Standard & Poor's Ratings Services affirmed its corporate credit rating of ‘B’ on Philadelphia-based auto parts supplier, Pep Boys - Manny, Moe & Jack (PBY - Analyst Report). The agency also revealed its issue-level rating on the company’s debts.
S&P assigned a ‘BB-’ issue-level rating on the company’s proposed six-year $200 million term loan. The recovery rating on the term loan is '1,' which implies a higher (90% to 100%) expectation of recovery for creditors in the event of any default or bankruptcy.
The issue-level rating on the company’s existing senior secured term loan due 2013 is ‘BB-’ with a recovery rating of ‘1.’ Meanwhile, the issue-level rating on Pep Boys’ $200 million senior subordinated notes due 2014 is ‘B’ with a recovery rating of ‘3,’ which indicates the agency’s expectation for a meaningful recovery (50% to 70%).
Overall, S&P ratings on the debt depict a “vulnerable” business risk profile and an “aggressive” financial risk profile of the company. The agency believes the company has a weak competitive position, given its competitively disadvantaged store base. It is also worried about weak industry conditions which could hamper Pep Boys’ service and tire center (STC) expansion plan, aimed at reducing average store size and increasing service- and maintenance-related revenues.
Pep Boys supplies tires, batteries, new and remanufactured parts for vehicles, chemicals and maintenance items, fashion, electronic, and performance accessories. It also provides non-automotive merchandise such as generators, power tools and personal transportation products.
In the second quarter of the year ended July 28, 2012, the company saw more than six-fold jump in profits to $76.7 million or $1.43 per share (excluding merger termination fees and severance costs) ended July 28, 2012 from $11.9 million or 22 cents (excluding asset impairment charge, acquisition related expenses and benefit from the release of state tax valuation allowances) in the comparable quarter of prior year. With this, the automotive parts supplier’s profits drove past the Zacks Consensus Estimate by a significant margin of $1.28 per share.
Revenues in the quarter grew marginally by 0.6% to $525.7 million from $522.6 million a year ago. It was in line with the Zacks Consensus Estimate. The revenue growth was mainly driven by the improvement in the company’s service business.
The company believes strong industry fundamentals driven by consistent demand for maintenance and repair services will drive its earnings. However, rising gas prices is expected to mar its sales.
Further, the company intends to improve its debt structure. It aims to reduce long-term debt by approximately $100 million, settle its interest rate swap, extend its maturities and reduce its overall interest expense.
The company, which competes with O’Reilly Automotive Inc. (ORLY - Analyst Report), AutoZone Inc. (AZO - Analyst Report) and CarMax Inc. (KMX - Analyst Report), currently retains a Zacks #3 Rank, which translates to a short-term rating of Hold.