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.


More from Benzinga
0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
284
284 rated 2
461
461 rated 3
671
671 rated 4
628
628 rated 5
618
618 rated 6
615
615 rated 7
495
495 rated 8
347
347 rated 9
115
115 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
DYNDYNEGY Inc10
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.