Pep Boys Falls Behind

By Greg Sushinsky | June 05, 2011 AAA

Automotive aftermarket chain The Pep Boys, Manny, Moe & Jack (NYSE:PBY) reported earnings that disappointed Wall Street. The company showed a slight increase in sales and income for its first quarter, but both missed analyst expectations.

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Gas Prices and Weather Dampen Earnings
The company cited high gasoline prices as well as rainy weather as holding back the consumer during the quarter. Sales increased from $510 million in the year ago quarter to $513.5 million in the first quarter this year, though comparable store sales decreased 0.6%. Analysts looked for $537 million in sales, according to Thomson Reuters I/B/E/S. Net income edged up to $12.37 million from $11.95 million in the year ago quarter. Earnings per share remained flat at 23 cents, with analysts looking for 30 cents. Pep Boys has had a trend of flat or lower revenue in the last five years, with net income in the black only in the last two. Wall Street has been looking for a promised turnaround from the company.

A Tough Sector
The automotive aftermarket for parts and service is a highly competitive space. The leader, AutoZone (NYSE:AZO), recently reported another stand out quarter with sales up 8.6% and income up over 12%. It has strong cash flow and has been repurchasing shares. It's an aggressive, focused and successful company. Advance Auto Parts (NYSE:AAP) and O'Reilly Automotive (Nasdaq:ORLY) are two other major players that are not far behind. Both continue to deliver impressive results. Smaller US Auto Parts Network (Nasdaq:PRTS) has a more uphill battle, as it has been fighting through losses in its last several years. The possibilities of consolidation are still strong in the sector.

Pep Boys Current Business
The results for the first quarter showed a 1.6% comparable gain in service sales, with a 1.2% decrease in merchandise sales. The tire centers helped lead the service segment growth. The company added several service and tire center locations, which were funded internally with cash on hand. Pep Boys replacement parts division for commercial vehicles as well as its replacement tire selling are considered by the company as two of its strong points, along with its usual automotive maintenance and repair services. Pep Boys is striving to hold its value niche. Whether this will be enough to fend off such vigorous competitors as AutoZone, Advance Auto and O'Reilly is unclear.

The Bottom Line
Bloomberg reported that Pep Boys suspended its search for a buyer in February when the company allegedly couldn't get a sufficiently attractive bid. Although the company declined to comment then, it had supposedly wanted a bid in the low teens, but could only get nibbles at $10 or $11 a share, so it took itself out of the market. There are a couple of possible things to surmise about this. Pep Boys knew and still knows it's in a difficult competitive position. Although it's attempting to keep up with competitors, the probability that potential buyers didn't value the business close to what the company may have is telling. Now, by posting an essentially flat quarter, Pep Boys is effectively losing ground. (Accident, theft, vandalism - make sure your coverage will protect you when you need it most. Check out Top Tips For Cheaper, Better Car Insurance.)

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