PHILADELPHIAPep Boys-Manny, Moe & Jack's board of directors, reacting to market interest in a potential transaction with the auto service provider, has initiated a review of strategic alternatives to enhance shareholder value.
Those options in-clude a possible sale, merger or other form of business combination or strategic transaction.
Philadelphia-based Pep Boys, which describes itself as the nation's leading automotive aftermarket service and retail chain, said the strategic review is being undertaken at this time in light of inquiries the board has received from third parties expressing an interest in a potential transaction.
The board has determined, according to the company, that it is appropriate to conduct a strategic review that evaluates Pep Boys' current long-term business plan against a broad range of alternatives that have the potential to enhance shareholder value.
The board is encouraged by the value-enhancing initiatives that our management team has been pursuing and the progress that we have made in growing comparable store sales, driving gross margin returns, reducing expenses, shrinking inventory and unlocking the value of our real estate by rationalizing our store base, said Chairman Bob Hotz.
We will continue to focus on these value-enhancing opportunities under the leadership of Scott Sider, our new CEO.
However, in keeping with our commitment to act in the best interests of all shareholders, and given that a number of potential strategic and financial buyers have expressed an interest in discussing a transaction with Pep Boys, we have determined that it is prudent to explore strategic alternatives to determine the best opportunities for enhancing shareholder value at this time.
The board has retained Rothschild Inc. as its financial adviser and Morgan, Lewis & Bockius L.L.P. as its legal adviser.
The company said it has no set timetable for the strategic review process, nor has it decided at this time to pursue a transaction. It cautioned that there can be no assurance that the process described above will result in the consummation of any transaction or, if a transaction is undertaken, as to its terms, structure or timing.
Pep Boys said it does not intend to disclose or comment on further developments regarding its review of possible strategic alternatives unless and until the board approves a specific action or it otherwise concludes its review of strategic alternatives.
Three years ago, Pep Boys went through a private equity buyout, only to have the interested investor, Gores Group L.L.C., call off its proposed acquisition of Pep Boys following two consecutive lackluster quarters.
Then last September, Pep Boys' President and CEO Mike Odell resigned two weeks after the company reported a second quarter net loss and disclosed plans to close up to 63 Supercenters in a cost-cutting move.
More recently, Pep Boys avoided a proxy fight with its largest shareholder, GAMCO Asset Management Inc., by agreeing to nominate three directors recommended by GAMCO to be voted on at Pep Boys' annual meeting July 10.
Rye, N.Y.-based GAMCO, which owns 18.9 percent of Pep Boys' stock, originally had proposed nominating a slate of four candidates, telling shareholders it was doing so because it had little confidence that [Pep Boys'] board, as currently composed, is committed to taking the necessary steps to enhance shareholder value....
GAMCO said it believes its nominees will bring significant and relevant experience, new insight and fresh perspectives to the board.
GAMCO describes itself as a privately owned investment manager, providing services to high net worth individuals as well as for pension and profit-sharing plans, banking or thrift institutions, investment companies, other pooled investment vehicles, foundations, charitable organizations, corporations and state or municipal government entities. It's one of several companies associated with noted investment adviser and stock market investor Mario Gabelli, who is listed as one of the company's principals.
In its filings with the Securities and Exchange Commission, GAMCO pointed out that Pep Boys' cumulative returns to shareholders has underperformed compared with Standard & Poor's SmallCap 600 Index, S&P 600 Automotive Retail Index and Pep Boys' own index of peer and comparable companies.
We are pleased to have reached this understanding with GAMCO, as we believe it is in the best interests of all Pep Boys shareholders to avoid the significant cost and distraction of a proxy contest, Mr. Hotz said.
Pep Boys reported a near quadrupling of operating earnings in the quarter ended May 2 on marginally higher sales of $542.3 million, marking a turnaround from the $27.3 million net loss for the fiscal year ended Jan. 31.
First quarter operating income jumped to $23.1 million from $6 million, the company reported, but the improved results included a $10 million pre-tax gain on the sale of a leasehold interest. Net income jumped 10-fold to $11.9 million.
Pep Boys reinvested a portion of the $10 million one-time gain into converting stores in the Baltimore area to its Road Ahead customer-centric format, according to interim CEO John Sweetwood. Pep Boys will hold a grand reopening in July for those revamped stores.
The company operates 803 stores568 Supercenters and 235 Service & Tire Centers.
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