Parts player downshifts to cope with growing pains - CSK Auto - Company Profile - Statistical Data Included

DSN Retailing Today, Oct 22, 2001 by Katherine Hutchison

While analysts seem to agree that the macro picture for aftermarket retailers is brightening, CSK Auto, the nation's fourth largest player, continues to struggle as a result of costly acquisitions starting in 1999 that nearly doubled the company's store base. As aggressive and praiseworthy as this growth plan was at the time, it has now saddled the Phoenix-based retailer with a financial burden that may prevent it from prospering in today's increasingly favorable market conditions.

While growing its market was top priority two years ago, CSK is now working to contain itself as it looks to commercial sales to drive results. The company, which is the top auto parts retailer in the West by store count, pledged at the outset of fiscal 2001 to cut debt and lift profits--with inventory reduction a key component to its strategy. However, auto parts retailing is seasonal and highly dependent on weather. High rainfall in California, where the company has its largest share of stores, conspired with overall economic malaise to drag first quarter comp sales down 1%. High energy costs in that state also harmed results.

Then the inventory cuts and payout of legal settlements hurt second quarter profit margins as vendor volume allowances and cash discounts were lost; net income before restructuring charges fell 37.5% to $5.2 million year over year. For the first half of fiscal 2001, ended Aug. 5, CSK's revenue rose just 1% to $738 million; same store sales were flat.

The company has renewed liquidity thanks to its recent $30 million in financing secured from Oppenheimer Funds. It is calling for income in the third quarter, which ends Nov. 4, to rise 50% over the second. But some analysts worry about the company's high borrowing levels, the financial strain from the hefty price paid for its acquisitions and subsequent integration costs and high product costs.

To conserve cash, CSK has halved its planned 2001 store openings from 50 to 25 and is closing 36 underperforming stores. Management hopes these actions, along with eliminating 120 mostly corporate jobs and scuttling low-selling product lines such as clutch parts, will help return it to the healthy profit growth it enjoyed before its rapid expansion-not to mention boost the company's ailing stock. CSK's shares trade between $6 and $8, down sharply from highs over $30 in 1999.

Charges for these second quarter restructuring moves totaled $44.6 million and led to a reported loss of $21.6 million for the first half of the year. Before the charges, net income was $9.5 million, or $0.34 per share, still far short of the $21.5 million, or $0.77 per share, earned in the first half of 2000. CSK expects the store closures to reduce revenue by $23.6 million and gross profit by about $10.6 million over the next 12 months. However, all the recent measures are expected to lower operating expenses by $9.3 million in the second half of 2001 and $16.5 million in fiscal 2002. The job cuts are seen shaving $7 million from annual salary costs and the closures lifting annual profits by $4 million.

Another bright spot is that sales at the acquired Big Wheel/Rossi stores are growing in double digits, although the business is still undercutting CSK's earnings. The June 1999 purchase of the chain gave the retailer a presence in the upper Midwest, with 86 locations in Minnesota, Wisconsin and North Dakota converted to Checker stores, and a distribution center in Minnesota. CSK paid $62.7 million in cash for the company and assumed its debt, which it funded by borrowing $125 million. Management has promised the stores will turn a profit in 2002; Lehman Brothers analyst Alan Rifkin estimates they will add $0.05 to $0.07 per share to earnings next year.

Already contributing to CSK's earnings are 194 former Al's and Grand Auto Supply stores in five Western states acquired in October 1999 for $143 million from PACCAR Inc. The purchase solidified CSK's dominance in the West. To strengthen its position in the Midwest, the company purchased All-Car Distributors and its 22 stores in Wisconsin and Michigan, now operating under the Checker banner, in April 2000.

The acquisitions left CSK with 84 auto service centers, which generated $7.6 million in sales in fiscal 2000, but also lost $2.9 million that year. The company has ditched the service business and closed or sublet most of the centers. Integration of all the 1999 and 2000 acquisitions cost CSK about $24 million in fiscal 2000, while capital expenses ate up another $10.2 million.

In response to manufacturer marketing initiatives that have encouraged dealership care for a longer period, CSK paid $10 million last year for Automotive Information Systems, a database service whose "Identifix" diagnostics technology can be marketed to both professionals and consumers through the Internet.

In fact, one of the few areas where CSK is doing well is its burgeoning commercial business. In a recent conference call with the investment community, chairman and ceo Maynard Jenkins noted the success of the CSK Proshop wholesale business, which has grown about 25% per year since it began in the mid-1990s. Sales to commercial accounts rose 14.5% in fiscal 2000. In its latest quarter, the commercial side totaled 19% of all sales at $71 million and rose 11.5% on a same store basis. By comparison, DIY same store sales were only slightly in positive territory. Commercial comps were the chief driver of CSK's 2% same store sales gain in the second quarter.