October 9, 2004
Ian Madsen, MBA, CFA, Editor
imadsen@zacks.com
Research Digest
155 North Wacker Drive  Chicago, IL 60606
www.zackspro.com
Pep Boys (PBY – NYSE)
Note to reader: All new comments since last report are highlighted.
Overview
The Pep Boys - Manny, Moe & Jack, based in Philadelphia, PA, sells automotive parts and
accessories, performs automotive maintenance and service, and installs auto parts. The company has
595 stores.
Both the company and analysts believe that Pep Boys’ long-term success will be a function of
improving its existing store productivity. To improve its productivity, Pep Boys plans to introduce unique
products and branded tires, focus on routine maintenance, and remodel all of its stores over the next
three years. The company believes these efforts will generate increased traffic and sales and narrow
the productivity gap between Pep Boys and its competitors.
To improve its store productivity, the company outlined a plan to increase and improve its product
selection, bump up its advertising budget, give its stores a makeover, and push a narrower list of
services. Management expects this plan to take about two years and won’t open a new store until 2006.
Analysts have been generally positive on the company’s future for a while. And they have maintained
this view despite PBY’s disappointing second quarter earnings report. Most still believe the long-term
prospects outweigh the company’s short-term problems.

Key Positive Arguments
The automotive repair and maintenance industry is
poised for solid growth based on solid growth in
vehicles.

Key Negative Arguments
Pep Boys has the lowest operating margins and
lowest sales/square foot in the retail auto supply
business.

As a top auto parts retailer and service bay
operator, Pep Boys is in the position to benefit from
more vehicles on the road.

PBY has 595 stores, which puts it at a
disadvantage to AutoZone’s 3300 stores and
Advance Auto’s 2500 stores.

The company is taking advantage of its industryleading store size to add unique product categories
that have increased store traffic and comp-store
sales.


Pep Boys will use free cash flow and proceeds
from this year’s equity issuance to remodel all
stores within the next three years, giving its store
base a much needed updating.
Non-core products such as scooters, jacks, and
tools are driving sales growth. Should the demand
for such items fall off or competitors decide to carry
similar merchandise, Pep Boys’ strong comps
could quickly reverse.

Pep Boys’ strategy to offer low margin, high
turnover services may not benefit the company’s
bottom-line as expected.

PBY’s disappointing second quarter performance
was due to a poor performance in the service side
of its business.

Pep Boys’ board of directors authorized the
repurchase of $100 million of outstanding stock.
This replaces the $25 million share repurchase
authorization initiated by its board last year.
Pep Boys’ fiscal year ends January; all calendar references are to the fiscal year.
© Copyright 2004, Zacks Investment Research. All Rights Reserved.
Sales
The analysts (Advest, FTN, Thomas Weisel, Whitaker) expect Pep Boy’s attempts to increase sales to
take hold. Those analysts estimate Pep Boys will increase sales by 6.8% in 2004 and 7.3% in 2005.
Net Sales
Same-store sales
Store growth
2003A
$2,134
-0.9%
0.0%
2004E
$2,279
2.0%
nf
2005E
$2,446
7.9%
nf
2006E
$2,610
6.6%
nf
Second quarter summary:
“The DIY side of the box performed better than expected, but a dramatic shortfall on the service side
was a surprise,” (Advest).
“While we expected that any weakness would come from installed parts and service, the magnitude
was greater than expected. Merchandise same-store sales rose 8.4% (including installed parts) while
Service same-store sales were flat, both in-line with our forecast. When you back out installed parts
and match it with the service labor, it tells the true story of how weak installed parts were:
DIY/Commercial same-store sales (excluding installed parts) up 16.7%, and Service Center same-store
sales (matching installed parts with labor) down 5.3%. DIY was stronger than expected and installed
parts were weaker than expected,” (Whitaker).
“So far, PBY has succeeded only in driving sales with broader retail assortments, as new, typically
non−core product drives top-line growth. Because growth associated with new products is the least
durable element of the turn, and consumes significant working capital, we expect it to garner a lower
multiple than growth associated with core operating improvements,” (Goldman).
According to analysts (Advest, FTN, Goldman, Thomas Weisel, Whitaker), Pep Boys is implementing a
four-point plan to drive sales higher.
First, Pep Boys has added unique product categories and increased its advertising and promotions.
Adding unique categories that go beyond its core auto parts business provide a compelling reason to
drive past a competitor's store and more importantly fills out the larger Pep Boys stores.
Second, the company’s narrow service focus enables the company to reduce prices on common
maintenance services such as oil changes in order to drive more frequent and routine service visits.
Third, Pep Boys’ expansion to include brand name tires to complement its existing private label (Futura)
brand. This should help its tire business because, according to analysts (FTN, Thomas Weisel), only
25% of replacement tire buyers choose private-label brands. By offering a bigger selection, Pep Boys
increases its potential customer market.
Last, Pep Boys plans to remodel its entire store base over the next three years using cash flows and
proceeds from 2004 equity offering. The remodeled stores are expected to attract additional floor traffic
and sales.
See the PBY consensus earnings model for more detail on the analysts’ sales estimates.
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Margins
Analysts (Advest, FTN, Thomas Weisel, Whitaker) expect the company’s efforts to improve productivity
to lead to higher profit margins in 2004 and 2005.
Margins
Gross
Operating
Net
2003A
29.0%
3.8%
1.4%
2004E
29.0%
5.7%
2.7%
2005E
29.3%
6.7%
3.5%
2006E
29.7%
7.5%
4.1%
Second quarter summary:
“Consolidated gross margins fell 80bps to 28.5%. Merchandise gross margins fell 80bps, but when you
factor the impact of EITF 00-21, gross margins were actually up. Service not only underperformed on
the top line, but also from the margin side as well, with a 120bps decline in margins to 24.5% due to the
fact that PBY was unable to adjust its fixed labor costs for mechanics and service counter employees.
By policy, PBY is required to pay a certain guarantee to its service technicians and mechanics (which
we believe is 75% of the average labor revenue). When service traffic fell off, margins got squeezed.
When you factor in the adjustments for EITF 00-21, the magnitude is much greater – only 17%-18%
margins as opposed to 24.5% margin. SG&A did improve 60bps due to sales leverage, but was offset
by higher labor and systems expenses,” (Whitaker).
Analysts (Advest, FTN, Goldman, Thomas Weisel, Whitaker) believe that key areas listed in the Sales
section of this report should also improve the company’s store-level productivity. Currently, Pep Boys
has the lowest operating margins in retail auto parts, and a number of initiatives still haven’t taken hold.
When they do take hold, Pep Boys’ operating margins should expand significantly.
One key area, for example, is with company’s re-merchandising efforts. Pep Boys is focused on
improving its service business by replacing expensive, high labor-cost jobs such as engine rebuilds with
lower priced, higher turnover jobs such as oil changes and brake jobs. Management hopes to create
repeat business and cross selling opportunities, which should enable the company to generate greater
net profit from the service bays over time.
See the PBY consensus earnings model for more detail on the analysts’ profit margin estimates.
Earnings Per Share
Prior to PBY’s second quarter earnings report, the Digest averages were $0.32 in 3Q04, $1.12 in 2004,
and $1.44 in 2005. After the company’s second quarter earnings miss, the Digest averages fell to $0.26
in 3Q04, $0.96 in 2004, and $1.26. There is one EPS estimate for 2006; it is $1.61, down from $1.77.
FY ends January
Zacks Consensus
Digest High
Digest Low
Digest Avg.
Digest YoY growth
Mgmt Guidance
2QA
nf
$0.29
$0.29
$0.29
-3.3%
3QE
$0.25
$0.27
$0.22
$0.26
7.3%
4QE
$0.14
$0.16
$0.12
$0.14
18.8%
2004E
$0.94
$0.98
$0.90
$0.96
12.6%
2005E
$1.24
$1.30
$1.20
$1.24
29.8%
2006E
nf
$1.61
$1.61
$1.61
29.6%
nf
nf
nf
nf
nf
nf
See the EPS and Recent Revisions tabs in the PBY consensus earnings model for more detail.
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Target Price / Valuation
There are two target prices: $20 and $21 with an average of $20.50. Both analysts use a multiple of
16x 2005 EPS estimates.
Go to the valuation tab of the PBY earnings model spreadsheet for more detail on the brokers’
valuation methodologies and individual price targets.
Upcoming Events
EVENT
Third quarter earnings release
DATE
November 10, 2004
Long-Term Growth
The demand picture is important to Pep Boys’ growth assumptions. The automotive repair and
maintenance industry has shown stable growth trends driven by consistent growth in the number of
vehicles and consistent growth in dollars spent per vehicle. Analysts expect to see accelerating growth
in the automotive repair and maintenance market in the coming years because of the increasing
number of older vehicles and the rising amount spent per vehicle.
In addition, Pep Boys’ efforts to improve productivity will have a big impact on how fast the company
will be able to grow over the next several years. In the near-term, however, those efforts will be the only
the growth driver. That’s because Pep Boys doesn’t plan to open a new store until 2006.
All told, the analysts are positive on Pep Boy’s long-term growth prospects. The Digest average longterm growth rate is 19.3%.
Individual Analyst Opinions
POSITIVE RATINGS
Advest – Buy ($20): report date 09/17/04
“With early ‘wins’ behind them, Pep Boys now faces longer-term structural challenges that will take time to resolve
- PBY will succeed, in our view We believe the biggest challenges the company faces are cultural, and will require
significant training and, if necessary, employee turnover to fully address There is no ‘quick fix,’ but we believe the
company has a tremendous opportunity to drive top-line growth and margin improvement.”
FTN – Buy ($33): report date 05/14/04
FTN continues to feel that new management has put in place strategies that will succeed at increasing traffic and
productivity, which will lead to margin gains and eventually justify a return to store growth. FTN also believes that
Pep Boys is in the early stages of a recovery that has implications well beyond 2004.
Thomas Weisel – Outperform: report date 08/12/04
Pep Boys is executing a long-term turnaround plan that includes many elements in addition to sales growth.
Whitaker – Buy ($21): report date 09/10/04
“For those investors that missed the upward movement in PBY stock before, this may be your second chance as
we expect the stock to rally over the next couple of months towards our $21 target price. This is a clear sign that
management is putting its money where its mouth is, especially CEO Larry Stevenson who purchased 14,000
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shares for his own person account on August 17. The news reiterates that investors should give PBY a strong
look. We are thus reiterating our BUY rating on PBY.”
NEUTRAL RATINGS
Goldman – In-Line: report date 08/13/04
“We are maintaining our In-Line rating on PBY shares, reflecting four factors: (1) The desire to see some
evidence that the company-specific factors that undermined service profits are corrected. (2) Our reluctance to
pay a premium for retail sales driven largely by new, non− core product introductions, and supported by sharply
rising inventory, despite the clear success of these efforts in the past three quarters. (3) A very tough 4Q04
comparison. (4) Sharply lower operating cash flow in 1H04 vs. 1H03, despite an increase in earnings.”
NEGATIVE RATINGS
None
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