Following the release last week of Pep Boys’ first quarter 2011 results, in which the company noted it is continuing its aggressive service center growth strategy, BB&T Capital Markets said the parts and service retailer is on the right track for the long run.
“We believe that management is on the right path to transforming Pep Boys over the intermediate-longer term into a successful competitor in the very fragmented professional service aftermarket through a combination of greenfield development activity and acquisitions,” said BB&T’s Tony Cristello. “In our opinion, this is critical to the company driving improved productivity and higher returns on capital from its existing asset base, principally its oversized (relative to its peers) supercenter store locations, which will essentially be used as an extensive hub store network. That being said, in the near term its recently opened Service and Tire Centers will continue to weigh on the company’s overall profitability until these locations gradually mature into higher revenue producing units.”
In the short-term however, there will be some challenges for Pep Boys, said Cristello, who remains concerned about the impact of $100/barrel oil and nearly $4/gallon gasoline on miles driven and aftermarket demand levels.
“Historically, fuel expenditures north of 3.5% of disposable income have signaled deterioration in aftermarket fundamentals, and we would note that fuel expenditures are currently running at an estimated 4.5% of income,” Cristello stated.