Why Pep Boys' Shares Got Crushed


Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of auto aftermarket parts specialist Pep Boys (NYS: PBY) were screeching off the road today, losing as much as 25% in intraday trading after the company ran into all sorts of headaches.

So what: According to Pep Boys' press release, first-quarter results will look much worse than expected -- Wall Street was looking for $0.26 in per-share profit, while the midpoint of the new guidance suggests the actual tally will be more like $0.02. But that's only half of the problem. The big first-quarter whiff has Gores Group -- the private equity firm that agreed to take Pep Boys private earlier this year -- worried. Gores is pushing back now and making noise like they may want to kill the buyout.

Now what: There may not be reason for shareholders to freak out quite yet. Pep Boys' contends that the big drop-off in first-quarter results is part of the normal course of business. If the company can successfully argue that, then there may be little opportunity for Gores to back out of the takeover. However, if there's something going on that represents a significant change in the business or something that Pep Boys didn't bring to Gores attention previously -- a "material adverse affect" or "material breach of covenant" in legalese -- then all bets may be off.

Either way, it unfortunately seems likely that shareholders will be treated to an ugly tug-of-war between Pep Boys and Gores Group.

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