Pep Boys: Turnaround Plan Gains Speed

| About: Pep Boys (PBY)
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The Pep Boys (NYSE:PBY) reported solid third quarter results when they delivered earnings of 4 cents (5 cents excluding one time charges) on sales of $473 million. Although the auto parts purveyor met earnings estimates, they handily surpassed their top line expectations by more than $4 million, by reporting their first comparable store sales gain in more than three years.

Gross profit margin gains: The auto parts retailer was able to increase its gross profit margin by 30 basis points from 24.7% to 25%. Its service segment was the biggest contributor of its gross profit improvement, as it nearly doubled from 5.4% to 9.6%. The company’s merchandise segment didn’t fare as well, losing 30 basis points from 29.1% to 28.8%.

Cost cutting efforts fruitful: PBY trimmed its SG&A costs by more than $10 million, as this category fell an impressive 260 basis points from 25.8% of sales to 23.2%. In addition, Manny, Moe and Jack were able to cut their interest expense from $7.1 million to $6.9 million, thanks to a combination of lower interest rates and reduced borrowings.

Sale leaseback transaction: PBY recorded a onetime gain of $1.3 million when it sold a single property during the quarter and entered into a lease contract with the new owner. This goes to show you how much hidden value the company still can tap in to. The fact is, they still own the real estate on 235 of their 580 locations.

New service spokes added: During the first nine months of the year, PBY acquired 20 new service locations, using only its free cash flow to do so. The acquisition of Florida Tire Inc. for $2.6 million appears be pure genius, especially when you consider the fact PBY was able to pick the entire ten-store chain for the bargain price of $2.6 million.

Bottom line: Although the shares have dipped more than 20% from their highs (at least new buyers don’t have to jump in at the top), the solid report should produce a few analyst upgrades, prompting the stock to re-challenge its 52 week high of $11. After all, PBY’s turnaround status is still in its infancy stage, and the sky is the limit if you have the patience to let the turnaround gain even more speed.

Disclosure: long PBY