Bret Jordan and David Kelley of BB&T Capital Markets, in a Sept. 13 report, offered a few insights gleaned from a meeting with the management of Philadelphia-based Pep Boys. Among them is the analysts’ belief that improving service comps should boost revenue.
They contend that market share gains are continuing to drive positive third-quarter traffic count in service. “As management noted that general service categories are comping positive year-to-date despite lackluster first-quarter results (service comp declined 1.2 percent in Q1), we anticipate improving service comps in fiscal year 2013 (we estimate +2.3 percent) will drive service revenue growth of 6.4 percent year-over-year to $448 million,” Jordan and Kelley wrote. “Coupling this with likely seasonal battery volume improvements in the second half of 2013 (January end) as failure rates should spike with inclement winter weather (comping off a mild winter in 2012), we anticipate improving general service volumes for Pep Boys in fiscal year 2013.”
BB&T also believes that tires are likely to drive margin expansion. “With management noting a 500-basis-point decline in tire margins over the last 24 months, we anticipate recent declines in input costs (we estimate tire input costs are down 12.4 percent year-over-year and 6.1 percent sequentially thus far in Q3) should drive margin expansion in the second half of 2013 and could contribute to roughly 100 basis points in earnings before interest and taxes (EBIT) margin expansion by fiscal year 2014,” Jordan and Kelley wrote in their report.
They added: “Despite continued soft tire shipment volumes (August industry-wide passenger car shipments declined roughly 4.3 percent year-over-year), we continue to believe that the tire market remains in a state of pent-up demand with accumulated wear and seasonal trends poised to drive volume improvements.”
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