PHILADELPHIA — The Pep Boys today announced the details of a long-term strategic plan, which includes a five-year plan to refocus on core automotive merchandise.
The company plans to optimize square footage productivity and add incremental service bay density through a "hub and spoke" growth model, in the hopes of driving robust revenue and profit growth in each of its lines of business.
As part of the retailer’s plan to refocus on core automotive merchandise, the company said it will reallocate a larger portion of its inventory investment to core automotive merchandise, including additional tire inventory, a broader parts assortment and more car customization accessories. To rebalance the company’s inventory, an aggressive mark down and sell-through program has been launched for certain non-core and unproductive merchandise.
In addition, the company is piloting several business development projects aimed at higher return utilization of the excess sales floor capacity present in its existing "supercenters."
The planned "hub and spoke" growth model calls for adding smaller neighborhood service shops to its existing Supercenter store base in order to further leverage existing inventories, distribution network, operations infrastructure and advertising spend. The company said it expects to add these new service facilities both through organic growth and opportunistic local acquisitions.
In order to support the investment for the company’s long-term strategic plan, the company has moved forward with a sale leaseback process for certain existing owned real estate. The first, previously-announced sale leaseback transaction has been completed on 34 stores for gross proceeds of $166.2 million. In addition, the company today closed 31 low-return stores (approximately 5 percent of the store count) located in ancillary markets and locales with changed shopping patterns. The store closures will result in a reduction of approximately 550 store employees, approximately 3 percent of the company’s overall staff.
Commenting on the job cuts, Pep Boys President and CEO Jeff Rachor said, "Today is the first of several difficult, but essential steps that we will take towards revitalizing the Pep Boys brand and returning to dominance in the automotive aftermarket, an industry pioneered by our founders, Manny, Moe & Jack. We are confident that these decisions will serve as the foundation for Pep Boys’ long-term growth and increased shareholder value.
This is an important day for Pep Boys as we commit ourselves to becoming the largest and most profitable service and tire provider in the United States and rededicate ourselves to our DIY customers with a focused aftermarket retail offering. Our customers, associates and shareholders are all eager for Pep Boys to grow this business and re-establish our leading position in this industry. I look forward to further discussing our long-term strategic plan on our call tomorrow."
The company also announced its financial results for the third quarter ended Nov. 3. Sales for the thirteen weeks were $535,376,000 as compared to the $550,849,000 for the thirteen weeks ended Oct. 28, 2006. Comparable sales decreased 2.9 percent, including a 4.1 percent comparable merchandise sales decrease and a 2.6 percent comparable service revenue increase. In accordance with GAAP, merchandise sales includes merchandise sold through both the company’s retail and service center lines of business and service revenue is limited to labor sales. Recategorizing Sales into the respective lines of business from which they are generated, comparable Retail Sales (DIY and Commercial) decreased 8.1 percent and comparable Service Center Revenue (labor plus installed merchandise and tires) increased 4.5 percent.
Net Loss from Continuing Operations Before Cumulative Effect of Change in Accounting Principle increased to $21,650,000 (42 cents per share – basic and diluted) from $10,713,000 (20 cents per share – basic and diluted).
Sales for the nine months ended Nov. 3, were $1,640,278,000 as compared to the $1,686,015,000 recorded last year. Comparable Sales decreased 2.9 percent, including a 4.1 percent comparable merchandise sales decrease and a 2.6 percent comparable service revenue increase. Recategorizing Sales, comparable Retail Sales decreased 7.3 percent and comparable Service Center Revenue increased 3.4 percent.
Net Loss from Continuing Operations Before Cumulative Effect of Change in Accounting Principle increased to $14,234,000 (27 cents per share – basic and diluted) from $10,110,000 (19 cents per share – basic and diluted).
CFO Harry Yanowitz said the costs associated with the initial steps in the company’s long-term strategic plan will impact both the third and fourth quarters.
"Including the $38.3 million in pre-tax charges noted below (50 cents per share, after tax), our Q3 Operating Loss increased from $1.3 million in 2006 to $28.5 million in 2007. Our 2007 Q3 Operating Loss includes (i) a $32.8 million inventory write down, (ii) $3.1 million for executive severance, (iii) $6.2 million for legal settlements and reserves and (iv) a $3.8 million benefit from a company-owned life insurance policy on a former executive. Our 2006 Q3 Operating Loss included a $4.6 million legal settlement. In Q4 2007, we expect to take an additional pre-tax charge of approximately $17 million related to the store closures completed today (22 cents per share, after tax).
"Over the next 12 months, we expect that the inventory rebalancing and the store portfolio reduction will generate working capital proceeds of approximately $65 million. We expect to utilize this working capital together with the proceeds generated from our sale leaseback transactions, the first of which closed today for $166.2 million, to reduce indebtedness and grow the business," Yanowitz added.
