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Pep Boys Still Driving to Nowhere

Stocks in this article: PBY AAP AZO WMT

NEW YORK ( TheStreet) -- It's true in life and it's true in business. The first step in fixing a problem is admitting that there is one. I think struggling retailer/auto services giant Pep Boys (PBY) has reached that point, if it hasn't completely driven past it.

As I've discussed recently, if management is not careful, this company many not have enough gas to hang a U-turn and reverse course.

While Pep Boys has made some decent operational progress, investors are getting frustrated and wondering if the business model can still work. After so many long battles with failed improvement attempts, Pep Boys just needs to admit what the numbers already say: the model can't work.

There's no longer a point to hanging on to a failing business plan, which is causing investors plenty of headaches, while prolonging the company's recovery.

What Does Pep Boys Want To Be?

That's a question management has yet to answer clearly. Although expectations have been low for some time, the company continues to miss its targets. However, it seems that the focus is beginning to shift more to a services business and less on retail. I'm just not convinced that it's for the better.

The company's third-quarter results showed evidence for this, including a 2% revenue decline that also highlighted much fundamental and operational concerns. For instance, it is clear that merchandise, which fell last quarter by 3%, is a major problem.

Pep Boys, with rivals such as Advance Auto Parts (AAP) and AutoZone (AZO), can seem to get comps going in the right direction, as evident by the 2.7% year-over-year decline. Plus, merchandise revenue also fell 3.5% on a comp basis.

However, competition from traditional auto parts rivals is only part of the problem. There is also the likes of Wal-Mart (WMT), which has been eating away not only at Pep Boys' merchandise business, but also its services revenue. Although Pep Boys did ok in its response, as services traffic grew, I just don't think it was the right move.

Although the company managed to increase Q3 service revenue by 1%, which also grew 0.2% on a comp basis, margin on the service business, which includes low-service oil changes, is not enough to have the sort of impact to make services a worthwhile focus -- and it showed.

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