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Debt refinancing results in 3Q loss for Pep Boys

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Pep Boys-Manny, Moe & Jack posted a net loss of $6.8 million on net sales of $509.6 million for its third quarter ended Oct. 27, 2012. That compares to net income of $7 million on sales of $522.2 million for the same quarter of fiscal 2011.

Comparable store sales decreased by 2.7%, broken out as follows:

* a 0.2% increase in comparable service revenue (labor sales),

* a 3.5% decrease in comparable merchandise sales, and

* a 5.4% decrease in retail sales (DIY and commercial).

Comparable service center revenue (labor plus installed merchandise and tires) was relatively flat for the third quarter.

"Positives for the quarter include a 3.4% increase in comparable service customer transactions and recovering tire margins,” says CEO and President Mike Odell.

“The service customer increase was again driven by maintenance and repair services. Tire margins had declined significantly over the previous 19 months, but have now been recovering for the past three months.

"We also reached our next eCommerce milestone with the launch of Buy Online, Ship to Home," says Odell. "This complements our previously launched online capabilities of service appointment scheduling, TreadSmart (tires from information to installation) and Buy Online, Pick Up In Store. We are continuing to further integrate our complete automotive service offerings and automotive superstore with our emerging digital capabilities."

The company  also refinanced its debt during the quarter, which reduced the principal by approximately $95 million and extended  the maturity to 2018.

"While this refinancing activity resulted in a one-time charge to interest expense of $11.2 million, it also reduces our annual interest expense by approximately $11 million," says Executive Vice President and Chief Financial Officer David Stern.

For the first nine months of fiscal 2012 (which ends at the end of January 2013), Pep Boys recorded net income of $27.4 million on net sales of more than $1.5 billion. Compared to the first nine months of fiscal 2011, income was down (by 17.7%) and sales were up (0.1%).

According to BB&T Capital Markets analyst Bret Jordan, the recovering tire margins are a bright spot in "another choppy quarter" for Pep Boys. He says tire sales represent roughly 20% of the company's sales.

"Given significant deferral in tire purchases nationally in recent years and the likely improvement in category sales in winter, we believe Pep Boys is likely to see improvement in segment sales and margins as we enter the cold weather months," adds Jordan, who gives Pep Boys' stock a "Buy" rating.

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