Gross margin continue to erode, including a Q3 drop of 150 basis points. Even though the company deserves credit for service revenue growth, service margin still managed to drop by five points. This is despite the fact that customers have responded well with higher transactions.
An argument can be made that the higher traffic actually hurt. Here too, Wal-Mart, which has an auto services business of its own, is undercutting Pep Boys' margins. And from a profitability standpoint, it doesn't appear as if management has an suitable answer. So does Pep Boys want to be a service-oriented business or a retail business? The "joint model" is still not working - not to the extent that it does for AutoZone and Advance Auto Parts.
Expectations for the Fourth Quarter
According to Yahoo! (YHOO), Pep Boys will announce fourth-quarter and full-year fiscal 2012 earnings on Tuesday. It's worth noting that the company has yet to confirm this. Here again, this brings up concern about the company's management and direction, which also suggests there's no enthusiasm about what the report may say. For that matter, the Street isn't expecting much.
Average estimates for full-year revenue is at $2.07 billion, which would represent 0.2% year-over-year growth, or roughly flat from the $2.06 billion posted a year ago. The company is expected to report earnings of 31 cents a share, which would be a year-over-year decline of 42% from earnings per share of 54 cents. These are not exactly breath-taking numbers.Absent some clear fundamental changes, it's hard to see a silver lining with Pep Boys, especially since this turnaround story has been going on now for 15 years. Management must still address the fact that its stores are often considered to be in "undesirable locations" and are inefficiently operated from the standpoint that the store seems to have more space than is utilized.