This year, as it marks its 90th anniversary, Pep Boys–Manny, Moe & Jack exceeded the company's goal to open 50 Service & Tire Centers and instead hit 119 stores, with 99 by acquisition.
And the Philadelphia-based auto service and parts chain is nowhere near finished expanding its specialized tire store network. In 2012, Pep Boys plans to add 75 more Service & Tire Centers through “organic” growth or taking over already-closed auto repair facilities and rebadging them, according to President and CEO Michael Odell.
Mr. Odell spoke with Tire Business about Pep Boys' plans and said the company is keeping its eye out for potential acquisitions, both small and large, but any acquired tire and service stores will supplement the targeted 75. Pep Boys also plans to open 10 Supercenters—its larger-format, parts and service outlets—next year compared with just one this year.
“I think I've got 10 conversations going on currently with folks,” Mr. Odell acknowledged. “It's hard to predict when it happens because basically, the people we're buying from are the people who are ready to move on and do something else…. I find that there's usually a two-year lag from when we start a conversation and when they finally decide it's what they want to do.”
Although Pep Boys is “over halfway” there with finalizing the deals for some of those new Service & Tire Centers, Mr. Odell declined to elaborate on where they will be located, other than to say they're “spread out quite a bit from Los Angeles to Florida to the Northeast.”
Whether it's a closed shop or a tire dealer who's ready to retire, Pep Boys is serious about expanding its network of Service & Tire Centers through acquisition as well as organic growth. Mr. Odell told Tire Business the company “sees the opportunity to have thousands of Service & Tire Centers” nationwide.
In its second quarter 2011 investors presentation released in September, the company elaborated that Service & Tire Centers are defined as four- to eight-bay, 5,000- to 6,000-sq.-ft., full-service facilities serving a three- to five-mile trading area. The company is budgeting $400,000 to open each Service & Tire Center, with the expectation each will generate about $1 million in sales and $150,000 in pre-tax operating earnings.
By comparison, Pep Boys paid $42.6 million, plus assumption of some liabilities, for Big 10 Tire, according to the firm's 10-Q form for the second quarter, or roughly $500,000 per store.
Pep Boys' service revenue—excluding the firm's parts business—is split 59/41 between auto maintenance/repair and tire sales and related services, according to the investor presentation.
The Supercenter concept is a 13,000-sq.-ft. parts store to serve as inventory hubs for Service & Tire Centers, which are clustering around the hub to build scale/buying power and gain advertising benefits, according to Tony Cristello, managing director of equity research for Richmond, Va.-based BB&T Capital Markets.
“This should improve overall inventory turns and store-level productivity,” Mr. Cristello said. “However, I think its business segment catering to the DIY side of the business will see minimal benefit.”
BB&T Capital Markets has performed investment banking services for Pep Boys and intends to seek compensation from Pep Boys in the next three months.
With 725 total locations and approximately $2.1 billion in revenues when accounting for the 99 purchased stores, Pep Boys disclosed it has $60 million in cash and $300 million in debt at “favorable rates,” with half due in 2013 and the rest in 2014, according to the investors report.
Mr. Odell said Pep Boys is financing all its expansions with internally generated funds. “We've got cash sitting on the balance sheet, so I think we're in a pretty good position. Obviously, if you went gangbusters, you could get ahead of yourself. But we're not borrowing to do any of our deals.”
Looking at markets
Regarding market expansions, Mr. Odell said the types of markets Pep Boys is eyeing can be categorized into three groups.
“There are some markets like Los Angeles and Philadelphia where we have good presence and we're more likely to do it organically,” he explained. “Any acquisition potentially results in too much overlap. The best markets for the acquisitions are like what we did in Orlando, Seattle, Houston, as well as the panhandle of Florida and southern Alabama and in Atlanta. That's the condition of most of our markets where we have fair presence.”
Pep Boys' 2009 acquisition of 10 Florida Tire stores brought it up to 17 Service & Tire Centers in the Orlando-Daytona, Fla., market. Mr. Odell said the dealership then took over five leases prior to its buyout of 85 Big 10 Tire stores this year throughout Florida, Alabama and Georgia.
It plans to open six more Service & Tire Centers in Orlando to complete in that market, he noted. In Houston, Pep Boys had six locations initially, then acquired seven My Mechanic auto repair stores and opened two more stores.
In the Seattle-Tacoma metro area, Pep Boys operated two Supercenters then acquired seven former Big O Tires L.L.C. franchised stores earlier this year to give Pep Boys what Mr. Odell called a “mediocre presence” in that market.
The company has just about finished converting all of those stores to the Service & Tire Centers model except for some former Big 10 stores in the Florida panhandle that likely will be completed in 2012, he added.
In addition to markets where Pep Boys has fair to no presence, the company's criteria for acquisitions are a market's population, household income, a store's projected sales and income, its neighborhood, store visibility and the facility's physical condition.
When Pep Boys buys out a tire and auto service business, it keeps all the employees, including managers, and will either buy or lease the properties from the owners. If the associates are “great people, then they're going to love working for us,” he said, or else they'll leave anyway in the normal course of business.
Mr. Odell noted that Pep Boys' model is to guarantee the pay of those new store associates initially before bringing them into its pay and benefit plans, which he claimed tend to be better than what the previous ownership offered.
For the owners, Mr. Odell said Pep Boys has the financial flexibility to work with them on a deal that benefits them, especially from a tax standpoint.
“The worst thing (a dealer) could do is hold onto a business too long, let it run into the ground,” he said. “So we make it a real nice exit. To the extent that we're leasing the properties from them, then they've got a nice steady retirement income too, from a good creditworthy tenant.”
A business of convenience
Service & Tire Centers offer all the same brands as traditional Pep Boys stores: Michelin, Cooper, Hankook, Falken and Nexen brands, as well as Pep Boys' proprietary private label brands—Cornell, Futura and Definity—which are positioned with Cornell as an entry-level tire and Definity as a high-quality tire at best value.
“We stock the Service & Tire Centers with the faster movers,” Mr. Odell said. “Then we've got in the Supercenters trucks that move product to commercial customers, to other installers. So if somebody wanted a tire that's not as quick of a seller, we'll have it there for installation.”
Additionally, Pep Boys has an arrangement with American Tire Distributors Holdings Inc. (ATD) where the stores can access ATD's vast inventory if they don't have a particular tire in stock there or at the Supercenters.
Mr. Cristello said gross profit dollars attributed to the Service & Tire Center network should increase if fixed costs are kept in check and if the stores take advantage of selling ancillary services to a tire sale, such as alignments and brake service.
Service & Tire Centers also are leveraging auto parts sales, and the company quickly delivers parts and accessories from its nearby Supercenters to the stores for installation. Next year, Pep Boys will place its whole store inventory online at www.pepboys.com so that customers have the convenience of ordering tires or parts online and shipping them home or to a nearby Service & Tire Center for pickup, Mr. Odell said.
Despite all this clustering of locations, Mr. Odell said Service & Tire Centers will not compete against traditional Pep Boys stores but offer customers convenience, which then builds trust and value.
“Our issue with our Supercenters is we stopped growing almost 20 years ago,” he said. “So what happened to us on retail is we stopped growing, and everyone else came and surrounded us and customers stopped driving the 15 minutes to come to us because someone else was more convenient. For these Service & Tire Centers, from day one that I got here, so many customers would tell me, ‘I love your store, I want to go to your store but it's just not convenient.'
“Is there some cannibalization? There's a little bit…. Convenience kind of gets you into the game because you either are or you're not. Then they look for a good value for their money, but trust is No. 1.
“Trust is what keeps them coming back, and so it generates the referrals and the repeat business.”