Pep Boys Ponders $1 Billion Sale Leaseback of Store Portfolio

Automotive Week/The Greensheet - June 1, 2007

Pep Boys management is asking for patience from the financial community as it is working on a long-term strategic plan to grow the business. During a recent conference call to discuss its first-quarter financial results, Jeff Rachor — the new president and CEO of Philadelphia-based Pep Boys — said he is working with the company’s senior leadership team and board of directors to define the company’s purpose and develop a plan.

“One reason our company’s return on invested capital has struggled is the relatively-heavy asset base that we carry,” Rachor said. “Since last year, the company has been developing a program to address this opportunity.”

He said Pep Boys is now in a position to move forward. “In my early assessment of Pep Boys, I always questioned the need to have such a large portfolio of owned properties and even secondary assets, such as our distribution centers, office buildings and company-owned life insurance,” Rachor explained. Pep Boys owns 323 of its 593 stores. According to a Pep Boys appraisal conducted at the close of 2004, those owned properties had a value of around $900 million. Harry Yanowitz, senior vice president and CFO, estimates that the properties are currently worth more than $1 billion. The company has an additional 200 ground-link stores, meaning that Pep Boys owns the building on top of the land and controls the property. Many of these leases were struck 15-20 years ago.

“We are very fortunate that many of these assets have appreciated materially from their original purchase values. There are several options available to the company to monetize these assets, including sale-leaseback transactions, outright sales and taking advantage of below-margin long-term leases,” Rachor said. “We are completing a process — supported by external real estate advisory specialists — to analyze each of our owned and leased locations to determine how to most efficiently evaluate our properties in a manner that will allow us to maximize shareholder value.” Sphere: Related Content