The Pep Boys otherwise known as Manny, Moe and Jack are a retail store that sells automotive parts and accessories, tires, and provides services such as maintenance work and installations to customers in 35 different states as well as Puerto Rico. Pep Boys is headquartered in located in Philadelphia and Pennsylvania. They have a combined total of 18,454 people working for them around their various locations.
The company was founded in 1921 and today has nearly 600 stores all across the United States as well as Puerto Rico.Pep Boys prides itself as the only national chain in automotive services, parts and accessories, and tires. The bulk of Pep Boys stores today are set up like your typical Wal-Mart, as they are in a supercenter format. The purpose of the supercenter is to provide multiple services and items for any desire of a customer. For instance there are specialty stores that operate only in Do it yourself and then there are other specialty stores that operate in Do it for me.At Pep Boys a customer can find both of these categories. Recently Pep Boys has taken a step forward by adding tire centers to their Pep Boys supercenter stores.
Pep Boys main source of income is generated from the parts and services offered to customers. Their 63% of revenue earned last fiscal period increased 3.47% between 2009 and 2010. Repair parts can be found in their stores or online at their website. Buying parts online is just as easy as going to the store now a days. When looking for parts online, a customer answers the four quick questions ; Year, Make, Model, and Engine of your vehicle. Then the customer can easily find the parts available for their repair work.
The most improved segment at Pep Boys from 2009 to 2010 is their tire division. Their 17% of total revenue earned in 2010 is up 7.08% from 2009. To find tire information can be difficult some times for those do it yourself people, on Pep Boys website they offer a diagram that helps customers figure out just what tire they currently have and what they can replace it with. Pep Boys offers a variety of different tires, ranging from performance tires to light truck and SUV tires. To go along with tires Pep Boys also offers custom wheels.
Pep Boys second largest source of income comes from all their services provided. This makes sense because of their new developed side door bays that allow customers to bring in their vehicles and let Pep Boys work on them. Revenue for this segment of their business is up 3.49% from 2009. At Pep Boys customers can receive tire services such as alignment, tire installation and replacement, or even tire puncture repair work. Also, Pep Boys performs repair services such as; Battery installation, belt and hose replacement, brake checkup and replacement. Lastly a service that all vehicles can not avoid is oil changes. At Pep Boys customers can schedule an oil change for their vehicle at one of their side door service bays. 
Pep Boys offers products to multiple users, for instance the “Do it for me” and the “Do it yourself” customers. On average Pep Boys stock their supercenters with approximately 25,000 parts. Parts range from batteries to engines, they can be new or refurbished parts, parts for import vehicles or domestic vehicles. Other products available are tires, electronics, performance accessories, and chemicals like window wiper fluid or antifreeze. A few products that Pep Boys offer for the “Do it yourself” individuals are power tools, hand tools, instruction manuals, and rain gear. Products at Pep Boys are considered high quality and range from suppliers such as Definity, Futura, or Cornell.Pep Boys direct a total of 6,027 side door service bays in almost all of their nearly 600 stores across the nation.In these service bays is where they perform task for the “Do it for me” customers. Services such as tune ups, tire changes, or shock tests. Pep Boys has three main segments of products which include: Parts and Accessories, Tires, Services and Labor provided.
A main way that Pep Boys gets parts to their customers is through one of their 600 stores located throughout the United States and Puerto Rico. Pep Boys headquarters is located in Philadelphia, PA. A few states with the most Pep Boys stores are: California with 130 stores, Florida with 60 stores, Pennsylvania with 51 stores, Texas with 49 stores, and Puerto Rico with 27 stores.Pep Boys also offers customers a website that can be accessed at www.pepboys.com. This is important to have because more users are looking to buy parts online because of the ease of access and the convenience of not having to leave their homes.
A great way to get ideas out to customers is by advertising a company’s products and services. Pep Boys does a good job at advertising with their knowledgeable and funny commercials of Manny, Moe, and Jack. Besides TV commercials Pep Boys also gets their name out to customers through the use of radio commercials as well. Pep Boys does not just want to air their commercials at any time of the day, instead they have scheduled their commercials around periods of time that they believe the automotive repair customers will be thinking about repair services.On Pep Boys website they offer plenty of coupons for customers to use when purchasing products. For example on the home page of their website, a customer can receive 10% off any service. Promotional discounts like that are great ways of attracting new customers as well as keeping old customers.
Pep Boys, “Does Everything for Less.” Pep Boys uses a cost leadership strategy because of similar products between competitors. A cost leadership strategy is intended to have the lowest prices on products to get more customers to buy from them. Pep Boys has went one step further with this strategy and has implemented a Low Price Guarantee. Their Low Price Guarantee states Pep Boys will beat, by 5%, any competitors recently advertised fee on comparable merchandise in inventory. Pep Boys also extends this offer of 5% towards comparable Tires and Services offered.
The threat of new entrants in the automotive services industry is high due to economies of scale. If every company is making the same product then customers are going to go to the lowest priced and the closest store that carries that product. This leaves a lot of room for competitors to come in and open up stores in towns that possibly already have a well established automotive store. The more stores and the more products a company can produce will limit their total cost per item. Now a company must out work their competitor to gain market share. Another factor that allows for multiple entrants in this automotive service industry is the low regulations that the government places on the industry. In this industry the government wants to promote competition because competition is good for the customer. Competition will help lower prices because the companies are trying to beat out their competitors by lowering their price to gain that market share.
In this industry the bargaining power of buyers is, unfortunately for Pep Boys, high because customers are always looking for the best price on items. When customers do not care where they get the product from but how much that product costs, it allows the customers buying power to be high. This is possible because Pep Boys and its competitors all carry the same products and if they want to gain market share they need a cost leadership strategy. To limit the Buyers' power it would be a great idea for Pep Boys to build stronger relationships with their customers, this way the customer does not mind paying that little extra for great service or reliability of the company.
In this industry bargaining power of suppliers is high. The reason behind this is because each part that a customer might be looking for is only made by one company. For instance, if a customer brings in a broke motor head off a 67 Shelby GT Mustang then Pep Boys will have to purchase that part from only one supplier which would be Ford. In this case since Ford knows they are the only one that has or can make the part then they have the option of increasing their price. Also steel is important for making parts so the cost of steel effects the price of the product and many times supplier’s prices will increase or decrease based on the price of steel. Unfortunately for business such as Pep Boys, Auto Zone, and Advance Auto Parts they will have to go along with the increase in price, but customers beware you may find that their cost gets pushed off on to you.
In this industry the threat of substitutes continues to grow as the price of oil grows. So as of right now the threat of substitutes would be classified as high. The higher gas prices are the more that people are going to avoid using their cars and substitute them with public transportation. The less people us their vehicles then the less maintenance that will be needed, thus less products will be sold at Pep Boys and other automotive service stores. Secondly since gas prices are reaching new highs, it will force people to buy newer cars that have better miles per gallon. Newer cars will not need as much maintenance as older cars so the automotive service industry will struggle. Another substitute for using one’s own personal transportation would be walking, or riding a bike. Both these activities help a person stay in shape better and are better for the planet.
Pep Boys has a high rivalry between their competitors in the automotive services industry. Some major companies that Pep Boys compete with are Advance Auto Parts (AAP), AutoZone (AZO), O’Reilly Automotive (ORLY), and numerous smaller auto repair shops.
Since there is not many ways to differentiate parts to replace on vehicles, Pep Boys and their competitors need to try and reduce prices to gain business from customers. There are many instances that a customer may visit an auto parts store which does not have the part they need. This is exactly what competitors are hoping for, and this is why customers will find a Pep Boys or another competitor like an Auto Zone right next to each other. This could be really bad for some businesses because if a customer does not find what they want at your store and then go across the street and find it at Pep Boys then the next time that customer will more than likely go to Pep Boys first when they need an item.
In the automotive repair and service industry basically every company is going to perform a cost leadership strategy so how can Pep Boys use this as a strength that no one else has? The answer to that is their slogan. Pep Boys slogan is a catchphrase that can be heard in their advertisements or red in any Pep Boys articles. Their motto is Pep Boys, “Does Everything. For Less.” This slogan can stick in customer’s heads and when it comes time for automotive repair they will think Pep Boys, “Does Everything, For Less”
The second strength that Pep Boys has over its competitors is their service garages. As a part of Pep Boys supercenter format, they offer service garages on the side of the building that assist customers in a range of services. Services include: Tune ups, Brake checks, Shock Test as well as other services. This is a strength of Pep Boys because its larger competitors do not offer this luxury and the smaller competitors that just specialize in these side door services do not offer a large a store for ‘do it yourself” customers.
A third strength that Pep Boys has over its competitors is their three mascots, Manny, Moe, and Jack. You might not think of mascots as a strength but they are. Mascots can help get your name out to community in a better way than just flyers. Mascots allow for customer interaction which could lead to more business for Pep Boys.
Pep Boys is a growing company but are still facing some challenging questions. As of right now one Pep Boys' biggest weakness is its inability to turnover its product. Their products are staying on shelves too long compared to the industry average. A low turnover ratio is a major factor to a low return on equity. A low return of equity is not good for the company or shareholders. Some questions they need to answer here is should they increase advertising expenses, or possibly lower prices on products. Something different needs to be done soon to increase their asset turnover ratio which is much lower than their competitors.
The current gas prices around the country allow opportunities for Pep Boys to advertise and expand certain business segments. According to fueleconomy.gov there are ways to increase gas mileage and save on gas prices. One tip users can try is replacing a clogged or dirty filter which could save as much as 14% on fuel. Another tip is to keep tires inflate to the proper PSI which usually is around 32 PSI. Properly inflated tires can reduce gas mileage by up to 3.3%. These two tips are definitely ways that Pep Boys can advertise their business and get new customers in. These two tips can also be advertised to both their customer bases, the “Do it yourself,” or the “Do it for me” users that can use Pep Boys side door service garages.
Gas prices can be an opportunity for Pep Boys but at the same time be a major threat to Pep Boys and other automotive repair service companies is the rise of gas prices. As gas prices continues to increase more and more people are going to be looking for a different means of transportation. Customers have a few options here; they can opt to purchase a newer vehicle that has higher miles to the gallon ratio. This option could be costly for Pep Boys and others because newer vehicles will have less wear and tear and not need as much repair work done as older model cars do. A second alternative to the higher gas prices could be public transportation which would also lead to the same factors of less wear and tear on their personal vehicles.
The Interest Burden ratio for Pep Boys in the last fiscal year is way below their competitors such as Auto Zone and Advanced Auto Parts. Pep boys interest burden ratio should be above 1 but it is not. Their opponent Auto Zone has an interest burden ratio of 1 which is right where they want to be. This should indicate to investors that Pep Boys may be borrowing too much money, which will hurt their return on equity. However, you can see from the chart that Pep Boys has been taking large steps to reduce the amount of money they are borrowing because in 2009 they reported an interest burden ratio of -14.1360 and then in 2011 that number improved to .6949.
Over the last three years Pep Boys Profit Margin has increased which is a great for the company. But Pep Boys wants this number to be as high as it can be. Advance Auto Parts posted a return of 9.85% and Auto Zone accumulated a return of 15.76%, for an Industry average of 12.81% gross profit. A possible reason for the industry average being better than Pep Boys is that their competitors have been more efficient in lowering their costs, which allows for higher gross profit and a higher return on equity.
Pep Boys has been very consistent in this category from 2009 to 2011. To find the asset turnover of Pep Boys divide Total revenue which can be found on their income statement, by their total assets which can be found on their balance sheet. They have maintained an average asset turnover ratio for the last three years of 1.2647. Comparing this to the industry, the industry is doing much better job of getting rid of their assets than Pep Boys is. A closer look at the industry average for this category shows that Pep Boys is actually pretty close to Advance Auto Parts, but Auto Zone is killing the market with an 11.4509 ratio. This shows investors that Auto Zone is doing a great job at moving their products to consumers and if Pep Boys wants to compete in the market and raise their return on equity then this would be the place to start.
ROA can be calculated by multiplying profit margin by asset turnover. In Pep Boys case for the last fiscal year they had a return on assets of 5.63%. Advanced Auto Parts had a ROA of 17.41% and Auto Zone had a whopping 180.49% return on Assets. Those two figures resulted in an industry average of 98.95% return on assets. Pep Boys ROA is way too far below the industry basically because of their asset turnover ratio. For Pep Boys to become more profitable they need to reduce the amount of time it takes them to turnover their assets. Pep Boys would like to see this number increase to at least the average of the industry in able to compete with their competitors. When comparing to its competitors, Pep Boy’s ROA (Interest Expense / Total Liabilities) is higher. 5.63% > 2.49%. This should show investors that even though that Pep Boys does not have a higher ROA they are not letting their debt and asset turnover ratio destroy them completely.
In the last three years Pep Boys has been able to maintain a constant asset to equity ratio. However, their Leverage ratio is higher than the industry performance. With Pep Boy’s high leverage ratio they are at risk of not turning their huge pile of assets into equity. On the other hand if Pep Boys were able to turn that around their asset to equity then their risk would turn into a large gain. Pep Boys looks to be doing fine, so for right now they are not having any trouble with their leverage ratio, since it is higher than the industry’s average. The industry seems to be on the right track with a slightly lower leverage ratio, with a lower leverage ratio the industry would not take as big of hit if the market turned for the worse.
A compound leverage ratio can be found by multiplying a company’s interest burden ratio by its leverage ratio. On January 31st 2009 they reported a negative 51.86 compound leverage ratio for the previous fiscal year, which is awful. A company is looking to have a benchmark of 1 for their compound leverage ratio. In the next two years Pep Boys was able to improve their compound leverage ratio tremendously. With a compound leverage ratio of 2.17 and then a 2.26 indicates to their stokeholds that Pep Boys are not being hurt by the debt that they are managing. The industry is a bit better than Pep Boys with a ratio of 2.60, which means they are managing their debt slightly more efficient than Pep Boys. Although Pep Boys was unable to beat the industry average they still have produced a respectable compound leverage ratio above the benchmark 1.
Return on Equity is a great way to measure a company. In the last three years as you can see from the chart, Pep Boys has improved greatly from their negative 7.19% return on equity. The negative ROE was created by their inability to turnover assets, and the large amount of debt that they were taking in. In the last fiscal year they had a ROE of 7.65%. What this means is 7.65 cents of assets are formed with a single dollar investment. Unfortunately for Pep Boys their competitors are absolutely murdering them in ROE. The industry average is 138.43%, which is dominated by Auto Zones’ strong hold in the industry.
Altman Z-Score is a multiple discriminate analysis method. This technique has the ability to determine bankrupt firms 12 months in advance at an accuracy rate of 95%. Here is how it works.
Z = 1.2 x1 + 1.4 x2 + 3.3 x3 + 0.6 x4 + 0.99 x5
First Z-Score was Pep Boys; Pep Boys has a Z-Score of 2.37 which falls in the Grey Area. In this model the higher the score the better off the company is, and less likely that they will fall into bankruptcy. A 2.37 score is not horrible but is not great either and Pep Boys has a lot of room to get better. This model is very user friendly and if you play around with some of the numbers you can see how Pep Boys can improve their Z-Score. As stated earlier, a great place to start is their asset turnover, if Pep Boys can decrease some of their total assets they would increase sales. Those two transactions would cause their Z-Score to improve. Now how does the Z-Score compare to S&P’s credit rating of the company? S&P rated Pep Boys as a single B company, which is consistent with the Z-Score’s Grey Area placement.
The next Z-Score was Advanced Auto Parts. Their Z-Score came out to be 4.50 which is well into the Safe Zone. However, when comparing their Z-Score to S&P’s credit rating inconsistency can be seen. Advanced Auto Parts credit rating was BBB- which is a better credit rating than Pep Boys but does not match the results of the Z-Score. A credit rating of A- or AA is expected. Perhaps S&P will update their credit rating soon.
The last Z-Score calculated was Auto Zone, which came out as 2.99. A 2.99 is right on the border of Safe Zone and Grey Area. However, a possible reason for such a low Z-Score is their negative working capital. In their last fiscal period they ended up with more current liabilities than current assets which resulted in this negative number. The 2.99 Z-Score is pretty accurate to S&Ps rating of BBB.
The following chart shows the key people who make Pep Boys what they are today.