Pep Boys Manny Moe & Jack's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Pep Boys Manny Moe & Jack (PBY)

Q2 2012 Earnings Call

September 5, 2012 8:30 a.m. ET

Executives

Sanjay Sood - VP, Chief Accounting Officer, and Controller

Mike Odell - President and CEO

Scott Webb - EVP, Merchandising, Supply Chain, and Digital Operations

Brian Zuckerman - SVP, General Counsel, and Secretary

Analysts

Bret Jordan - BB&T Capital Markets

Simeon Gutman - Credit Suisse

Ronald Bookbinder - Benchmark Company

John Evans - Edmunds White Partners

Presentation

Operator

Greetings, and welcome to the Pep Boys Manny Moe & Jack second quarter 2012 earnings conference call. [Operator instructions.] It is now my pleasure to introduce your host, Sanjay Sood, vice president, chief accounting officer, and controller. Thank you Mr. Sood. You may now begin.

Sanjay Sood

Good morning, and thank you for participating in Pep Boys’ second quarter earnings conference call. On the call with me today are Mike Odell, president and chief executive officer, and Scott Webb, executive vice president, merchandising, supply chain, and digital operations.

The format of the call is similar to our previous calls. First, Mike will provide opening comments regarding our results and our strategic priorities, then I will review the financial performance, balance sheet, and cash flows for the second quarter. We’ll then turn the call over to the operator to moderate a question and answer session and the call will end promptly at 9:30 a.m. this morning.

Before we begin, I would like to remind everyone that this conference call is governed by the language at the bottom of our press release concerning forward-looking statements, as well as SEC Regulation FD. In compliance with these regulations, we are webcasting the conference call on www.investorcalendar.com. For anyone on the webcast who does not have the financial statements, you can access them on our website, www.pepboys.com.

I will now turn the call over to Mike Odell, our president and chief executive officer.

Mike Odell

Good morning. Thank you for joining us today. As you can tell from our press release, we’ve been quite busy this summer. The bright spot is our strategically important service business, which grew 3.8% on a comparable store basis during the second quarter, and an impressive 7.8% in customer count.

Our maintenance business was particularly strong. However, the mix shift toward oil changes did lead to a lower average ticket and a lower margin rate. Tires were up 6.7% with a strong performance in July. Our repair business has remained consistently steady with a low single digit comp.

For the foreseeable future, we expect vehicle complexity to continue to increase. Therefore, we are focused on our competitive advantage with the skill level of our technicians to perform the medium and heavy work that folks just can’t do themselves.

In the meantime, we have also been evolving our pricing and online strategies to make it easy for customers to choose us to do it for them. And our biggest lever is to continue to improve how we engage and care for our customers.

As we discussed on our last earnings call, and as you have seen in our competitors earnings releases since then, the rate of sales in the industry has been decelerating. July was a much better month for us, allowing us to achieve flat comparable store sales overall for the second quarter. I do caution, however, that tire sales were sluggish again in August and we expect the environment for tire sales to continue to be choppy this year.

Obviously our termination of the potential deal to go private back in May significantly and positively impacted our second quarter and year to date results. The impact was a net $43 million of pretax, non-operating income. As we also previewed on our last earnings call, we experienced a decline in operating profit for the quarter due to tighter margins in our service business, higher marketing spend, and new store operating expenses. Sanjay will walk you through the details in a few minutes.

Our retail business has been challenging and declined 3.8% on a comparable store basis, driven by declining customer count, partially offset by a higher average ticket. Retail margins improved 120 basis points leading to a slight increase in retail margin dollars, but there was not much difference in the performance of parts versus accessories, but as in service, performance was stronger in the warmer weather climates.

In the big picture, industry fundamentals remain sold over the long term and mixed in the short term. The demand for maintenance and repair are consistent with the primary driver being miles driven. The recent spike in gas prices could create a short term headwind. Our primary external challenge is consumer spending relative to discretionary and deferrable purchases.

Industry response to this short term challenge has squeezed tire margins for the past 19 months. Tire margins declined over 300 basis points year over year, continuing the trend that started in January of ’11. We continue to take sales price increases where the market allows it, but we are not going to raise prices at the expense of market share in this fragmented and competitive marketplace. We have been working with our supplier partners who are seeing lower production input costs, and expect to improve tire margin rates in the back half of the year.

Tire and related merchandise sales account for 17% of our total sales and 36% of service and tire center sales. With our full service capability and great price position, Pep Boys is in a very good position to succeed in service over the long haul as the industry slowly consolidates. Margins in other product categories have remained stable overall except for some mix shift.

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