Pep Boys Transacts Sale-Leasebacks for Cash

Pep Boys said Friday it closed a new $300 million senior secured revolving credit facility, replacing a prior facility that was set to expire on December 9, 2009. The financing was expected and does little to change the auto parts retailer's dependence on sale-leaseback transactions of owned properties to access funds vital for capital expenditures, inventory purchases, and store renovations. For the nine-months ended November 1, 2008, the company had completed transactions involving 63 stores, raising $210 million, according to the regulatory 10-Q filed with the SEC on December 10.

Chief Executive Officer Mike O'Dell told analysts on the third-quarter 2008 earnings call that the company's "liquidity position remained strong." Yes, there is no significant debt maturating until October 2013, but the balance sheet is highly levered, with total debt approaching 85 percent of stockholder equity. Working capital stood at $207 million, but currents assets were principally composed of $585 million of inventory. In addition, the company is struggling to meet debt servicing, with a loss from continuing operations (EBITDA) of $11.8 million and interest expenses of $7 million (at November 1).

Pep Boys may be a great place to go to get "great prices on tires, oil changes, and automotive maintenance" -- to quote O'Dell -- but against a backdrop of rising unemployment and greater economic uncertainty, in my opinion, customers will continue to defer spending on automotive care. Focusing on solid operational execution -- combined with cost reductions, postponement of new store openings, and tighter spending controls (including $10 million cutback in advertising and marketing) -- will do little to lift operating profitability in the current environment.

Of the 562 store locations operated by the Company at November 1, 235 were owned and 327 are leased. Expect more sale-leaseback transactions this year, too.