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Mixed Bag from Pep Boys

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Pep Boys -- Manny, Moe & Jack reported a significant increase in profits to $13.2 million or 25 cents per share (excluding debt refinancing expense of $11.2 million and an asset impairment charge of $8.8 million) in the third quarter of the year ended October 27, 2012 from $7.0 million or 13 cents per share in the comparable quarter of prior year. With this, profits in the quarter surpassed the Zacks Consensus Estimate by 8 cents.

The company’s revenues for the quarter decreased 2.4% to $509.6 billion from $522.2 million a year ago. It missed the Zacks Consensus Estimate of $532.0 million.

Comparable sales slashed 2.7% due to a 3.2% drop in the company’s comparable merchandise revenues to $401.1 million, which was partially offset by a 0.8% increase in comparable service revenues to $108.5 million. In the U.S. automotive aftermarket, the company generated Service Center revenues of $271.4 million, which was flat year-over-year, and Retail business revenues of $238.2 million, a 5.6% decline from the prior year.

The decline in merchandise revenues can be attributable to a fall in the Retail business revenues. Meanwhile, the increase in service revenues was due to a 0.2% increase in comparable store service revenues resulting from higher customers, which was partially offset by decrease in the average transaction amount per customer.

The company launched the Buy Online and Ship to Home in the eCommerce business. This move will be adding to the other online capabilities of the company including TreadSmart (tires from information to installation) and Pick Up In Store. The company further plans to integrate automotive service offerings and automotive superstores with the digital capabilities.

Financial Details

Pep Boys had cash and cash equivalents of $78.7 million as of October 27, 2012, up from $58.2 million as of January 28, 2012. Total debt amounted to $200.0 million as of October 27, 2012 compared with $295.1 million as of January 28, 2012.

During the quarter, the company reduced debt by $95.0 million and extended the maturity period to 2018. This refinancing activity leads to a one-time charge of $11.2 million, while it reduced annual interest expense of the company by approximately $11.0 million.

During first nine months of fiscal year 2012, the company generated cash flow of $116.2 million compared with $85.1 million in the first nine months of fiscal 2012. Capital spending decreased to $36.8 million from $50.8 million in the first nine months of 2011.

Our Take

Pep Boys, based in Philadelphia, 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.

The company, which competes with O’Reilly Automotive Inc. (ORLY - Free Report) , AutoZone Inc. (AZO - Free Report) and CarMax Inc. (KMX - Free Report) , currently retains a Zacks #2 Rank, which translates into a short-term (1 to 3 months) Buy rating.

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