Pep Boys' results could torpedo merger

The private-equity firm buying the chain is having second thoughts after a disappointing quarter.

By Benzinga May 1, 2012 6:43PM

Image: Man working on car © Jose Luis Pelaez Inc/Blend Images/Getty ImagesBy Giovani Ortiz, Benzinga Staff Writer

Pep Boys' (PBY) first quarter was so bad that the company may have shot its upcoming merger in the foot.

On Tuesday, shares of the auto-parts retailer plunged after it announced disappointing early results for the quarter ended April 28. The stock closed down 22% to $11.62.

The company said its quarterly profit will be in the range of break even to 4 cents a share -- down sharply from 23 cents a share earned a year earlier. Sales, however, are expected to rise to between $524 million and $526 million from $513 million a year earlier.

Pep Boys said results were lower than expected due to a variety of factors during the normal business cycle, which will be released in the quarterly report. The company said it's working on strategies to improve results.

Pep Boys' results were boosted in the recession as people held on to their cars instead of buying new ones. But the auto industry has been on fire this year, with solid sales coming from Chrysler, Ford (F), General Motors (GM) and others. Analysts expect about 14.4 million new vehicles to be sold this year.

As people trade in their old clunkers, Pep Boys may see a business impact.

But there are bigger issues for the company to worry about now. Its proposed merger with private-equity company Gores Group is likely in jeopardy. Gores requested that Pep Boys delay its proxy statements related to the deal by 30 days after seeing what it described as the "serious deterioration" in the business. The projections included in the statements may not be accurate, and Pep Boys may have violated covenants in the merger agreement.

If Gores Group is able to prove that a breach of covenant has occurred, it may no longer be obligated to buy Pep Boys.

In response, Pep Boys said Gores' concerns are not justified. Results fell due to factors related to the normal cycle of operations such as the mild winter whether, the company said, which hurts auto-parts sales. That should have been known by Gores Group before the deal was signed, the company added. Pep Boys also said it has fully complied with all conditions for the merger, and offered to extend the period of time required for the final merger to occur.

The Gores Group says it will continue reviewing the situation to get to the root causes of the downturn.

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