Pep Boys-Manny, Moe & Jack (The) (PBY)

PBY 
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The Pep Boys – Manny, Moe & Jack (PBY)

F2Q09 Earnings Call

September 9, 2009 8:30 am ET

Executives

Ray Arthur - Chief Financial Officer

Mike Odell - Chief Executive Officer

Scott A. Webb - Sr. VP of Merchandising & Marketing

Analysts

Jeff Blaeser - Morgan Joseph & Co.

Bret Jordan - Avondale Partners

Sean Haydon – Yield Capital

Anthony Cristello - BB&T Capital Markets

Brian Lester – The Abernathy Group

Stephen Chick – FBR Capital Markets

Greg Malik – Morgan Stanley

Presentation

Operator

Welcome to The Pep Boys second quarter 2009 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host Mr. Ray Arthur, Executive Vice President and Chief Financial Officer of Pep Boys.

Ray Arthur

Good morning and thank you for participating in Pep Boy's second quarter fiscal year 2009 conference call. On the call with me today are: Mike Odell, Chief Executive Officer of the company; Scott Webb, SVP Merchandising and Marketing; and our Vice President and Corporate Controller, Sanjay Sood.

The format of the call is similar to those done by Pep Boys in the past. First Mike will provide opening comments regarding our results and priorities then I will review the second quarter of 2009 financial performance, balance sheet and cash flows. We will then turn the call over to the operator to moderate a question and answer session and we plan on ending the call no later than 9:30 a.m. Eastern Time.

Before we begin, I’d like to remind everyone that this conference call is governed by the language at the bottom of our press release concerning forward-looking statements, as well as SEC Regulation FD. In compliance with these regulations, we are Web casting the conference call on www.investorcalendar.com. For anyone on the Web cast who does not have the financial statements, you can access them on our Web site at PepBoys.com.

I will now turn the call over to Mike Odell, our Chief Executive Officer.

Mike Odell

Good morning and thank you for joining us today. We are now six quarters into our three-year plan to turnaround Pep Boys and we remain on track. Our vision is to be the automotive solutions provider of choice for the value-oriented customer, and I want to start by thanking the Pep Boys' team in our stores, distribution centers, and support center for the progress we've made in earning our customers' trust on a more consistent basis, for returning us to profitability, and for beginning to establish the foundation for our future growth.

As we have said before, 2009 is a year of positive change and building for the future, following the disruptive change that was required in 2008. And 2010 is the year we expect to complete most of the foundational work in our turnaround.

We still have more hard work ahead of us but it's nice to see two quarters of results from our work so far. I continue to be very pleased with the level of pride we see returning to our organization as our associates embrace and drive forward with our vision and strategies. Our people are the heart and soul of our business and they are proud of our return to core automotive.

Our operating profit was $18.7 million in the second quarter of 2009, as compared to $11.9 million in the second quarter of 2008. 2008's operating income also included $4.1 million in gains from asset sales.

So there is an $11.0 million improvement in operating profit before gains, which I characterize as service and commercial revenue growth, offset by a sales decline in retail accessories and complimentary product, as well as modest improvement in overall margin rate and significantly lower expenses. Basically, the trends that we discussed on our last call in June continued for the balance of the quarter.

For the first half, operating profit was $40.0 million in 2009 as compared to $26.0 million in 2008. 2008's operating profit also included $9.6 million in gains from asset sales.

So that leads to a $23.4 million year-to-date improvement in operating income before gains, which is also characterized by service and commercial revenue growth, offset by a sales decline in retail accessories and complementary product, as well as modest improvement in overall margin rate and significantly lower expenses as planned.

To remind everyone, there are three key strategies that underpin our vision. The first and primary strategy is to lead with our service business and to grow by adding service and tire centers. The second is to create a differentiated retail experience by creating the automotive superstore. And the third is to leverage our automotive superstores and our service and tire centers to provide the most complete offering for our commercial customers.

And we are executing this plan to transform Pep Boys into the automotive solutions provider of choice for the value-oriented customer. We want to be the one place that has, and does, everything automotive.

We have been very pleased with all aspects of our service business, except for tire sales. Service center customer account was up 3.2% during the second quarter, while service center comparable store revenue was up 2.3%. Maintenance and repair services were up nicely above customer count and revenues across all categories. We had double-digit increases in maintenance services, alignments, and ride control and high single-digit increases in brakes, starting and charging, and engine performance. This trend is due to our marketing programs, store execution, and favorable industry trends.

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