Pep Boys Puts the Pedal to the Metal

On Tuesday, Sept. 8, Wall Street was treated to a big run higher in shares of automotive after-market chain Pep Boys (PBY). The stock was up 8% in anticipation of the company’s earnings release after the closing bell. Well, Pep Boys did manage to post an increase in their second-quarter profit, but they did so largely as a result of a pedal-to-the-metal cost-cutting effort.

The Philadelphia-based company said its second-quarter profit revved-up 42% over last year’s Q2 to $7.7 million, or 15 cents per share, even as revenue fell 2%. Although the company cited growth in revenue from its service segment, the all-important retail barometer of same store sales declined 2.3% Merchandise sales also declined in the quarter, slipping 4% compared to the year ago period.

To be certain, Pep Boys earnings gains, achieved via a combination of revenue contraction and belt-tightening, is nothing new. This quarter’s earnings reports have been replete with companies managing to beat their bottom line numbers, yet stall out on their top-line figure. But in the case of Pep Boys, does this mean the company is likely to run out of gas in for the rest of the year, or do they have a little more fuel left in the tank?

As you might expect, the company’s management thinks they are on the road to recovery. “We are pleased with our performance for the quarter and year-to-date and remain on-track with our turnaround,” said CEO Mike Odell, who added, “Our service center and commercial businesses show strong revenue growth and our core DIY retail business is stable. The current environment for sales of more discretionary items remains challenging for now.”

That last comment is the real key here. Will consumer spending, especially on auto-related products, start to improve in the final months of the year? Will growing unemployment wreak havoc on the retail sector at large, and especially on DIY auto retailers such as Pep Boys?

While no one knows the answer to that larger question just yet, there are a few things we can say here with respect to this auto retailer’s shares.

First off, PBY shares are up 144% year to date. That kind of run higher is almost never sustainable. In fact, so far in Wednesday’s trade the shares are down over 4%. I would be inclined to steer clear of PBY shares here just based on the technical picture. You don’t want to be buying into a rally that’s taken a stock up 144% in just over eight months, and you definitely don’t want to buy into that stock’s rally as revenues decline and as same store sales slide.

Oh, and don’t forget about that matter of a challenging environment for sales of more discretionary items.

Related Articles:

Subscriber Sign in