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

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

Q3 2012 Earnings Conference Call

December 4, 2012; 08:30 a.m. ET

Executives

Michael Odell - President & CEO

Sanjay Sood - Vice President, Controller & Chief Accounting Office

Scott Webb - Executive Vice President of Merchandising, Supply Chain & Digital Operations

Analysts

Simeon Gutman - Credit Suisse

Brian Sponheimer - Gabelli & Company

Bret Jordan - BB&T Capital Markets

Ronald Bookbinder - The Benchmark Company

Presentation

Operator

Greetings and welcome to the Pep Boys, third quarter 2012 earnings conference call. (Operator Instructions)

It is now my pleasure to introduce your host, Michael Odell, President and CEO. Thank you, sir. You may now begin.

Michael Odell

Good morning and thank you for participating in Pep Boys third quarter earnings conference call. On the call with me today are Sanjay Sood, our Vice President, Controller and Chief Accounting Office; and Scott Webb, our Executive Vice President of Merchandising, Supply Chain and Digital Operations. David Stern, our Chief Financial Officer is not with us today, as he is attending to a sudden family illness and we hope they get well soon.

The format of the call is similar to our previous calls. First, I will provide opening comments regarding our results and strategic priorities and then Sanjay will review the financial performance, balance sheet and cash flows for the third quarter. We will then turn the call over to the operator to moderate a Q&A and the call will end by 9:30 Eastern.

Before I begin I do need 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 investorcalendar.com and anyone who does not have the financial statements can access them on our website at pepboys.com.

The third quarter was challenging overall, but there are several positives. Most importantly the number of customers served in our service space continues to grow and was up 3.4% on a comparable store basis the quarter.

We categorize our service customers as maintenance, repair and tires. This increase in customers served was again led by a double digit increase in maintenance service customers. Repair service customers were a getup low single digit, entire customers declined by a high single digit. However, tire margins did improve by 170 basis points year-over-year, causing comparable store tire margin dollars to increase despite the decline in sales.

As of the end of the quarter compared to last year, tire prices are up double digit, while costs are up mid single digit, reversing the margin compression we had been experiencing in 2011 and thus far in 2012.

Overall, service revenues were flat on a comparable store basis, while service product margins were up 2%. Tire sales had started to bounce back in July; however, as we cautioned in our last call we expected a choppy environment for tire sales. Based on the tire conditions we see in our shops today, we continue to expect a weather driven trend reversal, but it has not happened yet.

Our service business remains healthy despite the challenging industry environment. Pricing end margins aside from tires have been stable all year and we feel confident about our competitive position in our strategically important service business and we continue to expect vehicle complexity to increase to our benefit, therefore we continue to be focused on our competitive advantage with the skill level of our technicians, to perform the medium and heavy work that most folks just cannot do for themselves.

Retail sales declined 5.4% on a comparable store basis for the quarter. Accessories performed a little better than DIY core, but both declined. Retail product margins were up 13 basis points.

As you have seen, the rate of sales in the industry has decelerated significantly each of the past two years, so versus trend we are adding speed shop to more stores to highlight our point of competitive differentiation in retail, which is the breath of our assortments in our automotive super store. We had 16 speed shops at the start of the year. We have opened 12 more during the third quarter and plan to end the year with 37. We plan to have approximately 100 speed shops in total by the middle of next year.

Third quarter results included $11.2 million for the cost of our debt refinancing, as well as $8.8 million of non-cash store impairment changes. Operating income before impairment changes was $12.6 million for the quarter as compared to $17.3 million last year. The decline was primary attributable to the decline in retail sales and a $1.5 million increase in marketing spend to drive sales in this challenging consumer environment.

As we noted in our press release, we have reached our next e-commerce milestone with the launch of Buy Online, Ship to Home. This complements our previously launched online capabilities of service appointment scheduling, TreadSmart for tire research, purchase and installation and Buy Online, Pick up In-Store.

We continuing to further integrate our complete automotive service offering and our automotive superstore with our emerging digital capabilities that will include allowing customers to develop their own service estimates and then schedule their appointment.

We have the best pricing among national and regional service providers, so we intend to create a transparent shopping process for customers and to convert their research into appointments.

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