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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

x  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended July 31, 2010

 

OR

 

o  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from             to           

 

Commission File No.  1-3381

 

The Pep Boys - Manny, Moe & Jack

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

23-0962915

(State or other jurisdiction of

 

(I.R.S. Employer ID number)

incorporation or organization)

 

 

 

 

 

3111 W. Allegheny Ave. Philadelphia, PA

 

19132

(Address of principal executive offices)

 

(Zip code)

 

215-430-9000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

As of August 27, 2010, there were 52,487,160 shares of the registrant’s Common Stock outstanding.

 

 

 



Table of Contents

 

Index

 

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets - July 31, 2010 and January 30, 2010

3

 

 

 

 

Condensed Consolidated Statements of Operations and Changes in Retained Earnings - Thirteen and Twenty-six Weeks Ended July 31, 2010 and August 1, 2009

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Twenty-six Weeks Ended July 31, 2010 and August 1, 2009

5

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

27

 

 

 

Item 5.

Other Information

27

 

 

 

PART II - OTHER INFORMATION

27

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 1A.

Risk Factors

28

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

 

Item 3.

Defaults Upon Senior Securities

28

 

 

 

Item 4.

(Removed and Reserved)

28

 

 

 

Item 5.

Other Information

28

 

 

 

Item 6.

Exhibits

29

 

 

 

SIGNATURES

30

 

 

 

INDEX TO EXHIBITS

31

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except share data)

UNAUDITED

 

 

 

July 31, 2010

 

January 30, 2010

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

92,363

 

$

39,326

 

Accounts receivable, less allowance for uncollectible accounts of $1,703 and $1,488

 

24,204

 

22,983

 

Merchandise inventories

 

558,932

 

559,118

 

Prepaid expenses

 

20,816

 

24,784

 

Other current assets

 

51,598

 

65,428

 

Assets held for disposal

 

1,778

 

4,438

 

Total current assets

 

749,691

 

716,077

 

 

 

 

 

 

 

Property and equipment - net

 

694,262

 

706,450

 

Deferred income taxes

 

58,968

 

58,171

 

Other long-term assets

 

17,364

 

18,388

 

Total assets

 

$

1,520,285

 

$

1,499,086

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

196,676

 

$

202,974

 

Trade payable program liability

 

55,280

 

34,099

 

Accrued expenses

 

226,505

 

242,416

 

Deferred income taxes

 

35,750

 

29,984

 

Current maturities of long-term debt

 

1,079

 

1,079

 

Total current liabilities

 

515,290

 

510,552

 

 

 

 

 

 

 

Long-term debt less current maturities

 

305,661

 

306,201

 

Other long-term liabilities

 

76,325

 

73,933

 

Deferred gain from asset sales

 

159,177

 

165,105

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $1 per share: authorized 500,000,000 shares; issued 68,557,041 shares

 

68,557

 

68,557

 

Additional paid-in capital

 

294,535

 

293,810

 

Retained earnings

 

393,245

 

374,836

 

Accumulated other comprehensive loss

 

(18,758

)

(17,691

)

Less cost of shares in treasury — 16,072,557 shares and 16,164,074 shares

 

273,747

 

276,217

 

Total stockholders’ equity

 

463,832

 

443,295

 

Total liabilities and stockholders’ equity

 

$

1,520,285

 

$

1,499,086

 

 

See notes to condensed consolidated financial statements.

 

3



Table of Contents

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND CHANGES IN RETAINED EARNINGS

(dollar amounts in thousands, except per share amounts)

UNAUDITED

 

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

 

July 31,
2010

 

August 1,
2009

 

July 31,
2010

 

August 1,
2009

 

Merchandise sales

 

$

406,179

 

$

392,071

 

$

815,368

 

$

790,248

 

Service revenue

 

98,676

 

96,840

 

199,520

 

195,151

 

Total revenues

 

504,855

 

488,911

 

1,014,888

 

985,399

 

Costs of merchandise sales

 

282,362

 

275,790

 

566,158

 

556,825

 

Costs of service revenue

 

87,992

 

84,931

 

176,634

 

170,783

 

Total costs of revenues

 

370,354

 

360,721

 

742,792

 

727,608

 

Gross profit from merchandise sales

 

123,817

 

116,281

 

249,210

 

233,423

 

Gross profit from service revenue

 

10,684

 

11,909

 

22,886

 

24,368

 

Total gross profit

 

134,501

 

128,190

 

272,096

 

257,791

 

Selling, general and administrative expenses

 

113,108

 

109,482

 

224,740

 

217,535

 

Net gain (loss) from dispositions of assets

 

2,449

 

(16

)

2,494

 

(13

)

Operating profit

 

23,842

 

18,692

 

49,850

 

40,243

 

Non-operating income

 

621

 

539

 

1,205

 

942

 

Interest expense

 

6,643

 

6,466

 

13,251

 

8,402

 

Earnings from continuing operations before income taxes and discontinued operations

 

17,820

 

12,765

 

37,804

 

32,783

 

Income tax expense

 

7,021

 

4,907

 

14,845

 

13,862

 

Earnings from continuing operations before discontinued operations

 

10,799

 

7,858

 

22,959

 

18,921

 

Loss from discontinued operations, net of tax

 

(201

)

(123

)

(411

)

(277

)

Net earnings

 

10,598

 

7,735

 

22,548

 

18,644

 

 

 

 

 

 

 

 

 

 

 

Retained earnings, beginning of period

 

384,451

 

367,882

 

374,836

 

358,670

 

Cash dividends

 

(1,581

)

(1,577

)

(3,160

)

(3,152

)

Dividend reinvested and other

 

(223

)

(77

)

(979

)

(199

)

Retained earnings, end of period

 

$

393,245

 

$

373,963

 

$

393,245

 

$

373,963

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations before discontinued operations

 

$

0.21

 

$

0.15

 

$

0.44

 

$

0.36

 

Loss from discontinued operations, net of tax

 

(0.01

)

 

(0.01

)

 

Basic earnings per share

 

$

0.20

 

$

0.15

 

$

0.43

 

$

0.36

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations before discontinued operations

 

$

0.20

 

$

0.15

 

$

0.43

 

$

0.36

 

Loss from discontinued operations, net of tax

 

 

 

 

 

Diluted earnings per share

 

$

0.20

 

$

0.15

 

$

0.43

 

$

0.36

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share

 

$

0.03

 

$

0.03

 

$

0.06

 

$

0.06

 

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

UNAUDITED

 

Twenty-six weeks ended

 

July 31, 2010

 

August 1, 2009

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

22,548

 

$

18,644

 

Adjustments to reconcile net earnings to net cash provided by continuing operations:

 

 

 

 

 

Loss from discontinued operations, net of tax

 

411

 

277

 

Depreciation and amortization

 

36,656

 

35,338

 

Amortization of deferred gain from asset sales

 

(6,299

)

(6,086

)

Stock compensation expense

 

1,998

 

1,284

 

Gain on debt retirement

 

 

(6,248

)

Deferred income taxes

 

5,600

 

4,455

 

Gain from asset sales

 

(2,494

)

13

 

Loss from asset impairment

 

970

 

47

 

Other

 

179

 

188

 

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease in accounts receivable, prepaid expenses and other

 

19,673

 

24,143

 

Decrease in merchandise inventories

 

186

 

16,168

 

(Decrease) increase in accounts payable

 

(6,298

)

10,634

 

Decrease in accrued expenses

 

(14,917

)

(18,658

)

Increase in other long-term liabilities

 

911

 

1,972

 

Net cash provided by continuing operations

 

59,124

 

82,171

 

Net cash used in discontinued operations

 

(1,249

)

(543

)

Net cash provided by operating activities

 

57,875

 

81,628

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Cash paid for property and equipment

 

(27,284

)

(17,481

)

Proceeds from dispositions of assets

 

4,077

 

1,098

 

Other

 

(144

)

(500

)

Net cash used in continuing operations

 

(23,351

)

(16,883

)

Net cash provided by discontinued operations

 

569

 

1,758

 

Net cash used in investing activities

 

(22,782

)

(15,125

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowings under line of credit agreements

 

16,290

 

222,017

 

Payments under line of credit agreements

 

(16,290

)

(244,284

)

Borrowings on trade payable program liability

 

169,875

 

35,300

 

Payments on trade payable program liability

 

(148,694

)

(64,616

)

Debt payments

 

(540

)

(11,451

)

Dividends paid

 

(3,160

)

(3,152

)

Other

 

463

 

237

 

Net cash provided by (used in) financing activities

 

17,944

 

(65,949

)

Net increase in cash and cash equivalents

 

53,037

 

554

 

Cash and cash equivalents at beginning of period

 

39,326

 

21,332

 

Cash and cash equivalents at end of period

 

$

92,363

 

$

21,886

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for income taxes

 

$

810

 

$

2,585

 

Cash paid for interest

 

$

11,452

 

$

12,366

 

Accrued purchases of property and equipment

 

$

662

 

$

1,170

 

 

See notes to condensed consolidated financial statements

 

5



Table of Contents

 

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollar amounts in thousands)

 

NOTE 1. Basis of Presentation

 

The Pep Boys — Manny, Moe & Jack and subsidiaries (the “Company”) consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the Company’s financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, costs and expenses, as well as the disclosure of contingent assets and liabilities and other related disclosures. The Company bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of the Company’s assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates, and the Company includes any revisions to its estimates in the results for the period in which the actual amounts become known.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted, as permitted by Rule 10-01 of the Securities and Exchange Commission’s Regulation S-X, “Interim Financial Statements.” It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2010. The results of operations for the twenty-six weeks ended July 31, 2010 are not necessarily indicative of the operating results for the full fiscal year.

 

The condensed consolidated financial statements presented herein are unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows as of July 31, 2010 and for all periods presented have been made.

 

The Company’s fiscal year ends on the Saturday nearest January 31. Accordingly, references to fiscal years 2010 and 2009 refer to the years ended January 29, 2011 and January 30, 2010, respectively.

 

NOTE 2. New Accounting Standards

 

In October 2009, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) 2009-13 “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force,” (“ASU 2009-13”). This update eliminates the residual method of allocation and requires that consideration be allocated to all deliverables using the relative selling price method. ASU 2009-13 is effective for material revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company does not believe the adoption of ASU 2009-13 will have a material impact on its consolidated financial statements.

 

In January 2010, the FASB issued ASU 2010-06 “Fair Value Measurements — Improving Disclosures on Fair Value Measurements” (“ASU 2010-06”). This guidance requires new disclosures surrounding transfers in and out of level 1 or 2 in the fair value hierarchy and also requires that in the reconciliation of level 3 inputs, the entity should report separately information on purchases, sales, issuances or settlements. The increased disclosures should be reported for each class of assets or liabilities. ASU 2010-06 also clarifies existing disclosures for the level of disaggregating, disclosures about valuation techniques and inputs used to determine level 2 or 3 fair value measurements and includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances or settlements in the roll forward activity for level 3 fair value measurements which are effective for interim and annual periods beginning after December 15, 2010. The adoption of ASU 2010-06 for requirements effective December 15, 2009 did not have a material impact on the Company’s consolidated financial statements. The Company does not believe the adoption of those requirements of ASU 2010-06 which are effective for periods beginning after December 15, 2010 will have a material impact on its consolidated financial statements.

 

NOTE 3. Merchandise Inventories

 

Merchandise inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected fiscal year-end inventory levels and costs. If the first-in, first-out (“FIFO”) method of costing inventory had been used by the Company, inventory would have

 

6



Table of Contents

 

been $483.7 million and $482.0 million as of July 31, 2010 and January 30, 2010, respectively.

 

The Company provides for estimated inventory shrinkage based upon historical levels and the results of its cycle counting program.

 

The Company also records adjustments for potentially excess and obsolete inventories based on current inventory levels, the historical analysis of product sales and current market conditions. The nature of the Company’s inventory is such that the risk of obsolescence is minimal and excess inventory has historically been returned to the Company’s vendors for credit. The Company records adjustments when less than full credit is expected from a vendor or when market is lower than recorded costs. These adjustments are reviewed on a quarterly basis for adequacy. The Company’s inventory adjustments for these matters were $10.9 million and $13.0 million at July 31, 2010 and January 30, 2010, respectively.

 

NOTE 4. Property and Equipment

 

The Company’s property and equipment as of July 31, 2010 and January 30, 2010 was as follows:

 

(dollar amounts in thousands)

 

July 31, 2010

 

January 30, 2010

 

 

 

 

 

 

 

Property and equipment

 

 

 

 

 

Land

 

$

203,803

 

$

204,709

 

Buildings and improvements

 

830,712

 

826,804

 

Furniture, fixtures and equipment

 

691,983

 

695,072

 

Construction in progress

 

1,660

 

1,550

 

Accumulated depreciation and amortization

 

(1,033,896

)

(1,021,685

)

Property and equipment — net

 

$

694,262

 

$

706,450

 

 

NOTE 5. Warranty Reserve

 

The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by the respective vendors, with the Company covering any costs above the vendor’s stipulated allowance. Service labor warranties are covered in full by the Company on a limited lifetime basis. The Company establishes its warranty reserves based on historical data of warranty transactions. These costs are included in either costs of merchandise sales or costs of service revenues in the condensed consolidated statements of operations.

 

The reserve for warranty cost activity for the twenty-six weeks ended July 31, 2010 and the fifty-two weeks ended January 30, 2010 is as follows:

 

(dollar amounts in thousands)

 

July 31, 2010

 

January 30, 2010

 

Beginning balance

 

$

694

 

$

797

 

 

 

 

 

 

 

Additions related to current period sales

 

5,682

 

15,572

 

 

 

 

 

 

 

Warranty costs incurred in current period

 

(5,682

)

(15,675

)

 

 

 

 

 

 

Ending balance

 

$

694

 

$

694

 

 

NOTE 6. Debt and Financing Arrangements

 

The following are the components of debt and financing arrangements:

 

(dollar amounts in thousands)

 

July 31, 2010

 

January 30, 2010

 

7.50% Senior Subordinated Notes, due December 2014

 

$

157,565

 

$

157,565

 

Senior Secured Term Loan, due October 2013

 

149,175

 

149,715

 

Revolving Credit Agreement, expiring January 2014

 

 

 

 

 

306,740

 

307,280

 

Less current maturities

 

1,079

 

1,079

 

Long-term debt, less current maturities

 

$

305,661

 

$

306,201

 

 

7



Table of Contents

 

During the first quarter of fiscal 2009, the Company repurchased $17.0 million of its outstanding 7.50% Senior Subordinated Notes (the “Notes”) for $10.7 million resulting in a gain of $6.2 million which is reflected in interest expense on the accompanying condensed consolidated statements of operations and changes in retained earnings.

 

As of July 31, 2010, 126 of the Company’s 231 owned stores were used as collateral under the Company’s Senior Secured Term Loan due October 2013.

 

On January 16, 2009, the Company entered into a new $300.0 million Revolving Credit Agreement. The Company’s ability to borrow under the Revolving Credit Agreement is based on a specific borrowing base consisting of inventory and accounts receivable. The interest rate on this credit line is LIBOR or Prime plus 2.75% to 3.25% based upon the then current availability under the facility. As of July 31, 2010, there were no outstanding borrowings under this agreement and $114.2 million of availability was utilized to support outstanding letters of credit. Taking this into account and the borrowing base requirements, as of July 31, 2010, there was $128.3 million of availability remaining.

 

Several of the Company’s debt agreements require compliance with covenants. The most restrictive of these requirements is contained in the Company’s Revolving Credit Agreement. During any period when the availability under the Revolving Credit Agreement drops below the greater of $50.0 million or 17.5% of the borrowing base, the Company is required to maintain a consolidated fixed charge coverage ratio of at least 1.1:1.0, calculated as the ratio of (a) EBITDA (net income plus interest charges, provision for taxes, depreciation and amortization expense, non-cash stock compensation expenses and other non-recurring, non-cash items) minus capital expenditures and income taxes paid to (b) the sum of debt service charges and restricted payments made. The failure to satisfy this covenant would constitute an event of default under the Revolving Credit Agreement, which would result in a cross-default under the Company’s 7.50% Senior Subordinated Notes and Senior Secured Term Loan. As of July 31, 2010, the Company was in compliance with all such financial covenants.

 

Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange. The estimated fair value of long-term debt including current maturities was $298.7 million and $290.8 million as of July 31, 2010 and January 30, 2010, respectively.

 

NOTE 7.  Sale-Leaseback Transactions

 

During the twenty-six weeks ended July 31, 2010, the Company sold one property to an unrelated third party. Net proceeds from this sale were $1.6 million. Concurrent with this sale, the Company entered into an agreement to lease the property back from the purchaser over a minimum lease term of 15 years. The Company classified this lease as an operating lease. The Company actively uses this property and considers the lease as a normal leaseback. A deferred gain of $0.4 million is being recognized over the minimum term of the lease.

 

Of the 594 store locations operated by the Company at July 31, 2010, 231 are owned and 363 are leased.

 

NOTE 8. Income Taxes

 

The Company recognizes taxes payable for the current year, as well as deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The Company must assess the likelihood that any recorded deferred tax assets will be recovered against future taxable income. To the extent the Company believes it is more likely than not that the asset will not be recoverable, a valuation allowance must be established. Cumulative losses in recent years constitute “negative evidence” that a recovery is not more likely than not, which must be rebutted by “positive evidence” to avoid establishing a valuation allowance. To establish this positive evidence, the Company considers various tax planning strategies for generating income sufficient to utilize the deferred tax assets, including the potential sale of real estate and the conversion of the Company’s accounting policy for its inventory from LIFO to FIFO.

 

For income tax benefits related to uncertain tax positions to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. During the twenty-six weeks ended July 31, 2010, the Company did not have a material change to its uncertain tax position liabilities.

 

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NOTE 9. Accumulated Other Comprehensive Loss

 

The following are the components of other comprehensive income:

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

(dollar amounts in thousands)

 

July 31,
2010

 

August 1,
2009

 

July 31,
2010

 

August 1,
2009

 

Net earnings

 

$

 10,598

 

$

 7,735

 

$

 22,548

 

$

 18,644

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Defined benefit plan adjustment

 

265

 

356

 

530

 

560

 

Derivative financial instrument adjustment

 

(1,800

990

 

(1,597

)

1,038

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

 9,063

 

$

 9,081

 

$

 21,481

 

$

 20,242

 

 

The components of accumulated other comprehensive loss are:

 

(dollar amounts in thousands)

 

July 31, 2010

 

January 30, 2010

 

 

 

 

 

 

 

Defined benefit plan adjustment, net of tax

 

$

 (6,628

)

$

 (7,158

)

Derivative financial instrument adjustment, net of tax

 

(12,130

)

(10,533

)

Accumulated other comprehensive loss

 

$

 (18,758

)

$

 (17,691

)

 

NOTE 10: Impairments and Assets Held for Disposal

 

The Company evaluates the ability to recover long-lived assets whenever events or circumstances indicate that the carrying value of the asset may not be recoverable. In the event assets are impaired, losses are recognized to the extent the carrying value exceeds fair value. In addition, the Company reports assets held for disposal at the lower of the carrying amount or the estimated fair market value, net of disposal costs. A store is classified as “held for disposal” when (i) the Company has committed to a plan to sell, (ii) the building is vacant and the property is available for sale, (iii) the Company is actively marketing the property for sale, (iv) the sale price is reasonable in relation to its current fair value and (v) the Company expects to complete the sale within one year. No depreciation expense is recognized during the period the asset is held for disposal.

 

During the second quarter of fiscal 2010, the Company recorded an $0.8 million impairment charge related to two stores classified as held and used. The Company used a probability-weighted approach and estimates of expected future cash flows to determine the fair value of these stores. Discount and growth rate assumptions were derived from current economic conditions, management’s expectations and projected trends of current operating results. The fair market value estimate is classified as a Level 3 measure within the fair value hierarchy. Of the $0.8 million impairment charge, $0.6 million was charged to merchandise cost of sales, and $0.2 million was charged to service cost of sales.

 

During the second quarter of fiscal 2010, the Company also recorded a $0.2 million impairment charge related to a store classified as held for disposal. The Company lowered its selling price reflecting declines in the commercial real estate market. The fair market value of the store is classified as a Level 2 measure within the fair value hierarchy. Substantially all of this impairment was charged to merchandise cost of sales.

 

During the thirteen week period ended July 31, 2010, the Company sold one store classified as held for disposal for net proceeds of $0.8 million and recognized a net gain of $0.2 million. During the thirteen week period ended August 1, 2009, the Company sold one store classified as held for disposal for net proceeds of $1.0 million and recognized an immaterial net gain. During the twenty-six week period ended July 31, 2010, the Company sold four stores classified as held for disposal for net proceeds of $2.9 million and recognized a net gain of $0.3 million. During the twenty-six week period ended August 1, 2009, the Company sold three stores that were classified as held for disposal for net proceeds of $2.8 million and recognized a net gain of $0.1 million. Assets held for disposal are as follows:

 

9



Table of Contents

 

(dollar amounts in thousands)

 

July 31, 2010

 

January 30, 2010

 

 

 

 

 

 

 

Land

 

$

 1,310

 

$

 2,980

 

Buildings and improvements

 

2,445

 

5,453

 

Accumulated depreciation and amortization

 

(1,977

)

(3,995

)

Property and equipment - net

 

$

 1,778

 

$

 4,438

 

Number of properties

 

4

 

8

 

 

In addition to the above stores, the Company reached a settlement agreement during the second quarter on a previously closed store for $2.8 million, resulting in a net gain from the disposition of assets of $2.3 million.

 

NOTE 11. Earnings Per Share

 

The following table presents the calculation of basic and diluted earnings per share for earnings from continuing operations and net earnings:

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

(in thousands, except per share amounts)

 

July 31,
2010

 

August 1,
2009

 

July 31,
2010

 

August 1,
2009

 

 

 

 

 

 

 

 

 

 

 

(a)

Earnings from continuing operations

 

$

 10,799

 

$

 7,858

 

$

 22,959

 

$

 18,921

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

(201

)

(123

)

(411

)

(277

)

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

 10,598

 

$

 7,735

 

$

 22,548

 

$

 18,644

 

 

 

 

 

 

 

 

 

 

 

 

(b)

Basic average number of common shares outstanding during period

 

52,682

 

52,384

 

52,609

 

52,359

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares assumed issued upon exercise of dilutive stock options, net of assumed repurchase, at the average market price

 

447

 

315

 

426

 

179

 

 

 

 

 

 

 

 

 

 

 

 

(c)

Diluted average number of common shares assumed outstanding during period

 

53,129

 

52,699

 

53,035

 

52,538

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations (a/b)

 

$

 0.21

 

$

 0.15

 

$

 0.44

 

$

 0.36

 

 

Discontinued operations, net of tax

 

(0.01

)

 

(0.01

)

 

 

Basic earnings per share

 

$

 0.20

 

$

 0.15

 

$

 0.43

 

$

 0.36

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

Net earnings from continuing operations (a/c)

 

$

 0.20

 

$

 0.15

 

$

 0.43

 

$

 0.36

 

 

Discontinued operations, net of tax

 

 

 

 

 

 

Diluted earnings per share

 

$

 0.20

 

$

 0.15

 

$

 0.43

 

$

 0.36

 

 

At July 31, 2010 and August 1, 2009, respectively, there were 2,402,000 and 2,033,000 outstanding options and restricted stock units. Certain stock options were excluded from the calculation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the periods then ended and therefore would be anti-dilutive. The total numbers of such shares excluded from the diluted earnings per share calculation are 1,071,000 and 973,000 for the thirteen weeks ended July 31, 2010 and August 1, 2009, respectively. The total number of such shares excluded from the diluted earnings per share calculation are 1,088,000 and 1,355,000 for the twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively.

 

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Table of Contents

 

NOTE 12. Benefit Plans

 

The Company has a qualified 401(K) savings plan and a separate plan for employees residing in Puerto Rico, which cover all full-time employees who are at least 21 years of age with one or more years of service. The Company’s contribution expense related to the savings plans was approximately $0.7 million for both thirteen week periods ended July 31, 2010 and August 1, 2009, and approximately $1.6 million and $1.8 million for the twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively. The Company’s expense for its Account Plan (Defined Contribution SERP) was approximately $0.3 million for both thirteen week periods ended July 31, 2010 and August 1, 2009, and approximately $0.7 million and $0.5 million for the twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively. The Company’s contribution to these plans for fiscal year 2010 is contingent upon meeting certain performance metrics. The Company currently estimates that these performance metrics will be achieved and has recorded expense accordingly.

 

The Company also has a frozen defined benefit pension plan covering the Company’s full-time employees hired on or before February 1, 1992. The Company’s expense for its pension plan follows:

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

(dollar amounts in thousands)

 

July 31, 2010

 

August 1, 2009

 

July 31, 2010

 

August 1, 2009

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

640

 

649

 

1,280

 

1,270

 

Expected return on plan assets

 

(537

)

(365

)

(1,075

)

(902

)

Amortization of prior service cost

 

 

7

 

 

7

 

Amortization of net loss

 

422

 

559

 

843

 

884

 

Net periodic benefit cost

 

$

525

 

$

850

 

$

1,048

 

$

1,259

 

 

NOTE 13. Equity Compensation Plans

 

The Company has stock-based compensation plans, under which it grants stock options and restricted stock units to key employees and members of its Board of Directors. The Company generally recognizes compensation expense on a straight-line basis over the vesting period.

 

The following table summarizes the options under the Company’s plan:

 

 

 

Number of Shares

 

Outstanding — January 30, 2010

 

1,682,325

 

Granted

 

303,056

 

Exercised

 

(32,137

)

Forfeited

 

(6,066

)

Expired

 

(14,500

)

Outstanding — July 31, 2010

 

1,932,678

 

 

During the twenty-six weeks ended July 31, 2010 and August 1, 2009, the Company granted approximately 303,000 and 948,000 stock options with a weighted average grant date fair value of $4.26 and $2.10, respectively. These options have a seven year term and vest over a three year period with a third vesting on each of the three grant date anniversaries. The compensation expense recorded during the twenty-six weeks ended July 31, 2010 for the options granted was minimal.

 

Of the options granted in fiscal year 2009, the Company granted 736,000 stock options with a weighted average grant date fair value of $1.69. These options have a seven year term and include both a service and a market appreciation vesting requirement. These options vest over a three year period with a third vesting on each of the three grant date anniversaries, provided the market price of the Company’s stock has appreciated by a certain amount. From the date of grant, the market price of the Company’s stock must have appreciated, for at least 15 consecutive trading days, by $2.00 or more above grant price for 536,000 options and by $6.88 or more above grant price for 200,000 options in order to vest. The Company used a Monte Carlo simulation model to estimate the expected term and is recording the compensation expense over the service period for each separately vesting portion of the options granted. As of July 31, 2010, the market appreciation requirements of both grants have been satisfied.

 

Expected volatility is based on historical volatilities for a time period similar to that of the expected term. The risk-free rate is based on the U.S. treasury yield curve for issues with a remaining term equal to the expected term. The fair value of each option granted is

 

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Table of Contents

 

estimated on the date of grant using the Black-Scholes option-pricing model, and in certain situations where the grant includes both a market and service condition as described more fully above, using a Monte Carlo simulation.

 

The following are the weighted-average assumptions:

 

 

 

July 31, 2010

 

August 1, 2009

 

Dividend yield

 

1.4

%

2.3

%

Expected volatility

 

55.7

%

65.2

%

Risk-free interest rate range:

 

 

 

 

 

High

 

2.0

%

2.3

%

Low

 

1.7

%

1.6

%

Ranges of expected lives in years

 

4 - 5

 

4 - 5

 

 

Restricted Stock Units

 

In the first quarter of fiscal 2010, the Company granted approximately 105,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and the Company achieves certain financial targets for fiscal year 2012. The number of underlying shares that may be issued upon vesting will range from 0% to 150%, depending upon the Company achieving the financial targets for fiscal year 2012. The fair value for these awards was $10.34 at the date of the grant. The compensation expense recorded during the twenty-six weeks ended July 31, 2010 for these restricted stock units was minimal.

 

In the first quarter of fiscal 2010, the Company also granted approximately 52,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and will become exercisable if the Company satisfies a market condition in fiscal 2012. The number of underlying shares that may become exercisable will range from 0% to 175% depending upon whether the market condition is achieved. The Company used a Monte Carlo simulation to estimate a $12.99 grant date fair value. The compensation expense recorded during the twenty-six weeks ended July 3l, 2010 for these restricted stock units was minimal.

 

In the second quarter of fiscal 2010, the company granted approximately 52,000 restricted stock units to its non-employee directors of the board that vested immediately. The fair value was $9.55 per unit and the Company recognized compensation expense of approximately $0.5 million for these restricted stock units.

 

In the first quarter of fiscal 2010, the Company granted approximately 61,000 restricted stock units related to officer’s deferred bonus match under the Company’s non-qualified deferred compensation plan, which vest over a three year period. The following table summarizes the units under the Company’s plan, assuming maximum vesting of underlying shares for performance and market based awards:

 

 

 

Number of RSUs

 

Nonvested — January 30, 2010

 

232,593

 

Granted

 

362,283

 

Forfeited

 

(3,700

)

Vested

 

(122,313

)

Nonvested — July 31, 2010

 

468,863

 

 

NOTE 14. Fair Value Measurements

 

The Company’s fair value measurements consist of (a) non-financial assets and liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities.

 

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. There is a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

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Table of Contents

 

The following table provides information by level for assets and liabilities that are measured at fair value, on a recurring basis:

 

(dollar amounts in thousands)

 

Fair Value
at

 

Fair Value Measurements
Using Inputs Considered as

 

Description

 

July 31, 2010

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

92,363

 

$

92,363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Derivative liability (a)

 

$

38

 

 

 

$

38

 

 

 

Contingent consideration (a)

 

$

288

 

 

 

 

 

$

288

 

Other liabilities

 

 

 

 

 

 

 

 

 

Derivative liability (b)

 

$

18,980

 

 

 

$

18,980

 

 

 

Contingent consideration (b)

 

$

1,312

 

 

 

 

 

$

1,312

 

 


(a)          included in accrued liabilities

(b)         included in other long-term liabilities

 

The Company has one interest rate swap designated as a cash flow hedge on $145.0 million of the Company’s Senior Secured Term Loan that is due in October 2013. The swap is used to minimize interest rate exposure and overall interest costs by converting the variable interest rate to a fixed rate of 5.036%. Since February 1, 2008, this swap was deemed to be fully effective and all adjustments in the interest rate swap’s fair value have been recorded to accumulated other comprehensive loss.

 

The table below shows the effect of the Company’s interest rate swap on the condensed consolidated financial statements for the periods indicated:

 

(dollar amounts in thousands)

 

Amount of Loss in
Other Comprehensive
Income
(Effective Portion)

 

Earnings Statement
Classification

 

Amount of Loss
Recognized in Earnings
(Effective Portion) (a)

 

Thirteen weeks ended July 31, 2010

 

$

(1,801

)

Interest expense

 

$

(1,753

)

Twenty-six weeks ended July 31, 2010

 

$

(1,621

)

Interest expense

 

$

(3,448

)

 


(a) represents the effective portion of the loss reclassified from accumulated other comprehensive loss

 

In the second quarter of fiscal 2010, the Company entered into a price stability agreement (“Agreement”) that is also designated as a cash flow hedge. This Agreement is intended to hedge the price risks associated with the market volatility of retail gasoline. This hedge is deemed to be fully effective and all adjustments in the hedge’s fair value have been recorded to accumulated other comprehensive loss. The effect of this Agreement on the Company’s condensed consolidated financial statements is immaterial.

 

Non-financial assets measured at fair value on a non-recurring basis:

 

Certain assets are measured at fair value on a non-recurring basis, that is, the assets are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment. These measures of fair value, and related inputs, are considered level 2 or level 3 measures under the fair value hierarchy.

 

The fair value of the derivatives was $19.0 million and $16.4 million payable at July 31, 2010 and January 30, 2010, respectively. Of the $2.5 million increase in the fair value during the twenty-six weeks ended July 31, 2010, $1.6 million net of tax was recorded to accumulated other comprehensive loss on the condensed consolidated balance sheet.

 

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Table of Contents

 

NOTE 15. Legal Matters

 

In September 2006, the United States Environmental Protection Agency (“EPA”) requested certain information from the Company as part of an investigation to determine whether the Company had violated, and is in violation of, the Clean Air Act and its non-road engine regulations. The information requested concerned certain generator and personal transportation merchandise offered for sale by the Company. In the fourth quarter of fiscal 2008, the EPA informed the Company that it believed that the Company had violated the Clean Air Act by virtue of the fact that certain of this merchandise did not conform to their corresponding EPA Certificates of Conformity. During the third quarter of fiscal 2009, the Company and the EPA reached a settlement in principle of this matter requiring that the Company (i) pay a monetary penalty of $5.0 million, (ii) take certain corrective action with respect to certain inventory that had been restricted from sale during the course of the investigation, (iii) implement a formal compliance program and (iv) participate in certain non-monetary emission offset activities. The Company had previously accrued an amount equal to the agreed upon civil penalty and a $3.0 million contingency accrual with respect to the restricted inventory. During fiscal 2009, the Company reversed $2.0 million of the inventory accrual as a portion of the subject inventory was released for sale. During the second quarter of fiscal 2010, the Company reversed the remaining $1.0 million of the inventory accrual as the Company reached an agreement with the merchandise vendor to cover the entire cost of retrofitting a portion of the remaining subject merchandise and to accept the balance of the subject inventory for return for full credit. During the second quarter of fiscal 2010, the formal settlement agreement between the Company and the EPA became effective and the Company paid the monetary penalty.

 

The Company is also party to various other actions and claims arising in the normal course of business.

 

The Company believes that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position. However, there exists a reasonable possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While the Company does not believe that the amount of such excess loss could be material to the Company’s financial position, any such loss could have a material adverse effect on the Company’s results of operations in the period(s) during which the underlying matters are resolved.

 

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Table of Contents

 

NOTE 16. Supplemental Guarantor Information

 

The Company’s Notes are fully and unconditionally and joint and severally guaranteed by certain of the Company’s direct and indirectly wholly-owned subsidiaries - namely, The Pep Boys Manny Moe & Jack of California, Pep Boys — Manny Moe & Jack of Delaware, Inc., Pep Boys — Manny Moe & Jack of Puerto Rico, Inc. and PBY Corporation, (collectively, the “Subsidiary Guarantors”). The Notes are not guaranteed by the Company’s wholly owned subsidiary, Colchester Insurance Company.

 

The following condensed consolidating information presents, in separate columns, the condensed consolidating balance sheets as of July 31, 2010 and January 30, 2010 and the related condensed consolidating statements of operations for the thirteen and twenty-six weeks ended July 31, 2010 and August 1, 2009 and condensed consolidating statements of cash flows for the twenty-six weeks ended July 31, 2010 and August 1, 2009 for (i) the Company (“Pep Boys”) on a parent only basis, with its investment in subsidiaries recorded under the equity method, (ii) the Subsidiary Guarantors on a combined basis including the consolidation by PBY Corporation of its wholly owned subsidiary, The Pep Boys Manny Moe & Jack of California, (iii) the subsidiary of the Company that does not guarantee the Notes, and (iv) the Company on a consolidated basis.

 

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

(unaudited)

 

As of July 31, 2010

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation/
Elimination

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

71,665

 

$

12,911

 

$

7,787

 

$

 

$

92,363

 

Accounts receivable, net

 

12,333

 

11,871

 

 

 

24,204

 

Merchandise inventories

 

192,591

 

366,341

 

 

 

558,932

 

Prepaid expenses

 

10,694

 

8,494

 

7,394

 

(5,766

)

20,816

 

Other current assets

 

765

 

2,662

 

56,254

 

(8,083

)

51,598

 

Assets held for disposal

 

903

 

875

 

 

 

1,778

 

Total current assets

 

288,951

 

403,154

 

71,435

 

(13,849

)

749,691

 

Property and equipment—net

 

231,276

 

450,934

 

31,203

 

(19,151

)

694,262

 

Investment in subsidiaries

 

1,791,971

 

 

 

(1,791,971

)

 

Intercompany receivables

 

 

1,095,616

 

70,340

 

(1,165,956

)

 

Deferred income taxes

 

10,954

 

48,014

 

 

 

58,968

 

Other long-term assets

 

16,193

 

1,171

 

 

 

17,364

 

Total assets

 

$

2,339,345

 

$

1,998,889

 

$

172,978

 

$

(2,990,927

)

$

1,520,285

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

196,676

 

$

 

$

 

$

 

$

196,676

 

Trade payable program liability

 

55,280

 

 

 

 

55,280

 

Accrued expenses

 

32,861

 

55,652

 

146,420

 

(8,428

)

226,505

 

Deferred income taxes

 

11,901

 

29,270

 

 

(5,421

)

35,750

 

Current maturities of long-term debt

 

1,079

 

 

 

 

1,079

 

Total current liabilities

 

297,797

 

84,922

 

146,420

 

(13,849

)

515,290

 

Long-term debt less current maturities

 

305,661

 

 

 

 

305,661

 

Other long-term liabilities

 

38,474

 

37,851

 

 

 

76,325

 

Deferred gain from asset sales

 

67,625

 

110,703

 

 

(19,151

)

159,177

 

Intercompany liabilities

 

1,165,956

 

 

 

(1,165,956

)

 

Total stockholders’ equity

 

463,832

 

1,765,413

 

26,558

 

(1,791,971

)

463,832

 

Total liabilities and stockholders’ equity

 

$

2,339,345

 

$

1,998,889

 

$

172,978

 

$

(2,990,927

)

$

1,520,285

 

 

15



Table of Contents

 

As of January 30, 2010

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation/
Elimination

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,844

 

$

10,279

 

$

3,203

 

$

 

$

39,326

 

Accounts receivable, net

 

13,032

 

9,951

 

 

 

22,983

 

Merchandise inventories

 

195,314

 

363,804

 

 

 

559,118

 

Prepaid expenses

 

12,607

 

15,070

 

14,255

 

(17,148

)

24,784

 

Other current assets

 

1,101

 

2,667

 

67,038

 

(5,378

)

65,428

 

Assets held for disposal

 

1,045

 

3,393

 

 

 

4,438

 

Total current assets

 

248,943

 

405,164

 

84,496

 

(22,526

)

716,077

 

Property and equipment—net

 

232,115

 

462,128

 

31,544

 

(19,337

)

706,450

 

Investment in subsidiaries

 

1,755,426

 

 

 

(1,755,426

)

 

Intercompany receivables

 

 

1,058,132

 

83,953

 

(1,142,085

)

 

Deferred income taxes

 

11,200

 

46,971

 

 

 

58,171

 

Other long-term assets

 

17,566

 

822

 

 

 

18,388

 

Total assets

 

$

2,265,250

 

$

1,973,217

 

$

199,993

 

$

(2,939,374

)

$

1,499,086

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

202,974

 

$

 

$

 

$

 

$

202,974

 

Trade payable program liability

 

34,099

 

 

 

 

34,099

 

Accrued expenses

 

24,042

 

62,106

 

173,429

 

(17,161

)

242,416

 

Deferred income taxes

 

6,626

 

28,723

 

 

(5,365

)

29,984

 

Current maturities of long-term debt

 

1,079

 

 

 

 

1,079

 

Total current liabilities

 

268,820

 

90,829

 

173,429

 

(22,526

)

510,552

 

Long-term debt less current maturities

 

306,201

 

 

 

 

306,201

 

Other long-term liabilities

 

35,125

 

38,808

 

 

 

73,933

 

Deferred gain from asset sales

 

69,724

 

114,718

 

 

(19,337

)

165,105

 

Intercompany liabilities

 

1,142,085

 

 

 

(1,142,085

)

 

Total stockholders’ equity

 

443,295

 

1,728,862

 

26,564

 

(1,755,426

)

443,295

 

Total liabilities and stockholders’ equity

 

$

2,265,250

 

$

1,973,217

 

$

199,993

 

$

(2,939,374

)

$

1,499,086

 

 

16



Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(dollars in thousands)

(unaudited)

 

 

 

 

 

Subsidiary

 

Subsidiary Non-

 

Consolidation /

 

 

 

Thirteen Weeks Ended July 31, 2010

 

Pep Boys

 

Guarantors

 

Guarantors

 

Elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise sales

 

$

141,019

 

$

265,160

 

$

 

$

 

$

406,179

 

Service revenue

 

35,729

 

62,947

 

 

 

98,676

 

Other revenue

 

 

 

5,736

 

(5,736

)

 

Total revenues

 

176,748

 

328,107

 

5,736

 

(5,736

)

504,855

 

Costs of merchandise sales

 

99,511

 

183,260

 

 

(409

)

282,362

 

Costs of service revenue

 

31,186

 

56,844

 

 

(38

)

87,992

 

Costs of other revenue

 

 

 

5,091

 

(5,091

)

 

Total costs of revenues

 

130,697

 

240,104

 

5,091

 

(5,538

)

370,354

 

Gross profit from merchandise sales

 

41,508

 

81,900

 

 

409

 

123,817

 

Gross profit from service revenue

 

4,543

 

6,103

 

 

38

 

10,684

 

Gross profit from other revenue

 

 

 

645

 

(645

)

 

Total gross profit

 

46,051

 

88,003

 

645

 

(198

)

134,501

 

Selling, general and administrative expenses

 

41,258

 

72,576

 

89

 

(815

)

113,108

 

Net gain from dispositions of assets

 

2,218

 

231

 

 

 

2,449

 

Operating profit

 

7,011

 

15,658

 

556

 

617

 

23,842

 

Non-operating (expense) income

 

(4,163

)

20,313

 

617

 

(16,146

)

621

 

Interest expense (income)

 

16,306

 

6,393

 

(527

)

(15,529

)

6,643

 

(Loss) earnings from continuing operations before income taxes

 

(13,458

)

29,578

 

1,700

 

 

17,820

 

Income tax (benefit) expense

 

(5,311

)

11,663

 

669

 

 

7,021

 

Equity in earnings of subsidiaries

 

18,784

 

 

 

(18,784

)

 

Net earnings from continuing operations

 

10,637

 

17,915

 

1,031

 

(18,784

)

10,799

 

Discontinued operations, net of tax

 

(39

)

(162

)

 

 

(201

)

Net earnings

 

$

10,598

 

$

17,753

 

$

1,031

 

$

(18,784

)

$

10,598

 

 

 

 

 

 

Subsidiary

 

Subsidiary Non-

 

Consolidation /

 

 

 

Thirteen Weeks Ended August 1, 2009

 

Pep Boys

 

Guarantors

 

Guarantors

 

Elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise sales

 

$

133,660

 

$

258,411

 

$

 

$

 

$

392,071

 

Service revenue

 

34,046

 

62,794

 

 

 

96,840

 

Other revenue

 

 

 

5,722

 

(5,722

)

 

Total revenues

 

167,706

 

321,205

 

5,722

 

(5,722

)

488,911

 

Costs of merchandise sales

 

95,456

 

180,743

 

 

(409

)

275,790

 

Costs of service revenue

 

28,951

 

56,018

 

 

(38

)

84,931

 

Costs of other revenue

 

 

 

5,337

 

(5,337

)

 

Total costs of revenues

 

124,407

 

236,761

 

5,337

 

(5,784

)

360,721

 

Gross profit from merchandise sales

 

38,204

 

77,668

 

 

409

 

116,281

 

Gross profit from service revenue

 

5,095

 

6,776

 

 

38

 

11,909

 

Gross profit from other revenue

 

 

 

385

 

(385

)

 

Total gross profit

 

43,299

 

84,444

 

385

 

62

 

128,190

 

Selling, general and administrative expenses

 

39,240

 

70,720

 

77

 

(555

)

109,482

 

Net gain from dispositions of assets

 

13

 

(29

)

 

 

(16

)

Operating profit

 

4,072

 

13,695

 

308

 

617

 

18,692

 

Non-operating (expense) income

 

(4,039

)

21,508

 

620

 

(17,550

)

539

 

Interest expense (income)

 

17,016

 

6,904

 

(521

)

(16,933

)

6,466

 

(Loss) earnings from continuing operations before income taxes

 

(16,983

)

28,299

 

1,449

 

 

12,765

 

Income tax (benefit) expense

 

(7,940

)

12,232

 

615

 

 

4,907

 

Equity in earnings of subsidiaries

 

16,781

 

 

 

(16,781

)

 

Net earnings from continuing operations

 

7,738

 

16,067

 

834

 

(16,781

)

7,858

 

Discontinued operations, net of tax

 

(3

)

(120

)

 

 

(123

)

Net earnings

 

$

7,735

 

$

15,947

 

$

834

 

$

(16,781

)

$

7,735

 

 

17



Table of Contents

 

 

 

 

 

Subsidiary

 

Subsidiary Non-

 

Consolidation /

 

 

 

Twenty-six Weeks Ended July 31, 2010

 

Pep Boys

 

Guarantors

 

Guarantors

 

Elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise sales

 

$

285,444

 

$

529,924

 

$

 

$

 

$

815,368

 

Service revenue

 

72,370

 

127,150

 

 

 

199,520

 

Other revenue

 

 

 

11,472

 

(11,472

)

 

Total revenues

 

357,814

 

657,074

 

11,472

 

(11,472

)

1,014,888

 

Costs of merchandise sales

 

200,507

 

366,467

 

 

(816

)

566,158

 

Costs of service revenue

 

62,356

 

114,354

 

 

(76

)

176,634

 

Costs of other revenue

 

 

 

11,561

 

(11,561

)

 

Total costs of revenues

 

262,863

 

480,821

 

11,561

 

(12,453

)

742,792

 

Gross profit from merchandise sales

 

84,937

 

163,457

 

 

816

 

249,210

 

Gross profit from service revenue

 

10,014

 

12,796

 

 

76

 

22,886

 

Gross profit from other revenue

 

 

 

(89

)

89

 

 

Total gross profit

 

94,951

 

176,253

 

(89

)

981

 

272,096

 

Selling, general and administrative expenses

 

81,311

 

143,511

 

170

 

(252

)

224,740

 

Net gain from dispositions of assets

 

2,080

 

414

 

 

 

2,494

 

Operating profit

 

15,720

 

33,156

 

(259

)

1,233

 

49,850

 

Non-operating (expense) income

 

(8,413

)

40,521

 

1,233

 

(32,136

)

1,205

 

Interest expense (income)

 

32,352

 

12,851

 

(1,049

)

(30,903

)

13,251

 

(Loss) earnings from continuing operations before income taxes

 

(25,045

)

60,826

 

2,023

 

 

37,804

 

Income tax (benefit) expense

 

(9,856

)

23,905

 

796

 

 

14,845

 

Equity in earnings of subsidiaries

 

37,778

 

 

 

(37,778

)

 

Net earnings from continuing operations

 

22,589

 

36,921

 

1,227

 

(37,778

)

22,959

 

Discontinued operations, net of tax

 

(41

)

(370

)

 

 

(411

)

Net earnings

 

$

22,548

 

$

36,551

 

$

1,227

 

$

(37,778

)

$

22,548

 

 

 

 

 

 

Subsidiary

 

Subsidiary Non-

 

Consolidation /

 

 

 

Twenty-six Weeks Ended August 1, 2009

 

Pep Boys

 

Guarantors

 

Guarantors

 

Elimination

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise sales

 

$

269,988

 

$

520,260

 

$

 

$

 

$

790,248

 

Service revenue

 

68,859

 

126,292

 

 

 

195,151

 

Other revenue

 

 

 

11,445

 

(11,445

)

 

Total revenues

 

338,847

 

646,552

 

11,445

 

(11,445

)

985,399

 

Costs of merchandise sales

 

191,474

 

366,167

 

 

(816

)

556,825

 

Costs of service revenue

 

57,764

 

113,095

 

 

(76

)

170,783

 

Costs of other revenue

 

 

 

12,142

 

(12,142

)

 

Total costs of revenues

 

249,238

 

479,262

 

12,142

 

(13,034

)

727,608

 

Gross profit from merchandise sales

 

78,514

 

154,093

 

 

816

 

233,423

 

Gross profit from service revenue

 

11,095

 

13,197

 

 

76

 

24,368

 

Gross profit from other revenue

 

 

 

(697

)

697

 

 

Total gross profit

 

89,609

 

167,290

 

(697

)

1,589

 

257,791

 

Selling, general and administrative expenses

 

77,222

 

139,802

 

155

 

356

 

217,535

 

Net gain from dispositions of assets

 

14

 

(27

)

 

 

(13

)

Operating profit

 

12,401

 

27,461

 

(852

)

1,233

 

40,243

 

Non-operating (expense) income

 

(8,050

)

42,779

 

1,239

 

(35,026

)

942

 

Interest expense (income)

 

28,400

 

14,838

 

(1,043

)

(33,793

)

8,402

 

(Loss) earnings from continuing operations before income taxes

 

(24,049

)

55,402

 

1,430

 

 

32,783

 

Income tax (benefit) expense

 

(11,105

)

24,361

 

606

 

 

13,862

 

Equity in earnings of subsidiaries

 

31,581

 

 

 

(31,581

)

 

Net earnings from continuing operations

 

18,637

 

31,041

 

824

 

(31,581

)

18,921

 

Discontinued operations, net of tax

 

7

 

(284

)

 

 

(277

)

Net earnings

 

$

18,644

 

$

30,757

 

$

824

 

$

(31,581

)

$

18,644

 

 

18



Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

Twenty-six Weeks Ended July 31, 2010

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation /
Elimination

 

Consolidated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

22,548

 

$

36,551

 

$

1,227

 

$

(37,778

)

$

22,548

 

Adjustments to reconcile net earnings to net cash (used in) provided by continuing operations

 

(17,866

)

18,057

 

285

 

36,545

 

37,021

 

Changes in operating assets and liabilities

 

12,796

 

(3,933

)

(9,308

)

 

(445

)

Net cash provided by (used in) continuing operations

 

17,478

 

50,675

 

(7,796

)

(1,233

)

59,124

 

Net cash used in discontinued operations

 

(43

)

(1,206

)

 

 

(1,249

)

Net cash provided by (used in) operating activities

 

17,435

 

49,469

 

(7,796

)

(1,233

)

57,875

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in continuing operations

 

(13,509

)

(9,842

)

 

 

(23,351

)

Net cash provided by discontinued operations

 

 

569

 

 

 

569

 

Net cash used in investing activities

 

(13,509

)

(9,273

)

 

 

(22,782

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

41,895

 

(37,564

)

12,380

 

1,233

 

17,944

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

45,821

 

2,632

 

4,584

 

 

53,037

 

Cash and cash equivalents at beginning of period

 

25,844

 

10,279

 

3,203

 

 

39,326

 

Cash and cash equivalents at end of period

 

$

71,665

 

$

12,911

 

$

7,787

 

$

 

$

92,363

 

 

Twenty-six Weeks Ended August 1, 2009

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation /
Elimination

 

Consolidated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

18,644

 

$

30,757

 

$

824

 

$

(31,581

)

$

18,644

 

Adjustments to reconcile net earnings to net cash (used in) provided by continuing operations

 

(25,378

)

23,636

 

662

 

30,348

 

29,268

 

Changes in operating assets and liabilities

 

34,293

 

7,631

 

(7,665

)

 

34,259

 

Net cash provided by (used in) continuing operations

 

27,559

 

62,024

 

(6,179

)

(1,233

)

82,171

 

Net cash provided by (used in) discontinued operations

 

7

 

(550

)

 

 

(543

)

Net cash provided by (used in) operating activities

 

27,566

 

61,474

 

(6,179

)

(1,233

)

81,628

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in continuing operations

 

(9,616

)

(7,267

)

 

 

(16,883

)

Net cash provided by discontinued operations

 

 

1,758

 

 

 

1,758

 

Net cash used in investing activities

 

(9,616

)

(5,509

)

 

 

(15,125

)

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(17,691

)

(57,494

)

8,003

 

1,233

 

(65,949

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

259

 

(1,529

)

1,824

 

 

554

 

Cash and cash equivalents at beginning of period

 

12,753

 

6,393

 

2,186

 

 

21,332

 

Cash and cash equivalents at end of period

 

$

13,012

 

$

4,864

 

$

4,010

 

$

 

$

21,886

 

 

19



Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

OVERVIEW

 

The following discussion and analysis explains the results of operations for the second fiscal quarter and first half of 2010 and 2009 and significant developments affecting our financial condition for the twenty-six weeks ended July 31, 2010. This discussion and analysis should be read in conjunction with the condensed consolidated interim financial statements and the notes to such condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, and the consolidated financial statements and the notes to such financial statements included in Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

 

Introduction

 

The Pep Boys-Manny, Moe & Jack is the only national chain offering automotive service, tires, parts and accessories. This positioning allows us to streamline the distribution channel and pass the savings on to our customers facilitating our vision of becoming the automotive solutions provider of choice for the value oriented customer. The majority of our stores are in a Supercenter format, which serves both “do-it-for-me” (“DIFM”, which includes service labor, installed merchandise and tires) and “do-it-yourself” (“DIY”, or retail) customers with the highest quality service offerings and merchandise. Most of our Supercenters also have a commercial sales program that provides delivery of tires, parts and other products to automotive repair shops and dealers. In 2009, as part of our long-term strategy to lead with automotive service, we began complementing our existing Supercenter store base with Service & Tire Centers. These Service & Tire Centers are designed to capture market share and leverage our existing Supercenter and support infrastructure. We opened 24 Service & Tire Centers in fiscal 2009 and year-to-date in fiscal 2010 we have opened an additional seven locations. We also opened two new (14,000 sq. feet) smaller prototype Supercenters in fiscal 2010. We are targeting a total of 30 to 40 new locations in fiscal 2010 and 80 in fiscal 2011. As of July 31, 2010, we operated 555 Supercenters and 30 Service & Tire Centers, as well as nine legacy Pep Boys Express (retail only) stores throughout 35 states and Puerto Rico.

 

EXECUTIVE SUMMARY

 

Net earnings for the thirteen weeks ended July 31, 2010 were $10.6 million, a $2.9 million improvement over the $7.7 million reported for the thirteen weeks ended August 1, 2009. The increase in profitability was the result of increased sales across all lines of business, improved total gross profit margins and a $2.4 million pre-tax gain from asset dispositions, partially offset by higher selling, general and administrative expenses. Increased media spend and retail store payroll expenses were responsible for the selling general and administrative expenses increase.

 

Our diluted earnings per share for the second quarter and first half of 2010 were $0.20 and $0.43, respectively, an improvement of $0.05 and $0.07 over the $0.15 and $0.36 recorded in the second quarter and first half of 2009, respectively.

 

Total revenue increased for the thirteen and twenty-six week period ending July 31, 2010 by 3.3% and 3.0%, respectively, as compared to the same periods of the prior year. For the thirteen weeks ended July 31, 2010, comparable store sales (sales generated by locations in operation during the same period) increased by 1.8% compared to a decrease of 2.3% for the thirteen weeks ended August 1, 2009. This increase in comparable store sales included a 2.5% increase in comparable store merchandise sales and a 0.7% decrease in comparable store service revenue. For the twenty-six weeks ended July 31, 2010, our comparable store sales increased by 1.6% compared to a decrease of 1.3% for the twenty-six weeks ended August 1, 2009. This increase in comparable store sales included a 2.1% increase in comparable store merchandise sales and a 0.3% decrease in comparable store service revenue.

 

Various economic factors affect both our consumers and our industry. Sales of non-discretionary product categories are primarily impacted by miles driven, which declined in 2008 but began to stabilize beginning in the second half of fiscal 2009, primarily due to lower gasoline prices. Continued high unemployment and the credit crisis have also modestly benefited our non-discretionary product categories as customers have focused on maintaining their existing vehicles rather than purchasing new vehicles. These trends, however, have negatively impacted sales in our discretionary product categories like accessories and complementary merchandise, although the rate of decline has moderated since the beginning of fiscal 2010.

 

We continue to focus on refining and expanding our parts assortment to improve our in stock position, improving execution and the customer experience, utilizing television and radio advertising to communicate our value offerings and growing our rewards program to build customer loyalty and drive repeat business. We believe these efforts are responsible for increased customer traffic in our stores for the thirteen and twenty-six week periods ended July 31, 2010.

 

20



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RESULTS OF OPERATIONS

 

The following discussion explains the material changes in our results of operations.

 

Analysis of Statement of Operations

 

Thirteen weeks ended July 31, 2010 vs. Thirteen weeks ended August 1, 2009

 

The following table presents for the periods indicated certain items in the condensed consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.

 

 

 

Percentage of Total Revenues

 

Percentage Change

 

Thirteen weeks ended

 

July 31, 2010
(Fiscal 2010)

 

August 1, 2009
(Fiscal 2009)

 

Favorable
(Unfavorable)

 

 

 

 

 

 

 

 

 

Merchandise sales

 

80.5

%

80.2

%

3.6

%

Service revenue (1)

 

19.5

 

19.8

 

1.9

 

Total revenues

 

100.0

 

100.0

 

3.3

 

Costs of merchandise sales (2)

 

69.5

(3)

70.3

(3)

(2.4

)

Costs of service revenue (2)

 

89.2

(3)

87.7

(3)

(3.6

)

Total costs of revenues

 

73.4

 

73.8

 

(2.7

)

Gross profit from merchandise sales

 

30.5

(3)

29.7

(3)

6.5

 

Gross profit from service revenue

 

10.8

(3)

12.3

(3)

(10.3

)

Total gross profit

 

26.6

 

26.2

 

4.9

 

Selling, general and administrative expenses

 

22.4

 

22.4

 

(3.3

)

Net gain (loss) from dispositions of assets

 

0.5

 

 

NM

 

Operating profit

 

4.7

 

3.8

 

27.6

 

Non-operating income

 

0.1

 

0.1

 

15.2

 

Interest expense

 

1.3

 

1.3

 

(2.7

)

Earnings from continuing operations before income taxes

 

3.5

 

2.6

 

39.6

 

Income tax expense

 

39.4

(4)

38.4

(4)

(43.1

)

Earnings from continuing operations

 

2.1

 

1.6

 

37.4

 

Discontinued operations, net of tax

 

 

 

(63.4

)

Net Earnings

 

2.1

 

1.6

 

37.0

 

 


(1)

 

Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials.

(2)

 

Costs of merchandise sales include the cost of products sold, purchasing, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.

(3)

 

As a percentage of related sales or revenue, as applicable.

(4)

 

As a percentage of earnings from continuing operations before income taxes.

 

Total revenue and comparable store sales for the thirteen weeks ended July 31, 2010 increased 3.3% and 1.8%, respectively, as compared to the thirteen weeks ended August 1, 2009. Total revenue for the second quarter of 2010 increased by $15.9 million to $504.9 million from $488.9 million in the second quarter of 2009. The 1.8% increase in comparable store sales consisted of a 2.5% comparable store merchandise sales increase and a 0.7% comparable store service revenue decrease. While our total revenue figures were favorably impacted by the opening of the new stores, a new store is not added to our comparable store sales until it reaches its 13th month of operation. Non-comparable stores contributed an additional $7.0 million of total revenue in the second quarter of 2010 as compared to the second quarter of 2009.

 

Total merchandise sales increased 3.6%, or $14.1 million, to $406.2 million in the second quarter of fiscal 2010, compared to $392.1 million during the prior year period. Comparable store merchandise sales increased 2.5%, or $9.6 million, as compared to the second

 

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quarter of 2009, driven primarily by a higher average transaction amount per customer combined with a slight increase in comparable store customer count. The balance of the increase in merchandise sales was due to the contribution from our new stores. Total service revenue increased 1.9% to $98.7 million from $96.8 million in the prior year period primarily due to the contribution from new stores, which was partially offset by a 0.7% decrease in comparable store service revenue.

 

In the second quarter of 2010, comparable store customer counts marginally increased as compared to negative comparable store customer counts in the prior year period due to our traffic-driving promotional events and rewards program, and customer receptiveness to our improved in stock position and better store execution. We also experienced a 3.5% increase in sales of our core automotive parts categories which make up approximately 80% of our merchandise sales, which was slightly offset by a 1.4% decrease in sales of our discretionary product categories as compared to the prior year period. We continue to believe that providing a differentiated merchandise assortment, better customer experience, value proposition and innovative marketing will increase sales and customer counts consistently over the long term across all lines of business.

 

Gross profit from merchandise sales increased by $7.5 million, or 6.5%, to $123.8 million for the second quarter of 2010 from $116.3 million in the second quarter of 2009. Gross profit from merchandise sales increased to 30.5% for the second quarter of 2010 from 29.7% for the second quarter of 2009. Gross profit from merchandise sales for the second quarter of 2010 includes the reversal of inventory accruals of $1.0 million mostly offset by an asset impairment charge of $0.8 million. Excluding these adjustments, gross profit from merchandise sales increased to 30.4% from 29.7% in the prior year period. The increase in gross profit margins was primarily due to an improvement in inventory shrinkage, lower in-bound freight costs and lower defective product expense.

 

Gross profit from service revenue decreased by $1.2 million, or 10.3%, to $10.7 million for the second quarter of 2010 from $11.9 million in the second quarter of 2009. Gross profit from service revenue decreased to 10.8% from 12.3% for the prior year period. Gross profit from service revenue for the second quarter of 2010 includes an asset impairment charge of $0.2 million. Excluding this adjustment, gross profit from service revenue decreased to 11.1% from 12.3% in the prior year period. The decrease in gross profit was primarily due to higher payroll and occupancy costs (includes such items as rent, utilities and building maintenance), which increased by 80 basis points and 116 basis points, respectively, quarter over quarter, primarily due to adding the new Service & Tire Centers. Excluding the impact of the new Service & Tire Centers (which are still in their ramp up stage for sales but incurring the full fixed expense load), the gross profit from service revenue remained relatively flat quarter over quarter.

 

Selling, general and administrative expenses, as a percentage of total revenues remained flat at 22.4% in the second quarter of 2010 as compared to the prior year period. Selling, general and administrative expenses increased $3.6 million, or 3.3%, to $113.1 million for the second quarter of 2010 from $109.5 million in the prior year period. The increase was primarily due to higher payroll (primarily retail store payroll) and related expenses of $2.1 million and increased media expense of $1.5 million.

 

Net gains from the disposition of assets of $2.4 million for the second quarter of 2010 includes $2.3 million in net settlement proceeds from the disposition of a previously closed property.

 

Interest expense of $6.6 million for the second quarter of 2010 was relatively flat compared to the prior year period.

 

Our income tax expense for the second quarter of 2010 was $7.0 million, or an effective rate of 39.4%, as compared to an expense of $4.9 million, or an effective rate of 38.4%, for the second quarter of 2009. The annual rate depends on a number of factors, including the jurisdiction in which operating profit is earned and the timing and nature of discrete items.

 

As a result of the foregoing, we reported net earnings of $10.6 million for the second quarter of 2010 as compared to net earnings of $7.7 million in the prior year period. Our basic and diluted earnings per share were $0.20 as compared to $0.15 in the prior year period.

 

Twenty-six weeks ended July 31, 2010 vs. Twenty-six weeks ended August 1, 2009

 

The following table presents for the periods indicated certain items in the condensed consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.

 

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Percentage of Total Revenues

 

Percentage Change

 

Twenty-six weeks ended

 

July 31, 2010
(Fiscal 2010)

 

August 1, 2009
 (Fiscal 2009)

 

Favorable
(Unfavorable)

 

 

 

 

 

 

 

 

 

Merchandise sales

 

80.3

%

80.2

%

3.2

%

Service revenue (1)

 

19.7

 

19.8

 

2.2

 

Total revenues

 

100.0

 

100.0

 

3.0

 

Costs of merchandise sales (2)

 

69.4

(3)

70.5

(3)

(1.7

)

Costs of service revenue (2)

 

88.5

(3)

87.5

(3)

(3.4

)

Total costs of revenues

 

73.2

 

73.8

 

(2.1

)

Gross profit from merchandise sales

 

30.6

(3)

29.5

(3)

6.8

 

Gross profit from service revenue

 

11.5

(3)

12.5

(3)

(6.1

)

Total gross profit

 

26.8

 

26.2

 

5.5

 

Selling, general and administrative expenses

 

22.1

 

22.1

 

(3.3

)

Net gain (loss) from dispositions of assets

 

0.2

 

 

NM

 

Operating profit

 

4.9

 

4.1

 

23.9

 

Non-operating income

 

0.1

 

0.1

 

27.9

 

Interest expense

 

1.3

 

0.9

 

(57.7

)

Earnings from continuing operations before income taxes

 

3.7

 

3.3

 

15.3

 

Income tax expense

 

39.3

(4)

42.3

(4)

(7.1

)

Earnings from continuing operations

 

2.3

 

1.9

 

21.3

 

Discontinued operations, net of tax

 

 

 

(48.4

)

Net Earnings

 

2.2

 

1.9

 

20.9

 

 


(1)

 

Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials.

(2)

 

Costs of merchandise sales include the cost of products sold, purchasing, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.

(3)

 

As a percentage of related sales or revenue, as applicable.

(4)

 

As a percentage of earnings from continuing operations before income taxes.

 

Total revenue and comparable store sales for the twenty-six weeks ended July 31, 2010 increased 3.0% and 1.6%, respectively, as compared to the twenty-six weeks ended August 1, 2009. The 1.6% increase in comparable store sales consisted of a 2.1% comparable store merchandise sales increase, offset by a 0.3% comparable store service revenue decrease. While our total revenue figures were favorably impacted by the opening of the new stores, a new store is not added to our comparable store sales until it reaches its 13th month of operation. Non-comparable stores contributed an additional $13.7 million of total revenue in the first half of 2010 as compared to the prior year period. Total comparable store sales increased due to growth in customer counts in all three lines of business combined with an increase in the average transaction amount per customer.

 

Gross profit from merchandise sales increased by $15.8 million, or 6.8%, to $249.2 million for the first half of 2010 from $233.4 million in the first half of 2009. Gross profit from merchandise sales increased to 30.6% from 29.5% for the prior year period. The increase in gross profit margins was primarily due to an improvement in inventory shrinkage, lower in-bound freight costs and lower defective product expense.

 

Gross profit from service revenue decreased by $1.5 million, or 6.1%, to $22.9 million for the first half of 2010 from $24.4 million in the first half of 2009. Gross profit from service revenue decreased to 11.5% from 12.5% for the prior year period. The decrease in gross profit was primarily due to higher fixed expenses such as occupancy costs (includes such items as rent, utilities and building maintenance), which increased by 106 basis points compared to the prior year period, primarily due to adding the new Service & Tire Centers. Excluding the impact of the new Service & Tire Centers (which are still in their ramp up stage for sales but incurring the full fixed expense load), the gross profit from service revenue increased by 43 basis points period over period.

 

Selling, general and administrative expenses, as a percentage of total revenues remained flat at 22.1% in the first half of 2010 as compared to the prior year period. Selling, general and administrative expenses increased $7.2 million, or 3.3% over the amount recorded in the first half of 2009. The increase was primarily due to increased media expense of $5.3 million and increased payroll (primarily retail store payroll) and related expenses of $3.4 million, partially offset by lower general liability insurance claims expense of $1.9 million.

 

Net gains from the disposition of assets of $2.5 million for the first half of 2010 includes $2.3 million in net settlement proceeds from the disposition of a previously closed property.

 

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Table of Contents

 

Interest expense for the first half of 2010 was $13.3 million, an increase of $4.8 million compared to the prior year period. The first half of 2009 included a $6.2 million gain resulting from the retirement of debt. Excluding this gain, interest expense declined by $1.4 million, period over period, due to reduced debt levels.

 

Our income tax expense for the first half of 2010 was $14.9 million, or an effective rate of 39.3%, as compared to an expense of $13.9 million, or an effective rate of 42.3%, for the first half of 2009. The change was primarily due to the release of valuation reserves on net operating losses at the state level, which resulted from our improved profitability. The annual rate is dependent on a number of factors, including the jurisdiction in which operating profit is earned and the timing and nature of discrete items.

 

As a result of the foregoing, we reported net earnings of $22.5 million for the first half of 2010 as compared to net earnings of $18.6 million in the prior year period. Our basic and diluted earnings per share were $0.43 as compared to $0.36 in the prior year period.

 

INDUSTRY COMPARISON

 

We operate in the U.S. automotive aftermarket, which has two general lines of business: the Service Business defined as Do-It-For-Me (service labor, installed merchandise and tires) and the Retail Business defined as Do-It-Yourself (retail merchandise) and commercial. Generally, specialized automotive retailers focus on either the Retail or Service area of the business. We believe that operation in both the Retail and Service areas of the business positively differentiates us from most of our competitors. Although we manage our store performance at a store level in aggregation, we believe that the following presentation, which includes the reclassification of revenue from installed products from retail sales to service center revenue, shows an accurate comparison against competitors within the two sales arenas. We compete in the Retail area of the business through our retail sales floor and commercial sales business. Our Service Center business competes in the Service area of the industry.

 

The following table presents the revenues and gross profit for each area of our business:

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

 

 

July 31,

 

August 1,

 

July 31,

 

August 1,

 

(Dollar amounts in thousands)

 

2010

 

2009

 

2009

 

2009

 

 

 

 

 

 

 

 

 

 

 

Retail Sales (1)

 

$

268,804

 

$

259,435

 

$

538,511

 

$

523,846

 

Service Center Revenue (2)

 

236,051

 

229,476

 

476,377

 

461,553

 

Total revenues

 

$

504,855

 

$

488,911

 

$

1,014,888

 

$

985,399

 

 

 

 

 

 

 

 

 

 

 

Gross profit from Retail Sales (3)

 

$

78,830

 

$

70,746

 

$

158,584

 

$

144,301

 

Gross profit from Service Center Revenue (3)

 

55,671

 

57,444

 

113,512

 

113,490

 

Total gross profit

 

$

134,501

 

$

128,190

 

$

272,096

 

$

257,791

 

 


(1)     Excludes revenues from installed products.

(2)     Includes revenues from installed products.

(3)     Gross profit from Retail Sales includes the cost of products sold, purchasing, warehousing and store occupancy costs. Gross profit from Service Center Revenue includes the cost of installed products sold, purchasing, warehousing, service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.

 

CAPITAL AND LIQUIDITY

 

Our cash requirements arise principally from (1) the purchase of inventory and capital expenditures related to existing and new stores, offices and distribution centers, (2) debt service and (3) contractual obligations. Cash flows realized through the sales of automotive services, tires, parts and accessories are our primary source of liquidity. Net cash provided by operating activities was $57.9 million in the first half of 2010, as compared to $81.6 million in the prior year period. While net earnings increased by $11.7 million (net of non-cash adjustments) in the first half of 2010, cash flow from operating activities decreased from the prior year period primarily due to the $16.2 million inventory reduction we accomplished in the first half of 2009 as we focused on maximizing our inventory investment. Inventory at the end of the current year second quarter remained flat to fiscal 2009 year-end balances despite the need for the inventory investment in our new locations. This is a result of our continued disciplined inventory management including reduced seasonal inventory purchases, inventory lead times and safety stocks. In addition, cash flows from accounts payable declined by $16.9 million primarily due to a shift to our trade payable financing program (shown as cash flows from financing activities on the consolidated statement of cash flows). After taking into consideration changes in the amounts financed under our trade payable

 

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Table of Contents

 

program, accounts payable improved by $33.6 million primarily due to increased inventory purchases and the timing of our accounts payable cycle. The ratio of accounts payable to inventory was 45.1% at July 31, 2010, and 41.1% at August 1, 2009.

 

Cash used in investing activities was $22.8 million for the first half of 2010 as compared to $15.1 million in the prior year period. During the first half of 2010, we sold four properties classified as held for disposal for net proceeds of $2.9 million, of which $0.6 million is included in discontinued operations, and completed one sale leaseback transaction for net proceeds of $1.6 million. During the first half of 2009, we sold three properties classified as assets held for disposal for net proceeds of $2.8 million, of which $1.8 million is reported in discontinued operations. Capital expenditures in the first half of 2010 increased by $9.8 million, to $27.3 million, from $17.5 million for the prior year period. Capital expenditures for the current year were for improvements of our existing stores, offices, distribution centers and for the opening of the new facilities.

 

Our targeted capital expenditures for fiscal 2010 are $80.0 million. Our fiscal year 2010 capital expenditures include the addition of approximately 30 to 40 new locations and required expenditures for our existing stores, offices and distribution centers. These expenditures are expected to be funded by cash on hand and net cash generated from operating activities. Additional capacity, if needed, exists under our existing line of credit.

 

In the first half of 2010, cash provided by financing activities was $17.9 million, as compared to cash used in financing of $65.9 million in the prior year period. The $83.9 million improvement was primarily due to increased usage of our trade payable program of $50.5 million. On April 6, 2009, a previously existing program was replaced by a new program funded by various bank participants who have the ability, but not the obligation, to purchase, directly from our vendors, account receivables owed by Pep Boys. This transition temporarily resulted in a net reduction in our trade payable financing program of $29.3 million in the prior year period, as vendors typically participating in the legacy financing program were temporarily paid on a customary trade payable cycle until such time as they were able to transition onto the new financing program. In the current year, we increased the availability under this new financing program to $75.0 million from $50.0 million. As of July 31, 2010, January 30, 2010 and August 1, 2009, we had an outstanding balance of $55.3 million, $34.1 million and $2.6 million, respectively, (classified as trade payable program liability on the condensed consolidated balance sheet) under our vendor financing programs. Additionally, in the first half of 2009, we repurchased $17.0 million of our outstanding 7.5% Senior Subordinated Notes for $10.7 million and repaid $22.3 million of borrowings under our revolving credit agreement.

 

We anticipate that cash on hand and cash generated by operating activities will exceed our expected cash requirements in fiscal year 2010. In addition, we expect to have excess availability under our existing revolving credit agreement during the entirety of fiscal year 2010. As of July 31, 2010, we had zero drawn on our revolving credit facility and maintained undrawn availability of $128.3 million.

 

Our working capital was $234.4 million and $205.5 million at July 31, 2010 and January 30, 2010, respectively. Our long-term debt, as a percentage of our total capitalization, was 39.7% and 40.9% at July 31, 2010 and January 30, 2010, respectively.

 

NEW ACCOUNTING STANDARDS

 

In October 2009, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) 2009-13 “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force,” (“ASU 2009-13”). This update eliminates the residual method of allocation and requires that consideration be allocated to all deliverables using the relative selling price method. ASU 2009-13 is effective for material revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company does not believe the adoption of ASU 2009-13 will have a material impact on its consolidated financial statements.

 

In January 2010, the FASB issued ASU 2010-06 “Fair Value Measurements — Improving Disclosures on Fair Value Measurements” (“ASU 2010-06”). This guidance requires new disclosures surrounding transfers in and out of level 1 or 2 in the fair value hierarchy and also requires that in the reconciliation of level 3 inputs, the entity should report separately information on purchases, sales, issuances or settlements. The increased disclosures should be reported for each class of assets or liabilities. ASU 2010-06 also clarifies existing disclosures for the level of disaggregating, disclosures about valuation techniques and inputs used to determine level 2 or 3 fair value measurements and includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances or settlements in the roll forward activity for level 3 fair value measurements which are effective for interim and annual periods beginning after December 15, 2010. The adoption of ASU 2010-06 for requirements effective December 15, 2009 did not have a material impact on the Company’s consolidated financial statements. The Company does not believe the adoption of those requirements of ASU 2010-06 which are effective for periods beginning after December 15, 2010 will have a material impact on its consolidated financial statements.

 

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Table of Contents

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

 

On an on-going basis, we evaluate our estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, merchandise inventories, income taxes, financing operations, restructuring costs, retirement benefits, risk participation agreements and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to “Critical Accounting Policies and Estimates” as reported in our Annual Report on Form 10-K for the fiscal year ended January 30, 2010, which disclosures are hereby incorporated by reference.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained herein constitute “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. The words “guidance,” “expect,” “anticipate,” “estimates,” “forecasts” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include management’s expectations regarding implementation of its long-term strategic plan, future financial performance, automotive aftermarket trends, levels of competition, business development activities, future capital expenditures, financing sources and availability and the effects of regulation and litigation. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. Our actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond our control, including the strength of the national and regional economies, retail and commercial consumers’ ability to spend, the health of the various sectors of the automotive aftermarket, the weather in geographical regions with a high concentration of our stores, competitive pricing, the location and number of competitors’ stores, product and labor costs and the additional factors described in our filings with the Securities and Exchange Commission (SEC). We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Our primary market risk exposure with regard to financial instruments is due to changes in interest rates. Pursuant to the terms of our Revolving Credit Agreement, changes in LIBOR or the Prime Rate could affect the rates at which we could borrow funds thereunder. At July 31, 2010 we had no borrowings under this facility. Additionally, we have a $149.2 million Senior Secured Term Loan that bears interest at three month LIBOR plus 2.0%.

 

We have an interest rate swap for a notional amount of $145.0 million, which is designated as a cash flow hedge on our Senior Secured Term Loan. We also have a fuel hedge which is intended to maintain a fixed price for retail gasoline through the January 31, 2011. This is also designated as a cash flow hedge. We record the effective portion of the changes in fair value through accumulated other comprehensive loss.

 

The fair value of the derivatives was $19.0 million and $16.4 million payable at July 31, 2010 and January 30, 2010, respectively. Of the $2.5 million increase in fair value during the twenty-six weeks ended July 31, 2010, $1.6 million net of tax was recorded to accumulated other comprehensive loss on the condensed consolidated balance sheet.

 

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Item 4.  Controls and Procedures.

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

Our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. The term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were functioning effectively and provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

No change in the Company’s internal control over financial reporting occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 5.  Other Information

 

None.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

In September 2006, the United States Environmental Protection Agency (“EPA”) requested certain information from the Company as part of an investigation to determine whether the Company had violated, and is in violation of, the Clean Air Act and its non-road engine regulations. The information requested concerned certain generator and personal transportation merchandise offered for sale by the Company. In the fourth quarter of fiscal 2008, the EPA informed the Company that it believed that the Company had violated the Clean Air Act by virtue of the fact that certain of this merchandise did not conform to their corresponding EPA Certificates of Conformity. During the third quarter of fiscal 2009, the Company and the EPA reached a settlement in principle of this matter requiring that the Company (i) pay a monetary penalty of $5.0 million, (ii) take certain corrective action with respect to certain inventory that had been restricted from sale during the course of the investigation, (iii) implement a formal compliance program and (iv) participate in certain non-monetary emission offset activities. The Company had previously accrued an amount equal to the agreed upon civil penalty and a $3.0 million contingency accrual with respect to the restricted inventory. During fiscal 2009, the Company reversed $2.0 million of the inventory accrual as a portion of the subject inventory was released for sale. During the second quarter of fiscal 2010, the Company reversed the remaining $1.0 million of the inventory accrual as the Company reached an agreement with the merchandise vendor to cover the entire cost of retrofitting a portion of the remaining subject merchandise and to accept the balance of the subject inventory for return for full credit. During the second quarter of fiscal 2010, the formal settlement agreement between the Company and the EPA became effective and the Company paid the monetary penalty.

 

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The Company is also party to various other actions and claims arising in the normal course of business.

 

The Company believes that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position. However, there exists a reasonable possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While the Company does not believe that the amount of such excess loss could be material to the Company’s financial position, any such loss could have a material adverse effect on the Company’s results of operations in the period(s) during which the underlying matters are resolved.

 

Item 1A.  Risk Factors

 

There have been no changes to the risks described in the Company’s previously filed Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  (Removed and Reserved)

 

Item 5.  Other Information

 

None.

 

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Item 6.  Exhibits

 

(31.1)

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

(31.2)

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

(32.1)

 

Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

(32.2)

 

Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

THE PEP BOYS - MANNY, MOE & JACK

 

 

(Registrant)

 

 

 

 

Date:

September 8, 2010

by:

/s/ Raymond L. Arthur

 

 

 

 

 

 

Raymond L. Arthur

 

 

Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

 

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INDEX TO EXHIBITS

 

(31.1)

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

(31.2)

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

(32.1)

 

Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

(32.2)

 

Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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