Another Major Auto Parts Retailers Makes Major Management Change

CSK Auto Parts CAO (NYSE) one of the largest automotive parts and accessories retailers in the United States, selected Lawrence N. Mondry its new President and Chief Executive Officer. Mondry will succeed Maynard Jenkins, who had previously announced his intent to retire upon the Board’s selection of his successor. Mondry will begin work immediately and is expected to assume the President and CEO positions in early July, upon Mr. Jenkins’ retirement. He will also join the Company’s Board of Directors at that time. The Company also announced that James B. Riley, Senior Vice President and Chief Financial Officer, resigned to accept a position as CFO with Ormet, an aluminum production company. The Company expects to appoint an interim Chief Financial Officer in the near future and to commence a search for a qualified replacement for Mr. Riley.

The company has been facing some problems related to their regulatory filings.

The announced change in top management at CSK Auto comes in the midst of intense pressure from Karsch Capital, an activist shareholder, who currently holds over 9% of the company's common stock. The head of Karsch Capital, David Karsch, just yesterday in a letter to the board urged CSK's Board to take action to enhance shareholder value. In the letter to CSK Auto's board Karsch stated,

"we believe the Board should conduct a review of strategic alternatives in which it weighs the relative merits of selling the Company versus giving a new management team time to turn around the business. It is increasingly evident that, under the right management team, such a turnaround should be relatively easy to achieve because of the tremendous opportunity to improve CSK Auto's operating margins".

In the letter Karsch goes on to state,

"having reviewed the recently released financial statements in which historical operating results were revised upwardly, we recognize the merit in considering the alternative of turning around the Company under a new management team and potentially receiving a much greater premium. With the leadership and vision of an above-average CEO, we believe CSK Auto could execute a very achievable operating margin of 9% in 2009 and retain its current8x forward multiple on our EBITDA projections, which would result in a stock price well above $30 per share over the next 18 months. Depressed operating margins should swiftly return to 2004 operating margin levels of 8.3% given that the unsuccessful integration of Murray's has temporarily reduced EBITDA from that unit and prevented the full realization of synergies, the 2006 EBITDA includes one-time integration costs, associates have been distracted by significant senior management turnover and a commensurate lack of direction,and difficult trends in the auto parts industry in 2006 resulted in de-leverag eof fixed costs.

Under the direction of a high quality CEO, the company should be able to surpass the 8.3% operating margin levels it generated in 2004 under a subpar management team given that its category management efforts are inferior to competitors, direct sourcing and private label penetration stand below peers,buying from vendors can be improved, sales mix can be shifted more toward higher-margin hard parts versus lower-margin discretionary and front-end product, and below-peer sales per store can be enhanced through better merchandising, marketing, adjacencies, attachment rates and store-level compensation programs. Lastly, we believe an 8x forward EBITDA multiple is very reasonable given the quality of the auto parts business and the valuation of relevant competitors. Auto parts is a large, fragmented, predictable industry with very little influence from Wal-Mart and rational, margin-focused companies that do not use price as a weapon to gain market share, all of which beget high margins, returns on capital and free cash flow. This unique type of industry backdrop provides turnarounds with a greater probability of success and less risk whereas industries with heavy promotional activity such as home furnishings have witnessed a number of failed turnarounds."

Karsch continues on to say,

"A sale of CSK Auto may still be the best option for shareholders, depending on where the bids fall, given the time value benefit of receiving a solid premium today versus an even better premium in 18 months, the execution risk that a new CEO could fail to improve operating margins, and the additional returns for CSK Auto shareholders if they were to possibly receive stock in one of the high-quality strategic buyers, whose stock should appreciate significantly in the years following the transaction given the notable earnings accretion and strategic value. Therefore, we believe a strategic review should be initiated so that both options can be properly considered and evaluated.

We believe the board has a very poor track record given two accounting probes,a near bankruptcy and a stock that has dramatically underperformed its key competitors, and therefore, we cannot presume for certain that the Board can execute hiring a high quality CEO. We expect to meet the new CEO immediately after that person is hired. If the Board hires a CEO that we do not believe is adequate for the turnaround, and does not conduct a strategic review, we will strongly consider all of our options including a proxy fight to replace some or all members of the Board."

The new CEO may end up being acceptable to Karsch but from a quick look does not appear to bring any extraordinary skills to bear for the firm's success. Mondry had previously been CEO of CompUSA from November 2003 to May 2006, a period of time when the retailer performed reasonably well. He began his retail career back in 1983 with Highland Superstores, a multi-regional consumer electronics retailer, where he held various merchandising positions including Vice President, National Merchandise Manager. He currently serves on the boards of directors of Micron Technology, Inc. and Golfsmith, Inc.

I would recommend investors examine Mondry's background carefully and keep on eye on Karsch Capital to get a sense on exactly how they intend to proceed with the firm with regard to their demands.

For more on CSK Auto

StreetInsider.com Rumor Pipeline (Feb. 26, 2007)
StreetInsider.com 13 D Tracker
Boston.com
Newratings.com
AZcentral.com