Automotive Parts Dealers Earnings Breakdown: It's All in the Quotes

by: Jerry Marks

We cherish too, the Poppy red

That grows on fields where valor led,

It seems to signal to the skies

That blood of heroes never dies.

Source: Moina Michael "In Flanders Fields," 1915,

Happy Memorial Day Weekend
AAA estimates 38.2 million American's will travel 50 miles or more from home this Memorial holiday, a 1.7% increase from last year. Travel Industry Wire says 84% of these travelers (32.1 million) expect to go by motor vehicle (up 1.8%).

I think this is a great time for families and friends to get together. Heck, maybe they should even consider using the extra time to go shopping for a vehicle. Or maybe they will buy some maintenance products so their vehicle doesn't encounter problems on the trip.

But I think Ms. Michael's poem (today's opening quote) that inspired people to wear red poppies on Memorial day in honor of those who died serving the nation during war appropriately reminds us what Memorial Day is all about.

So to our armed service professionals (or anyone who has served in the military before): Thank you!

Monro (NASDAQ:MNRO) Fiscal Fourth Quarter (4Q07) Statistics (January 1, 2007 - March 31, 2007)


Pep Boys (NYSE:PBY) Fiscal 1Q07 Statistics

pep boys

Keystone (KEYS-OLD) Statistics 4Q07


AutoZone (NYSE:AZO) Quote #1: "provide a great offering to our customers" (First)

We've got to build a world class sales organization. The retail sales approach is very different than going out and making sales calls. We need to create the processes, the training, and then develop a world class sales organization through the people. That's a component that quite frankly we have not done a great job of. And we are in the early stages of doing that.

As we continue to build our model and see that we do provide a great offering to our customers. Now we just need to go out and tell them about it.

Source: Bill Rhodes, CEO, AutoZone 3Q07 conference call. 05.22.07

Why is this important?
Mr. Rhodes comment about creating the processes and training before "spreading the news" is incredibly important. And something I think we in the investment community tend to forget. We focus on sales growth. But when sales growth requires a different approach to delivering the same goods (such as auto parts to repair shop customers versus do-it-yourselfers walking in off the street), the company has to be ready to handle the volume.

I think a failure to have the right infrastructure in place (before focusing on the sales growth) could be more damaging than not getting the sale at all. Because the organization/company risks a negative customer experience.

I would rather see a company like AutoZone not get the commercial sale (repair shop customer business) versus a negative customer experience. This may sound like philosophical lip service that the customer matters most. But particularly when you are dealing with "experts"), like repair shops, it becomes incredibly important to AutoZone's underlying do-it-yourself [DIY] business.

For example, if AutoZone fails to deliver a favorable experience to the repair shop customer, the technicians and/or shop owners may "trash talk" AutoZone. I don't know about you, but if I were a DIY repair person (meaning I do it in my spare time), if some "pro" (the technician) said they didn't like AutoZone, I sure would not want to use AutoZone. "I want to go with who the pros use" (I might say to myself).

I think it is great that Mr. Rhodes recognizes this and is therefore focused on making sure they can "provide a great offering" to their customers first. And then focus on the sales side of the equation.

I heard similar comments from Jeff Rachor (new CEO of Pep Boys) on the Pep Boys conference call as well about having the right technicians in place so they are ready when the sales volumes pick up.

AutoZone Quote #2: "Trustworthy Advice Campaign"

We also have two really strong marketing messages that we are very comfortable with. Both ZNet, the introduction of that to our customers. As well as trustworthy advice campaign. That tells people come to us, we're going to help you do it right, and make sure we help you manage your costs as well.

Source: Bill Rhodes, CEO, AutoZone 3Q07 conference call. 05.22.07

I didn't notice overwhelming euphoria (excitement) for ZNet from employees or customers based on my unscientific 2 store visit to AutoZone a few weeks ago (I needed a gas cap). Although it is early days for ZNet.

But I like the trustworthy advice campaign idea. If only they expand it beyond their DIY focus to do-it-for-me (DIFM) repair shop customers.

Whether it is trying to get a gas cap, tires, or even my regular maintenance (service checkup), personally I have yet to find a shop or dealer I trust. And yet the repair shops and service writers (contrary to popular myth) I think are generally good people. But when you put good people in a bad situation it creates problems.

I left Wall Street because I felt the idea of paying for investment research with trading commissions put good people (investment research analysts) in a bad situation. How does a brokerage firm generate revenues if the best thing for the customer is to do nothing at all (don't buy or sell the stock)? And so it invites the potential for analysts to "create" trades (upgrades/downgrades) when it may not be what is in the best interest of the customers.

In the same regard, repair shops are stuck in the "turn and earn" business. And I don't think the change comes from trying to change the repair shop. I think the change (in filling this consumer need) comes from a resource center. An auto parts store (or possibly some online organization) that can diagnose (at the store with a machine or some remote diagnostic service like OnStar) that is completely on the side of the customer (like me).

I (the customer) would gladly go to whatever repair shop this individual or organization recommended, because I know the resource center is on my side. They are not "conflicted" because all they care about is selling the parts (not turning the bays). Or in a case with something like OnStar, maybe they aren't even interested in the part sale, just my subscription.

And for the repair shops? Once again, put yourself on the side of the customer. Yesterday, Jennifer Reed of SubPrime Auto Finance News ran a story about data revealed at the National Alliance of Buy Here Pay Here Dealers [NABD].

Specifically, Ms. Reed discussed data provided by SubPrime Analytics and NCM Associates. In the article, Ms. Reed cites NCM Associates as saying reconditioning costs at buy here pay here used car dealers (who primarily deal in 8+ year old vehicles) were a median 5.38% as a percent of revenues.

This works out to a little more than $600 per vehicle. Based on some of the registration data out of folks like Polk and my own estimates, I think there are about 20 million 8+ year old vehicles sold a year. This means there is about $12 billion in reconditioning work that I don't think repair shops have really focused on getting.

And yet, similar to the "helplessness" feeling consumers have when they walk into a repair shop, why can't repair shops similarly align themselves with people buying used vehicles?

They should become the voice for the used vehicle buyer by offering free inspections/certifications of these older (8+ year old) vehicles. Additionally, in this case, I think the repair shops simultaneously put themselves on the side of the used dealer as well by reducing the potential of the vehicle breaking down and the customer defaulting on the loan.

Monro Quote #1: "too fixable, albeit not as quick as I had anticipated."

Yeah, again ProCare being out of bankruptcy and running comps down 30% to 35%. We just felt that deal was too strategic, too many stores, and too fixable, albeit not as quick as I had anticipated to pass up. And I think it was reflected in the price of $200,000 per location. Other deals, and certainly the two three four we are currently trying to bring along the finish line are all companies that will not be dilutive in year one.

Source: Robert Gross, CEO, Monro Muffler Brake, 4Q07 Conference Call

Why is this quote important?
Here is something amazing. I did not hear a single question about what happens when Monro acquires a company (aside from a couple questions about the acquisition pricing environment).

I don't think gas prices, the weather, or intra quarter trends will determine the long term returns shareholders will receive from Monro. Instead, I think the most important issue for Monro is transitioning to an acquisition oriented company.

And given this transition, the metrics, questions and focus that were once important to Monro shareholders change, and analysts need to start recognizing this. Monro is moving from an internal focus (creating a great internal infrastructure) to external (growth through new stores and markets).

So I did not understand why the analysts on the Monro conference call seemed to be "high fiving" management with the fourth quarter results. There was a lot of noise in the data: extra selling days (82 versus 78), easy comps (sales and costs such as an unplanned insurance charge), and a low tax rate.

But when you look at the full year results (even excluding the Strauss charge), earnings per share were up only 4% from last year ($1.57 versus $1.51). And the Strauss charge of $0.11 is because they started to make an acquisition and then had to walk from the deal.

Fiscal 2007 was not management's finest hour. And I think management even acknowledged this fact by saying selling, general, and administrative expenses benefited in the fourth quarter of this fiscal year versus last fiscal year because management did not receive bonuses.

Several years ago, Robert Gross came in and led a tremendous transformation at Monro. The store model works and is profitable (no easy feat in such an entrepreneurial driven business). Pep Boys and Midas International (working with their franchisees) are still trying to get the model down. So I think Monro is ahead of the curve.

But after having spent years kind of perfecting the model, Monro's management is now transitioning to a growth strategy. And I think management has appropriately determined it is more economical to buy (acquire) stores versus build. There is a tremendous amount of service bay capacity in the market place, they have a great operating system, and so it seems to make sense that they go in and buy stores and convert them to the Monro model versus build a bunch of new bays.

The problem? The repair business is an incredibly people intensive/entrepreneurial business. So it is a lot easier said than done to go in and acquire a store (with the pre-existing cultures that existed at the store) and transform it to the "Monro model." In fiscal 2007, I think it is pretty clear management stumbled. They tried to acquire Strauss and then had to walk from the deal. And as you see from Quote #1 with Monro, the ProCare acquisition did not go exactly as planned.

However, just as I think Mr. Gross and his team proved larger organizations in this highly people intensive (entrepreneurial) driven business can thrive, I have every confidence management will similarly figure out how to acquire and integrate stores into the fold in a cost effective (attractive return on investment) manner.

But this is what we (in the investment community) need to focus on. How quick can management get the acquisition/growth model down?

Monro Quote #2: "anything we buy from someone else, we better stop."

Has there been any change in terms of the mix of inventory that you get directly from your vendors versus what you get form auto parts retailers?"

Cid Wilson, Kevin Dann & Partners

"No, again, we are very focused and a key component of our business model is if we are buying something from an Autozone, an Advance or NAPA, while thy all do a great job, we are paying twice as much and we view that as something we should have had and a mistake.

So we have a significant focus because we think we do have a cost of goods advantage with our distribution network and the way we buy our product having it come into one warehouse and distributing it from there. That anything we buy from someone else, we better stop buying from someone else.

And you know our customers walk into our service stores, and 90% of the time we service them out of our own inventory. And remember on our system, every single one of our locations has the 7 closest stores inventory on its system. So we have 8 chances to buy a part internally at very attractive price before we have to go and do business with some of the retailers."

Robert Gross, CEO, Monro

Why is this quote important?
I think this quote is self explanatory. But it clearly raises the challenge auto parts stores (jobbers) face in just trying to be a parts distributor to repair shop chains. The value proposition can not come from price.

This is why I continue to think auto parts stores need to focus on creating a real value proposition for the customers actually receiving the repair work, or by providing value added systems and processes (like a NAPA Auto Care Center or O'Reilly Certified Shop) to independent repair shop owners.

Pep Boys Quote #1: "I am committed to getting it right this time."

Before I move forward with my comments on some key operating initiatives, I want to address your questions about strategy right up front by asking all of you and the capital markets for your patience.

Clearly one of my highest priorities as the new CEO will be to collaborate with our senior leadership team and board of directors to define the company's purpose and develop a comprehensive long term strategic plan to grow the business.

However, I believe it would be irresponsible to rush the strategic planning process. It has taken years for the company to lose its way. And I am committed to getting it right this time.

Source: Jeff Rachor, CEO, Pep Boys

Why is this quote important?
I think Jeff Rachor is the real deal. And a lot of this comes from watching him (and the deep admiration I observed from his employees) at his previous stint at Sonic Automotive (NYSE:SAH).

But past performance is not a guarantee of future results. He seems to be saying and doing the right things. Now what I owe you are some metrics that will help us evaluate the real progress being made or not being made.

During the conference call, Mr. Rachor said that he will try to communicate no later than the third quarter a long term strategic plan to grow the business. I am going to try to come up with some metrics by July. But until a long term strategic direction is set and communicated, any metrics I come up with are subject to change.

Pep Boys Quote 2: "significant benefit to real estate regardless of strategic plans"

Don't see the two as linked. Significant benefit to real estate regardless of strategic plans.

Source: Jeff Rachor, CEO, Pep Boys

Why is this quote important?
Management teams first need to evaluate the investment option, and then decide the financing. And sale-leasebacks are just another form of financing. So I think Pep Boys management needs to slow up plans to sale leaseback any properties.

It is actually what I learned from Mr. Rachor's former CFO, David Cosper (now Vice Chairman of Sonic Automotive) and John Rickel (CFO of Group 1). Mr. Cosper and Mr. Rickel are both alumni of Ford finance. And they are very clear that first you evaluate the investment, then ask: "ok, how are we going to finance this?"

So I don't think it is prudent to make changes to the financial/capital structure until management has developed a strategic direction and therefore has an idea of what financing needs they will have. This is especially important when you think about sale leasebacks where you lock yourself into long-term leases, creating less flexibility with your footprint.

Once a strategic direction is set, then you evaluate all of the financing options. But until a direction is set, I think the company needs to hold off asking "how are we going to finance it," because you don't know what you are financing.

Keystone's Conference Call Quotes

In stock parts availability throughout our entire network is fundamental to our performance and growth potential. This is an SKU intensive business with lumpy and unpredictable demand. This business is not like selling clothing so when you are out of blue shirts maybe you can sell some white ones. . . Most businesses have some degree of substitution possibility.

About this article:

Tagged: Earnings
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here