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Pep Boys Contiues To Repair The Shop

Posted: Dec 09, 2009 10:05 AM by Sham Gad

Tickers in this Article: AAP, AZO, PEP, WMT

Pep Boys (NYSE:PBY), the iconic auto repair shop featuring Manny, Moe and Jack, reported third-quarter figures that show the company moving in the right direction. Nevertheless, the company needs some more work before it can become the darling it once was. None other than mutual fund legend Peter Lynch owned stock in this business many, many years ago, albeit during more pleasant economic times. The investment was a home run for Lynch.

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Moving Forward
The days of Lynch and Pep Boys are long gone. The most positive piece of news coming out of the earnings release was that Pep Boys earned a positive comparable store revenue increase since the fourth quarter of 2006, as well as an increase in overall customer count since the first quarter of 2004. That led to a very nice quarter-over-quarter comparison. Net income came in at $2.1 million for the quarter against a loss of $7.3 million over the same period last year. Sales, however, remained flat quarter over quarter and for the first nine months comparison. It seems that cost cutting is for everyone these days.

Generation DIY
As the economy continues to put people out work, more and more folks begin to appreciate the value of "do it yourself." When possible, folks attempt to fix their own cars before using a mechanic. That bodes well for places like AutoZone (NYSE:AZO) and Advance Auto Parts (NYSE:AAP) that cater to the do it yourself crowd. Despite the fact that customer count increased for the first time since 2004, one quarter is not enough to signal a turnaround. Cash for Clunkers certainly did not help either by taking thousands of used cars off the roads for good.

Current Situation
Shares in Pep Boys are up almost 100% over the past year and are no longer cheap. In addition, the company has over $300 million in debt and has lost money for the past three years. Pep Boys' quarter shows signs of repair, but the times have changed for the automotive service industry since the days of Peter Lynch. Now you have Wal-Mart (NYSE:WMT) offering automotive service stations in many of its stores and that is always cause for concern. (For related reading, check out Your Car: Fixer-Upper Or Scrap Metal?)

Bottom Line
The third quarter was decent for Pep Boys, but the company and the industry continues to face headwinds. Time will tell how such changes will change the dynamics going forward.

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By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

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