Pep Boys' (NYSE: PBY) operations are in dire need of a major overhaul. While its sales team and mechanics are hard at work selling auto parts and servicing vehicles, management needs to get even busier fixing its own equipment.
Overall sales for the quarter fell more than 3% to $558.9 million, with same-store sales down 3.6%. Larger-ticket items stalled the top line in this soft retail environment, but a buy-three-get-one-free tire promotion helped to offset weak traffic patterns -- service-center revenue comps improved by 4.9%.
Despite gloomy sales, the company managed to report a significant bottom-line improvement, attributable to management's significant cost-cutting achievements in sales, general, and administrative expenses. Earnings from continuing operations came in at $0.08 a share, a sharp rise from the $0.03 a year earlier. Management also assured investors that it has a number of short-term solutions in the works for the company's woes in other areas, such as focusing on variable pricing implementation, productive staffing levels, and ongoing tire promotions. Now, I'll grant that these tactics may have positive effects throughout the next quarter, or even the next year. But I don't see any of this helping the company in the long run, since it doesn't address the top line, which Pep Boys needs to boost if it wants to continue to succeed.
Pep Boys has been trying to expand the service portion of its business, but it's struggling with the trend among car owners to take their mechanical problems to the dealer. When they do, Pep Boys is left with low-margin, commodity-type services such as oil changes. Even higher gas prices are hurting this part of the business, since more expensive gas means people try to spend less time on the road, and less time on the road means less maintenance.
Updating merchandise and marketing is a top priority, and Pep Boys will discuss that strategy in November. Honestly, I'm not expecting too much. The entire industry is struggling. Advance Auto Parts (NYSE: AAP) reported disappointing results, with a meager 1.3% increase in comps, and AutoZone (NYSE: AZO) is struggling to even keep its comps headed in the right direction.
This company carries a hefty load of debt on its balance sheet -- almost $624 million as of last quarter. To help unload some of it, the company plans on a sale/leaseback on its properties, from which it expects to generate $1.3 billion. Although this strategy will initially untie cash to help pay off some of the accumulated debt, Pep Boys will have to turn around and begin paying higher rents to the new lessors of its assets. Between the lackluster sales and the leaseback action from the second quarter, my advice would be to steer clear of Pep Boys for now.
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Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at rothmanviews@comcast.net. He doesn't have any positions in the companies mentioned.
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