PHILADELPHIA (Aug. 12, 2004) — Adding name-brand tires to its product mix hasn't yielded much yet for Pep Boys—Manny, Moe & Jack, but management expects the change to start paying dividends by next year.
Pep Boys' service business—including tire sales—proved a “disappointment” in the second quarter, with comparable service sales down 5.3 percent, the firm said in its quarterly statement.
Service center revenue, which includes labor as well as parts and tire installation, fell to $233.8 million from $248.1 million last year. Retail revenue, which includes do-it-yourself and commercial sales, increased to $359.6 million from $308 million from a year ago. Comparable retail sales grew 16.7 percent as comparable sales overall rose 6.9 percent.
For the quarter, Pep Boys reported sales of $593.4 million, up 6.7 percent from $556 million last year. Pep Boys reported net earnings of $14.6 million, compared with a loss last year of $13.6 million.
For the first half of the year, Pep Boys reported sales of $1.16 billion, up 8.7 percent from $1.07 billion last year. Comparable sales grew 8.8 percent as retail comp sales increased 17.4 percent, and service sales fell 2 percent. Net earnings improved to $30.8 million from a loss of $20.9 million last year.
The Philadelphia-based automotive service chain introduced name brand tires—including Continental, General, Goodyear, Michelin and Hankook—to its shops in May. However, company officials said sales from those products aren't expected to make a significant effect on service revenues until about the second quarter of next year. In fact, if anything the tires are causing a negative impact on the bottom line in the short-term as Pep Boys builds inventory and trains employees, but tires are expected to have a positive impact by the fourth quarter of this year with a “meaningful” effect next year, CEO Larry Stevenson said.
“Ultimately (name brand tires) will enable us to double our tire business,” said President George Babich. Pep Boys expects name brand tires to increase private label sales as well.
The service business also was affected by execution miscues such as training needs, overall headwinds such as economic uncertainty and high oil prices and reduced advertising for service, officials said.
The retail business was strong as the company had implemented several initiatives to strengthen that business. Some of those initiatives are continuing, such as Pep Boys' plans to redesign its stores. So far only nine of the company's 595 stores have been completed with more following in 2005 and 2006.
“I am pleased with the progress that we have made over the past four quarters on the retail side of our business,” Mr. Stevenson said in a statement. “...On the other hand, we still need to do a lot with the service side of our business.”
To improve the service business, Pep Boys has given Mr. Babich responsibility for the operations side of the business. Harry Yanowitz, who previously was senior vice president of strategy and business development, will take over as CFO from Mr. Babich, who held that and the president post.
Mr. Babich said he will accelerate advertising and other programs aimed at aiding the service business.