Pep Boys - Manny, Moe & Jack (NYSE:PBY) -- yes, that's the company's full title -- assembled its fourth-quarter earnings report yesterday. Is this auto parts and services business worth your attention, or should you steer clear?
Total sales increased roughly 6.5% to $586.1 million. Adjusting for the presence of an extra week during this past quarter, comparable merchandise sales and comparable service revenue decreased 1.5% and increased 2%, respectively. The top-line growth was decent, but the bottom line really impressed. The company reported a profit of $0.15 per diluted share from continuing operations (before an accounting change). Last year at this time, Pep Boys reported a loss of $0.42 per diluted share.
Pep Boys' mantra is clear: Reduce costs and focus on margins. Interim CEO William Leonard cited a conservative approach to discounting, and a reduction in operating costs, as drivers for the improved quarterly performance. He also handed over the reins of corporate power to new head mechanic Jeff Rachor. According to CFO Harry Yanowitz, the company will seek more ways to make Pep Boys a lean machine of efficiency by exploring additional cost cuts.
Pep Boys is doing a lot better in terms of operational cash flow. For the full fiscal year, the company generated roughly $90 million in net cash from operating activities, compared to using more than $38 million for operating activities in the previous fiscal year. Capital requirements decreased this year as well, coming in at roughly $48 million, compared to $86 million last time around. As a result, Pep Boys generated positive free cash flow in 2006.
I applaud the company's hunt for improved operating efficiencies, especially its effort to keep discounting practices from hindering margin expansion. I also like that a new CEO is in place. Those improvements should help it compete with Advance Auto Parts (NYSE:AAP), CSK Auto (NYSE:CAO), AutoZone (NYSE:AZO), which recently released its earnings to the market, and O'Reilly Automotive (NASDAQ:ORLY).
I'm not so happy, however, that the stock closed yesterday at the upper end of a 52-week range. In addition, the share price rallied more than 7% in after-hours trading, making the dividend yield approximately 1.6% as of this writing. That's a bit low, considering that Pep Boys' dividend payout has remained stagnant the last several years. I'd have to see a pullback in the stock price, as well a quarter or two of continued earnings improvement, to truly pique my interest.
Pep up with further Foolishness:
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Fool contributor Steven Mallas owns none of the companies mentioned. As of this writing, he was ranked 12,989 out of 24,330 investors in the CAPS system. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.
