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

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

F3Q09 Earnings Call

December 8, 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

Anthony Cristello - BB&T Capital Markets

Jeff Blaeser - Morgan Joseph & Co.

Bret Jordan - Avondale Partners

Analyst for Greg Malik – Morgan Stanley

Presentation

Operator

Greetings and welcome to The Pep Boys - Manny, Moe, and Jack third 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. Thank you.

Ray Arthur

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

The format of the call is similar to our previous calls. First Mike will provide opening comments regarding our results and strategic priorities, then I will review the financial performance, balance sheet, and cash flows for the third fiscal quarter of 2009. We will then turn the call over to the operator to moderate a question and answer session and the call will end at 9:30 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 webcasting the conference call on www.investorcalendar.com. For anyone on the webcast who does not have the financial statements, you can access them on our website, www.pepboys.com.

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

Mike Odell

Thanks, Ray. Good morning, everyone and thank you for joining us today. We are pleased to report Pep Boys' first comparable store sales increase since the fourth quarter of 2006 and also the first total store customer count increase since the first quarter of 2004 as we continue to progress with our operational turnaround. Our vision is to be the automotive solutions provider of choice for the value oriented customer and I do want to start by thanking the Pep Boys team and our stores, distribution centers, and support center for the progress we have 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.

We do still have more hard work ahead of us but it’s nice to see three quarters of improved 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.

The third and fourth quarters have typically been difficult for Pep Boys as the seasonal drop in sales has historically dropped us into an unprofitable condition. But because of our planned cost savings and an increase in sales, we delivered a $2.1 million net profit for the quarter against the loss of $7.3 million last year.

Ray will walk you through the unusual items when he reviews our financial statements but in summary, the gains on property sales, the impairments of assets held for sale, and a few other unusual items roughly offset. Our operating profit was $10.1 million in the third quarter of 2009, as compared to a $5.0 million loss in the third quarter of 2008, representing an improvement of $15.1 million. The results reflect a sales increase, improved total gross margin, primarily due to fixed cost leverage in our service business, and planned reductions in operating expenses.

For the first three quarters, operating profit is $50.3 million in 2009, as compared to $21.4 million in 2008. 2009 and 2008’s operating profit included gains from asset sales of $1.3 million and $9.6 million respectively, so that represents a $37.2 million improvement in operating profit before any gains on asset sales. Our year-to-date operating margin is now 3.4% and our long-term goal is to achieve a mid and then high single-digit operating margin with the gap being closed equally through both continuing operational improvements and also growth through our service and tire centers.

We are pleased with our cash flow from earnings, working capital management, and several opportunistic sale leasebacks that we executed during the third quarter. Ray will speak more about these during his comments, but basically they are at favourable cap rates that allow us to pay down debt while also adding more service and tire centers.

To remind everyone, there are four key strategies that underpin our vision. It starts with earning the trust of our customers every day, which is the top of mind focus of our 18,000 associates. Our primary business strategy is to lead with our service business and to grow by adding service and tire centers. This is followed by our next business strategy, which is to create a differentiated retail experience by leveraging our strength as the automotive superstore. And finally, we are leveraging our automotive superstores and our service and tire centers to provide the most complete offering for our commercial customers, and the vision to be achieved from executing these strategies is to transform Pep Boys into the automotive solutions provider of choice for the value-oriented customer. We want to be the one place that does and has everything automotive.

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