Auto repair service and parts retailer Pep Boys (NYSE:PBY) reported solid second-quarter earnings results. The automotive and aftermarket company registered sales increases as well as a profit boost over its same year-ago quarter.

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Profits Edging Up
Pep Boys' sales increased from $488.9 million in the second quarter last year to $504.9 million this year's quarter. Net income was $10.6 million, or 20 cents per share, compared to $7.7 million, or 15 cents a share last year's quarter. Same store sales were up 1.8%, with a slight decrease in comparable service revenue offset by a slight rise in comparable merchandise sales. While this is the sixth consecutive quarter of improved profitability, it was driven by what the company admits is discipline in ringing profits out of modest sales increases.

Pep Boys and the Competition
Pep Boys has improved its earnings significantly in the last couple of years. Pep Boys' CEO Michael Odell points out that the company earned more money last year than in the last decade combined. The company is opening new service and tire centers, as well as super centers and what are called "super hubs", to bring its services closer to the neighborhoods in which consumers live and work. Yet Pep Boys has lagged behind strong competitor Auto Zone (NYSE:AZO) in most categories.

Is Modest Growth Good Enough?
While Pep Boys grew its sales at a 3.3% rate in the quarter versus last year's quarter, Advance Auto Parts (NYSE:AAP) grew its sales 7.2% and Auto Zone increased its revenue by 9.9%. On the fundamental measure of return on invested capital (ROIC), which strips out the use of debt, Auto Zone's ROIC in the last 12 months is 32.6%, Advance Auto's is 23.8%, and O'Reilly Automotive (Nasdaq:ORLY) has a 10.6% ROIC. Pep Boys' ROIC is 4.37%. US Auto Parts Network (Nasdaq:PRTS) has a 1.64 ROIC. Neither the sales growth rates nor the ROIC ratio are decisive in themselves, but they're part of the picture of where Pep Boys is along the competitive landscape of the auto parts retailers. (To learn more, see Spot Quality With ROIC.)

Pep Boys' Prospects
One can make the investment argument that Pep Boys doesn't have to have the blockbuster results that Auto Zone and Advance Auto are ringing up, and that's a point to be noted. Each auto parts retailer has a slightly different business mix and approach, and Pep Boys has clearly turned its fortunes around since the pits of the recession, so that's a plus. The company continues to do better, with an expansion plan that makes sense for its market. It's just that with the recession having provided the helpful demographic shift of owners keeping their cars longer, these should be flush times in the auto repair industry. Pep Boys should and still needs to take greater advantage of that.

The Bottom Line
Pep Boys stock was recently trading at $9.29 per share, which is not far over its book value of $8.84. Its debt to equity ratio, at 0.66, is higher than the industry average of 0.14. Its current P/E is 17.55 and its forward multiple is 12.57. These are not bad numbers, but we'd like to see more robust sales and earnings growth from the company. Until then, Auto Zone and Advance Auto are better stocks to consider.

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