Auto Parts Industry Remains Resilient

By Greg Sushinsky | September 16, 2009 AAA

The Pep Boys - Manny, Moe & Jack (NYSE: PBY), an automotive parts retailer, reported profitable second-quarter earnings, which were achieved by cost-cutting, as revenues were slightly off by 2%. Pep Boys also showed a profit increase for the first six months of the year, but again, with revenues slightly off year-over-year for the period. While the profit trend for the company shows promise, with a 42% quarterly net income increase compared to last year's second quarter, the company is still fighting through the effects of the bad economy.

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Some Pep, But Not Enough
Pep Boys earned $7.7 million, 15 cents a share, in their second quarter, which ended on August 1, compared to last year's second-quarter net income of $5.5 million, or 10 cents per share. Revenue was $488.9 million versus $500 million for the same quarter last year. For the first six months, profits came in at $18.6 million or 36 cents a share, compared with $10.1 million, or 19 cents a share, for the same period last year.

Recession Can't Take All of the Credit
The ability of Pep Boys to squeeze sizable profits out of largely stagnant revenue is evidence of good management, especially when you consider that the auto industry has, like housing, been a decimated field. But while housing affected the adjacent home improvement business, with both Lowe's (NYSE: LOW) and Home Depot (NYSE: HD) feeling the aftershocks, the story wasn't quite the same in the auto parts business. While the adjacent auto parts business has felt some of the effects of the chilling economy in the auto industry, there have also been some more uplifting results. Car repairs and parts supply businesses fared better than home improvement, which is probably because consumers need to keep their cars running. With that in mind, Pep Boys can't be completely let off the hook for not having a better top-line performance, which some of its competitors have achieved.

Big Three Auto Parts Retailers
Advance Auto Parts (NYSE: AAP), Auto Zone (NYSE: AZO) , O'Reilly Automotive (Nasdaq: ORLY), Pep Boys' competitors, together have 25% of the commercial repair market. This is a segment where revenues increased for Pep Boys, and also for these other auto parts retailers. Advance Auto Parts, arguably the strongest in this strong group of competitors, reported a 7% increase in both revenue and profits in its latest earnings report which came out in mid-August. Its commercial sales were up 14%, as the company also continued aggressive supply chain improvements and added new stores. Auto Zone continues to rack up impressive earnings numbers, quarter over quarter and year over year, despite the bad economy. The company continues to expand in its public sector contracts. O'Reilly, likewise, which continued the trend toward consolidation in the industry when it bought CSK, had robust earnings and blowout revenue increases. O'Reilly's stock has shot up in the past year, and Auto Zone and Advance Auto Parts have also seen healthy stock increases.

The trend towards consolidation shows that scale is very important in this business. Smaller players like US Auto Parts Network (Nasdaq: PRTS) also exemplify the importance of scale, as the company's sales and earnings, unlike its larger competitors, have been way off throughout the recession.

The Bottom Line
So where can Pep Boys pep up their business? Though there is hardly agreement on the outlook for the auto parts aftermarket retailers, Wall Street observers have been largely positive, despite "cash for clunkers" and the damper left over the consumer by the recession. There is concern that the do-it-yourself trend is declining, so Pep Boys will need to continue to strengthen its commercial trade and continue streamlining its operations. There is certainly room for Pep Boys to increase its revenue in both commercial and consumer trade, but long-term it will be important to see how Pep Boys distinguishes itself from its potent competitors in the auto parts retailing space. (To learn more, see Analyzing Auto Stocks.)

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