The auto parts industry has been on a surge from quite some time. As the average age of vehicles in U.S continues to increase, so does the demand for repairs and maintenance. According to IHS Automotive, average age of vehicles on the road stands at 11.4 years. Thus, people need to spend on the wear and tear of auto parts in order to keep the cars in good condition.
However, auto parts retailer The Pep Boys (PBY, Financial) seems to be less benefited from this uptrend. Its share price has been on a continuous decline and its recent quarter too was a lackluster one. The numbers were below the Street’s estimates, sending its share price down. Let’s take a closer look.
Weakness throughout
Revenue slipped 0.3% to $525.8 million as compared to last year’s quarter. This was driven by same store sales decline of 1.8%, as comparable store sales of merchandise dropped 3.8%. However, comparable service revenue surged 5.4% as demand for the retailer’s services increased.
The worst performing segment, which dragged down the revenue, were the tire segment and the Do-It-Yourself (DIY) segment. On the other hand, segments such as repairs and service maintenance operations showed strength. Also, the digital and commercial business witnessed growth.
The retailer’s strategy of remodelling its stores benefitted largely. It has changed the look of its stores to make it look like a car service center rather than a local mechanic’s shop. This helped in attracting more customers to its stores. Therefore, the company plans to remodel 50 more stores by the end of next year. Further, it aims to reduce the cost of investment related to the revamp by $150,000.
This cost saving initiative should help in increasing the bottom line, which stood at a break-even point as compared to earnings of $0.10 per share. This was much lower than the analysts’ estimate of $0.16 per share. The bottom line suffered due to loss in the tire business and one time charges related to asset write-downs.
The bigger picture
When compared to its peers such as AutoZone (AZO, Financial) and Advance Auto Parts (AAP, Financial), Pep Boys has been a poor performer. Its share price has dropped by 6% since the beginning of the year, whereas AutoZone and Advance Auto registered stock price appreciation of 12.2% and 23.6%, respectively.
Both the peers have been able to perform well through the strategy of acquisition. For instance, AutoZone acquired Auto Anything, an online retailer of auto parts, which strengthened its online business.
Even Advance Auto Parts’ acquisition of General Parts International has been instrumental to its growth. In fact, this buyout made Advance Auto the largest aftermarket retailer in the U.S.
Currently, Pep Boys have a trailing P/E of 89.84, which is significantly higher than the industry average of 23.99. Also, it is higher than that of AutoZone and Advance Auto which have a P/E of 17.32 and 24.09, respectively. This makes Pep Boys an unattractive stock.
Conclusion
It is surely not the right time to invest in this auto-parts retailer. Its weak performance, declining sales, inability to manage costs and an unattractive valuation make it an undesirable pick. Further, weakness in its tire business as well as the DIY business should be recovered in order to bring back the company to profits. Therefore, investors should stay away from this company.
