Say it isn't so, guys. The Pep Boys - Manny, Moe & Jack (NYSE:PBY) reported first-quarter results today, and investors will notice that they were positively not peppy.
Earnings per share fell into the red, at $0.04, compared with profits of $0.25 in the same quarter a year ago. This follows lower profits in last year's fourth quarter, which follows an earnings decline from the third quarter, which follows... you get the picture. Because the Street was expecting earnings of $0.21, I would call this quarter a miss.
The company, which operates 593 retail stores in 36 states, looked to be revving it up from 2002 through mid-2004, before the wheels fell off last summer. In the face of solid growth at competitors Advance Auto Parts (NYSE:AAP), AutoZone (NYSE:AZO), and O'Reilly Automotive (NASDAQ:ORLY), our intrepid trio definitely has its work cut out for it.
Looking at the quarterly financials, you can see an organization struggling to reinvent itself, hitting a lot of speed bumps along the way. Revenues fell just under 1%, with the retail side of the business slightly positive, but service in the bays was down. Gross margins fell by over 4%, and selling, general, and administrative expenses were up over 1%.
The company's problems are largely self-induced. The Pep Boys is investing heavily in the future, with a major store refurbishment program underway. During the first quarter, it completed remodels of 76 stores in Los Angeles, its largest market. At the same time, the company has completely reorganized its field management structure, dividing store employees into a retail team and a service team. Add to that an intensified training program, higher advertising, and the rollout of a new point-of-sale system, and you have an organization that is stretched and not executing well.
I don't disagree with the strategic directions Manny, Moe & Jack are taking. All of the above makes sense for a specialty retailer, particularly a company that is not adding new stores, but instead must grow by making more of what it has. But strategy and execution are two different things. Until The Pep Boys shows it can execute on the basics of running a retail business, look out for more speed bumps, and perhaps a dented fender or two.
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Fool contributor Timothy M. Otte lives in Atlanta and welcomes comments. He doesn't own shares in any of the companies mentioned in this article.
