PHILADELPHIA—Pep Boys - Manny, Moe & Jack fell into the red in the quarter ended Aug. 2 on lower sales and higher operating costs, prompting management to step up efforts to reduce expenses and consider closing as many as 63 Supercenter stores in the coming years.
The automotive parts and service retailer reported a net loss of $300,000 for the second quarter on 0.3-percent lower sales of $525.8 million. Operating profit plunged 81.6 percent to $3.27 million. The loss compares with net earnings of $5.4 million a year ago.
In connection with plans to cut operating expenses, Pep Boys is evaluating closing or selling as many as 63 Supercenter stores, pending review by management to determine suitability for additional investment under the firm's “Road Ahead” upgrade program, according to Pep Boys President and CEO Mike O'Dell.
Many of the 63 stores so targeted are leased locations, Mr. Odell said during the firm's second quarter earnings conference call with analysts, so the company is evaluating those leases and the stores' locations to determine if they are suitable for converting to the more customer-centric Road Ahead format.
Some of the locations that Pep Boys is looking at for closure are more valuable as real estate, so they likely would be sold for the better return, he said in response to an analyst's question.
“Similarly, we...continue to evaluate the profitability of our store portfolio and close those stores that do not justify their expense burden as their leases expire or other real estate opportunities arise,” he said.
At the same time, Mr. Odell said Pep Boys expects to convert 508 Supercenters to the Road Ahead format in the coming years, at an average cost of about $400,000.
The investment/divestment strategy for the Supercenters is in addition to plans Pep Boys is formulating to cut costs related to the base business by up to $25 million a year and cutting $50 million in costs by fiscal 2015 year-end through “optimizing our inventory mix....”
At the same time, Pep Boys noted it expects capital expenditures this year to reach about $80 million to cover the opening of 21 Service & Tire Centers, relocate two Supercenters, open one Supercenter, convert 43 stores to the Road Ahead format and install Speed Shops at 25 existing Supercenters.
Mr. Odell noted in his comments that the firm's new Service & Tire Centers “continue to perform better than pro forma,” when those stores are built using the Road Ahead format in areas matching Pep Boys' targeted demographics.
The company now has 30 Supercenters and 45 Service & Tire Centers operating under the Road Ahead format, and the experience gained in these conversions will allow the company to convert additional locations with lower per-store investment, Mr. Odell said.
Philadelphia-based Pep Boys has now completed conversions of stores in the Tampa, Fla., San Francisco, Boston and Charlotte, N.C., areas and now will target the Cincinnati (eight locations), Denver (five locations) and Baltimore (10 locations) markets for conversions to be completed this year.
The stores converted so far have required, on average, investments of about $550,000 per store, but the company now foresees a range of conversions starting with a moderate version covering exterior rebranding and installing a customer lounge and speed shop at a cost of $300,000 to $350,000.
Mr. Odell also noted in his remarks that retraining staff in line with the Road Ahead rebranding has proved harder than anticipated, with staff turnover in some case as high as 40 percent.
“When we convert a store to our Road Ahead model, it includes intensive customer care training,” Mr. Odell said. “And to be successful requires not just product knowledge, but also the right personality and selling skills.
“As a result, our associate turnover has been high. When our vision is achieved, it resonates with our customers and our associates, but it is hard work to get there.”
In addition, Pep Boys said its investments in pepboys.com digital operations are paying off. Business generated online grew 52 percent during the quarter and now accounts for 4.6 percent of overall sales.
Separately, Pep Boys recently changed its advertising/promotional tagline to: “Trust The Boys To Get You There” from “Pep Boys Does Everything For Less.”
As for the firm's second-quarter loss, Mr. O'Dell cited lower revenue from the firm's do-it-yourself and tires categories for the reduced sales, which more than offset revenue gains in the firm's service business.
Pep Boys' net earnings for the six months ended Aug. 2 sank 85.5 percent to $1.34 million on 0.1-percent lower sales of $1.06 billion. Operating income dropped 56.2 percent to $9.32 million, or 0.9 percent of sales.
Mr. Odell noted that Pep Boys' service maintenance and repair business, along with its digital and commercial operations, continue to be “bright spots.”
Pep Boys operates about 800 stores with more than 7,500 service bays in 35 states and Puerto Rico.
To reach this reporter: [email protected]; 330-865-6145.