The Pep Boys
Combined revenues were $550.8 million, up 0.9% from the third quarter of 2005. The big news was that service revenue increased 3.9% compared with third-quarter 2005. This had been a major drag on previous periods. (For a complete breakdown, check out the Fool by Numbers.)
As for highlights, management would like to draw your attention to its EBITDA (earnings before all of the bad stuff) performance, which is sometimes used as a proxy for cash flow. Why, you might ask? For the obvious reason that it is improving. And even though that's a positive sign, Pep Boys has a long way to go before generating economic profits. I estimate that Pep Boys needs at least 9% in operating margins before it can begin to create value for its shareholders.
This should be realistic, given the performance of some of its competitors. AutoZone
Now, it's going to take time to gain those types of profits. I wonder, though, if those in current control are willing to be patient enough. If this past year's activity in the boardroom is any indication, it's going to be a tumultuous ride.
Let's review some highlights year-to-date:
- In February, the company was prompted to hire Goldman Sachs
(NYSE:GS)to "pursue strategic alternatives," which means "find a private equity buyer." No high enough bids were found.
- In July, the now ex-CEO, Lawrence Stevenson, was forced out and replaced by current interim CEO William Leonard.
- In August, the company opted not to sell itself, but rather gave up four board seats to activist shareholder James A. Mitarotonda of Barington Capital (he took one for himself).
- Later in August, the board was expanded to 11 to include another shareholder activist, Thomas R. Hudson Jr. of Pirate Capital.
With all this change in the boardroom, let's hope there's at least one mechanic who can keep the rest of the wrenches in line. If a leader can emerge and has the skills to tune up Pep Boys' operations, then this could be a solid turnaround investment opportunity.
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