A quick look under the hood at Pep Boys (NYSE:PBY) suggests that the automotive retail and service chain has seen better days. But the good news is that it appears the company's management team isn't sitting idle.
In fact, it's embarking on a fairly major initiative to turn around the company. But before I go into what the company is doing to tune its engine, it's important to first understand how tough things currently are. To that end, simply take a closer look at the company's Q3 results.
Disappointing Q3
In the period ended November 3, Pep Boys reported a loss from continuing operations of $21.7 million (42 cents per share). In the comparable period a year ago the company lost $10.7 million or 20 cents a share. Meanwhile its sales declined to $535.4 million from $550.8 million last year. For the record, analysts had been expecting the company to post a roughly 2-cent-per-share profit on $538.9 million of revenue. Finally, its same-store-sales slumped 2.9%.
Pep Boys Major Malfunction
Pep Boys problems are many. First off, when I was a kid, and my dad needed his car fixed or some obscure car part that only dads know about, we headed to Pep Boys - good ol' Manny, Moe and Jack. Times have changed and the automotive space has become highly competitive in recent years.
Pep Boys used to rule the roost, but many dealerships have built out and are emphasizing their service centers.
You also now have places like Jiffy Lube,Advance Auto Parts (NYSE:AAP) and Autozone (NYSE:AZO) for buying parts. Also, many discounters such as Costco (Nasdaq:COST) and Wal-Mart (NYSE:WMT) now offer services and parts as well.
Finally, there's the economy and rising gas prices, and the aesthetics of its stores. Some of its locations look a bit worn when compared to the competition. (For more on the importance of appearance, see Analyzing Retail Stocks.)
The Solution
Management isn't sitting idly by. In conjunction with its quarterly numbers, the company said that it is marking down slower moving merchandise and will begin in earnest to focus on what it calls its "core automotive merchandise". In other words, the company wants to focus on items it thinks will bring people in the door, such as its tire selection, customized car accessories and parts.
It also announced the closure of 31 underperforming stores (roughly 5% of its store base) and that in association with these closures it will be laying off as many as 550 employees. It plans to add smaller neighborhood-locations going forward to "further leverage existing inventories, distribution network, operations infrastructure and advertising spend".
My Take
I think that this is a much needed effort that's being undertaken. Ultimately I think it will probably help garner foot traffic and build loyalty among its customers. My interest is also piqued by recent insider buying. (To learn more, see When Insiders Buy, Should Investors Join Them?)
But with all of this in mind folks, would I buy the stock based upon these plans? No. And that's because I think that a turnaround could take several years to play itself out. Plus there's no guarantee of its success. After all, the company is up against some competitors with pretty deep pockets. However, stay tuned because I intend on reviewing this story again as the turnaround efforts play themselves out.
Bottom Line
Pep Boys has seen better days, and its third quarter results are evidence of that. However, management is undertaking a variety of tasks that it thinks will ultimately help drive same-store and overall sales. I applaud these efforts; however, I plan to continue to wait to see how these efforts play out a bit before getting involved in the stock.
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