Financial PerformancePep Boys Manny, Moe, and Jack: Trying to Solve the Riddle of -

Gregory A Totty presents

Pep Boys- Manny, Moe, and Jack: Trying to Solve the Riddle of Financial PerformanceGregory TottyFIN 500 Principles of FinanceColorado State University Global CampusDoctor Juan RomanMarch 30, 20141

Purpose of ResearchStrategyIncomeRevenueBalance SheetAssetsStock PerformanceThe executive leadership of Pep Boys - Manny, Moe, and Jack; currently utilize large amounts of capital in order to acquire aftermarket automotive service and repair facilities as well as chains of tire retailers in an effort to grow and expand in the aftermarket automotive industry (ODell, 2010).To synthesize Pep Boys investment strategy for shareholder value To provide an analysis of the financial performance of Pep Boys To evaluate financial statements and ratios for effectiveness To compare the current financial health of the organization as it relates to other companies in the industry

Tin the following presentation, several elements are considered in the formation of a hypothesis on the financial and investment strategy of the leadership of Pep Boys Incorporated, Manny, Moe, and Jack. Factual information was obtained from the United States Securities and Exchange Commission as well as Pep Boys Public disclosure through its annual financial report. The Presentations exactly That: - Presentation. It is complete with Narrative and Video enhancement. To keep an atmosphere of direction and brevity, The slides are automatic and the presentation has a focus on entertainment quality to ensure the most important factor keeping the audience attention, which is paramount to all other functions of the presentation.2

Pep Boys Manny, Moe, and Jack

The BeginningsThe FutureTodays Manny, Moe, and Jack

In the following research, Pep Boys Incorporated is the test subject for the qualitative analysis of their financial statements and selected ratios. Particular att`ention is devoted to the idea of growth stimulation through acquisitions and mergers; a frequent condition recently within Pep Boys Organization. Several other topics are addressed including the following:Organization overviewFinancial statements analysisAnalysis of cash flowStock performance analysisCost of capital or required return on investmentValue of the organization: book value, common stock valueDiscussion of appropriate organizational development options with the inclusion of general risk and return scenarios from a management perspectiveIn depth ratio comparative analysis with results tableCAPM and WACC cost of capital analysisConclusions synthesis of results into hypothesis 3

Pep Boys the past/present/and future - synopsisFounded in Philadelphia in 1921 by Emanuel (Manny) Rosenfeld, Maurice (Moe) Strauss, W, Graham (Jack) Jackson, and Moe Radavitz.The broadest provider of customer satisfaction in the automotive aftermarket.Strength of Organization lies in quality of supply chain managementBecame a public company in 1946Became a world-wide industry giant under the leadership of Mitch Leibovitz, the first non-founder CEO in 1986The most complete company in satisfying customers in the industryToday, the company is growing rapidly primarily through the acquisition of several chains of tire and service facilities

A very brief synopsis of the organizations beginnings coupled with a rapidly ascending chronology of pivotal moments in the companies history4

Manny, Moe, and the now famous caricatures

Pictures of the past and of the modern super center5

Analysis of relevant Financial Ratios over a ten year period summarized in a table of results indicating aspects of the organizations Financial Condition and Performance

Current Financial Statements Financial Data

The information on the financial statements is used in the calculation of financial ratios. In this presentation, I will use both the statements and various ratios to demonstrate the inner connectivity of the reporting methods and in the interest of breivity.6

Balance SheetIncome Statement

The Basic financial Statements for all of Finance are: 1). The Balance Sheet which must equal zero as the name implies. It is The Product of Assets = Liabilities + Owners Equity. 2). The Income Statement or Profit/Loss Statement, and the 3). Statement of Cash Flows, which is a measurement of The flow of cash in and out of the business7

Statement of Cash FlowsOperations

InvestingFinancing

The Statement of Cash Flows is a bell weather indicator of financial health. Most experts agree that a positive flow is good, but a negative flow is not always bad8

Pep Boys Balance Sheet Analysis

Consistently Weak Balance Sheet

Over the past ten years, Pep Boys has consistently had a weak Balance Sheet. The graph representing the relationship between the current ratio and the percentage of total liabilities to total assets is consistently large.9

Profit/Loss Analysis (Income Statement)

Very little re-investment of profits over last ten yearsNet Income44.04M-29.66M23.58M-35.51M-2.74M-41.04M-30.43M23.04M36.63M28.90Mdivided byRevenue2.17B2.13B2.27B2.24B2.27B2.14B1.93B1.91B1.99B2.06BNet Profit Margin2.03%-1.39%1.04%-1.59%-0.12%-1.92%-1.58%1.21%1.84%1.40%

Retained Earnings to Retained Earnings Growth is generally negative for Period indicating little investment of profit. Negative profits over time 10

Highly Competitive Industry over TimeInconsistent Gross Margin/TimeHigh Capital Intensity/ Time

The numbers here say do not invest. 1) The Gross Margins has been low to inconsistent over the past ten years2)The industry is generally highly competitive by nature, but especially in the 21st century. The real evidence however supports the hypothesis of the research. Demonstrated by the last line chart in the lower right corner; Pep Boys has invested extra-ordinary amounts of Capital in fixed assets, in particular acquisitions and mergers. 11

Financial Ratios

These ratios are indicators of overall Financial Performance and Organizational Health12

Efficiency2004-012005-012006-012007-012008-012009-012010-012011-012012-012013-01TTMDays Sales Outstanding4.154.945.515.305.045.524.953.904.014.344.36Days Inventory122.94127.86129.05131.30129.07140.53143.97139.84138.40143.26148.08Payables Period63.9972.2760.6558.1157.9957.1353.2051.4653.3355.7458.36Cash Conversion Cycle63.0960.5473.9178.4976.1188.9295.7392.2889.0791.8694.07Receivables Turnover88.0573.8566.3068.8472.4466.1573.7693.5391.0584.1583.79Inventory Turnover2.972.852.832.782.832.602.542.612.642.552.46Fixed Assets Turnover2.062.352.362.452.532.532.642.832.953.093.24Asset Turnover1.171.231.211.271.281.231.251.301.291.291.32

Efficiency Ratios

These ratios are common as a measurement of financial Condition. These overlap with the next set of ratios13

2004-012005-012006-012007-012008-012009-012010-012011-012012-012013-01TTMTax Rate %37.3735.9036.4029.9641.53Net Margin %-1.511.04-1.68-0.11-1.92-1.581.211.841.400.61-0.21Asset/Turnover1.171.231.211.271.281.231.251.301.291.291.32Return on Asset-1.771.27-2.03-0.14-2.45-1.941.512.401.810.79-0.27Financial Leverage2.992.863.063.113.363.673.383.253.242.982.89Return on Equity-5.083.72-6.01-0.44-7.90-6.815.327.955.882.46-0.80Return on Investment Capital-4.660.09-5.85-3.03-7.52-6.391.192.571.33-1.21-1.88Interest Coverage2.733.192.581.660.96

Profitability Ratios

Perhaps the most impotrtant set of ratios as these measure profitability14

Ratio Comparisons and AnalysisRatioAverage Value/10yearsResults LiquidityCurrent Ratio1.21Liquidity Ratios are consistent with the industryQuick Ratio0.22Financial Leverage2.69Debt to Equity0.36 Cash Flow Capital Expenditures as a % of Sales2.69These results reveal some of the nature of the current strategyFree Cash Flow as a % of sales-1.01Free Cash Flow as a % of Net Income4.87 Efficiency RatiosDays of Outstanding Sales4.36Efficiency Ratios give another hint as to the strategy, but inefficiencies of management are presentDays Inventory148.08Cash Conversion Cycle94.07Inventory Turnover2.46 Profitability RatiosAsset Turnover1.32These are the ratios that support the hypothesis of this researchReturn on Asset-0.27Return on Equity-0.80Return on Investment Capital-1.88

An analysis of several different ratios indicates the presence of financial strategy issues within the company. While many indicators show normal results for growth, evidence found in these ratios add to the hypothesis of aggressive acquisitions on a large scale as a corporate strategy by the executive leadership. Mike Odell remarked recently on the buyout of the southern California Discount Tire Chain that the action was part of the organizational vision of Growth among the aftermarket automotive industry. (Odell, 2013). As a result, the valuation of the company is affected.15

P:ep Boys Stock Performance / Time

Erratic Stock Fluctuations are a direct result of the Capital investment strategy of Pep Boys. The spikes Directly correlate to Large-Scale Capital Investments The strategy of Capital Investment has artificially inflated the earnings by presenting an upward movement progressively over time. Other indicators forebode a severe drop in earnings for the near future16

Summary of Pep Boys Current Financial HealthPoor and Misleading

To summarize Pep Boys current Financial condition, the first word that comes to mind is misleading. I will use the Financial Condition Provided by Vuru (2014). They used the word Poor. BUT, if their sdtrategy pays off, the long term future could be very bright, as show by the hypothesis on Pep Bioys Financial Strategy 17

Pep Boys Incorporated is a publically held corporation within the aftermarket automotive parts, service, and repair industry.

Visionto be the automotive solutions provider of choice for the value-oriented customer. (Dolan, 2010).

According to Partridge (2010), Pep Boys attributes a great deal of credit for the companys success to its supply chain management system, which is unique in the industry. Pep Boys is both a automotive parts retailer and a tire and service facility. Recently, the company has been investing in the purchase of similar, competing, service chains, with the intention of achieving a maximum return on investment. This high-risk strategy has proven both successful and devastating to Pep Boys.18

Investment Strategy: Using Acquisitions to Strengthen Financial DataRecent Acquisitions85 Big Ten Tire Stores in July of 2011`How Acquisitions improve Financial Health #Positive Component AddedResults1Acquisition adds ValueMore Service Facilities2Improved EarningsShareholder Value3Low Entry PriceFavors High Stock Return4Analyst HappyFinancial Growth

17 Discount Tire Centers in Southern California in 2013

Pep Boys aggressively merges and acquires competing automotive service and tire centers. Odell (2012) remarks that acquisitions further our growth in the aftermarket automotive industry. This concept is all incorporated into the vision , where it is abundantly evident that the companys main goal is to completely dominate the industry, out maneuvering the competition at almost every turn. Noto reports of the aquisition of Big Ten Tires. Harvey (2013) reports of another 17 discount tire stores purchased in Southern California. He explains the strategy of merger and acquisition with the in Pep Boys Case in his 4 reasons why Pep Boys is tuning back up. With this financial strategy, many other factors enter the equation in greater proportions. This is an organizational example of risk vs. return, but in a different way of capital structure investing (Keown, Martin, and Petty, 2014). The Latest Acquisition of Discount Tire Stores was financed with Cash on Hand19

Sources say buy all of them

If the hypothetical strategy holds true, Pep Boys could be poised to take complete market control in the next few years. This would make Mr. Mike Odell the new king of the aftermarket automotive industry. (Ulrich, 2011)20

ReferencesBloomberg, (2014). Pep boys-Manny Moe & Jack (PBY: New York): Retrieve from: http://investing.businessweek.com/research/stocks/charts/charts.asp? ticker=PBYDiStefano, J. (2012). 'More stores,' says Pep Boys' billion-dollar buyer. philly.com. Retrieved from: http://www.philly.com/philly/blogs/inq-phillydeals/Pep-Boys-sold-for-1-billion15-a-share.htmlDolan, J. (2010). Pep Boys Leverages Intermodal to Accommodate Growth. Retrieved from: http://www.bnsf.com/customers/campaign/pdf/case-study-pepboys.pdfHarvey, I. (2013). 4 Reasons Pep Boys (PBY) is Turning Back Up. Options on PBY offer 57% upside. Stock Options Made Easy. Retrieved from: http://investorplace.com/2013/09/4-reasons-pep-boys-pby-is-turning-back-up/#.UzfwmvldWSoKeown, A. J., Martin, J. D., & Petty, J.W. (2014). Foundations of Finance: The Logic andPractice of Financial Management (8th Ed.). Upper Saddle River, NJ: Prentice HallNoto, A. (2011). Pep Boys Scores Big 10.Mergers & Acquisitions Report,24(19), 9.ODell, M. (2014).Retrieved fromhttp://www.pepboys.com/about_pep_boys/investor_relations/financial_information/annual_reporPartridge, A. (2010). Managing a Customer-Driven Supply Chain. Inbound Logistics. Retrieved from: http://www.inboundlogistics.com/cms/article/managing-a-customer-driven-supply-chain/Pep Boys. (2014) Financial Statements. Pep Boys Annual Financial Report. from: http://www.pepboys.com/about_pep_boys/investor_relations/financial_information/annual_report/

It is very hard to correctly format references in a power point presentation, I hope this will be acceptable. I spent WAY too much time trying to format this page 21

PR, N. (2012, January 30). The Law Office of James C. Kelly Announces Acquisition of Pep Boys by The Gores Group.PR Newswire Ulrich, B. (2011). Acquisitions Improve Pep Boys Financial Results. Modern Tire Dealer. Retrieved from: http://www.moderntiredealer.com/news/print/story/2011/12/acquisitions-improve-pep-boys-financial-results.aspxUnited States Securities and Exchange Commission. (2014). Edgar Database. Pep Boys Manny, Moe, and Jack. Retrieved from: http://secsearch.sec.gov/search/docs?utf8=%E2%9C%93&sc=1&query=edgar+database&m=false&dc=665&affiliate=secsearch Vuru. (2014). Retrieved from: - See more at: http://www.vuru.co/analysis/PBY/financialStrength#sthash.TyQth6na.dpufReferences

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Sheet1Figures in USD. Fiscal year ends in January2003200420052006200720082009201020112012Cash42.77M60.98M82.76M48.28M21.88M20.93M21.33M39.33M90.24M58.24MCurrent Assets664.87M803.44M858.59M828.06M768.14M749.76M715.56M716.08M763.54M784.55MTotal Assets1.80B1.84B1.87B1.82B1.77B1.58B1.55B1.50B1.56B1.63BCurrent Liabilities534.19M727.21M677.94M580.53M604.18M554.41M536.33M510.55M560.17M617.92MTotal Liabilities1.15B1.23B1.21B1.23B1.20B1.11B1.13B1.06B1.08B1.13BStockholder' Equity649.99M615.59M653.46M594.57M567.76M470.71M423.16M443.30M478.46M504.33MCurrent Ratio1.241.11.271.431.271.351.331.41.361.27TL-to-TA0.640.670.650.670.680.70.730.70.690.69- See more at: file:///C:/Users/Keep%20Away!/Desktop/Pep%20Boys-manny%20Moe%20&%20Jack%20(The)%20(PBY)%20Financial%20Strength%20%20%20Value%20Investing%20in%20Seconds%20-%20Vuru.co.htm#sthash.TLmCeEHu.dpuf