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Pep Boys Still Needs a Tune-Up

What's more, given the fact there continues to be an obvious divergence in the company's service/merchandise model, management should now seek to do what the numbers say should have been done several years ago -- kill merchandise. This is the only way to get Pep Boys back to solid growth. It's costing too much money to compete with Wal-Mart's lower prices.

For instance, while same-store sales did decline again this quarter by 1.3%, the service business still grew -- albeit modestly by 0.2%. The merchandise business, however, declined year- over-year by 1.7%. But when looking at the merchandise business on a GAAP basis, the same-store number is even worse, coming in at decrease of 2.6% year over year.

Essentially, that part of the business, from which Wal-Mart has been stealing share, is not carrying its weight. I don't believe that management has made it clear how it plans to turn things around and get back the leverage that it needs. Plus, consumers have long complained that Pep Boys stores are, in most cases, in "undesirable locations." I don't know if I necessarily agree with that. But I don't think this is the sort of reputation that serves the interest of sales growth.

To date, I doesn't seem like management has publicly discussed what (if anything) it plans to do about its "locale" status. But after the company's purchase last week of 17 Discount Tire Centers from AKH Company, it's clear that Pep Boys certainly "loves L.A." This acquisition, which now brings the total of Pep Boys stores in the U.S. to 750, means that 20% of the stores (150) are now located in California.

If this deal was an answer to Pep Boys' dubious store image, it may work. But given the expectations presumed in the stock price, I will be more impressed if the 17 new stores can help drive better revenue and comps. To the extent this deal can bring better store efficiency and space utilization, it's not out of the question to expect Pep Boys to generate better long-term cash flow. But that's a big if.

As I've said, after so many long battles with failed improvement attempts this is still a company that has been in a perpetual turnaround mode for almost two decades. Management has not shown that it can repair the engine, at least not without an excruciating waiting period. To that end, until there are clearer signs of progress, I can't in good conscience recommend this stock.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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