The Pep Boys – Manny, Moe, & Jack (NYSE: PBY) missed third-quarter earnings by a long shot in the company's recent release. The automotive retailer, which specializes in automotive repair, maintenance, part replacement, merchandise retail, and other services, released a report that sent its share price plummeting after the market close. This miss made investors question the company's business model and its future. Although Pep Boys has been around since 1921, it has experienced increasing competition from the likes of AutoZone (AZO -1.45%) and O'Reilly Automotive Inc (ORLY -3.53%). Based on its most recent earnings release, drastic measures must be taken if the company is going to survive this increased competition.

Breaking it down part by part
Pep Boys missed Wall Street estimates big time in the third quarter ended Nov. 2, 2013. Net earnings totaled just $1 million, or $0.02 a share, which was down $6.8 million or $0.11 from the third quarter of fiscal 2012. Pep Boys missed Wall Street estimates by $0.12 as analysts anticipated the company earning $0.14 per share. Along with EPS, Pep Boys also fell short of revenue estimates of $521.74 million.  In fact, revenue actually declined in comparison with the same period in fiscal 2012, falling 0.5% to $507 million from $509.6 million. 

The issues don't end there
Pep Boys also disappointed on comparable-store sales, which fell by 2.8% due to a small increase in stores' service revenue and a 3.6% decline in stores' merchandise sales, including a decline of -2.5% in service center revenue and a -3.1% drop in retail sales. Pep Boys CEO Mike Odell has claimed that the company's maintenance and repair services sector has remained strong over the past six consecutive quarters while tire sales have risen due to cooler temperatures. Such strength seems hard to believe in the face of the company's latest results, but its fourth quarter and full-year earnings will tell the whole tale in the coming months. 

Auto parts against auto parts
You might conclude that auto parts as an industry might be doing poorly given Pep Boys' latest earnings report, but in fact the industry is doing quite well. The proof is in competitors' earning releases, namely AutoZone and O'Reilly Automotive.

In its most recent quarter, AutoZone reported an increase of 16.2% in EPS, a 5.1% increase in total revenue, and a 0.9% increase in same-store sales, which was icing on the cake. In addition, AutoZone implemented 100 new commercial programs while acting on continued investment opportunities and expanding its chain across the United States.

O'Reilly Automotive also reported solid third-quarter results with revenue increasing by 8% over the same period a year ago and net income jumping 17% to $186 million from $159 million. In just its most recent quarter, O'Reilly Automotive opened 50 new stores to reach a total of 4,087 stores, while AutoZone opened only seven stores in its most recent quarter. 



The automotive industry has been experiencing steady growth with some retailers doing better than others, and clearly the current winners are companies like AutoZone and O'Reilly Automotive. It remains to be seen if Pep Boys can compete with its competitors in a marketplace often dominated by price and service quality. The latest results out of Pep Boys have given investors pause as well as good reason to question if the company is worth an investment. Given the economic recovery and the strong performances out of the major U.S. automakers, one has to wonder why Pep Boys cannot register comparable-store growth like its competitors have done.

Foolish takeaway
Shares of Pep Boys sold off with good reason. Not only did Pep Boys fall drastically short of expectations in regard to both earnings and revenues estimates, but the company did so in an environment where its competitors are growing their own revenues, earnings, and comparable-store sales. Any investor looking to step in and invest with Pep Boys should hold off on making such a move until it is clear that this nearly 100 year old company can thrive in this environment. Pep Boys has certainly been through a lot, but at the moment competitors like AutoZone and O'Reilly Automotive are giving the company a run for its money.