Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Can Pep Boys Gain Some Momentum From Old Man Winter?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Old Man Winter has been releasing his wrath on the northern states of the U.S., closing schools and turning the roads and byways into pot-hole adventures. While that is bad news for car owners, it is good news for auto-parts retailers like The Pep Boys -- Manny, Moe & Jack (NYSE: PBY  ) , which does a considerable business in the tire-replacement area. 

The company's share price has been fairly listless since an aborted private equity takeover bid in early 2012. However, with a new operating strategy in place, code named Road Ahead, and with the weather drumming up business, is the company worth betting on?

What's the value?
Unlike its primary competitors that focus on selling parts and accessories, Pep Boys generates a roughly equal revenue share from its retail- and service-center units. While the top 10 auto-parts chains have consolidated roughly half of the retail trade, the larger service side of the business is more fragmented, providing growth opportunities for Pep Boys through the capturing of a portion of the roughly 60% market share controlled by small independent shops. 

On the downside, though, Pep Boys' dual-focused operating model requires a larger average store size, 20,000 square feet versus roughly 7,000 square feet for its competitors, which generally limits its footprint to more populated market areas.

In FY 2013, Pep Boys has continued to struggle to find growth, reporting a 0.7% top-line gain that was hurt by negative comparable-store sales. Despite a new store layout that caters to car enthusiasts via designated Speed Shop areas, part of its Road Ahead strategy, the company has had trouble attracting larger volumes of customers to its stores. More importantly, the high support and administration costs required by Pep Boys' focus on two major lines of business has kept its operating margin at an unhealthy sub-2% range.

Biting off more than it can chew
Clearly, Pep Boys is focused on growing its service-center business, as evidenced by its recent purchase of 17 service and tire centers in Southern California, a group that will be folded into the company's own growing chain of service and tire stores. Alongside its supercenters, Pep Boys has been building a network of small stores that provide light vehicle and tire services, but maintain little retail inventory, with the hope of leveraging nearby traditional Pep Boys locations. However, that strategy seems to have little chance of success, given that a growing percentage of its retail stores' customer base is commercial customers, the very people that its service centers are competing against.

Competitor Advance Auto Parts (NYSE: AAP  ) has noticed the changing mix of customers in its stores, a trend that it attributes to the increasing complexity of vehicles' systems, repairs for which are better left to professional technicians. The company's recent acquisition activity has been meant to strengthen its relationship with its commercial customer base, including its purchase of General Parts International, the No. 1 domestic distributor of import vehicle parts.

Like Pep Boys, Advance Auto Parts has struggled with negative comparable-store sales in FY 2013 due to weak customer volumes among its do-it-yourself (DIY) customer base. Nevertheless, the company was able to power an overall top-line gain, thanks to its acquisition of commercial-focused parts distributor BWP, as well as an organic increase in its store network. It has also used a strong pricing environment for auto parts to maintain solid operating profitability, which has helped fund its acquisition activity.

Meanwhile, fellow competitor O'Reilly Automotive (NASDAQ: ORLY  ) continues its long-standing focus on the commercial-customer subset, a group that accounted for more than 40% of its total sales in its latest fiscal year. The company's recent expansion of its distribution center network, as well as the installation of a more advanced electronic parts catalog in all of its stores, was primarily designed to quickly and efficiently meet the needs of this important customer group.

Despite the operating challenges of its competitors, it has been just another day at the office for O'Reilly in FY 2013, reporting a 7.1% top-line gain that was aided by a solid 3.9% increase in its comparable-store sales. More importantly, the company's focus on high-touch customer service and long-term customer relationships, preached throughout the company's environs, has allowed it to maintain a healthy level of profitability, providing the financial flexibility to pursue selective acquisitions.

The bottom line
Old Man Winter may give Pep Boys' service sales a nice lift, but the company probably needs a rethink of its dual-business-line strategy, if it hopes to compete against hard-charging, focused competitors like Advance Auto Parts and O'Reilly Automotive. While the company certainly has promise with a national network of stores, it still needs to find a way to turn that promise into higher profits. As such, investors should stay away from this work in process.

6 growth picks that have the potential to crush the market
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2819155, ~/Articles/ArticleHandler.aspx, 8/30/2015 4:13:00 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Robert Hanley

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:02 PM
AAP $176.48 Up +0.25 +0.14%
Advance Auto Parts… CAPS Rating: *****
ORLY $240.99 Down -1.97 -0.81%
O'Reilly Automotiv… CAPS Rating: *****
PBY $11.74 Up +1.01 +9.41%
The Pep Boys - Man… CAPS Rating: ***