CRASH! I rebooted one terminal 18 times in one 8 hour shift. Good one pep boys IT!! YOU SUCK!
The company is pledged with so many more problems which im not going to wast my time on. Bottom line I would rather work for NTW then this non loyal sinking ship!

2008 Apr 13 08:14 PM

[W. Gator:]

here is some good reading, for the employees who didn't get a raise this year, and for the ones who only got pennies for a raise,, check out what our CEO made for JUST 10 MONTHS ...


PHILADELPHIA (AP) - The Pep Boys - Manny, Moe & Jack gave its former chief executive a compensation package worth $17.2 million for just over 10 months of work in 2007, but he had to forfeit 39 percent of it this year after resigning.

Jeffrey Rachor, an executive hired from Sonic Automotive Inc. in March 2007, received a salary of $1.04 million and a bonus of $1.2 million, according to a Securities and Exchange Commission filing made Friday. He left Pep Boys last month.

For the fiscal year that ended Feb. 2, he also got nonequity incentive plan compensation of $1.8 million and other perks worth $743,068, which includes $97,720 in temporary living and commuting expenses. DELL INC



NASDAQ:DELL
Updated: 16:00 ET
20.06 +0.06
PEP BOYS MANNY MOE & JACK



NYSE:PBY
Updated: 16:02 ET
9.11 +0.01

But when Rachor quit this year, he gave up $520,015 worth of retirement benefits and company matches to deferred compensation.

In 2007, Rachor, who resigned to join a luxury car dealership venture backed by Dell Inc. founder Michael Dell, also was given stock and option awards worth $12.43 million on the date they were granted. But he had to give up $6.22 million in unvested options and restricted shares when he left, the company said.

The remaining options he holds, worth $2.46 million on their grant date, are currently worthless because the price at which Rachor is allowed to buy shares is below what the stock is trading. However, Rachor could stand to gain if the stock rebounds before the options expire in late June.

The Associated Press calculations of total pay include executives' salary, bonus, incentives, perks, above-market returns on deferred compensation and the estimated value of stock options and awards granted during the year

2008 May 14 07:53 PM

[WordOnWallS...:]

The speculation/rumor by Wall Street Investment Analysts is that there is a pending class action lawsuit against PepBoys for discriminatory pricingstrategies across gender lines. A former executive of The Pep Boys - Manny, Moe, and Jack is claiming that in private conversations with the company chairman William Leonard and Sr. VP Joseph Cirelli, they have tacitly and systematically developed a culture that encourages, across their comprehensive
spoke and wheel business model, unethical pricing strategies primarily targeting women customers and less than savvy male clients.

PepBoys’unwritt... strategy attempts to maximize company profits by routinely charging women an average price of 16 percent above what is charged to the male counterparts (which would be an enormous statistical anomaly). The whistle blower is also rumored to have communicated with the legal parties that the systematic pricing fraud against women was so widespread, that Leonard and Cirelli frequently mused in their Philadelphia headquarters about their substantial compensation packages thanks to the "Vics", an abbreviated term for "Victims" which they loosely used to
refer to their female clientele.

Wachovia Capital markets is expected to change their forecasted outlook (as of March 27, 2008) of $10-$12 a share, based on a 6-7X EV/EBITDA ratio. I think that with PepBoys current financial
struggles, the company certainly cannot afford to face a class action suit. If true, PepBoys is likely to go under, or be acquired by a competitor at will likely be below fair- market-value given the potential legal environ. PepBoys highest source of value as an acquisition target may be in its numerous and valuable real-estate and physical properties, and not their repair services, which in recent years has become a damaged brand.

We wish them luck and hopethat what some analysts believe regarding their legal environment is just speculation.

2008 Jun 10 12:39 PM

[Larry Reusen:]

Pep Boys will fail for one simple reason: greed. There is much evidence starting to surface proving that their shops fraudulently recommend unnecessary repairs and mislead customers simply to boost their bottom line. Honesty has no place at Pep Boys. Clients are catching on to their illegal schemes and the Pep Cowards have gotten away with it for way too long.

2008 Jun 21 01:36 AM

[RROB311:]

That is a very simplistic outlook. Do you know of a corporation that is not greedy? Here is some food for thought. I cranked out about 580,000$ in Gross Labor dollars for Pep Boys in the last 3 years. And I can say I would not be surprised if over 80% of the technician workforce in the ENTIRE automotive industry I have worked with for over 10 years is incompetent. That is one source of attempting to sell repairs that are not needed. A smaller percentage in this industry are just flat out dishonest. The moral of the story is that a person's true nature becomes evident on commission based sales.

2008 Jul 07 09:55 AM

[puckandlala...:]

i am an exemployee from fresno,ca. my store manager was heading out for vaction that night. last day of the month by the way. i was hurt on the job but not the stores fault nor mine. he left me laying on the floor whimpering and yes i vomited form the stress on my back. i was there for over an hour until other employees convinced him that i needed a dotor. then he didnt file paperwork because he hoped it would be proven i was faking. then he docked hrours because they made me go to physical therepy which i did not get paid for. when it was all said and done he mentioned that it was my fault he didnt get a bonus for that month.
then register tape, toilet paper and copy paper wasnt ordered on a regular basis and we were forced to do stock transfers with other stores. it kept overhead down. now he's sutting hours on an employee of over a decade who has bone spurs. her doctor wants her to sit at the register. he is hurting his own store to instill fear.
and these things are well known. he is disliked by many in and out of the company. nothing is done and now the class action suit. this company is going down. sell and run far away. its going to be messy at the bottom of this fall.

2008 Oct 13 06:35 PM