Pep Boys bets $41M on smaller stores in South, West

Pep Boys says it's agreed to pay $41 million in two separate deals to add 92 stores in northern Florida, Alabama, metro Atlanta, and metro Seattle.

Pep Boys - Manny Moe & Jack - said today it is purchasing Big 10 Tires and Automotive, with 85 Southern stores, for an undisclosed price, from owner Sun Capital Partners. Morgan Joseph TriArtisan LLC advised Pep Boys on the deal.

That follows Pep Boys' purchase earlier this year of seven Big O stores in the Seattle-Tacoma area from a local franchise owner.

"It's time to grow again," chief executive Michael Odell told me. Since he took over in 2008, Odell and his team have bought dozens of neighborhood garages, ex-muffler franchise sites and other locations, and reopened them as tire and service shops, boosting the store count from around 560 to over 700 with the latest deals.

These and other deals reverse years of consolidation at Pep Boys. Under Odell, Pep Boys shares have recovered to the mid-teens level since falling below $3. Pep Boys earned $37 million on sales of $1.99 billion last year -- its highest profit since 2002, and the first time sales have risen since 2004.

The new stores average about 5,000 square feet in size and $1 million in yearly sales, a quarter the size and a third the revenue of Pep Boys' "superstores," which retail light bulbs, exhaust pipes, head gaskets, beef jerky.

Pep Boys' old emphasis on bigger stores diluted the company's focus on auto repair, Odell says. Now "we look at service as being the biggest opportunity, our lead business. It's four times larger than the do-it-yourself market, and it's growing slightly faster." It's tough to fix computerized cars without specialized equipment; Pep Boys tries to operate more cheaply than mom-and-pop garages by setting up parts delivery routes and local advertising.

I asked Robert Costello, a Huntingdon Valley money manager who used to cover Pep Boys as a securities analyst in the 1990s, if he'd buy the stock again. No, he said: Pep Boys faces "new, cutthroat competition" as chains like Advance and Autozone invade its coastal markets.