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Pep Boys posts 2Q earnings of nearly $1.5 million

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Pep Boys-Manny, Moe & Jack posted earnings of $1.47 million on sales of $578.5 million for the 13 weeks ended July 29, 2006. That compares to earnings of $832,000 on sales of $577.4 million for the same period in 2005.

(The company's earnings were net from continuing operations before the cumulative effect of its change in accounting principle.)

The board of directors also tabled "any strategic or financial alternatives" until the company improves its operating results.

Comparable sales were up 0.4% as a result of a 0.4% comparable merchandise sales increase, which includes merchandise Pep Boys sold through both its retail and service center lines of business. Comparable service revenue, which was limited to labor sales, was flat.

Comparable retail sales (DIY and commercial) decreased 0.5%, while comparable service center revenue (labor plus installed merchandise and tires) increased 1.7%.

For the 26 weeks ended July 29, the company recorded earnings of $603,000 on sales of $1.13 billion. That compares to a net loss of $1.5 million on sales of $1.14 billion for the same period a year ago.

Comparable sales decreased 0.3%, comparable retail sales decreased 1.7% and comparable service center revenue increased 2% for the 26-month period.

"During a time of transition and external distraction for the company, and in a difficult macro environment, the company posted flat operating results," says William Leonard, who took over as interim chairman and CEO when Larry Stevenson resigned July 18.

"While we need to begin posting significant absolute improvements, I believe the resilience of this organization reflects the talents of its store employee base and the strength of its customer franchise.

"Based on my early days here, I am encouraged by the operational opportunities that lay before us, and my faith in the potential of this company has been reinforced. I remain convinced that the company's best days are ahead of it."

According to Chief Financial Officer Harry Yanowitz, the company made progress in several significant areas despite a difficult environment. "We have been restrained in our capital spend and made notable progress in working capital management. We ended the quarter with merchandise inventories down slightly from the end of the year, and down approximately 3% from last year's second quarter.

"In our "Line of Business Format," as adjusted to reflect our new co-op advertising arrangements, margins for the second quarter were down slightly from the same quarter last year, with slightly higher retail merchandise margins offset by lower tire margins and higher depreciation and occupancy costs. On this basis, SG&A was down approximately $4.2 million. On an unadjusted GAAP basis, margins were up approximately 1.1% and SG&A was up $6.3 million from the same quarter last year."

Cash flow generation was strong, he says. "During the first six months of the year, we have repaid over $60 million in indebtedness and generated over $86 million in Net Cash Provided from Operating Activities. We remain comfortable with our liquidity profile."

In the second quarter, the company separately identified "Net Gain from Sales of Assets" from other operating activities, says Yanowitz. During the same period, "SG&A increased by approximately $1.4 million due to costs associated with our strategic review process and approximately $1.1 million due to executive severance, and was reduced by a $2.1 million settlement from a credit card issuer class action suit."

Pep Boys had this to say following the conclusion of its strategic review process with Goldman Sachs & Co. "While the process produced interest from a number of potential investors, at this time the board of directors believes that any strategic or financial alternatives will be more profitably revisited when the company's operating results have improved.

"The board will continue to review opportunities as they arise, but expects to focus on ensuring that the company's operating results reflect the company's potential."

Pep Boys' stock price on the New York Stock Exchange closed at $9.81 a share on Tuesday, Aug. 15. That compares to a 52-week high and low of $16.55 and $9.33, respectively.

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