Due to sagging consumer spending, auto parts retailers are more or less sinking except Pep Boys (PBY) . Shares of PBY are up 8.08 percent to $11.37 on June 10, continuing the momentum it gained in after-hours trading on June 9 following the release of the company’s Q1 earnings results. .
The Nuts and Bolts of Pep Boy’s Earnings
For the period through May 3, 2014, the Philadelphia, Pa.-based company Pep Boys-Many, Moe & Jack posted net income of $1.61 million, or $0.03 per diluted share, comparing with $3.90 million, or $0.07 per share one year earlier. In addition, sales edged up to $538.80 million, compared to the Thomson Reuters consensus estimate a profit of $0.06 per share on $542.10 million in sales. Comparable store sales for the quarter decreased 1.40 percent, and the retail sales 1.90 percent.
The company stated that they expect sales trends to improve in the second half of the year while reporting that its service business has improved during the first five weeks of the current quarter.
“Our first-quarter operating improved significantly over the prior year driven primarily by higher gross margin,” said CEO Mike Odell in a statement. “Our core service business remains solid and we expect tire sales trends to improve in the back half of the year. Our service business footprint also continues its growth, with 25 new Service & Tire Centers planned for 2014.”
Currently, there are more than 800 Pep Boys locations in 35 states and Puerto Rico, which represent more than 7,500 service bays. The company would also strengthen its customer strategies and digital operations.
“Our target customer groups have been endorsing our improved customer experience with new and repeat business, but we need to get to critical mass to accelerate our performance,” said Odell in the statement. “We also continued to see strong growth in pepboys.com digital operations, which includes on-line service appointments, tire sales that are made on-line and installed in our stores, ship-to-home sales and products that are ordered on-line and picked up in our stores. From a mix of business perspective, sales through digital operations accounted for 4.0 percent of our sales during the first quarter as compared to 2.3 percent for the prior year.”
According to its financial results, Pep Boys shows strengths in multiple areas, such as good cash flow from operations, growth in earnings per share, and low debt-to-equity.
The company’s net operating cash flow has significantly increased by 87.56 percent to -$3.45 million since the year-earlier quarter, which also vastly outpaces the industry average rate of 15.13 percent. The current debt-to-equity ration, 0.37, is low and is below the industry average, implying that there has been successful management of debt levels. However, it should be noted that the company's quick ratio of 0.20 is weak, and demonstrates a lack of ability to pay short-term obligations.
Rest of Industry Lost Ground, But Not For Long
The auto parts industry is not a monolith, evidenced by the slight dropdown for the rest of the sector. Aside from Pep Boys, the rest of the industry sank on the day. AutoZone, Inc. ($AZO) lost .02 percent, O’Reilly Automotive, Inc. (ORLY) was down 0.34 percent, Advanced Auto Parts Inc. (AAP) lost 0.58 percent, and U.S. Auto Parts Network, Inc. (PRTS) shed 0.58 percent on the day.
Though they didn't move in tandem on the day, the auto parts industry as a whole still looks bright. Several factors have contributed to the increased demand for auto parts. As the economic recovery in the U.S. matures, the initial surge in new auto sales has slowed down. Fewer people buy new cars, and there is a greater need to fix and maintain their current vehicles. Furthermore, customers prefer keeping their cars longer.
The second major factor is inclement weather. The harsh winter last year has benefited auto parts makers considerably. It looks that, as Pep Boys' earnings indicate, the industry looks to continue the gains they experienced last year.