The Pep Boys Manny, Moe & Jack Business Information, Profile, and History

Company Perspectives

Pep Boys is the only aftermarket retail and service chain in the nation that is capable of serving all four segments of the automotive aftermarket: the do-it-yourself, do-it-for-me, buy-for-resale and replacement tires.

History of The Pep Boys Manny, Moe & Jack

The Pep Boys--Manny, Moe & Jack, operating in the U.S. automotive aftermarket, distinguishes itself from competitors by size and service. The typical Pep Boys supercenter's 18,200 square feet of space allows for an extensive selection of products; 12 service bays accommodate preventive maintenance and repair. Pep Boys, with nearly 600 stores in 36 states and Puerto Rico, caters to all four segments of the automotive aftermarket that it identifies as: "do-it-yourself," "buy-for-resale" (sales to professional mechanics and garages), "do-it-for-me" (the service side), and replacement tires. Advertised as "the three best friends your car ever had," the original Pep Boys launched their first auto parts store just as the automobile was coming of age. Things looked less friendly a half decade into the 21st century when losses prompted the company to consider putting itself up for sale.

Lore-Filled Start

Pep Boys was founded by Emanuel (Manny) Rosenfeld, Maurice (Moe) Strauss, Moe Radavitz, and W. Graham (Jack) Jackson, Philadelphians who met and became friends during their World War I stint in the U.S. Navy. In 1921, less than 15 years after mass production came to the auto industry, the four war buddies put up $200 each to open an auto supplies store in their hometown. Strauss, who had already made two unsuccessful attempts at entrepreneurship, started out as a silent partner, since he was employed at a competing store and was not ready to give up the steady income.

The partners rented a small storefront in Philadelphia, so small that only the shortest of names would fit on its marquee. Corporate folklore tells of a brainstorming session that adopted the "Pep" from Pep Valve Grinding Compound, one of the shop's first product lines. Pep Auto Supply fit neatly above the shop's front door, but there is more to the chain's christening. The tale goes on to tell of a street cop who, upon issuing equipment citations, would recommend that the motorists go to the "boys" at Pep for replacement parts. The three Pep Boys who remained after Moe Radavitz cashed out in the early 1920s tacked their own names on in 1923.

The corporate caricatures that would later become famous throughout the country were commissioned shortly thereafter and drawn by Harry Moskovitch. Manny, a now-reformed cigar smoker with a Charlie Chaplin mustache, was on the left. Moe, who would be known as "the father of the automotive aftermarket," was in the middle. Jack's grinning caricature made a brief appearance before being replaced with that of Moe's brother, Isaac (Izzy) Strauss, on the right. (The company name stayed the same despite the personnel changes--"Manny, Moe and Izzy" just did not sound right.) As the chain grew, the Pep Boys were rendered in cotton on T-shirts, in ink on match books, and in cement as statues in front of stores. The bizarre but distinctive trademark was later joked about in Johnny Carson's Tonight Show monologue, parodied on Saturday Night Live, and came to life in Claymation for late 1980s television ads.

In the late 1920s, Manny Rosenfeld brought his brother, Murray, into the business and Izzy Strauss broke away to start his own automotive chain. The sometimes convoluted family ties at Pep Boys remained strong through the 1980s, and the Strauss and Rosenfeld families controlled one-fifth of the chain's stock into the early 1990s.

Expanding into California; Conservative Management

By 1928, Pep Boys had a dozen stores in the Philadelphia area, and Strauss began to feel the pull of the burgeoning California market. He had lived briefly in the state in the early 1920s, when he became convinced that it was an ideal location for an automotive retail business. In 1932, he sent Murray Rosenfeld, called "perhaps the most astute merchandiser of the Philadelphia group" by Aftermarket Business in 1991, out to the West Coast to launch what was commonly known as Pep Boys West. The first two California stores were opened in 1933 in Los Angeles. By that time, the chain had 40 Philadelphia outlets.

Although the founders had planned to operate both segments of the business in concert, the physical distance between them soon forced the division of primary merchandising functions. For example, intense competition compelled Pep Boys West to expand the size of, and selection at, those stores, whereas East Coast outlets concentrated more on service. Manny Rosenfeld stayed in Philadelphia, his brother Murray ran the Los Angeles operation, and Moe Strauss commuted between the two.

During World War II, automotive production was curtailed while car companies focused on war production, and "Murray the merchandiser" stocked Pep Boys West shelves with nonautomotive products such as work clothes, bicycles, and lawn and garden equipment. The West Coast division also experimented with wholesaling and even exporting.

When the retailer went public in 1946, Manny Rosenfeld was named president and Moe Strauss was elected chairman of the board. For the next three decades, the company grew relatively slowly under what was later interpreted as a preponderance of caution; the company insisted on owning, rather than leasing, its stores, and doggedly avoided debt. Under the direction of Moe Strauss, who assumed the additional responsibilities of president in 1960 after Manny Rosenfeld's death, the chain grew by only two new stores over the 20-year period from 1964 to 1984. The fiscally conservative Strauss occupied both posts until 1973, when he relinquished the title of president to son Benjamin; however, he remained chairman through 1977. He was still a member of the board of directors at his death in 1982, over six decades after he helped found the business.

Rapid Growth and Modernization Under New Management

Ben Strauss advanced to chairman and CEO that year, and Morton (Bud) Krause, son-in-law of Moe Strauss, was named president. When Krause took an early retirement in 1984 at the age of 54, Ben Strauss shouldered the responsibilities of all three offices. In 1986, Strauss called on Mitchell Leibovitz to become Pep Boys' first president from outside the founding families. Leibovitz had joined the company at the age of 33 in 1978 as controller and was promoted to chief financial officer within a year. He had worked as a teacher and coach before earning an M.B.A. from Temple University by going to night classes. Leibovitz caught Ben Strauss's attention while employed as a CPA for the accounting firm that audited Pep Boys' books. From 1979 to 1984, Leibovitz was in charge of Pep Boys' eastern operations. He closed down 32 "small and stodgy" stores, then opened 60 stores in the ensuing two years. The East Coast expansion was financed with an offering of $50 million in convertible debentures (bonds that can be converted to stock), a debt Moe Strauss would never have taken on.

By 1986, when Leibovitz assumed the presidency, Pep Boys was the second largest chain in the highly fragmented, $100 billion automotive aftermarket industry, after Western Auto Supply Co. Its earnings had increased 18 percent annually from 1982 to 1986, but the new leader had even bigger plans for the retailer. As president, Leibovitz mapped out and executed a five-year plan to consolidate Pep Boys' headquarters and simultaneously expand its geographic reach, in the hopes of its becoming the Home Depot of the retail automotive aftermarket industry. In fact, Leibovitz enjoyed the counsel of Bernie Marcus, the executive who catapulted Home Depot to the upper echelon of the do-it-yourself home repair market. Leibovitz recognized the industrywide changes that could either launch Pep Boys to the top of the heap or see it acquired by a competitor by the end of the century.

During the 1980s, the traditionally fragmented retail automotive aftermarket industry became more competitive as larger chains began to emerge. Many neighborhood service garages were being transformed into convenience stores with gas stations, and some of the larger chains that had provided limited service, such as J.C. Penney and Kmart, also started phasing out auto repairs. All the while, cars were growing increasingly complex and difficult for non-pros to fix.

In the face of these market shifts, Leibovitz set out a five-year plan for Pep Boys that encompassed six goals: store expansion, a refined merchandise mix, increased warehousing and distribution capacity, improved promotion of the service operations, modernization of systems support, and consolidation of the headquarters in Philadelphia. From February 1986 to February 1991, Pep Boys invested $477 million in the plan, almost as much as 1986's sales of $486 million.

During that period, the number of Pep Boys stores doubled to 337, the number of states with Pep Boys locations reached 17, and product offerings nearly tripled from 9,000 items to 24,000. Individual locations were expanded into a "superstore" or "warehouse" format, with an average size of 23,000 square feet, and the company launched an "everyday low price" strategy. These larger stores also featured an increased number of service bays, a fairly unique feature in the industry, and services offered were expanded. Unlike many of its competitors, which would only install tires and batteries (if anything), Pep Boys' mechanics would perform practically any automotive service except body work and engine replacement. Pep Boys' new computerized merchandising and inventory control helped stores tailor their offerings to the local market. For example, rural stores might carry more truck parts, whereas urban stores might stock more foreign car parts. Weekends were added to the retailer's schedule, and hours were extended to 9 p.m. on weeknights.

To tout the service bays and increase emphasis on national brands, Leibovitz raised Pep Boys' advertising budget and began to divert funds from traditional, full-page newspaper ads to direct mail, catalogs, and electronic media. He also began phasing the Pep Boys caricature out of advertising and promotional material in an effort to modernize the company's image, even though "the boys" had ranked as one of the automotive aftermarket's five most recognized corporate symbols.

In 1991, as the company concluded its five-year plan and celebrated its 70th anniversary, it also topped $1 billion in annual sales, added eight Sunbelt states to its geographic reach, and more than doubled corporate employment from 5,500 to 14,000. Leibovitz advanced to Pep Boys' chief executive office and the company was added to Standard & Poor's 500 Index in 1990. Although the young leader modestly deflected praise of his transformation of Pep Boys to the management team he had assembled, analysts gave him the lion's share of the credit for modernizing the chain.

Pep Boys is considered a noncyclical business, but its massive expenditures and assumption of debt combined with an early 1990s recession to depress profit growth. Net income declined from $42 million in 1989 to $32 million in 1990, then increased incrementally in 1991 and 1992. Pep Boys was able to begin fueling its continuing expansion and retire debt with cash flow in 1992. The company added 30 stores that year and took advantage of an "early conversion expiration" provision (also known as a "screw clause" to investors) to save $2.3 million in interest on a $75 million convertible debenture.

Pep Boys had long been known for its good working conditions and generous benefits, which helped the company attract and retain some of the industry's best employees for decades. Leibovitz instilled his employees with competitive fervor by staging ritual annihilations of competitors. Whenever competitive pressure from Pep Boys closed down a major rival's store, he added a photo of the closed-down outlet to his collection. Baseball caps bearing the vanquished competitors' corporate logos were incinerated, and Leibovitz videotaped the symbolic destruction for in-house pep rallies.

The year 1993 saw the inauguration of yet another change at Pep Boys that was hailed by Financial World as "the final step in transforming the old-fashioned family-owned chain into a nationwide leader." After a year of planning, Leibovitz put all his technicians and mechanics on commission in the hopes of attracting top employees and increasing their productivity. Just three months after he made the shift, consumer fraud inspectors in California, Florida, and New Jersey charged Sears, Roebuck and Co.'s auto service division with systematically overcharging customers for unnecessary repairs. The allegations specifically cited Sears's commission program as the locus of the problem. Although chagrined at the negative publicity surrounding commissioned employees generally, Leibovitz confidently stuck with his plan, which incorporated several safeguards. The cornerstone of Pep Boys' system was an ethics policy that dictated termination of mechanics who made unnecessary repairs. Technicians, who were certified by the Institute for Automotive Service Excellence (ASE), also agreed to have their commission docked if their work had to be redone.

Even with commissions, Pep Boys' service cost 20 to 50 percent less than dealerships and independent garages. Service accounted for 13 percent of the retailer's total revenue in fiscal 1993, and income from that segment was increasing more than 10 percent each year in the early 1990s. Sears's subsequent decision to cut back on auto service undoubtedly sent more business to Pep Boys' service bays.

Leibovitz worked to allay customers' ingrained apprehension about gouging in automotive repairs by offering a toll-free "squeal line" and postpaid comment cards addressed to the CEO. Complaints were categorized and tabulated to detect patterns of misconduct, and regional sales managers followed up each complaint with a personal contact. According to the chief, Pep Boys received about 200 complaints and 200 compliments, out of about five million customers, each month. Commendations were reviewed and read on videotape for the firm's "Customer Corner," a video presentation played back in company break rooms across the country.

Pep Boys emerged from the early 1990s recession with strong earnings and stock performance. Even though comparable store sales only increased 1 percent, profits grew by over 20 percent from 1992 to 1993, to $65.6 million and the share price jumped from less than $20 in early 1992 to over $30 by early 1994. Stock market observers predicted that Pep Boys' stock would increase 20 to 30 percent by the end of 1994. Future expansion was planned for new markets in Chicago, Ohio, Denver, Houston, the San Francisco Bay area, and New England. The chain also planned to increase its grip on existing markets in New York, New Jersey, Baltimore, Washington, D.C., Florida, and its historical strongholds in southern California and Philadelphia.

Shifting Away from DIY Market

Pep Boys ended 1994 with 432 stores, 4,166 service bays, and revenues of $1.41 billion. Three years later, following the biggest expansion in company history, there were 711 Pep Boys outlets with 6,208 service bays while revenues surpassed the $2 billion mark for the first time. This expansion included the launching in 1995 of a new parts-only store format (with no service bays and no tires) called PartsUSA. By 1997, there were 109 PartsUSA stores, which were rechristened Pep Boys Express that year in an attempt to leverage the name recognition that the Pep Boys brand had gained in its 75-plus-years of existence. The new format was intended to help the company pursue the "buy-for-resale" segment of the automotive aftermarket, which consisted of sales to professional mechanics and garages, as well as traditional do-it-yourself (DIY) customers. The buy-for-resale segment of the market, along with the "do-it-for-me" segment (services), was increasing in importance at the same time that the DIY sector was plateauing. Fewer people were doing their own auto repair in the mid-to-late 1990s because cars were becoming more and more complex. In pursuit of sales to professionals, Pep Boys began rolling out a system for delivering parts to repair shops in 1996. By the end of 1997, about half of the company's units were offering delivery services. At the same time, Pep Boys was pursuing increased service business by signing agreements with fleet customers, such as maintenance agreements with rental car agencies and deals to recondition used cars and make warranty repairs for used car superstores. In 1997 Pep Boys also began testing a service-only format called Pep Boys Service and Tire Center at a location in Moorestown, New Jersey.

With DIY sales continuing to disappoint, Pep Boys decided in October 1998 to refocus on its supercenter format. The company sold 100 of its Express outlets to arch-rival AutoZone, Inc. for $108 million. Pep Boys also closed an additional nine Express units, leaving just 12 in operation. In connection with this contraction, the company recorded pretax charges of $29.5 million, which reduced 1998 net earnings to $5 million. Pep Boys also slowed down its expansion drive, growing by only 24 units in 1999, and worked to improve the performance of the supercenters by remodeling some of the older units and making other enhancements. At the same time, the rollout of the delivery system continued, culminating by 1999 in 88 percent of the stores participating. Sales for 1999 were flat compared to 1998, but net earnings improved to $29.3 million.

In 2000 Pep Boys continued the expansion of its service operations by launching a new program for buyers or sellers of used cars whereby Pep Boys would inspect a vehicle and, assuming the vehicle passed the inspection, provide a certification vouching for the vehicles' mechanical and operational soundness. Pep Boys initially charged between $89.99 and $229.99 for the service.

Challenging Times

Pep Boys recorded losses in excess of $50 million for 2000. In a money-saving response, the company closed 38 stores and two distribution centers, eliminated 1,300 jobs, cut back store hours, and moved to pay down debt. Comparable sales and total sales declined during 2001, a reflection of the cost-cutting measures. Just two new stores were planned for 2002; both located in the Northeast.

Many other aftermarket players had dialed back expansion in the light of the economic downturn intensified by the September 11, 2001 terrorist attacks against the United States. Pep Boys concentrated on improving performance in its 628 existing stores. A marketing campaign featured services and the benefits of one-stop shopping. Restructuring efforts began to pay off with four straight quarters of improved earnings, stronger profit margins, reduced inventory, and a rebounding stock price, DSN Retailing Today reported in January 2002.

Profits generated by the growing do-it-for-me market aided Pep Boys cause: 6,500 service bays brought in about half of total revenue. The service aspect of its business made it unique among auto parts retailers. "Our service offering is a competitive advantage," Chairman, President and CEO Mitch Leibovitz told DSN Retailing Today. "Our challenge is to maximize that advantage." Service sales had climbed from 4 percent to 45 percent of business during Leibovitz's watch.

Already the largest store in its retail niche, Pep Boys under Leibovitz desired category dominance. Yet the number one player, AutoZone, was just as determined to grow market share. Its "Get in the Zone" campaign caught fire with younger consumers. Conversely, Pep Boys' ad campaign was skewed toward cable TV sports programming and focused on tire sales, a sector nailed by the weak economy and a 2000 third quarter Firestone tire recall.

To generate buzz among "tuners" Pep Boys signed up for sponsorship of Hot Import Nights. U.S. sales in the import performance category sped toward $2 billion during 2002, compared to just $295 million a half decade earlier, according to Forbes. Promising high gross margins, $120 racing gauges, $50 chrome valve covers, and $350 racing mufflers appeared more prominently on Pep Boys shelves, Elisa Williams reported.

The company's parts business needed a boost, coming off a lackluster fiscal 2001 and suffering from a decade-long downward trend in the do-it-yourself sector. On the other hand, Pep Boys' service sales climbed 25 percent from 1998 to 2001, reaching $418 million.

The challenging economic conditions and flat tire market continued to drag on the Pep Boys well into 2002. To create another revenue stream, the aftermarket retail and service chain moved to license its corporate logo for use on products ranging from apparel and toys to car maintenance books. Absent from TV ads for several years, Manny, Moe and Jack fit well with the retro resurgence. Logoed items had already appeared on eBay.com, and the company self-produced T-shirts, baseball caps, and bobbleheads, according to License!

Declining comparable store sales during 2002 led to a change of leadership and tightened control on expenses in 2003. While earnings remained in the black, they were well off the pace set in the late 1990s. Moreover, peer group comp sales had risen in 2002, led by AutoZone's 9 percent increase.

New CEO Lawrence Stevenson, who succeeded Leibovitz after his retirement, acted quickly, shaking up merchandising and marketing, closing underperforming stores, and cutting staff. The former head of Canadian book retailer Chapters foresaw an $11 million savings annually by shuttering 33 stores, primarily in California, and eliminating 700 jobs and 160 corporate positions, according to an August 2003 DSN Retailing Today article. The closures would reduce the store count to 596, down from a peak of 711 in 1997. A related $75 million annual sales decline was expected.

Changes continued in 2004, including a new store format, new logo, and new name. Operating as Pep Boys Auto, the company planned to remodel every store by 2008, creating more cohesion in its identity and a better experience for customers, in particular, women. New product categories were added, including scooters and organizational items for home garages. The new store design and product offerings debuted in the San Diego market. Test stores, reconfigured to highlight product areas such as electronics, trucks, or maintenance, produced promising sales gains.

Pep Boys returned to profitability in 2004, after recording more than $30 million in losses during 2003. Same store sales gains bypassed its automotive parts and accessories retail peer group, according to DSN Retail Today. But while do-it-yourself parts and accessories sales climbed, service revenue remained flat, and tire sales slipped. The segments produced $1.54 billion, $409 million, and $324 million in revenue, respectively.

The service area, despite a significant personnel overhaul, continued to stagnate. The company posted losses during 2005 and a corresponding drop in shareholder value. Over the past year, Pep Boys shares fell 4 percent, versus a 4 percent gain for AutoZone Inc., a 46 percent gain for Advance Auto Parts Inc., and a 41 percent gain for O'Reilly Automotive Inc., Joseph N. DiStefano reported for the Philadelphia Inquirer in February 2006.

Searching for a solution, the board asked long-term financial adviser Goldman, Sachs & Co. "to explore strategic and financial alternatives for the Company." Stevenson continued as CEO, but board member William Leonard took over as chairman. James Mitarotonda, the chairman of Barington Capital Group, a major Pep Boys shareholder, laid blame for the setback at Stevenson's feet and predicted a sale or another restructuring.

The service segment and nontraditional product mix diminished prospects of selling the company to another parts supplier, according to Mergers & Acquisitions Report. Neither was the standard fare of the automotive aftermarket.

Principal Subsidiaries

Pep Boys--Manny, Moe & Jack of California; Pep Boys--Manny, Moe & Jack of Delaware, Inc.; Pep Boys--Manny, Moe & Jack of Puerto Rico, Inc.; Colchester Insurance Company; PBY Corporation; Carrus Supply Corporation.

Principal Competitors

Advance Auto Parts, Inc.; AutoZone, Inc.; CARQUEST Corporation.

Chronology

• Key Dates
• 1921 Four World War I buddies open an auto supplies store in Philadelphia called Pep Auto Supply, soon renamed Pep Boys.
• 1923 Official name of business becomes The Pep Boys--Manny, Moe &Jack.
• 1933 First two California stores are opened in Los Angeles.
• 1946 Company goes public.
• 1986 Mitchell Leibovitz becomes the first company president from outside the founding families; the chain includes 159 stores.
• 1991 Chain has grown to 337 units in 17 states; sales reach $1 billion.
• 1993 All the company's technicians and mechanics are placed on commission.
• 1995 A new parts-only store format, PartsUSA, is launched.
• 1997 PartsUSA outlets are renamed Pep Boys Express; revenues reach $2 billion.
• 1998 Company sells 100 of its Express outlets to AutoZone and closes an additional nine.
• 2006 Following several years of roller-coaster earnings, Pep Boys considers its options.