Cramer: Stay Away from Pep Boys

On Thursday, “Mad Money” host Jim Cramer recommended investors avoid Pep Boys - Manny, Moe & Jack’s stock.

“Pep Boys is stuck with an outdated business model from the 1920s and their execution has been downright lousy,” Cramer complained. “I don't even know how this company could get its act together, but it would take a real genius to turn the thing around.”

Most stocks in the auto parts retail industry have rallied year-to-date, Cramer said, but Pep Boys is down 14 percent year-to-date and is currently flirting with its 52-week low. In Cramer’s opinion, part of the problem involved a failed takeover bid for Pep Boys.

In May, private equity firm Gores Group walked away from a $791 million deal to buy Pep Boys. Gores had offered $15 per share for the company in January in a deal that gave the company an enterprise value of $1 billion. Several months after making the offer, though, it sought to delay the completion of the deal, citing serious deterioration in Pep Boys' business and a breach of covenant under the merger agreement. Both the parties then tried to negotiate a settlement, a source familiar with the matter told Reuters.

Cramer thinks the problem pre-dates the botched takeover, though. In his opinion, Pep Boys has an outdated business model. Unlike its competition, he noted Pep Boys is not a pure play on auto parts. Instead, it gets one-half of its revenues from selling auto parts and one-half from servicing cars.

“The fundamental problem here is that these two businesses simply do not belong under the same roof,” Cramer complained. “The kind of person who takes his car in to get serviced is very different from the kind of person who buys his own auto parts directly.”

In addition, Cramer said Pep Boys has not executed well. Compared to other auto parts retailers, Pep Boys’ stores are considerably bigger. In fact, they are just too big for Cramer. They have too much exposure to discretionary merchandise, which he said doesn’t sell well in this economy. It also has a troubled balance sheet, he added.

For investors interested in the auto parts retail space, Cramer recommends avoiding Pep Boys and going with rival AutoZone instead.

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—Reuters contributed to this report

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