PHILADELPHIA—Pep Boys-Manny, Moe & Jack will invest $65 million this year to open 31 Service & Tire Centers and seven supercenters, including about $3 million to convert six existing “supercenter” locations in the Tampa, Fla., area to the prototype “neighborhood” style store concept the company has been test marketing there for the past several months.
Pep Boys opened the prototype store in north central Tampa in March. The Philadelphia-based tire, auto service and auto parts retailer describes the new store concept—which features “neighborhoods” within the store—as designed to appeal to a broader swath of customers.
Last year the company opened 20 tire centers and six supercenters and converted seven supercenters into “super hubs.”
Pep Boys is budgeting $525,000 to cover the cost of converting each of the supercenters in Tampa, Chairman Mike Odell told financial analsysts in the company's first quarter conference call.
In order for the stores to generate the desired 15-percent after-tax internal rate of return, Mr. Odell said, the converted locations have to improve sales 13 percent in the first year of operation.
Mr. Odell said the results to date at the prototype store are “significantly higher than that.”
At the same time, though, he said Pep Boys expects “to read this market further before proceeding to any other markets,” and that the firm expects the conversion costs will come down further in a bigger rollout.
“When you experience the (new) store,” he said, “you will clearly see our vision for Pep Boys to become the best alternative to the dealer and also how we can use our retail business to drive our service business. While all parts of our business have seen a lift in the first store, the strongest lift has been in service, which supports our lead-with-service growth plans.”
Mr. Odell went on to say Pep Boys already has begun “talent selection and development” related to the Tampa project.
In general, he said, Pep Boys' strategy “leads with service now more than ever as we still favor the fundamentals for (do-it-for-me) over the long haul.
“The demand for maintenance and repair remains consistent, which has been driving the growth of our service customer base. We also still intend to provide a great value, but that value will be more oriented toward raising the customer experience that we deliver in both our service business and our retail business.”
For the quarter ended May 4, Pep Boys suffered a 55.7-percent drop in operating earnings on 2.2-percent better sales of $536.2 million,
Net income more than tripled to $3.86 million on a one-time tax benefit due to state hiring credits. The drop in operating income—to just 0.7 percent of sales—can be attributed primarily to lower gross profits from service revenues. Comparable sales increased 1 percent, based on a gain of 4.2 percent in comparable service revenue and an increase of 0.1 percent in comparable merchandise sales. The marginal growth came despite the chain having 25 more stores in operation than a year ago.
Mr. Odell said all of Pep Boys' service business categories experienced positive sales comps, except for tires, and “while not quite positive yet, tire sales comps are improving and we are capturing more margin dollars from each tire sold.”
Pep Boys operated 763 stores at the end of the quarter.